Zahner v. Sec'y Pa. Dep't of Human Servs.

• Decision Date: 02 September 2015
• Docket Number: 14–1328.,Nos. 14–1406,s. 14–1406
• Citation: 802 F.3d 497
• Parties: Anabel ZAHNER, by her agent Raymond E. Zahner; Estate of Donna C. Claypoole, by Mitchell R. Claypoole, Executor; Connie L. Sanner, by her agent Jamie R. Rybak, Appellants in No. 14–1328 v. SECRETARY PENNSYLVANIA DEPARTMENT OF HUMAN SERVICES, Appellants in No. 14–1406.
• Court: U.S. Court of Appeals — Third Circuit

802 F.3d 497

Anabel ZAHNER, by her agent Raymond E. Zahner; Estate of Donna C. Claypoole, by Mitchell R. Claypoole, Executor; Connie L. Sanner, by her agent Jamie R. Rybak, Appellants in No. 14–1328

v.SECRETARY PENNSYLVANIA DEPARTMENT OF HUMAN SERVICES, Appellants in No. 14–1406.

Nos. 14–1406

14–1328.

United States Court of Appeals, Third Circuit.

Argued Nov. 19, 2014.

Opinion Filed: Sept. 2, 2015.

René H. Reixach, Esq., (Argued), Woods Oviatt Gilman LLP, Rochester, N.Y., Kemp C. Scales, Esq., Titusville, PA, Counsel for Appellants/Cross–Appellees in 14–1328.

Jason W. Manne, Esq., (Argued), Manne Law Office, Eugene K. Cuccarese, Esq., Office of General Counsel, Pittsburgh, PA, Counsel for Appellee, Cross–Appellant/Appellee.

Stephen H. Kaufman, Esq., Eric J. Pelletier, Esq., Revée M. Walters, Esq., Offit Kurman, P.A., Owings Mills, MD, Counsel for Amicus Appellant Fidelity & Guaranty Life Insurance Company.

Ron M. Landsman, Esq., Ron M. Landsman, P.A., Rockville, MD, Stanley M. Vasiliadis, Esq., Bethlehem, PA, John William Callinan, Esq., Wall, NJ, Counsel for Amicus Appellant National Academy of Elder Law Attorneys, and its Pennsylvania and New Jersey Chapters.

Before: McKEE, Chief Judge, RENDELL, and SLOVITER, Circuit Judges.

OPINION

McKEE, Chief Judge.

Anabel Zahner, Donna Claypoole, and Connie Sanner each applied for Medicaid institutional care coverage shortly after purchasing a short-term annuity. The Pennsylvania Department of Human Services (“DHS”), formerly the Department of Welfare, classified each of their annuities as a resource when determining Medicaid eligibility.¹ This classification meant that the value of each annuity precluded them from receiving Medicaid assistance and resulted in a penalty period of ineligibility. Each plaintiff responded by bringing an action against DHS. The District Court held that the plaintiffs' purchases of the short-term annuities were sham transactions intended only to shield resources from Medicaid calculations, and affirmed DHS's imposition of a period of Medicaid ineligibility. The District Court also held that, contrary to DHS's arguments, a Pennsylvania statute that purported to make all annuities assignable was preempted by federal law. This appeal followed.

We agree with the District Court's preemption analysis, but will reverse its ruling that the annuities are resources for the purposes of Medicaid eligibility.

I. BACKGROUND

Donna Claypoole was admitted to a nursing home in December 2010; her husband remained in their home (a “community spouse”). In 2009 and 2010, Claypoole and her husband made gifts to family members totaling over $100,000, resulting in a period of Medicaid ineligibility. In August 2011, Claypoole's husband applied for an annuity for which he paid MetLife $45,000.00 in return for monthly payments of $760.20 for five years. Claypoole also purchased an annuity. She paid ELCO $84,874.08 in return for monthly payments of $6,100.22 for 14 months. Both contracts contained anti-assignment provisions. One purpose of the ELCO annuity was to pay for Claypoole's nursing home care during the period of Medicaid ineligibility that resulted from her large gifts to family members. DHS considered both annuities “resources” in calculating a new penalty period of ineligibility.

Connie Sanner entered a nursing home in March 2011 without a community spouse. In July 2011 she paid ELCO $53,700.00 in return for an annuity which paid her $4,499.17 per month for 12 months. Sanner had also made a large financial gift to her children which reduced her resources below the Medicaid limits and resulted in a period of Medicaid ineligibility. The purpose of the annuity was to pay for Sanner's nursing home care during that period of ineligibility. As with Claypoole, DHS counted Sanner's annuity as a “resource” in calculating a new penalty period of ineligibility.

Claypoole and Sanner brought these 42 U.S.C. § 1983 actions against DHS arguing that DHS acted illegally by counting the amount of their respective annuities as an available “resource” for purposes of Medicaid eligibility; their cases were consolidated by the District Court. The plaintiffs and DHS filed cross motions for summary judgment and the District Court partially granted each party's motion. The District Court held that the plaintiffs' purchases of the short-term annuities were sham transactions intended only to shield resources from the calculation of Medicaid eligibility. Zahner ex rel. Zahner v. Mackereth, Civ. Action No. 11–306, 2014 WL 198526, at *12–*13 (W.D.Pa. Jan. 16, 2014). The District Court treated the annuities as trust-like instruments, or transfers of assets for less than fair market value, and permitted DHS to count their cost as resources in calculating Medicaid eligibility. Id. at *14.

