862 F.2d 1228 (6th Cir. 1988), 86-3449, State of Ohio Dept. of Human Services v. United States Dept. of Health & Human Services, Health Care Financing Admin.

Docket Nº:86-3449.
Citation:862 F.2d 1228
Party Name:STATE OF OHIO DEPARTMENT OF HUMAN SERVICES, Petitioner, Dorothy Willoweit, Benjamin Lehman, Roberta Lehman, Individually and on Behalf of All Others Similarly Situated, Intervenors-Petitioners, v. UNITED STATES DEPARTMENT OF HEALTH & HUMAN SERVICES, HEALTH CARE FINANCING ADMINISTRATION, Respondent.
Case Date:November 28, 1988
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

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862 F.2d 1228 (6th Cir. 1988)


Dorothy Willoweit, Benjamin Lehman, Roberta Lehman,

Individually and on Behalf of All Others Similarly

Situated, Intervenors-Petitioners,




No. 86-3449.

United States Court of Appeals, Sixth Circuit

November 28, 1988

Argued April 16, 1987.

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Anthony J. Celebrezze, Jr., Atty. Gen., Sheila P. Cooley, Asst. Atty. Gen., State Departments Section, Columbus, Ohio, Alan Schwepe, argued, for petitioner.

David R. Smith, argued, Washington, D.C., Office of the Gen. Counsel, Health Care Financing Div., Dept. of Health & Human Services, Washington, D.C., for respondent.

Gregory S. French, Cincinnati, Ohio, Janet Pecquet, for intervenors-petitioners.

Before MERRITT and NELSON, Circuit Judges, and CONTIE, Senior Circuit Judge.

DAVID A. NELSON, Circuit Judge.

Dissatisfied with a final determination in which the United States Department of Health and Human Services disapproved Ohio Medicaid State Plan Amendment No. 84-2, the State of Ohio has petitioned for review of that determination under 42 U.S.C. Sec. 1316.

The Plan Amendment would liberalize Ohio's formula for determining how much money should be allocated from Medicaid funds, in effect, for maintenance and support of non-institutionalized spouses of institutionalized Medicaid recipients. Health and Human Services disapproved Ohio's proposal on the basis of a "maintenance amount ceiling," as we shall call it, contained in a 1978 amendment to a regulation first adopted by the United States Department of Health, Education and Welfare in 1974. The 1978 amendment was promulgated as a final rule without the prior notice and opportunity for comment required by the Administrative Procedure Act for rules that are not "interpretative" in character. 5 U.S.C. Sec. 553(b)(A).

HHS maintains that the 1978 amendment to the agency's regulation was interpretive, rather than substantive; the contention is that the rule merely made explicit a limitation or ceiling that had been implicit in the original regulation from the beginning. In support of this contention HHS points to a 1976 manual that set forth a ceiling comparable to the one written into the actual regulation two years later.

The State of Ohio, on the other hand, insists that the 1978 amendment was substantive rather than interpretive. The state points out that in 1974, acting under the original regulation, the agency itself approved an Ohio plan that ignored the ceiling now claimed to have been part of the regulation from the beginning. If the ceiling was invisible to the agency's own people when the 1974 regulation was still new, the state suggests, the state does not have to observe the ceiling unless and until a rule imposing it is adopted in a rulemaking proceeding conducted in conformity with the notice and comment requirements of the Administrative Procedure Act.

For the reasons set forth below, we conclude that the state is correct; the ceiling rule adopted in 1978 was not an "interpretative" rule exempt from the notice and comment requirements. Because the decision

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disapproving the Ohio Plan Amendment was based on a rule that had not been validly adopted, the decision is not in accordance with law and must be reversed.


The federal Medicaid program, Title XIX of the Social Security Act, 42 U.S.C. Secs. 1396 et seq., was enacted in 1965 "for the purpose of providing federal financial assistance to States that choose to reimburse certain costs of medical treatment for needy persons." Harris v. McRae, 448 U.S. 297, 301, 100 S.Ct. 2671, 2680, 65 L.Ed.2d 784 (1980). Section 1902(a)(10) of the Act, 42 U.S.C. Sec. 1396a(a), set forth the basic requirements for the program. Under the Act, participating states were required to provide Medicaid coverage to individuals described as the "categorically needy," i.e., those who were entitled to receive financial assistance as members of one of four categories of disadvantaged people designated in the Act. Schweiker v. Hogan, 457 U.S. 569, 572, 102 S.Ct. 2597, 2600, 73 L.Ed.2d 227 (1982); Turner v. Heckler, 783 F.2d 657, 658 (6th Cir.1986). In addition, states had the option of providing coverage for the "medically needy" (persons included under the state's Medicaid plan pursuant to 42 U.S.C. Sec. 1396a(a)(10)(C)). Schweiker v. Gray Panthers, 453 U.S. 34, 37, 101 S.Ct. 2633, 2637, 69 L.Ed.2d 460 (1981).

