Mertz ex rel. Mertz v. Houstoun

• Decision Date: 30 July 2001
• Docket Number: No. CIV.A. 01-2627.,CIV.A. 01-2627.
• Parties: Etheleine J. MERTZ, by her next friend and Attorney-In-Fact Charles M. MERTZ, v. Feather O. HOUSTOUN, Secretary of the Pennsylvania Department of Welfare.
• Court: U.S. District Court — Eastern District of Pennsylvania

155 F.Supp.2d 415

Etheleine J. MERTZ, by her next friend and Attorney-In-Fact Charles M. MERTZ, v. Feather O. HOUSTOUN, Secretary of the Pennsylvania Department of Welfare.

No. CIV.A. 01-2627.

United States District Court, E.D. Pennsylvania.

July 30, 2001.

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Stanley M. Vasiliadis, Bethlehem, PA, for Plaintiff.

Andrew A. Coates, Office of Legal Counsel, Dept. of Public Welfare, Philadelphia, PA, for Defendant.

MEMORANDUM

WALDMAN, District Judge.

I. Introduction

Plaintiff has asserted claims for declaratory and injunctive relief pursuant to 42 U.S.C. § 1983. She alleges that defendant has violated Title XIX of the Social Security Act, 42 U.S.C. §§ 1396 et seq., in determining her eligibility for Medicaid benefits. Plaintiff asserts federal question jurisdiction pursuant to 28 U.S.C. § 1331.

Plaintiff seeks a declaration that defendant's decision that plaintiff is ineligible for Medicaid until January 1, 2002 because of her husband's purchase of annuities with joint assets in November 1999 is "illegal, null and void." Plaintiff also filed a motion for a preliminary injunction and in her complaint asked for a temporary restraining order to enjoin defendant from denying Medicaid benefits in the interim to plaintiff who is now in a nursing home.¹

II. Factual Background

Pennsylvania participates in the federally organized Medicaid program whereby states are granted federal funding for establishing plans to dispense assistance to qualifying needy individuals. Funding is conditioned on the adoption of a plan which complies with specific federal requirements. The Department of Public Welfare ("DPW") is the Pennsylvania regulatory body charged with administering Medicaid assistance throughout the Commonwealth. See 62 P.S. § 403. Defendant is the Secretary of the DPW.

Plaintiff entered nursing home care on May 19, 1999. Her husband purchased two irrevocable commercial annuities with $106,600 of joint assets on November 19 and November 29, 1999 respectively. The term of each annuity is five years. They pay just under $2,000 per month for a total payout of $119,917.80. The total earnings of $13,318 reflect an annual rate of return of just under 2.5%. Plaintiff's husband is the sole beneficiary. There appears to be no designated residual beneficiary. At the time, he had a life expectancy of 9.4 years. Almost immediately thereafter, on December 1, 1999, plaintiff moved to a "participating" facility, that is a nursing home which participates in the Medicaid program.

Plaintiff filed an application with the DPW on March 31, 2000 for Medicaid coverage. On May 4, 2000 the DPW determined that plaintiff was eligible for Medicaid assistance effective January 1, 2000. After review by a superior official, the DPW determined on June 14, 2000 that its prior decision had been in error and that plaintiff would not be eligible for assistance until January 1, 2002.

Plaintiff timely appealed the DPW decision. Her appeal was denied by order of November 28, 2000, accompanied by a formal opinion captioned "Adjudication." Upon reconsideration, the Secretary upheld the decision by order of May 11, 2001 and informed plaintiff that she could appeal to the Pennsylvania Commonwealth Court within thirty days. Pennsylvania provides for direct judicial review of such administrative decisions. See 42 Pa.C.S.A. § 763(a); 55 Pa.Code § 275.3.

III. Basis of Plaintiff's Claim

Plaintiff asserts that in making its decision, the DPW violated 42 U.S.C §§ 1396p(c)(1) and (c)(2). Section 1396p(c)(1) requires that participating states recognize a period of ineligibility for benefits for individuals who transfer assets for less than fair market value during a specified time-frame. Section 1396p(c)(2) provides in pertinent part that an individual shall not be deemed ineligible for a transfer of assets for less than fair market value if the assets were transferred to the individual's spouse or to another for the sole benefit of the spouse, if the individual intended to dispose of the assets for valuable consideration or if the assets were transferred exclusively for a purpose other than qualifying for medical assistance. These provisions are mirrored in the Pennsylvania Public Welfare Code. See 55 Pa. Code § 178.104.

