Zahner Ex Rel. Zahner v. Secretary Pennsylvania Department of Human Services

PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
__________

Nos. 14-1328, 14-1406
___________

ANABEL ZAHNER, by her agent Raymond E. Zahner;
ESTATE OF DONNA C. CLAYPOOLE, by Mitchell R.
Claypool, Executor; CONNIE L. SANNER, by her agent
Jamie R. Rybak,
Appellants in No. 14-1328

v.

SECRETARY PENNSYLVANIA DEPARTMENT OF
HUMAN SERVICES,
Appellants in No. 14-1406
______________

ON APPEAL FROM THE UNITED STATES DISTRICT
COURT FOR THE WESTERN DISTRICT OF
PENNSYLVANIA
(D.C. Civ. No. 1-11-cv-00306)
District Judge: Honorable Maurice B. Cohill, Jr.
______________

Argued November 19, 2014
______________

Before: MCKEE, Chief Judge, RENDELL, and SLOVITER,
Circuit Judges.

(Opinion Filed: September 2, 2015)

René H. Reixach, Esq. [ARGUED]
Woods Oviatt Gilman LLP
2 State Street
700 Crossroads Building
Rochester, NY 14614
 Kemp C. Scales, Esq.
P.O. Box 346
Titusville, PA 16354
Counsel for Appellants/Cross-Appellees in 14-1328

Jason W. Manne, Esq. [ARGUED]
Manne Law Office
355 Fifth Avenue, Suite 411
P.O. Box 23297
Pittsburgh, PA 15222

Eugene K. Cuccarese, Esq.
Office of General Counsel
Department of Public Welfare
301 Fifth Avenue, Suite 430
Pittsburgh, PA. 15222
Counsel for Appellee, Cross-Appellant/Appellee

Stephen H. Kaufman, Esq.
Eric J. Pelletier, Esq.
Revée M. Walters, Esq.
Offit Kurman, P.A.
8 Park Center Court, 2nd Floor
Owings Mills, MD 21117
Counsel for Amicus Appellant Fidelity &
Guaranty Life Insurance Company

Ron M. Landsman, Esq.
Ron M. Landsman, P.A.
200-A Monroe Street, Suite 110
Rockville, MD 20850

Stanley M. Vasiliadis, Esq.
2551 Baglyos Circle, Suite A-14
Bethlehem, PA 18020

John William Callinan, Esq.
2052 Highway 35, Suite 103
Wall, NJ 07719
Counsel for Amicus Appellant National
Academy of Elder Law Attorneys,
and its Pennsylvania and New Jersey Chapters

2
 ______________

OPINION
______________

MCKEE, Chief Judge.

Anabel Zahner, Donna Claypoole, and Connie Sanner
each applied for Medicaid institutional care coverage shortly
after purchasing a short-term annuity. The Pennsylvania
Department of Human Services (“DHS”), formerly the
Department of Welfare, classified each of their annuities as a
resource when determining Medicaid eligibility.1 This
classification meant that the value of each annuity precluded
them from receiving Medicaid assistance and resulted in a
penalty period of ineligibility. Each plaintiff responded by
bringing an action against DHS. The District Court held that
the plaintiffs’ purchases of the short-term annuities were
sham transactions intended only to shield resources from
Medicaid calculations, and affirmed DHS’s imposition of a
period of Medicaid ineligibility. The District Court also held
that, contrary to DHS’s arguments, a Pennsylvania statute that
purported to make all annuities assignable was preempted by
federal law. This appeal followed.

We agree with the District Court’s preemption
analysis, but will reverse its ruling that the annuities are
resources for the purposes of Medicaid eligibility.

I. BACKGROUND

1
The named plaintiff, Anabel Zahner, is deceased.
Her claim is moot and she is no longer a party.

Although the life insurance and annuity company,
ELCO Mutual Life and Annuity (“ELCO”), refers to these
contracts as annuities, DHS argues that they do not qualify as
annuities under statutes and regulations governing Medicaid.
We therefore must decide whether these contracts are
annuities for purposes of Medicaid eligibility. For the sake of
convenience and simplicity we will refer to them as annuities
throughout our discussion. Our use of that term does not
influence or determine our analysis.
3
 Donna Claypoole was admitted to a nursing home in
December 2010; her husband remained in their home (a
“community spouse”). In 2009 and 2010, Claypoole and her
husband made gifts to family members totaling over
$100,000, resulting in a period of Medicaid ineligibility. In
August 2011, Claypoole’s husband applied for an annuity for
which he paid MetLife $45,000.00 in return for monthly
payments of $760.20 for five years. Claypoole also
purchased an annuity. She paid ELCO $84,874.08 in return
for monthly payments of $6,100.22 for 14 months. Both
contracts contained anti-assignment provisions. One purpose
of the ELCO annuity was to pay for Claypoole’s nursing
home care during the period of Medicaid ineligibility that
resulted from her large gifts to family members. DHS
considered both annuities “resources” in calculating a new
penalty period of ineligibility.

Connie Sanner entered a nursing home in March 2011
without a community spouse. In July 2011 she paid ELCO
$53,700.00 in return for an annuity which paid her $4,499.17
per month for 12 months. Sanner had also made a large
financial gift to her children which reduced her resources
below the Medicaid limits and resulted in a period of
Medicaid ineligibility. The purpose of the annuity was to pay
for Sanner’s nursing home care during that period of
ineligibility. As with Claypoole, DHS counted Sanner’s
annuity as a “resource” in calculating a new penalty period of
ineligibility.

Claypoole and Sanner brought these 42 U.S.C. § 1983
actions against DHS arguing that DHS acted illegally by
counting the amount of their respective annuities as an
available “resource” for purposes of Medicaid eligibility;
their cases were consolidated by the District Court. The
plaintiffs and DHS filed cross motions for summary judgment
and the District Court partially granted each party’s motion.
The District Court held that the plaintiffs’ purchases of the
short-term annuities were sham transactions intended only to
shield resources from the calculation of Medicaid eligibility.
Zahner ex rel. Zahner v. Mackereth, Civ. Action No. 11-306,
2014 WL 198526, at *12-*13 (W.D. Pa. Jan. 16, 2014). The
District Court treated the annuities as trust-like instruments,

4
or transfers of assets for less than fair market value, and
permitted DHS to count their cost as resources in calculating
Medicaid eligibility. Id. at *14.

The District Court also ruled that a Pennsylvania
statute that purported to make all annuities assignable was
preempted by the federal Medicaid law because Congress
specifically provided that, under certain circumstances,
annuities are exempt from inclusion as an available resource
for determinations of Medicaid eligibility. Id. at *10. Under
Pennsylvania law, the value of any annuity held by the
Medicaid applicant or his or her community spouse was
considered a countable resource in determining if the
applicant qualified for Medicaid assistance. Accordingly, the
District Court held that the nonassignability clause in
Claypoole’s husband’s annuity with MetLife was valid and
enforceable. That annuity therefore complied with the
applicable federal statute and could not be counted as a
resource in determining Claypoole’s Medicaid eligibility.
This appeal followed.2 We have jurisdiction pursuant to 28
U.S.C. § 1291.

II. ANALYSIS

We review a district court’s decision on summary
judgment de novo. See Heffner v. Murphy, 745 F.3d 56, 65
(3d Cir. 2014) (citations omitted); Allstate Settlement Corp. v.
Rapid Settlements, Ltd., 559 F.3d 164, 169 (3d Cir. 2009)
(citations omitted). Questions of statutory interpretation are
also reviewed de novo. See Seamans v. Temple Univ., 744
F.3d 853, 859 (3d Cir. 2014) (citations omitted); Kaufman v.
Allstate N.J. Ins. Co., 561 F.3d 144, 151 (3d Cir. 2009)
(citations omitted).

