3d Cir.: A favorable Medicaid annuity decision under § 1983

The Third Circuit affirmed injunctive relief to prohibit the state’s treatment of a non-revocable, non-transferrable annuity as an available resource for Medicaid.

Treating the claim as one arising under 42 U.S.C. § 1983, the court held that exhaustion of administrative remedies is not required in a § 1983 action for injunctive relief. The court further held that an annuity is not an available resource under the Medicaid Act if it cannot be transferred without incurring legal liability. The court did not discuss the plaintiff’s preemption claim, or whether a cause of action exists under § 1983 to enforce the relevant Medicaid provision. James v. Richman, No. 06-5092 (3d Cir. Nov. 12, 2008).

          Shortly after admission to a nursing facility in 2005, Mr. James purchased an irrevocable $250,000 annuity payable to Mrs. James. The state denied Mr. James’s Medicaid application, treating the annuity as an available resource. (Mr. James died while the case was on appeal, and Mrs. James was substituted.) He pursued relief through a still-pending administrative appeal and an action for injunctive relief under § 1983 and the Supremacy Clause, alleging violations of various Medicaid provisions. James also claimed that 62 Pa. Stat. Ann. § 441.6, which purports to void anti-assignment clauses in annuities purchased by Medicaid applicants, was preempted by the Medicaid Act. The state agency then denied reliance on the state law, saying that its decision was based on its uncodified interpretation of federal law.

          The district court granted summary judgment to James without explicitly relying on either the Supremacy Clause or § 1983. 465 F.Supp.2d 395 (M.D. Pa. 2006). Its only mention of either was in denying James’s request for a declaration that the state statute was preempted, saying it was not in issue since the state was not relying on the statute. But the court went on to say that it had jurisdiction under the federal question statute “to apply or interpret provisions of the federal Medicaid Act in order to determine whether the remedies sought by Plaintiff are warranted.” In support of this holding, the court cited § 1983 cases, as well as cases that considered injunctive relief against states under federal law without mentioning § 1983 or preemption.

          In its opinion, the Third Circuit discussed only the § 1983 claim. It said that the Supremacy Clause claim was based only on the state statute, was not considered by the district court, and was not raised on appeal – thus treating the district court judgment as being purely based on § 1983. Notably, the court did not discuss whether the Medicaid provisions at issue created § 1983 rights under Gonzaga Univ. v. Doe, 536 U.S. 273 (2002).

          The panel stated that “the district court had federal question jurisdiction, as the primary issue presented was whether the Department misinterpreted federal law regarding James’s right to Medicaid benefits.” This language could be helpful for future preemption cases involving state misinterpretation of federal law, but the court’s reliance on § 1983 muddies the waters. If this is seen as purely a § 1983 case, then it may not be relevant to claims outside § 1983.

           The state argued that injunctive relief was inappropriate because legal relief was available through the pending administrative appeal. The court noted the general rule that exhaustion of state administrative remedies is not required to bring a § 1983 action, and held that “this precept also holds true in a request for injunctive relief in a § 1983 action.”

          On the merits, the court observed that under Medicaid states cannot treat annuities in a manner more restrictive than the Supplemental Security Income program. 42 U.S.C. §§ 1396a(a)(10)(C), 1396a(r)(2)(B). SSI regulations provide that a resource is considered “available” if an individual has “the right, authority, or power to liquidate the property.” 20 C.F.R. § 416.1201. The Social Security Administration’s Program Operations Manual makes clear, said that court, that this “power to liquidate” “is not simply the de facto ability to accomplish a change in ownership of an asset, but must also include the power to do so without incurring legal liability.” Because the annuity is non-transferrable, Mrs. James lacks that power. The court also rejected the state’s argument that this holding “would undercut the purpose of Medicaid,” presumably by allowing evasion of the resource rules. The court said, however, that its job was not to “create rules based on our own sense of the ultimate purpose of the law being interpreted,” but to apply the text of the law, in this case a highly detailed one.

          In dissent, Judge Fisher focused on James’s resources at the time of admission, just prior to purchase of the annuity. He would hold that “an annuity which replaces cash existing at the time of institutionalization can be a marketable resource,” but thought that the nature of the annuity and its treatment under state contract law were not sufficiently clear. He said he would remand for determination of the annuity’s marketability.