Annuities and the Criminalization of Moving Assets for Medicaid Planning

David Goldfarb

The Government agreed to dismiss its appeal of the September 1998 decision of Judge Thomas McAvoy. On September 14, 1998, Judge Thomas J. McAvoy (U.S. District Court, Northern District of New York) entered final judgment declaring unconstitutional, and permanently enjoining the federal statute that had made it a crime to advise clients regarding asset transfer to qualify for Medicaid. Previously the Court had enjoined enforcement of the statute. NYSBA Sues U.S. Attorney General Janet Reno; Asks Court to Rule on Constitutionality of Medicaid Counseling Act.

March 11, 1998: Attorney General Reno Will Not Defend Constitutionality of Medicaid Criminalization Law.

Making Medicaid Planning a Crime

Federal law now provides the following criminal sanctions regarding Medicaid planning [42 U.S.C. §1320a-7b(a)]:

(a) MAKING OR CAUSING TO BE MADE FALSE STATEMENTS OR REPRESENTATIONS:
Whoever - ***

(6) for a fee knowingly and willfully counsels or assists an individual to dispose of assets (including by any transfer in trust) in order for the individual to become eligible for medical assistance under a State plan under Title XIX, if disposing of the assets results in the imposition of a period of ineligibility for such assistance under section 1917 c,
shall ***

(ii) in the case of such a statement, representation, concealment, failure, conversion or provision of counsel or assistance by any other person, be guilty of a misdemeanor and upon conviction thereof fined not more than $10,000 or imprisoned for not more than one year, or both. In addition, in any case where an individual who is otherwise eligible for assistance under a State plan approved under subchapter XIX of this chapter is convicted of an offense under the preceding provisions of this subsection, the State may at its option (notwithstanding any other provision of that subchapter or of such plan) limit, restrict, or suspend the eligibility of that individual for such period (not exceeding one year) as it deems appropriate; but the imposition of a limitation, restriction, or suspension with respect to the eligibility of any individual under this sentence shall not affect the eligibility of any other person for assistance under the plan, regardless of the relationship between that individual and such other person.

Section 1917(c) [42 U.S.C. §1396p (c)] referred to in the statute describes the calculation of a period of Medicaid ineligibility if an individual or his/her spouse disposes of assets for less than fair market value during a look-back period.

History of the Provision

Section 217 of The Health Insurance Portability and Accountability Act (Kennedy -Kassebaum Bill) which was signed into law on August 21, 1996, and took effect January 1, 1997, contained a provision which criminalize certain transfers of assets for the purpose of qualifying for Medicaid. This law was amended and replaced by Section 4734 of the Balanced Budget Act of 1997 with a provision that makes it a crime to "for a fee counsel or assist an individual" to make certain asset transfers.

The effective date this provision is August 5, 1997, the date the Balanced Budget Act was signed by the President.

Explanation

Under current federal and state law when someone applies for Medicaid, the Medicaid agency looks back at all transfers of assets made in the prior 36 months (60 months for transfers to or from a trust). Some states such as New York have not opted to apply the look-back and consequent imposition of a penalty to "community based" care; all states do apply the look-back and penalty period to "institutional care" (nursing homes and certain waivered programs).

If a transfer of assets was done during the look-back period by either an applicant or his/her spouse and it doesn't fall within any stated exemption, then a period of ineligibility for Medicaid from the beginning of the month following the date of the transfer is calculated. The number of months of the penalty or waiting period is equal to the amount which was transferred divided by the average monthly cost of nursing home care in the region. For example, if the regional rate is $5000 per month and someone transferred immediately prior to January 1, 1996, $50,000, then he or she would not be eligible to be covered by Medicaid for nursing home care for ten month or until November 1, 1996.
What is the "imposition of a period of ineligibility"?

