State of Cal., Dept. of Health Services v. U.S. Dept. of Health & Human Services

• Decision Date: 27 July 1988
• Docket Number: No. 86-7453,86-7453
• Citation: 853 F.2d 634
• Parties: , Medicare&Medicaid Gu 37,222 STATE OF CALIFORNIA, DEPARTMENT OF HEALTH SERVICES, Petitioner, v. UNITED STATES DEPARTMENT OF HEALTH & HUMAN SERVICES, Respondent.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 634

853 F.2d 634

22 Soc.Sec.Rep.Ser. 551, Medicare&Medicaid Gu 37,222

STATE OF CALIFORNIA, DEPARTMENT OF HEALTH SERVICES, Petitioner, v. UNITED STATES DEPARTMENT OF HEALTH & HUMAN SERVICES, Respondent.

No. 86-7453.

United States Court of Appeals Ninth Circuit.

Argued March 12, 1987.

Submitted Nov. 20, 1987.

Order and Opinion July 27, 1988.

Joseph Stein, Asst. Regional Counsel, U.S. Dept. of Health and Human Services, Washington, D.C., for respondent.

Petition for Review of an Order of the United States Department of Health and Human Services.

Before POOLE and BOOCHEVER, Circuit Judges, and DAVIES, ^* District Judge.

ORDER

The petition for rehearing is granted. The opinion filed December 7, 1987 is withdrawn. The attached opinion is ordered filed.

OPINION

BOOCHEVER, Circuit Judge:

The State of California, Department of Health Services (State) challenges the administrative decision of the Secretary of Health and Human Services (Secretary) denying the State permission to implement its proposed Medicaid State Plan Amendment 82-03 (amendment) as part of the California Medicaid program. The Health Care Financing Administration (HCFA), an agency of the Health and Human Services Department responsible for the administration of the Medicaid program, denied approval of the proposed amendment. The State filed a formal appeal of the HCFA decision. A HCFA Review Officer proposed affirming the HCFA decision and the Administrator of the HCFA adopted the review officer's decision, thus rendering a final decision of the Secretary. On this petition for rehearing the State contends that the Secretary's decision must be reversed because it is arbitrary and capricious, constitutes an abuse of discretion, and is contrary to law. We affirm in part and reverse in part the Secretary's decision.

BACKGROUND

This case arises under the Medicaid program, Title XIX of the Social Security Act, 42 U.S.C. Secs. 1396-1396p (1982 & Supp.III 1985). The purpose of the Medicaid program is to provide "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). Although participation in the program is entirely optional, once a state chooses to participate, the state then must comply with the Title XIX requirements. Id. Participation begins with the state submitting a State Medicaid Plan to the Secretary of Health and Human Services. The Secretary then must approve any state plan that meets the requirements of 42 U.S.C. Sec. 1396a(a). 42 U.S.C. Sec. 1396a(b) (1982 & Supp. III 1985). Upon the Secretary's approval, the state becomes entitled to receive federal financial assistance for state program expenditures made in accordance with the approved plan. 42 U.S.C. Sec. 1396b(a) (1982).

The Medicaid program consists of two components. First, a state Medicaid program must provide assistance to the so-called "categorically needy" recipients of welfare benefits. 42 U.S.C. Sec. 1396a(a)(10)(A). This means that all those eligible for benefits in the "categorical assistance" programs--Aid to Families with Dependent Children (AFDC), 42 U.S.C. Secs. 601-606 (1982 & Supp. III 1985), and Supplemental Security Income for the Aged, Blind and Disabled (SSI), 42 U.S.C. Secs. 1381-1382j (1982 & Supp. III 1985), must be provided with full Medicaid benefits under the state plan.

Congress considers these categorically needy persons "especially deserving of public assistance" for medical expenses, Schweiker v. Gray Panthers, 453 U.S. 34, 37, 101 S.Ct. 2633, 2637, 69 L.Ed.2d 460 (1981), because they "earn[ ] less than what has been determined to be required for the basic necessities of life." Atkins v. Rivera 77 U.S. 154, 157, 106 S.Ct. 2456, 2459, 91 L.Ed.2d 131 (1986). AFDC and SSI cover only basic necessities, not medical expenses. If a categorically needy person incurs medical expenses, payment of these expenses would infringe on the amounts provided by AFDC or SSI for basic necessities. Thus, mandatory medical coverage is needed for these people. Id.

