hhs amicus brief -- spousal annuities-hughes v. colbert 6th circuit

No. 12-3765

IN THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

CAROLE HUGHES AND HARRY HUGHES,

Plaintiffs-Appellants, v.

MICHAEL COLBERT, in his official capacity, as Director of the Ohio Department of Job & Family Services,

Defendant-Appellee.

__________________________

ON APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF OHIO, EASTERN DIVISION

BRIEF FOR THE UNITED STATES

DEPARTMENT OF HEALTH AND HUMAN SERVICES AS AMICUS CURIAE ___________________

STUART F. DELERY Acting Assistant Attorney General MICHAEL S. RAAB 202-514-4053 HOWARD S. SCHER 202-514-4814 Attorneys, Appellate Staff Civil Division, Room 7239 Department of Justice 950 Pennsylvania Avenue, NW Washington, DC 20530-0001

Case: 12-3765 Document: 006111738403 Filed: 06/28/2013 Page: 1

TABLE OF CONTENTS

Page

INTRODUCTION .................................................................................................... 1 STATEMENT ........................................................................................................... 3

1. Medicaid Resource Limits for Community Spouses .......................................................................................................... 3

2. Transfer of Assets ......................................................................................... 5

3. Treatment of Annuities ................................................................................. 6

4. The Present Litigation ................................................................................... 8

ARGUMENT ............................................................................................................ 9

1. The transfer of a community resource to purchase an annuity for the community spouse’s sole benefit, after the institutionalized spouse is institutionalized but before the institutionalized spouse’s Medicaid eligibility is determined, cannot be deemed an improper transfer under 42 U.S.C. § 1396r-5(f)(1) if it complies with § 1396p(c)(2)(B)(i) ................................ 9

2. The transfer of a community resource to purchase an annuity by or on behalf of the community spouse is “for the sole benefit of the individual’s spouse” under § 1396p(c)(2)(B)(i) if the annuity is actuarially sound and its payments are based on, and made during, the community spouse’s life expectancy, and the annuity designates the institutionalized spouse as the primary beneficiary and the state as the contingent beneficiary ................................................................................. 14

3. The transfer of a community resource to purchase an annuity by or on behalf of the community spouse that satisfies § 1396p(c)(2)(B)(i) must also satisfy § 1396p(c)(1)(F) but not § 1396p(c)(1)(G) .............................. 16

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4. The transfer of a community resource to purchase an annuity by or on behalf of the community spouse that provides for payments based on, and made during, the community spouse’s life expectancy, but designates the institutionalized spouse as the primary beneficiary and the state as the contingent beneficiary to receive payments in the event of the community spouse’s early death, does not satisfy the letter of § 1396p(c)(1)(F) ........................................................... 18

5. Section 1396p(c)(1)(G) does not apply to an annuity purchased by or on behalf of the community spouse. .................................................. 22

CONCLUSION ....................................................................................................... 23

SIXTH CIRCUIT RULE 32(a) CERTIFICATION

CERTIFICATE OF SERVICE

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Cases: Morris v. Oklahoma Department of Human Services, 685 F.3d 925 (10th Cir. 2012)......................................................................... 10-11

Statutes: 42 U.S.C. 1396 et seq. ............................................................................................. 3 42 U.S.C. 1396a(a)(17) ........................................................................................... 3 42 U.S.C. 1396p ...................................................................................................... 7 42 U.S.C. 1396p(c) ........................................................................................... 5, 21 42 U.S.C. 1396p(c)(1)(F) ...................................... 2, 7, 9, 14, 16, 17, 18, 19, 20, 22 42 U.S.C. 1396p(c)(1)(G) ............................................. 2, 3, 7, 9, 16, 17, 18, 19, 22 42 U.S.C. 1396p(c)(2)(B)(i) ................... 1, 2, 5, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17 42 U.S.C. 1396p(d)(6)..................................................................................... 15, 17 42 U.S.C. 1396p(e)(1) ............................................................................................. 7 42 U.S.C. 1396p(e)(2)(B) ....................................................................................... 7 42 U.S.C. 1396r-5 ............................................................................................. 3, 10 42 U.S.C. 1396r-5(b)(1) - (2)(A)(i) ........................................................................ 7 42 U.S.C. 1396r-5(c)(1)(A)(i) ............................................................................... 11 42 U.S.C. 1396r-5(c)(1)(A)(ii) ................................................................................ 4 42 U.S.C. 1396r-5(c)(2) .......................................................................................... 5 42 U.S.C. 1396r-5(c)(2)(B) ..................................................................................... 4 42 U.S.C. 1396r-5(c)(4) ...................................................................................... 5, 7 42 U.S.C. 1396r-5(d)(2) .......................................................................................... 4

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42 U.S.C. 1396r-5(f)(1) .................................................. 1, 2, 6, 8, 9, 11, 12, 13, 14 42 U.S.C. 1396r-5(f)(2) ........................................................................................ 12 42 U.S.C. 1396r-5(f)(2)(A) ..................................................................................... 4 Deficit Reduction Act of 2005 (DRA), Pub. L. No. 109-171, § 6012 (2005) ....................................................................................... 7 Regulatons: 42 C.F.R. 435.916(a). ............................................................................................ 13

Miscellaneous:

Centers for Medicare & Medicaid Services’ State Medicaid Manual § 3258.9(B) .................................................................................................. 15, 17 § 3258.11 ............................................................................................................ 11 § 3262.4 .............................................................................................................. 12

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IN THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

No. 12-3765

CAROLE HUGHES AND HARRY HUGHES,

Plaintiffs-Appellants, v.

MICHAEL COLBERT, in his official capacity, as Director of the Ohio Department of Job & Family Services,

Defendant-Appellee.