The District Court also ruled that a Pennsylvania statute that purported to make all annuities assignable was preempted by the federal Medicaid law because Congress specifically provided that, under certain circumstances, annuities are exempt from inclusion as an available resource for determinations of Medicaid eligibility. Id. at *10. Under Pennsylvania law, the value of any annuity held by the Medicaid applicant or his or her community spouse was considered a countable resource in determining if the applicant qualified for Medicaid assistance. Accordingly, the District Court held that the nonassignability clause in Claypoole's husband's annuity with MetLife was valid and enforceable. That annuity therefore complied with the applicable federal statute and could not be counted as a resource in determining Claypoole's Medicaid eligibility. This appeal followed.² We have jurisdiction pursuant to 28 U.S.C. § 1291.

II. ANALYSIS

We review a district court's decision on summary judgment de novo. See Heffner v. Murphy, 745 F.3d 56, 65 (3d Cir.2014) (citations omitted); Allstate Settlement Corp. v. Rapid Settlements, Ltd., 559 F.3d 164, 169 (3d Cir.2009) (citations omitted). Questions of statutory interpretation are also reviewed de novo. See Seamans v. Temple Univ., 744 F.3d 853, 859 (3d Cir.2014) (citations omitted); Kaufman v. Allstate N.J. Ins. Co., 561 F.3d 144, 151 (3d Cir.2009) (citations omitted).

A. WHEN DOES AN ANNUITY CONSTITUTE A “RESOURCE” FOR PURPOSES OF MEDICAID ELIGIBILITY?

Pennsylvania participates in the federal Medicaid Program established by Title XIX of the Social Security Act (“the Medicaid Act”). 42 U.S.C. § 1396, et seq. Under the Medicaid Act, states receive federal funding to dispense assistance to qualified needy individuals. “Congress has created a comprehensive system of asset-counting rules for determining who qualifies for Medicaid.” Lewis v. Alexander, 685 F.3d 325, 332 (3d Cir.2012). The rules are intended to limit Medicaid assistance to those deemed most in need of it, and to ensure that applicants' spouses are not impoverished by the eligibility requirements. Those eligibility requirements change with some regularity.

The Deficit Reduction Act of 2005 (“DRA”), Pub.L. 109–171, amended the Medicaid Act. The provisions of the DRA that are relevant here establish the “appropriate means by which an individual or couple can reduce excess resources without incurring penalties [for purposes of Medicaid eligibility].” Jeffrey A. Marshall, Matthew J. Parker, A Guide to Medicaid Annuities for Pennsylvania Lawyers at 4 (Nov. 19, 2009), available at http://www.paannuity.com/pdf/guide_to_dra_annuities.pdf. Financial planning often involves the purchase of annuities. “The purchase of the annuity spends down a couple's excess resources to the level required for the institutionalized spouse to become financially eligible for Medicaid/[Long–Term Care] benefits.” Id.

DHS oversees Pennsylvania's Medicaid assistance in conjunction with federal regulations as Pennsylvania's regulatory body charged with administering Medicaid assistance throughout the State. The federal Centers for Medicare and Medicaid Services (“CMS”) has developed a State Medicaid Manual that assists states in interpreting the complex labyrinth of statutory and regulatory requirements that govern receipt of Medicare and Medicaid benefits.³ That manual “serves as the official [U.S. Health and Human Services Department (“HHS”) ] interpretation of the [Medicaid] law and regulations[.]” Pa., Dep't of Pub. Welfare v. HHS, 647 F.3d 506, 509 (3d Cir.2011). The portion of the State Medicaid Manual relevant to our inquiry, concerning trusts and annuities, “is commonly referred to as ‘Transmittal 64.’ ” Morris v. Okla. Dep't of Human Servs., 685 F.3d 925, 930 (10th Cir.2012) (citing Health Care Fin. Admin., U.S. Dep't of Health & Human Servs., State Medicaid Manual 64 § 3258.11 (1994)).

As explained at the outset, this dispute results from DHS's decision to count Claypoole's and Sanner's annuities as resources in determining whether they qualified for Medicaid benefits. The issue arose because Congress created a “safe harbor” pursuant to which, certain annuities are not considered resources for purposes of Medicaid eligibility. Therefore, the value of such annuities does not disqualify those otherwise eligible for Medicaid assistance from Medicaid eligibility. See 42 U.S.C. § 1396p(c)(1)(F), (G)(ii). We must determine if the disputed annuities here are within this safe harbor and therefore sheltered from inclusion in the plaintiffs' assets.

The DRA establishes a four-part test for determining whether an annuity is included within the safe harbor and thus not counted as a resource. The annuity must (1) name the State as the remainder beneficiary, (2) be irrevocable and nonassignable, (3) be actuarially sound, and (4) provide for payments in equal amounts during the term of the annuity, with no deferral and no balloon payments. Id.⁴ These requirements apply to all annuities purchased on or after February 8, 2006, including the disputed annuities here.

DHS first claims that the relatively short terms of these contracts disqualifies them from being “annuities.” The DRA...