                         Docket No. 100123.

                        IN THE
                   SUPREME COURT
                          OF
                 THE STATE OF ILLINOIS



MARTHA GILLMORE, Ex=r of the Estate of Mary Fillbright,
Deceased, Appellant, v. THE ILLINOIS DEPARTMENT OF
                     HUMAN SERVICES, Appellee.

                   Opinion filed January 20, 2006.



   JUSTICE FITZGERALD delivered the judgment of the court,
with opinion.
   Chief Justice Thomas and Justices Freeman, McMorrow,
Kilbride, Garman, and Karmeier concurred in the judgment and
opinion.



                              OPINION

    The plaintiff, Martha Gillmore, as the executrix of Mary
Fillbright=s estate, appeals the decision of the appellate court (354 Ill.
App. 3d 497) affirming the decision of the circuit court of Menard
County in turn confirming the administrative decision of the Illinois
Department of Human Services (DHS). The DHS found Fillbright
eligible for Medicaid, but imposed a 22-month penalty period
because Fillbright had purchased a so-called Aballoon@ annuity that
the DHS considered an improper transfer of assets pursuant to a state
regulation. For the reasons that follow, we affirm.
                          BACKGROUND
    In 1965, Congress enacted Title XIX of the Social Security Act,
commonly known as the Medicaid Act. See 42 U.S.C. '1396 et seq.
(2000). This statute created a cooperative program in which the
federal government reimburses state governments for a portion of the
costs to provide medical assistance to two low income groups: the
categorically needy and the medically needy. The categorically needy
are persons who are automatically eligible to receive cash grants
under one of the general welfare programsBthe Aid to Families with
Dependent Children program (AFDC) (42 U.S.C. '601 et seq.
(2000)) or the Supplemental Security Income for the Aged, Blind, or
Disabled program (SSI) (42 U.S.C. '1381 et seq. (2000)). See 305
ILCS 5/5B2(1) (West 2002); 42 C.F.R. '435.100 et seq. (2003). The
medically needy are persons who are ineligible to receive cash grants
under AFDC or SSI because their resources exceed the eligibility
threshold for those programs, but who still lack the ability to pay for
medical assistance. See 305 ILCS 5/5B2(2) (West 2002); 42 C.F.R.
'435.300 et seq. (2003). People who fall into the second category are
called MANG (Medical AssistanceBNo Grant) recipients. See 89 Ill.
Adm. Code '120.10(a) (Conway-Greene CD-ROM March 2002). To
qualify for Medicaid as a MANG recipient, a person must have low
income and low assets, and the person must Aspend down@ any
resources over the statutory and regulatory limits. See 89 Ill. Adm.
Code '120.10(d) (Conway-Greene CD-ROM March 2002).
    States that choose to participate in the Medicaid program design
their own plans and set reasonable standards for eligibility and
assistance. See 42 U.S.C. '1396a(a)(17) (2000). States must comply
with certain broad requirements imposed by federal statutes and
regulations issued by the United States Department of Health and
Human Services, which oversees the Medicaid program through the
Health Care Financing Administration (HCFA), now called the
Centers for Medicaid and Medicare Services. See Schweiker v. Gray
Panthers, 453 U.S. 34, 36-37, 69 L. Ed. 2d 460, 465, 101 S. Ct. 2633,
2636 (1981); West Virginia University Hospitals, Inc. v. Casey, 885
F.2d 11, 15 (3d Cir. 1989) (Medicaid A >is basically administered by
each state within certain broad requirements and guidelines= @). Each
state also must designate a single agency to administer its Medicaid
plan, though another agency may make eligibility determinations. See
42 U.S.C. '1396a(a)(5) (2000); see also 42 C.F.R. '431.10(a) (2003).

