La. Court Finds Pre-DRA Annuity Rule Preempted

In a case involving eligibility for Medicaid prior to the enactment of the Deficit Reduction Act of 2005, the Court of Appeals for Louisiana held that the state regulation concerning annuities was contrary to, and preempted by, federal law.  The case concerns the denial of Medicaid for long term care based on excess resources, due to the counting of an annuity as an available resource.  The state regulations required that an annuity name the State of Louisiana, Department of Health and Hospitals, as the primary and permanent residual beneficiary remaining in the annuity, not to exceed any Medicaid funds expended during the lifetime of the individual.  The court concluded that the state Medicaid regulation's pre-DRA requirement that actuarially sound annuities name the state as the remainder beneficiary was invalid.  King v. Secretary, Louisiana Dept. Of Health and Hospitals, __ So.2d__, 2007 WL 984400 (La.App.2 Cir. April 4, 2007). 

Prior to the DRA's enactment, the Medicaid Act provided that the federal Centers for Medicare & Medicaid Services (CMS) had sole discretion on how to treat annuities for purposes of Medicaid long-term care eligibility.  The federal agency's position was spelled out in Sect. 3258.9 of the federal State Medicaid Manual, and this policy made actuarial soundness the sole test in determining whether or not the purchase of annuity constituted a transfer for less than fair market value.  Actuarial soundness is determined by comparing the life of the annuity with the owner's life expectancy (the latter determined by reference to the Social Security Administration's life expectancy tables).  Where the payments of an annuity were scheduled to end during the individual's expected lifetime, CMS considered the purchased annuity actuarially sound and therefore a transfer for fair market value.

The DRA amended 42 U.S.C. Sect. 1396p to add other factors to the evaluation of an annuity for purposes of Medicaid long-term care eligibility, but Louisiana's remainder beneficiary requirement predated the DRA and was applied to Renate King's 2005 Medicaid application. 
The court found that the state regulation conflicted with CMS' interpretation of federal law, and was therefore invalid under the Supremacy Clause.  The court stated: “It is well established that generally state regulations that are inconsistent with federal law are invalid under the Supremacy Clause. U.S.C.A. Const. Art. 6, cl. 2.  Also, it is generally held that the Supremacy Clause applies to the regulatory scheme promulgated under the Medicaid act.”  Interestingly, the court noted that the state produced letters from a CMS employee in which the employee asserted that Louisiana's regulation "fully comport[ed] with federal statutes and regulations, which is why it was approved by CMS." The court ultimately disregarded these letters in favor of the policy the federal agency set forth in the State Medicaid Manual. 

For more information, please call Gene Coffey in NSCLC's D.C. office.