June 6, 2001

Page One Feature

New 'Artificially Impoverished' Seniors
Get Medicaid to Pay for Nursing Homes

Annuity That Converts Assets Into Income Can Help
Even Affluent People to Qualify; States Crack Down

By ANN DAVIS
Staff Reporter of THE WALL STREET JOURNAL

JASPER, Ga. -- In a packed room at the public library in this small town, seniors listened attentively as Rocco Canora told them how they could avoid dying broke after depleting their hard-earned savings on nursing-home care.

By moving their assets into what he called a "Medicaid annuity," they could appear poor enough to get the government to pick up their tab for a nursing home. In reality, they would be far from impoverished. The annuity would pay back their entire nest egg in monthly installments over a few years. "Annuities can protect what you've worked for," Mr. Canora said as he handed out fliers for SunMark Group, an insurance broker in Duluth, Ga. "Remember, Medicaid is everybody's right."

Martin Gardner was an eager listener. "I'm disgusted with the U.S. government," said the 75-year-old former defense-plant worker, who feared his wife would soon have to enter a nursing home. "You work all your life, then you end up stone broke. I want to fix my money so they can't grab it."

Since the late 1990s, sales pitches such as Mr. Canora's have led thousands of middle-class and even affluent retirees to collect public assistance. Selling at a rate of an estimated $300 million to $500 million a year, the Medicaid annuities are the latest wrinkle in a strategy often described by critics as artificial impoverishment.

Asset Play

Medicaid won't pay for people's nursing-home care if they have assets of more than about $2,000, not counting a house and car. This often means the assets go to pay a nursing home until they're gone, after which Medicaid does step in, but heirs are left with little. Lawyers and financial planners have long sought devices to avoid this outcome, such as carefully crafted trusts, and Congress has responded with crackdowns. Now, annuity sellers offer another strategy.

Their solution: Hand over almost all of the elderly person's assets to an insurance company, which agrees to send it all back, with interest, in monthly payments over a few years. Voila, the person no longer has significant assets -- only an income stream -- and thus can be eligible for Medicaid. This works so long as the annuity appears to be set up for retirement income and is irrevocable and nontransferable, even though federal officials say they didn't intend for the Medicaid-eligibility guidelines they wrote to make this kind of maneuver possible.

Medicaid annuities have drawn tacit support from staffers at nursing homes, who sometimes steer the elderly to Medicaid planners. Donna McDyer, social-services director at a home in New Port Richey, Fla., estimates that 20% of its residents who seek Medicaid have done some sheltering of assets. "I'm the patient advocate," she says. "You do what's best for your patients."

At Risk

But critics such as state regulators see the annuities as a clear abuse and assail the insurance industry for profiting from a product that they estimate has drained $1 billion from Medicaid so far. Owners of some nursing homes are also opposed, because Medicaid pays less than the private rate. Some of the sharpest criticism comes from others in the insurance industry who sell a rival product, insurance for long-term care. Joseph W. Jordan, a senior vice president at MetLife Inc., says Medicaid annuities "smack of avoidance, and we think we would put customers at risk" by selling them.

Now a regulatory backlash is growing. Some states are restricting the annuities by seizing the funds remaining in them when the elderly person dies. Other states, such as Ohio and Pennsylvania, are starting to refuse Medicaid to some assetless applicants on the ground that they are using an annuity to game the system, not to obtain retirement income. "If you allow this to go on, you're going to create a system where even Bill Gates could qualify for Medicaid," says Joe Case, a spokesman for the Ohio Attorney General's office.

Independent agents who sell the annuities are raising funds for a lawsuit in hopes of getting a federal court to weigh in against activist states such as Ohio. Although insurance companies haven't joined in the agents' effort, they defend their sales. "We don't believe we're doing anything outside the rules that the government has set," says Margery Hughes, president of Allianz AG's Allianz Life Insurance Co. of North America. "Our desire is to develop products that people really need" and that "allow everybody to be independent in their retirement years."

Others who sell products used in the Medicaid strategy include General Electric Co., St. Paul Cos., Allstate Corp., American Financial Group Inc. and privately held Americo Life Inc. of Kansas City, Mo., which popularized the annuities in 1998.