                                 -2-
In Illinois, the Medicaid agency is the Department of Public Aid
(DPA). See 305 ILCS 5/2B12(3) (West 2002); American Society of
Consultant Pharmacists v. Garner, 180 F. Supp. 2d 953, 958 (N.D.
Ill. 2001). The DHS makes eligibility determinations in accord with
DPA regulations. See 305 ILCS 5/5B4 (West 2002).
     In 1993, Congress sought to combat the rapidly increasing costs
of Medicaid by enacting statutory provisions to ensure that persons
who could pay for their own care did not receive assistance. Congress
mandated that, in determining Medicaid eligibility, a state must
Alook-back@ into a three- or five-year period, depending on the asset,
before a person applied for assistance to determine if the person made
any transfers solely to become eligible for Medicaid. See 42 U.S.C.
'1396p(c)(1)(B) (2000). If the person disposed of assets for less than
fair market value during the look-back period, the person is ineligible
for medical assistance for a statutory penalty period based on the
value of the assets transferred. See 42 U.S.C. '1396p(c)(1)(A)
(2000). Congress also mandated that a state plan for medical
assistance must comply with, inter alia, the provisions of section
1396p with respect to Atransfers of assets[ ] and treatment of certain
trusts.@ 42 U.S.C. '1396a(a)(18) (2000). If the person establishes a
trust during the look-back period, any portion of such a trust from
which no payments could be made to the person shall be considered
assets disposed of by that person. See 42 U.S.C. '1396p(d)(3)(B)(ii)
(2000). That is, any assets disposed of during the look-back period
are Acountable@ toward Medicaid limits and subject to the spend-
down requirement, if the person=s resources are over those limits. The
term Atrust@ includes an annuity Aonly to such extent and in such
manner as the Secretary [of Health and Human Services] specifies.@
42 U.S.C. '1396p(d)(6) (2000).
     In November 1994, the HCFA did just that in a policy document
known as Transmittal 64. State Medicaid Manual, Health Care
Financing Administration Pub. No. 45B3, Transmittal 64, '3258.9(B)
(November 1994). Transmittal 64 provided guidelines for state
Medicaid caseworkers on how to evaluate the transfer of assets into
trusts and annuities. An annuity is a contract in which a person pays a
bank or an insurance company a lump sum in return for fixed
periodic payments. If the person dies during the term of the annuity,
the remainder is typically converted into a lump sum and paid to a
designated beneficiary. See State Medicaid Manual, Health Care

                                 -3-
Financing Administration Pub. No. 45B3, Transmittal 64, '3258.9(B)
(November 1994); see generally Black=s Law Dictionary 99 (8th ed.
2004). According to the HCFA:
            AAnnuities, although usually purchased in order to
        provide a source of income for retirement, are occasionally
        used to shelter assets so that individuals purchasing them can
        become eligible for Medicaid. In 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 life expectancy
        of the beneficiary, the annuity can be deemed actuarially
        sound.
            *** The average number of years of expected life
        remaining for the individual must coincide with the life of the
        annuity. 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. In this case, the annuity is not actuarially
        sound and a transfer of assets for less than fair market value
        has taken place, subjecting the individual to a penalty.@ State
        Medicaid Manual, Health Care Financing Administration
        Pub. No. 45B3, Transmittal 64, '3258.9(B) (November 1994).
    Transmittal 64 included two examples of this rule. If a 65-year-
old man with a life expectancy of nearly 15 years purchases a
$10,000 annuity with a 10-year term, the transfer of assets is
actuarially sound. State Medicaid Manual, Health Care Financing
Administration Pub. No. 45B3, Transmittal 64, '3258.9(B)
(November 1994). However, if an 80-year-old man with life
expectancy of nearly seven years purchases the same annuity, Aa
payout of the annuity for approximately 3 years is considered a
transfer of assets for less than fair market value and that amount is
subject to a penalty.@ State Medicaid Manual, Health Care Financing
Administration Pub. No. 45B3, Transmittal 64, '3258.9(B)
(November 1994). Transmittal 64 dictated that AStates cannot apply


                                 -4-
periods of ineligibility due to a transfer of resources for less than fair
market value except in accordance with these instructions.@ State
Medicaid Manual, Health Care Financing Administration Pub. No.
45B3, Transmittal 64, '3258.9(B) (November 1994).
    In Illinois, MANG recipients must not transfer assets for less than
fair market value. See 305 ILCS 5/5B2.1(a) (West 2002). The
legislature provided that the DPA Ashall by rule establish the amounts
of assets to be disregarded in determining eligibility for medical
assistance, which shall at a minimum equal the amounts to be
disregarded under [federal law].@ See 305 ILCS 5/5B2(12) (West
2002). In a 1999 ANotice of Adopted Amendments,@ the DPA stated:
             A[The DPA] has become aware that the marketing of
         Medicaid planning devices sometimes includes plans offering
         back-end loaded annuities that pay only very small monthly
         amounts until the final month of life expectancy when a
         balloon payment reflecting the payout balance is made. Such
         annuity plans are intended to primarily benefit the person=s
         heirs. While these annuities are literally consistent with
         current policy, they are in conflict with the intent of asset
         consideration for the purpose of equitable assistance
         eligibility determination.@ 23 Ill. Reg. 11301 (eff. August 27,
         1999).
Thus, the DPA promulgated a regulation regarding annuity payments:
             A(e) A transfer is allowable if:
                                   ***
                  (13) the transfer was to an annuity, the expected
             return on the annuity is commensurate with the estimated
             life expectancy of the person, and the annuity pays
             benefits in approximately equal periodic payments.@ 89
             Ill. Adm. Code '120.387(e)(13) (Conway Greene CD-
             ROM March 2002).
    On January 31, 2002, 78-year-old Mary Fillbright, a resident in a
long-term care facility, applied for medical assistance as a MANG
recipient. That day, she also bought a balloon annuity for $73,713.
The annuity would stretch payments over her life expectancy of 116
months; it would pay her $188.94 per monthB$10 per month
principal, plus interestBfor 115 months and $72,741.94 in its final
month. The final or balloon payment represented nearly 99% of the

