Washington and a handful of other states are cracking down on a loophole that allowed some people to shield large portions of their assets in order to qualify for Medicaid.
The Department of Social and Health Services (DSHS) in May amended the Washington Adminisÿtrative Code to prevent Washington residents from using annuities to shelter assets in order to qualify for Medicaid.
"Technically, what people were doing was not illegal, but it violated the spirit of Medicaid, which is a state-federal partnership that protects the most vulnerable citizens who can't afford the cost of their own care," said DSHS Secretary Dennis Braddock.
"The real problem is that once one of these loopholes shows up, every consultant and accountant quickly catches on, and the number of people using it can increase exponentially.
Before a person is eligible for Medicaid to support their health care or long-term care (LTC) costs, they must meet both income and resource requirements.
A person who has resources that can be quickly reduced to meet the standard can become eligible by paying for some or all of their care. In other situations, people may meet the income standard but have total assets that greatly exceed the resource standard, leaving them ineligible.
That's where the annuities came in.
In some cases, individuals entered into annuities that provided for irregular payments, or so-called "balloon payments," with the effect of qualifying for Medicaid and sheltering the asset from paying part of the cost of care.
While it is impossible to say how many balloon-type annuities have been sold in the past, DSHS reviewers said the annuities were clearly becoming more popular in recent years as news of the loophole spread.
Here's how the loophole worked:
Under the option, the annuity did not count as an asset as long as it paid back the principal (original purchase price) to the beneficiary of the annuity during the beneficiary's life expectancy. That means some individuals would qualify for Medicaid long-term care services even though the individual's or couple's assets exceeded the asset standard.
Payments from an annuity are considered income instead of an asset. Thus, an annuity could be set up to pay out only a very small amount of money per month in order to keep the annuity owner's income below Medicaid income eligibility guidelines.
The annuity owner could simply postpone any real payoff until a balloon payment at the end of the annuity contract. If annuity owners were still living at the contract's end, they could quickly purchase another annuity with another big balloon payment, once again sheltering the asset.
Field staff in Aging and Adult Services Administration (AASA) initially spotted the loophole, and Mary Lou Percival of AASA turned to experts in the Medical Assistance Administration to help write a regulation change that would rule out the improper annuities.
The regulation change (WAC 388.561) became effective May 1. Basically, it gives the state Medicaid program the ability to compute, based on the beneficiary's life expectancy, a realistic year-by-year payout on any annuity and to require uniform monthly payments. Under the new rule, people can still purchase balloon-payment annuities, but they no longer will shelter assets as before. As a result, some annuity owners may not qualify for Medicaid in the first place; others will have to start using those proceeds to share the cost of their care.
About 10 other states are working on similar rules changes to close the loophole, and Braddock said he expects the federal government also will review the problem.