Opinion ID: 2466469
Heading Depth: 2
Heading Rank: 2

Heading: facts, legislative history, and proceedings

Text: On February 8, 2006, President George W. Bush signed the Deficit Reduction Act of 2005(DRA). [1] He stated that the bill tightens the loopholes that allowed people to game the system by transferring assets to their children so they can qualify for Medicaid benefits. [2] Even before the enactment of the DRA, federal Medicaid law imposed a period of ineligibility on a person who transferred assets for less than fair market value before applying for benefits. [3] The penalty period lasted approximately for the number of months that the applicant could have paid for her own health care using the transferred assets if the transfer had not been made. [4] But the law contained a provision allowing prospective Medicaid beneficiaries to engage in so-called half-a-loaf planning, according to which the prospective beneficiary makes a gift of a portion of [her] assets while retaining sufficient assets to pay for [her] nursing home care during the period of ineligibility that results from the gifts. [5] Because the penalty period began running roughly at the time of the asset transfer, [6] prospective beneficiaries were able to calculat[e] how long they would be ineligible for Medicaid benefits after a transfer and reserv[e] enough personal assets to pay for their care until the penalty period had run. [7] The Deficit Reduction Act eliminated the possibility of this estate planning strategy by changing the start date for the asset transfer penalty period. The DRA states that for asset transfers made after February 8, 2006, the penalty period begins on the first day of a month during or after which assets have been transferred for less than fair market value, or the date on which the individual is eligible for medical assistance under the State plan and would otherwise be receiving institutional level care . . . but for the application of the penalty period, whichever is later.[ [8] ] This rule makes it practically impossible for a potential Medicaid beneficiary to cover her own medical expenses while waiting out the asset transfer penalty period: The period will not start until her remaining assets are gone. On July 31, 2006, Alaska Governor Frank Murkowski signed House Bill (H.B.) 426, legislation that was intended to amend the Alaska Statutes to reflect the DRA's change to the penalty period start date. [9] The legislation added a subsection (m) to AS 47.07.020 that stated: Except as provided in (g) of this section, the department shall impose a penalty period of ineligibility for the transfer of an asset for less than fair market value by an applicant or an applicant's spouse consistent with 42 U.S.C. 1396p(c)(1). [10] Because 42 U.S.C. § 1396p(c)(1) codified the DRA's new asset transfer penalty period start date, AS 47.07.020(m) would have eliminated the possibility of a prospective beneficiary qualifying for Medicaid coverage by transferring some assets to a family member and then waiting out the penalty period using her remaining assets. But the legislature stated that AS 47.07.020(m) would only become effective July 1, 2006, or on the date of notification under sec. 13 of this Act of federal approval of a revised state plan for medical assistance coverage incorporating the changes made by secs. 1-7 and 9 of this Act, whichever is later. [11] This language proved problematic, because federal approval of the state plan did not arrive as anticipated in a single, all-encompassing gesture, with notification on a single date. [12] As a result, there was a great deal of uncertainty about the effective date of the effective clauses. [13] In order to resolve any uncertainty, Senate Bill (S.B.) 259 would eventually be passed in 2008 to eliminate the conditional language in AS 47.07.020(m) and give it retroactive effect to October 1, 2006. [14] While the preceding legislative changes took place through 2006, Sarah Pfeifer was living in Wichita, Kansas. Sarah was born in 1914. In 2005, her husband, Warren Pfeifer, was diagnosed with terminal cancer. He died in September 2006. After Warren's death, Sarah moved to Alaska, where her only son, John Pfeifer, lived with his wife. [15] According to John's testimony, his mother and father had said they wanted to give most of the proceeds of the sale of their house in