Lazzell v. INDIANA FAMILY & SOCIAL SERVICES ADMIN.

• Decision Date: 24 September 2002
• Docket Number: No. 03A01-0202-CV-74.,03A01-0202-CV-74.
• Citation: 775 N.E.2d 1113
• Parties: James and Shannon LAZZELL, in their own capacities and as representatives of their minor daughter, C. L., Appellants-Petitioners, v. INDIANA FAMILY AND SOCIAL SERVICES ADMINISTRATION; Katherine Humphreys, in her capacity as Former Secretary of Indiana FSSA; and John Hamilton, in his official capacity as Secretary of Indiana FSSA, Appellees-Respondents.
• Court: Indiana Appellate Court

775 N.E.2d 1113

James and Shannon LAZZELL, in their own capacities and as representatives of their minor daughter, C. L., Appellants-Petitioners, v. INDIANA FAMILY AND SOCIAL SERVICES ADMINISTRATION; Katherine Humphreys, in her capacity as Former Secretary of Indiana FSSA; and John Hamilton, in his official capacity as Secretary of Indiana FSSA, Appellees-Respondents.

No. 03A01-0202-CV-74.

Court of Appeals of Indiana.

September 24, 2002.

Keith Guthrie, Elizabethtown, IN, Attorney for Appellants.

Steve Carter, Attorney General of Indiana, Frances Barrow, Deputy Attorney General, Indianapolis, IN, Attorneys for Appellees.

OPINION

SULLIVAN, Judge.

Appellants, James and Shannon Lazzell, challenge the decision of the review court upholding the decision of the Indiana Family and Social Services Administration ("FSSA") affirming the determination of the Administrative Law Judge ("ALJ") which denied the Lazzells' application for Medicaid benefits. Upon appeal, the Lazzells present three issues, which we restate as:

I. Whether the FSSA erred in calculating Mr. Lazzell's income for purposes of determining Medicaid eligibility;

II. Whether the FSSA erred in using Mr. Lazzell's 1999 income tax return to determine his family's Medicaid eligibility; and

III. Whether the Lazzells should recover attorney fees.

We affirm in part, reverse in part, and remand.

The record reveals that on June 19, 2000, while Mrs. Lazzell was pregnant with C.L., she applied in Indianapolis for Medicaid benefits for her and her son, B.L. Because the Lazzells reside in Bartholomew County, these applications were forwarded to the Bartholomew County Office of Family and Children ("OFC"). Mr. Lazzell is self-employed. Therefore, to establish his income levels, Mr. Lazzell provided the OFC with a profit and loss statement covering the first five months of 2000. Based upon this information, the Lazzells' son B.L. was approved for benefits. Mrs. Lazzell's application was denied because she failed to provide proof of her pregnancy.

On August 16, 2000, following the birth of her daughter, C.L., Mrs. Lazzell again applied for Medicaid benefits, this time with the appropriate proof of her pregnancy. Per the request of the caseworker, Mr. Lazzell provided the OFC with his 1999 income tax return and a profit and loss statement. The OFC used the information on Schedule C from Mr. Lazzell's 1999 income tax return to determine Medicaid eligibility. The OFC did not allow some of the expenses allowed by the IRS and, on September 22, 2000, determined that Mrs. Lazzell and her daughter did not qualify for benefits. The Lazzells requested administrative review, and a hearing was held before the ALJ on October 30, 2000. The ALJ issued findings of fact and conclusions of law which upheld the denial of benefits. The Lazzells then appealed the ALJ's decision to the FSSA, and, on January 16, 2001, the FSSA issued a notice of final agency action affirming the ALJ's decision.

On February 16, 2001, the Lazzells filed a verified petition for judicial review of the FSSA's action. See Ind.Code § 4-21.5-5-7 (Burns Code Ed. Repl.1996). Along with the administrative record, both parties filed briefs with the review court. On November 1, 2001, the review court held a hearing upon the Lazzells' petition and took the matter under advisement. On November 19, 2001, the Lazzells, without leave of the review court, filed Count II alleging that the FSSA had violated the Lazzells' civil rights and requesting attorney fees. On January 24, 2002, the review court issued findings of fact and conclusions of law affirming the FSSA's denial of the Lazzells' application for Medicaid benefits.

Judicial review of administrative decisions is limited. Partlow v. Indiana Family and Social Services Admin., 717 N.E.2d 1212, 1214 (Ind.Ct.App.1999). In our review of the FSSA's denial of benefits, we do so as did the review court. Sanders v. State Family and Social Services Admin., 696 N.E.2d 69, 70 (Ind.Ct.App.1998). We look to see if the FSSA's denial of benefits was arbitrary and capricious, an abuse of discretion, or otherwise contrary to law. Id. at 71. Both this court and the review court are prohibited from reweighing the evidence or judging the credibility of witnesses and must accept the facts as found by the administrative body. Partlow, 717 N.E.2d at 1214. The party attempting to upset the administrative order has the burden of proving that the agency's action was erroneous. Id.