GE's position is unusual because, as a big seller of long-term-care insurance, it has spoken out against Medicaid asset-depletion and backed an association that is dedicated to stamping it out. Yet GE's First Colony Life Insurance Co. unit enables some customers to make their annuities nontransferrable, an essential move in qualifying for Medicaid.

GE spokesman Mike Kachel notes that GE's materials don't mention Medicaid. He says the company isn't encouraging anyone to shelter money and has little control over how the annuities are pitched because it leaves their sale to independent marketing firms and agents. "Deliberate asset depletion is not part of [our] product strategy," Mr. Kachel says.

Asset depletion for Medicaid reasons took off in the 1980s, when some lawyers built a brisk trade in sheltering money through trusts and ownership of expensive cars. Congress cracked down in 1993, lengthening the number of years administrators would "look back" at applicants' finances to see if they had transferred their assets to their heirs or a trust. In 1996, Congress even authorized prison time for some seniors who abused the Medicaid rules.

'Granny Goes to Jail'

Advocates for the elderly derided this as the "Granny goes to jail" law, and Congress soon revised it, seeking to impose the prison penalty instead on financial and legal advisers. But because of free-speech concerns, that provision has never been enforced. Medicaid currently pays part or all of the bill for two-thirds of people in nursing homes.

Meanwhile, a few enterprising insurance agents pored over federal fine print and found an opening. The Health Care Financing Administration, which oversees Medicaid, warned that annuities shouldn't be used to "abusively shelter assets." But its rules made clear what was needed to pass muster. For instance, the annuity had to be bought to provide retirement income and structured to pay back the principal within a senior's life expectancy.

An Austin, Texas, insurance-marketing executive named Chuck Gill was among the first to tweak annuities to make them Medicaid-friendly. Then, after he moved to a marketing agency, he persuaded the Austin office of Americo's Great Southern Life Insurance Co. to create a Medicaid annuity in 1998. Other insurers and marketing agencies soon jumped aboard. Insurers created the annuities, while the marketing agencies drew up brochures and trained agents to give seminars for the public.

'You May Cancel ...'

A brochure for one Americo annuity promises "protection from nursing home costs" by making assets "unavailable when an application for Medicaid is being made." One from a St. Paul Cos. unit called Fidelity & Guaranty Life Insurance Co. goes further: If told your annuity is "not allowable for purposes of 'spending down' assets to gain Medicaid eligibility," it advises customers, "you may cancel your contract and receive a full refund ..." St. Paul is in the process of selling this unit to London-based Old Mutual PLC.

For insurers, this was a way to expand a sleepy product line often used to structure lottery prizes and court settlements. Unlike annuities that are tied to the stock market (the "variable" ones), these are "single-premium immediate annuities" for "term certain": one premium, payout starting at once, lasting for a set period.

There is appeal for independent agents, too. Michael Osadchey of Palm Harbor, Fla., says Americo pays him a commission of as much as 7% of the annuity's face value, more than he pockets for selling long-term-care insurance.

Not a Big Money Maker

For buyers, the terms aren't so hot. Buyers earn only about 3% annually on their money. And to shift their funds into an annuity, people often have to first sell stocks or bonds, triggering a tax bill. "It's a lousy investment, but that's not why you're buying it," says Barry Rahm, an agent who sells an annuity called the Wealth Protector from Employees Life Co. (Mutual).

Insurers and agents soon found their market. Typical buyers were "blue-collarish" savers with memories of the Depression who "didn't know about long-term-care insurance or couldn't qualify for it or couldn't afford it," says James Anderson, an Americo senior vice president. Dale Krause, an annuity broker in Wisconsin, says he has done cases "right around the million-dollar mark." But "it's the people that took 50 years to save a couple hundred thousand that really are devastated," he says.

The annuities are best suited to married couples, who under Medicaid rules can shelter part but not all of their assets. The rules say that if a person entering a nursing home transfers assets to his or her spouse, this spouse can keep half of the couple's total assets, up to about $87,000, plus a house and car, without barring the frailer partner from getting Medicaid.

But if the healthier spouse pours the couple's money into an annuity, it is possible to protect all of it. The annuity is set up to return all the money, in monthly payments, to the spouse who remains at home. It deprives the couple of assets but gives the healthier spouse income.