Kansas to John and his wife as a gift. [T]he money remaining in the bank account, my parents' bank account, John testified, could be used to take care of my mom during the remaining months of her life. But before making the gift, Sarah and John wanted to make sure [they] were complying with all the applicable laws, especially those relating to Medicaid. John didn't want to do anything that would jeopardize [his] mother's future medical care. In November 2006, John met with an attorney specializing in elder law and Medicaid eligibility. The attorney told John that his parents' contemplated gift of roughly half of their assets should not cause a problem under the state regulations then in effect. According to John, the attorney suggested that if the asset transfer led to a penalty under Medicaid, Sarah would still have enough money in her bank account to pay for her care until the penalty period ended and she became eligible for coverage. In other words, the attorney advised John that half-a-loaf planning remained a viable estate planning strategy in Alaska. The attorney's advice was consistent with the most recent edition of the State's Aged, Disabled, and Long Term Care Medicaid Eligibility Manual (the Medicaid eligibility manual), released by the Division of Public Assistance (the Division). This manual was originally introduced in 2004 and has been updated on several occasions since then. Section 554 of the manual contains the rules governing the effect of asset transfers on Medicaid eligibility. The most recent version of the Medicaid eligibility manual available in November 2006, when John first met with the attorney, was the October 2006 edition. Though the record does not contain a copy of section 554 from the October 2006 edition, it is uncontested that this version of section 554 continued to feature the pre-DRA asset transfer penalty start date, according to which [t]he penalty period begins the month after the. . . transfer of assets. Thus the Medicaid eligibility manual continued to suggest in November 2006 that half-a-loaf planning remained viable in Alaska, despite the passage of the DRA and AS 47.07.020(m). The manual would not be revised to reflect the DRA's prevention of the half-a-loaf planning strategy until July 2007. [16] On February 27, 2007, the day that Sarah's house in Kansas sold, John spoke again with the attorney and confirmed that the relevant rules had not changed since their last consultation in November 2006. Sarah then signed a letter formalizing the transfer of $120,000 to John and his wife. The parties agree that for legal purposes, the transfer took place on February 27. [17] In July 2007, after Sarah's gift and before her application for Medicaid, Alaska changed its regulations in a way that reflected the new penalty start date in the DRA. Before this time, the main regulation dealing with asset transfer penalties, 7 Alaska Administrative Code (AAC) 40.295, only laid out the length of the penalty period, and was silent regarding the penalty period's start date. [18] Effective July 20, 2007, a new regulation at 7 AAC 100.510(g) provided: The penalty period [for a transfer of an asset for less than fair market value that occurs on or after February 8, 2006] begins on the first day of the following month, whichever is later: (1) the month immediately after the month the transfer occurred; (2) the month that the department determines the recipient is eligible to receive long-term care services. Also in July 2007, the Division released a revised version of its Medicaid eligibility manual that for the first time contained the post-DRA penalty start date. Finally, as noted above, in May 2008 the Alaska legislature passed S.B. 259, revising AS 47.07.020(m) to make it retroactive to October 1, 2006. [19] On August 19, 2008, Sarah, through John, applied for Medicaid long-term care services. She had been living by then for over a year in a nursing home in Soldotna. The Division temporarily denied her application after concluding that the $120,000 gift triggered a transfer of asset penalty that began on September 1, 2008 and prevented her application from being granted prior to July 15, 2009. The Division's decision cited no law other than stating that it is supported by Medicaid Manual Section 554, apparently a reference to the July 2007 Medicaid eligibility manual discussed above.
