E.D. Pa: state law with additional requirements for special needs trust preempted by federal Medicaid law

The federal court for the Eastern District of Pennsylvania held that provisions of a Pennsylvania statute imposing additional requirements for special needs trusts under Medicaid were preempted by federal law, including the exclusion of individuals over age 65 from pooled trusts. The court enjoined enforcement of the parts of the statute that it held were preempted. The court also held that the plaintiffs had standing and certified a class. Lewis ex rel. Young v. Alexander, 2011 WL 3678721, Civil Action No. 06-3963 (E.D.Pa. 2011). Judge DuBois, nominated by President Ronald Reagan, wrote the opinion of the court.

In general, to receive Medicaid benefits a disabled individual must have resources below a certain threshold. However, the federal statutes defining the resource limits exclude resources in a certain type of trust, called a Special Needs Trust. By putting their assets in special needs trusts, disabled individuals can stay below the threshold for qualifying for Medicaid benefits. The Medicaid statute sets out the requirements for a special needs trust.

62 Pa. Stat. Ann. § 1414 (Section 1414) creates additional requirements for trusts to qualify as special needs trusts in Pennsylvania. The plaintiffs included two trusts and eight individuals holding pooled trust accounts. They brought a lawsuit against the Secretary of the Department of Public Welfare of Pennsylvania and the Executive Director of the Erie County Assistance Office. The plaintiffs claimed that Section 1414 violated the Due Process Clause of the Fourteenth Amendment and was preempted by federal Medicaid law. In an earlier decision, the court held that the applicable provisions of the Medicaid statute did create rights that were privately enforceable under 42 U.S.C. § 1983. However, the court held that Section 1414 did not violate the plaintiffs’ substantive or procedural due process rights. Lewis v. Rendell, 501 F.Supp. 2d 671 (E.D.Pa. 2007).

In this opinion, the court addressed the defendants’ argument that the plaintiffs lacked standing to challenge two parts of Section 1414 because Pennsylavania’s Department of Public Welfare (DPW) had not yet tried to enforce those provisions. The court found that Section 1414’s requirements, along with DPW’s stated intent to enforce them in the future, created financial burdens and liability risks that injured the plaintiffs. The provisions also harmed the plaintiffs by discouraging others from joining the trusts. The court similarly rejected the defendants’ contention that the claims were not ripe.

The defendants further argued that there was no cause of action for the claim that the state law is preempted by federal law.  The court noted that there was precedent from the Supreme Court, Third Circuit, and First Circuit holding that there is federal jurisdiction to address whether state regulations are preempted by federal law.  The court found the defendants’ reliance on Day v. Bond, 511 F.3d 1030 (10th Cir. 2007), to be unavailing.  The case did not support the defendants’ contention that an injury beyond the invasion of statutory rights was required.

Turning to the merits, the court dismissed the defendants’ argument that Section 1414 could not be preempted because it was a part of Pennsylvania’s general laws governing trusts rather than regulating medical benefits. Preemption must apply whenever a state law conflicts with federal law, even if it is possible to describe the state law as aimed at regulating something other than what the relevant federal law regulates. Calling Section 1414 a law about trusts did not save it from conflicting with federal Medicaid law.

The defendants claimed that the provision that makes special needs trusts exempt from the Medicaid resource calculations is permissive and not mandatory. The court responded by citing its own case and several other decisions that held the provision was mandatory. See, Northwestern Bank of North Dakota v. Doth, 159 F.3d 328 (8th Cir. 1998).

Having rejected the defendants’ two arguments that Section 1414 was not pre-empted, the court evaluated the plaintiffs’ two arguments that Section 1414 was pre-empted. First, the plaintiffs asserted that 42 U.S.C. § 1396a(a)(10)(C)(i)(III) bars states from passing laws that require including income in a person’s assets calculation that federal law would exclude. The court accepted that the “no more restrictive” rule applied to the federal statute dealing with special needs trusts.

The court then found that Section 1414 was more restrictive than allowed by federal statute in several ways. First, the enforcement mechanism in Section 1414(c) made the eligibility for Medicaid benefits of one trust beneficiary depend on other beneficiaries and trustees. The federal law did not make one person’s eligibility depend on the compliance of other people with the statute. Second, Section 1414(b)(1) limited the availability of pooled trusts to people under age 65.  The court noted that the pooled trust provision, 42 U.S.C. § 1396p(d)(4)(C), does not limit availability based on age, in contrast to 42 U.S.C. § 1396p(d)(4)(A), which does contain an age limitation for a different kind of trust.  The defendants argued that this was a drafting error by Congress, which really intended to impose the age limitation on pooled trusts. Rejecting this argument, the court noted that Congress had amended 1396p four times since its passage in 1993 and never “corrected” the purported “drafting error.” Based on the language of the statute, the court found the age limitation preempted by federal law.  The court similarly found two other additional requirements in the state law to be more restrictive than federal law and therefore preempted.  The court severed the preempted provisions, otherwise leaving the state law in effect.

The final issue was whether to grant class certification for a class composed of all those disabled individuals and their representatives who would be denied access to benefits because of Section 1414.  First, the court noted that the class “clearly” was sufficiently numerous. There were over 1,000 known members and more unknown members, and joinder of all of them was impracticable. Second, the class shared the same questions of law and fact since they were seeking an injunction against a statute they challenged as unconstitutional. Third, the representatives of the class had the same claim as the other members of the class. Fourth, the court ruled that one of the plaintiff trusts and its members were appropriate representatives, but that another trust and its members were not appropriate representatives because their trust did not meet the federal eligibility requirements for pooled special needs trusts. The court dismissed the defendants’ claim that the class was too broad and should not include the trustees. The trustees, the court acknowledged, had a large stake in the litigation in line with the interests of the beneficiaries.

Nate Vogel, University of Pennsylvania Law School, class of 2011


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