Quarterly Newsletters

June 2010: Paving the Way To Federal Court

The other week, a federal judge made a ruling in one of the federal cases that I filed, paving the way for that lawsuit to proceed against the State and for many future federal lawsuits. The Medicaid Act is a federal law, so if a State fails to implement the law properly, a person has a right to sue the State (or so I argued); however, not until I filed a number of federal lawsuits against the State has that fact been proven.

Prior to the federal lawsuits that I filed, there had only been two federal lawsuits filed by elder law attorneys against the state of New Jersey. One lawsuit resulted in a complete loss on the merits for the elderly plaintiffs and the other lawsuit was dismissed because the Court believed it should abstain from hearing the case. It is this latter issue on which I received a favorable ruling last week.

Even if the State violates a federal law, such as the Medicaid Act, there is still a question as to whether or not a federal court will hear the plaintiff's case. A federal court will refrain from hearing a case if there is an on-going state court proceeding, if important state interests are implicated by the case, and if the plaintiff has an adequate opportunity to raise his federal claims in the state court proceeding. cases was dismissed because the judge believed he should refrain from hearing the case pursuant to these principles. (In the other case, the State never raised this challenge, so the case proceeded to conclusion. Unfortunately, that conclusion was an absolute loss on the merits.) In the case that was dismissed, the judge believed that the plaintiff's opportunity to pursue his claims in a state court proceeding precluded him from proceeding in federal court.

If this judge were correct, a person would never have an opportunity to file a federal lawsuit. When a person is denied Medicaid benefits, he always has the opportunity to file an appeal of that denial through a state court proceeding. This appeals process is called a "fair hearing."

The problem I find with fair hearings is, the hearings aren't fair. While the parties do have an opportunity to present their arguments and evidence before a judge (an administrative law judge, to be specific), the administrative law judge's decision is merely a recommendation to the director of Medicaid who makes the ultimate decision.

Now, if you are complaining about a policy that the director of Medicaid has put in place, the fact that you appeal his policy through a process in which he has the final say as to whether or not he is correct is almost comical. No, it is comical. So, while I like a good joke, I don't like this type of joke when it comes to my business.

In my federal case, I argued that the ability to present a case in a fair hearing was not the type of on-going state court proceeding that should prevent a federal court from hearing a case alleging a violation of the Medicaid Act. And, in a thirty-six page opinion, a federal judge agreed with my argument.

The judge held that since the last case was dismissed in 1998, the law governing this issue has evolved and that the opportunity for a fair hearing is not the type of state court proceeding that would preclude a federal court from hearing my case. The judge's decision is (… well …) very technical and would probably be very boring to most people, but the results of the decision are very interesting.

This decision opens up an entire new forum for challenges to the State's actions in implementing the Medicaid Act, the federal court system. And in federal court, the director of the Medicaid department does not have the last word. He is merely a defendant.

CHANGE IN POLICY BAD FOR NURSING HOMES

This week, the state's Medicaid office changed a policy that has been in effect for almost two decades. The State made this policy change in order to stop a Medicaid planning technique that it views as abusive. But the impact of this change will be felt very dramatically by nursing homes across the state.

Medicaid is a medical assistance program for needy individuals. Most people who seek to qualify for Medicaid, at least those with whom I deal as an elder law attorney, require long-term medical assistance, such as care in an assisted living residence or at home. Long-term care costs an inordinate amount of money, anywhere from $8,000 to $11,000 per month.

Many older people make gifts to family members. As people age, they realize that they cannot take their money with them and they want to see family members benefit from their money. For many of these elderly people, gifting in order to qualify for Medicaid is not a thought in their head. They don't believe they will ever end up in a nursing home, and they don't want to be in a nursing home. "Put a pillow over my head," they'll say. However, they are not in great health, so the Medicaid Office would never believe that they weren't thinking about Medicaid when they made the gift.

The Medicaid laws punish an individual who makes gifts during a specified period of time, called the "lookback period," prior to applying for Medicaid benefits. Currently, the lookback period is the five-year period of time prior to applying for Medicaid.

If an individual makes a gift during the lookback period, he is ineligible for Medicaid benefits. The more money that was gifted, the longer the period of ineligibility. For instance, if Mr. Smith gifted $72,000, he'll be ineligible for Medicaid for about one year. If he gifted $144,000, he'd be ineligible for about two years. This period of ineligibility for Medicaid benefits is called a "penalty period."

For the past two decades, the Medicaid Office has permitted an applicant for benefits to ameliorate a penalty period by returning some, but not all, of the gifted assets. In other words, if Mr. Smith gifted $144,000 and had a two-year penalty period assessed against him, his family could return $72,000 to him and reduce the penalty period from two years to one year.

This presented a planning opportunity for lawyers, so the State is moving to stop this. The State is doing this be refusing to reduce the penalty period. Now, it is an all-or-nothing proposition. In other words, if the children were to return $72,000 to Mr. Smith, the penalty period would still be two years. Only if the children returned the $144,000 would the penalty period be eliminated.