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF OHIO, EASTERN DIVISION

BRIEF FOR THE UNITED STATES

DEPARTMENT OF HEALTH AND HUMAN SERVICES AS AMICUS CURIAE ___________________

INTRODUCTION

A. On February 13, 2013, the Court invited the views of the Department of

Health and Human Services (HHS) on the following two questions:

1. Whether the transfer of a community resource to purchase an annuity for the community spouse’s sole benefit, which is done before the institutionalized spouse’s Medicaid eligibility is determined, can be deemed an improper transfer under 42 U.S.C. 1396r-5(f)(1), even though 42 U.S.C. 1396p(c)(2)(B)(i) allows the transfer.


2. Whether the transfer of funds to purchase an annuity for the community spouse is subject to Section 1396p(c)(1)(F) and/or (G), or only Section 1396p(c)(2)(B)(i).

B. On April 9, the Court invited the government to address the following

questions:

1. Whether the transfer of a community resource to purchase an annuity for the community spouse’s sole benefit, which transfer is done after the institutionalized spouse is institutionalized but before the institutionalized spouse’s Medicaid eligibility is determined, can be deemed an improper transfer under 42 U.S.C. § 1396r-5(f)(1), even though § 1396p(c)(2)(B)(i) allows the transfer. 2. Whether the transfer of a community resource to purchase an annuity by or on behalf of the community spouse is “for the sole benefit of the individual’s spouse” under § 1396p(c)(2)(B)(i) if the annuity is actuarially sound and its payments are based on, and made during, the community spouse’s life expectancy, but designates the institutionalized spouse as the primary beneficiary and the state as the contingent beneficiary to receive payments in the event of the community spouse’s early death. 3. Whether the transfer of a community resource to purchase an annuity by or on behalf of the community spouse that satisfies § 1396p(c)(2)(B)(i)’s sole benefit provision must also satisfy § 1396p(c)(1)(F) and/or (G). 4. Whether the transfer of a community resource to purchase an annuity by or on behalf of the community spouse that provides for payments based on, and made during, the community spouse’s life expectancy, but designates the institutionalized spouse as the primary beneficiary and the state as the contingent beneficiary to receive payments in the event of the community spouse’s early death, satisfies § 1396p(c)(1)(F). 5. Whether § 1396p(c)(1)(G) applies to an annuity purchased by

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or on behalf of the community spouse. See 42 U.S.C. § 1396p(c)(1)(G) (“For purposes of this paragraph with respect to a transfer of assets, the term ‘assets’ includes an annuity purchased by or on behalf of an annuitant who has applied for medical assistance with respect to nursing facility services or other long-term care services under this subchapter * * * .” (emphasis added)).

We view Questions 1, 3, and 5 in the second request as covering the same

substantive matter as the two questions posed by the Court in the original request.

Accordingly, we address each of the questions posed by the Court in the second

request.

STATEMENT

1. Medicaid Resource Limits for Community Spouses.

The Medicaid program, enacted in 1965 as Title XIX of the Social Security

Act, is a cooperative federal-state public assistance program that provides medical

assistance to low-income individuals. See 42 U.S.C. 1396 et seq. The Medicaid

statute provides that a Medicaid state plan must include “reasonable standards * * *

for determining eligibility for and the extent of medical assistance under the [state]

plan,” and these standards must be consistent with the objectives of Medicaid and

take into account only such income and resources available as determined according

to standards prescribed by the Secretary. Id. § 1396a(a)(17).

In 1988, Congress enacted 42 U.S.C. 1396r-5 to address the allocation of

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income and resources between spouses when one spouse applies for Medicaid

coverage of long term institutional care and the other spouse continues to reside in

the community. To prevent impoverishment of the community spouse, the law

mandates that the community spouse be entitled to retain minimum portions of the

couple’s combined assets (or “resources”) and income up to maximum portions that

are adjusted annually and referred to in the statute as the “Community Spouse

Resource Allowance” (CSRA) and “Community Spouse Income Allowance.” 42

U.S.C. 1396r-5(d)(2) and (f)(2)(A).

To determine the portion of the couple’s combined assets that the community

spouse is entitled to retain, the “resources” of the two spouses, measured at the time

of the institutionalized spouse’s initial institutionalization, are first pooled to

determine the couple’s total resources, and this amount is then divided equally

between the spouses. 42 U.S.C. 1396r-5(c)(1)(A)(ii). The community spouse’s

share is then measured against the CSRA established by each state (which is based

on the minimum and maximum thresholds established by the statute). 42 U.S.C.

1396r-5(c)(2)(B). Before a Medicaid eligibility determination, any resources in

excess of the CSRA are considered available for use by the institutionalized spouse.

Ibid. Once the institutionalized spouse’s eligibility for Medicaid has been

established, the resources of the community spouse are no longer considered

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available for use by the institutionalized spouse. 42 U.S.C. 1396r-5(c)(4).

2. Transfer of Assets.

When an individual applies for Medicaid and seeks coverage for long term

care services and support, a state conducts a review to determine whether the

individual has engaged in transactions (such as making gifts) that have made income

or resources unavailable. 42 U.S.C. 1396r-5(c)(2). If, within specified time periods,

the institutionalized individual has transferred assets to a third party for less than fair

market value, there may be a penalty period imposed. If such a penalty period

applies, Medicaid will not pay the cost of long term care services provided to the

institutionalized individual during that period. See 42 U.S.C. 1396p(c). For a

married individual applying for Medicaid coverage of long term care services, the

review extends to the transactions of the individual’s spouse as well. Thus, a

transfer of assets to a third party for less than fair market value by the community

spouse may also result in a delay in Medicaid eligibility for the institutionalized

spouse. Ibid. Transfers of assets between spouses, however, are not subject to such

a penalty. Moreover, prior to a Medicaid eligibility determination, either spouse

may transfer an unlimited amount of resources to a third party where the third-party

transfer is for the sole benefit of either spouse, without penalty. Id.

§ 1396p(c)(2)(B)(i).

