Gillmore v. Dept. of Human Services

• Decision Date: 20 January 2006
• Docket Number: No. 100123.,100123.
• Citation: 843 N.E.2d 336,218 Ill.2d 302
• Parties: Martha GILLMORE, Ex'r of the Estate of Mary Fillbright, Deceased, Appellant, v. The ILLINOIS DEPARTMENT OF HUMAN SERVICES, Appellee.
• Court: Illinois Supreme Court

843 N.E.2d 336

218 Ill.2d 302

Martha GILLMORE, Ex'r of the Estate of Mary Fillbright, Deceased, Appellant, v. The ILLINOIS DEPARTMENT OF HUMAN SERVICES, Appellee.

No. 100123.

Supreme Court of Illinois.

January 20, 2006.

Duane D. Young and Dawn D. Behnke, of LaBarre, Young & Behnke, Springfield, for appellant.

Lisa Madigan, Attorney General, Springfield (Gary Feinerman, Solicitor General, and Timothy K. McPike, Assistant Attorney General, Chicago, of counsel), for appellee.

Jerry W. Friedman, Elaine M. Ryan and Ryan M. Faden, Washington, D.C., for amicus curiae American Public Human Services Association.

OPINION

Justice FITZGERALD delivered the judgment of the court, with opinion:

The plaintiff, Martha Gillmore, as the executrix of Mary Fillbright's estate, appeals the decision of the appellate court (354 Ill.App.3d 497, 291 Ill.Dec. 7, 822 N.E.2d 882) affirming the decision of the circuit court of Menard County in turn confirming the administrative decision of the Illinois Department of Human Services (DHS). The DHS found Fillbright eligible for Medicaid, but imposed a 22-month penalty period because Fillbright had purchased a so-called "balloon" annuity that the DHS considered an improper transfer of assets pursuant to a state regulation. For the reasons that follow, we affirm.

BACKGROUND

In 1965, Congress enacted Title XIX of the Social Security Act, commonly known as the Medicaid Act. See 42 U.S.C. § 1396 et seq. (2000). This statute created a cooperative program in which the federal government reimburses state governments for a portion of the costs to provide medical assistance to two low income groups: the categorically needy and the medically needy. The categorically needy are persons who are automatically eligible to receive cash grants under one of the general welfare programs — the Aid to Families with Dependent Children program (AFDC) (42 U.S.C. § 601 et seq. (2000)) or the Supplemental Security Income for the Aged, Blind, or Disabled program (SSI) (42 U.S.C. § 1381 et seq. (2000)). See 305 ILCS 5/5-2(1) (West 2002); 42 C.F.R. § 435.100 et seq. (2003). The medically needy are persons who are ineligible to receive cash grants under AFDC or SSI because their resources exceed the eligibility threshold for those programs, but who still lack the ability to pay for medical assistance. See 305 ILCS 5/5-2(2) (West 2002); 42 C.F.R. § 435.300 et seq. (2003). People who fall into the second category are called MANG (Medical Assistance — No Grant) recipients. See 89 Ill. Adm. Code § 120.10(a) (Conway-Greene CD-ROM March 2002). To qualify for Medicaid as a MANG recipient, a person must have low income and low assets, and the person must "spend down" any resources over the statutory and regulatory limits. See 89 Ill. Adm.Code § 120.10(d) (Conway-Greene CD-ROM March 2002).

States that choose to participate in the Medicaid program design their own plans and set reasonable standards for eligibility and assistance. See 42 U.S.C. § 1396a(a)(17) (2000). States must comply with certain broad requirements imposed by federal statutes and regulations issued by the United States Department of Health and Human Services, which oversees the Medicaid program through the Health Care Financing Administration (HCFA), now called the Centers for Medicaid and Medicare Services. See Schweiker v. Gray Panthers, 453 U.S. 34, 36-37, 101 S.Ct. 2633, 2636, 69 L.Ed.2d 460, 465 (1981); West Virginia University Hospitals, Inc. v. Casey, 885 F.2d 11, 15 (3d Cir.1989) (Medicaid "`is basically administered by each state within certain broad requirements and guidelines'"). Each state also must designate a single agency to administer its Medicaid plan, though another agency may make eligibility determinations. See 42 U.S.C. § 1396a(a)(5) (2000); see also 42 C.F.R. § 431.10(a) (2003). In Illinois, the Medicaid agency is the Department of Public Aid (DPA). See 305 ILCS 5/2-12(3) (West 2002); American Society of Consultant Pharmacists v. Garner, 180 F.Supp.2d 953, 958 (N.D.Ill.2001). The DHS makes eligibility determinations in accord with DPA regulations. See 305 ILCS 5/5-4 (West 2002).