                                  -5-
purchase price. The annuity also provided:
              AOn any anniversary prior to attaining age 101, you may
        request a determination of your then life expectancy. If the
        period thus determined is greater than the balance remaining
        for the current period, you may request an amendment to the
        new period. Such amendment will require a change in the
        monthly payment amount to that for the new period.@
    On March 11, 2002, caseworkers at the county DHS office found
Fillbright eligible for medical assistance, but determined that her
purchase of the balloon annuity constituted an improper transfer of
assets because it violated the Aequal periodic payment@ regulation.
Her benefits, which had been approved effective January 1, 2002,
were subject to a 22-month penalty from April 2002 to January 2004.
    Fillbright appealed this decision, arguing that the equal periodic
payment regulation violated federal law, as enunciated in Transmittal
64. On June 25, 2002, the DHS conducted an administrative hearing,
and on July 29, 2002, it considered and adopted the hearing officer=s
findings of fact and affirmed his decision. The DHS determined that,
because Fillbright would not receive equal periodic payments from
the annuity, she did not receive fair market value for it. The DHS
rejected Fillbright=s argument that the regulation violated federal law,
stating it is Abound by its policy and regulations, and those arguments
cannot be considered in this forum.@ The order was signed by DHS
Secretary Linda Baker and DPA Director Jackie Garner. A cover
letter noted that the order was the DHS=s AFinal Administrative
Decision,@ as well as the DPA=s final decision Aas to Medicaid
issues.@
    On August 22, 2002, Fillbright filed a complaint for
administrative review by the trial court, naming as defendants the
DHS, the DHS Secretary, and the DPA Director. Fillbright served
summons on the DHS Secretary, but not on the DPA or its director.
In her complaint, Fillbright claimed that the DHS=s decision was
incorrect because the purchase of the annuity was an actuarially
sound transfer for fair market value. Fillbright again argued that the
equal periodic payment regulation violated federal law.
    The DHS filed a motion to dismiss the complaint because
Fillbright failed to serve the DPA, a necessary party, and thus failed
to comply with the Administrative Review Law. The DHS argued

                                  -6-
that the final administrative decision was a decision by both the DHS
and the DPA, and that the Administrative Review Law required
Fillbright to serve both agencies. Fillbright responded that the DHS
determines issues of Medicaid eligibility. The trial court denied this
motion, reasoning that the DPA is a part of the DHS, and the DHS
was served. The court stated, APublic Aid *** can clearly come in and
defend. They=re not prejudiced in any way because the [DHS] had
proper notice in a timely fashion.@
     On September 15, 2003, the trial court confirmed the DHS=s
decision to impose the penalty period. The trial court stated that the
question in this case is simple: ADoes a Medicaid recipient who
purchases a back-loaded annuity payable in full over the life-
expectancy of the annuitant within the >look back= period, engage in a
non-allowable transfer of assets such that payment of benefits is
deferred for a penalty period?@ The answer, observed the court, is not
so simple. The trial court further noted that, unfortunately, the DHS
did not address this question, depriving the court of an agency
reading of the equal payment regulation.
     The trial court acknowledged Aa 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.@ According to the
trial court, actuarial soundness and fair market value are distinct
requirements; an annuity, in order to be considered a proper transfer
of assets, must meet both. The court stated:
         AOnce the Department determined the annuity in this case was
         not purchased for fair market value, it was incumbent upon
         [Fillbright] to show that in fact it was a fair market value
         transfer. Plaintiff relied solely on a legal argument for her
         position and presented no testimony to the hearing officer
         concerning the fair market value of the transfer. Under these
         circumstances, this court is unable to find that the Department
         erred.@
     Fillbright then appealed again, but died while her case was
pending. Gillmore was appointed executrix of her estate and
proceeded with the appeal. The appellate court affirmed. 354 Ill. App.
3d 497. The court initially reviewed Transmittal 64 and the equal
periodic payment regulation. 354 Ill. App. 3d at 501-02. According to

