Angeline Ellis of Crystal was trying to be a helpful mom four years ago when she lent her son $17,000 to tide him over a financial tight spot. So far, he's repaid $12,250.

Now, beset by dementia, severe arthritis and heart disease at age 83, Ellis needs long-term care.

As a result, she finds herself at the center of a lawsuit challenging a state rule designed to discourage people from giving an early inheritance to their children and then getting taxpayer help to pay for their care through Medicaid.

At a court hearing Tuesday in Minneapolis, her attorney asked a judge to bar the state from enforcing the new rule, arguing that the 2010 federal health care overhaul law prohibits states from restricting Medicaid eligibility beyond where it stood when the law was passed.

While the money and potential impact of Ellis' case are relatively modest -- at worst, she might be disqualified from Medicaid benefits for four months -- the judge's decision could affect scores of similar Minnesotans immediately, and thousands in coming years.

If Ellis wins, it will cost the state millions of dollars in payments for nursing homes and other forms of long-term care. If she loses, it will delay needed help for many people. Overall this year, Medicaid will spend about $7.5 billion for Minnesotans (a little more than half paid by the federal government), much of it for long-term care of the elderly and disabled.

At issue is how to calculate a penalty period in which people are ineligible for Medicaid benefits, which is imposed by the state when someone gives away assets and then, within five years, seeks Medicaid help to pay for long-term care. The number of months of ineligibility is calculated by dividing the amount of money given away by $5,341 -- the current average monthly nursing home cost in Minnesota.

Over the past 30 years, state and federal officials have sought to tighten the screws on people who try to shelter their wealth rather than pay for their long-term care.

Gift rule changed

The most recent change, passed by the Legislature in 2009 and approved by federal officials earlier this year, tightens the rules governing gifts from elderly residents to family members. Current rules allow a penalty period to be shortened if part of the gift is repaid; but starting Thursday, the penalty can be shortened only if the entire amount is repaid.

During Tuesday's hearing, an attorney for the state argued that the new rule does not restrict access to Medicaid, but only Medicaid benefits, a change and interpretation approved by federal officials.

Assistant Attorney General Cynthia Jahnke also argued that the request for a temporary restraining order should be thrown out because Ellis has not yet been approved for Medicaid, much less penalized for the loan to her son.

Ellis' attorney, Karl Cambronne, said he expected the loan to be considered a gift by state officials because there was no paperwork saying when it would be repaid.

In a curious turn, Jahnke seemed to change the wording of the new rule Tuesday in explaining to the judge how it would affect Ellis.

While the rule says that no penalty periods assessed after Dec. 1 can be shortened unless the whole gift is repaid, Jahnke said the penalty that Ellis eventually might face would be determined as of the date of her Nov. 22 application -- or one month of ineligibility for the $5,000 still owed on the loan, instead of nearly four months for the $17,000 original loan. She supplied that interpretation to the judge in writing late Tuesday.

Five private elder-law attorneys in the courtroom said afterward that Jahnke's statement seemed to change the new rule.

"I don't know how she can do that," said Julian Zweber, a St. Paul attorney who closely follows state and federal law affecting elderly clients.

Caring for mom at home

Six weeks ago, Ellis fell and broke several bones, and since then has lived with her daughter, Georgia Fisher. Two weeks ago, Ellis was diagnosed with Lewy body dementia, which can cause weakness, falls, memory loss and hallucinations. Her doctor said she no longer can live alone. But Fisher has heart disease and filed for bankruptcy protection early this month; she no longer can care for her mother on her own, the lawsuit said.

The son, Paul Ellis, said he cannot repay the rest of the loan now because of financial problems, including the fact that his wife was recently laid off.

On Nov. 22 Ellis applied for assistance from Medicaid, called Medical Assistance in Minnesota.

"We're doing the best we can," Fisher said Tuesday after the hearing, as she prepared to take her mother to a doctor. "I want to care for Mom here as long as I can. But I just can't handle all the care without help."

The judge's ruling could come on Wednesday.

Warren Wolfe • 612-673-7253