Ruling Builds Case for Medicaid Annuities

Another federal court has ruled that an immediate annuity is not considered an asset for Medicaid qualification purposes.

The decision not only applies to unassignable annuities, which are irrevocable and nontransferable, but also opens the door to allowing application to assignable annuities.

In Lopes v. Starkowski [No. 3:lO-CV-307 (JCH)], the United Stated District Court in Connecticut ruled that the income stream from an unassignable immediate annuity is not an asset for Medicaid eligibility.

As precedent, it cites a Third Circuit opinion --James v. Richman [547 F.3d 214 (3 Cir. 2008)]--which held that under the Supplemental Security Income program, “an unassignable annuity’s income stream would be treated as income and not as an asset.”

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But the new District Court decision went further, by stating that “it would be incongruent with the principles of [Medicaid law] to permit a state to characterize even an assignable income stream as an asset.”

Handed down on Aug. 11 by the United Stated District Court in Connecticut, the ruling drew little notice from the insurance industry during the first few months after issue. However, that may be changing.

The Secondary Market Insurance Blogpublished by the Seiger Gfeller Laurie LLP law firm, points out that the decision involves the secondary market. This is because the defendant — the Connecticut Department of Social Services — had told a Medicaid applicant’s wife that must sell her existing annuity income stream to a secondary market company. The wife refused to sell, so the department denied Medicaid benefits to her husband. The wife then sued in District Court, which ruled in her favor.

Jack Marrion, president of Advantage Compendium Ltd., St. Louis, Mo., says the court’s comments on assignable income streams caught his eye.

This could be interpreted as meaning that a customer can use immediate annuities in Medicaid planning, “even if the annuity is revocable, assignable or has a cash position that can be converted,” Marrion says.

Up until that decision, Marrion notes, the general understanding has been that unassignable annuities could be used in Medicaid planning—that is, they would not be considered an asset for spend-down purposes, if individuals follow the requirements of their state. But assignable annuities were considered to have no such protection.

In fact, he says, many annuity carriers have been avoiding the so-called Medicaid-annuity market due to laws, such as the Deficit Reduction Act of 2005, that restrict use of annuities in Medicaid spend-down scenarios.

But once annuity companies learn of the Connecticut court’s comments on assignable income streams, some may start re-thinking their position, he says.

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Raymond Ohlson, president and CEO of The Ohlson Group, a Carmel, Ind., insurance marketing organization, also thinks the decision may help revive industry interest in Medicaid annuities. But so might consumer demand, he says.

Demand for Medicaid annuities is rising, Ohlson says, because the nest eggs of many older couples have dropped to only $200,000-$300,000, often due to the effects of the recession. If a sick spouse needs care, the couples typically look to the Medicaid annuity as a way to protect the healthy spouse from becoming a pauper while paying for the sick person’s care, he says.

Ohlson predicts this demand will continue with the rise of the aging population. And that, he says, will spur more carriers to consider entering the Medicaid annuity market.

The two biggest Medicaid annuity carriers will produce a total of a half billion dollars in 2010, he estimates.

The continuing low interest environment will dampen the amount of payout that immediate annuity carriers can provide, Ohlson concedes. “But in the Medicaid market, clients are primarily interested in preserving capital. An immediate annuity will be able to do that, even in the low interest environment.”

Ohlson notes that there are many other cases dealing with whether an annuity is an asset for Medicaid spend-down purposes. Many are decided at the state level, and most when the person applies for Medicaid, he says.

Source: 11-12-2010

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