Stell v. BOULDER COUNTY DEPT. OF SOC. SERV.

• Decision Date: 14 June 2004
• Docket Number: No. 03SC511.,03SC511.
• Parties: Dylan Michael STELL, Petitioner, v. BOULDER COUNTY DEPARTMENT OF SOCIAL SERVICES and The State of Colorado Department of Health Care Policy and Financing, Respondents.
• Court: Colorado Supreme Court

92 P.3d 910

Dylan Michael STELL, Petitioner, v. BOULDER COUNTY DEPARTMENT OF SOCIAL SERVICES and The State of Colorado Department of Health Care Policy and Financing, Respondents.

No. 03SC511.

Supreme Court of Colorado, En Banc.

June 14, 2004.

As Modified on Denial of Rehearing July 12, 2004.

Sagrillo, Hammond & Dineen, LLC, Robert L. Sagrillo, Henry M. Kohnlein, Claire E. Dineen, Denver, Colorado, Attorneys for Petitioner.

Ken Salazar, Attorney General, Ann Hause, First Assistant Attorney General, Laurie A. Schoder, Assistant Attorney General, Anne Baudino Holton, Assistant Attorney General, Denver, Colorado, Attorneys for Respondent.

Chief Justice MULLARKEY delivered the Opinion of the Court.

I. Introduction

Federal and state laws allow a disabled person who has financial assets exceeding $2,000 to qualify for Medicaid benefits under certain circumstances if the assets are placed in a qualified trust. In this opinion, we review the court of appeals' decision in Stell v. Colorado Department of Health Care Policy and Financing, 78 P.3d 1142 (Colo.App. 2003), which held that the trust established for the petitioner, Dylan Michael Stell, did not qualify. The Colorado Department of Health Care Policy and Financing (the "Department") rejected Stell's trust because it provided that, when the trust terminates after Stell dies, the trustee could use the funds to pay outstanding state and federal taxes prior to reimbursing the state for medical assistance rendered. The court of appeals concluded that the state must have absolute priority to the trust funds when the trust ends and affirmed the Department's determination that Stell's trust failed to meet federal and state statutory requirements. We reverse.

We hold that upon termination of a disability trust, a trustee may use the corpus of the trust to pay state and federal taxes before the state is reimbursed for medical assistance rendered to the beneficiary. This construction of Colorado's disability trust statute, section 15-14-412.8, 5 C.R.S. (2003), is consistent with the language of the statute, the federal enabling act, the applicable federal guidelines, as well as state and federal tax law.¹

In reaching the merits of the case, we determine that Stell's case is not moot and is ripe for this court's review. These arguments are raised because after the Department issued its final agency action terminating Stell's Medicaid benefits, the United States Court of Appeals for the Tenth Circuit decided that recipients of social security income ("SSI") benefits such as Stell are categorically eligible for Medicaid. Ramey v. Reinertson, 268 F.3d 955 (10th Cir.2001). The consequent reinstatement of Stell's benefits does not moot the case. To the contrary, the priority of payments upon termination of a disability trust is justiciable because the court of appeals' construction of section 15-14-412.8 inevitably exposes a trustee to personal liability for taxes due upon termination of the trust. Stell's trust remains in effect, and he is entitled to a judicial determination of the trustee's legal obligations in administering the trust.

Accordingly, we reverse the court of appeals' decision in this case and return it to the court of appeals for further proceedings consistent with this opinion.

II. Background and Facts

To put this case in context, we first discuss the Medicaid program as well as the definition and purpose of disability trusts. Medicaid, formally known as the Medical Assistance Program, was created by Title XIX of the Social Security Act, 42 U.S.C.A. §§ 1396a—1396v (West 2003) (the "Act"). It is a "cooperative federal-state venture designed to afford medical assistance to persons whose income and resources are insufficient to meet the financial demands of necessary care and services." Ramey, 268 F.3d at 957 (internal citations omitted).

A person's eligibility for Medicaid is a function of the applicant's countable assets; once the assets exceed the statutory ceiling, the applicant is disqualified from receiving benefits. 42 U.S.C.A. § 1396a(a)(10)(I),(II) (West 2003); Ramey, 268 F.3d at 958. Under qualifying circumstances, a disabled applicant with assets in excess of the Medicaid resource limit may place those assets in a trust, and thus exempt them from consideration when determining Medicaid eligibility.² 42 U.S.C.A. § 1396p(d)(4)(A) (West 2003). Once established, funds from a disability trust may be used to satisfy the beneficiary's supplemental needs, including the purchase of medical services not available through Medicaid.