A. WHEN DOES AN ANNUITY
CONSTITUTE A “RESOURCE” FOR
PURPOSES OF MEDICAID ELIGIBILTY?

2
Two amici have filed briefs in support of the
plaintiff-appellants. Fidelity & Guaranty Life Insurance
Company and the National Academy of Elder Law Attorneys,
Incorporated filed briefs arguing that the annuities should not
be counted as resources for Medicaid eligibility.
5
 Pennsylvania participates in the federal Medicaid
Program established by Title XIX of the Social Security Act
(“the Medicaid Act”). 42 U.S.C. § 1396, et seq. Under the
Medicaid Act, states receive federal funding to dispense
assistance to qualified needy individuals. “Congress has
created a comprehensive system of asset-counting rules for
determining who qualifies for Medicaid.” Lewis v.
Alexander, 685 F.3d 325, 332 (3d Cir. 2012). The rules are
intended to limit Medicaid assistance to those deemed most in
need of it, and to ensure that applicants’ spouses are not
impoverished by the eligibility requirements. Those
eligibility requirements change with some regularity.

The Deficit Reduction Act of 2005 (“DRA”), Pub. L.
109‐171, amended the Medicaid Act. The provisions of the
DRA that are relevant here establish the “appropriate means
by which an individual or couple can reduce excess resources
without incurring penalties [for purposes of Medicaid
eligibility].” Jeffrey A. Marshall, Matthew J. Parker, A Guide
to Medicaid Annuities for Pennsylvania Lawyers at 4 (Nov.
19, 2009), available at
http://www.paannuity.com/pdf/guide_to_dra_annuities.pdf.
Financial planning often involves the purchase of annuities.
“The purchase of the annuity spends down a couple’s excess
resources to the level required for the institutionalized spouse
to become financially eligible for Medicaid/[Long-Term
Care] benefits.” Id.

DHS oversees Pennsylvania’s Medicaid assistance in
conjunction with federal regulations as Pennsylvania’s
regulatory body charged with administering Medicaid
assistance throughout the State. The federal Centers for
Medicare and Medicaid Services (“CMS”) has developed a
State Medicaid Manual that assists states in interpreting the
complex labyrinth of statutory and regulatory requirements
that govern receipt of Medicare and Medicaid benefits.3 That
manual “serves as the official [U.S. Health and Human

3
In 2001, the Health Care Financing Administration
became CMS. See Statement of Organization, 66 Fed. Reg.
35437-03 (July 5, 2001).
6
Services Department (“HHS”)] interpretation of the
[Medicaid] law and regulations[.]” Pa., Dep’t of Pub.
Welfare v. HHS, 647 F.3d 506, 509 (3d Cir. 2011). The
portion of the State Medicaid Manual relevant to our inquiry,
concerning trusts and annuities, “is commonly referred to as
‘Transmittal 64.’” Morris v. Okla. Dep’t of Human Servs.,
685 F.3d 925, 930 (10th Cir. 2012) (citing Health Care Fin.
Admin., U.S. Dep’t of Health & Human Servs., State
Medicaid Manual 64 § 3258.11 (1994)).

As explained at the outset, this dispute results from
DHS’s decision to count Claypoole’s and Sanner’s annuities
as resources in determining whether they qualified for
Medicaid benefits. The issue arose because Congress created
a “safe harbor” pursuant to which, certain annuities are not
considered resources for purposes of Medicaid eligibility.
Therefore, the value of such annuities does not disqualify
those otherwise eligible for Medicaid assistance from
Medicaid eligibility. See 42 U.S.C. § 1396p(c)(1)(F), (G)(ii).
We must determine if the disputed annuities here are within
this safe harbor and therefore sheltered from inclusion in the
plaintiffs’ assets.

The DRA establishes a four-part test for determining
whether an annuity is included within the safe harbor and thus
not counted as a resource. The annuity must (1) name the
State as the remainder beneficiary, (2) be irrevocable and
nonassignable, (3) be actuarially sound, and (4) provide for
payments in equal amounts during the term of the annuity,
with no deferral and no balloon payments. Id.4 These

4
The relevant section of § 1396p reads:
[T]he term “assets” includes an annuity
purchased by or on behalf of an annuitant who
has applied for medical assistance with respect
to nursing facility services or other long-term
care services . . . unless . . . . the annuity . . . (I)
is irrevocable and nonassignable; (II) is
actuarially sound (as determined in accordance
with actuarial publications of the Office of the
Chief Actuary of the Social Security
Administration); and (III) provides for
payments in equal amounts during the term of
7
requirements apply to all annuities purchased on or after
February 8, 2006, including the disputed annuities here.

DHS first claims that the relatively short terms of these
contracts disqualifies them from being “annuities.” The DRA
does not define “annuity.” In 1995, the Supreme Court
defined annuities for the purposes of determining whether a
state’s comptroller had the authority to allow banks, in
addition to insurance companies, to sell annuities.
NationsBank of N.C., N.A. v. Variable Annuity Life Ins. Co.,
513 U.S. 251 (1995). NationsBank defined annuities as
“contracts under which the purchaser makes one or more
premium payments to the issuer in exchange for a series of
payments, which continue either for a fixed period or for the
life of the purchaser or a designated beneficiary.” Id. at 254.
The Supreme Court explained that “annuities are widely
recognized as . . . investment products.” Id. at 259 (citations
omitted).

DHS relies, in part, upon Mackey v. Dep’t of Human
Servs., 289 Mich. App. 688 (2010), and Miller v. State Dep’t
of Soc. & Rehab. Servs., 275 Kan. 349 (2003), to argue that
the plaintiffs’ annuities are not “annuities” under the DRA’s
safe harbor. In Mackey, the Court of Appeals of Michigan
concluded that an “investment in a closely held L.L.C.
rendered [a] transaction a transfer for less than fair market
value.” Mackey, 289 Mich. App. at 690. The Court
determined that an arrangement between relatives to facilitate
Medicaid eligibility was not a transfer for fair market value
due to its terms, not merely because of the intent to facilitate
Medicaid eligibility. However, Mackey is neither binding

the annuity, with no deferral and no balloon
payments made.
42 U.S.C. § 1396p(c)(1)(G)(ii); see also id. § 1396p(c)(1)(F)
(explaining that annuities can be used to dispose assets if “the
State is named as the remainder beneficiary . . . for at least the
total amount of medical assistance paid on behalf of the
institutionalized individual . . . .”). See generally Morris, 685
F.3d at 928 (“A separate provision states that an annuity is
not treated as an available resource for purposes of Medicaid
eligibility if the annuity meets certain requirements.”
(citations omitted)).
8
authority, nor persuasive given the very different
circumstances here. Miller is equally unpersuasive, and also
not binding. There, the Kansas Supreme Court considered the
effects of a support trust on Medicaid eligibility.5 The Court
concluded that, although a support trust is an asset that is
available to the Medicaid applicant, the principal balance was
not available on the record before the Court. Nevertheless,
“for the purposes of Medicaid eligibility determination,
[Miller] h[e]ld [that the Medicaid applicant] became a co-
settlor of her husband’s trust[]” because she would have been
entitled to half of his estate if he had not put it in a trust
because of their marriage. Miller, 275 Kan. at 359.

It is not disputed that each of the annuities here is a
transfer of a sum of money in exchange for a series of
payments, continuing for a fixed period. NationsBank of
N.C., N.A., 513 U.S. at 254. As noted at the outset, Claypoole
paid ELCO $84,874.08 to receive equal monthly payments of
$6,100.22 over a 14-month term, while Sanner paid ELCO
$53,700.00 for monthly payments of $4,499.17 over a 12-
month term.

