Medicaid Eligibility Determinations: are “Wall Street Ethics” Ubiquitous?

Introduction: as someone who worked in law and compliance for Wall Street banks, I know a good deal about “Wall Street ethics” (or lack thereof) and I will assume that the reader has a good sense of this oxymoron. When I left the world of finance to open a solo law practice I expected somewhat higher standards in other sectors of the economy.

A recent discussion of ethical standards of government attorneys on the National Academy of Elder Law Attorneys (NAELA) website started with the following tale from a member attorney in a mid-western state (paraphrasing):

“My client was denied Medicaid benefits. He appealed, and was again twice denied at the two levels of administrative appeal. I took an appeal from the Medicaid determination to the local state court and filed a brief. I was soon contacted by the state attorney general’s office which recognized the validity of my arguments and offered a settlement. This gentlemen did not want to see the case litigated to a decision in my favor because of the fear of setting a precedent which others would learn about and follow.

The settlement was simple, my client would be accepted into Medicaid and would receive all of the benefits which he had been wrongly denied by the state agency (sounds very good), but, my client and I would be required to keep the settlement confidential.”

What is most troublesome about this story is the author’s comment that his client’s circumstances are commonplace, and the state Medicaid agency’s policy to deny benefits in similar cases is routinely made.

    Thus many deserving Medicaid applicants are being denied benefits unfairly, and the state attorney general’s office sanctions this abuse.

The author goes on to say that he was so troubled by the ethical dilemma of agreeing to keep the settlement confidential that he contacted the head of the bar association’s legal ethics division, the Inspector General’s office and the Ethics Commission. All of these legal ethics watchdogs were unable to see an ethical problem.

The author did not reveal the circumstances which led to his client’s unfair denial of benefits, and I can’t blame him as his primary duty is to his client, and by agreeing to the confidentiality obligation he is obtaining for his client exactly what his client sought.

A telling, if cynical, response from a senior NAELA member was, “What’s the problem? Your client got what he wanted and you got paid. You have no obligation to some vague concept of the common good.”

As for the ethics of the attorneys representing the government, the same cynic wrote: “Government lawyers have no higher calling than private practice lawyers…”

I’m afraid I have to agree with the cynic.

Hidden Medicaid Trap in Elder Nuptials

An unpleasant fact of life in the U.S. is the way that government regulations can leap out of the bushes to bite you when you least expect it. One prime example is in the case of a marriage between elders.

Henry was 75, healthy and retired, he had saved $600k which he held in a revocable living trust for his children and grandchildren. The love of his life, his wife Betsy, had passed away and when he met Lydia he never imagined that romance might bloom again. But it did, and Henry and Lydia, who had no assets of her own, were married shortly thereafter.

What Henry hadn’t counted on was the effect of Medicaid rules on his trust funds when Lydia became ill and was diagnosed with Alzheimer’s disease. When Henry contacted the state Medicaid agency to begin the application process for Lydia he discovered that as a Community Spouse he was expected to “spend down” his trust to about $113k, decimating the inheritance he and his first wife had built up for so many years for their children, before Lydia would become eligible for government benefits.

When Henry contacted an attorney he had difficulty believing that there was no way out of the dilemma. He could spend his money on home improvements, a new car, travel or anything else, but what he wanted was to live simply and save his money for his children. In desperation he asked the attorney if there wasn’t any possible solution, and he learned the brutal truth: in order to protect his financial legacy he needed to divorce Lydia!

Divorce solves Henry’s problem in that his assets would no longer be considered “available” resources to Lydia, who having no resources of her own, automatically qualifies for Medicaid. Henry still loves Lydia and there is nothing to prevent Henry from retaining his spiritual bond with her, and purchasing goods and services for Lydia which go beyond what Medicaid provides, as a way to improve the quality of her life while she is in the nursing home.

The emotional pain of being forced to choose between divorce and impoverishment is a cruel plight which takes the joy out of life for many elders. Single elders involved in a committed relationship and considering marriage need to carefully weigh the financial impact which long term care might have on their respective finances.

For many the solution is a domestic partnership, often celebrated in a church ceremony, with an agreement, formal or otherwise, about sharing expenses, but without registering a marriage. Since Arizona, like most states, no longer recognizes the common law marriage, this arrangement will not be treated by Medicaid as a marriage and will not cause the community “spouse” to have to spend down his/her assets.

Medicaid Alchemy: Base “Resources” Transmuted into Precious “Income”

Citation: Lopes v. Dept. of Social Services (2nd Cir., No. 10-3741-cv, Oct. 2, 2012)

Background: in the jargon of Medicaid, the term “community spouse” describes the healthy spouse of a Medicaid applicant (aka the “nursing home spouse”). The resources of both spouses are considered available to the nursing home spouse and must be disclosed on the Medicaid application. The Medicaid applicant is permitted to keep a maximum of $2,000 in “non-exempt” assets, while the community spouse can keep as much as $113,000.

If this sounds harsh then you get the picture. Medicaid regulations are designed to force the couple to spend down their assets to a very low level in order for the nursing home spouse to qualify for government assistance. A short list of assets is “exempt” from this rule (the family home up to a value of $500,000, one family car, home furnishings, personal belongings, a burial plot and a few other items).

New Development: Last month there was a rare bit of good news for elder couples who are facing the need to apply for Medicaid. The second circuit court of appeals has just ruled that the community spouse may convert “resources” into “income” through the purchase of a qualifying annuity. The devil is in the details (the annuity must be “non-assignable”, and the government must be named as the beneficiary of any funds left over after the death of the annuitant among other requirements) but this device is an important tool which can prevent the community spouse from being truly impoverished.

By using her own resources ($166,000 in cash—the amount by which her resources exceeded the Medicaid allowance for the community spouse), Mrs. Lopes purchased a single premium annuity which promised to pay her a stream of monthly income ($2,340) for a period of six years (which was determined to be “actuarially sound”, or a complete pay back within the purchaser’s life expectancy). The state was named as beneficiary and will receive any remaining funds should Mrs. Lopes pass away during the 6 year annuity period.  

Mrs. Lopes chose an annuity contract which contains an “Assignment Limitation Rider” (which provided that the annuity was non- transferable), which the court found determinative of the question of whether the annuity payments were resource or income. Since Mrs. Lopes did not have the legal right to sell her annuity, the court found that the payment stream was “income” (which is not deemed to be available to the nursing home spouse), and thus after the purchase of this annuity, the couples’ combined resources did not exceed the Medicaid limit.

Mrs. Lopes filed her husband’s Medicaid application 13 days after purchasing the annuity and the court ruled that it was irrelevant that the annuity was purchased for the purpose of qualifying for Medicaid. The Connecticut Department of Social Services’ policy manual treated annuities, even those which are non-assignable, as resources, and Mrs. Lopes’ suit challenged the legality of this provision on the basis that it was impermissibly more restrictive than the existing SSI regulations passed by Congress, and the Court agreed with Mrs. Lopes.

Many couples have in the past felt forced to make unnecessary home repairs, take expensive vacations that they hadn’t planned for, bought new cars they didn’t need and made other wasteful expenditures of their precious life savings in order to comply with the perceived need to “spend down” so that the nursing home spouse would be eligible for Medicaid. With this new ruling the courts have clearly come down on the side of the community spouse, recognizing a dual purpose of Medicaid legislation:

“…to provide health care for the indigent and protect community spouses from impoverishment while preventing financially secure couples from obtaining Medicaid assistance.”