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As noted, after an institutionalized spouse is determined to be eligible for

Medicaid, the resources of the community spouse are no longer deemed available to

the institutionalized spouse. 42 U.S.C. 1396r-5(c)(4). Thus, in determining the

institutionalized spouse’s continued eligibility for Medicaid, resources of the

community spouse are not counted. With respect to resources held in the name of

the institutionalized spouse, if the total amount of those resources exceeds the

relevant limit, the institutionalized spouse may “as soon as practicable after the date

of the initial determination of eligibility” transfer excess resources held in the

institutionalized spouse’s name to the community spouse. Id. § 1396r-5(f)(1).

However, the institutionalized spouse may transfer to the community spouse

resources only up to the CSRA limit. Ibid.

3. Treatment of Annuities.

An annuity is a contract by which the annuitant purchases the right to receive

monthly payments for a specified period of time in exchange for the payment of an

amount of principal. The purchase of an annuity may involve converting a couple’s

resources into income, which would not affect an institutionalized spouse’s

Medicaid eligibility if the annuity is determined to be a fair market value-based

transaction. Even if resources above the CSRA are used for the purchase of the

annuity, the purchase would not affect Medicaid eligibility if the annuity is payable

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to the community spouse because of the exemption from penalty for transfers of

assets to third parties for the sole benefit of the community spouse. 42 U.S.C.

1396r-5(b)(1) - (2)(A)(i).

In 2005, Congress added new rules for evaluating whether annuities

purchased by Medicaid recipients and their spouses in anticipation of Medicaid

eligibility determinations constitute transfers of assets to third parties for less than

fair market value. Deficit Reduction Act of 2005 (DRA), Pub. L. No. 109-171,

§ 6012 (2005), codified as amendments to 42 U.S.C. 1396p. The DRA amendments

require the disclosure of any interest that an institutionalized or community spouse

has in an annuity, id. § 1396p(e)(1), and provide for notice to the state by the annuity

issuer of any changes in the interest or principal withdrawn, id. § 1396p(e)(2)(B).

To avoid being considered a transfer of assets to a third party for less than fair

market value which, as detailed above, may delay the institutionalized spouse’s

Medicaid eligibility (e.g., where it is not for the sole benefit of either spouse), an

annuity contract must name the state Medicaid agency as the remainder beneficiary.

Id. § 1396p(c)(1)(F). Moreover, an annuity in which the institutionalized spouse (as

opposed to the community spouse) is the annuitant must also meet certain

requirements set forth in Section 1396p(c)(1)(G) to avoid being considered a transfer

of assets to a third party for less than fair market value.

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4. The present litigation.1

Mrs. Hughes was residing in a nursing facility. Prior to becoming eligible for

Medicaid, she and her husband used resources in excess of the CSRA to purchase an

income-generating annuity for Mr. Hughes’s sole benefit. When Mrs. Hughes

applied for Medicaid benefits, the Ohio Department of Job and Family Services

(ODJFS) assessed a penalty for an “improper transfer of assets” based on the

purchase of the annuity. According to Ohio, Mr. Hughes took a jointly owned

resource that exceeded the CSRA and converted it into income for his sole benefit,

thereby making the resource no longer available to the couple for payment of Mrs.

Hughes’s care.

The Hugheses contend that the state’s position violated federal and state

Medicaid law. The state filed a motion to dismiss arguing, among other things, that,

while 42 U.S.C. 1396p(c)(2)(B)(i) authorizes transfers of assets to spouses, Section

1396r-5(f)(1) bars the transfer of assets to the community spouse in any amount

above the CSRA. In the state’s view, Section 1396r-5(f)(1) controls over any

provision that would otherwise allow a community spouse to take for himself more

than the CSRA while leaving the public to pay for the institutionalized spouse’s care

that the couple could have paid for themselves. The Hugheses countered that the

1 This discussion is based on the district court opinion. 8


annuity was not an improper transfer because it met the requirements set out in

Section 1396p(c)(1)(F) and (G). The state disputed that the annuity met these

requirements and also contended that those provisions do not apply to an annuity

purchased for the sole benefit of a community spouse. The district court granted the

state’s motion to dismiss, holding that a transfer to a community spouse in excess of

the CSRA is an improper transfer, and that, to the extent that annuity purchases are

protected under federal Medicaid annuity laws, the protection extends only to

annuities purchased by or on behalf of an institutionalized spouse or Medicaid

applicant.

Argument 1. The transfer of a community resource to purchase an annuity for the community spouse’s sole benefit, after the institutionalized spouse is institutionalized but before the institutionalized spouse’s Medicaid eligibility is determined, cannot be deemed an improper transfer under 42 U.S.C. § 1396r-5(f)(1) if it complies with § 1396p(c)(2)(B)(i).

a. The transfer of a community resource by a Medicaid applicant to purchase

an annuity for the community spouse’s sole benefit, accomplished after the

institutionalized spouse is institutionalized but before the institutionalized spouse’s

Medicaid eligibility is determined, is not improper under 42 U.S.C. 1396r-5(f)(1) or

42 U.S.C. 1396p(c)(2)(B)(i). These two provisions operate at distinctly different

periods and thus do not conflict. Prior to an initial Medicaid eligibility

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determination, the Medicaid statute permits the transfer of assets from an

institutionalized spouse to the community spouse or a third party for the community

spouse’s sole benefit. Section 1396p(c)(2)(B)(i). The statute specifically exempts

from penalty any transfer from one spouse to another, or, from an individual to a

third party for the sole benefit of the individual’s spouse, and places no limit on the

value of the assets that can be transferred. Ibid. Although the express authorization

of transfers from institutionalized spouses to community spouses is limited in

Section 1396r-5 to amounts within the CSRA, this provision is operative only after

the institutionalized spouse has been determined to be eligible for Medicaid.