Nevertheless, DHS argues, and the dissent agrees, that
the contracts are not annuities because they are not
investment products, as recognized in NationsBank. See
generally id. at 259 (citations omitted). DHS notes that
Claypoole and Sanner each paid a broker a $1,000 start-up
fee. When that fee is added to the monthly return of each
annuity, the cost of the annuity exceeds its return. However,

5
“A support trust exists when the trustee is required to
inquire into the basic support needs of the beneficiary and to
provide for those needs.” Miller, 275 Kan. at 400 (citation
omitted). This is distinguished from a discretionary trust
wherein the beneficiary has no legal right to require a trustee
to use any part of the principal. Rather, the trustee has
complete authority to withhold trust assets from the
beneficiary in the exercise of the trustee’s discretion and in
the exercise of his or her fiduciary duties. Since the assets of
a support trust must be available to the beneficiary for his or
her support needs, the assets in such a trust are routinely
considered to be available to the beneficiary and therefore can
affect the beneficiary’s eligibility for Medicaid assistance. Id.
9
nothing in NationsBank requires that an instrument must
provide a certain rate of return to qualify as an “annuity.” In
addition, NationsBank does not suggest that fees incurred in
acquiring an annuity are considered in calculating the
annuity’s return. Nor does DHS (or the dissent) point us to
authority suggesting that fees and costs must be taken into
account in calculating the value received for a transfer in the
form of an annuity. The plaintiffs contend that the fee paid to
a financial advisor is a cost entirely separate from the
purchase price paid to the annuity company, especially when
-- like a fee paid to an elder law attorney to develop a
Medicaid eligibility plan -- such service helps ensure that the
annuities purchased are Medicaid-compliant, and thus helps
reduce the risk of litigation. Appellants Br. at 14 n.7.
Furthermore, the statutes that control our inquiry do not
require a positive rate of return as a prerequisite for being
sheltered under the DRA safe harbor.

The dissent is also concerned that “[t]he short payback
period for the annuities . . . precluded any meaningful return
from an investment standpoint.” Dissent Op. at 1-2. Yet, we
see no reason why the relatively short-term of these
instruments necessarily precludes viewing them as
investments, and Congress has not foreclosed that
possibility.6

6
As an example, “Treasury bills, or T-bills, are a
short-term investment in terms ranging from a few days to 26
weeks.” Dave Kansas, What is a Bond?, Wall St. J.,
available at http://guides.wsj.com/personal-
finance/investing/what-is-a-bond/. See also Min Zeng and
Katy Burne, Treasury Plans More Short-Term Debt, Wall St.
J., May 6, 2015, available at
http://www.wsj.com/articles/treasury-plans-more-short-term-
debt-1430966689 (discussing the market for short-term loans
and short-term investments, including “Treasury bills, which
mature in a year or less[]”).
We certainly do not suggest that annuities such as the
ones in dispute here are on the same investment footing as
government obligations. Rather, we note the short term of the
latter instruments only to underscore our point that the short
term of an annuity should not preclude it from being
considered an investment.
10
DHS next asks us to disallow any annuity that does not have a
term of two years or more because Transmittal 64 uses the
plural of “years” in its definition of an annuity. Transmittal
64 defines an annuity as “a right to receive fixed, periodic
payments, either for life or a term of years.” Transmittal 64,
§ 3259.1(A)(9). (Notably, this definition is similar to that in
NationsBank. 513 U.S. at 254.) DHS’s concern is that, if
there is no floor, then the “the payback period timeframe”
could be reduced to “contracts of two days, two hours, or
even two seconds, and [still be] an ‘annuity.’” Appellee Br.
at 36.

Perhaps, as DHS argues, annuities lasting only for
hours or a few days would be “sham transactions.” Id. at 37
(citing United States v. Wexler, 31 F.3d 117 (3d Cir. 1994)).
It is, however, difficult to imagine such instruments gaining a
foothold in the marketplace. Moreover, annuities cannot be
sold in Pennsylvania without first obtaining approval of the
Commissioner of Insurance and we doubt that an annuity
lasting two seconds, two hours, or two days would win
approval. See Herman v. Mut. Life Ins. Co. of N.Y., 108 F.2d
678, 682 (3d Cir. 1939) (“No annuity policy may be issued
without the formal approval of the Insurance
Commissioner[.]”).

Other than DHS’s concern for hypothetical, two-
second annuities that are not before us, and the obvious
problems they would create, DHS presents little else to
support its tortured reading of Transmittal 64. In contrast to
DHS’s position, much of the authority the plaintiffs rely upon
suggests that an annuity’s term has no floor at all. See
Appellants Reply Br. at 17 (“‘An annuity is a sum paid yearly
or at other specific times in return for the payment of a fixed
sum.’” (quoting POMS SI 00830.160(A)(1)) 7); id. at 5

7
“POMS” refers to the Social Security Administration
Program Operations Manual System. “The POMS is relevant
in determining the meaning of terms for Medicaid purposes
because the Medicaid rules for evaluating resources may be
no more restrictive than those for [the Supplemental Security
Income program].” Appellants Reply Br. at 17 n.3 (citing 42
U.S.C § 1396a(a)(10)(C)(i)(III); 42 U.S.C. § 1396a(r)(2)(A),
(B)).
11
(“‘Although annuities for the community spouse must be
actuarially sound -- that is, they must pay out during the
community spouse’s life expectancy -- and must name the
state as a remainder beneficiary, there are no other limitations
on the time period in which annuities must pay out.’”
(emphasis added to original) (quoting U.S. Gov’t
Accountability Off., Medicaid: Fin. Characteristics of
Approved Applicants & Methods used to Reduce Assets to
Qualify for Nursing Home Coverage, at 32 (May 2014),
available at http://www.gao.gov/assets/670/663417.pdf)).

The resolution of this question turns largely on the
meaning of “term of years” as used in Transmittal 64. The
tenth edition of Black’s Law Dictionary defines “term of
years” as:
1. A fixed period covering a precise
number of years. – Also termed tenancy
for a term. 2. English law. A fixed
period covering less than a year, or a
specified number of years and a fraction
of a year. . . . “In effect, ‘term of years’
seems to mean any term having a fixed
and certain duration as a minimum.
Thus, in addition to a tenancy for a
specified number of years . . ., such
tenancies as a yearly tenancy or a weekly
tenancy are ‘terms of years’ within the
definition, for there is a minimum
duration of a year or a week respectively
. . . .”

Black’s Law Dictionary 1699 (10th ed. 2014) (quoting Robert
E. Megarry & M.P. Thompson, A Manual of the Law of Real
Property 74 (6th ed. 1993)). The edition of Black’s Law
Dictionary in place when Transmittal 64 was published
defines only “term for years,” and does so as “[a]n estate for
years and the time during which such estate is to be held are
each called a ‘term[.]’” Black’s Law Dictionary 1470 (6th ed.
1992) (emphasis in original).8 However, it fails to elaborate

8
Notably, the sixth edition of Black’s Law Dictionary
defines “annuity” with the same language as Transmittal 64.
12
on an “estate for years.” The previous edition of Black’s Law
Dictionary defined an “estates for years” as “embrac[ing] all
terms limited to endure for a definite and ascertained period,
however short or long the period may be; they embrace terms
for a fixed number of weeks or months or for a single year, as
well as for any definite number of years, however great.”
Black’s Law Dictionary 492 (5th ed. 1981) (emphasis
added).9

We agree that a “term of years” is merely “a term of
art[.]” Appellants Br. at 18. It requires that the contract last
for some “definite period of time, as opposed to an indefinite
term [or] for life.” Id. It thus stands in contrast to an
indefinite period or an estate lasting for the duration of a
person’s life. The contracts here, lasting 12 and 14 months,
fall within the legal meaning of a “term of years” as each
contract permits multiple, periodic payments, over time,
though not indefinitely, and not for a period that is
coterminous with the annuitant’s actual life. See generally
NationsBank of N.C., N.A., 513 U.S. at 254, 259-60. Clearly,
if Congress intended to limit the safe harbor to annuities
lasting two or more years, it would have been the height of
simplicity to say so. We will not judicially amend
Transmittal 64 by adding that requirement to the requirements
Congress established for safe harbor treatment. Therefore,
Claypoole’s and Sanner’s 14- and 12-month contracts with
ELCO are for a term of years as is required by Transmittal 64.

