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Estate of F.K. v. Division of Medical Assistance and Health Services

January 4, 2005


On appeal from the Division of Medical Assistance and Health Services.

Before Judges Cuff, Weissbard and Kimmelman.

The opinion of the court was delivered by: Cuff, J.A.D.


Argued: September 27, 2004

This appeal presents several issues concerning qualification for Medicaid benefits for a spouse who requires care in a nursing facility while the other spouse remains in the community. We consider a regulation adopted by the State Medicaid agency to control allegedly abusive use of annuities to shelter marital assets. Petitioner challenges the regulation that allows the purchase of an annuity but limits the amount of marital assets that may be used to purchase the annuity to the current community spouse resource allowance, which was $91,000 at the time the institutionalized spouse applied for benefits. Petitioner contends that the regulation is invalid because it is more restrictive than federal law. Petitioner also contends that the agency decision that the annuity is an available asset because it may be sold on a secondary market is contrary to law and unsupported by any facts in the record. We agree and reverse.

In May 2000, F.K. became a resident of the Holiday Care Center in Toms River. He suffered from Alzheimer's disease and his wife, H.K., was no longer able to care for him in their home. In accordance with the regulations in effect at that time, F.K. and H.K. purchased an actuarially sound commercial annuity for $273,538. By its terms, the annuity is irrevocable and non-assignable. H.K. is the sole beneficiary of the income. Although not required at the time of purchase, in apparent anticipation of the adoption of a proposed rule, the Department of Human Services, Division of Medical Assistance & Health Services (DMAHS) was named first remainder beneficiary.*fn2 The annuity was partially funded on May 28, 2001, and fully funded by June 11, 2001.

On June 5, 2000, DMAHS proposed new rules regarding qualification for Medicaid. The proposed regulations, including N.J.A.C. 10:71-4.10, concern the transfer of assets and the treatment of annuities for the purpose of determining an applicant's eligibility for Medicaid benefits and respond to the agency's concern that annuities were being used to shelter large sums of money. Following an extended comment and review period, DMAHS adopted N.J.A.C. 10:71-4.10 on June 18, 2001. The notice stated that the regulation was effective immediately. N.J.A.C. 10:71-4.10(p)2i provides (p) Annuity provisions shall be as follows:

2. Any commercial annuity purchased which is not actuarially sound, based on the life expectancy of the individual (as set forth in life expectancy tables published by the Health Care Financing Administration) or term certain (the length of payout is specified and payment does not terminate upon the death of the annuitant) shall be considered to be a transfer of an asset in order to qualify for Medicaid benefits. In the event that an annuity is not actuarially sound at the time of purchase, the amount that shall be considered to have been transferred at less than fair market value shall be that proportion of the annuity purchase price which is not actuarially sound. This shall be the same proportion as the amount by which the pay-out period exceeds the life expectancy of the individual at the time of the annuity purchase. (Life expectancy divided by the pay-out period of the annuity multiplied by the purchase amount of the annuity is subtracted from the total amount of the annuity to determine the uncompensated value.)

i. If an annuity is purchased for a community spouse with any portion of the couple's funds and the annuity purchase price exceeds the amount of the protective share of the community spouse, as determined in accordance with the procedures specified at N.J.A.C. 10:71-4.8(a), the amount in excess of the community spouse's protected share shall be counted in determining the applicant's eligibility.

On July 25, 2001, approximately thirty-seven days after the effective date of the regulation, F.K.'s former counsel submitted an application for Medicaid benefits on behalf of F.K.

On August 13, 2001, the Ocean County Board of Social Services (OCBSS) denied F.K.'s Medicaid application. Relying on N.J.A.C. 10:71-4.10(p)2i, the OCBSS determined that the annuity was a countable asset and F.K.'s and his wife's combined resources exceeded the $91,000 community spouse resource allowance (CSRA).

F.K. appealed. The matter was referred to the Office of Administrative Law and treated as a contested case. At the hearing before an Administrative Law Judge (ALJ), the parties stipulated that the annuity purchased by F.K. for the benefit of his wife complied with the regulations in effect at the time of purchase. It is undisputed that the annuity is actuarially sound. F.K. disputed the applicability of the newly adopted regulations to him and also argued that the regulation was invalid because it violated federal law. Following the hearing, the ALJ issued an Initial Decision in which he found that the regulations were effective on September 27, 2001; therefore, F.K.'s application for Medicaid benefits was governed by the regulations in effect at the time of issuance of the annuity. Because the parties stipulated that the annuity complied with the regulations in effect at the time of purchase, the ALJ recommended that the application for benefits should have been granted.

On September 12, 2002, the Director of DMAHS issued a Final Decision that reversed the Initial Decision and affirmed the OCBSS denial of benefits. She found that the regulation complied with the procedural requirements of the Administrative Procedure Act, that the regulation adopted June 18, 2001 applied to the application filed by F.K., and that the annuity was correctly included in the resource determination. The Director also held that the regulation did not violate federal law.

F.K. filed a timely notice of appeal. While the appeal was pending, we remanded the matter to DMAHS for further consideration in light of an October 21, 2002 letter that addressed the validity of the newly adopted regulations, particularly N.J.A.C. 10:71-4.10(p)2i, written by Thomas Hamilton, the director of the federal program charged with implementation and oversight of the federal Medicaid program.*fn3 Hamilton opined that limitation of the amount of a couple's resources that can be used to purchase an annuity for benefit of the community spouse to the CSRA level is not permitted by federal law. On July 3, 2003, the Acting Director of DMAHS ordered that the Hamilton letter should be included in the record but concluded that he was not required to defer to the legal opinion expressed in the letter. He further found that the annuity purchased by F.K. was an available asset because it was readily marketable on a secondary market for such annuities. We commence our consideration of this appeal with a review of the Medicaid program.

Medicaid is a cooperative federal-state program that is funded in large part by the federal government and administered by the states"so that eligible needy persons may be reimbursed for the cost of medical care." A.K. v. Div. of Med. Assistance and Health Serv., 350 N.J. Super. 175, 178 (App. Div. 2002) (citing 42 U.S.C.A. §§ 1396a to 1396v)."While state participation in the program is voluntary, participating states must adopt plans that comply with certain requirements imposed by federal statutes and regulations." Mertz v. Houstoun, 155 F. Supp. 2d 415, 420 (E.D. Pa. 2001) (citing Wilder v. Virginia Hosp. Ass'n, 496 U.S. 498, 502, 110 S.Ct. 2510, 2513, 110 L.Ed. 2d 455, 462 (1990)). The program is"'basically administered by each state within certain broad requirements and guidelines.'" Ibid. (quoting West Virginia Univ. Hosps., Inc. v. Casey, 885 F.2d 11, 15 (3d Cir. 1989), aff'd, 499 U.S. 83, 111 S.Ct. 1138, 113 L.Ed. 2d 68 (1991))."The states have significant discretion to design programs, but those programs must be consistent with federal law." A.K., supra, 350 N.J. Super. at 178-79 (citations omitted). States that choose to participate are required to comply with the Medicaid Act and the regulations adopted by the Secretary of Health and Human Services, and"must prescribe a single ...

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