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The History of Medicaid Reform and Immediate Annuities: Part Two

Disclaimer: With Medicaid, VA, and insurance regulations frequently changing, past blog posts may not be presently accurate or relevant. Please contact our office for information on current planning strategies, tips, and how-to's.


In 1985 Congress enacted the Consolidated Omnibus Budget Reconciliation Act – COBRA ’85.  The ’85 Act put an end to “Medicaid qualifying trusts.”  Medicaid qualifying trusts were irrevocable trusts established with the applicant or the applicant’s spouse as the beneficiary of all or part of the payments from the trust, as determined by the absolute discretion of the trustee.  The Act deemed the assets of the trust to be available resources when determining the Medicaid eligibility.


In 1988 Congress enacted the Medicare Catastrophic Coverage Act – MCCA ’88.  The ’88 Act required state Medicaid programs to:


  • penalize asset transfers for less than fair market value, and
  • look-back 30 months for inappropriate transfers.  Each uncompensated asset transfer stood on its own merits as to an applicable penalty period, penalty periods ran consecutively – no overlap, and the maximum time period for which a Medicaid applicant was ineligible was 30 months.


In 1993 Congress enacted the Omnibus Budget Reconciliation Act – OBRA ’93.  The ’93 Act required state Medicaid programs to:


  • extend the 30-month look-back to 36 months,
  • extend the look-back from 30 to 60 months in the case of an irrevocable grantor trust, and
  •  impose a penalty period commensurate with the value of the uncompensated transfers – no maximum limit.


In November of 1994, in response to immediate annuities that were structured with very long payouts (some as long as 30 years), the Health Care Financing Administration (“HCFA”) issued Transmittal 64.  This established the “actuarially sound test” for immediate annuities.


Based on a specific age and gender life expectancy table, in order for an immediate annuity to be compliant it had to return the investment amount within the owner’s life expectancy.  If the annuity was too long, it did not satisfy the test and caused a Medicaid ineligibility period.  With the actuarially sound test in place, single applicants paid more for their care, reducing what the government paid.


On February 6, 2006, Congress passed the Deficit Reduction Act of 2005 – DRA ’05.  The intent of the ’05 Act was to discourage individuals from purchasing immediate annuities for the purpose of sheltering or transferring assets to avoid paying for long-term care costs.  The Act required state Medicaid programs to treat the purchase of an immediate annuity as a “transfer for less than fair market value” unless it met all of the following requirements:


  • is irrevocable and non-assignable,
  • is actuarially sound,
  • provides for payments in equal amounts, with no deferral and no balloon payments,
  • names the state Medicaid program in the first position for at least the total amount of medical assistance paid on behalf of the applicant/recipient, or names the state Medicaid program in the second position after the community spouse, minor child, or disabled child, for at least the total amount of medical assistance paid on behalf of the applicant/recipient.


I don’t anticipate, even for a moment, that the Deficit Reduction Act of 2005 is the last major change to the face of the Medicare and Medicaid systems.  When that next change comes, I will do what I have been doing since 1985 – educating myself, refocusing, and growing my practice.


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