                                  -7-
the appellate court, the purpose for the fair market value requirement
in Transmittal 64 is to provide a reliable indicator for Medicaid
caseworkers trying to discern whether the annuity was intended for
retirement planning or for sheltering assets. 354 Ill. App. 3d at 503.
Like the trial court, the appellate court determined that fair market
value and actuarial soundness are distinct concepts. 354 Ill. App. 3d
at 503. The appellate court concluded that Fillbright=s annuity was
actuarially sound, but not purchased for fair market value. 354 Ill.
App. 3d at 504. It was actuarially sound because the payment term
coincided with her life expectancy. 354 Ill. App. 3d at 504. It was not
purchased for fair market value because, in effect, the balloon
payment would extend the term beyond her life expectancy. 354 Ill.
App. 3d at 504. In theory, Fillbright would receive the final payment
on the day before her death, and accordingly, A[T]he final payment on
[her] annuity would not be used as her retirement income but as a
payment to the designated beneficiary.@ 354 Ill. App. 3d at 504. The
court continued:
             AThe purchase of the back-loaded annuity with a benefit
        term equivalent to plaintiff=s life expectancy cannot be
        deemed to be a valid retirement tool when the
        overwhelmingly substantial portion of the benefit would be
        paid the day before plaintiff=s expected death. *** Based
        upon its terms, this type of plan is more likely viewed as a
        way to shelter assets for the purpose of Medicaid eligibility
        than as a valid retirement tool.@ 354 Ill. App. 3d at 504.
    According to the appellate court, the state regulation did not
conflict with federal regulations, but rather provided further guidance
on them. 354 Ill. App. 3d at 504-05. The court held that the DHS
correctly imposed a penalty period based on Fillbright=s transfer of
assets into the annuity. 354 Ill. App. 3d at 505.
    We allowed Gillmore=s petition for leave to appeal. See 177 Ill.
2d R. 315(a). We allowed the American Public Human Services
Association to file an amicus curiae brief in support of the DHS. See
155 Ill. 2d R. 345. On the legal issues in this case, our standard of
review is de novo. See Carpetland U.S.A., Inc. v. Department of
Employment Security, 201 Ill. 2d 351, 369 (2002).
                              ANALYSIS
    In this appeal, Gillmore essentially raises a single issue: whether

                                 -8-
the DHS=s eligibility decision was correct. Before we reach that issue,
however, we must dispose of an argument made by the DHS. The
DHS insists that Gillmore=s appeal must be dismissed because
Fillbright failed to serve her complaint on the DPA. The trial court
found that the DPA was part of the DHS for the purposes of
Fillbright=s case and denied the DHS=s motion to dismiss. The
appellate court declined to reach this argument because the DHS
never cross-appealed.
    Initially, we disagree with the appellate court. The DHS could not
have cross-appealed the trial court=s decision on its motion to dismiss
because the trial court=s final judgment on the merits of Fillbright=s
administrative review complaint was not adverse to the department.
See Material Service Corp. v. Department of Revenue, 98 Ill. 2d 382,
386-87 (1983).
    The Illinois Public Aid Code provides that it Ashall be
administered by the Department of Human Services and the Illinois
Department of Public Aid as provided in the Department of Human
Services Act.@ 305 ILCS 5/12B1(a) (West 2002). In 1996, section
80B10(d) of the Department of Human Services Act declared that the
Department of Human Services is the successor agency to the
Department of Public Aid with respect to certain functions. See 20
ILCS 1305/80B10(d) (West 2002). The Act did not shift
responsibility over AMedical Assistance@ or Medicaid to the DHS (see
305 ILCS 5/2B12(3) (West 2002)), but eligibility decisions rest with
the DHS. Section 5B4 of the Public Aid Code provides, AThe amount
and nature of medical assistance shall be determined by the County
Departments in accordance with the standards, rules, and regulations
of the Illinois Department of Public Aid ***.@ 305 ILCS 5/5B4 (West
2002). Until 2002, ACounty Department@ was defined as the County
Department of Public Aid; thereafter, and in this case, it was the
County Department of Human Services. Compare 305 ILCS 5/2B13
(West 2000) with 305 ILCS 5/2B13 (West 2002).
    The Administrative Review Law applies to all proceedings in
which a party seeks judicial review of an agency decision under
article V. See 305 ILCS 5/11B8.7 (West 2002). Section 3B107(a) of
the Administrative Review Law requires that Ain any action to review
any final decision of an administrative agency, the administrative
agency *** shall be made [a] defendant[ ].@ 735 ILCS 5/3B107(a)