DHS also challenges the length of these annuities on
the grounds that, even if the plaintiffs’ ELCO contracts are
“annuities,” they are still too short to be actuarially sound and
therefore cannot benefit from the safe harbor. The dissent
agrees.

Compare Black’s Law Dictionary 90 (6th ed. 1992), with
Transmittal 64, § 3259.1(A)(9).
9
The phrase thus seems to connote an interest in
property that is less than a fee simple interest, Black’s Law
Dictionary 615 (6th ed. 1992) (“Typically, [the] words ‘fee
simple’ standing alone create an absolute estate in [the]
devisee[.]” (emphasis in original)), or life estate, id. at 924
(“An estate whose duration is limited to the life of the party
holding it, or some other person.”).
13
 Congress did not require any minimum term for an
annuity to qualify under the safe harbor. See 42 U.S.C.
§ 1396p(c)(1)(F), (G)(ii) (listing the requirements). Rather,
as noted above, the Medicaid Act limits the safe harbor to
those annuities that are actuarially sound. 42 U.S.C.
§ 1396p(G)(ii)(II). Although the DRA does not define
“actuarially sound,” Congress specified that assets must have
a repayment term that is “actuarially sound (as determined in
accordance with actuarial publications of the Office of the
Chief Actuary of the Social Security Administration
[(‘SSA’)).]” 42 U.S.C. § 1396p(c)(1)(I)(i).

Transmittal 64 adds: “[i]f the expected return on the
annuity is commensurate with a reasonable estimate of the life
expectancy of the beneficiary, the annuity can be deemed
actuarially sound.” Transmittal 64, § 3258.9(B) (emphasis
added). The “reasonable estimate of the life expectancy of
the beneficiary” is determined using “life expectancy tables[]
compiled [by] . . . the Office of the Actuary of the [SSA].”
Id. Transmittal 64 further explains that “[t]he average
number of years of expected life remaining for the individual
must coincide with the life of the annuity.” Id. (emphasis
added). This requirement prevents individuals from
purchasing annuities that will pay out to their heirs after the
annuitant dies and thus prevent the state from recouping
assets to compensate for the Medicaid benefits the annuitant
received.10

10
42 U.S.C. § 1396p(c)(1)(F) provides:
[T]he purchase of an annuity shall be treated as
the disposal of an asset for less than fair market
value unless-- the State is named as the
remainder beneficiary in the first position for at
least the total amount of medical assistance paid
on behalf of the institutionalized individual
under this subchapter; or the State is named as
such a beneficiary in the second position after
the community spouse or minor or disabled
child and is named in the first position if such
spouse or a representative of such child
disposes of any such remainder for less than fair
market value.
14
 Neither the “commensurate with” nor the “coincide
with” standard specifies a minimum term for an annuity nor
requires a minimum ratio to the annuitant’s actuarially
determined life expectancy. The plain text merely provides a
simple example that states that if an annuity is for a term of
10 years, it is not actuarially sound if the beneficiary’s
reasonable life expectancy is 6.98 years, but it is actuarially
sound if the beneficiary’s reasonable life expectancy is 14.96
years. Id. It compares the beneficiary’s reasonable life
expectancy with the term of the annuity, stating that when the
term is shorter than the life expectancy, “the expected return
on the annuity is commensurate with a reasonable estimate of
the life expectancy of the beneficiary, [and] the annuity can
be deemed actuarially sound.” Id. (emphasis added).
Notably, it does not discuss just how much shorter the annuity
can be and still be considered actuarially sound.

The District Court concluded that these annuities
satisfied Transmittal 64’s requirement because the plaintiffs’
“life expectancies were all greater than the terms of the
annuities by a large margin[.]” Zahner ex rel. Zahner, 2014
WL 198526, at *12 (citation omitted). It noted that “[i]n this
case the Plaintiffs’ life expectancies ranged from six to ten
years and the longest ELCO annuity was for a term of 18
months.” Id. (citation omitted). It thus concluded that “the
annuities may be considered actuarially sound . . . .” Id.

On appeal, DHS highlights the “reasonable estimate of
the life expectancy” language in Transmittal 64 to assert that
these annuities are too short to have any relationship to the
life expectancies of these annuitants. Appellee Br. at 40.
While DHS and the dissent agree that Transmittal 64 imposes
a maximum term for an annuity (the reasonable life
expectancy of the annuitant), DHS and the dissent seek to
impose a kind of floating floor for the minimum term for an
annuity to be actuarially sound. However, neither the DRA
nor Transmittal 64 imposes one. Transmittal 64 merely refers
to actuarially sound in a manner that ensures that the term of

Thus, the State is normally the first to take only if the
annuitant has no direct descendants.
15
any annuity will not exceed the annuitant’s life expectancy.
Accordingly, we conclude that any attempt to fashion a rule
that would create some minimum ratio between duration of an
annuity and life expectancy would constitute an improper
judicial amendment of the applicable statutes and regulations.
It would be an additional requirement to those that Congress
has already prescribed and result in very practical difficulties
that can best be addressed by policy choices made by elected
representatives and their appointees.

A given individual’s life expectancy may be far less
(or far more) than that suggested by the statistical prediction
reflected in actuarial tables. This is exacerbated by the fact
that the actuarial predictions in the SSA tables depend on
only two variables: age and gender. Id. at 37 n.8. Such tables
may well have predictive value when applied to a large
number of individuals because demographic determinants of
longevity are averaged over a large statistical sample.
However, when applied to any given individual within that
statistical universe, these generalized tables lose much of their
predictive force because they ignore a variety of highly
relevant factors, such as race, medical history, and income,
which have been demonstrated to correlate with, and have an
impact upon, longevity. See, e.g., City of Los Angeles, Dep’t
of Water & Power v. Manhart, 435 U.S. 702, 709 (1978)
(“Actuarial studies could unquestionably identify differences
in life expectancy based on race or national origin, as well as
sex.”); United States v. Prevatte, 66 F.3d 840, 848 (7th Cir.
1995) (Posner, J., concurring) (“[B]lack and [W]hite life
expectancies differ greatly[.]”); see also Kathryn L. Moore,
Partial Privatization of Social Security: Assessing Its Effect
on Women, Minorities, and Lower Income Workers, 65 Mo.
L. Rev. 341, 368-74 (2000) (discussing various characteristics
that impact life expectancy).

Accordingly, “there is strategic decision making at the
individual and subpopulation levels because demographic
groups have different longevity rates and individuals can
often assess their own longevity.” Benjamin A. Templin,
Social Security Reform: Should The Retirement Age Be

16
Increased?, 89 Or. L. Rev. 1179, 1199 (2011) (emphasis
added) (footnotes omitted).11

Claypoole’s situation exemplifies this and illustrates
the inherent problems with judicial attempts to further limit
the safe harbor with reference to the annuitant’s actuarial life
expectancy. Claypoole was 86 years old when she purchased
a 14-month annuity. Although she then had a “reasonable life
expectancy” of over six more years according to the
prescribed actuarial tables, Zahner ex rel. Zahner, 2014 WL
198526, at *4, few people who reach the age of 86 could be
faulted for measuring life expectancy in months rather than
years and not assuming that they would live long enough to
see their 92nd birthday. Moreover, it is not for this court to
decide if Claypoole’s decision to purchase an annuity that
would only last for 14 months (rather than attempting to
approximate the six years predicted by the SSA tables) was
unreasonable in terms of her assumptions about her life
expectancy.

