Gilmore v. IDHS

Docket No. 100123.

IN THE

SUPREME COURT

OF

THE STATE OF ILLINOIS

MARTHA GILLMORE, Ex=r of the Estate of Mary Fillbright,

Deceased, Appellant, v. THE ILLINOIS DEPARTMENT OF

HUMAN SERVICES, Appellee.

Opinion filed January 20, 2006.

JUSTICE FITZGERALD delivered the judgment of the court,

with opinion.

Chief Justice Thomas and Justices Freeman, McMorrow,

Kilbride, Garman, and Karmeier concurred in the judgment and

opinion.

OPINION

The plaintiff, Martha Gillmore, as the executrix of Mary

Fillbright=s estate, appeals the decision of the appellate court (354 Ill.

App. 3d 497) affirming the decision of the circuit court of Menard

County in turn confirming the administrative decision of the Illinois

Department of Human Services (DHS). The DHS found Fillbright

eligible for Medicaid, but imposed a 22-month penalty period

because Fillbright had purchased a so-called Aballoon@ annuity that

the DHS considered an improper transfer of assets pursuant to a state

regulation. For the reasons that follow, we affirm.

BACKGROUND

In 1965, Congress enacted Title XIX of the Social Security Act,

commonly known as the Medicaid Act. See 42 U.S.C. '1396 et seq.

(2000). This statute created a cooperative program in which the

federal government reimburses state governments for a portion of the

costs to provide medical assistance to two low income groups: the

categorically needy and the medically needy. The categorically needy

are persons who are automatically eligible to receive cash grants

under one of the general welfare programsBthe Aid to Families with

Dependent Children program (AFDC) (42 U.S.C. '601 et seq.

(2000)) or the Supplemental Security Income for the Aged, Blind, or

Disabled program (SSI) (42 U.S.C. '1381 et seq. (2000)). See 305

ILCS 5/5B2(1) (West 2002); 42 C.F.R. '435.100 et seq. (2003). The

medically needy are persons who are ineligible to receive cash grants

under AFDC or SSI because their resources exceed the eligibility

threshold for those programs, but who still lack the ability to pay for

medical assistance. See 305 ILCS 5/5B2(2) (West 2002); 42 C.F.R.

'435.300 et seq. (2003). People who fall into the second category are

called MANG (Medical AssistanceBNo Grant) recipients. See 89 Ill.

Adm. Code '120.10(a) (Conway-Greene CD-ROM March 2002). To

qualify for Medicaid as a MANG recipient, a person must have low

income and low assets, and the person must Aspend down@ any

resources over the statutory and regulatory limits. See 89 Ill. Adm.

Code '120.10(d) (Conway-Greene CD-ROM March 2002).

States that choose to participate in the Medicaid program design

their own plans and set reasonable standards for eligibility and

assistance. See 42 U.S.C. '1396a(a)(17) (2000). States must comply

with certain broad requirements imposed by federal statutes and

regulations issued by the United States Department of Health and

Human Services, which oversees the Medicaid program through the

Health Care Financing Administration (HCFA), now called the

Centers for Medicaid and Medicare Services. See Schweiker v. Gray

Panthers, 453 U.S. 34, 36-37, 69 L. Ed. 2d 460, 465, 101 S. Ct. 2633,

2636 (1981); West Virginia University Hospitals, Inc. v. Casey, 885

F.2d 11, 15 (3d Cir. 1989) (Medicaid A >is basically administered by

each state within certain broad requirements and guidelines= @). Each

state also must designate a single agency to administer its Medicaid

plan, though another agency may make eligibility determinations. See

42 U.S.C. '1396a(a)(5) (2000); see also 42 C.F.R. '431.10(a) (2003).

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In Illinois, the Medicaid agency is the Department of Public Aid

(DPA). See 305 ILCS 5/2B12(3) (West 2002); American Society of

Consultant Pharmacists v. Garner, 180 F. Supp. 2d 953, 958 (N.D.

Ill. 2001). The DHS makes eligibility determinations in accord with

DPA regulations. See 305 ILCS 5/5B4 (West 2002).

In 1993, Congress sought to combat the rapidly increasing costs

of Medicaid by enacting statutory provisions to ensure that persons

who could pay for their own care did not receive assistance. Congress

mandated that, in determining Medicaid eligibility, a state must

Alook-back@ into a three- or five-year period, depending on the asset,

before a person applied for assistance to determine if the person made

any transfers solely to become eligible for Medicaid. See 42 U.S.C.