                                 -9-
(West 2002). AAdministrative agency@ means the department having
the power to make administrative decisions. 735 ILCS 5/3B101 (West
2002). AAdministrative decision@ means a determination by an agency
which affects the rights and duties of the parties and terminates the
proceedings. 735 ILCS 5/3B101 (West 2002).
    Certainly, where two agencies share the power to make the
administrative decision at issue, both must be made defendants and
served. See ESG Watts, Inc. v. Pollution Control Board, 191 Ill. 2d
26 (2000). But here only one agency, the DHS, had the power to
decide Fillbright=s Medicaid eligibility. The review of the county
DHS office=s finding that Fillbright was eligible for assistance,
subject to a penalty, was signed by the DHS Secretary and, consistent
with federal regulations, the DPA Director. See 42 C.F.R. '431.243
(2003) (the state Medicaid agency Amust participate in the hearing@ of
an administrative appeal from an adverse eligibility decision, if it did
not decide eligibility). We agree with Gillmore that the DPA simply
endorsed the DHS=s eligibility decision, and Fillbright properly
served the DHS. We turn to the merits of Gillmore=s appeal.
    Gillmore contends that the DHS=s eligibility decision was
incorrect because Fillbright=s annuity satisfied the requirements of
Transmittal 64. According to Gillmore, the equal periodic payment
regulation imposes a requirement which does not exist in federal law,
and thus violates federal law. According to Gillmore, federal law
addresses financial eligibility requirements, and the state cannot be
more restrictive. Gillmore acknowledges that actuarial soundness and
fair market value are distinct concepts, but insists that for Medicaid
eligibility purposes, the sole federal test of whether a transfer of
assets into a commercial annuity is permissible is simply actuarial
soundness. If the term of the annuity was commensurate with
Fillbright=s life expectancy, then it was a transfer for fair market
value, and therefore permissible.
    Gillmore distinguishes between commercial annuities like the one
purchased by Fillbright from private annuities, which are generally
agreements between parents and children where the parents transfer
money, often in trust, to the children with an understanding that the
children will pay the money back to the parents over their life
expectancy. Private annuities are like gifts and need not return fair
market value. Commercial annuities, on the other hand, are purchased


                                 -10-
on the open market and do return fair market value. Gillmore
discusses the examples in Transmittal 64 and concludes that the only
commercial annuity which can be characterized as a transfer for less
than fair market value is an annuity whose term extends beyond the
purchaser=s life expectancy.
    In response, the DHS agrees that state Medicaid plans must
comply with the federal statutory and regulatory requirements, but
asserts that the Medicaid scheme gives the states latitude for
implementation. The DHS suggests that the federal definition of fair
market value is so broad as to allow the state to create and impose
more specific rules. The Medicaid Act does not define fair market
value, but the state Medicaid manual defines it as the Aestimate of the
value of an asset, if sold at the prevailing price at the time it was
actually transferred. Value is based on criteria you use in appraising
the value of assets for the purpose of determining Medicaid
eligibility.@ State Medicaid Manual, Health Care Financing
Administration Pub. No. 45B3, Transmittal 64, '3258.1(A)(1)
(November 1994). According to the DHS, this reference to other
Acriteria@ leaves room for the equal periodic payment regulation.
    The parties have neither cited nor discussed any cases regarding
the propriety of balloon annuities under the Medicaid Act and its
regulations. Instead, they rely on cases from other jurisdictions that
address Transmittal 64 in the context of nonballoon annuities. These
cases, of course, do not bind this court, but they warrant some
discussion.
    Gillmore principally relies upon Mertz v. Houstoun, 155 F. Supp.
2d 415 (E.D. Pa. 2001), a federal district court case from
Pennsylvania. In Mertz, a husband purchased two actuarially sound,
nonballoon commercial annuities for $106,000 immediately before
his wife entered a nursing home that participates in the Medicaid
program. Shortly thereafter, the wife applied for Medicaid. The State
welfare department determined that she was eligible for medical
assistance, subject to a two-year penalty, because the purchase of the
annuities violated a state welfare regulation creating a presumption
that assets transferred during the look-back period were transferred in
order to qualify for Medicaid. The wife then filed an administrative
appeal of the state welfare department=s decision, and the department
denied her appeal. Rather than seeking judicial review in state court,


