Medicaid is a federal assistance program, administered by the states, that helps individuals with below a certain level of assets pay for medical expenses.1 Because Medicaid is available only to the needy, creative lawyers and financial planners have devised various ways to "shield" wealthier claimants' assets in determining Medicaid eligibility. In this context, we decide, among other issues, whether New Jersey has correctly interpreted federal law to preclude use of a private annuity trust to shield assets.

Plaintiffs in this case are elderly couples in which one spouse resides in a nursing home (the "institutionalized spouse") and the other resides in the community (the "community spouse"). Plaintiffs, New Jersey residents, sought and were denied Medicaid benefits because their assets exceed a level qualifying them for Medicaid eligibility. They challenge their benefits denials under 42 U.S.C. § 1983, and seek both injunctive relief and a declaratory judgment. The District Court held, inter alia, that New Jersey did not violate federal law in denying plaintiffs benefits and thus dismissed their complaint.

Whether plaintiffs are entitled to Medicaid benefits depends on how we view certain private trusts they established for the community spouses' benefit. Those trusts, known as Community Spouse Annuity Trusts ("CSATs"), are designed to provide a stream of annuity payments to the community spouse for the duration of his or her life. From 1994 to 1999, New Jersey did not consider the corpus of these CSATs as "countable" assets — that is, among plaintiffs' available resources for Medicaid eligibility purposes — so long as, on the community spouse's death, New Jersey would be the first beneficiary of the CSAT to the extent that the State paid benefits on behalf of the institutionalized spouse ("state payback" or "state-payback requirement"). Thus, New Jersey effectively permitted Medicaid claimants to use CSATs to shield a couple's assets from Medicaid eligibility determinations during the community spouse's lifetime. New Jersey would then be reimbursed for benefits paid if any funds remained in the CSAT after the community spouse's death. If no funds remained, New Jersey would recover nothing.

In 1999 New Jersey changed its position on the countability of CSATs, largely in response to an earlier interpretive letter from an employee of the Department of Health and Human Services ("HHS") stating that trusts such as CSATs should be considered countable assets. With this change New Jersey considers CSATs among Medicaid claimants' assets when determining their total resources for eligibility purposes. Thus, CSATs can no longer be used to shelter assets.2 New Jersey has taken a similar position with respect to commercial annuities.3

Plaintiffs applied for Medicaid benefits during the period that New Jersey was implementing its CSAT policy change. They claim that, during this period, New Jersey delayed in processing their pending Medicaid applications for anywhere between eight and eighteen months. When New Jersey finally determined plaintiffs' eligibility, applying its "new" policy, it deemed their asset levels too high to qualify for Medicaid benefits because it included their CSATs as available assets. Plaintiffs dispute that the corpus of their CSATs should be counted among their assets.

Recognizing the difficulties its policy change caused plaintiffs (who had established CSATs expecting pre-1999 policy to apply), New Jersey advised that it would allow them to replace their CSATs with commercial annuities. As a compromise to plaintiffs, the State would treat these annuities as non-countable (whereas for other Medicaid claimants the State treats commercial annuities as countable), so long as plaintiffs included a state-payback provision in the annuities. Plaintiffs, however, did not accept this settlement.4

After New Jersey held their CSATs countable (thereby making them ineligible for Medicaid), plaintiffs sought to prove that New Jersey's denial of benefits would cause them "undue hardship." Under federal law, if denial of Medicaid benefits to a claimant causes undue hardship, the state must provide benefits, even though the claimant would otherwise not be so entitled. Federal law requires states to establish hearing procedures by which individuals can present their undue hardship claims. But at that time New Jersey had not promulgated these procedures, leaving plaintiffs without any administrative avenue for undue hardship relief.

As a result of these circumstances, plaintiffs filed suit in the District Court. They challenged, inter alia, New Jersey's determination that their CSATs are countable resources, the state-payback requirement for CSATs deemed not countable, and New Jersey's failure to promulgate procedures for undue hardship hearings required by federal law. The District Court (per Judge Bassler) denied relief and dismissed certain of their claims (though both actions were without prejudice in part). First, it held plaintiffs' CSATs countable under federal law. Second, although the Court believed that New Jersey's state-payback requirement violates federal law by imposing Medicaid eligibility criteria more stringent than those imposed by the Medicaid Act (i.e., that Medicaid claimants with CSATs name New Jersey first beneficiary, when federal law imposes no such requirement), the Court saw no risk of irreparable harm because New Jersey ceased to require state paybacks for CSATs post-1999 when it began to deem CSATs countable assets. Finally, the Court confirmed that plaintiffs must be afforded an opportunity for an undue hardship hearing (and that New Jersey had failed to promulgate procedures for such a hearing). However, because New Jersey conceded its obligation and had committed to promulgating regulations for hearings, the Court held that its failure to do so thus far posed no risk of irreparable harm. Judge Bassler left open the possibility that plaintiffs could return to federal court if New Jersey failed to implement its promised procedures.