States may elect to participate in the Medicaid program. See Schweiker v. Gray Panthers, 453 U.S. 34, 36-37, 101 S.Ct. 2633, 69 L.Ed.2d 460 (1981)

. However, once they decide to participate, states must comply with the requirements imposed by the Act and by the Secretary of Health and Human Services in order to receive federal funds. Id.; see also Hern v. Beye, 57 F.3d 906, 913 (10th Cir.1995) ("[B]ecause Colorado has decided to participate and accept federal Medicaid funds, it must do so on the terms established by Congress.") The Centers for Medicare and Medicaid Services ("CMS") are charged with administering the federal Medicaid program, and the Social Security Administration ("SSA") administers the SSI program.³

See Pediatric Specialty Care, Inc. v. Ark. Dept. of Human Servs., 364 F.3d 925, 926 (8th Cir.2004); Graham v. Barnhart, 278 F.Supp.2d 1251, 1260 (D.Kan.2003).

Through enactment of the Colorado Medical Assistance Act, Colorado elected to participate in the Medicaid program. §§ 26-4-101 to -1408, 8 C.R.S. (2003). Colorado is a so-called section 1634 Medicaid state. Program Operations Manual System ("POMS") § SI 0715.020. Under this section of the Act, the SSA enters into an agreement to make Medicaid eligibility determinations for the state, provided the individual is SSI eligible and meets all Medicaid eligibility requirements. POMS § SI 01730.005. In a 1634 state, an SSI application is also an application for Medicaid. Id.

Colorado's Department of Health Care Policy and Financing reviews and must approve all disability trusts, determining whether they comply with federal and state law. See § 26-4-104, 8 C.R.S. (2003). At the time Stell submitted his proposed trust for review by the Department, he was receiving Medicaid and SSI benefits due to his disability.

Stell's disability was caused in September 1998 when he suffered catastrophic injuries in a fall at a construction site. As a result of a personal injury claim, Stell received a net settlement of $638,495.58, which was placed in a disability trust.

Upon review, the Department recommended termination of Stell's Medicaid benefits because it objected to two of the trust's provisions: 1) the directive that upon termination of the trust, the payment of funeral, burial, administrative, and tax expenses would precede state Medicaid reimbursement, and 2) the requirement that the Department file a creditor's claim upon termination of the trust. The Boulder Department of Social Services notified Stell that his Medicaid benefits would be terminated because the trust did not meet the legal requirements to exempt the assets held within it for the purpose of determining Medicaid eligibility.

Stell timely appealed the proposed termination of his Medicaid benefits. At the initial hearing, the administrative law judge ("ALJ") determined that the Department's objections to the trust were not well founded, and that the trust was valid pursuant to federal and state law. The ALJ concluded that the trust assets should not be counted for purposes of determining Stell's Medicaid eligibility, and therefore, that his benefits could not be terminated. The Department's Office of Appeals reversed, rejecting the ALJ's interpretation of the statutes. In its final agency action, the Department determined that because Stell's trust provided for payment of other expenses before reimbursing the state for Medicaid benefits, it was invalid.

The district court affirmed the agency's ruling. In doing so, the court held the trust provisions at issue failed to meet the requirements of the governing federal and state laws, and that the Department should receive any amount remaining in the trust upon its termination "without any consideration and with absolute priority."

The court of appeals agreed, interpreting section 15-14-412.8 to prohibit deductions prior to the reimbursement of the state for Medicaid assistance. Stell, 78 P.3d at 1145. The court of appeals considered the Department to have the highest priority with respect to the remainder in a disability trust and held that the state must be compensated in full upon termination of the trust prior to any other expenditures. Id. To reach this conclusion, the court of appeals decided that Colorado's disability trust statute refers to the gross remainder of funds left in the trust upon its termination, and not to the funds left in the trust after the deduction of expenses arising from its administration, including federal and state taxes.⁴See id. at 1145-46.

Stell petitioned this court for review of the court of appeals' ruling with regard to the priority of federal and state taxes upon termination of a disability trust.⁵ He does not challenge the court of appeals' ruling as to burial and funeral expenses, nor is the issue of whether the Department is required to file a claim against Stell's estate before this court.

Notably in this case, Stell's Medicaid benefits have not been terminated. The United States Court of Appeals for the Tenth Circuit decided in Ramey that the Department's practice of independently reviewing the trusts of SSI recipients to determine Medicaid eligibility was invalid, and that SSI recipients are automatically eligible for Medicaid. 268 F.3d at 964. The application of Ramey to this case renders Stell, as an SSI recipient, eligible for Medicaid regardless of whether the Department finds his assets are...