In 1972 Congress consolidated three of the four categorical assistance programs into one Supplemental Security Income (SSI) program for the Aged, Blind and Disabled. 42 U.S.C. Secs. 1381 et seq.; Turner, 783 F.2d at 658. Although the SSI program is funded by the federal government alone, adoption of the program caused some states to experience an increase in their Medicaid obligations. Schweiker v. Hogan, 457 U.S. at 581-82, n. 18, 102 S.Ct. at 2605-06, n. 18. To avoid imposing a "substantial fiscal burden" on such states or discouraging them from participating, Congress offered what became known as the "Sec. 209(b) option," codified at 42 U.S.C. Sec. 1396a(f). Under that option, which became effective in January of 1974, states could elect to provide Medicaid assistance only to those individuals who would have been eligible under the state plan in effect on January 1, 1972. See Schweiker v. Gray Panthers, 453 U.S. at 38-39, 101 S.Ct. at 2637-38. Ohio is one of the states that have elected to exercise the Sec. 209(b) option.

Under the Medicaid system, individual states prepare state plans that are evaluated by HHS under regulations now codified at 42 C.F.R. Part 435. In 1974, following a notice and comment proceeding, the Department of Health, Education and Welfare, a predecessor of HHS, adopted as part of these regulations a rule governing the amount of an institutionalized Medicaid recipient's income that would have to be contributed to the cost of his care at the institution. Where the Medicaid recipient had a spouse who continued to live at home, the regulation said, provision would have to be made for the appropriate level of income to be applied first to the maintenance of the spouse, before any residue went to defray institutionalization costs:

"(b) With respect to both the categorically needy and, if they are included in the plan, the medically needy, a State plan must:

(1) Provide that only such income and resources as are actually available [for payment to the institution] will be considered and that income and resources will be reasonably evaluated.

* * *

* * *

(4) * * * When ... an [institutionalized] individual's home is maintained for a spouse or other dependents, the appropriate income level for such dependents, plus the individual's income level for maintenance in a long-term care facility, shall be applied. A higher level of maintenance may also be applied for a temporary period, not to exceed six months, to allow an individual to apply his income and resources to maintenance of a home if a physician has certified that such individual is likely to return to the home within such temporary period."

39 Fed.Reg. 9512, 9516 (March 11, 1974) (codified initially at 45 C.F.R. Sec. 248.3(b)).

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In response to this new regulation, Ohio submitted a state plan that included a "family budgeting system." Ohio explains the operation of this system as follows:

"Under the family budgeting system, the income of the institutionalized Medicaid recipient was combined with the income of the community [i.e., non-institutionalized] spouse. The Medicaid need (or categorically needy) standard was deducted from the total family income. The remaining income was then prorated between all family members, including the institutionalized Medicaid recipient. The recipient's prorated share, less $25 for his or her personal expenses, was paid toward the cost of institutional care. The remaining family members retained their prorated shares, plus the [categorically needy standard amount], which was to be applied to their living expenses."

Ohio's plan was duly approved, in 1974, by the cognizant Regional Office of the Department of Health, Education and Welfare. The plan ought not to have been approved if the phrase "the appropriate income level," as used in 45 C.F.R. Sec. 248.3(b), meant something other than the amount of income determined by the state to be appropriate for dependents of the Medicaid recipient upon the latter's being placed in an institution. The Ohio plan made it possible for a spouse who remained at home to receive more than the general "need standard" for the spouse of an aged, blind or disabled person--and the agency now claims that this was improper. A "Medical Assistance Manual" issued by HEW in 1976--issued, it should be noted, without a rulemaking proceeding under the Administrative Procedure Act--said that the amount designated for the maintenance needs of the institutionalized Medicaid recipient's at-home spouse "may not exceed the need standard recognized by ... a State supplementary payment program (for the spouse of an aged, blind, or disabled person)...." HHS asserts that the manual represented "a correct statement of the Department's view of the [1974] regulation." The Department acknowledges that its approval of Ohio's family budgeting system in 1974 was at odds with the view the agency now takes of the 1974 regulation, but we are asked to attach no significance to this "erroneous" approval because of "the confusion inherent in implementing the SSI program" after enactment of the 1972 amendments.

Ohio continued to follow its family budgeting system for several years, but in 1978 HEW published a Federal Register notice announcing, without any prior notice or opportunity to comment, adoption of a "final rule" containing a maintenance amount ceiling...

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