The facts here are nearly identical to those in Morris v. Oklahoma Department

of Human Services, 685 F.3d 925 (10th Cir. 2012). In Morris, a married couple used

a resource above the CSRA to purchase an annuity for the sole benefit of the

community spouse prior to the institutionalized spouse’s Medicaid eligibility

determination. The Tenth Circuit held that the transfer penalty should not apply to

qualifying annuities for the sole benefit of a community spouse purchased prior to a

Medicaid eligibility determination. The court concluded that Section

1396p(c)(2)(B)(i) (allowing transfer of an unlimited amount of resources between

either spouse and a third party for the sole benefit of either spouse, without penalty)

applies to spousal transfers occurring prior to an eligibility determination and

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Section 1396r-5(f)(1) (allowing a transfer from an institutionalized spouse to a

community spouse of resources only up to an amount equal to the CSRA, without

penalty) applies to spousal transfers occurring after an eligibility determination.

In HHS’s view, prior to an eligibility determination, transfers between spouses

or between either spouse and a third party for the sole benefit of either spouse as

provided in Section 1396p(c)(2)(B)(i) have little, if any, effect on Medicaid

eligibility because the assets of both spouses are pooled together and deemed to be

available to the institutionalized spouse. Section 1396r-5(c)(1)(A)(i). After the

institutionalized spouse is determined to be eligible for Medicaid, only resources

held in her name are counted and her continued Medicaid eligibility is dependent on

her having resources in her name below the relevant resource eligibility limit. If the

institutionalized spouse has resources above the relevant resource limit, Section

1396r-5(f)(1) provides a couple with the opportunity “as soon as practicable after the

date of the initial determination of eligibility” to transfer excess resources held in the

institutionalized spouse’s name to the community spouse so that the institutionalized

spouse has no more than her own resource allowance and the community spouse is

brought closer to the CSRA.

The Centers for Medicare & Medicaid Services’ State Medicaid Manual

supports the foregoing discussion. Section 3258.11 of the Manual contains

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instructions describing an institutionalized spouse’s ability to transfer unlimited

assets to a community spouse above the CSRA prior to an eligibility determination.

Section 3262.4, in turn, expressly states that Section 1396r-5(f)(1) applies only to

post-eligibility reallocation of resources. The agency has also taken the same

position in letters to state administrators and the public. See Addendum A (Letter to

Administrator of the Nevada State Welfare Division, dated August 31, 2001; Letter

to Director of Illinois Department of Public Aid, dated October 31, 2002; and Letter

to Michael Millonig Law Group, LLC, dated July 28, 2003).

b. The following discussion may be helpful to explain HHS’s interpretation

of the two provisions. Under the statute, an institutionalized spouse’s resources

must fall below a certain amount for the individual to qualify for Medicaid. To

determine whether the institutionalized spouse is Medicaid-eligible, it is necessary to

first determine the spousal resources at the time of institutionalization. The

community spouse is entitled to retain marital resources up to an amount determined

by state law – in accordance with the minimum and maximum amounts established

under Section 1396r-5(f)(2) – for his or her own use. That amount, the CSRA, is not

counted toward the institutionalized spouse’s Medicaid eligibility. The purpose of

the CSRA is to prevent the impoverishment of the community spouse. After

subtracting the CSRA, all other community resources are considered in determining

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whether the institutionalized spouse is eligible for Medicaid. To the extent the

remaining resources exceed the Medicaid limit, the institutionalized spouse must

“spend down” the remaining resources to qualify. For example, if a married couple

has $300,000 in community resources and the CSRA is $100,000, then $200,000

will be imputed to the institutionalized spouse. If Medicaid requires an individual’s

resources to fall below $5000, then to qualify the institutionalized spouse will have

to first spend down $195,000.

Section 1396r-5(f)(1) was designed to serve a limited and somewhat different

purpose than Section 1396p(c)(2)(B)(i). It is basically a “clean up” provision. If,

after the date of eligibility, assets within the CSRA remain in the institutionalized

spouse’s name, the institutionalized spouse may transfer those assets to (or for the

sole benefit of) the community spouse “as soon as practicable after the date of the

initial determination of eligibility.” 42 U.S.C. 1396r-5(f)(1). A failure to make such

a transfer would lead to the denial of Medicaid eligibility when it came time for the

institutionalized spouse’s first eligibility redetermination – which must take place at

least once every 12 months, see 42 C.F.R. 435.916(a). Working from the example in

the previous paragraph, if the $100,000 CSRA was held in a joint savings account,

the institutionalized spouse would have to transfer her interest in that amount to the

community spouse as soon as possible after she is determined eligible for Medicaid.

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If the institutionalized spouse does not, then the $100,000 will be imputed to her at

her first eligibility redetermination and will render her ineligible for Medicaid.

Section 1396r-5(f)(1), however, has nothing to say about the inter-spousal transfers

that are permissible before a determination of eligibility.

2. The transfer of a community resource to purchase an annuity by or on behalf of the community spouse is “for the sole benefit of the individual’s spouse” under § 1396p(c)(2)(B)(i) if the annuity is actuarially sound and its payments are based on, and made during, the community spouse’s life expectancy, and the annuity designates the institutionalized spouse as the primary beneficiary and the state as the contingent beneficiary.

The transfer of a community resource to purchase an actuarially sound annuity

for a community spouse that provides payments commensurate with the community

spouse’s life expectancy, and that designates the institutionalized spouse as the

primary remainder beneficiary and the state as the contingent beneficiary, is a

transfer “for the sole benefit of the individual’s spouse” under 42 U.S.C.

1396p(c)(2)(B)(i). However, whether the annuity also complies with Section

1396p(c)(1)(F), based on these same facts, is addressed in our response to Question

4, below.

An annuity is a contract by which the annuitant purchases the right to receive

monthly payments for a specified period of time in exchange for the payment of an

amount of principal. The Medicaid statute contemplates that a couple may, without

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penalty, use its resources to purchase an annuity for fair market value. See 42

U.S.C. 1396p(d)(6) (permitting the Secretary to establish the terms for qualifying

annuities). Section 3258.9(B) of the State Medicaid Manual provides guidance for

determining whether an annuity is purchased for fair market value. An annuity

purchased by or on behalf of either the institutionalized or the community spouse is

considered a transfer of assets for fair market value so long as the annuity is, among

other things, actuarially sound and commensurate with the reasonable life

expectancy of the beneficiary. Ibid. Thus, an annuity is “for the sole benefit of” the

community spouse if the annuity provides for payment of the entire value of the

annuity, plus interest, to the community spouse within that person’s expected

lifetime.

