The Revolution in California's Medi-cal Recovery Program

• Publication year: 2017
• Author: By Peter S. Stern, Esq.*

THE REVOLUTION IN CALIFORNIA'S MEDI-CAL RECOVERY PROGRAM

By Peter S. Stern, Esq.*

I. INTRODUCTION AND OVERVIEW

Governor Brown's signature on SB 833 on June 29, 2016, turned nearly 25 years of California law on its head and opened the door to a new era in recovery under the state's Medi-Cal program. The new law applies to individuals, including MediCal recipients or their spouses, who die on or after January 1, 2017, as well as Medi-Cal recipients who died before 2017 and who are survived by spouses who died on or after January 1, 2017.¹ The law eliminates recovery for most non-nursing home services and restricts the possible recovery pool to the decedent's probate estate, narrowly defined as what is subject to a formal probate procedure. If the Medi-Cal beneficiary is survived by a spouse or registered domestic partner, as well as other categories of individuals, the state cannot recover. In many regards, the new law takes recovery back to 1981, when Medi-Cal recovery was first started. Practitioners should note with caution that the new recovery law does not apply to payback due under legislation and regulations affecting special needs trusts.²

II. THE EARLY HISTORY OF MEDICAID RECOVERY

Medi-Cal is California's version of Medicaid, the program initiated under President Johnson to provide healthcare to the poor, as a complement to the Medicare program.³ There was no recovery program at either the federal or the state level until the early 1980s, when the Social Security Act was amended by the "Tax Equity and Fiscal Responsibility Act" (TEFRA) to provide for recovery for certain medical services.⁴ California adopted a recovery statute in 1981.⁵

A. Early Recovery Under Federal Law

TEFRA focused more on liens than estate recovery per se. The state could place a lien on an individual's property following a court judgment for medical benefits incorrectly paid.⁶ For an individual receiving inpatient skilled nursing facility benefits, after notice and opportunity for a hearing on whether that individual could reasonably be expected to be discharged, the state could also place a lien on the individual's property.⁷ The lien could only be placed if none of the following resided in the home: the spouse, the individual's child under age 21, a blind and disabled child, or the sibling of the individual who had an equity interest in the property and had lived there at least one year before the individual's admission to a long term care facility.⁸ If the state did place a lien on the home, it would be dissolved on the discharge of the individual and his or her return to the home.⁹

Federal law permitted the state to seek recovery only on limited terms. For an individual whose property was secured by a lien, the state could collect from the estate or on sale of the property subject to the lien.¹⁰ Where the individual was over 65 when he or she received medical benefits, the state could seek recovery but only after the death of a surviving spouse, if any, and only if the individual was not survived by a child under age 21 or a blind or disabled child. There could be no recovery on the lien during the lifetime of the surviving spouse, or if the individual was survived by a child under age 21, or by a blind or disabled child. Further, in the case of an individual whose residence was subject to a lien, there could be no recovery if a sibling, who had an equity interest, was residing in the home at least a year before the individual was institutionalized. Finally, the state could not recover if a child of the individual, who lived in the individual's home for at least two years prior to institutionalization, established that the care he or she provided kept the individual out of an institution for at least two years, and was lawfully residing in the individual's home since the individual had been institutionalized.¹¹ These early restrictions on recovery have continued in hardship waiver provisions applicable today.¹²

The federal law did not define recoverable medical services or what property could be recovered against, other than the property that had been subject to a lien or property in the decedent's estate.¹³

B. Early Recovery Under California Law

The California Legislature added section 14009.5 to the Welfare and Institutions Code in June 1981, and with the same legislation adopted Probate Code section 700.1.¹⁴ Where federal legislation had permitted recovery after the death of a surviving spouse, California's legislation barred recovery entirely when the Medi-Cal recipient was survived by a spouse. It also barred recovery when the decedent was survived by a child under 21, or a blind or disabled child. The state could claim against the estate of the decedent or against any recipient of the decedent's property by distribution or survival for the value of health care services received. As with federal legislation, California permitted recovery only for services provided when the recipient was 65 or older.¹⁵

