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J. Brian Mcdonald, As Independent v. the Illinois Department of Human

December 28, 2010


Appeal from Administrator of the Circuit Court of Sangamon County Honorable Director, John W. Belz, Judge Presiding.

The opinion of the court was delivered by: Justice Pope

JUSTICE POPE delivered the opinion of the court: This Medicaid case asks us to resolve a tension between the need to preserve scarce public medical resources for the truly needy and the desire of families to preserve their assets while qualifying for medical assistance through a perceived legitimate loophole. This tension manifests itself in this case where an applicant's eligibility for medical assistance was delayed by the imposition of a penalty period by the transfer of nearly $125,000 in cash gifts in the year leading up to her application for benefits.

In June 2007, plaintiff, J. Brian McDonald, acting pursuant to power of attorney, applied for medical assistance on behalf of his mother, Betty J. McDonald, to help cover her long-term-care expenses. Defendant, the Department of Healthcare and Family Services (Healthcare and Family Services), investigated Betty's application, and defendant, the Department of Human Services (Human Services), approved Betty's application but imposed a penalty period of noncoverage because of certain nonallowable transfers Brian made on behalf of Betty.

These nonallowable transfers consisted of systematic monthly gifts from Betty's checking account to Brian and his siblings. Each month, one of Betty's children would receive two checks: one for an amount less than twice Betty's monthly long-term-care expenses and one for the exact amount of Betty's monthly social-security benefits. When added together, these gifts totaled more than twice Betty's monthly long-term-care expenses, resulting in a two-month penalty period for each month's gifts.

Brian appealed the penalty period, arguing the social-security gifts, each of which was labeled a "gift of income" in the check's memorandum line, were not subject to the asset-transfer policy that resulted in the penalty. Under Brian's theory, only the gifts of assets should have been used in calcu- lating the penalty period; since each gift of assets was for less than twice Betty's monthly long-term-care expenses, each would result in only one penalty month. Brian claimed the transfers of income were exempted from the penalty, citing Human Services' "Cash, SNAP, and Medical Policy Manual" (Medical Policy Manual). He also relied on a January 2001 letter from the chief of the bureau of policy of the Department of Public Aid (later succeeded by Healthcare and Family Services as the agency charged with executing Illinois's Medicaid laws), which gave an interpretation of the policy manual's asset-transfer provisions for an unrelated individual. After a hearing held before an administrative law judge, Human Services upheld the imposition of the penalty period, issuing the departments' final administrative decision.

Brian then sought administrative review in the circuit court, presenting two arguments. First, Brian argued the departments misapplied their own policies, again citing the Medical Policy Manual and the January 2001 letter. Second, Brian alternatively argued the departments were estopped from changing the way the policy manual was applied and from departing from the January 2001 letter's interpretation of their policies. The court reversed and remanded to Human Services for it to rescind the portion of the penalty period that resulted from the "gifts of income."

The departments appeal, arguing federal and state statutory laws require Human Services to impose a penalty period for transfers of income, as well as assets, for less than fair market value and asserting the departments' own rules and policies are in accord with these statutes. Again, Brian maintains the departments misinterpreted their rules and policies and argues, alternatively, the departments are estopped from departing from the interpretation provided in the January 2001 letter.

We reverse the circuit court's judgment and affirm the administrative decision because we find (1) the departments correctly applied the law they are charged with enforcing; (2) the relevant sections of the Medical Policy Manual do not conflict with that law; and (3) the departments were not bound by the January 2001 letter.


Betty moved into a nursing home in June 2006. There, she incurred continuing monthly long-term-care expenses of $4,365. Each month from June 2006 through December 2006, Betty received $1,542.01 from social security and $573.90 from an annuity. Beginning January 2007, Betty's monthly income from social security increased to $1,583.44, and she continued to receive $573.90 from her annuity. The annuity payments were never deposited into any of Betty's bank accounts. These annuity payments were never considered by the departments in setting the penalty period and are not an issue on appeal. Beginning in June 2006 and continuing through June 2007, through Brian, as power of attorney, Betty made gifts by check nearly each month to one of her children. These checks were marked as either gifts of assets or gifts of income in the memorandum line. Gifts of assets were in the amount of $7,500 from June 2006 through August 2006 and in the amount of $7,800 from September 2006 through June 2007. Gifts of income were in the amount of $1,542.01 from June 2006 through December 2006 and in the amount of $1,583.44 from January 2007 through June 2007.

Brian applied for medical-assistance benefits on Betty's behalf in June 2007. Healthcare and Family Services determined the gifts noted above were nonallowable transfers under the Medical Policy Manual and calculated a penalty period from March 2007 through July 2008. Healthcare and Family Services approved Betty's application for medical assistance subject to the 17-month penalty period. On Betty's behalf, Brian appealed the portion of the penalty period attributable to the "gifts of income," and Human Services upheld the full penalty period after a hearing by an administrative law judge.

After receiving the unfavorable administrative decision, Brian initiated this administrative-review action in the circuit court with Betty as the named plaintiff. On administrative review, the circuit court reversed and remanded with directions "to exclude from each of the monthly transfer calculations[] all transfers of income made by [Betty] during that same calendar month." The court appeared to be persuaded by Brian's estoppel argument, which consisted of two subarguments, the first of which can also be understood as a separate argument based on a straight application of law.

First, Brian argued the plain meaning of a section from the Medical Policy Manual regarding "income mixed with an asset" demonstrates a gift of income made in the month when the income is received does not constitute a nonallowable transfer. The section provides, in similar language to sections in other portions of the policy manual, "Money considered as income for a month is not an asset for the same month. Any income added to a bank account is income for that month, and not a part of the account's asset value for the month." Department of Human Services, Medical Policy Manual, PM 07-02-06-a (eff. March 1, 1997) (hereinafter Medical Policy Manual); see also Medical Policy Manual, PM 07-04-09-a (eff. October 1, 2010). According to Brian, this means the funds comprising the gifts Brian made to himself and his siblings from Betty's social-security benefits never became an asset. Because the money was not an asset, according to Brian, it cannot be subject to the departments' "asset-transfer" or "transfer-of-asset" policy.

Second, Brian argued the departments were estopped from deviating from the interpretation of policy expressed in a letter written by the chief of the bureau of policy development of the Department of Public Aid. The letter was written by then-chief John Rupcich in January 2001 in response to an inquiry by Joe Oettel, who appears not to be related in any way to this case or the parties. Oettel inquired, relying on the above-quoted language from the policy manual, "Does this mean that income given away to another person during the same month it is received is NOT subject to the asset transfer policy and therefore is NOT used in calculating a penalty period as explained in [the policy manual section]?" Rupcich responded, without reference to any discrete facts or circumstances, "Income given away during the same month it is received is not subject to the transfer of asset policy." According to Brian, this statement by the chief of the bureau of policy was a general interpretation of Illinois's Medicaid/medical-assistance law, made by the agency charged with implementing it, that bound the departments in future medical-assistance cases and on which applicants can rely. Thus, according to Brian, the departments' departure from this interpretation in Betty's case was arbitrary and capricious.

In October 2009, the circuit court, having accepted Brian's estoppel argument, reversed the administrative decision and remanded to the departments to rescind Betty's penalty period insofar as it resulted from their inclusion of Brian's gifts of Betty's income in the calculation of nonallowable transfers. In November 2009, the departments filed a motion to reconsider the court's judgment. Later that month, the court allowed Brian to substitute himself, as independent administrator of Betty's estate, for ...

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