Occasional Pangs

Fredric Zinger of Zephyrhills, Fla., cared for his wife, who has a heart problem, for nearly two years before putting her in a nursing home. In 1998, the retired trucker turned nearly $200,000 over to an insurance company, and his wife went on Medicaid, which now pays for her nursing home. Mr. Zinger, 77, lives on his annuity income.

He admits to pangs of conscience: "Who would ever think I'd be on welfare? If I could have seen some way to pay it myself ... and still not go bankrupt," he says, he would have.

In Sunnyvale, Calif., Sarah Symington put $98,000 into an annuity and let Medicaid pay for most of her husband's nursing home until his death last year. Now, the 97-year-old woman uses the $436 monthly annuity income to help pay her rent at an assisted-living facility. "It's been too good to be true," says her daughter, Sara Todd, of Palo Alto.

Marketers next targeted people who didn't yet need nursing homes. Tyrone Clark, who says he has trained about 7,000 agents through a workshop called Annuity University, urged brokers at a recent seminar in Denver to tell seniors they face eventual illness and likely bankruptcy. "Disturb them" with lines like "the American dream just went down the tubes," he advised.

Seniors without a spouse to transfer assets to are a tougher challenge, but some insurers are tackling it. The tactic: a balloon annuity. It pays out a tiny monthly check and then returns most of the money in the final month. The buyer thus gets rid of assets and stays below income limits for a Medicaid recipient, which range from $1,500 to $2,000 a month, depending on the state.

Hoping for a Miracle

Ed Remisiewicz arranged for his 84-year-old aunt, a widow with no children, to buy balloon annuities after she entered a nursing home in New Port Richey. They totaled $336,000, according to his insurance agency. "We knew her money would be gone if she stayed a couple of years in the nursing home," says Mr. Remisiewicz's wife, Annette. "We want to preserve her money in case she comes home -- in case of a miracle."

Annuities can work for the single elderly even without a balloon, although not quite as well. Suppose an elderly man's annuity provides $1,400 a month of income. He qualifies for Medicaid, but has to turn the whole $1,400 over to the nursing home to pay part of its cost. So what's the advantage? Without this device, he'd have to pay the home much more per month, maybe $4,000 or $5,000, and would more rapidly deplete his assets. With the annuity, it's more likely there will be something left for heirs when he dies.

It was balloon annuities that galvanized state regulators. Mary Lou Percival, an eligibility specialist in Washington state, became upset early last year when she felt she had to approve Medicaid for an 80-year-old widow whose annuity would pay her nothing for 59 months and then $325,000 in the final month. "This is getting out of hand," she recalls telling colleagues. "That annuity was not purchased to provide an income for retirement."

Ms. Percival spurred her state to change its policy. Because states administer and partially finance Medicaid, they have some leeway in interpreting the federal eligibility guidelines. In addition, the federal government recently gave states greater authority to recover what is left in an annuity when someone dies.

State Crackdowns

Now, Washington state has decided that on future annuities bought by state residents, it has the right, after a Medicaid beneficiary dies, to recover its Medicaid outlays from what's left of any annuity in that person's name. It will let the heirs have anything that's left over. At least 10 other states have put various restrictions on the use of Medicaid annuities. Ohio and Pennsylvania now often reject even applications involving couples, where no balloon payment is involved. State courts increasingly are supporting the crackdowns.

At HCFA, a deputy director, Charlene Brown, says the federal agency has done what it can to stamp out Medicaid abuse. There isn't any way "to stop companies from selling what they want to sell," she says.

State clampdowns have produced some big surprises. After going into an Ohio nursing home in 1999, Philip Parker, an 80-year-old former factory worker, let his nephew and sole heir shift about $75,000 into a balloon annuity from Employees Life Co. (Mutual). It would pay Mr. Parker $195 a month for about seven years and $75,073 in the final month. But when Mr. Parker applied for Medicaid, Ohio turned him down, saying he had transferred assets just to qualify for Medicaid, not for retirement income.

The nephew, Thomas Neal, says the insurer agreed to cancel the annuity and give all but $10,000 of the money back. At a nursing-home cost of $5,000 a month, the funds were soon eaten up, and now Medicaid is picking up Mr. Parker's tab.