Similarly, the transfer of a couple’s resources to a third party for the purchase

of an annuity for the sole benefit of a community spouse is a transaction subject to

42 U.S.C. 1396p(c)(2)(B)(i). That provision exempts from penalty transfers of

assets “to the individual’s spouse or to another for the sole benefit of the individual’s

spouse.” Ibid. (emphasis added). In the case of a purchase of an annuity for the sole

benefit of the community spouse, the entity selling the annuity is “another” within

the meaning of the statute, i.e., the third party to which the resources are being

transferred.

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For the foregoing reasons, 42 U.S.C. 1396p(c)(2)(B)(i) exempts as a transfer

to a third party for the sole benefit of a community spouse the transfer of resources

to purchase by or on behalf of the community spouse an annuity in which the

income generated by the annuity is payable to and for the sole benefit of the

community spouse during her lifetime. While Section 1396p(c)(1)(F) mandates that

the state be a remainder beneficiary of the annuity, among the broader rules of

determining whether an annuity purchase is for fair market value (see responses to

Questions 3 and 4, infra), where the state is placed in the remainder designation line

does not affect whether the purchased annuity is for the “sole benefit of” the

community spouse. Thus, if the annuity designates the institutionalized spouse as

the primary remainder beneficiary and the state as the contingent beneficiary in the

event the community spouse dies before the end of the annuity period, the annuity

will still be considered to be for the sole benefit of the community spouse.

3. The transfer of a community resource to purchase an annuity by or on behalf of the community spouse that satisfies § 1396p(c)(2)(B)(i) must also satisfy § 1396p(c)(1)(F) but not § 1396p(c)(1)(G).

A transfer of funds to purchase an annuity for the community spouse is

subject to Sections 1396p(c)(2)(B)(i) and 1396p(c)(1)(F), but for reasons explained

below (in addressing Question 5), not Section 1396p(c)(1)(G). A transfer of funds

to purchase an annuity for the sole benefit of a community spouse is a transaction

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that is subject to the general provision, Section 1396p(c)(2)(B)(i), which permits the

transfer of unlimited assets from an institutionalized individual to a third party for

the sole benefit of the individual’s spouse. Such a transaction is also subject to

section 1396p(c)(1)(F), which specifically addresses annuities and provides that an

annuity naming the state as a remainder beneficiary will not be subject to penalty.

Such a transaction is not subject to Section 1396p(c)(1)(G), which applies only to

annuities for which the institutionalized spouse is the annuitant.

The purchase of an annuity can convert a couple’s resources into income. But

the Medicaid statute contemplates that result, allowing a couple, without penalty, to

use the couple’s resources for the purchase of an annuity for fair market value. See

Section 1396p(d)(6). Section 3258.9(B) of the State Medicaid Manual further

confirms this result. Thus, an annuity purchased by or on behalf of either the

institutional or the community spouse is not considered a transfer of assets for less

than fair market value, as long as it is (inter alia) actuarially sound and

commensurate with the reasonable life expectancy of the beneficiary. Ibid.

Under Section 1396p(c)(2)(B)(i), an institutionalized individual may transfer

funds to a third party for the purposes of purchasing an actuarially sound annuity for

the sole benefit of the individual’s spouse, provided that the income generated from

such an annuity is payable only to and for the sole benefit of the community spouse

17


and no other party during that spouse’s lifetime. Section 1396p(c)(1)(F) includes an

additional requirement for annuities by requiring that the state be named as a

remainder beneficiary in the first or second position. If the community spouse does

not survive the annuity’s terms, the state, rather than a third-party beneficiary, is

paid the remaining payments up to the total amount of Medicaid assistance paid on

behalf of the institutionalized spouse. Ibid. Section 1396p(c)(1)(G) provides

additional requirements for the transfer of funds to purchase an annuity without

penalty, but this provision, by its terms, applies only to annuities “purchased by or

on behalf of an annuitant who has applied for medical assistance” and does not apply

when a community spouse is the annuitant. See Addendum B (July 27, 2006 State

Medicaid Directors Letter Enclosure concerning treatment of annuities under the

DRA, section II.B and C).

4. The transfer of a community resource to purchase an annuity by or on behalf of the community spouse that provides for payments based on, and made during, the community spouse’s life expectancy, but designates the institutionalized spouse as the primary beneficiary and the state as the contingent beneficiary to receive payments in the event of the community spouse’s early death, does not satisfy the letter of § 1396p(c)(1)(F).

The transfer of a community resource to purchase an annuity for a community

spouse is subject to 42 U.S.C. 1396p(c)(1)(F). Section 1396p(c)(1)(F) states that a

purchase of an annuity shall be treated as the disposal of an asset for less than fair

18


market value unless either (i) the state is named as the remainder beneficiary “in the

first position,” or (ii) the state is named as the remainder beneficiary “in the second

position after the community spouse or minor or disabled child.” 42 U.S.C.

1396p(c)(1)(F). If an annuity purchased by or on behalf of a community spouse

does not name the state in the “first position” and instead names the state in the

second position after the institutionalized spouse, the annuity fails to comply with

the letter of the statute.

Section 1396p(c)(1)(F), added in the 2005 DRA, imposes an additional

requirement (on top of the requirements that apply to transfers of assets in general)

for annuities purchased for the sole benefit of a spouse, to ensure that those annuities

do not confer a remainder benefit to any party other than a community spouse, a

minor or disabled child, or the state (as specifically provided in the statute). Under

this provision, if the state is named as a remainder beneficiary in the first position or

in the second position after a community spouse or a minor or disabled child, the

purchase of that annuity is not considered a transfer of assets for less than fair

market value. This provision ensures that if either an institutionalized or community

spouse annuitant does not survive the annuity’s terms, the state, rather than a third-

party beneficiary or heir, other than those specified in the preceding sentence, will be

paid the remaining annuity payments up to the total amount of Medicaid assistance

19


paid on behalf of the institutionalized spouse.

