802 F.

2d 623

15 Soc.Sec.Rep.Ser. 175, Medicare&Medicaid Gu 35,871

Catherine LIEGL, on behalf of herself, her minor child
Kathleen Liegl, and all others similarly situated,
Plaintiff-Appellant,
v.
Arthur Y. WEBB, as Acting Commissioner of the New York
State
Department of Social Services, and Fred J. Buscaglia, as
Commissioner of the Erie County Department of Social
Services, Defendants-Appellees.
No. 545, Docket 85-7117.

United States Court of Appeals,

Second Circuit.
Argued Dec. 19, 1985.
Final Briefs Submitted April 16, 1986.
Decided Oct. 2, 1986.

Rene H. Reixach, Greater Upstate Law Project, Rochester, N.Y. (James

Sheldon, Neighborhood Legal Services, Buffalo, N.Y., of counsel), for
plaintiff-appellant.
Clifford A. Royael, Albany, N.Y. (Robert Abrams, Atty. Gen. of the State
of N.Y., Peter H. Schiff, Deputy Sol. Gen., William J. Kogan, Asst. Sol.
Gen., Albany, N.Y., of counsel), for defendants-appellees.
Jaclyn C. Taner, Washington, D.C., (Richard K. Willard, Acting Asst.
Atty. Gen., Salvatore R. Martoche, U.S. Atty., Washington, D.C., Ronald
E. Robertson, Gen. Counsel, Ann T. Hunsaker, Associate Gen. Counsel,
of counsel), as amicus curiae for the Dept. of Health and Human Services.
Before OAKES, KEARSE and PIERCE, Circuit Judges.
PIERCE, Circuit Judge:

Appeal by Catherine Liegl on behalf of herself, her minor child and all others
similarly situated from a judgment by the United States District Court for the
Western District of New York, John T. Curtin, Chief Judge, dismissing her
complaint after cross motions for summary judgment. Appellant contends that
the procedure adopted by the New York State Department of Social Services
for determination of eligibility for retroactive Medicaid claimants contravenes
federal law and, therefore, violates the supremacy clause. Since we find no
contradiction between the State's eligibility requirement and federal law, and
since a recent interpretation by the Department of Health and Human Services
("HHS"), the federal agency charged with the responsibility of administering
the Medicaid program, endorses the procedure used in New York, we affirm
the decision of the District Court.

BACKGROUND
2

In late November of 1981, appellant Catherine Liegl applied for retroactive

Medicaid assistance from the Erie County Department of Social Services
("local agency") for herself and her minor daughter, Kathleen Liegl. The
application sought retroactive reimbursement for $1,809.54 in expenses
incurred on behalf of Kathleen while a patient in the Sister's Hospital in
Buffalo, New York, from August 10 to August 17, 1981. After the local agency
denied the application due to its determination that there was surplus income
available to appellant for payment of such medical expenses, Catherine Liegl
sought a "fair hearing" review from the Commissioner of the New York State
Department of Social Services ("Commissioner").

On June 7, 1982, the Commissioner issued a decision affirming the

determination of the local agency and concluding that the local agency's ruling
complied with the state regulations which provide in pertinent part that:

4 For persons not in chronic care, any excess income above the amounts allowed in
(d)
the preceding schedules shall be utilized in the following manner:
5 For inpatient hospital care, only the excess income for a period of six months
(1)
shall be considered as available for payment; if the income of the applicant or
recipient increases or decreases during the six-month period, his obligation for
payment shall be altered accordingly.
6

18 NYCRR Sec. 360.5 (emphasis added).

The Commissioner calculated that Catherine Liegl had a net monthly income of
$861.73, and that this amount surpassed the exemption for a family of two by

$377.73 per month.1 Appellant does not challenge these calculations. However,
based upon these figures the Commissioner found an accumulated surplus over
a six month budget period of $2,266.38 to be available for payment of the
daughter's inpatient hospital care. Apparently, the six months of surplus income
was accrued from August 1981 through January of the following year. Since
this accumulated surplus exceeded the amount of expenses for which
reimbursement was sought, the entire application was denied. Appellant
challenges the six month accrual of surplus income. She asserts that any such
accrual should accumulate at most three months of surplus income. Using such
a three month accrual would result in a total surplus of only $1,133.19 (3 X
$377.73) available and thereby would render appellant eligible to recover
$676.35 ($1,809.54 less $1,133.19) in medicaid payments.
8

On October 7, 1982, appellant commenced this action seeking class

certification and injunctive and declaratory relief. The complaint alleged, inter
alia, that the state regulation which provided that the excess income for a
period of six months could be considered to be available for payment of
medical expenses incurred for non-chronic ailments was in violation of federal
policy promulgated by the former Department of Health, Education and
Welfare ("HEW") as announced in HEW Action Transmittal SRS-AT-76-109
(MSA), issued July 8, 1976, and based upon the medical eligibility provisions
of the Social Security Act, 42 U.S.C. Secs. 1396 et seq.