I Calculation of Income

The Lazzells first claim that the FSSA failed to use the proper method to calculate their income for purposes of Medicaid eligibility. The FSSA counters that they properly followed 470 I.A.C. § 10.1-3-4, the administrative rule set forth to calculate income to determine eligibility for the Temporary Aid to Needy Families program ("TANF"), formerly known as Aid to Families with Dependent Children ("AFDC"). The Lazzells claim instead that 405 I.A.C. § 2-3-3 sets forth the proper method of calculating their income to determine financial eligibility. This section reads in pertinent part:

"Determination of net earned income as follows:

(A) All of the earned income of a child under fourteen (14) years of age is excluded.

(B) Up to ten dollars ($10) of earned income is disregarded if the income is received only once during the calendar quarter from a single source (infrequent) or could not be reasonably to expected (irregular) [sic]. If the total amount of infrequent or irregular earned income received in a month exceeds ten dollars ($10), this disregard cannot be applied.

(C) Expenses allowed by the Internal Revenue Service shall be deducted from gross income from self-employment to determine net self-employment earnings.

(D) Sixty-five dollars ($65) of earned income per month plus one-half (1/2) of remaining earned income is excluded." 405 I.A.C. § 2-3-3(1) (emphasis supplied).

The Lazzells argue that, if all expenses allowed by the IRS had been deducted from their gross income, they would have qualified for Medicaid benefits. The FSSA counters that this rule applies only to applicants applying for assistance under the Medicaid program for the aged, blind, and disabled.

The title of 405 I.A.C. Article 2, Rule 3 is "Eligibility Requirements Based on Need; Aged, Blind, and Disabled Program." The Lazzells claim that Rule 3 covers eligibility requirements for applicants to both the aged, blind, and disabled program and the pregnant women and children program. In support of their argument, the Lazzells note that Rule 3 was re-codified in 1992. They note that, prior to this, the rule was codified as 470 I.A.C. 9.1-3, where it was captioned "Eligibility Requirements Based on Need," and made no mention of the Aged, Blind, and Disabled program.¹ The Lazzells propose that the caption was "revised to make clear that it applies not just to need-based applications, but to applications based on age, blindness, and disability as well." Appellant's Reply Brief at 4.

We note, however, that the rule following Rule 3, 405 I.A.C. 2-3.1 was titled "Eligibility Requirements Based on Need; Pregnancy Related Coverage; Coverage for Children 18 Years of Age and Under." The existence of this rule would suggest that Rule 3 was meant to cover eligibility requirements based on need for purposes of the aged, blind, and disabled program, and Rule 3.1 was meant to cover eligibility requirements based on need for purposes of the program for pregnant women and children—precisely what the Lazzells applied for. Rule 3.1, however, was voided by the General Assembly in 1997. See Acts 1997, P.L. No. 119, § 6. In fact, Rule 3.1 was voided before it was included in the version of the Indiana Administrative Code published by the Indiana Legislative Council. The 1996 edition and 1997 supplement of the Administrative Code contain no Rule 3.1, and the 1998 supplement lists Rule 3.1, but indicates that it has been voided and contains none of the provisions of the Rule. Thus, it appears that the FSSA attempted to promulgate a rule to determine eligibility based upon need for the Medicaid program covering pregnant women and children, but that this rule was quickly voided by the legislature.

This presents a regulatory gap. The rule which might have addressed the very question before us has been voided, leaving Rule 3, which appears to address eligibility requirements for the aged, blind, and disabled program. Whether for this reason or not, the FSSA claims that, to determine eligibility for the Medicaid program for pregnant women and children, it uses the methodology set forth in 470 I.A.C. § 10.1-3-4(b)(2) to calculate income for purposes of determining AFDC/TANF eligibility.² The FSSA cites no authority for its position. Instead, it simply asserts, "Indiana applies the AFDC income methodology to calculate applicants' incomes for the purpose of arriving at an amount to compare to the [Medicaid] program income standards." Appellee's Brief at 1. The Lazzells claim that the AFDC program is "a cash assistance program that is completely separate from the Medicaid program." Appellant's Brief at 8. This is not entirely accurate. "Title XIX of the Social Security Act (`SSA'), popularly called `Medicaid,' was enacted by the Social Security Amendments of 1965, Pub.L. No. 89-97." Sullivan v. Day, 681 N.E.2d 713, 715 (Ind. 1997). States which elect to participate in the Medicaid program and receive federal funds must make Medicaid available to all persons who are "categorically needy." Id. Whether a person is "categorically needy" is determined by reference to eligibility for certain other programs. Id. States were permitted, but not required, to offer Medicaid to the "medically needy," defined as individuals whose income or resources were too great to qualify for categorically needy assistance but were unable to pay for necessary medical expenses. Roloff v. Sullivan, 975 F.2d 333, 335 (7th Cir.1992). Indiana has obligated itself to...