'1396p(c)(1)(B) (2000). If the person disposed of assets for less than

fair market value during the look-back period, the person is ineligible

for medical assistance for a statutory penalty period based on the

value of the assets transferred. See 42 U.S.C. '1396p(c)(1)(A)

(2000). Congress also mandated that a state plan for medical

assistance must comply with, inter alia, the provisions of section

1396p with respect to Atransfers of assets[ ] and treatment of certain

trusts.@ 42 U.S.C. '1396a(a)(18) (2000). If the person establishes a

trust during the look-back period, any portion of such a trust from

which no payments could be made to the person shall be considered

assets disposed of by that person. See 42 U.S.C. '1396p(d)(3)(B)(ii)

(2000). That is, any assets disposed of during the look-back period

are Acountable@ toward Medicaid limits and subject to the spend-

down requirement, if the person=s resources are over those limits. The

term Atrust@ includes an annuity Aonly to such extent and in such

manner as the Secretary [of Health and Human Services] specifies.@

42 U.S.C. '1396p(d)(6) (2000).

In November 1994, the HCFA did just that in a policy document

known as Transmittal 64. State Medicaid Manual, Health Care

Financing Administration Pub. No. 45B3, Transmittal 64, '3258.9(B)

(November 1994). Transmittal 64 provided guidelines for state

Medicaid caseworkers on how to evaluate the transfer of assets into

trusts and annuities. An annuity is a contract in which a person pays a

bank or an insurance company a lump sum in return for fixed

periodic payments. If the person dies during the term of the annuity,

the remainder is typically converted into a lump sum and paid to a

designated beneficiary. See State Medicaid Manual, Health Care

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Financing Administration Pub. No. 45B3, Transmittal 64, '3258.9(B)

(November 1994); see generally Black=s Law Dictionary 99 (8th ed.

2004). According to the HCFA:

AAnnuities, although usually purchased in order to

provide a source of income for retirement, are occasionally

used to shelter assets so that individuals purchasing them can

become eligible for Medicaid. In order to avoid penalizing

annuities validly purchased as part of a retirement plan but to

capture those annuities which abusively shelter assets, a

determination must be made with regard to the ultimate

purpose of the annuity (i.e., whether the purchase of the

annuity constitutes a transfer of assets for less than fair

market value). If the expected return on the annuity is

commensurate with a reasonable estimate of life expectancy

of the beneficiary, the annuity can be deemed actuarially

sound.

*** The average number of years of expected life

remaining for the individual must coincide with the life of the

annuity. If the individual is not reasonably expected to live

longer than the guarantee period of the annuity, the individual

will not receive fair market value for the annuity based on the

projected return. In this case, the annuity is not actuarially

sound and a transfer of assets for less than fair market value

has taken place, subjecting the individual to a penalty.@ State

Medicaid Manual, Health Care Financing Administration

Pub. No. 45B3, Transmittal 64, '3258.9(B) (November 1994).

Transmittal 64 included two examples of this rule. If a 65-year-

old man with a life expectancy of nearly 15 years purchases a

$10,000 annuity with a 10-year term, the transfer of assets is

actuarially sound. State Medicaid Manual, Health Care Financing

Administration Pub. No. 45B3, Transmittal 64, '3258.9(B)

(November 1994). However, if an 80-year-old man with life

expectancy of nearly seven years purchases the same annuity, Aa

payout of the annuity for approximately 3 years is considered a

transfer of assets for less than fair market value and that amount is

subject to a penalty.@ State Medicaid Manual, Health Care Financing

Administration Pub. No. 45B3, Transmittal 64, '3258.9(B)

(November 1994). Transmittal 64 dictated that AStates cannot apply

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periods of ineligibility due to a transfer of resources for less than fair

market value except in accordance with these instructions.@ State

Medicaid Manual, Health Care Financing Administration Pub. No.

45B3, Transmittal 64, '3258.9(B) (November 1994).

In Illinois, MANG recipients must not transfer assets for less than

fair market value. See 305 ILCS 5/5B2.1(a) (West 2002). The

legislature provided that the DPA Ashall by rule establish the amounts

of assets to be disregarded in determining eligibility for medical

assistance, which shall at a minimum equal the amounts to be

disregarded under [federal law].@ See 305 ILCS 5/5B2(12) (West

2002). In a 1999 ANotice of Adopted Amendments,@ the DPA stated:

A[The DPA] has become aware that the marketing of

Medicaid planning devices sometimes includes plans offering

back-end loaded annuities that pay only very small monthly

amounts until the final month of life expectancy when a

balloon payment reflecting the payout balance is made. Such

annuity plans are intended to primarily benefit the person=s

heirs. While these annuities are literally consistent with

current policy, they are in conflict with the intent of asset

consideration for the purpose of equitable assistance

eligibility determination.@ 23 Ill. Reg. 11301 (eff. August 27,

1999).

