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Johnson v. Guhl

January 3, 2001

DONALD H. JOHNSON, ET AL., PLAINTIFFS
v.
MICHELE K. GUHL, COMMISSIONER OF THE NEW JERSEY DEPARTMENT OF HUMAN SERVICES, ET AL., DEFENDANTS



The opinion of the court was delivered by: Bassler, District Judge

OPINION

"There can be no doubt but that the statutes and provisions in question, involving the financing of Medicare and Medicaid, are among the most completely impenetrable texts within human experience. Indeed, one approaches them at the level of specificity herein demanded with dread, for not only are they dense reading of the most tortuous kind, but Congress also revisits the area frequently, generously cutting and pruning in the process and making any solid grasp of the matters addressed merely a passing phase." Rehabilitation Ass'n of Virginia v. Koziowski, Civ. Nos. 93-2572, 94-1134 (4th Cir. 1994). With this in mind, we begin.

Plaintiffs are married couples with one spouse living in the community ("community spouse") and the other residing in a skilled nursing facility ("institutionalized spouse"). Plaintiffs challenge certain provisions of the New Jersey Medicaid plan governing Medicaid eligibility to cover the cost of the institutionalized spouse's receipt of long term care.

Defendants' motion to dismiss for failure to state a claim upon which relief may be granted is denied on all counts, except as to the due process and equal protection claims, and except as to all claims by those Plaintiffs who have not yet applied for Medicaid benefits. Plaintiffs' motion for preliminary injunction is denied.

I. BACKGROUND

Some of the Plaintiffs *fn1 are institutionalized spouses currently residing in long-term care facilities in New Jersey. (See First Amended Compl. ¶ 4.) *fn2 Of those institutionalized spouses, some have been denied Medicaid benefits and have filed fair hearing appeals, *fn3 and some have Medicaid applications pending. *fn4 (Id. at ¶ 5.) Some Plaintiffs are prospective Medicaid applicants. *fn5 (Id. at ¶ 6.) Plaintiffs residing in the community are the beneficiaries of Community Spouse Annuity Trusts ("CSATs"). *fn6 (Id. at ¶ 7.)

In this action, Plaintiffs challenge the treatment of the CSATs as a countable resource in determining Medicaid eligibility. Because the institutionalized spouses have been denied, or will be denied benefits as a result of such treatment, Plaintiffs claim that Defendants' treatment of CSATs constitutes impermissible rule-making in violation of their rights to due process and equal protection. Plaintiffs urge this Court to order the State to implement regulations governing undue hardship hearings.

Plaintiffs are suing Michele Guhl, Commissioner of the New Jersey Department of Human Services ("DHS"), Margaret Murray, Director of the Division of Medical Assistance and Health Services ("DMAHS"), as well as the Directors of the Board of Social Services for Bergen County and Morris County (collectively referred to as "Defendants"). The first amended complaint contains six counts: (1) 42 U.S.C. § 1983; (2) Declaratory Judgment; (3) constitutional due process; (4) improper rule making; (5)equitable estoppel and equal protection; and (6) violation of New Jersey regulations. Plaintiffs seek the following relief:

§ to enjoin the fair hearings appeal of Plaintiffs' denials pending resolution of this action;

§ declaratory judgment that Defendants engaged in improper rule making;

§ a requirement that Defendants utilize proper standards and procedures to adopt regulations to implement undue hardship regulations;

§ declaratory judgment that Defendants' denials of each of the institutionalized Plaintiffs pending Medicaid applications were illegal, null and void;

§ a requirement that Defendants redetermine each Plaintiff's pending Medicaid application in accordance with current law, regulations and prior "policy" determinations;

§ a declaratory judgment that prospective Medicaid applications utilizing CSATs drafted and funded prior to the adoptions of undue hardship regulations be permitted as exceptions to the transfer rules pursuant to 42 U.S.C. § 1396p(c)(2)(B)(i) and (ii);

§ estoppel of Defendants from determining that Plaintiffs' contributions of available resources to CSATs constitute transfers for less than fair market value resulting in a period of ineligibility for Medicaid benefits;

§ compensatory damages; and

§ attorneys' fees and costs pursuant to 42 U.S.C. § 1988.

