As Medicaid costs consume ever-larger portions of state budgets around the country, states are becoming more aggressive in their attempts to curtail what they might see as abuses of the Medicaid eligibility process. A primary target of attacks in Arizona and elsewhere has been the use of annuities in Medicaid planning. Last month two New Jersey courts made clear that federal law permits most of the practices challenged by the states.

The case of F.K. (the court uses only initials) demonstrates the most common approach to the use of annuities. F.K.’s wife, no longer able to care for him, placed him in a local nursing home. She could not get Medicaid assistance with his care immediately because the couple owned assets of about $300,000, well over the limit for eligibility. Still, she could not afford to pay for his care with their combined incomes.

F.K.’s wife attempted to solve the problem by purchasing a single-premium immediate annuity for $273,538. With the annuity in place she would receive a monthly check—but the original principal would no longer be available to her and would not prevent F.K. from qualifying for Medicaid. Because New Jersey had already served notice that it intended to attack annuity planning, Mrs. F.K. even took the extra step of naming the state as beneficiary of the annuity if she should die before it finished making payments to her.

The trouble with that plan was that when New Jersey finally acted a few months later the state simply chose to ignore annuities. It announced that the purchase price would still be treated as available despite the fact that it simply was not. The Appellate Division of the New Jersey Superior Court (the state’s court of appeals) shot that theory—and New Jersey’s ill-fated regulation—down in straightforward language. Estate of F.K. v. Division of Medical Assistance and Health Services, January 4, 2005.

Just two weeks later three different judges from the same court also invalidated New Jersey’s attempt to require that the state be named as beneficiary on annuities. In the second case, involving a similar annuity purchased by a husband to secure eligibility for his wife, the second appellate court ruled that federal law simply does not permit the state to require that it be named as beneficiary. A.B. v. Division of Medical Assistance and Health Services, January 21, 2005.

The two New Jersey cases come down at the very moment that Arizona’s Medicaid program, ALTCS, is seeking similar rules from the Arizona legislature. Senate Bill 1161, introduced by Senator Carolyn Allen and assigned to the House Health Committee she chairs, would closely follow several of the objectionable provisions of the New Jersey regulations. If adopted, the state faces certain litigation and likely failure in an expensive attempt to cut Medicaid costs.

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