In the meantime, despite the absence of officially promulgated procedures, New Jersey offered plaintiffs the opportunity to plead undue hardship in conformity with federally mandated standards. The State sent "amended" denial letters to plaintiffs in December 1999 notifying them of their right to apply for undue hardship exceptions. Plaintiffs declined to do so, however.5

In 2001, New Jersey's undue-hardship regulations became effective. Plaintiffs believe those regulations are inadequate, however, because they fail to specify a time in which the State must hold a hearing, thereby violating a federal Medicaid regulation requiring a "timely process for determining whether an undue hardship waiver will be granted." Health Care Financing Administration (now Centers for Medicare & Medicaid Services)("HCFA") Transmittal No. 64 § 3259.8C.

Plaintiffs returned to the District Court. This time the Court (with Judge Cavanaugh now presiding) denied their motion for, inter alia, injunctive relief and dismissed their complaint. It again held plaintiffs' CSATs countable in determining Medicaid eligibility. It also rejected their argument that, because New Jersey unduly delayed in determining their eligibility, it should be equitably estopped from applying its new CSAT countability policy to plaintiffs. The Court reasoned that equitable estoppel will rarely lie against governmental entities. Moreover, Judge Cavanaugh rejected plaintiffs' state-payback argument, though for different reasons than did Judge Bassler. Judge Cavanaugh found no evidence that New Jersey any longer requires state paybacks for CSATs. However, in disagreement with Judge Bassler, Judge Cavanaugh held that state paybacks are consistent with federal policy disfavoring Medicaid claimants' attempts to shelter assets and thus do not violate federal law. Finally, the Court disagreed with plaintiffs that New Jersey's newly promulgated undue hardship hearing provisions were deficient for their failure explicitly to provide a time frame in which a hearing must be conducted. Rather, it held that the State had "substantially complied" with federal law's mandate to provide for undue hardship hearing procedures.

Plaintiffs appeal Judge Cavanaugh's dismissal of their complaint.6 They raise essentially five issues for our review:7 (1) whether CSATs are countable assets for Medicaid eligibility purposes; (2) whether in any event New Jersey should be estopped from treating plaintiffs' CSATs as countable assets because they delayed unduly in determining plaintiffs' Medicaid eligibility (or alternatively whether the District Court should hold a hearing on plaintiffs' estoppel claim); (3) whether New Jersey's state-payback requirement pre-1999 for CSATs violates federal law; (4) whether New Jersey's state-payback requirement for the commercial annuity option offered to plaintiffs violates federal law; and (5) whether the undue hardship regulations of New Jersey violate federal law by failing explicitly to provide a time by which it must hold a hearing. Plaintiffs also seek attorneys' fees.

New Jersey deemed plaintiffs ineligible for Medicaid benefits because, when the capital in their CSATs was taken into account, they had assets exceeding a level qualifying them for Medicaid. Plaintiffs argue that New Jersey should not have considered their CSATs as countable assets.

As this is a question of statutory interpretation,8 we begin (and end) our inquiry with the relevant statute, 42 U.S.C. § 1396p(d)(3)(B). That provision provides, in subsection (i), that "[i]n the case of an irrevocable trust — if there are any circumstances under which payment from the trust could be made to or for the benefit of [the institutionalized spouse whose assets are used to establish the trust], the portion of the corpus from which, or the income on the corpus from which, payment to the individual could be made shall be considered resources available to the individual...." Both parties agree that CSATs are irrevocable trusts. They are generally funded with marital assets (assets that belong to both spouses). Moreover, CSATs are designed so that the corpus and the income on the corpus will provide the community spouse a stream of payments. Once the community spouse receives these payments, there is nothing preventing her or him from sharing them with the institutionalized spouse as well. Section 1396p(d)(3)(B)(i) thus squarely covers CSATs — as "circumstances [exist] under which payment from the trust could be made to or for the benefit of" the institutionalized spouse — and deems them countable resources.9 Accordingly, we affirm the District Court ruling that plaintiffs' CSAT assets are countable resources.