Plaintiffs move for preliminary and permanent injunctive and declaratory relief, and Defendants move to dismiss. Oral argument was held on March 27, 2000.

To understand the issues and place them in context, a brief overview of Medicaid and its eligibility requirements for institutionalized spouses is required.

II. MEDICAID

A. Overview

The Medicaid Act *fn7 is a cooperative federal-state program that is jointly financed with federal and state funds. Wilder v. Virginia Hospital Ass'n, 496 U.S. 498, 501 (1990). The purpose of the program is to "provide a nationwide program of medical assistance for low income families and individuals." West Virginia Univ. Hosps., Inc. v. Casey, 885 F.2d 11, 15 (3d Cir. 1989).

Although participation in the program is voluntary, participating States must comply with certain requirements imposed by the Act and regulations promulgated by the Secretary of Health and Human Services (Secretary). To qualify for federal assistance, a State must submit to the Secretary and have approved a "plan for medical assistance," § 1396a(a), that contains a comprehensive statement describing the nature and scope of the State's Medicaid program. 42 CFR § 430.10 (1989). Wilder, 496 U.S. at 501.

The Medicaid program is "`basically administered by each state within certain broad requirements and guidelines.'" West Virginia, 885 F.2d at 15 (citation omitted).

On the federal level, the Secretary of the U.S. Department of Health and Human Services ("HHS") administers the program through the Health Care Financing Administration ("HCFA"). HCFA has issued guidelines, known as "Transmittal 64," or the "State Medicaid Manual," interpreting the transfer of assets and treatment of trusts provisions of the Medicaid Act [hereinafter "HCFA Guidelines" or "Transmittal 64"]. *fn8

The New Jersey Medical Assistance and Health Services Act, N.J.S.A. 30:4D-1, et seq., authorizes New Jersey's participation in the Medicaid program.

On the state level, the DMAHS, an agency contained within the DHS, is responsible for administration of the Medicaid program in New Jersey. N.J.S.A. 30:4D-4. The county welfare agencies ("CWA") assist DMAHS in administering the program by processing applications for Medicaid, including determining whether an applicant has met the income and resource eligibility standards. N.J.S.A. 30:4D-7a; N.J.A.C. 10:71-3.15. CWA staff members make their determinations based on information received from an applicant and from their own investigations to verify, supplement or clarify such information. N.J.A.C. 10:71 et seq.

With certain exceptions, for an individual to be eligible for Medicaid benefits, a person's income and resources must fall below a certain limit. When inventorying an applicant's income and resources to determine eligibility, Medicaid "deems" the income and resources of each spouse to be available to the other when both spouses live together in the community. When, however, one spouse enters a nursing facility ("institutionalized spouse") and is eligible for Medicaid, while the other spouse stays in the community ("community spouse"), the rules become more complex. John Bigler, Diane Archer, John Regan, An Overview of Social Security, Medicare and Medicaid, 65 N.Y. State Bar Journal 14 (September/October, 1993) [hereinafter "Bigler Article"]. The Medicare Catastrophic Coverage Act ("MCCA"), enacted in 1988, and the 1993 Omnibus Budget Reconciliation Act ("OBRA") contain provisions addressing this more complex situation.

B. Pre-MCCA and OBRA

Prior to enactment of the MCCA, shortly after a spouse was institutionalized, each spouse was treated as a separate household. Income, such as Social Security checks, pensions, and interest or dividends from investments, were considered to belong to the spouse whose name was on the instrument conveying the funds. Consequently, when the husband, for example, entered a nursing home and the couple's pension check had the husband's name on it, all of that income was attributed to him when determining Medicaid eligibility, leaving the wife destitute. Conversely, if the wife entered the nursing home, the husband had no obligation under federal law to contribute any of that income toward the cost of the wife's care. See H.R. Rep. No. 100-105(II), 100th Cong., 2nd Sess., at 66 (1987), reprinted in 1988 U.S.C.C.A.N. 857, 889.

A similar rule was in effect for the attribution of resources. Ibid. Generally, in the month following institutionalization, jointly held resources to which a spouse had unrestricted access, such as a joint savings account, or resources solely held by the institutionalized spouse, were considered available to that spouse for eligibility purposes. Ibid. In contrast, assets solely held by the community spouse were, after the first month, considered to belong to her and she had no obligation under federal law to contribute any amount of such resources toward the costs of care of the institutionalized spouse. Id. at 66-67; 1988 U.S.C.C.A.N. at 889-90.