An annuity that names the institutionalized spouse in the first position and the

state in the second does not comply with the letter of Section 1396p(c)(1)(F), but

because the state will likely benefit regardless of whether the institutionalized

spouse or state is named first in a community spouse’s annuity, there seems to be no

obvious reason to treat the two spouses differently. Designating an institutionalized

spouse as the primary remainder beneficiary and the state as a contingent beneficiary

for an annuity purchased by or on behalf of a community spouse would likely reduce

Medicaid’s costs for the services delivered to the institutionalized spouse. If an

annuity purchased for a community spouse designates the institutionalized spouse as

the primary remainder beneficiary and the community spouse dies before the end of

the annuity period, the remaining value of the annuity transfers from the deceased

community spouse to the surviving institutionalized spouse and will affect the

institutionalized spouse’s Medicaid eligibility. If the institutionalized spouse

receives the remainder in income installments, Medicaid’s payment for the

individual’s services will be reduced by the same amount of the annuity income

received (i.e., the individual will have to contribute the income to the cost of his or

her services). If the remainder is received as a lump sum payment, the payment

received by the institutionalized spouse will be counted against the eligibility limit.

20


If the amount is greater than the resource limit, Medicaid will no longer be

responsible for paying for the individual’s services because she will lose eligibility

for Medicaid.

Regaining eligibility will be dependent on the individual spending the lump

sum, and because of the restrictions on transfers to third parties under Section

1396p(c) (and without any longer having a community spouse), the individual will

likely end up using at least a portion of the payment to pay for her services.

Additionally, with the state named as a contingent beneficiary, if the

institutionalized spouse predeceases the community spouse and the community

spouse dies before the end of the annuity period, the state as the contingent

beneficiary receives the remaining value of the annuity to cover the amount of

Medicaid assistance paid on behalf of the institutionalized spouse during her

lifetime. The scenario just described contrasts sharply with the situation in which

the institutionalized spouse is the annuitant, names the community spouse as the first

remainder beneficiary, and then predeceases the community spouse, in which case –

more likely than not – the state will not benefit at all.

Thus, there may be good reasons not to penalize individuals – through a

period of past ineligibility or recoupment – where the community spouse has

previously designated an institutionalized spouse as the primary remainder

21


beneficiary and the state as a contingent beneficiary. As just explained, there is no

(or very little) harm to the state where the institutionalized spouse is named as the

primary beneficiary. In fact, HHS’s understanding is that some states permit such

annuities, and in HHS’s view such annuities are not inconsistent with the policies

underlying Section 1396p(c)(1)(F).

5. Section 1396p(c)(1)(G) does not apply to an annuity purchased by or on behalf of the community spouse.

Section 1396p(c)(1)(G), like Section 1396p(c)(1)(F), sets forth certain

requirements that an annuity purchase must meet to avoid being considered a

transfer of assets to a third party for less than fair market value. But it does not

apply to an annuity purchased by or on behalf of a community spouse. By its

express terms, it refers to “an annuity purchased by or on behalf of an annuitant who

has applied for medical assistance,” which refers to an institutionalized spouse

annuitant (since that is the individual “who has applied for medical assistance” under

the Medicaid program). Section 1396p(c)(1)(G). This interpretation is also

reflected in agency guidance, which makes clear that Section 1396p(c)(1)(G) applies

only to a purchase of an annuity by or on behalf of an institutionalized spouse

annuitant and “does not apply to annuities for which the community spouse is the

annuitant.” Addendum B ¶ 2(C) (emphasis in original).

22


CONCLUSION

For the foregoing reasons, the Court’s decision should reflect an analysis in

accordance with the answers provided above.

Respectfully submitted,

STUART F. DELERY Acting Assistant Attorney General MICHAEL S. RAAB 202-514-4053 /s/ Howard S. Scher HOWARD S. SCHER 202-514-4814 Attorneys, Appellate Staff Civil Division, Room 7239 Department of Justice 950 Pennsylvania Avenue, NW Washington, D.C. 20530-0001 JUNE 2013

23


Sixth Circuit Rule 32(a) Certification

Pursuant to Fed. R. App. P. 32(a)(7)(C) and Sixth Circuit Rule 32(a)(7)(C), I

hereby certify that this brief is double spaced (except for extended quotations,

headings, and footnotes) and is proportionately spaced, using Time New Roman

font, 14 point type. Based on a word count of my word processing system, this

amicus brief contains fewer than 7,000 words. It contains 5,094 words excluding

exempt material.

/s/ Howard S. Scher Howard S. Scher Counsel for the Amicus Curiae, U.S. Dep’t of Health and Human Services


Certificate of Service

I hereby certify that on this 28th day of June, 2013, I caused the foregoing

Brief for the United States Department of Health and Human Services as Amicus

Curiae to be filed by way of the ECF filing system. In addition, I also caused the

Amicus Brief to be served on counsel for the parties by way of the Court’s ECF

notification system.