Thus, the DPA promulgated a regulation regarding annuity payments:

A(e) A transfer is allowable if:

***

(13) the transfer was to an annuity, the expected

return on the annuity is commensurate with the estimated

life expectancy of the person, and the annuity pays

benefits in approximately equal periodic payments.@ 89

Ill. Adm. Code '120.387(e)(13) (Conway Greene CD-

ROM March 2002).

On January 31, 2002, 78-year-old Mary Fillbright, a resident in a

long-term care facility, applied for medical assistance as a MANG

recipient. That day, she also bought a balloon annuity for $73,713.

The annuity would stretch payments over her life expectancy of 116

months; it would pay her $188.94 per monthB$10 per month

principal, plus interestBfor 115 months and $72,741.94 in its final

month. The final or balloon payment represented nearly 99% of the

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purchase price. The annuity also provided:

AOn any anniversary prior to attaining age 101, you may

request a determination of your then life expectancy. If the

period thus determined is greater than the balance remaining

for the current period, you may request an amendment to the

new period. Such amendment will require a change in the

monthly payment amount to that for the new period.@

On March 11, 2002, caseworkers at the county DHS office found

Fillbright eligible for medical assistance, but determined that her

purchase of the balloon annuity constituted an improper transfer of

assets because it violated the Aequal periodic payment@ regulation.

Her benefits, which had been approved effective January 1, 2002,

were subject to a 22-month penalty from April 2002 to January 2004.

Fillbright appealed this decision, arguing that the equal periodic

payment regulation violated federal law, as enunciated in Transmittal

64. On June 25, 2002, the DHS conducted an administrative hearing,

and on July 29, 2002, it considered and adopted the hearing officer=s

findings of fact and affirmed his decision. The DHS determined that,

because Fillbright would not receive equal periodic payments from

the annuity, she did not receive fair market value for it. The DHS

rejected Fillbright=s argument that the regulation violated federal law,

stating it is Abound by its policy and regulations, and those arguments

cannot be considered in this forum.@ The order was signed by DHS

Secretary Linda Baker and DPA Director Jackie Garner. A cover

letter noted that the order was the DHS=s AFinal Administrative

Decision,@ as well as the DPA=s final decision Aas to Medicaid

issues.@

On August 22, 2002, Fillbright filed a complaint for

administrative review by the trial court, naming as defendants the

DHS, the DHS Secretary, and the DPA Director. Fillbright served

summons on the DHS Secretary, but not on the DPA or its director.

In her complaint, Fillbright claimed that the DHS=s decision was

incorrect because the purchase of the annuity was an actuarially

sound transfer for fair market value. Fillbright again argued that the

equal periodic payment regulation violated federal law.

The DHS filed a motion to dismiss the complaint because

Fillbright failed to serve the DPA, a necessary party, and thus failed

to comply with the Administrative Review Law. The DHS argued

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that the final administrative decision was a decision by both the DHS

and the DPA, and that the Administrative Review Law required

Fillbright to serve both agencies. Fillbright responded that the DHS

determines issues of Medicaid eligibility. The trial court denied this

motion, reasoning that the DPA is a part of the DHS, and the DHS

was served. The court stated, APublic Aid *** can clearly come in and

defend. They=re not prejudiced in any way because the [DHS] had

proper notice in a timely fashion.@

On September 15, 2003, the trial court confirmed the DHS=s

decision to impose the penalty period. The trial court stated that the

question in this case is simple: ADoes a Medicaid recipient who

purchases a back-loaded annuity payable in full over the life-

expectancy of the annuitant within the >look back= period, engage in a

non-allowable transfer of assets such that payment of benefits is

deferred for a penalty period?@ The answer, observed the court, is not

so simple. The trial court further noted that, unfortunately, the DHS

did not address this question, depriving the court of an agency

reading of the equal payment regulation.

The trial court acknowledged Aa tension between the need to

preserve scarce public medical resources for the truly needy and the

desire of families to preserve their assets while qualifying for medical

assistance through a perceived legitimate loophole.@ According to the

trial court, actuarial soundness and fair market value are distinct

requirements; an annuity, in order to be considered a proper transfer

of assets, must meet both. The court stated:

AOnce the Department determined the annuity in this case was

not purchased for fair market value, it was incumbent upon

[Fillbright] to show that in fact it was a fair market value

transfer. Plaintiff relied solely on a legal argument for her

position and presented no testimony to the hearing officer

concerning the fair market value of the transfer. Under these

circumstances, this court is unable to find that the Department

erred.@

Fillbright then appealed again, but died while her case was

pending. Gillmore was appointed executrix of her estate and

proceeded with the appeal. The appellate court affirmed. 354 Ill. App.