The state may also provide, at its option, Medicaid coverage to other aged, blind, and disabled people and to families with dependent children, whose income and/or resources are too high to qualify them for welfare benefits. This group is designated as "medically needy" and is deemed "less needy" than the categorically needy. They "receive assistance only if their income and resources [are] insufficient 'to meet the costs of necessary medical or remedial care and services.' " Schweiker v. Hogan, 457 U.S. 569, 573, 102 S.Ct. 2597, 2601, 73 L.Ed.2d 227 (1982) (quoting 79 Stat. 345, as amended by 42 U.S.C. Sec. 1396a(a)(10)(C)). The medically needy may qualify for financial assistance if they incur medical expenses in an amount that effectively reduces their income below that of the categorically needy. Atkins, 477 U.S. at 158, 106 S.Ct. at 2459. Only when the medically needy "spenddown" the amount by which their income exceeds the medically needy income level determined necessary for the basic necessities of life are they in the same position as the categorically needy AFDC or SSI recipients. Similarly, any further expenditure by the medically needy for medical expenses would have to come from funds reserved for basic necessities. Id. Thus, the state, with the assistance of federal financial participation, may aid the medically needy whose income falls below the medically needy income level.

The state Medicaid plan establishes the "medically needy income level" (MNIL) standard that determines the maximum amount of income a medically needy applicant is allowed to keep for nonmedical needs and still be eligible for Medicaid. For a medically needy family of two, in either of California's AFDC-linked or SSI-linked programs, the MNIL amount was $500 during the period in question.

California's Medicaid program (Medi-Cal) includes provisions for both the categorically needy and medically needy groups. The present dispute involves two issues in the medically needy category of the Medi-Cal program: (1) a special income deduction (SID) for medically needy applicants, and (2) a "time factor" limitation on the amount of incurred medical expenses that is deducted in determining the eligibility of a medically needy applicant. The Secretary determined that the inclusion of these two provisions violated Title XIX of the Social Security Act and rejected the proposed amendment. Shortly thereafter, California repealed the Special Income Deduction.

STANDARD OF REVIEW

In reviewing the Secretary's denial of the amendment, we must decide all relevant questions of law and interpret the statutory provisions at issue. 5 U.S.C. Sec. 706 (1982). We can set aside the Secretary's decision only if it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," Sec. 706(2)(A); "in excess of statutory ... authority," Sec. 706(2)(C); or "without observance of procedure required by law," Sec. 706(2)(D). The Secretary's interpretation of the Medicaid Act is entitled to deference; nevertheless, "the courts are the final authorities on issues of statutory construction. They must reject administrative constructions of the statute ... that are inconsistent with the statutory mandate or that frustrate the policy that Congress sought to implement." FEC v. Democratic Senatorial Campaign Comm., 454 U.S. 27, 31-32, 102 S.Ct. 38, 42, 70 L.Ed.2d 23 (1981).

DISCUSSION

1) Special Income Deduction

The State urges that the "Special Income Deduction" (SID) complies with the regulations implementing 42 U.S.C. Sec. 1396a(a)(10)(C) specifying that to determine countable income the State must subtract amounts deductible that would be deducted in determining eligibility under SSI. 42 C.F.R. Sec. 435.831(a) (1986). ¹ These deductions are known as income disregards. The State argues that, pursuant to 20 C.F.R. Sec. 416.1124(c) (1987), it had the authority to promulgate the SID as a valid income disregard. That federal regulation provides:

(c) Other unearned income we do not count. We do not count as unearned income--

* * *

(2) Assistance based on need which is wholly funded by a State or one of its political subdivisions ... [which] includes State supplementation of Federal SSI benefits [as defined]....

The State contends that this section of the Supplemental Security Income for the Aged, Blind and Disabled (SSI) regulations permits the medically needy recipient under SSI to retain for general living purposes the same amount of income as that retained by a categorically needy (welfare) recipient. The State accomplishes this through the use of the SID.

The SID problem first appeared with the State's attempt to equalize the amount of income a SSI medically needy applicant receives with that of the categorically needy. For example, an AFDC family of two receives a $480 combination of grant and non-disregard income. A medically needy family, which aside from income would qualify under the federal AFDC program, is referred to as AFDC-linked. An AFDC-linked "medically needy" family of two may retain a maximum income of $500 while still qualifying for Medi-Cal. Thus, for the AFDC-linked medically needy family of two, a maintenance level of $500 necessarily allows the beneficiaries an amount to live on which is slightly greater than the $480 amount that they would have to live on if their income were totally or partially a grant under the AFDC "categorically needy" program.

For the SSI-linked medically needy family, however, the situation is different. Under the State and federal program an SSI family of two receives a combination of grant and nonexempt income of $746. The SSI-linked medically needy family of two, however, may keep only $500 in nonexempt income after the spenddown. Thus, in this example, the SSI-linked medically needy family is entitled to keep less income than the...