While some may believe that is fair, this policy is going to cause tremendous losses for nursing homes. As I said, many older people have made gifts within the five-year period prior to applying for Medicaid. Medicaid will see these gifts, aggregate them, and assess a penalty period. If a family member said, "Okay, I can return half of what mom gave me three years ago," the penalty period will not be reduced at all. So, there is no incentive for the family member to try and return anything. (Good luck getting even half, by the way. That money was probably spent the day after it was received.)

Now, mom is in the nursing home, and even though the nursing home isn't being paid, it cannot discharge mom because mom needs the care the nursing home is giving her. Mom has no money, so the nursing home cannot sue her and expect to get anything, and the children who received the gifts years earlier are probably immune from suit. So, who gets stuck with the unpaid bill? The nursing home.

JOINT BANK ACCOUNT DANGERS

Over the course of my career, I have written hundreds of articles on topics of elder law. I have written one article a week, week-in and week-out, for the past eight years or so. I can tell you that it is not always easy coming up with a topic on which to write, but amazingly, the rather narrow practice area of elder law does give me sufficient subject-matter on which to write.

Of all the articles that I have written, few have generated as many comments or questions from clients of mine as an article I wrote several months ago on the topic of joint bank accounts. While I have written many times about the dangers of joint bank accounts, the article I wrote several months ago appeared in my newsletter that I send to my clients, so perhaps that is why I have heard so much from my clients on the subject.

I believe that joint bank accounts are dangerous because those accounts expose one person's assets to the problems of another person's. For instance, assume that Mrs. Smith adds her daughter Judy to her bank accounts as a joint owner.

Mrs. Smith probably added Judy's name to the accounts because she wants Judy to have access to her money in the event Judy needs to access the money to pay Mrs. Smith's bills. Or, because Mrs. Smith wants Judy to have access to her money after Mrs. Smith dies, so Judy can pay for Mrs. Smith's funeral or final medical bills.

Mrs. Smith probably believes that if Judy is not on her bank accounts, Judy won't be able to pay for Mrs. Smith's funeral or that Judy will have to submit Mrs. Smith's last will and testament to probate, a process that Mrs. Smith believes involves significant government involvement and taxes.

The thing is, all of Mrs. Smith's thoughts are incorrect. If her daughter Judy is her power of attorney agent and executor named under her Will, Judy will be able to access Mrs. Smith's accounts to pay her bills and to pay the bills of her estate.

Far from alleviating problems by adding Judy's name to her accounts, Mrs. Smith has exposed her money to significant, potential problems. For instance, if Judy is sued because she gets into a car accident, Mrs. Smith's money may be exposed to Judy's liability. If Judy gets divorced from her husband, the husband may make a claim for mom's money, claiming that it was Judy's money. If Judy dies, mom's money may be exposed to Judy's estate tax issues.

So far from helping things, adding someone to your accounts is very dangerous.

With that said, I have had a number of clients come to me and say, "I read your article about joint bank accounts. My daughter is on my account. Should I take her name off?"

Now, if someone asked me this question before they added their daughter's name to their accounts, I'd say, "No, don't add your daughter's name. You should have a power of attorney." But if the daughter's name is already on the account, my question is, "How much money is in the account?"

If mom has her daughter's name on one account and $10,000 is in that account at any point in time, I might say, "Well, while I wouldn't have recommended it, I wouldn't go change it now." But if mom tells me that one daughter's name is on most of her accounts, I'd probably say, "Yes, you should change it."

The bottom line is, joint bank accounts are dangerous, but many things in life are dangerous. It's a question of managing your risks and the burdens associated with undoing what you have done. Have a power of attorney and a will, and you won't need joint bank accounts. Joint bank accounts should never be treated as a substitute for these documents. But if you already have a joint bank account and that account is a fraction of the assets that you own, that's fine, with the caveat that the one minor account is subject to another person's problems.

I WON!

Last week, I won the last of the initial four federal court cases that I filed several months ago. Of all the cases that I filed in federal court, I thought the issue in this case was the most interesting. The case involved the manner in which the State was treating people who sought Medicaid benefits at home or in an assisted living residence.

In New Jersey, Medicaid will pay for care in a nursing home, in an assisted living residence, or at home. For each of these programs, if an individual gifts assets within the five year period before applying for Medicaid benefits, commonly known as the "lookback period," he is ineligible for benefits. My suit involved an issue as to how long that period of ineligibility would last for applicants at home or in an assisted living residence.

The Medicaid Act is a very comprehensive federal law. If you read the Act, it will answer almost any question you have, if you understood what you were reading. The Act has a section that tells a person how long he will be ineligible for benefits if he makes a gift within the lookback period.

The Medicaid Act calculates a "penalty period," or period of ineligibility for Medicaid benefits, by taking the aggregate of the gifts that were made during the lookback period and dividing the aggregate gift figure by a divisor number, which is based upon the statewide average cost of a nursing home. So, for instance, if Mr. Smith were to make a gift of $60,000 on March 5, 2010, and apply for Medicaid benefits on April 1, 2010, the Medicaid department would assess a penalty period against him.