Despite actuarial predictions, Claypoole did not have
six more years to live. Rather, she died within two years of
purchasing the contract -- only five months after her 14-
month annuity expired. Appellants Br. at 20. We therefore
must respectfully disagree with the dissent’s suggestion that
her annuity “[was] not remotely commensurate with [her] life
expectanc[y].” Dissent Op. at 3. Her 14-month annuity was,
in fact, far more commensurate with her actual life

11
The longevity gaps by race and level of education
have increased over time. S. Jay Olshansky, et al.,
Differences In Life Expectancy Due To Race & Educational
Differences Are Widening, & Many May Not Catch Up, 31
Health Aff. 1803 (2012), available at
http://content.healthaffairs.org/content/31/8/1803.full.pdf+ht
ml; see also James E. Duggan, Robert Gillingham, John S.
Greenless, Mortality & Lifetime Income Evidence from Soc.
Security Records, U.S. Dep’t of the Treasury, Econ. Pol’y
Res. Paper Series, at 3 (2006), available at
http://www.treasury.gov/resource-center/economic-
policy/Documents/rp2007-01.pdf (“Our results give strong
empirical support to a negative relationship between
individual lifetime income and mortality.”).
17
expectancy than the actuarial predictions contained in the
SSA tables. The short-term annuity that she purchased
ensured that she would be able to enjoy the benefit of her
annuity while minimizing the possibility that it would outlast
her and, therefore, be considered as a transfer of wealth.

We do not, of course, suggest that the statistical
forecasts in actuarial tables must accurately reflect actual
longevity of a given individual or that they must have some
minimal level of accuracy before they can be relied upon.
Such precision is not possible. We merely conclude that the
difficult policy decisions that are endemic in the kind of
problem exemplified by the disputed terms of these annuities
must be left to legislators and the administrators they appoint.
This is particularly true here since a contrary result would
force us to graft an additional requirement onto the Medicaid
Act.

The DRA and its regulations contain no other
definition or example than one requiring that an annuity not
be for a term that exceeds an annuitant’s reasonable life
expectancy. We therefore conclude that an annuity is
actuarially sound for purposes of the safe harbor if its term is
less than the annuitant’s reasonable life expectancy.
Transmittal 64, § 3258.9(B).12 This result is consistent with

12
DHS relies on a North Dakota Medicaid state plan
that adds an 85% life-expectancy requirement. Appellee Br.
at 41-42 (citing JA A273-76). But, as the plaintiffs note,
there is “no evidence that CMS ever approved the
Pennsylvania policy in question[,]” like it did in North
Dakota. Appellants Reply Br. at 6. Nor does CMS approval
necessarily establish compliance with legal requirements.
See, e.g., Geston v. Anderson, 729 F.3d 1077, 1079 (8th Cir.
2013) (striking down another aspect of North Dakota’s plan
that held that the “North Dakota statute under which the
annuity had been deemed countable violates and is preempted
by federal Medicaid law.”). In addition, even the example
provided in Transmittal 64 would not have satisfied the North
Dakota requirement because it is only two-thirds of the
individual’s life expectancy -- far lower than 85%. Thus, we
find North Dakota’s requirement unpersuasive to analyzing
the annuities in this case.
18
Transmittal 64 in that it discourages the purchase of annuities
for terms that are so long that assets would pass to heirs and
not be available to reimburse the State for the Medicaid
assistance the annuitant received while alive.13 It also avoids
drawing an arbitrary line that would determine if one’s own
assessment of his or her life expectancy is reasonable. Here,
for example, although DHS and the dissent suggest that
Claypoole’s annuity was for too short a period to be
reasonably commensurate with her life expectancy, the term
of that annuity was a much closer approximation of her
longevity than was actuarially suggested.

Here, the District Court concluded that these annuities
were actuarially sound because they did not exceed the
annuitant’s life expectancy. It held that “the word
commensurate indicates a reasonable relatedness of the term
of the annuity to the beneficiary’s life expectancy.” Zahner
ex rel. Zahner, 2014 WL 198526, at *12. However, it went
further and concluded that these annuities should not be
excluded from the plaintiffs’ resources because they did not
pass the “sniff[]test.” Id. The District Court failed to cite
authority for its imposition of a “reasonably related”
requirement or for its “sniff test.” Instead, it discussed the
policy issues supporting that result.14 The District Court

13
The National Academy of Elder Law Attorneys,
Incorporated, amicus to the plaintiffs, points out that CMS
originally used the term “actuarially sound” in 1994 in order
to address a concern that the annuity would be paid to
someone other than the annuitant. National Academy of
Elder Law Attorneys, Inc. Br. at 4. In order to prevent this,
CMS devised that if the annuity’s term were shorter than the
life expectancy of the beneficiary, the annuity would go to the
beneficiary and not another party. Id. at 4, 31. The National
Academy of Elder Law Attorneys, Incorporated argues that
Congress took on this phrasing and meaning when it adopted
the term “actuarially sound” in the DRA amendments. Id. at
30.
14
The District Court failed to recognize countervailing
policy considerations that weigh in favor of permitting short-
term annuities like the ones used in this case. Shorter
annuities make it possible for people with fewer assets to
19
reasoned that the key problem with these annuities is that they
do not have “a scrupulous eye toward[] achieving a
legitimate, non-shelter, purpose or at least have the
appearance of such an investment.” Id. at *13.15

While Transmittal 64 acknowledges that annuities “are
occasionally used to shelter assets so that individuals
purchasing them can become eligible for Medicaid[,]”
Transmittal 64, § 3258.9(B), the policy it implements to
address that problem does not focus on how short an
annuity’s term can be, it focuses on the maximum term. The
publication states: “[i]n order to . . . capture those annuities
which abusively shelter assets,” courts assess the “ultimate
purpose[.]” Id. It then narrowly defines a negative “ultimate
purpose” as the transfer of assets for less than fair market
value, which occurs when “the individual is not reasonably
expected to live longer than the guarantee period of the
annuity[.]” Id. Thus, it reiterates a bright-line rule requiring
qualifying annuities to be shorter than the beneficiary’s life
expectancy. That is a policy choice and we should not disturb
it.16

purchase annuities. Being able to purchase an annuity for
multiple years requires a large upfront cost that aging, low-
income individuals may not have access to. See Appellants
Br. at 19-20 & n.8; National Academy of Elder Law
Attorneys, Inc. Br. at 19-20 & n.37, 24-25. The need to
exercise caution is even greater when adopting a particular
policy that places those who are already disadvantaged in an
even worse position vis-à-vis more affluent members of
society -- especially because the text of the Medicaid Act
does not support such a reading.
15
Moreover, as an amicus notes, weaving such
unguided subjectivity and discretion into the fabric of a
highly regulated benefit, like Medicaid, by allowing the
District Court’s “sniff test,” “is a recipe for a cash-strapped
state with a delicate nose to deny otherwise deserving
Medicaid applications on the grounds that it sniffed abuse.”
Fidelity & Guaranty Life Ins. Co. Br. at 25.
16
This interpretation does not lead to the absurd result
that DHS alleges based on its theoretical parade of horribles.
20
 Thus, we do not believe that the annuitant’s motive is
determinative. See James v. Richman, 547 F.3d 214, 219 (3d
Cir. 2008) (“[W]e do not create rules based on our own sense
of the ultimate purpose of the law being interpreted, but rather
seek to implement the purpose of Congress as expressed in
the text of the statutes it passed.” (citation omitted)).
Although we are sympathetic to the concerns the dissent and
DHS outline, Congress must resolve them. Absent legislative
change, it is clear that “Congress has not revised the Medicaid
statute to foreclose this option.” Morris, 685 F.3d at 928, 934
(a case involving annuities purchased for non-
institutionalized spouses recognizing that “the district court’s
concerns regarding the exploitation of what can only be
described as a loophole in the Medicaid statutes[] [and]
conclud[ing] that the problem can only be addressed by
Congress.”). “It 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.” Mertz ex rel. Mertz v.
Houstoun, 155 F. Supp. 2d 415, 428 (E.D. Pa. 2001) (footnote
omitted); see also Lewis, 685 F.3d at 351 (“[W]hile
preventing abuse is a laudable goal and one with which
Congress may agree, that requirement is not reflected in the
Medicaid statute.”). “Policy rationales cannot prevail over
the text of a statute.” Hughes v. McCarthy, 734 F.3d 473, 480
(6th Cir. 2013) (quotation marks omitted).