                                -11-
the wife filed a civil rights action in federal court. The wife asked for
declaratory and injunctive relief, arguing that the annuities were
actuarially sound and purchased for fair market value and, thus, the
state welfare department violated federal law when it imposed a
penalty period based on the regulatory presumption.
    The federal district court reviewed the Medicaid Act and
Transmittal 64, as well as the state Medicaid plan. Mertz, 155 F.
Supp. 2d at 420-22. The court noted that the state welfare department
found that the annuities were purchased for fair market value, but still
penalized the transfers because the wife had not rebutted the
regulatory presumption. Mertz, 155 F. Supp. 2d at 425. Federal law,
however, penalizes only transfers made for less than fair market
value. Mertz, 155 F. Supp. 2d at 425. In a footnote, the court
explained:
            AThe [state welfare department] seizes upon the portion of
        the sentence in Transmittal 64 which reads >a determination
        must be made with regard to the ultimate purpose of the
        annuity= but omits the language immediately following which
        reads, >i.e. whether the purchase of the annuity constitutes a
        transfer of assets for less than fair market value.= [Citation.]
        *** [T]he critical factor in determining whether the purchase
        of an annuity may be penalized is whether it was a purchase
        for fair market value, which is then essentially equated with
        actuarial soundness. Insofar as the [state welfare department]
        relies on [the statutory presumption] to penalize transfers
        made for fair market value *** upon a finding they were also
        made to qualify for benefits, the agency is engaging in a
        practice inconsistent with federal law. Insofar as that
        regulation is intended not merely to create a rebuttable
        presumption of an intent to qualify upon a finding of a
        transaction for less than fair market value but rather to
        penalize transfers made for fair market value upon a
        presumption or finding of such intent, the regulation is
        inconsistent with federal law.@ Mertz, 155 F. Supp. 2d at 425
        n.13.
    In closing, the court discussed the loophole in the Medicaid
scheme which allows a couple to convert countable resources into
noncountable income for the noninstitutionalized spouse by


                                 -12-
purchasing a commercial annuity for the sole benefit of the
noninstitutionalized spouse. Mertz, 155 F. Supp. 2d at 427. This
loophole, Aapparently discerned by lawyers and exploited by issuers
who advertise such annuities as a means to qualify for Medicaid
benefits,@ is inconsistent with the purpose of the Medicaid program to
provide assistance to needy persons. Mertz, 155 F. Supp. 2d at 427.
The court acknowledged that this loophole has proven frustrating to
state Medicaid administrators across the country, but stated it was
powerless to help: AIt 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. It is for the Congress to determine if and how this
loophole should be closed.@ Mertz, 155 F. Supp. 2d at 428.
    Dempsey v. Department of Public Welfare, 756 A.2d 90 (Pa.
Commw. 2000), an intermediate appellate court case from
Pennsylvania, reaches the opposite conclusion. In Dempsey, a
husband purchased two actuarially sound, nonballoon, commercial
annuities for a total of $375,000 after a resource assessment by the
county assistance office. The husband then applied for Medicaid on
behalf of his wife. The county assistance office concluded that the
transfer was improper under the same regulatory presumption as in
Mertz, denied the wife=s application, and declared her ineligible for
medical assistance for more than six years. The state welfare
department affirmed, and the husband appealed. The husband argued
that Transmittal 64 is conclusive and allows the purchase of
commercial annuities without penalty if they are actuarially sound.
According to the husband, Transmittal 64 prohibited the state welfare
department from making a presumption that the transfer was for less
than fair market value and thus improper.
    The appellate court affirmed, stating that actuarial soundness of
an annuity does not place a transfer of assets to such an annuity
beyond the review of the state welfare department. Dempsey, 756
A.2d at 93. According to the appellate court, the husband transferred
almost $400,000 of assets immediately before applying for Medicaid
on his wife=s behalf, and the state welfare department Acorrectly
presumed that the transactions were made for less than fair market
value and for the impermissible purpose of qualifying for
[Medicaid].@ Dempsey, 756 A.2d 95. In fact, the court concluded,
Transmittal 64

                                 -13-
         Adoes not itself provide that a transfer of assets to an
         actuarially sound annuity establishes that the transfer may not
         under any circumstances render ineligible an applicant for
         [Medicaid]. As we read the provision, it is simply a guideline
         to aid caseworkers in determining whether or not an annuity
         appears on its face to be a legitimate instrument as opposed to
         an abusive shelter for assets.@ Dempsey, 756 A.2d at 95-96.
Accord Bird v. Pennsylvania Department of Public Welfare, 731
A.2d 660 (Pa. Commw. 1999).
    Though we disagree with the result reached by the court in Mertz,
we do agree with its comment that it is apparent annuities have been
structured to bypass Medicaid limits and consequently to defeat the
purpose of the Medicaid Act. Additionally, we find Dempsey more
persuasive than Mertz on the issue of whether Transmittal 64
forecloses further state regulation. Dean v. Delaware Department of
Health & Social Services, C.A. No. 00AB05B006 (Del. Super.
December 6, 2000), aff=d, 781 A.2d 693 (Del. 2001), a trial court
decision from Delaware upon which Gillmore relies, supports our
position.
    In Dean, a wife entered a nursing home. Her husband considered
applying for Medicaid on her behalf and asked the state social
services office for an assessment of their assets. The social services
office determined that, not including the husband=s community
spouse resource allowance, they had assets $51,000 over Medicaid
limits. The husband purchased an actuarially sound, nonballoon
commercial annuity for $53,000 in order to spend down his
resources. The social services office denied the wife=s Medicaid
application, and the husband asked for an administrative hearing. At
the hearing, the husband=s attorney, who specialized in Aputting
together Medicaid annuities for purposes of Medicaid qualification@
testified. Dean, No. C.A. 00AB05B006. He described Transmittal 64
and stated that the husband=s annuity was actuarially sound, making it
noncountable under Medicaid. The social services office caseworker
who reviewed the wife=s application also testified. She stated that she
was under the impression that the annuity was crafted in order to
create eligibility, adding that the office considers transfers of assets
for the sole purpose of becoming eligible for Medicaid to be
improper. The administrative hearing officer sided with the social


