Federal Medicaid Law Preempts Less Restrictive State Regulation Regarding Annuities

The U.S. Court of Appeals for the Sixth Circuit rules that a case by the family of a Kentucky Medicaid recipient challenging the state’s adherence to federal law regarding spousal annuities rather than to a less restrictive state regulation is dismissed because federal law preempts the state regulation. Singleton v. Commenwealth of Kentucky (6th Cir., No. 16-5596, Dec. 6, 2016).

Claude Singleton entered a nursing home and applied for Medicaid. His wife, Mary, purchased an annuity with herself as annuitant. Ms. Singleton wished to name the state as remainder beneficiary up to the amount of Medicaid paid on her behalf. State regulations provide that the state must be named remainder beneficiary for the amount of Medicaid benefits paid on behalf of the annuitant, and this did not change even after federal Medicaid law was amended in 2006 to require that states be named as a remainder beneficiary for Medicaid benefits paid on behalf of the institutionalized individual. However, Ms. Singleton’s attorneys – the Lexington, Kentucky, ElderLawAnswers member firm of McClelland & Associates, PLLC — informed her that the state Medicaid agency’s branch manager would view structuring the annuity pursuant to the state’s regulation as a transfer for less than market value, so Ms. Singleton changed the state’s remainder beneficiary amount to Medicaid paid on behalf of Mr. Singleton.

After Ms. Singleton died, her children, the annuity’s secondary beneficiaries, sued the secretary of the state Medicaid agency, along with other parties, in federal court, arguing that state regulations may be less restrictive than federal law and that the branch manager’s alleged policy of rejecting annuities drafted pursuant to Kentucky’s own statute was improper. The secretary of state filed a motion to dismiss, claiming immunity. The district court determined the case should not be dismissed because the secretary of state was not immune, and she appealed.

The U.S. Court of Appeals for the Sixth Circuit grants the secretary’s motion to dismiss, holding that federal law preempts the state regulation. According to the court, states may pass less restrictive laws that make additional people eligible for Medicaid, but because this regulation does not extend care to more individuals, the secretary “was correct that federal law required her to impose a look-back penalty on couples who structured their annuities to avoid paying the state back for the cost of care.”

For more information about guidance on the new Medicare set-aside accounts, read this Article.