3d 497. The court initially reviewed Transmittal 64 and the equal

periodic payment regulation. 354 Ill. App. 3d at 501-02. According to

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the appellate court, the purpose for the fair market value requirement

in Transmittal 64 is to provide a reliable indicator for Medicaid

caseworkers trying to discern whether the annuity was intended for

retirement planning or for sheltering assets. 354 Ill. App. 3d at 503.

Like the trial court, the appellate court determined that fair market

value and actuarial soundness are distinct concepts. 354 Ill. App. 3d

at 503. The appellate court concluded that Fillbright=s annuity was

actuarially sound, but not purchased for fair market value. 354 Ill.

App. 3d at 504. It was actuarially sound because the payment term

coincided with her life expectancy. 354 Ill. App. 3d at 504. It was not

purchased for fair market value because, in effect, the balloon

payment would extend the term beyond her life expectancy. 354 Ill.

App. 3d at 504. In theory, Fillbright would receive the final payment

on the day before her death, and accordingly, A[T]he final payment on

[her] annuity would not be used as her retirement income but as a

payment to the designated beneficiary.@ 354 Ill. App. 3d at 504. The

court continued:

AThe purchase of the back-loaded annuity with a benefit

term equivalent to plaintiff=s life expectancy cannot be

deemed to be a valid retirement tool when the

overwhelmingly substantial portion of the benefit would be

paid the day before plaintiff=s expected death. *** Based

upon its terms, this type of plan is more likely viewed as a

way to shelter assets for the purpose of Medicaid eligibility

than as a valid retirement tool.@ 354 Ill. App. 3d at 504.

According to the appellate court, the state regulation did not

conflict with federal regulations, but rather provided further guidance

on them. 354 Ill. App. 3d at 504-05. The court held that the DHS

correctly imposed a penalty period based on Fillbright=s transfer of

assets into the annuity. 354 Ill. App. 3d at 505.

We allowed Gillmore=s petition for leave to appeal. See 177 Ill.

2d R. 315(a). We allowed the American Public Human Services

Association to file an amicus curiae brief in support of the DHS. See

155 Ill. 2d R. 345. On the legal issues in this case, our standard of

review is de novo. See Carpetland U.S.A., Inc. v. Department of

Employment Security, 201 Ill. 2d 351, 369 (2002).

ANALYSIS

In this appeal, Gillmore essentially raises a single issue: whether

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the DHS=s eligibility decision was correct. Before we reach that issue,

however, we must dispose of an argument made by the DHS. The

DHS insists that Gillmore=s appeal must be dismissed because

Fillbright failed to serve her complaint on the DPA. The trial court

found that the DPA was part of the DHS for the purposes of

Fillbright=s case and denied the DHS=s motion to dismiss. The

appellate court declined to reach this argument because the DHS

never cross-appealed.

Initially, we disagree with the appellate court. The DHS could not

have cross-appealed the trial court=s decision on its motion to dismiss

because the trial court=s final judgment on the merits of Fillbright=s

administrative review complaint was not adverse to the department.

See Material Service Corp. v. Department of Revenue, 98 Ill. 2d 382,

386-87 (1983).

The Illinois Public Aid Code provides that it Ashall be

administered by the Department of Human Services and the Illinois

Department of Public Aid as provided in the Department of Human

Services Act.@ 305 ILCS 5/12B1(a) (West 2002). In 1996, section

80B10(d) of the Department of Human Services Act declared that the

Department of Human Services is the successor agency to the

Department of Public Aid with respect to certain functions. See 20

ILCS 1305/80B10(d) (West 2002). The Act did not shift

responsibility over AMedical Assistance@ or Medicaid to the DHS (see

305 ILCS 5/2B12(3) (West 2002)), but eligibility decisions rest with

the DHS. Section 5B4 of the Public Aid Code provides, AThe amount

and nature of medical assistance shall be determined by the County

Departments in accordance with the standards, rules, and regulations

of the Illinois Department of Public Aid ***.@ 305 ILCS 5/5B4 (West

2002). Until 2002, ACounty Department@ was defined as the County

Department of Public Aid; thereafter, and in this case, it was the

County Department of Human Services. Compare 305 ILCS 5/2B13

(West 2000) with 305 ILCS 5/2B13 (West 2002).

The Administrative Review Law applies to all proceedings in

which a party seeks judicial review of an agency decision under

article V. See 305 ILCS 5/11B8.7 (West 2002). Section 3B107(a) of

the Administrative Review Law requires that Ain any action to review

any final decision of an administrative agency, the administrative

agency *** shall be made [a] defendant[ ].@ 735 ILCS 5/3B107(a)

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(West 2002). AAdministrative agency@ means the department having

the power to make administrative decisions. 735 ILCS 5/3B101 (West

2002). AAdministrative decision@ means a determination by an agency

which affects the rights and duties of the parties and terminates the

proceedings. 735 ILCS 5/3B101 (West 2002).