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Probate Code section 700.1 established the Department of Health Services (DHCS) procedure for making a claim and established requirements for heirs, personal representatives, or persons in possession of the decedent's property to give notice within 90 days of the decedent's death. Interest on DHCS's claim accrued at the rate earned in the Pooled Money Investment Fund from date of distribution to date of presenting the claim, whichever was later.¹⁶

The state did not have recovery regulations in this early period, but the 1986 version of the Medi-Cal Eligibility Manual outlined procedures for recovery to be followed by those persons identified in Probate Code section 700.1 and by the counties. The estate was described as "real property (joint tenancy, tenants in common, and fee simple) and/or personal property."¹⁷ The state's attempts to recover from assets that passed by joint tenancy were cut off by Citizens Action League v. Kizer (1989) 887 F.2d 1003, which found that federal law, referring to the "estate," should be construed as the probate estate of a decedent.¹⁸

The early federal and state recovery laws were permissive rather than mandatory, with a greater focus on liens than on recovery. There was little definition of what property would be subject to recovery, and there were no details regarding which medical services would be subject to recovery. It took the implementation of the Omnibus Budget Reconciliation Act (OBRA) in 1993 to set higher standards all around, to make the recovery program mandatory, and to give it teeth.

III. MANDATORY RECOVERY IN THE OMNIBUS BUDGET RECONCILIATION ACT

OBRA moved all Medicaid recovery in the direction taken earlier in 1993 by California. The federal statute, signed on August 10, 1993, made recovery mandatory, both for individuals whose property was subject to a lien because of their permanently institutionalized status, and for individuals 55 and older who had received medical services. The law specified that recovery would be mandatory for nursing facility care, home and community based services, ²⁰ and related hospital and prescription drug services, and it added "or, at the option of the State, any items or services under the State plan."²¹ With regard to what could be recovered from, the law further amended 42 USC section 1396p subdivision (b) by adding a new paragraph (4) defining "estate," which "shall include all real and personal property and other assets included within the individual's estate, as defined for the purposes of State probate law; and may include, at the option of the State . . . any other real and personal property and other assets in which the individual had any legal title or interest at the time of death . . . , including such assets conveyed to a survivor, heir, or assign . . . through joint tenancy, tenancy in common, survivorship, life estate, living trust, or other arrangement."²²

California had amended its recovery statute earlier in 1993, to make recovery mandatory.²³ The amendments permitted: (1) recovery against the estate of the surviving spouse or any recipient of property from the surviving spouse for either the amount paid for the decedent's medical expenses or the value of the property received by the surviving spouse (from the decedent); (2) the placement of a lien by the state on the real property of the surviving spouse that had passed from the decedent; and (3) state claims against the proportionate share of those persons receiving property from the decedent's estate when recovery against others would be barred because oftheir age or disability. On its face, the law made it possible for the state to claim against recipients of property from a surviving spouse for the full amount of the claim against the decedent, even though the surviving spouse might have spent down all that he or she had received from the decedent. Moreover, the provision permitting the state to seek a proportionate share ran counter to the clear language in the federal statute barring any recovery if the decedent was survived by a child under age 21 or by a blind and disabled child.²⁴

The California Legislature again amended the statute in 1994 to allow recovery for Medi-Cal services provided to those age 55 or older.²⁵ Further amendment, in 1995, deleted the provision that permitted the state to place a lien against the property that the surviving spouse received from the beneficiary deceased spouse²⁶ and repealed Welfare & Institutions Code section 14006.7, which permitted liens under TEFRA.

With the release of Transmittal 63 of the State Medicaid Manual in September 1994,²⁷ and the adoption of regulations by California to implement the recovery provisions in 1995,²⁸ the basic structure of federal and California recovery was in place. Over the next twenty years, advocacy groups challenged the state's overreach on proportionate share recovery, recovery against property in living trusts before the effective date of OBRA, failure to have proper regulations in place, and...