Financial planning is inherent in the Medicaid scheme:
annuities are not barred from the safe harbor, and the look-
back period that considers gifts as resources for purposes of
Medicaid assistance is of limited duration. Therefore, the
definition of protected annuities is one best left to the
policymakers in the legislative branch.

First Merchants Acceptance Corp. v. J.C. Bradford & Co.,
198 F.3d 394, 402 (3d Cir. 1999) (“[O]nly absurd results and
‘the most extraordinary showing of contrary intentions’
justify a limitation on the ‘plain meaning’ of the statutory
language.” (quoting Garcia v. United States, 469 U.S. 70, 75
(1984))).
21
 B. ARE THE ANNUITIES TRUSTS OR
TRUST-LIKE?17

To the extent that an annuity is “trust-like,”
Transmittal 64 disallows the annuity from protection in the
safe harbor and the annuity’s value can be treated as
resources that can disqualify an applicant for Medicaid
assistance. See Transmittal 64, § 3258.9(B). DHS argues
that these annuities should be treated as resources of the
plaintiffs under this provision.

Transmittal 64, § 3258.9(B) states, in relevant part:
[i]n 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 the life expectancy of the
beneficiary, the annuity can be deemed
actuarially sound. . . .
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.

17
Although we will conclude that the annuities are not
trusts or trust-like, it is not clear that this is essential to our
holding since we have already concluded that the annuities
are in the safe harbor that Congress has defined. The DRA
directs that annuities “shall be treated as the disposal of an
asset for less than fair-market value unless” the annuity meets
the requirements, as we have concluded they do here. 42
U.S.C. § 1396p(c)(1)(F) (emphasis added); see also Fidelity
& Guaranty Life Ins. Co. Br. at 14 (noting that Transmittal 64
cannot supplant Congress’s express definition of the test for
compliant annuities because “42 U.S.C. § 1396p(c)(1)(G)(ii)
is the statutory test for determining whether any annuity is an
abusive asset shelter.” (emphasis in original)).
22
Id. However, DHS’s argument is circular because we have
already explained why these annuities are actuarially sound
and not a transfer of assets for less than fair market value.
There are, however, other reasons to reject DHS’s attempt to
define these annuities as trust-like.

Congress provided that “[t]he term ‘trust’ includes any legal
instrument or device that is similar to a trust but includes an
annuity only to such extent and in such manner as the [HHS]
Secretary specifies.” 42 U.S.C. § 1396p(d)(6) (emphasis
added). We agree with the plaintiffs that, “because the
Secretary to date has not so specified, it follows that [the
plaintiffs’] annuities cannot be treated as trusts.” Appellants
Br. at 11. In a brief that the HHS filed in the Court of
Appeals for the Second Circuit, the HHS explicitly stated that
“the Secretary has not so specified.” Brief for the Amicus
Curiae U.S. Dep’t of Health & Human Servs., Lopes v. Dep’t
of Social Servs., 10-3741-cv, at *11, n.5 (2d Cir. 2011)
(emphasis added). This rejection was made in 2011, after the
DRA and Transmittal 64 were in existence. See also Geston
v. Anderson, 729 F.3d 1077, 1085 (8th Cir. 2013) (“[T]he
Secretary has not so specified[.]” (quotation marks omitted)).

Although DHS acknowledges that Transmittal 64
predates the Medicaid Act, it asserts that Transmittal 64 is
still the Secretary’s reply to the statutory invitation to define
when annuities are “trusts.” Appellee Br. at 38-39; see
Transmittal 64, § 3258.9(B) (“Section 1917(d)(6) [42 U.S.C.
1396p(d)(6)] provides that the term ‘trust’ includes an annuity
to the extent and in such manner as the Secretary specifies.
This subsection describes how annuities are treated under the
trust/transfer provisions.”).

Transmittal 64 does not present any support for
treating these annuities as trust-like devices. As noted, it
merely points back to the requirement that annuities must not
be longer than an individual’s reasonable life expectancy, by
adding a new requirement that the annuity cannot constitute
“a transfer of assets for less than fair market value.” Id.
Transmittal 64 defines an annuity with a fair market value in
the same way it defines actuarial soundness. Given the text
of the DRA and the language in Transmittal 64, these

23
annuities are actuarially sound for the reasons we have
explained, just as the District Court found.

Moreover, these annuities cannot be equated with
trusts because there is nothing akin to a fiduciary relationship
between the annuitants and ELCO. Id., § 3259.1(A)(l)
(defining a trust as “any arrangement in which a grantor
transfers property to a trustee or trustees with the intention
that it be held, managed, or administered by the trustee(s) for
the benefit of the grantor or certain designated individuals
(beneficiaries)[]”); see also id., § 3259.1(A)(2) (requiring “a
grantor who transfers property to an individual or entity with
fiduciary obligations”). ELCO is not under any fiduciary
obligation to wisely invest plaintiffs’ funds or even to
preserve them as long as ELCO fulfills its contractual
obligation to make regular monthly payments in the agreed
amount for the term of the annuity. See generally Appellants
Br. at 12-13; Fidelity & Guaranty Life Ins. Co. Br. at 4-5.
ELCO’s duty to annuitants is purely contractual, it is not
fiduciary. Accordingly, we readily reject DHS’s attempt to
have us view these annuities as some form of trust.

C. IS PENNSYLVANIA’S ANTIASSIGNMENT
PROVISION PREEMPTED?

Under Pennsylvania law, all annuities are assignable.
The relevant provision states:

Any provision in any annuity . . . owned by an
applicant or recipient of medical assistance[] . .
. that has the effect of limiting the right of such
owner to sell, transfer or assign the right to
receive payments thereunder or restricts the
right to change the designated beneficiary
thereunder is void.

62 PA. CONS. STAT. ANN. § 441.6(b). Section 441.6(b),
making annuities assignable by operation of law, applies to
all annuities, regardless of who purchases them, either the
Medicaid applicant who lives in a nursing home, like
Claypoole or Sanner, or the community spouse, like
Claypoole’s husband.

24
 As we have explained, under the Medicaid Act, an
annuity held by the Medicaid applicant counts as an asset for
purposes of qualifying for Medicaid unless it meets certain
requirements. 42 U.S.C. § 1396p(c)(1)(F), (G). One
requirement is that the annuity must not be assignable. Id. §
1396p(c)(1)(G)(ii)(I). Further, although a community
spouse’s resources can be counted in determining Medicaid
eligibility, id. § 1396r-5(c)(2)(A), a community spouse’s
irrevocable, nonassignable annuities may not be treated as
available resources. James, 547 F.3d at 218-19.

Thus, if § 441.6(b) controls, no Medicaid applicant or
his or her spouse can exclude an annuity from being
considered a resource for purposes of Medicaid eligibility
because Pennsylvania makes all annuities assignable. Section
441.6(b) requires that all annuities are countable resources for
the purposes of Medicaid eligibility determinations.