In 1993, Congress sought to combat the rapidly increasing costs of Medicaid by enacting statutory provisions to ensure that persons who could pay for their own care did not receive assistance. Congress mandated that, in determining Medicaid eligibility, a state must "look-back" into a three- or five-year period, depending on the asset, before a person applied for assistance to determine if the person made any transfers solely to become eligible for Medicaid. See 42 U.S.C. § 1396p(c)(1)(B) (2000). If the person disposed of assets for less than fair market value during the look-back period, the person is ineligible for medical assistance for a statutory penalty period based on the value of the assets transferred. See 42 U.S.C. § 1396p(c)(1)(A) (2000). Congress also mandated that a state plan for medical assistance must comply with, inter alia, the provisions of section 1396p with respect to "transfers of assets[] and treatment of certain trusts." 42 U.S.C. § 1396a(a)(18) (2000). If the person establishes a trust during the look-back period, any portion of such a trust from which no payments could be made to the person shall be considered assets disposed of by that person. See 42 U.S.C. § 1396p(d)(3)(B)(ii) (2000). That is, any assets disposed of during the look-back period are "countable" toward Medicaid limits and subject to the spend-down requirement, if the person's resources are over those limits. The term "trust" includes an annuity "only to such extent and in such manner as the Secretary [of Health and Human Services] specifies." 42 U.S.C. § 1396p(d)(6) (2000).

In November 1994, the HCFA did just that in a policy document known as Transmittal 64. State Medicaid Manual, Health Care Financing Administration Pub. No. 45-3, Transmittal 64, § 3258.9(B) (November 1994). Transmittal 64 provided guidelines for state Medicaid caseworkers on how to evaluate the transfer of assets into trusts and annuities. An annuity is a contract in which a person pays a bank or an insurance company a lump sum in return for fixed periodic payments. If the person dies during the term of the annuity, the remainder is typically converted into a lump sum and paid to a designated beneficiary. See State Medicaid Manual, Health Care Financing Administration Pub. No. 45-3, Transmittal 64, § 3258.9(B) (November 1994); see generally Black's Law Dictionary 99 (8th ed. 2004). According to the HCFA:

"Annuities, although usually purchased in order to provide a source of income for retirement, are occasionally used to shelter assets so that individuals purchasing them can become eligible for Medicaid. In order to avoid penalizing annuities validly purchased as part of a retirement plan but to capture those annuities which abusively shelter assets, a determination must be made with regard to the ultimate purpose of the annuity (i.e., whether the purchase of the annuity constitutes a transfer of assets for less than fair market value). If the expected return on the annuity is commensurate with a reasonable estimate of life expectancy of the beneficiary, the annuity can be deemed actuarially sound.

* * * The average number of years of expected life remaining for the individual must coincide with the life of the annuity. If the individual is not reasonably expected to live longer than the guarantee period of the annuity, the individual will not receive fair market value for the annuity based on the projected return. In this case, the annuity is not actuarially sound and a transfer of assets for less than fair market value has taken place, subjecting the individual to a penalty." State Medicaid Manual, Health Care Financing Administration Pub. No. 45-3, Transmittal 64, § 3258.9(B) (November 1994).

Transmittal 64 included two examples of this rule. If a 65-year-old man with a life expectancy of nearly 15 years purchases a $10,000 annuity with a 10-year term, the transfer of assets is actuarially sound. State Medicaid Manual, Health Care Financing Administration Pub. No. 45-3, Transmittal 64, § 3258.9(B) (November 1994). However, if an 80-year-old man with life expectancy of nearly seven years purchases the same annuity, "a payout of the annuity for approximately 3 years is considered a transfer of assets for less than fair market value and that amount is subject to a penalty." State Medicaid Manual, Health Care Financing Administration Pub. No. 45-3, Transmittal 64, § 3258.9(B) (November 1994). Transmittal 64 dictated that "States cannot apply periods of ineligibility due to a transfer of resources for less than fair market value except in accordance with these instructions." State Medicaid Manual, Health Care Financing Administration Pub. No. 45-3, Transmittal 64, § 3258.9(B) (November 1994).

In Illinois, MANG recipients must not transfer assets for less than fair market value. See 305 ILCS 5/5-2.1(a) (West 2002). The legislature provided that the DPA "shall by rule establish the amounts of assets to be disregarded in determining eligibility for medical assistance, which shall at a minimum equal the amounts to be disregarded under [federal law]." See 305 ILCS 5/5-2(12) (West 2002). In a 1999 "Notice of Adopted Amendments," the DPA stated:

"[The DPA] has become aware that the marketing of Medicaid planning devices sometimes includes plans offering back-end loaded annuities that pay only very small monthly amounts until the final month of life expectancy when a balloon payment reflecting the payout balance is made. Such annuity plans are intended to primarily benefit the person's heirs. While these annuities are literally consistent with current policy, they are in conflict with the intent of asset consideration for the purpose of equitable assistance eligibility determination." 23 Ill. Reg. 11301 (eff. August 27, 1999).

Thus, the DPA promulgated a regulation regarding annuity payments:

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