Certainly, where two agencies share the power to make the

administrative decision at issue, both must be made defendants and

served. See ESG Watts, Inc. v. Pollution Control Board, 191 Ill. 2d

26 (2000). But here only one agency, the DHS, had the power to

decide Fillbright=s Medicaid eligibility. The review of the county

DHS office=s finding that Fillbright was eligible for assistance,

subject to a penalty, was signed by the DHS Secretary and, consistent

with federal regulations, the DPA Director. See 42 C.F.R. '431.243

(2003) (the state Medicaid agency Amust participate in the hearing@ of

an administrative appeal from an adverse eligibility decision, if it did

not decide eligibility). We agree with Gillmore that the DPA simply

endorsed the DHS=s eligibility decision, and Fillbright properly

served the DHS. We turn to the merits of Gillmore=s appeal.

Gillmore contends that the DHS=s eligibility decision was

incorrect because Fillbright=s annuity satisfied the requirements of

Transmittal 64. According to Gillmore, the equal periodic payment

regulation imposes a requirement which does not exist in federal law,

and thus violates federal law. According to Gillmore, federal law

addresses financial eligibility requirements, and the state cannot be

more restrictive. Gillmore acknowledges that actuarial soundness and

fair market value are distinct concepts, but insists that for Medicaid

eligibility purposes, the sole federal test of whether a transfer of

assets into a commercial annuity is permissible is simply actuarial

soundness. If the term of the annuity was commensurate with

Fillbright=s life expectancy, then it was a transfer for fair market

value, and therefore permissible.

Gillmore distinguishes between commercial annuities like the one

purchased by Fillbright from private annuities, which are generally

agreements between parents and children where the parents transfer

money, often in trust, to the children with an understanding that the

children will pay the money back to the parents over their life

expectancy. Private annuities are like gifts and need not return fair

market value. Commercial annuities, on the other hand, are purchased

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on the open market and do return fair market value. Gillmore

discusses the examples in Transmittal 64 and concludes that the only

commercial annuity which can be characterized as a transfer for less

than fair market value is an annuity whose term extends beyond the

purchaser=s life expectancy.

In response, the DHS agrees that state Medicaid plans must

comply with the federal statutory and regulatory requirements, but

asserts that the Medicaid scheme gives the states latitude for

implementation. The DHS suggests that the federal definition of fair

market value is so broad as to allow the state to create and impose

more specific rules. The Medicaid Act does not define fair market

value, but the state Medicaid manual defines it as the Aestimate of the

value of an asset, if sold at the prevailing price at the time it was

actually transferred. Value is based on criteria you use in appraising

the value of assets for the purpose of determining Medicaid

eligibility.@ State Medicaid Manual, Health Care Financing

Administration Pub. No. 45B3, Transmittal 64, '3258.1(A)(1)

(November 1994). According to the DHS, this reference to other

Acriteria@ leaves room for the equal periodic payment regulation.

The parties have neither cited nor discussed any cases regarding

the propriety of balloon annuities under the Medicaid Act and its

regulations. Instead, they rely on cases from other jurisdictions that

address Transmittal 64 in the context of nonballoon annuities. These

cases, of course, do not bind this court, but they warrant some

discussion.

Gillmore principally relies upon Mertz v. Houstoun, 155 F. Supp.

2d 415 (E.D. Pa. 2001), a federal district court case from

Pennsylvania. In Mertz, a husband purchased two actuarially sound,

nonballoon commercial annuities for $106,000 immediately before

his wife entered a nursing home that participates in the Medicaid

program. Shortly thereafter, the wife applied for Medicaid. The State

welfare department determined that she was eligible for medical

assistance, subject to a two-year penalty, because the purchase of the

annuities violated a state welfare regulation creating a presumption

that assets transferred during the look-back period were transferred in

order to qualify for Medicaid. The wife then filed an administrative

appeal of the state welfare department=s decision, and the department

denied her appeal. Rather than seeking judicial review in state court,

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the wife filed a civil rights action in federal court. The wife asked for

declaratory and injunctive relief, arguing that the annuities were

actuarially sound and purchased for fair market value and, thus, the

state welfare department violated federal law when it imposed a

penalty period based on the regulatory presumption.

The federal district court reviewed the Medicaid Act and

Transmittal 64, as well as the state Medicaid plan. Mertz, 155 F.