C. Resource Rules Under MCCA and OBRA

One of Congress' reasons for enacting the MCCA *fn9 was to end the "pauperization" of the community spouse "by assuring that the community spouse has a sufficient - but not excessive - amount of income and resources available . . . while . . . [the institutionalized] spouse is in a nursing home at Medicaid expense." Id. at 65, 1988 U.S.C.C.A.N. at 888. Additionally, Congress intended to close the loophole where a couple could shelter resources in the community spouse's name while the institutionalized spouse received Medicaid.

To achieve those goals, the MCCA requires that at the time of institutionalization, a "snapshot" of the total value of the couple's resources owned by either the institutionalized or community spouse is inventoried or assessed. 42 U.S.C. § 1396r-5(c)(1)(A). The spousal share is equal to half of such total value. Id. To avoid impoverishment of the community spouse, the community spouse is permitted to retain what is termed the "community spouse resource allowance," *fn10 ("CSRA"). 42 U.S.C. § 1396r-5(f)(2).

The CSRA is not considered available to pay for the care of the institutionalized spouse and need not be "spent down" in order for the applicant to be Medicaid eligible.

If [the community spouse] actually owns less than this amount, a portion of the institutionalized spouse's resources must be transferred to [the community spouse] to raise her personal resources to the required level. Conversely, if her resources exceed this level, she is obliged to spend the excess on the costs of care of the institutionalized spouse. If she refuses, the state has the right to seek to enforce her obligation in the courts, but the institutionalized spouse will still qualify for Medicaid. He, too, after providing for the community spouse's MMMNA, must spend any excess for his own care. Medicaid will pay for his care only after he has spent down to the basic level of exempt resources. Bigler Article; see 42 U.S.C. § 1396r-5(c)(2).

To illustrate, if a couple has $100,000 in a joint savings account and jointly held stocks and mutual funds at the time the spouse is institutionalized, then $50,000 is attributable to each spouse. If the ceiling on the community spouse's share of the couple's resources was $48,000, as it was in 1992 when the MCCA was passed, then the $2,000 in excess of $48,000 would be attributed to the institutionalized spouse for the purposes of determining eligibility. Consequently, the couple would have to "spend down" $52,000 (the institutionalized spouse's $50,000 share, plus $2,000 excess resources from the community spouse's share) less the resource eligibility standard (currently $2,000) before the institutionalized spouse could qualify for Medicaid. See H.R. Rep. No. 100-105(II), at 77 (1987); 1988 U.S.C.C.A.N. at 900.

D. Penalty Period for Transfer of Assets

When an institutionalized individual who has transferred assets applies for Medicaid benefits, the application is subject to transfer and trust rules under the statutory scheme set forth in OBRA and the MCCA.

In addition to the new resource rules, discussed above, which closed the loophole where a couple could shelter resources in the community spouse's name, the Committee on Energy and Commerce, concerned about the fact that wealthy individuals could transfer resources in order to qualify for Medicaid nursing home coverage, instituted a new formula under the MCCA for calculating a penalty, (i.e. a period of ineligibility), for transferring of assets. See H.R. Rep. No. 100-105(II), at 73; 1988 U.S.C.C.A.N. at 896.

Under OBRA, an institutionalized spouse may be denied Medicaid eligibility if that person (or the person's spouse) has transferred any nonexempt "asset" or his or her home for less than fair market value during the 36 month period (referred to as "look-back" period) before applying for Medicaid while institutionalized. Bigler Article; 42 U.S.C. § 1396p(c)(1)(B)(i). "The term `asset' includes all of the countable income and resources of the individual or his or her spouse, as well as those assets which these persons are entitled to but do not receive because of their own actions or the action of another person, including a court or administrative body, with legal authority to act in place of the individual or the spouse." Bigler Article; 42 U.S.C. § 1396p(e).