The length of the penalty period would be calculated by taking the amount of the gift, $60,000, and dividing it by $7,282, which is what the Medicaid department says is the statewide average cost of a nursing home room in New Jersey. (Good luck, by the way, trying to find a nursing home that costs $7,282 per month in New Jersey. The Medicaid department likes to keep the divisor number artificially low in order to increase the period of ineligibility that results from a gift. … But that will probably be the subject of a future federal lawsuit that I will file.)

The result of that calculation is 8.2 ($60,000/$7,282 = 8.2). That is the period of time for which Mr. Smith is ineligible for Medicaid benefits, 8.2 months. During that period of time, Medicaid will not pay for Mr. Smith's nursing home costs, so Mr. Smith must find an alternative method of payment or face discharge from the nursing home for non-payment of rent.

This methodology for calculating a penalty period is the same whether the applicant is seeking Medicaid benefits in a nursing home, in an assisted living residence, or at home. But several years ago, the State decided to treat applicants who sought care at home or in assisted living residence differently than those applicants who sought care in a nursing home.

Under the State's methodology, if the applicant were in a nursing home and gave away $300, he would be ineligible for benefits for one day. But if the applicant were at home or in an assisted living residence and gave away $300, he would be ineligible for five years, the entire length of the lookback period.

For obvious reasons, the State's methodology was extraordinarily harsh. Most people make gifts, yet if a person made even a nominal gift, he would be ineligible for Medicaid for years.

I am happy to report that last week, Chief Judge Garrett E. Brown, Jr., of the federal district court of New Jersey agreed with my argument and permanently enjoined the State from enforcing its policy against my clients. As I say, this was a very sweet victory. It's a case of first impression, meaning that no other court in the country has ever ruled on this issue, and it's a case that has the potential of making a very deep impact on a great number of peoples' lives.

WHERE DID THE TIME GO?

I have been practicing elder law exclusively for the past ten years, and during that time a significant number of changes have occurred in my practice area.

Ten years ago, it seemed as if a new assisted living residence were opening every other day. But in the past six years, I don't know of any new assisted living residences. This is a trend that I don't quite understand. It would seem that the business is overcrowded.

Ten years ago, an assisted living residence cost between $2,500 and $3,500 per month. Now, an assisted living residence costs between $4,000 and $7,500 per month.

Ten years ago, a nursing home cost between $5,500 and $7,500 a month. Now, a nursing home costs between $8,000 and $11,000 per month.

Ten years ago, an estate valued at slightly more than $600,000 was subject to federal estate tax and New Jersey estate tax. Now, at least for this year, there is no federal estate tax and the state estate tax credit is frozen at $675,000. Next year, the federal estate tax will come back, perhaps with a $3,500,000 credit equivalent, perhaps with a $1,000,000 credit equivalent.

When I first opened my practice, one of the things that greatly appealed to me about elder law is the fact that it involved very little, if any, litigation. While it may seem odd for a lawyer to say, I do not enjoy going to court. In fact, if I never went to court again in my life, I wouldn't miss it.

Now, I'm now as one of the most litigious elder law attorneys that there is. I regularly give presentations to other elder law attorneys on litigating issues that arise under the Medicaid Act.

Ten years ago, Medicaid planning was a relatively simple process. For instance, if you gave away about $6,000 a month, you'd be ineligible for Medicaid benefits for one month. So, if you had $36,000 in total assets, you would give away $6,000 and pay the nursing home $6,000 for that month's bill, and so on the next month and the month after that. In the end, you would save $18,000 and you would have spent $18,000 on your care. They called this half-a-loaf planning.

Half-a-loaf planning was the meat and bones of Medicaid planning ten years ago, but it was so simple that I would worry about telling a person who came to me for a consultation too much, less they would be able to do the planning themselves without my assistance. While I did believe that a client would benefit from my help, the bottom line is, there was much that a client could have done to save money that did not necessarily require the assistance of an attorney.

Ten years later, Medicaid planning is so complicated that it's difficult to explain the planning to clients, let alone to explain it to people who come to me for a consultation. I could tell someone everything that I am going to do and there isn't a snowball's chance in hell that they could do it themselves.

Medicaid planning has become so complicated that I believe that there are only fifty or so attorneys in the entire state who could be said to be knowledgeable and experienced enough to advise clients on the process.

Where do I think the next ten years will take us?

I think Medicaid planning will remain a complex issue that will necessitate litigation against the state. The State will always want to curtail Medicaid planning because those in charge of the Medicaid program view planning for Medicaid as an abuse.

I think the federal estate tax credit will be so high that the average person will not be affected by the tax; however, I think the New Jersey estate tax will continue to affect more and more estates, as the State will be reluctant to raise the credit equivalent above the current $675,000 number.

Bottom line is, I think there is a tremendous need for advocacy and planning in the elder law field.