Plaintiff also points to the Health Care Financing Administration ("HCFA") State Medicaid Manual, known as "Transmittal 64," a directive issued by the Secretary of the Department of Health and Human Services ("DHHS") which provides guidance for determining whether an annuity was purchased for fair market value. See State Medical Manual, Health Care Financing Administration Pub. 45-3, Transmittal 64 (Nov. 1994), § 3258.9(B). The key criteria is actuarial soundness. It provides that "[i]f the expected return on the annuity is commensurate with a reasonable estimate of the life expectancy of the beneficiary, the annuity can be deemed actuarially sound" and thus a purchase for "fair market value." This directive is mirrored by § 440.97 of the DPW Nursing Care Handbook.

Plaintiff argues the annuities are for the sole benefit of her spouse, are actuarially sound and were purchased for fair market value, and that defendant thus violated federal law by penalizing her with a period of ineligibility for benefits for twenty-four months based upon the purchase price of the annuities.²

The DPW made an express finding of fact that the annuities were purchased for fair market value. The DPW concluded that it could nevertheless penalize plaintiff upon a determination that the purchase of the annuities reflected a transfer of assets for the purpose of qualifying for Medicaid assistance.

The DPW relied upon provisions of the Medicare Catastrophe Coverage Act of 1988 ("MCCA"), 42 U.S.C. § 1396r-5, and corresponding Pennsylvania regulations.³ In reaching its conclusion, the DPW also relied on recent Pennsylvania Commonwealth Court opinions in Bird v. Department of Public Welfare, 731 A.2d 660 (Pa. Commw.1999) and Dempsey v. Department of Public Welfare, 756 A.2d 90 (Pa. Commw.2000). These opinions seem to suggest that the purchase price of annuities for the benefit of a non-institutionalized or "community" spouse at fair market value may still be a countable resource in determining eligibility if the purchase was made for the purpose of qualifying for medical assistance.⁴ Plaintiff contends that these opinions are wrong and that the DPW may not scrutinize the intent behind an annuity purchase after it concludes the purchase was for fair market value or the sole benefit of a spouse without violating the Pennsylvania Medicaid plan and federal requirements on which it is based.

IV. Basis for Federal Question Jurisdiction

"[F]ederal courts have an everpresent obligation to satisfy themselves of their subject matter jurisdiction and to decide the issue sua sponte." Liberty Mut. Ins. Co. v. Ward Trucking Corp., 48 F.3d 742, 750 (3d Cir.1995). Accord American Policyholders Ins. v. Nyacol Products, 989 F.2d 1256, 1258 (1st Cir.1993) ("a federal court is under an unflagging duty to ensure that it has jurisdiction"); Steel Valley Authority v. Union Switch & Signal Div., 809 F.2d 1006, 1010 (3d Cir.1987) ("lack of subject matter jurisdiction voids any decree entered in a federal court"); Wisconsin Knife Works v. National Metal Crafters, 781 F.2d 1280, 1282 (7th Cir. 1986).⁵ To determine conscientiously the existence of subject matter jurisdiction in the instant case, the court must examine the essence of plaintiff's claim against the backdrop of pertinent federal and state Medicaid law.

Title XIX of the Social Security Act, or the Medicaid Act, is a co-operative federal-state program which is funded in large part by the federal government and administered by the states. See Alexander v. Choate, 469 U.S. 287, 289 n. 1, 105 S.Ct. 712, 83 L.Ed.2d 661 (1985).⁶ While state participation in the program is voluntary, participating states must adopt plans that comply with certain requirements imposed by federal statutes and regulations. See Wilder v. Virginia Hosp. Ass'n, 496 U.S. 498, 502, 110 S.Ct. 2510, 110 L.Ed.2d 455 (1990). Thus, the actual program itself is "basically administered by each state within certain broad requirements and guidelines." West Virginia Univ. Hosps. Inc. v. Casey, 885 F.2d 11, 15 (3d Cir.1989). This case implicates the provisions of the Act regarding transfers of assets by Medicaid applicants or their spouses and the resources deemed available to a married couple to pay for the nursing care costs of one spouse.

Sections 1396p(c) & (d) of the Medicaid Act discuss transfers of assets and the treatment of annuities. Section 1396p(c)(1) requires states to establish periods of ineligibility for transfers of assets made for less than fair market value during a certain time period up to the application for Medicaid assistance, known as the "look back period."⁷ Section 1396p(d) discusses how trusts are to be treated under the Act, particularly with respect to the transfer of asset provisions of subsection (c). It states that an annuity may be considered a trust "only to such extent and in such manner as the Secretary specifies." 42 U.S.C. § 1396p(d)(6). The only specification in this regard ever provided by the Secretary is Transmittal 64.

Transmittal 64 states in pertinent part:

[a]nnuities, although usually purchased 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 purchased as part of a retirement plan but to capture those annuities which abusively shelter assets, a determination must be made with respect 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 for the life...