Plaintiffs argue that New Jersey "stalled" their Medicaid applications for eight to eighteen months to allow the State to make a "policy change" regarding CSATs' countability. As a result, plaintiffs assert that we should equitably estop New Jersey from attempting to apply its new CSAT countability rule to plaintiffs or at least order the District Court to hold a hearing and allow discovery on this claim.

We decline to do either. "[E]quitable estoppel will not lie against the Government as it lies against private litigants." Office of Personnel Mgmt. v. Richmond, 496 U.S. 414, 419, 110 S. Ct. 2465, 110 L. Ed. 2d 387 (1990). In Richmond, even though a federal employee provided misinformation to the plaintiff (on which he relied to his detriment), the Supreme Court declined equitably to estop the Government. Id. at 433-34, 110 S. Ct. 2465. In a case more than a century before, The Floyd Acceptances, the Court similarly held that the Government could not be compelled to honor bills of exchange issued by a government official where there was no statutory authority for the issuance of the bills. 7 Wall. 666, 74 U.S. 666, 682-83, 19 L. Ed. 169 (1868). An analogous principle applies here: because, as discussed, there is no statutory authority (federal or state) for treating CSAT assets as not countable, New Jersey should not be estopped from treating them as countable. While the Richmond Court left open the possibility that some kind of "`affirmative misconduct' might give rise to estoppel against the Government," plaintiffs allege no affirmative misconduct here. Richmond, 496 U.S. at 421, 110 S. Ct. 2465 (citations omitted). In this context, the District Court was correct in eschewing the estoppel of New Jersey's countability rule.10

Plaintiffs challenge New Jersey's state-payback requirement for CSATs. They argue that no provision of the Medicaid Act allows a state to seek payback from a community spouse's estate. Moreover, because § 1396p requires state payback for other types of trusts, see § 1396p(d)(4)(A)-(C),11 Congress knew how to specify state payback when it wanted; that it did not do so for spousal trusts indicates that it did not intend to permit states to seek payback for CSATs. New Jersey counters that this issue is now moot because it considers CSATs countable and therefore no longer imposes this condition. We agree with New Jersey.

As background, § 1396p(d)(3) instructs states how to treat trusts for Medicaid eligibility purposes. Previously, when New Jersey considered CSATs noncountable, it presumably believed them to be governed by § 1396p(d)(3)(B)(ii), which addresses irrevocable trusts when no income or principal from the trust "could under any circumstances be made to the individual [establishing the trust]." That section provides that these trusts "shall be considered... to be assets disposed by the individual for purposes of subsection (c) of this section [imposing a penalty on transfers of assets]." The creation of a CSAT results in a transfer of marital assets to the community spouse. See § 1396p(c)(3). Thus, absent some exception, even though a CSAT is noncountable it still is subject to § 1396p(c)'s transfer penalty.12 Section 1396p(c)(2)(B)(i), however, exempts transfers from penalty when made "for the sole benefit of the individual's spouse." In Medicaid parlance, this is known as an "SBO transfer." New Jersey conditioned application of the SBO exception to the § 1396p(c) transfer penalty by defining an SBO transfer to include when the State is named first beneficiary of the trust to the extent of benefits paid on behalf of the institutionalized spouse. N.J. Admin. Code tit. 10, § 71-4.10(f). In layman's language, transfers of assets by the institutionalized spouse for the sole benefit of the community spouse are not penalized for Medicaid eligibility, according to New Jersey, if it has first call on those trust assets equal to the Medicaid benefits it pays to the institutionalized spouse.

Because New Jersey no longer requires state paybacks for CSATs, we have no occasion to decide whether it had the authority to define an SBO transfer in this manner.13 Thus the state-payback issue plaintiffs assert is moot with respect to CSATs.

D. Commercial annuity option offered to plaintiffs

Plaintiffs argue that the commercial annuity option New Jersey offered them — whereby New Jersey would deem commercial annuities noncountable assets so long as they provided for state payback — violates federal law for the same reasons discussed above. New Jersey responds that because plaintiffs did not raise this issue in their complaint (i.e., plaintiffs only raised the issue with respect to CSATs), it is not properly before us.