After cross motions for summary judgment were filed, the district court ruled in
favor of the agencies, dismissing the complaint in its entirety. The district court
found that the state's surplus income provision did not violate any provision of
the Social Security Act. The court went on to note, that it was "impossible to be
certain" whether the HEW Action Transmittal was intended to apply in every
instance, in the nature of a rule, or was merely intended to explain the proper
calculation based upon an assumed set of facts. As a result, the district judge
concluded that, since the state's six month budget period was within the outer
boundaries of the federal statutory requirement, the supremacy clause claims
were groundless. We agree with the district court and affirm its ruling.

DISCUSSION
10

The Medicaid Program is a cooperative federal-state program established 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). Individuals covered by certain federal assistance programs such as
Supplemental Security Income ("SSI") for the aged, blind, and disabled or Aid

to Families with Dependent Children ("AFDC") automatically qualify for

Medicaid, and States that choose to participate in the Medicaid Program are
required to provide assistance to these individuals. See 42 U.S.C. Sec. 1396a(a)
(10)(A)(i); 42 C.F.R. Sec. 435.100. These individuals are referred to as
"categorically needy." 42 C.F.R. Sec. 435.4.
11

At its option, a participating State may also provide coverage to other less
needy individuals. See H.R.Rep. No. 213, 89th Cong., 1st Sess. 66 (1985); 42
U.S.C. Sec. 1396a(a)(10)(C). Generally, these individuals are people who
would otherwise qualify for SSI or AFDC but whose incomes exceed the level
set for these assistance programs, see Schweiker v. Hogan, 457 U.S. 569, 573,
102 S.Ct. 2597, 2601, 73 L.Ed.2d 227 (1982); De Jesus v. Perales, 770 F.2d
316, 321 (2d Cir.1985), cert. denied, --- U.S. ----, 106 S.Ct. 3301, 92 L.Ed.2d
715 (1986). These individuals may qualify for Medicaid coverage only if they
incur medical expenses that reduce their income over a given period down to
the income eligibility standard. Such individuals are referred to as "medically
needy." 42 C.F.R. Sec. 435.4. Under 42 U.S.C. Sec. 1396a(a)(34), a State that
chooses to provide Medicaid coverage to the medically needy is required to
make such assistance available on both a prospective and retroactive basis,

12 applicants] for care and services included under the plan and furnished in or after
[to
the third month before the month in which he made application ... for such
assistance if such individual was ... eligible for such assistance at the time such care
and services were furnished.
13

Id.

14

In calculating whether an otherwise qualified individual has become medically

needy it is necessary to apply some budget or "spend down" period during
which the applicant's excess income is presumed to be available to pay medical
expenses. While federal regulations are clear that a State may use a budget
period of up to six months to determine prospective eligibility, 42 C.F.R. Sec.
435.831, federal regulations are silent with regard to the length of the budget
period applicable to determinations of retroactive eligibility.

15

Appellant contends that we should defer to the statement of agency policy

included in the 1976 HEW Action Transmittal SRS-AT-76-109 as indicating
the appropriate budget period for determinations of medically needy status
regarding retroactive applicants. Although agency interpretations of federal
statutes which are as complex and intricate as the provisions establishing and
regulating the Medicaid Program are typically accorded particular deference,
DeJesus, 770 F.2d at 327, we doubt the propriety of reliance upon the

interpretation urged upon us herein.

16

This Action Transmittal was issued by the Medical Services Administration, a

department within the Health Care Financing Administration ("HCFA") and
included in its Medical Assistance Manual. Generally, the Medical Assistance
Manual provides operational explanations to state agencies regarding the
Medicaid program. In the introduction of the manual under the subheading
"Purpose" the manual states:

17 purpose of this Manual is to assist States in implementing ... Program

The
Regulations pertaining to the administration of medical assistance. It is an official
medium by which the Medical Services Administration issues guides and procedures
to States for the operation of certain aspects of the medical assistance program under
the Social Security Act.
18

Medical Assistance Manual--Instructions, MSA-PRG-1 (5/31/71) (emphasis

added).

19

In the same section and under the subheading "Relationship to Regulations" the
manual states:

20 material contained in this Manual is consistent with the Regulations on the

The
subjects and contains no new or different requirements from those in the
Regulations.... The Regulations present the specific requirements, developed from
the Federal legislation, that States must meet in the State plan and in claiming
Federal financial participation.
21

Id. These passages strongly suggest that the manual containing the Action
Transmittal merely provides operational assistance to the state agencies without
intending to supplement the regulations. Further, a manual does not comprise
regulations which are issued by the Secretary and are entitled to "particular
deference." See DeJesus, 770 F.2d at 327. Rather, a manual contains
interpretative guidelines that the court may disregard after due consideration.
See St. Mary's Hospital v. Blue Cross & Blue Shield Association, 788 F.2d 888,
890 (2d Cir.1986); Smith v. Miller, 665 F.2d 172, 179 n. 7 (7th Cir.1981); cf.
Schweiker v. Hansen, 450 U.S. 785, 789-90, 101 S.Ct. 1468, 1471, 67 L.Ed.2d
685 (1981) (agency manuals have "no legal force").