/s/ Howard S. Scher Howard S. Scher Counsel for the Amicus Curiae, U.S. Dep’t of Health and Human Services


ADDENDUM A


Case: 3:09-cv-01878-JGC Doc #: 23-2 Filed: 03/02/10 1 of 4. PageID #: 301 Case: 12-3765 Document: 006111738403 Filed: 06/28/2013 Page: 32

ADDENDUM B


Enclosure

Section 6012

Changes in Medicaid Annuity RulesUnder the

Deficit Reduction Act of 2005

Centers for Medicare & Medicaid ServicesCenter for Medicaid and State Operations

July 27, 2006


Enclosure Highlights—Section 6012

I. Application RequirementsA. Disclosure of Interest in an AnnuityB. Requirement to Name the State as a Remainder Beneficiary C. Applications for Coverage of Long-Term Care Services in 1634 States D. Consideration of Income and Resources from an Annuity

II. Evaluation and Treatment of Purchases of Annuities and Certain Transactions Related to Annuities on or after February 8, 2006

A. Annuity-Related Transactions Other than Purchases.B. Requirement to Name the State as a Remainder Beneficiary on Annuities C. Annuities Purchased by or on Behalf of an Annuitant Who Applied for

Medical Assistance

III. Effective Date


The Deficit Reduction Act of 2005 (DRA), P.L. 109-171, adds new requirements to the Medicaid statute with respect to the treatment of annuities purchased on or after the date of enactment, February 8, 2006, as well as certain other transactions involving annuities that take place on or after the date of enactment. The DRA amends section 1917 of the Social Security Act (the Act) which pertains to Liens, Adjustments and Recoveries, and

Transfers of Assets. The DRA adds new provisions to section 1917, which include:

• The requirement to disclose, in an application for long-term care services, information regarding any interest an applicant or community spouse may have in an annuity;• The requirement to name the State as a remainder beneficiary in annuities in which the applicant or spouse is the annuitant; and • Provisions for the treatment of the purchase of certain annuities as a transfer for less than fair market value.

I. Application Requirements

A. Disclosure of Interest in an Annuity

Section 6012(a) of the DRA adds a new section 1917(e) to the statute. Under the new section 1917(e)(1), all States, including those with “1634 agreements”, are required to alter their applications for medical assistance for long-term care services, including applications for recertification, to include a disclosure and description of any interest the applicant or the community spouse may have in an annuity. This disclosure is a condition for Medicaid coverage of long-term care services described in section 1917(c)(1)(C)(i), which include:

• Nursing facility services; • A level of care in any institution equivalent to that of nursing facility services; and • Home and community-based services furnished under a waiver of section 1915 (c) or (d).

This disclosure requirement applies regardless of whether or not an annuity is irrevocable or is treated as an asset.

If the individual, spouse or representative refuses to disclose sufficient information related to any annuity the State must either:

• Using the authority of new section 1917(e)(1) described above, deny or terminate coverage of long-term care services only; or • Using existing Medicaid program authority, deny or terminate eligibility for Medicaid entirely based on the applicant’s failure to cooperate.

If the State wants to limit its action to denial of payment for long-term care services, it must still ensure that enough information regarding the income and/or resources related to an annuity has been collected and verified in order to establish Medicaid eligibility under existing rules. The DRA does not provide applicants an option to withhold information about annuities that may impact the computation of resources or income. If the State cannot collect enough information about an annuity to allow the


State to establish Medicaid eligibility, the State should deny eligibility entirely based on the applicant’s failure to cooperate in accordance with the State’s existing policies.

In cases where an unreported annuity is discovered after eligibility has been established and after payment for long-term care services has been made, the State should take appropriate steps to terminate payment for long-term care services as discussed above, including appropriate notice to the individual of adverse action. The State should also consider whether other steps should be taken including, if appropriate, possible civil and criminal charges, and potential recovery of benefits which were incorrectly paid.

B. Requirement to Name the State as a Remainder Beneficiary

Under new sections 1917(e)(1) and (2), all States must also include in the application for long-term care services, including the application for recertification, a statement that names the State as a remainder beneficiary on any annuity purchased on or after February 8, 2006 by virtue of the provision of medical assistance for institutional care. The State must also notify the issuer of any annuity disclosed for purposes of section 1917(c)(1)(F) of the State’s rights as a preferred remainder beneficiary.

• The State may require the issuer to notify it regarding any changes in disbursement of income or principal from the annuity; and

• The issuer of an annuity may disclose information about the State’s position as remainder beneficiary to others who have a remainder interest in the annuity.

C. Applications for Coverage of Long-Term Care Services in 1634 States

States that have entered into an agreement under section 1634 of the Social Security Act must ensure that any individual eligible for medical assistance under that agreement who wishes to receive coverage of long-term care services completes an application which includes the disclosure required under the new section 1917(e)(1) and the statement required under the new section 1917(e)(1) and (2). Failure to complete an application form that meets these requirements will not affect the individual’s eligibility for Medicaid; however, the individual will not be eligible for coverage of long-term care services unless the appropriate form is completed and signed.

D. Consideration of Income and Resources from an Annuity

The State may take into consideration the income or resources derived from an annuity when determining eligibility for medical assistance or the extent of the State’s obligations for such assistance. This means that even though an annuity is not penalized as a transfer for less than fair market value (see II. Evaluation and Treatment of Purchases of Annuities and Certain Transactions On or After February 8, 2006 below for further information about treating the purchase of an annuity as a transfer of assets), it must still be considered in determining eligibility, including spousal income and resources, and in the post-eligibility calculation, as appropriate.In other words, even if an annuity is not subject to penalty under the provisions of the DRA, this does not mean that it is excluded as income or resource.


II. Evaluation and Treatment of Purchases of Annuities and Certain Transactions Related to Annuities On or After February 8, 2006

A. Annuity-Related Transactions Other than Purchases

Section 6012(d) specifies that the provisions of the DRA apply to transactions, including purchases, which occur on or after the date of enactment. In addition to purchases, certain transactions which occur on or after that date would make an annuity, including one purchased before that date, subject to the provisions of the DRA. Such transactions include any action taken by the individual that changes the course of payments to be made by the annuity or the treatment of the income or principal of the annuity. These actions include additions of principal, elective withdrawals, requests to change the distribution of the annuity, elections to annuitize the contract and similar actions taken by the individual on or after February 8, 2006. Such transactions result in all provisions of the DRA being applicable to the annuity.