We agree that plaintiffs take issue too late. Moreover, at oral argument New Jersey made clear that its offer to treat any commercial annuities plaintiffs might purchase as noncountable (so long as they named New Jersey as first beneficiary) was intended to be a settlement available to the plaintiffs, not a policy generally applicable to all Medicaid claimants. New Jersey need not have offered this compromise to plaintiffs, and instead could have chosen to treat as countable assets in any annuities (whether private or commercial) plaintiffs purchased. Regardless, plaintiffs rejected this settlement, and New Jersey tells us it is no longer on the table. Thus, not only was this issue not properly pled, it is moot as well.

Section 1396p(d)(5) requires states to afford otherwise ineligible claimants Medicaid benefits if "undue hardship" would result from the failure to provide benefits.14 The relevant Medicaid regulation, § 3259.8 of HCFA Transmittal No. 64, sets standards for states to apply in making "undue hardship" determinations. Section 3259.8A provides that "[u]ndue hardship exists when application of the trust provisions would deprive the individual of medical care such that his/her health or his/her life would be endangered [or] when application of the trust provisions would deprive the individual of food, clothing, shelter, or other necessities of life." While states have "considerable flexibility in deciding the circumstances under which [they] will not count funds in trusts ... because of undue hardship," the regulation requires that states, "at a minimum, provide for: [1][n]otice to recipients that an undue hardship exception exists; [2][a] timely process for determining whether an undue hardship waiver will be granted; [and][3][a] process under which an adverse determination can be appealed." § 3259.8C. Moreover, a state's "undue hardship provision must discuss how [the state] will meet these requirements." Id.

Plaintiffs' arguments have necessarily shifted through the course of this case because, before seeking relief initially in the District Court, New Jersey had not promulgated procedures under which Medicaid claimants could seek undue hardship hearings in accordance with § 1396p(d)(5) of the Medicaid Act and § 3259.8 of Transmittal No. 64. However, after the hearing before Judge Bassler, New Jersey implemented the long-promised undue hardship regulations. See N.J. Admin. Code tit. 10, § 71:4.11(i). According to plaintiffs, however, New Jersey's regulations do not fully comply with federal law. They argued before Judge Cavanaugh — and now before us — that New Jersey's regulations do not specify within what time period the State will afford an undue hardship hearing and thus do not "discuss how [New Jersey] will meet" Transmittal No. 64's "timely process" requirement. This failure, plaintiffs argue, violates federal law.

New Jersey responds that plaintiffs are without standing to complain about the lack of an explicit timeliness clause in its regulation because plaintiffs have not availed themselves of the offered undue hardship remedy and thus have suffered no injury as a result of the lack of an explicit timeliness provision in § 71:4.11(i). On the merits, New Jersey also argues that neither § 1396p(d)(5) nor § 3259.8 of Transmittal No. 64 requires states to include an express timeliness provision.

We agree with New Jersey that plaintiffs lack standing because they have suffered no injury related to § 71:4.11(i)'s lack of an explicit timeliness provision. Plaintiffs conceded both in their brief and at oral argument that New Jersey notified them of their right to an undue hardship hearing in December 1999 and required them to submit "the reasons and all documentation that you believe gives rise to an undue hardship ... to the county welfare agency within 20 day[s] of this letter." While these notices were sent out before New Jersey's undue hardship regulations became effective in 2001, this chronology is irrelevant.15 What is important is that (the lack of formal regulations notwithstanding) New Jersey offered plaintiffs the opportunity to apply for an undue hardship hearing, as federal law requires. For whatever reason, plaintiffs chose not to seek a hearing for undue hardship at that time. Thus they have suffered no injury (and indeed have no basis to believe that New Jersey would not have timely processed their request).16 As a consequence, plaintiffs are without standing.

Because plaintiffs have not received a favorable judgment on any of their claims — either in the District Court or here — they are not entitled to attorneys' fees. Cf. Buckhannon Bd. and Care Home, Inc. v. West Virginia Dep't of Health & Human Resources, 532 U.S. 598, 600, 121 S. Ct. 1835, 149 L. Ed. 2d 855 (2001) (party that failed to win on the merits by judgment or consent decree, yet obtained result it sought by defendant's voluntary change, is not a prevailing party entitled to attorney's fees and costs).

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We hold that CSATs are countable resources for Medicaid eligibility purposes and decline (a) to estop New Jersey from treating plaintiffs' CSAT assets as countable or (b) to require the District Court to hold a hearing on the issue. Moreover, we hold that plaintiffs' claims with respect to state paybacks are moot both as to CSATs and commercial annuities, and they are without standing to attack New Jersey's undue hardship regulations. Finally, because plaintiffs do not prevail on the merits, they have no claim for attorneys' fees.