                                 -14-
services office because the annuity was an abusive shelter of assets.
The husband filed a complaint for judicial review.
    The trial court reversed, holding that the annuity complied with
Transmittal 64, and the State was powerless to penalize it. Dean, No.
C.A. No. 00AB05B006. The court discussed Transmittal 64, which
         Aclearly suggests that sheltering, that is, moving or altering,
         assets solely in order to qualify for Medicaid is an abuse of
         the Medicaid system. It does so only by implication and by
         contrasting a valid retirement plan with a strategy to ensure
         eligibility. But it stops short of prohibiting such action. Worse
         yet, while [Transmittal 64] appears to denounce the purchase
         of an annuity for the purpose of qualifying for Medicaid, it
         inhibits the caseworker=s ability to penalize such abuse by
         making the single determinative factor the question of fair
         market value.@ Dean, C.A. No. 00AB05B006.
The court stated that unlike the state in Mertz, the state in this case
did not have a regulatory presumption that assets disposed of during
the look-back period were disposed of to create Medicaid eligibility,
despite Athe obvious logic and utility@ of such a presumption. Dean,
C.A. No. 00AB05B006. According to the court, such a presumption is
consistent with Transmittal 64 because Transmittal 64 Aimplicitly
presumes that a transfer of assets for less than fair market value was
for the purpose of qualifying for Medicaid.@ Dean, C.A. No.
00AB05B006.
    Our research has revealed two very recent cases from Ohio
involving Medicaid eligibility and balloon annuities. In King v. Ohio
Department of Job & Family Services, 2005-Ohio-4939, an Ohio
Court of Appeals affirmed a trial court decision which upheld an
administrative decision by the Ohio Department of Job and Family
Services. The department denied the application of a 94-year-old
woman who purchased a commercial balloon annuity for $257,220.38
because she failed to present clear and convincing medical evidence
pursuant to a state regulation that she would live beyond the balloon
payment date. The court of appeals, however, did not address the
eligibility issue, finding that the woman had not provided legal
support for her arguments. See King, 2005-Ohio-4939, at &8.




                                  -15-
     Fire v. Ohio Department of Job & Family Services, 2005-Ohio-
5214, provides more substantive analysis. Fire involved three
consolidated appeals. In each case, a woman in her 80s purchased a
balloon annuity after entering a nursing home. In each case the local
Job and Family Services bureau denied their Medicaid applications
and imposed penalty periods because the annuities were countable
assets that put the women over Medicaid limits. Under a state
regulation, a balloon annuity is a countable asset unless the Medicaid
applicant can prove by clear and convincing evidence that she was
expected to live past the date of the balloon payment. The State Job
and Family Services director affirmed the local decisions, and the
trial court affirmed the director=s decisions. The women appealed.
     The court of appeals reviewed the Medicaid Act and discussed
the state regulations regarding eligibility. Fire, 2005-Ohio-5214, at
&22. One of those regulations tracked Transmittal 64=s actuarial
soundness requirement, but added that the validity of a balloon
annuity is not governed by life expectancy tables. Fire, 2005-Ohio-
5214, at &30. Instead, the value of balloon annuity Awill be deemed
improperly transferred@ unless the applicant can produce Aclear and
convincing medical evidence that the [applicant] is expected to
actually live past the date of the balloon payment.@ Fire, 2005-Ohio-
5214, at &30, citing Ohio Adm. Code '5101:1B39B22.8(E). The court
of appeals agreed that the women had not rebutted this presumption:
             AThe features inherent in the transfers made by [the
        women] indicate that the transfers were made with the intent
        to avoid using the resources for nursing home care. ***
             *** [T]here was insufficient evidence to support the
        [women=s] claims that [the] purchased annuities were not
        improper transfers of assets for the purpose of meeting
        eligibility requirements for Medicaid; the [women]
        transferred significant funds to annuities almost immediately
        before each applied for Medicaid benefits.@ Fire, 2005-Ohio-
        5214, at &&41-42.
     The equal period payment regulation here, like the regulatory
presumptions in Dempsey, King, and Fire, remains consistent with
the spirit of Transmittal 64. The Medicaid Act is Aamong the most
intricate ever drafted by Congress.@ Schweiker, 453 U.S. at 43, 69 L.
Ed. 2d at 469, 101 S. Ct. at 2640. Though its provisions are dense,