Supp. 2d at 420-22. The court noted that the state welfare department

found that the annuities were purchased for fair market value, but still

penalized the transfers because the wife had not rebutted the

regulatory presumption. Mertz, 155 F. Supp. 2d at 425. Federal law,

however, penalizes only transfers made for less than fair market

value. Mertz, 155 F. Supp. 2d at 425. In a footnote, the court

explained:

AThe [state welfare department] seizes upon the portion of

the sentence in Transmittal 64 which reads >a determination

must be made with regard to the ultimate purpose of the

annuity= but omits the language immediately following which

reads, >i.e. whether the purchase of the annuity constitutes a

transfer of assets for less than fair market value.= [Citation.]

*** [T]he critical factor in determining whether the purchase

of an annuity may be penalized is whether it was a purchase

for fair market value, which is then essentially equated with

actuarial soundness. Insofar as the [state welfare department]

relies on [the statutory presumption] to penalize transfers

made for fair market value *** upon a finding they were also

made to qualify for benefits, the agency is engaging in a

practice inconsistent with federal law. Insofar as that

regulation is intended not merely to create a rebuttable

presumption of an intent to qualify upon a finding of a

transaction for less than fair market value but rather to

penalize transfers made for fair market value upon a

presumption or finding of such intent, the regulation is

inconsistent with federal law.@ Mertz, 155 F. Supp. 2d at 425

n.13.

In closing, the court discussed the loophole in the Medicaid

scheme which allows a couple to convert countable resources into

noncountable income for the noninstitutionalized spouse by

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purchasing a commercial annuity for the sole benefit of the

noninstitutionalized spouse. Mertz, 155 F. Supp. 2d at 427. This

loophole, Aapparently discerned by lawyers and exploited by issuers

who advertise such annuities as a means to qualify for Medicaid

benefits,@ is inconsistent with the purpose of the Medicaid program to

provide assistance to needy persons. Mertz, 155 F. Supp. 2d at 427.

The court acknowledged that this loophole has proven frustrating to

state Medicaid administrators across the country, but stated it was

powerless to help: AIt is not the role of the court to compensate for an

apparent legislative oversight by effectively rewriting a law to

comport with one of the perceived or presumed purposes motivating

its enactment. It is for the Congress to determine if and how this

loophole should be closed.@ Mertz, 155 F. Supp. 2d at 428.

Dempsey v. Department of Public Welfare, 756 A.2d 90 (Pa.

Commw. 2000), an intermediate appellate court case from

Pennsylvania, reaches the opposite conclusion. In Dempsey, a

husband purchased two actuarially sound, nonballoon, commercial

annuities for a total of $375,000 after a resource assessment by the

county assistance office. The husband then applied for Medicaid on

behalf of his wife. The county assistance office concluded that the

transfer was improper under the same regulatory presumption as in

Mertz, denied the wife=s application, and declared her ineligible for

medical assistance for more than six years. The state welfare

department affirmed, and the husband appealed. The husband argued

that Transmittal 64 is conclusive and allows the purchase of

commercial annuities without penalty if they are actuarially sound.

According to the husband, Transmittal 64 prohibited the state welfare

department from making a presumption that the transfer was for less

than fair market value and thus improper.

The appellate court affirmed, stating that actuarial soundness of

an annuity does not place a transfer of assets to such an annuity

beyond the review of the state welfare department. Dempsey, 756

A.2d at 93. According to the appellate court, the husband transferred

almost $400,000 of assets immediately before applying for Medicaid

on his wife=s behalf, and the state welfare department Acorrectly

presumed that the transactions were made for less than fair market

value and for the impermissible purpose of qualifying for

[Medicaid].@ Dempsey, 756 A.2d 95. In fact, the court concluded,

Transmittal 64

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Adoes not itself provide that a transfer of assets to an

actuarially sound annuity establishes that the transfer may not

under any circumstances render ineligible an applicant for

[Medicaid]. As we read the provision, it is simply a guideline

to aid caseworkers in determining whether or not an annuity

appears on its face to be a legitimate instrument as opposed to

an abusive shelter for assets.@ Dempsey, 756 A.2d at 95-96.

Accord Bird v. Pennsylvania Department of Public Welfare, 731

A.2d 660 (Pa. Commw. 1999).

Though we disagree with the result reached by the court in Mertz,

we do agree with its comment that it is apparent annuities have been

structured to bypass Medicaid limits and consequently to defeat the

purpose of the Medicaid Act. Additionally, we find Dempsey more

persuasive than Mertz on the issue of whether Transmittal 64

forecloses further state regulation. Dean v. Delaware Department of

Health & Social Services, C.A. No. 00AB05B006 (Del. Super.

December 6, 2000), aff=d, 781 A.2d 693 (Del. 2001), a trial court

decision from Delaware upon which Gillmore relies, supports our

position.

