New Jersey Annuity Opinion Sinks in Medicaid’s Bog: An Analysis of N.M.  

This article originally appeared in the May 2009 edition of The ElderLaw Report, page 3

By: Matthew J. Parker, CELA* and Jeffrey A. Marshall, CELA*

More than a decade ago, Connecticut’s high court described Medicaid laws as equivalent to the “Serbonian bog” referenced in John Milton’s Paradise Lost. See Ross v. Giardi, 680 A.2^nd 113 (Conn. 1996). It appears that the bog has claimed another victim. A New Jersey state appellate court has concluded that payments from a DRA-complaint annuity owned by a community spouse are a countable resource.

In the case, N.M. v. Division of Medical Assistance and Health Services, et al., N.J. Sup. Ct. , App. Div., Feb. 26, 2009), the community spouse purchased a DRA-compliant annuity that reduced the couple’s resources to the eligibility level. Nevertheless, the state Medicaid agency denied N.M.’s application on the ground that the income stream produced by the annuity was an available resource. The New Jersey Superior Court upheld the denial. (See the ElderLaw Report, April 2009, page 5.)   Previously the New Jersey court had held that payments from an immediate annuity were not a resource because there was no evidence of a secondary market for this type of investment. See, F.K. v Div. of Med. Assistance & Health Servs., 374 N.J. Super. 126 (App.Div.); see The ElderLaw Report, March 2005, page 5). However, the marketability issue was irrelevant to the decision in N.M. because of a somewhat baffling stipulation by the applicant that the monthly payment stream could be sold.

To reach its conclusion, the N.M. court had to circumvent the recent precedential decision by the U.S. 3^rd Circuit Court of Appeals in James v. Richman, 547 F.3d 214 (3rd Cir. 2008); see The ElderLaw Report, January 2009, page 7). The James court held that Pennsylvania could not treat the payments from a non-assignable immediate annuity as a resource. It noted that there was no statutory authority for such treatment and that allowing it would undermine the Medicare Catastrophic Coverage Act (MCCA) rule that “no income of the community spouse shall be deemed available to the institutionalized spouse.” See 42 U.S.C. § 1396r-5(b)(1).

James dealt with an annuity purchased prior to the effective date of the DRA. The N.M. opinion argues that James no longer applies because Congress changed the law with the enactment of DRA Section 42 U.S.C. '1396 (e)(4). Subsection (e)(4) states: @Nothing in this subsection [the subsection of the DRA requiring disclosure of annuity interests] shall be construed as preventing a state from denying eligibility for medical assistance for an individual based on the income or resources derived from an annuity described in paragraph (1).@

Even after noting that (e)(4) “is not a model of clarity” the N.M. court nonetheless concludes that it  authorizes the disregard of the community spouse income protections established by MCCA. The court fails to acknowledge the clear and explicit Congressional mandate that the community spouse income protections are to be given priority over other provisions of Medicaid law, such as (e)(4). See 42 U.S.C. § 1396r-5(a)(1). On the other hand, (e)(4) has the clearly limited purpose of restricting the effect of the rules on disclosure of annuities. 

The N.M. court fails to consider the context of (e)(4). And it conspicuously disregards a recent federal court decision with virtually identical issues and facts but opposite result, Weatherbee v. Richman, ____ F.Supp.2d___ (W.D.Pa.2009); see The ElderLaw Report, March 2009, page 5).  In contrast to the cogent statutory analysis in Weatherbee, the N.M. court bases its conclusions on a few general comments from Congressional representatives that don’t even refer to the annuity provisions. N.M. also seeks support in a July 27, 2006 CMS directive on annuities. see The ElderLaw Report, September 2006, page 2.) But the CMS guidance doesn’t address the payment stream issue and basically just reiterates the terms of (e)(4). 

In the authors’ opinion, a more reasonable reading of subsection (e)(4) is that it simply means that the DRA disclosure requirements are not to be interpreted as modifying the treatment of annuities. Disclosure is required regardless of whether the annuity involves a penalized transfer, is irrevocable, or is treated as income or an asset.

It seems that the N.M. court has allowed its view of desirable public policy to influence its decision.  It would have been better served to follow the wise guidance offered by Judge Roth in James: Courts should not “create rules based on our own sense of the ultimate purpose of the law being interpreted, but rather seek to implement the purpose of Congress as expressed in the text of the statutes it passed.”

N.M. does serve to remind us of the antipathy of many courts to Medicaid planning. As to the issue of whether annuity payments are a resource, a more reasoned analysis can be found in Weatherbee. Since Weatherbee is on appeal to the 3^rd Circuit Court of Appeals, it may ultimately decide the annuity issue for New Jersey . In the meantime, at least in New Jersey , attorneys should anticipate further resistance to the use of annuities to reduce community spouse resources. 

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