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.”


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