In Dean, a wife entered a nursing home. Her husband considered

applying for Medicaid on her behalf and asked the state social

services office for an assessment of their assets. The social services

office determined that, not including the husband=s community

spouse resource allowance, they had assets $51,000 over Medicaid

limits. The husband purchased an actuarially sound, nonballoon

commercial annuity for $53,000 in order to spend down his

resources. The social services office denied the wife=s Medicaid

application, and the husband asked for an administrative hearing. At

the hearing, the husband=s attorney, who specialized in Aputting

together Medicaid annuities for purposes of Medicaid qualification@

testified. Dean, No. C.A. 00AB05B006. He described Transmittal 64

and stated that the husband=s annuity was actuarially sound, making it

noncountable under Medicaid. The social services office caseworker

who reviewed the wife=s application also testified. She stated that she

was under the impression that the annuity was crafted in order to

create eligibility, adding that the office considers transfers of assets

for the sole purpose of becoming eligible for Medicaid to be

improper. The administrative hearing officer sided with the social

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services office because the annuity was an abusive shelter of assets.

The husband filed a complaint for judicial review.

The trial court reversed, holding that the annuity complied with

Transmittal 64, and the State was powerless to penalize it. Dean, No.

C.A. No. 00AB05B006. The court discussed Transmittal 64, which

Aclearly suggests that sheltering, that is, moving or altering,

assets solely in order to qualify for Medicaid is an abuse of

the Medicaid system. It does so only by implication and by

contrasting a valid retirement plan with a strategy to ensure

eligibility. But it stops short of prohibiting such action. Worse

yet, while [Transmittal 64] appears to denounce the purchase

of an annuity for the purpose of qualifying for Medicaid, it

inhibits the caseworker=s ability to penalize such abuse by

making the single determinative factor the question of fair

market value.@ Dean, C.A. No. 00AB05B006.

The court stated that unlike the state in Mertz, the state in this case

did not have a regulatory presumption that assets disposed of during

the look-back period were disposed of to create Medicaid eligibility,

despite Athe obvious logic and utility@ of such a presumption. Dean,

C.A. No. 00AB05B006. According to the court, such a presumption is

consistent with Transmittal 64 because Transmittal 64 Aimplicitly

presumes that a transfer of assets for less than fair market value was

for the purpose of qualifying for Medicaid.@ Dean, C.A. No.

00AB05B006.

Our research has revealed two very recent cases from Ohio

involving Medicaid eligibility and balloon annuities. In King v. Ohio

Department of Job & Family Services, 2005-Ohio-4939, an Ohio

Court of Appeals affirmed a trial court decision which upheld an

administrative decision by the Ohio Department of Job and Family

Services. The department denied the application of a 94-year-old

woman who purchased a commercial balloon annuity for $257,220.38

because she failed to present clear and convincing medical evidence

pursuant to a state regulation that she would live beyond the balloon

payment date. The court of appeals, however, did not address the

eligibility issue, finding that the woman had not provided legal

support for her arguments. See King, 2005-Ohio-4939, at &8.

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Fire v. Ohio Department of Job & Family Services, 2005-Ohio-

5214, provides more substantive analysis. Fire involved three

consolidated appeals. In each case, a woman in her 80s purchased a

balloon annuity after entering a nursing home. In each case the local

Job and Family Services bureau denied their Medicaid applications

and imposed penalty periods because the annuities were countable

assets that put the women over Medicaid limits. Under a state

regulation, a balloon annuity is a countable asset unless the Medicaid

applicant can prove by clear and convincing evidence that she was

expected to live past the date of the balloon payment. The State Job

and Family Services director affirmed the local decisions, and the

trial court affirmed the director=s decisions. The women appealed.

The court of appeals reviewed the Medicaid Act and discussed

the state regulations regarding eligibility. Fire, 2005-Ohio-5214, at

&22. One of those regulations tracked Transmittal 64=s actuarial

soundness requirement, but added that the validity of a balloon

annuity is not governed by life expectancy tables. Fire, 2005-Ohio-

5214, at &30. Instead, the value of balloon annuity Awill be deemed

improperly transferred@ unless the applicant can produce Aclear and

convincing medical evidence that the [applicant] is expected to

actually live past the date of the balloon payment.@ Fire, 2005-Ohio-

5214, at &30, citing Ohio Adm. Code '5101:1B39B22.8(E). The court

of appeals agreed that the women had not rebutted this presumption:

AThe features inherent in the transfers made by [the

women] indicate that the transfers were made with the intent

to avoid using the resources for nursing home care. ***

*** [T]here was insufficient evidence to support the

[women=s] claims that [the] purchased annuities were not

improper transfers of assets for the purpose of meeting

eligibility requirements for Medicaid; the [women]

transferred significant funds to annuities almost immediately

before each applied for Medicaid benefits.@ Fire, 2005-Ohio-

5214, at &&41-42.