If an asset is transferred during the "look-back" period, then the applicant is subject to a "penalty period," which is a period of ineligibility calculated by dividing the uncompensated amount of the assets transferred by the average monthly cost of nursing home care in the particular state. Michael Feinberg, Medicaid After OBRA `93 As It Impacts on Long-Term Care Planning, 164 N.J. Lawyer 24 (October, 1994) [hereinafter "Feinberg article"]. For example, if an individual transfers $300,000 on January 1, 1995 to his respective family members and applies for Medicaid on December 1, 1997, his look-back period extends to December 1, 1994. Because the transfer was made before December 1, 1994, it will fall within the person's look-back period. Because the amount of the transfer was $300,000, an 88 month penalty period ($300,000 divided by $3,376 *fn11 ) would result. Therefore, that individual would not be eligible for Medicaid until April 2002.

E. Treatment of Trusts

Next, specific rules apply for trusts created by the Medicaid applicant, the applicant's spouse, or any person, including a court or administrative body, acting "with legal authority to act in place of or on behalf of the individual or the individual's spouse" or "at the direction or upon the request of the individual or the individual's spouse." *fn12 The following rules apply regardless of why the trust was established; whether the trustees have or exercise any discretion under the trust; any restriction of when or whether distributions can be made from the trust; or any restrictions on the use of distributions. 42 U.S.C. § 1396p(d)(2)(C).

When a trust is revocable, under the MCCA resource rules, the corpus of the trust is considered a resource to the applicant. 42 U.S.C. § 1396p(d)(3)(A). "Because it remains available, no penalty is incurred for a transfer into a revocable trust." Peter M. Macy, Medicaid Planning After OBRA-93: Placing the Home in a Revocable Trust, 79 Mass. L. Rev. 2 (March 1994) [hereinafter "Macy Article"].

The treatment of an irrevocable trust in determining Medicaid eligibility depends on what type of interest the Medicaid applicant retains in the trust. If the applicant is a permitted beneficiary of an irrevocable trust, the corpus of the trust is a countable resource and any distributions to the applicant, whether made from income or principal, will be treated as income to him or her. H.R. Rep. No. 103-111(II), 103th Cong., 1st Sess., at 207-08 (1993), reprinted in 1993 U.S.C.C.A.N. 378, 534-35; 42 U.S.C. § 1396p(d)(3)(B)(i). "Any other payments from the trust are considered a transfer of assets by the individual." Ibid.

If, on the other hand, the applicant can in no way benefit from the trust, no part of the corpus will be treated as a countable resource to the institutionalized spouse. See HCFA Guidelines § 3259.6(C); see also Feinberg Article. Rather, the corpus of the trust will be considered a transfer of assets for less than fair market value and trigger a 60-month look-back period. 42 U.S.C. § 1396p(d)(3)(B)(ii); 42 U.S.C. § 1396p(c)(1)(B)(i). Certain transfers, however, such as the transfer of assets between spouses "for the sole benefit of" the other spouse, do not trigger a penalty period. 42 U.S.C. § 1396p(c)(2)(B)(i). HCFA has established that a "sole benefit" transfer is one where "no individual or entity except the spouse . . . can benefit from the assets transferred in any way, whether at the time of the transfer or at any time in the future." HCFA Guidelines § 3257(b)(6). A trust meets this definition if the trust provides for "spending of the funds involved for the benefit of the individual a basis that is actuarially sound based on the life expectancy of the individual involved." Ibid.

Exhibit A attached to the Certification of Eugene Mariani ("Mariani Cert.") is typical in form and content of the CSATs at issue here. See Certification of Donald McHugh, Esq. ("McHugh Cert."), ¶ 2. The CSATs are irrevocable trusts created for the "sole benefit" of the community spouse. The purpose of the trust is to qualify the institutionalized spouse for Medicaid benefits. According to the trust document, the trust is "actuarially sound" within the meaning of OBRA and the HCFA Guidelines because the entire income and corpus will be issued to the community spouse within his/her lifetime, as determined by the actuarial tables set forth in the HCFA Guidelines. Defendants do not dispute that the CSATs at issue are actuarially sound transfers "for the sole benefit of" the community spouse and are therefore not subject to a transfer penalty. As required by DMAHS, upon the death of the beneficiary (community spouse), the trust names DMAHS as the first beneficiary under the CSAT. The CSAT terminates when the first of the following occurs: the corpus is exhausted; the beneficiary dies; or the actuarial life expectancy expires.