The District Court held that the Medicaid Act
preempted Pennsylvania’s statute and that the annuities had
valid nonassignability clauses in compliance with the federal
statute. Zahner ex rel. Zahner, 2014 WL 198526, at *8. On
appeal, DHS argues that the federal law cannot preempt
Pennsylvania’s law because §§ 1396p(c)(1)(F) and (G) do not
create an impermeable safe harbor. Appellee Br. at 31-33.
Rather, according to DHS, federal law merely gives states the
option of allowing annuities to be excluded, and Pennsylvania
chose to not exercise that option by enacting § 441.6(b). Id.
at 32. DHS also claims that our precedent mistakenly
assumed that Pennsylvania generally allows anti-assignment
provisions; and instead, Pennsylvania is able to clarify its
public policy position against nonassignment clauses by
enacting § 441.6(b). Id. at 28 (citations omitted).18

The Supremacy Clause provides that “the Laws of the
United States . . . shall be the supreme Law of the Land; . . .
any Thing in the Constitution or Laws of any State to the
Contrary notwithstanding.” U.S. CONST. art. VI, cl. 2. The
Supremacy Clause preempts any state law that “interferes

18
Our review of this issue is de novo. In re Federal-
Mogul Global, 684 F.3d 355, 364 n.16 (3d Cir. 2012)
(citation omitted).
25
with or is contrary to federal law[.]” Free v. Bland, 369 U.S.
663, 666 (1962) (citations omitted). There are different forms
of preemption, but all agree that this dispute implicates
conflict preemption. Conflict preemption occurs when it is
impossible to comply with both the federal and state law.
Bell v. Cheswick Generating Station, 734 F.3d 188, 193 (3d
Cir. 2013) (citations omitted). “Conflict preemption nullifies
state law inasmuch as it conflicts with federal law, either
where compliance with both laws is impossible or where state
law erects an obstacle to the accomplishment and execution
of the full purposes and objectives of Congress.” Farina v.
Nokia, 625 F.3d 97, 115 (3d Cir. 2010) (quotation marks
omitted).

States that elect to participate in the Medicaid program
must comply with eligibility requirements set by the federal
government. The Medicaid Act permits states to establish
eligibility requirements that are more liberal than those of the
federal government, however states may not create more
restrictive requirements. 42 U.S.C. § 1396a(a)(10)(C)(i)(III).
A state law is considered “no more restrictive” if “additional
individuals may be eligible for medical assistance and no
individuals who are otherwise eligible are made ineligible for
such assistance.” Id. § 1396a(r)(2)(B). “[O]nce the state
voluntarily accepts the conditions imposed by Congress, the
Supremacy Clause obliges it to comply with federal
requirements.” Lankford v. Sherman, 451 F.3d 496, 510 (8th
Cir. 2006) (citations omitted); see also Lewis, 685 F.3d at 332
(“No State is obligated to join Medicaid, but if they do join,
they are subject to federal regulations governing its
administration.” (citation omitted)).

“[E]very exercise of statutory interpretation begins
with an examination of the plain language of the statute.
Where the statutory language is plain and unambiguous,
further inquiry is not required.” Rosenberg v. XM Ventures,
274 F.3d 137, 141 (3d Cir. 2001) (citations omitted).
Moreover, we must examine the totality of every statute and
not unduly focus on some language to the exclusion of other
statutory text. Id. (“[W]hen interpreting a statute, courts
should endeavor to give meaning to every word which
Congress used and therefore should avoid an interpretation
which renders an element of the language superfluous.”

26
(citations omitted)). We also note that, “[i]n areas of
traditional state regulation, we assume that a federal statute
has not supplanted state law unless Congress has made such
an intention ‘clear and manifest.’” Bates v. Dow
Agrosciences, LLC, 544 U.S. 431, 449 (2005) (citations
omitted); see also MD Mall Assocs., LLC v. CSX Transp.,
Inc., 715 F.3d 479 (3d Cir. 2013). There is a presumption
against preempting state law. Farina, 625 F.3d at 116
(citations omitted). Our inquiry is therefore controlled by the
text of the Medicaid Act pertaining to the assignability of
annuities, to the extent that the language is not ambiguous.

Congress clearly intended for some annuities to be
considered resources for the purposes of Medicaid eligibility.
However, it is equally clear that Congress did not intend that
all annuities be considered. It therefore established the
criteria that would allow Medicaid applicants to purchase
annuities without fear of becoming ineligible for Medicaid
assistance. One criterion Congress established for an annuity
to not count as a Medicaid applicant’s resource is that it must
be nonassignable. 42 U.S.C. § 1396p(c)(1)(F), (G). This
affords some protection for the community spouse.
“Congress sought to protect community spouses from
pauperization while preventing financially secure couples
from obtaining Medicaid assistance. To achieve this aim,
Congress installed a set of intricate and interlocking
requirements with which States must comply in allocating a
couple’s income and resources.” Wisconsin Dep’t of Health
& Family Servs. v. Blumer, 534 U.S. 473, 480 (2002)
(internal quotation marks omitted).

Congress also declared that, with some exceptions, “no
income of the community spouse shall be deemed available to
the institutionalized spouse.” 42 U.S.C. § 1396r-5(b)(1).
Irrevocable, nonassignable annuities are income streams, not
countable as resources against the institutionalized spouse’s
Medicaid eligibility. James, 547 F.3d at 218-19; see also
Geston, 729 F.3d at 1083; Lopes, 696 F.3d at 188-89; Morris,
685 F.3d at 932-33; Vieth v. Ohio Dep’t of Job & Family
Servs., 2009-Ohio-3748, at ¶ 34 (July 30, 2009).

Nevertheless, DHS invites us to read ambiguity into
seemingly straightforward text and precedent by pointing to a

27
separate section of the DRA. That section reads: “Nothing in
this subsection shall be construed as preventing a State from
denying eligibility for medical assistance for an individual
based on the income or resources derived from an annuity
described in paragraph (1)[.]” 42 U.S.C. § 1396p(e)(4).
DHS weaves an ambiguity into this provision by noting the
DRA’s use of “subsection” instead of “section.” Appellee Br.
at 25-26.

Section 1396p(e)(4) uses the term “subsection” in
reference to subsection (e), which pertains to disclosure
requirements. Thus, according to DHS, § 1396p(e)(4)
“literally states only that nothing in the disclosure
requirements shall prevent a State from treating an annuity as
a resource.” Id. To its credit, DHS acknowledges that this
reading is “something of a non-sequitur since disclosure has
nothing to do with whether an annuity is treated as a resource
or not.” Id at 26. Nevertheless, DHS asserts “[s]ubparagraph
(e)(4) demonstrates that Congress intended that States be able
to treat annuities as resources under certain circumstances,
but whether that authority extends to annuities exempt from
transfer of asset treatment under §§ 1396p(c)(1)(F) and (G) is
uncertain.” Id.

We agree that this reading is a non-sequitur and we
disagree with DHS’s strained interpretation of the DRA. We
reiterate that these provisions of the Medicaid Act are “not
ambiguous” and, “contrary to the [DHS]’s interpretation, §
1396p(e)(4) cannot be regarded as a basis by which it may
deny eligibility for benefits where the annuity otherwise
complies with the law.” Weatherbee ex rel. Vecchio v.
Richman, 351 Fed. App’x 786, 787 (3d Cir. 2009).

When the Medicaid Act is read as a whole, Congress’s
intent with respect to annuities is addressed clearly and
consistently throughout. As discussed above, with respect to
Medicaid applicants, §§ 1396p(c)(1)(F) and (G) make clear
that annuities with certain characteristics, including
nonassignability clauses, are not assets to be counted as
resources for their Medicaid eligibility. Moreover, after
reviewing the Medicaid Act and the Supplemental Security
Income Program, we previously held that Congress intended
to shield a community spouse’s annuity from calculation of

28
the institutionalized spouse’s Medicaid eligibility if the
annuity is nonassignable and irrevocable. James, 547 F.3d at
218; see also Geston, 729 F.3d at 1083; Lopes, 696 F.3d at
184-85.

DHS seeks to undermine James by pointing out that
(1) Congress passed the DRA after the annuities in James
were purchased and added a half-a-loaf gifting prohibition
and (2) Pennsylvania passed § 441.6(b) specifically seeking
to undermine James in light of Pennsylvania’s public policy
against restraints on alienation. Appellee Br. at 28, 37-38.
We find neither argument persuasive.

As discussed above, the DRA outlines the
requirements for annuities purchased by a person who is
seeking Medicaid eligibility. James, on the other hand,
discusses annuities purchased by a community spouse.
Moreover, all appellate courts that have discussed whether a
community spouse’s nonassignable annuity is a countable
resource toward the institutionalized spouse’s Medicaid
eligibility have done so after changes to the DRA and have
come to the same conclusion as James. See Geston, 729 F.3d
at 1083; Lopes, 696 F.3d at 188-89; Morris, 685 F.3d at 932-
33; Vieth, 2009-Ohio-3748, at ¶ 34.

