Elder Law FAX -- August 15, 2005

Medicaid Divorce Cannot Shelter Income for Spouse of Nursing Home Resident
A New Jersey appeals court has ruled that a married couple cannot protect income from the nursing home costs of one of them by agreeing to a divorce that leaves the non-institutionalized spouse with most of the couple's assets and income and the State Medicaid program paying most of the institutionalized spouse's nursing home bill.

The husband, "H. K." (initials are used to protect the privacy of the couple) suffered a debilitating stroke and was admitted to a New Jersey nursing home in May 2002. H. K. initially applied for Medicaid in May 2002, but could not qualify until he and his wife, R. K., had "spent down" their available resources to the limit that would qualify H. K. for Medicaid. They reached that limit in August of 2002.

H. K. was able to qualify for nursing home Medicaid benefits even though he had Social Security and pension income of approximately $4500 per month and his wife worked full-time and earned over $2000 per month. However, H. K. was required to use his pension and Social Security benefits to pay part of the cost of his nursing home care. Medicaid would pay for the balance of the nursing home costs.

The federal Medicaid statute recognizes that some portion of an institutionalized spouse's income may be used to support the community spouse -- R. K. -- to avoid the latter from becoming impoverished. As the U. S. Supreme Court wrote a few years ago, "Congress sought to protect community spouses from 'pauperization' while preventing financially secure couples from obtaining Medicaid assistance."

But the Medicaid law places strict limits on the amount of the Medicaid spouse's income that is paid to the community spouse instead of to the nursing home. At the time H. K. qualified for Medicaid, the monthly spousal allowance for R. K. was ordinarily set as $1493.

This limit does not mean that the community spouse automatically gets $1493 a month. The community spouse gets an income allowance only if her own income does not reach the State's minimum allowance. R. K could not get any of her husband's income.

But those same provisions place strict limits. R. K. was earning $2000 a month -- $507 a month more than the minimum allowance.

Had R. K. elected not to work, she would have received $1493 a month out of H. K.'s Social Security and pension income. In effect, Medicaid rules punished her for working.

A community spouse may obtain a larger income allowance by demonstrating, at an administrative hearing, that he or she suffers "exceptional circumstances resulting in financial duress." A separate provision in both federal and New Jersey law permits an alternative means of obtaining support for the community spouse, by getting a court order setting an amount of income support to be paid by the institutionalized spouse for the community spouse.

H. K. and R. K. filed for a "divorce from bed and board." Under New Jersey law, a divorce from bed and board means the couple is still married, but it formalizes the couple's arrangement to live separately and requires one spouse to pay for the other spouse's separate living expenses.

H.K. and R.K. attempted to invoke the "court order" exception of federal and state law by obtaining a divorce from bed and board with a property settlement agreement providing for support to be paid to R.K. from H. K.'s pension. The court order specifically recited that the property settlement agreement, incorporated in the judgment, was entered without the court having taken testimony "as to the merits thereof, and therefore [the court] makes no judgment with respect to the fairness thereof."

Based on this final judgment, H. K. sought recalculation of his Medicaid benefit, claiming that the court order for her support superseded the cap on the spousal allowance.

New Jersey's Medicaid agency denied the recalculation and on appeal, the state Court of Appeals upheld the agency's decision. "Accepting H. K.'s contentions would allow Medicaid recipients and their spouses to enter into collusive support agreements for the sole purpose of diverting the Medicaid recipient's income to the community spouse," said the court.

What could H. K. and R. K. have done instead? According to the New Jersey Court of Appeals, when it enacted the Medicaid statute that protects assets and income for the community spouse, Congress also recognized that under "special circumstances," a court order for support might supersede the default asset and income allowances for the community spouse.

As the appeals court observed, the court could have held "an evidentiary proceeding and determined independently that the community spouse is in need of support or that she has 'special circumstances' " that justify the court's entry of an order deviating from the default Medicaid spousal allowances. H. K. and R. K. did not have to file a state action for a "Medicaid divorce" to protect resources for her.

H. K. v. Department of Social Services, July 29, 2005.

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