F. Undue Hardship Provisions

Pursuant to the Medicaid Act, the transfer rules do not render an applicant ineligible to the extent that "the State determines, under procedures established by the State (in accordance with standards specified by the Secretary), that the denial of eligibility would work an undue hardship as determined on the basis of criteria established by the Secretary." 42 U.S.C. § 1396p(c)(2)(D).

G. New Jersey Medicaid

Defendants do not dispute that since late 1994 (when trusts had to comply with OBRA), DMAHS had approved the use of numerous CSATs so that the community spouse trust amounts were excluded from the countable resources of the institutionalized spouse. On April 16, 1998, however, a letter was issued by Robert Streimer, on behalf of HCFA, to a private attorney in Virginia ("Streimer letter") explaining that assets in a trust established solely for the benefit of the community spouse were to be viewed in two contexts: (1) whether the transfer of assets for less than fair market value subjects the institutionalized spouse to a transfer penalty; and (2) whether the asset is a countable resource. See McHugh Certif., Ex. D.

While the letter is certainly not binding on this Court, it is, at the very least, instructive. In the Streimer letter, the HCFA agreed that no transfer penalty was triggered by the transferral between spouses of assets for less than fair market value. The letter provided that actuarial soundness was one means of determining that a transfer was in fact made for the sole benefit of the spouse. It disagreed, however, that actuarial soundness had any bearing on whether the trust was a countable resource. According to HCFA, the "sole benefit of" trust did not warrant the same treatment as a standard annuity because it was an irrevocable trust subject to § 1917(d) of the Social Security Act; *fn13 the Streimer letter explained that there is a fundamental difference between a standard annuity and the "annuitized" trust at issue.

A standard annuity requires the actual purchase of a commodity, i.e., the annuity itself. . . .Upon completion of the transaction, the buyer no longer owns the funds used to purchase the annuity. Instead, he or she owns the annuity itself. If the annuity is irrevocable, as most annuities are, the buyer cannot reclaim ownership of the funds used to purchase the annuity.

Streimer Letter. By contrast, the corpus of the trust established for the sole benefit of the community spouse can, at some point in time, be paid to the community spouse. Id. Therefore, the author of the Streimer letter concluded that while the spouse was not subject to the transfer penalty provision, the corpus of the trust at issue was a countable resource.

After learning of HCFA's position, DMAHS, by letter dated July 6, 1999, notified the Bergen County Board of Social Services that "actuarial soundness only pertains to whether a penalty can be imposed for transferring assets to a third party for the sole benefit of a spouse" and "does not affect how resources are counted in determining eligibility." See McHugh Certif., Ex. A. Echoing the Streimer letter, the letter from DMAHS further explained that because CSATs can be paid at some point in time to the community spouse, the entire corpus is considered available to the community spouse. In recognition that some applications for Medicaid eligibility had been submitted in reliance on the prior approvals of CSATs and that some applications had been pending for awhile, DMAHS offered to permit the community spouse to convert the CSAT into a commercially purchased annuity, naming the state as the first remaining beneficiary. See Mariani Certif., Ex. C.

III. DISCUSSION

A. Motion to Strike

1. McHugh Certification

At oral argument, Defendants made an oral motion to strike the Certification of Donald M. McHugh, Esq., alleging that it contains legal conclusions.

Local Civil Rule 7.2 provides that "[a]ffidavits shall be restricted to statements of fact within the personal knowledge of the affiant. Argument of the facts and the law shall not be contained in the affidavits. Legal arguments and summations in affidavits will be disregarded by the Court . . ."

To the extent that the McHugh Certification does contain legal conclusion, those portions will be ignored. Only matters within Mr. McHugh's personal knowledge shall be considered by this Court. See San Filippo v. Bongiovanni, 743 F. Supp. 327, 332 n.3 (D.N.J. 1990)(striking inadmissible elements of affidavit but permitting remainder), rev'd on other grounds, 961 F.2d 1125 (3d Cir.), cert. denied 506 U.S. 908 (1992); see also Lombardi v. Cosgrove, 7 F. Supp.2d 481, 492 (D.N.J. 1997)(denying ...


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