Quarterly Newsletters

September 2009: Two-Pronged Attack

The state of New Jersey is at war with lawyers who engage in the practice of Medicaid planning. Medicaid is a medical assistance program for needy individuals. Unlike private health insurance programs, however, Medicaid will pay for the costs of long-term care, such as nursing home care, assisted living care, and home health aides.

Long-term care can cost an extraordinary amount of money, anywhere from $3,000 to $10,000 a month. If you are someone who needs long-term care for … well … a long period of time, you may bankrupt yourself paying for that care.

Medicaid planning is a process through which lawyers counsel clients in methods to qualify for Medicaid sooner than they would qualify for Medicaid if they simply spent all of their money on their care. The money saved can then be used to supplement the care that the individual receives.

In the past three to four months, the state of New Jersey has declared all out war on Medicaid planning. For the next several weeks, I will write a series of articles on the State's two-pronged plan of attack against Medicaid planning.

The two prongs of the plan can be summarized as follows: (1) deny Medicaid benefits to all applicants who attempt to shelter any money for any reason the State can think of no matter how legally baseless the reason may be and (2) push a new product of long-term care insurance, called the long-term care insurance partnership program.

I will start this series of articles discussing the second prong, the long-term care insurance partnership program.

Long-term care insurance is a type of insurance that is designed to pay for the costs of long-term care, such as nursing home care, assisted living care, or home health aide care. In that respect, long-term care insurance is much like Medicaid; however, unlike Medicaid, long-term care insurance is 100% privately funded, meaning that the individual insured pays for the cost of the insurance.

A typical policy of long-term care insurance might pay the insured $200 a day for a maximum of three years worth of coverage during a period of time when the insured needs long-term care. Most policies have an "elimination period," which is a period of time when the insured needs long-term care, but the policy does not pay for the care. A typical elimination period is ninety days.

So, for example, assume that Mr. Smith, age eighty-five, breaks his hip and goes to the hospital. Mr. Smith has surgery performed on his broken hip. A few days after his surgery, Mr. Smith is discharged to a nursing home for rehabilitation for his newly-mended broken hip. Medicare, which is a government-sponsored health insurance program, pays for twenty-six days of rehabilitative care for Mr. Smith. After twenty-six days, Medicare ceases paying for his care.

Mr. Smith and his family decide that Mr. Smith is too ill to return home. The recent, traumatic events have taken a toll on Mr. Smith and he is deteriorating physically and mentally. Mr. Smith will continue to reside in the nursing home.

Mr. Smith has a long-term care insurance policy that pays him $200 a day for a maximum of three years if he requires long-term care. The policy has a ninety day elimination period.

What this means is, only after Mr. Smith has resided in the nursing home for ninety days will the insurance begin paying him $200 a day for his care and that $200 will be paid for a maximum of three years. After that, Mr. Smith is on his own.

The elimination period is key, because there is a very high probability that most people either will go home before ninety days has elapsed or they will die within that first ninety days because their health deteriorated.


Last week I began a series of articles on the state of New Jersey's two-pronged attack against lawyers who engage in Medicaid planning. This week I am going to write about the long-term care insurance partnership program, which is one prong of the two-pronged attack.

As mentioned last week, long-term care insurance helps pay for the costs of long-term care, such as care in a nursing home, an assisted living residence, or at home with a home health aide. A typical policy of long-term care insurance might pay $200 a day for a period of three years with a ninety day elimination period.

The long-term care insurance partnership program is a new type of long-term care insurance tied to the Medicaid program. Partnership program insurance permits the insured to retain additional assets and qualify for Medicaid benefits after his insurance has paid out.

Typically, in order to qualify for Medicaid, an individual must have less than $2,000 in assets. If, for example, an individual purchases a partnership program of insurance that will pay a maximum lifetime benefit of $292,000, he will be permitted to retain $294,000 and still qualify for Medicaid benefits after his long-term care insurance pays out.

The partnership program was authorized as part of a federal budget bill that brought sweeping changes to the Medicaid program in 2006. All fifty states are now authorized to have partnership programs. New Jersey's Department of Banking and Insurance authorized the insurance last summer and the state is now mandating that insurance salesman take classes introducing them to the insurance.

As of this date, no company is actually selling the insurance in New Jersey, but I believe companies soon will offer it.

I think long-term care insurance, in general, is a good concept. Whenever asked about long-term care insurance, I tell the client that they should look into it and see if they can afford it. The long-term care insurance partnership program adds a nice, extra feature to long-term care insurance and because of its direct relation to the Medicaid program, I may become licensed to sell long-term care insurance. I think a client or two a year might be interested in purchasing the insurance.

But, quite frankly, I don't anticipate selling more than five policies a year for the same reason most people do not purchase standard policies of long-term care insurance-it's too expensive. Or so people think.