For annuities purchased prior to February 8, 2006, routine changes and automatic events that do not require any action or decision after the effective date of enactment are not considered transactions that would subject the annuity to treatment under these provisions of the DRA. Routine changes could be notification of an address change or death or divorce of a remainder beneficiary, and other similar circumstances. Changes which occur based on the terms of the annuity which existed prior to February 8, 2006, and which do not require a decision, election or action to take effect are likewise not subject to the DRA.

For example, if an annuity purchased in June 2001 included terms which require distribution to begin five years from the date of purchase, and payouts consequently begin, as scheduled, in June 2006 this will not be considered a transaction subject to the DRA, since no action was required, post-enactment, to initiate the change. Lastly, changes which are beyond the control of the individual, such as a change in law, a change in the policies of the issuer, or a change in the terms based on other factors, such as the issuer’s economic conditions, are not considered transactions that cause the annuity to be subject to the terms of the DRA.

B. Requirement to Name the State as a Remainder Beneficiary on Annuities

Section 6012(b) of the DRA adds a new section 1917(c)(1)(F) which provides that the purchase of an annuity shall be treated as a disposal of an asset for less than fair market value unless the State is named as a remainder beneficiary. Unlike the new section 1917(c)(1)(G) added by section 6012(c) of the DRA (discussed in detail below), section 1917(c)(1)(F) does not restrict application of its requirements only to an annuity purchased by or on behalf of an annuitant who has applied for medical assistance for nursing facility or other long term-care services. Therefore, we interpret section 1917(c)(1)(F) as applying to annuities purchased by an applicant or by a spouse, or to transactions made by the applicant or spouse.


Under the DRA an annuity must name the State as the remainder beneficiary in the first position for the total amount of medical assistance paid on behalf of the annuitant, unless there is a community spouse and/or a minor or disabled child. A child is considered disabled if he or she meets the definition of disability found at section 1614(a)(3) of the Act. If there is a community spouse and/or any minor or disabled child, the State may be named in the next position after those individuals. If the State has been named after a community spouse and/or a minor or disabled child, and any of those individuals or their representatives dispose of any of the remainder of the annuity for less than fair market value, the State may then be named in the first position.

As a remainder beneficiary, the State may receive up to the total amount of medical assistance paid on behalf of the individual, including both long term care services and community services. Under the new section 1917(e) (see section I.B. above) the State must notify the issuer of the annuity of the State’s right as the preferred remainder beneficiary. The State should require verification from the issuer that the State is named as a remainder beneficiary in the correct position. States should also require the issuer to notify the State if and when there is any change in the amount of income or principal being withdrawn.

If the State is not named as a remainder beneficiary in the correct position, the purchase of the annuity will be considered a transfer for less than fair market value. We interpret the statute to mean that the full purchase value of the annuity will be considered the amount transferred.

C. Annuities Purchased by or on Behalf of an Annuitant Who Applied for Medical Assistance

Section 6012(c) of the DRA amends section 1917(c)(1) by adding a new sub-paragraph (G) which provides that the purchase of an annuity on or after February 8, 2006, by or on behalf of an annuitant who has applied for medical assistance with respect to nursing facility services or other long-term care services, shall be treated as a transfer of assets for less than fair market value unless the annuity meets certain criteria. Unlike the new section 1917(c)(1)(F) discussed above, this requirement does not apply to annuities for which the community spouse is the annuitant. This requirement is in addition to those specified in 1917(c)(1)(F) pertaining to the State’s position as a remainder beneficiary. An annuity purchased by or on behalf of an annuitant who has applied for medical assistance will not be treated as a transfer of assets if the annuity meets any of the following conditions:

1. The annuity is considered either:• An individual retirement annuity (according to Sec. 408(b)) of the Internal Revenue Code of 1986 (IRC), or• A deemed Individual Retirement Account (IRA) under a qualified employer plan (according to Sec. 408(q) of the IRC).

OR


2. The annuity is purchased with proceeds from one of the following: • A traditional IRA (IRC Sec. 408a); or • Certain accounts or trusts which are treated as traditional IRAs (IRC Sec. 408 §(c)); or• A simplified retirement account (IRC Sec. 408 §(p)); or • A simplified employee pension (IRC Sec. 408 §(k)); or • A Roth IRA (IRC Sec. 408A).

OR

3. The annuity meets all of the following requirements: • The annuity is irrevocable and non-assignable; and• The annuity is actuarially sound; and• The annuity provides payments in approximately equal amounts, with no deferred or balloon payments.

To determine that an annuity is established under any of the various provisions of the Internal Revenue Code that are referenced in items 1. and 2. above, rely on verification from the financial institution, employer or employer association that issued the annuity. The burden of proof is on the institutionalized individual or his or her representative to produce this documentation. Absent such documentation, the purchase of the annuity will be considered a transfer for less than fair market value which is subject to a penalty. We interpret the statute to mean that the full purchase value of the annuity will be considered the amount transferred.

When evaluating whether or not an annuity meets the conditions listed in 3. above, use the methodology for determining actuarial soundness that is found in the State Medicaid Manual Chapter III, Section 3258.9 B. However, do not use the actuarial life expectancy tables published in that section. Instead, use the current actuarial tables published by the Office of the Chief Actuary of the Social Security Administration. These tables may be accessed at http://www.ssa.gov/OACT/STATS/table4c6.html.

Note that even if an annuity is determined to meet the requirements above, and the purchase is not treated as a transfer, if the annuity or the income stream from the annuity is transferred, except to a spouse or to another individual for the sole benefit of the spouse, child or trust as described in 1917(c)(2)(B), that transfer may be subject to penalty.

III. Effective Date

These provisions apply to purchases of annuities, and certain transactions related to annuities, that occur on or after the date of enactment of the DRA, February 8, 2006.States must take all reasonable steps to implement these provisions as soon as practicable. States should consider if pending applications need to be supplemented to collect information regarding annuities, or if this information is already specifically collected to determine income and resources. States should also consider how to best


notify applicants and recipients of the State’s rights regarding annuities purchased after the date of enactment.


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