Section Review

It has long been a standard MassHealth planning tool of spouses of nursing home residents — so-called “community spouses” — to shelter “excess assets” by purchasing qualified annuities. MassHealth will pick up the cost of nursing home care for a married resident when the combined countable assets of the couple have been spent down to just over $150,000 ($148,620 for the community spouse in 2023 plus $2,000 for the nursing home spouse). The community spouse may shelter assets above $150,000 by purchasing an immediate annuity for a term that is shorter than the community spouse’s life expectancy.

An immediate annuity is a contract with an insurance company for a stream of payments. For example, if the couple has $300,000 in countable assets and the community spouse’s actuarial life expectancy is six years, the community spouse may buy a five-year annuity paying back $30,000 a year, plus interest, and MassHealth will pick up the cost of the nursing home spouse’s care. The annuity must meet certain requirements for its purchase not to be considered an uncompensated transfer of assets causing a transfer penalty. (We describe this strategy more fully in a legal guide that you may download here.)

The issue that has been in dispute, and which is resolved in Laurie A. Dermody vs. Executive Office of Health and Human Services (SJC-13199, Jan. 27, 2023), is what happens to the annuity payments if the community spouse dies before they have all been paid out. Are they payable to the commonwealth to reimburse it for its expenses covering the care of the nursing home spouse, or may they be paid to the beneficiaries named by the community spouse? The Supreme Judicial Court (SJC) decides this question in favor of the commonwealth, reversing an earlier Superior Court decision.

The Annuity in question

Joan A. Hamel moved to a nursing home in May 2015. In June, her husband, Robert, purchased an annuity from Nationwide Life Insurance for $172,000, paying him $2,973.69 a month for five years. He listed the “Commonwealth of MA the Extent Benefits Paid” as the primary remainder beneficiary of the annuity and his daughter, Laurie A. Dermody, as the contingent remainder beneficiary.

Robert died in December 2016. In July 2017, MassHealth made a claim for payment of the $135,511.99 it had paid to date for Joan’s care. Nationwide paid over to MassHealth the $118,517.50 still due under the annuity contract. Laurie Dermody then brought this action against both the commonwealth and Nationwide, arguing that she was entitled to these funds, not MassHealth.

The decision

MassHealth is the Massachusetts version of the federal Medicaid program and operates under both federal and state laws. In deciding this case, the SJC looks to federal law at 42 U.S.C. § 1396p(c)(1)(F)(i), which states that for an annuity to qualify, it must name the state “as the remainder beneficiary in the first position for at least the total amount of medical assistance paid on behalf of the institutionalized individual.” This would appear to decide the matter in favor of MassHealth.

However, Dermody argues that another provision of federal Medicaid law exempts the annuity from a repayment obligation for a community spouse’s care. The statutory provision that penalizes certain transfers of assets at 42 U.S.C. § 1396p(c)(2)(B)(i) exempts transfers that are made for the sole benefit of the individual making the transfer. Dermody argues that her father’s annuity meets this standard, and as a result, MassHealth’s requirement that the annuity name it as the primary remainder beneficiary is unlawful.

The SJC disagrees, distinguishing between the “sole benefit” rule, which it reads as “applicable to asset transfers generally,” and the Medicaid provisions that apply specifically to annuities. It concludes:

As there is no exemption directing us to disregard the beneficiary naming provision, and because creating one would contravene Congress’s intent to limit the use of annuities for Medicaid planning purposes, subsections (c)(1)(F)(i) and (c)(2)(B)(i) both must apply to ensure that an annuity purchased does not become a vehicle for sheltering assets that otherwise properly would be used to pay for medical care.

The SJC also rejects Dermody’s further argument that, under the annuity contract, MassHealth is only entitled to reimbursement for payments made on behalf of Robert (of which there were none), not for those made for Joan’s care:

This argument is flawed. Admittedly, the annuity contract is not a model of clarity. However, it is undisputed that Robert purchased the annuity as part of a strategy to spend down the couple’s assets so that Joan would be eligible for MassHealth benefits. Because a community spouse annuity must list the State as the remainder beneficiary to the extent benefits are paid for the institutionalized spouse to be exempted from a transfer penalty, we conclude that Joan, as the institutionalized spouse, is the presumed recipient of benefits referenced in the remainder clause. And the Commonwealth is the rightful beneficiary of the remainder proceeds up to the amount it paid on behalf of Joan.

Conclusion

Early in its decision, the SJC quotes another court’s reference to Medicaid law as “among the most completely impenetrable texts within human experience.” It’s this unfortunate reality that gave rise to this litigation and that bedevils the field of Medicaid eligibility in general. The Medicaid rules regarding annuities may well be read to require reimbursement of the Medicaid agency only for payments made on behalf of the community spouse, not also for those made on behalf of the nursing home spouse, which is why the Superior Court decided in favor of Laurie Dermody.

In this case, however, the SJC has decided to go with its interpretation of the intent of Congress in creating the laws around the use of qualifying annuities rather than the plain language of the statute. While families of nursing home residents may disagree with this decision, at least it offers clarity. If a community spouse dies before receiving full payment on a qualifying annuity purchased for MassHealth planning purposes, the commonwealth will be entitled to reimbursement for payments made on behalf of the nursing home spouse.

This means that annuities continue to be good strategies for protecting the financial security of community spouses, but they will be less likely to be able to pass on the sheltered asset to their children or other beneficiaries.