Long-term care insurance might cost $3,000 a year or more. Telling someone who is either soon going to retire or is retired already that they have to pay $3,000 a year for the next twenty years for an insurance policy that they may not need is a hard sell.

Most people in their fifties and sixties do not believe they will ever need long-term care services. So, convincing a person who does not believe he will ever need long-term care to purchase long-term care insurance is not easy. By the time people attain an age when they believe they may need long-term care someday-say their late 70's or early 80's-they are uninsurable and cannot obtain long-term care insurance at any price, or the cost of the insurance is highly prohibitive.

And while I believe long-term care insurance is a good product, the hope of the insurance companies is that the they will never have to pay out on a claim. For instance, the elimination period discussed in part I of this series of articles eliminates coverage for a large percentage of people who need long-term care. Since most policies of insurance exclude coverage for the first ninety days of need, a very large percentage of individuals never receive a payout from their insurance. Insurance companies know that a large percentage of individuals who need long-term care either rehabilitate in that first ninety days and no longer need (or want) long-term care or they die.

As for qualifying for Medicaid and retain $292,000, or more, I think that is only going to happen in very rare circumstances. Even people who need long-term typically do not need long-term care for more than three years. These are frail, elderly individuals about whom I am speaking. Their illnesses and age typically take them before they need care for that long of a period of time. So, while the partnership program is a good selling point, its benefits will probably only be realized in less than 5% of cases.


In the past several weeks, I have written several articles on the state of New Jersey's two-pronged attack against Medicaid planning. Medicaid planning is the process through which an individual who requires long-term care costing as much as $11,000 per month in a nursing facility seeks to preserve a fraction of his estate.

The State's two-pronged attack involves a push on a new type of long-term care insurance, of which I have previously written, and attacking valid Medicaid planning techniques with policy arguments that are veiled in legal arguments. In this article, I am going to addresses these thinly veiled policy arguments.

The State's policy positions attack a number of Medicaid planning techniques involving transfers to disabled children, promissory notes, annuities, and planning for individuals in assisted living residences. In order to understand the State's positions, it is proper that you should understand a little bit about the planning techniques that they are attacking.

Transfers to Disabled Children. The federal Medicaid law (as well as the state's law) permits an individual to transfer an unlimited amount of assets to his disabled child without incurring any period of ineligibility for Medicaid benefits. In other words, even though the Medicaid Act typically does make an applicant ineligible for Medicaid if the applicant has given away assets, there is an unlimited exclusion for transfers to an applicant's disabled child.

The federal law (as well as the state law) also permits an individual to transfer any of his assets to a trust for the sole benefit of his disabled child.

This has been that law since 1993. The state of New Jersey has consistently honored this law, as it must. I, personally, have made over 100 outright transfers of assets to Medicaid applicants' disabled children without incurring any period of ineligibility for Medicaid benefits.

In the past three months, the State has promulgated an unwritten policy that all such transfers to a disabled child must be into a trust and that the State will penalize transfers made directly to the disabled child. Has anything changed in the federal law or state law? No. But the State doesn't like outright transfers to disabled children, so the State has decided to promulgate this policy and will wrap it in some thinly veiled legal argument.

Of all of the State's new policies, this is the one that most clearly demonstrates that the State is simply making a policy decision that has no basis in the law and, in fact, violates the law. Medicaid is a federal-state cooperative program. A State voluntarily participates in the Medicaid program; however, if a State chooses to participate in the program, then the State must adhere to the federal law.

The fact that an applicant can make an outright transfer of an asset to a disabled child could not be more clear. I could point to five federal laws off the top of my head that mandate this requirement. It is beyond my imagination what the State will say in support of its position.

I have filed suit in federal court against the State on this issue. So, I will get to see the State's legal argument, and I will let you know. But I can tell you that whatever the argument is, it will have no basis in federal law, or even New Jersey law, which also clearly mandates this treatment.


Promissory Notes. In February 2006, the federal government amended the Medicaid Act. In part, those amendments addressed promissory notes. Essentially, what the law now says is, if a Medicaid applicant purchases a promissory note that is actuarially sound, pays in equal monthly installments with no deferral or balloon payments, and does not cancel upon the death of the Medicaid applicant, then Medicaid cannot treat the purchase of the promissory note as a transfer of an asset.

I have had several clients purchase promissory notes from relatives that meet these criteria. Other elder care attorneys whom I know have done the same. By doing this, our clients have been able to qualify for Medicaid benefits sooner than they would have qualified for Medicaid benefits. The State doesn't like this result. So, what does the State do?

In the past four months, the State has decided that it will treat all such promissory notes as trust-like devices. Under this argument, the parent who purchased the promissory note really did not purchase a promissory note. Instead, the parent merely transferred money to a child to hold for the parent's benefit.