John promptly filed a fair hearing request on Sarah's behalf to contest the denial of her application. [20] The request stated that John disagreed with the Division's application of the transfer of asset penalty period. Before the fair hearing, a representative of the Division presented a brief position statement arguing that section 554 of the Medicaid eligibility manual and the Alaska Administrative Code supported the Division's denial of the application. The Division submitted a copy of section 554 of the Medicaid eligibility manual from July 2007 stating that [f]or asset transfers made on or after February 8, 2006, the penalty begins the month the individual is eligible for Medicaid and would be receiving institutional level of care services, except for the imposition of a transfer of asset penalty. This language from the July 2007 manual was apparently the language relied on by the Division in denying Sarah's application in 2008. The Division also submitted an undated version of 7 AAC 100.510 stating in section (g) that the penalty period begins on the first day of the following month, whichever is later: (1) the month immediately after the month the transfer occurred; (2) the month that the department determines the recipient is eligible to receive long-term care services. As noted above, this version of 7 AAC 100.510 came into effect on July 20, 2007. At the fair hearing, the Division's representative briefly summarized the Division's position. The remainder of the hearing was largely dedicated to John's presentation of arguments on Sarah's behalf. He stated that the argument we're making is primarily legal and noted no factual disputes between the parties. John emphasized that he was not taking issue with the imposition of a penalty period, but with the Division's calculation of the period's start date. He argued that based on the version of the Medicaid eligibility manual in effect at the time of the gift, Sarah's period of ineligibility should have begun March 1, 2007, the first day of the month after she transferred the assets to her son, not September 1, 2008, as the Division concluded based on the July 2007 version of the manual. If the March 1, 2007 starting date had been applied, Sarah's ten-and-a-half-month penalty period would have ended in January 2008, long before she applied for Medicaid in August 2008. John also advanced state constitutional arguments on his mother's behalf. The hearing officer ruled in favor of the Division. He concluded that he lacked jurisdiction to adjudicate John's constitutional arguments. The premises of his decision were that there were no disputed issues of material fact, that the sole issue for determination was the start date of Sarah's penalty period, and that the Division based its decision on 7 AAC 100.510(g). The hearing officer noted that AS 44.62.240 states that legislative regulations (as opposed to interpretive ones) have prospective effect only. [21] Reasoning that .510 is a legislative rather than an interpretive regulation, the hearing officer concluded that .510 must be prospective only. It can properly be applied only to asset transfers occurring after its effective date of July 20, 2007, even though the regulation states that it applies to asset transfers on or after February 8, 2006. [22] Thus, the Division erred by retroactively applying 7 AAC 100.510(g) to calculate the penalty period start date for Sarah's application. Nevertheless, the hearing officer upheld the Division's application of a September 1, 2008 penalty start date. The hearing officer reasoned that in the absence of a valid state regulation establishing a penalty start date, the start date contained in the federal Medicaid statute at 42 U.S.C. § 1396p, effective for gifts made after February 8, 2006, applies by default. Because this start date is functionally identical to the one in 7 AAC 100.510(g), the Division's calculations were correct, and Sarah's penalty period began on September 1, 2008. John appealed the fair hearing decision to the director of the Division. In his appeal, John agreed that 7 AAC 100.510 is invalid, but argued that there was no need to look to federal law, because 7 AAC 40.295 gave the Division authority to establish a penalty start date on its own, and the Division did so through its Medicaid eligibility manual. He also repeated his argument that the Division should be equitably estopped from imposing a penalty start date different than the one contained in the edition of the manual available at the time of Sarah's gift. The director upheld the fair hearing decision, concluding that the hearing officer correctly interpreted the applicable federal law. . . when making its decision. The director noted that the fair hearing decision was also supported by [s]tate law existing at the time of the asset transfer, specifically AS 47.07.020, which as noted above was amended on July 31, 2006, to state: Except as provided in (g) of this section, the department shall impose a penalty period of ineligibility for the transfer of an asset for less than fair market value by an applicant or an applicant's spouse consistent with 42 U.S.C. 1396p(c)(1). [23] While John's appeal indicated there was some confusion as to the effective date of this section, this issue was resolved on May 22, 2008, with the passage of S.B. 259, which clearly established an effective date for AS 47.07.020(m) of October 1, 2006. John appealed the director's decision to the superior court. The superior court affirmed the Division's decision, concluding that under the Supremacy Clause of the U.S. Constitution, 42 U.S.C. § 1396p(c) preempted any conflicting penalty start date in state law. The superior court also rejected John's equitable estoppel, due process, and equal protection arguments. Finally, the superior court rejected John's argument that the Division's retroactive application of federal law and AS 47.07.020(m) constituted an unconstitutional ex post facto law under article I, § 15 of the Alaska Constitution. John appeals the superior court's affirmation of the Division's decision.