The equal period payment regulation here, like the regulatory

presumptions in Dempsey, King, and Fire, remains consistent with

the spirit of Transmittal 64. The Medicaid Act is Aamong the most

intricate ever drafted by Congress.@ Schweiker, 453 U.S. at 43, 69 L.

Ed. 2d at 469, 101 S. Ct. at 2640. Though its provisions are dense,

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circuitous, and often difficult to harmonize (Mertz, 155 F. Supp. 2d at

420 n.6), even this tangled web of interlaced legislation and

regulation has gaps. The Aactuarially sound@ approach in Transmittal

64 was an attempt to close one such gapBannuities with terms longer

than the Medicaid applicant=s life expectancy. It simply did not

address anotherBballoon annuities. 1

The Medicaid scheme leaves to participating states like Illinois

the task of fashioning reasonable standards for determining eligibility

which Aprovide for reasonable evaluation of any [available] income

or resources.@ 42 U.S.C. '1396a(a)(17)(C) (2000). The Medicaid Act

is Adesigned to advance cooperative federalism,@ and the United

States Supreme Court has Anot been reluctant to leave a range of

permissible choices to the States, at least where the superintending

federal agency has concluded that such latitude is consistent with the

statute=s aims.@ Wisconsin Department of Health & Family Services v.

Blumer, 534 U.S. 473, 495, 151 L. Ed. 2d 935, 954, 122 S. Ct. 962,

975 (2002). Though the Department of Health and Human Services

has not definitively indicated that the states may penalize balloon

annuities, the HCFA in Transmittal 64 did intimate that the aim of

federal regulators and state caseworkers alike is Ato avoid penalizing

annuities validly purchased as part of a retirement plan but to capture

those annuities which abusively shelter assets.@ State Medicaid

Manual, Health Care Financing Administration Pub. No. 45B3,

Transmittal 64, '3258.9(B) (November 1994).

1

We note, however, that, according to a survey conducted by amicus, 25

of the 40 states who responded to a 2003 survey do not permit balloon

annuities to bypass restrictions on transfers of assets. A consultant hired by

the federal Department of Health and Human Services has recommended

that that agency should specifically do the same. See R. Levy, Analysis of

the Use of Annuities to Shelter Assets in State Medicaid Programs 58 (CNA

Corp. 2005).

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The benefit of treating an annuity as a trust is that an annuity

transforms assets in the form of the purchase price into income. Thus,

a person applying for Medicaid does not have to spend down those

assets, but only the monthly income from the annuity. Balloon

annuities take this approach to an extremeBminimizing income to

shelter assets, instead of providing sufficient income for the Medicaid

applicant. A balloon annuity returns fair market value only in a

technical sense because the person purchasing it receives the

disproportionately largest payment on the last day of her life, when

she is unable to spend it, and the state is unable to enforce a spend

down. In fact, Fillbright=s immunity went a step further than most

balloon annuities and included an amendment clause, which allowed

her to push back the balloon payment if a redetermination of her life

expectancy revealed a period longer than that left on the annuity. The

structure of a balloon annuity demonstrates that its purpose is to

shelter assets and not to provide income.

Somehow, according to Gillmore, the equal periodic payment

regulation violated Transmittal 64, even though a stated goal of the

federal scheme is to prevent shielding assets. She would bind the

department to federal law where doing so would allow her annuity to

shield assets, but ask the department to ignore the spirit of federal

law, where doing so would close an obvious loophole. The DHS does

not dispute that before the equal periodic payment regulation, an

annuity such as Fillbright=s was considered a proper transfer of assets.

That regulation, however, turned such an annuity into an improper

transfer. Because the equal periodic payment regulation was a

permissible and reasonable standard to help caseworkers evaluate

transfers of assets, we conclude that it did not violate federal law.

Accordingly, we refuse to disturb the DHS=s eligibility decision.

In a closing policy argument, Gillmore discusses and asks for our

imprimatur on the reasons seniors would want to shelter assets.

According to Gillmore, balloon annuities are asset shelters, but

laudable ones because such annuities allow seniors to reserve a nest

egg in the event they live past their life expectancy. She contends that

we should somehow sanction Fillbright=s purchase of a balloon

annuity because Congress has not acted to provide seniors with more

benefits or cheaper care. We acknowledge that this case has deep

implications for seniors in Illinois. As Gillmore notes, the costs of

long-term care are staggering, and seniors can exhaust their life

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savings in a short time while in long-term care. But this coin has

another side: the resources of Medicaid are similarly finite, a fact

which will become increasingly apparent as our population ages. We

decline to enter this fray. Decisions on how best to allocate public

revenues are best left with the legislature.

CONCLUSION

For the reasons that we have discussed, the judgment of the

appellate court is affirmed.

Affirmed.

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