The problem with this argument is multi-fold. First of all, a promissory note is not a trust. A promissory note lacks all of the fundamental characteristics of a trust, most fundamentally, a fiduciary obligation that exists between a trustee and the beneficiary of a trust. Trustees do not pay beneficiaries interest. The laws governing the Medicaid program treat promissory notes and trusts as two discrete issues, analyzing both types of entities under different sections of the law.

In short, promissory notes are not trusts, and while the State may find it convenient to treat a promissory note as a trust because it produces their desired result-denial of Medicaid benefits-the State is required to work within the confines of the federal law. If the State is unhappy with a particular provision of the federal Medicaid Act, the State is free to do what you or I could do-call our local Congressman and Senator.

What the State has decided to do instead is take the position that it is better to ask forgiveness than permission. I have taken the position that I will sue the State in federal court, and as with the disabled child transfer issue, I have.


Annuities. Annuities have been used in Medicaid planning for decades. Typically, an annuity is used with a married couple. Let's assume, Mr. Smith enters a nursing home. Assume that Mr. and Mrs. Smith have $100,000 too much to qualify Mr. Smith for Medicaid benefits. If Mrs. Smith buys an annuity that is structured properly, she can covert that excess $100,000 into a stream of income in her name that does not affect Mr. Smith's eligibility for Medicaid benefits.

There is no doubt that the use of annuities is a sound Medicaid planning technique. For the past ten years, the State has promulgated one invalid policy after another to stop the use of annuities. A recent New Jersey case supported the State's most recent argument, but two recent federal court cases and cases from other states have rejected the holding of the New Jersey case.

As with all of the issues on which I am writing, I have filed a suit in federal court challenging the State's position.

Never ending penalty. In New Jersey, Medicaid will pay for long-term care in a nursing home and in an assisted living residence and at home; however, New Jersey has taken the position that if you apply for benefits in an assisted living residence or at home and you have given away any money in the past five years, then you are ineligible for benefits for five years subsequent to the asset transfer.

In other words, assume that Mr. Smith lives in an assisted living residence and gave away $5,000 to his son on May 1, 2009. Under the State's theory, Mr. Smith is ineligible for Medicaid in the assisted living residence until April 30, 2014. This is not the case if Mr. Smith lived in a nursing home. In a nursing home, Mr. Smith would be ineligible for less than 1 month for his $5,000 gift.

As with annuities, the disabled child transfer issue, and promissory notes, I am suing the state of New Jersey in federal court over this issue.


So, the question becomes, What am I doing to fight back against these attacks? I'm a lawyer, so I'm suing. Frequently, when you want to challenge the State's action with regard to a question involving the Medicaid program, you appeal through what is commonly referred to as a "fair hearing" administrative appeal.

Medicaid is administered through administrative agencies. At the state-level, the Division of Medical Assistance and Health Services is responsible for administering the Medicaid program. The Division contracts with the local county boards of social services to handle the applications. When an applicant is denied benefits, he has the option of appealing the county's decision through an administrative appeal.

The first stage of an administrative appeal involves a hearing before an administrative law judge (or "ALJ"). ALJs work for the Office of Administrative Law, which is an independent administrative agency that hears appeals from other administrative agencies, such as the Division of Medical Assistance and the local county boards of social services.

A hearing before an ALJ is rather informal. The aggrieved applicant has an opportunity to present witnesses on his behalf, assuming there is a question of fact involved in the appeal, and present legal arguments. The Division and County also have an opportunity to present witnesses and legal arguments.

The ALJ, like any other judge, then considers the facts presented and the legal arguments made and renders a decision. The typical timeframe from the date on which an appeal is filed to the date on which the ALJ renders his decision is about three to four months.

I have taken a number of fair hearing appeals in my career. In my experience, most ALJs are fair and rendered well-reasoned decisions. The problem is, the decision of the ALJ is not a binding decision.

The ALJ's decision is merely a recommendation to the Director of the Division of Medical Assistance and Health Services. The Director makes the final agency decision. The Director can adopt, modify, or reject the decision of the ALJ.

Of all the fair hearing appeals that I have taken, most of which I have won before the ALJ, I can only remember one decision in which the Director upheld the decision of the ALJ in a case in which the ALJ ruled in my client's favor. Obviously, the term "fair hearing" is an oxymoron, because it would be extremely difficult to believe that I would win perhaps thirty times before a judge only to have that judge's decision rejected as being incorrect.

Once the Director rules against you, you can appeal his decision to the Superior Court of New Jersey, Appellate Division, which is the court immediately below the Supreme Court of New Jersey. An aggrieved party can only set aside the Director's decision if the aggrieved party can prove that the Director's decision is arbitrary and capricious. The arbitrary and capricious standard is very hard to satisfy, so most appeals to the Appellate Division lose.

For this reason, I have chosen to forgo this appeal process and take my cases to federal court. I currently have five federal lawsuits pending against the State on the issues I have discussed in previous articles. In federal court, the Director's opinion is entitled to no deference and his decision must actually be based upon the law as written.

I will keep you posted.