                                -16-
circuitous, and often difficult to harmonize (Mertz, 155 F. Supp. 2d at
420 n.6), even this tangled web of interlaced legislation and
regulation has gaps. The Aactuarially sound@ approach in Transmittal
64 was an attempt to close one such gapBannuities with terms longer
than the Medicaid applicant=s life expectancy. It simply did not
address anotherBballoon annuities. 1
    The Medicaid scheme leaves to participating states like Illinois
the task of fashioning reasonable standards for determining eligibility
which Aprovide for reasonable evaluation of any [available] income
or resources.@ 42 U.S.C. '1396a(a)(17)(C) (2000). The Medicaid Act
is Adesigned to advance cooperative federalism,@ and the United
States Supreme Court has Anot been reluctant to leave a range of
permissible choices to the States, at least where the superintending
federal agency has concluded that such latitude is consistent with the
statute=s aims.@ Wisconsin Department of Health & Family Services v.
Blumer, 534 U.S. 473, 495, 151 L. Ed. 2d 935, 954, 122 S. Ct. 962,
975 (2002). Though the Department of Health and Human Services
has not definitively indicated that the states may penalize balloon
annuities, the HCFA in Transmittal 64 did intimate that the aim of
federal regulators and state caseworkers alike is Ato avoid penalizing
annuities validly purchased as part of a retirement plan but to capture
those annuities which abusively shelter assets.@ State Medicaid
Manual, Health Care Financing Administration Pub. No. 45B3,
Transmittal 64, '3258.9(B) (November 1994).

   1
    We note, however, that, according to a survey conducted by amicus, 25
of the 40 states who responded to a 2003 survey do not permit balloon
annuities to bypass restrictions on transfers of assets. A consultant hired by
the federal Department of Health and Human Services has recommended
that that agency should specifically do the same. See R. Levy, Analysis of
the Use of Annuities to Shelter Assets in State Medicaid Programs 58 (CNA
Corp. 2005).




                                    -17-
     The benefit of treating an annuity as a trust is that an annuity
transforms assets in the form of the purchase price into income. Thus,
a person applying for Medicaid does not have to spend down those
assets, but only the monthly income from the annuity. Balloon
annuities take this approach to an extremeBminimizing income to
shelter assets, instead of providing sufficient income for the Medicaid
applicant. A balloon annuity returns fair market value only in a
technical sense because the person purchasing it receives the
disproportionately largest payment on the last day of her life, when
she is unable to spend it, and the state is unable to enforce a spend
down. In fact, Fillbright=s immunity went a step further than most
balloon annuities and included an amendment clause, which allowed
her to push back the balloon payment if a redetermination of her life
expectancy revealed a period longer than that left on the annuity. The
structure of a balloon annuity demonstrates that its purpose is to
shelter assets and not to provide income.
    Somehow, according to Gillmore, the equal periodic payment
regulation violated Transmittal 64, even though a stated goal of the
federal scheme is to prevent shielding assets. She would bind the
department to federal law where doing so would allow her annuity to
shield assets, but ask the department to ignore the spirit of federal
law, where doing so would close an obvious loophole. The DHS does
not dispute that before the equal periodic payment regulation, an
annuity such as Fillbright=s was considered a proper transfer of assets.
That regulation, however, turned such an annuity into an improper
transfer. Because the equal periodic payment regulation was a
permissible and reasonable standard to help caseworkers evaluate
transfers of assets, we conclude that it did not violate federal law.
Accordingly, we refuse to disturb the DHS=s eligibility decision.
    In a closing policy argument, Gillmore discusses and asks for our
imprimatur on the reasons seniors would want to shelter assets.
According to Gillmore, balloon annuities are asset shelters, but
laudable ones because such annuities allow seniors to reserve a nest
egg in the event they live past their life expectancy. She contends that
we should somehow sanction Fillbright=s purchase of a balloon
annuity because Congress has not acted to provide seniors with more
benefits or cheaper care. We acknowledge that this case has deep
implications for seniors in Illinois. As Gillmore notes, the costs of
long-term care are staggering, and seniors can exhaust their life

                                 -18-
savings in a short time while in long-term care. But this coin has
another side: the resources of Medicaid are similarly finite, a fact
which will become increasingly apparent as our population ages. We
decline to enter this fray. Decisions on how best to allocate public
revenues are best left with the legislature.
                           CONCLUSION
    For the reasons that we have discussed, the judgment of the
appellate court is affirmed.

                                                          Affirmed.




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