Federal Question Jurisdiction for Medicaid Annuity Case
A federal district court in Pennsylvania issued an order stating that an institutionalized spouse could not be denied Medicaid benefits based on his wife’s annuity income. The court held that the state’s interpretation of federal Medicaid law was invalid, and that under federal law, the income from the annuity could not be counted in determining eligibility for the institutionalized spouse. James v. Richman, 2006 WL 3387183 (M.D.Pa. Nov. 21, 2006).A federal district court in Pennsylvania issued an order stating that an institutionalized spouse could not be denied Medicaid benefits based on his wife’s annuity income. The court held that the state’s interpretation of federal Medicaid law was invalid, and that under federal law, the income from the annuity could not be counted in determining eligibility for the institutionalized spouse. James v. Richman, 2006 WL 3387183 (M.D.Pa. Nov. 21, 2006).
The court held that the application or interpretation of federal Medicaid law “presents a federal question, vesting this Court with jurisdiction under 28 U.S.C. § 1331.” Federal question jurisdiction permitted the court to determine whether the state’s denial of Medicaid benefits conflicted with federal law and therefore would be preempted pursuant to the Supremacy Clause of the US Constitution.
Most preemption cases under the Supremacy Clause involve a state statute or regulation that conflicts with federal law. In the James v. Richman case, the district court had issued a preliminary injunction ruling that a Pennsylvania statute regarding annuities was preempted by federal law. Then when the case got to the permanent injunction stage, the state explicitly disavowed any reliance on the Pennsylvania statute. Since the state claimed that it did not rely on its statute in denying Medicaid benefits, the district court decided not to issue a permanent injunction or declaratory judgment regarding the state law’s conflict with federal law. Instead, the state argued that its interpretation of federal law regarding annuities permitted the denial of Medicaid benefits. The court did not cite any written document codifying the state’s interpretation of federal law regarding annuities. So, this case held that there was federal question jurisdiction to determine whether an unwritten practice of the state violated federal law.
On the merits, the court relied on Mertz v. Houstoun in holding that “so long as the principal … of an irrevocable annuity or trust cannot be reached by the applicant or spouse, the income derived from such an asset cannot be counted as a resource for Medicaid purposes, notwithstanding that income stream’s market value in the eyes of a third party.” The court permanently enjoined the state from denying the applicant Medicaid benefits based upon the $250,000 annuity purchased by his wife in September 2005.
However, it should be noted that the Deficit Reduction Act of 2005 changed the federal Medicaid law rules regarding annuities. For more information on the DRA's changes to Medicaid's annuity rules, see the chapter NSCLC attorney Gene Coffey wrote on Medicaid's new transfer-of-asset rules in the National Health Law Program's The Deficit Reduction Act of 2005: Congress Targets Beneficiaries for Cuts (special edition of NHeLP's Health Advocate newsletter), available at www.healthlaw.org.