The statute has been criticized as having been passed without sufficient public debate. It has also been criticized as inappropriate to criminalize civilly legal action or the giving of advice regarding civilly legal action. It contains a number of ambiguities which make it difficult to advise clients as to what is covered. The following is a discussion of some of the ambiguities in the statute.

The statute refers to conduct which "results in the imposition of a period of ineligibility...." There is clearly a lack of clarity as to what this covers. Among the alternative possibilities are the following:
It applies only to transfers where the applicant applies for Medicaid before the calculated penalty period expired and the state agency imposes a period of ineligibility by denying Medicaid.
It applies to any non-exempt transfer within a look-back period where either the applicant applies before the penalty period expires and the agency denies Medicaid or the applicant applies after the penalty period expires and Medicaid is granted.

It applies to all non-exempt transfers, even beyond a look-back period.
It applies to all transfers (exempt and non-exempt) which ultimately render a person eligible for Medicaid.

Although the 1997 amendment did not clarify which transfers result in the imposition of a period of ineligibility, the House Commerce Committee Report appears to incorporate the Attorney General Opinion in Peebler & Nay v. Reno. The Attorney General has adopted the interpretation in the first choice above in Peebler & Nay v. Reno.

The U.S. District Court for Oregon (Ancer L. Haggerty, U.S. District Judge) dismissed Peebler & Nay v. Reno, Civ. 97-256-HA (D. Or. April 25, 1997) for lack of subject matter jurisdiction. The court found that prosecution of a crime was not actual or imminent where a transfer had occurred and a durational period had expired before a Medicaid application was submitted. The motion to dismiss by the U.S. Attorney represented that no penalty is imposed and the criminal statute is not triggered where the Medicaid applicant waits out the penalty period.

The Attorney General in her memorandum of support for her motion to dismiss in Peebler & Nay v. Reno stated the following regarding the criminalization provision:

The Last phrase – "if disposing of the assets results in the imposition of a period of ineligibility for such assistance" – is the only one which is relevant for the purposes of this motion. The Attorney General agrees that the most reasonable interpretation of the provision is that Section 217 only applies if the transfer of assets actually "results in the imposition of a period of ineligibility" for Medicaid benefits. Thus, if an individual transfers assets, waits out the period during which she otherwise would be ineligible, then applies for benefits such that a period of ineligibility is not imposed upon her by the relevant state agency, that individual does not fall within the ambit of Section 217. Put another way, if Ms. Peebler disposes of assets, waits out the period during which she otherwise would have been ineligible, then applies for prospective benefits such that a period of ineligibility is not imposed upon her by the Oregon Medicaid authority, she will not be subject to prosecution under Section 217.
Both a Department of Justice letter (letter from Andrew Fois, Assistant Attorney General to Hon. Steven C. LaTourette, April 11, 1997) and a DHHS Inspector General Advisory Opinion (Opinion No. 97-3) support this narrow interpretation of what "impose a period of ineligibility" means.

Constitutionality of the provision

The provision acts as a "gag rule." While the Balanced Budget Bill was pending in Congress, the Congressional Research Service of the Library of Congress wrote an opinion letter (July 11, 1997) at the request of Senator Jack Reed (R-RI). It questioned the Constitutionality of the provision making it a crime to provide advice.

The provision also creates an ethical dilemma for attorneys creating a conflict between their potentially criminal act of giving advice and the client's right to know about civilly permissible Medicaid planning.
NYSBA has sued U.S. Attorney General Janet Reno and asked the Court to rule on the Constitutionality of Section 4734 of the Balanced Budget Act of 1997 which makes it a crime to "for a fee counsel or assist an individual" to make certain asset transfers. In New York State Bar Association v. Reno, Judge Thomas J. McAvoy (U.S. District Court, Northern District of New York) has enjoined enforcement of the federal statute that had made it a crime to advise clients about transferring assets to qualify for Medicaid.

On March 11, 1998, Attorney General Reno wrote Congress that she would not defend the Constitutionality of the Medicaid Criminalization Law.

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(not intended for the General Public)