More fundamentally, Pennsylvania cannot enact
legislation that changes federal law (or binding judicial
interpretation of federal law) with respect to annuities.
Marbury v. Madison, 5 U.S. 137 (1803). In Geston, the Court
of Appeals for the Eighth Circuit explained, “[i]f the State’s
public policy requires it to count as resources certain
annuities that federal law excludes from the scope of
resources that may be considered in making eligibility
determinations, then the State’s methodology is more
restrictive than the federal methodology.” Id. 729 F.3d at
1085-86 (citation omitted).19

19
DHS mistakenly interprets Geston v. Anderson as
supporting its position on preemption. Geston held that §
1396p(e)(4) “maintained the status quo[,]” and merely
“clarifies that the new disclosure provisions do not restrict a
State’s authority to deny eligibility on the basis of an annuity
where the State otherwise has authority to do so.” 729 F.3d at
29
 The Medicaid Act cannot reasonably be read to
support DHS’s contention that Congress intended to make
protection of annuities optional. See generally United States
v. Voigt, 89 F.3d 1050, 1087 (3d Cir. 1996) (“[C]ourts should
disfavor interpretations of statutes that render language
superfluous.” (quotation marks omitted)).

Moreover, the argument here is akin to the dispute that
we resolved in Lewis v. Alexander. There, we held that the
Medicaid Act preempted parts of Section 9 of the
Pennsylvania Act of 2005, 62 PA. STAT. ANN. § 1414, which
sought to add Medicaid eligibility requirements for special
needs trusts. 685 F.3d at 331. We explained that the
Medicaid Act is a “complex and comprehensive system of
asset-counting rules[]” in which “Congress rigorously dictates
what assets shall count and what assets shall not count toward
Medicaid eligibility.” Id. at 344. Lewis rejected DHS’s
myopic attempts to create a gap in the Medicaid Act within
which, states were free to legislate. We said: “focusing solely
on the words ‘[t]his subsection’ has caused [DHS] . . . to miss
the forest for the trees.” Id. at 343. Because Congress has
“actually legislated on th[e] precise class of asset[]” at issue,
id. at 344 (emphasis in original), further limitations from the
state are preempted. No meaningful distinction can be drawn
between the “rigorous system” of legislating trusts in Lewis,
and the equally rigorous attempts to define when annuities
can be considered for Medicaid eligibility. Thus, “it seems
clear that Congress intended to create a purely binary system
of classification: either a trust[, or, in this case, an annuity,]
affects Medicaid eligibility or it does not.” Id. at 344.
Pennsylvania may not create more restrictive requirements.
42 U.S.C. 1396a(a)(10)(C)(i)(III).

III. CONCLUSION

1084. The Court looked at the entirety of the statute and held:
“where other provisions of law define annuity benefits as
unearned income, § 1396p(e)(4) did not authorize States to
recharacterize those benefits as resources.” Id. That is
precisely what DHS seeks to do here.
30
 For the reasons set forth above, we will reverse the
order of the District Court in part, and affirm the order in part.

31
 ZAHNER v. SECRETARY PENNSYLVANIA
DEPARMENT HUMAN SERVICES

Nos. 14-1328 and 14-1406

RENDELL, Circuit Judge, dissenting

I would affirm the District Court’s ruling on the
grounds that the annuities that Sanner and Claypoole
purchased were not purchased for an investment purpose, but,
rather, were purchased in order to qualify for benefits. In
addition, they were not actuarially sound. Therefore, they
should be counted as resources for the purpose of the
Medicare eligibility determination as outlined in the DRA.

The State Medicaid Manual “serves as the official
HHS interpretation of the law and regulations.” Pa. Dep’t of
Pub. Welfare v. U.S. Dep’t of Health & Human Servs., 647
F.3d 506, 509 (3d Cir. 2011). It specifically recognizes that
annuities “are occasionally used to shelter assets so that
individuals purchasing them can become eligible for
Medicaid.” Transmittal 64, § 3258.9(B). The Manual
mandates that “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).” Id. We cannot ignore that language, and
must therefore consider whether the annuities here were
investments. Thus, I take issue with the majority’s statement
that motive is not determinative. It is an essential
consideration. I conclude that the annuities were not
investments. The short payback period for the annuities

1
purchased by Sanner and Claypoole, 12 months and 14
months, respectively, precluded any meaningful return from
an investment standpoint. Furthermore, when the broker fees
are included, the transactions actually lost money.1 In other
words, as DPW argues, these annuities “had no economic
purpose other than qualifying plaintiffs for [Medicaid]
benefits.” (DPW Br. at 21.) The majority asserts that nothing
requires annuities to be investment vehicles, but, indeed, that
is their legitimate, common sense purpose. The majority even
notes that they are “widely recognized” as “investment
products.” (Majority Op. at 8 (quoting NationsBank of N.C.,
N.A. v. Variable Annuity Life Ins. Co., 513 U.S. 251, 259
(1995)). But these annuities were not investment products.

Aside from the lack of investment purpose, these
annuities also were not actuarially sound. As the majority
notes, Congress indicated that an annuity will fit within the
“safe harbor” if, inter alia, “the annuity . . . is actuarially
sound (as determined in accordance with actuarial
publications of the Office of the Chief Actuary of the Social
Security Administration).” 42 U.S.C.
§ 1396p(c)(1)(G)(ii)(II). The State Medicaid Manual
provides that “[i]f the expected return on the annuity is
commensurate with a reasonable estimate of the life
expectancy of the beneficiary, the annuity can be deemed
actuarially sound. . . . The average number of years of

1
Even without the fees, the $290.04 “return” on Sanner’s
investment of $53,700 and the $526.20 “return” on
Claypoole’s investment of $84,874.08 represent an annual
rate of return on each annuity of approximately .05%, a
miniscule return. (Appellants’ Br. 14.)

2
expected life remaining for the individual must coincide with
the life of the annuity.” Transmittal 64, § 3258.9(B)
(emphasis added). Essentially, the Manual indicates that an
annuity is “actuarially sound” when the individual’s life
expectancy is “commensurate with” or “coincide[s] with” the
annuity term. Neither Sanner nor Claypoole had annuities
with terms that coincided with or were commensurate with
their life expectancies. In Sanner’s case, her annuity term
was 10.55% of her life expectancy and Claypoole’s annuity
term was 17.23% of her life expectancy. These percentages
are not remotely commensurate with their life expectancies.
We need not opine as to what percentage of life expectancy
would be sufficient to satisfy this test, but these percentages
clearly miss the mark.

The majority concludes that an annuity with a term
that is less than the annuitant’s life expectancy passes the
actuarial soundness test. I disagree. If Congress simply
wanted to require the annuity terms to be shorter than life
expectancy, it could have expressly stated that. Instead,
Congress said that annuities must be actuarially sound, and
the State Medicaid Manual defines that term as meaning that
annuities must be commensurate with or coincide with life
expectancy. Those words must mean something. Moreover,
the “commensurate with” requirement makes sense from a
policy standpoint. If an annuity term exceeds life expectancy,
then it is clearly an attempt to transfer assets to others without
facing Medicaid penalties. And similarly, an annuity that is a
tiny fraction of life expectancy has no investment purpose and
operates only to shield assets. Thus, actuarial soundness is
the proper test to avoid both these undesirable situations, by
requiring the term to be commensurate with life expectancy.

3
 Because I would hold that the annuities were not for a
legitimate economic purpose and were not actuarially sound, I
would not reach the question of whether the provision of
Pennsylvania law regarding non-assignability, § 441.6(b), is
preempted.

Accordingly, I must disagree with the majority and
would affirm.

4