22

The remainder of the manual contains explanatory practical examples for such
things as "Determining Available Income." The section relied upon by appellant
is included therein and states:

23
Where
financial eligibility is routinely determined on less than a 6-month basis, such
as quarterly or monthly, income shall not be considered available beyond the
eligibility period. For example, in determining Mr. R's eligibility for the quarterly
period July-September, earnings he may receive from employment to begin when he
completes the training program in October are not considered.
24 that financial eligibility for Medicaid coverage during the 3-month retroactive
Note
period must be separately determined; i.e., by applying a quarterly medically needy
income level to the amount of income which was actually available to the applicant
during the retroactive period.
25

Id. at Sec. 4-30-30 (emphasis added).

26

This language alone provides no clear answer to the question whether the
agency intended to mandate a quarterly budget period for all retroactive
applicants or merely intended to respond to the assumed facts set forth therein.
When read in the context of the previously quoted prefatory language in the
manual, the interpretation that Sec. 4-30-30 purports to supplement existing
regulations seems strained. However, even assuming that the Action
Transmittal was intended to set forth a rule that requires a quarterly budget
period for the retroactive period, it fails to address whether such a three month
retrospective budget period could be combined with a three month prospective
budget period to achieve a total budget period of six months as applied herein.

27

Moreover, HHS has expressed a different view in a Notice of Proposed

Rulemaking ("NPR") which seeks to establish a rule that would allow for the
use of combined budget periods under the circumstances of this case. See 48
Fed.Reg. 39,959, 39,961 (proposed September 2, 1983). The NPR notes2 that
the prior agency policy which precluded the use of combined budget periods
for retroactive applicants is supported by neither statute nor regulation. It is
unclear whether the Action Transmittal in fact announced agency policy, but
even if it did, the modification of policy articulated in an agency manual would
not require the completion of a notice and comment period culminating in a
substantive rule. See Administrative Procedure Act Sec. 553(d)(2), 5 U.S.C.
Sec. 553(d)(2). Therefore, the fact that the NPR has not yet been adopted by
HHS does not preclude our taking account of it as a clarification of current
policy.

28

The dissent acknowledges that the meaning of the Action Transmittal is

ambiguous, but nevertheless urges that the NPR policy guidelines would have a
retroactive effect in this case and therefore should not be applied here. In
support of this contention, the dissent views the NPR as a statement of "new

policy." However, in light of the ambiguity of construction of the Action

Transmittal, we view the declaration of policy in the NPR as a clarification,
rather than a change, of prior policy. Deferring to such a clarification is
consistent with a court's responsibility to ascertain the appropriate statutory
construction of an agency regulation. The NPR provides us with an updated
view of the spend down guidelines that is consistent with the policy
considerations discussed below. In our view, we should not disregard this
interpretation of the agency's current policy in favor of a possible prior
interpretation that is ambiguous at best.
29

As noted in the NPR, the position urged by appellant would result in an

anomalous situation where a potential medically needy applicant might have a
better opportunity to receive Medicaid assistance, and in fact may receive a
larger Medicaid benefit, if his application is delayed and not made during the
month when he received the medical care. The retroactive claim would be
subject to at most a three month spend down period while an application
submitted during the month would be subject to a six month spend down. The
longer the applicable spend down the greater the possibility that an applicant's
excess income might exceed the medical expense. It is difficult to see how such
a result furthers the objectives of the statute. Were this outcome consistent with
a clearly articulated agency policy, the results of such a policy might not
dissuade us from deferring to that policy. However, here the prior agency
policy is not clearly articulated and is in stark contrast with a more recent rule
proposal.

30

Given the questionable applicability of the agency's policy as expressed in the

Action Transmittal, the current proposed rule which endorses the state
procedure, and the lack of any legislative authority contrary to the rule applied
in New York, we find no basis upon which to support a supremacy clause
challenge. We affirm the judgment of the district court dismissing appellant's
complaint.
OAKES, Circuit Judge (dissenting):

31

I respectfully dissent.

32

The Department of Health and Human Services' ("HHS") requirement that a

three-month spend-down period be used to determine eligibility for retroactive
Medicaid coverage, set forth in the 1976 Action Transmittal SRS-AT-76-109
(MSA) ("the ATL") and included in the agency's Medical Assistance Manual
Sec. 4-30-30, is an interpretive rule issued pursuant to 42 U.S.C. Sec. 1396a(a)

(34) (1982) (authorizing retroactive eligibility) and 42 C.F.R. Sec. 435.914

(1985) (regulation implementing three-month retroactive coverage).
Interpretive rules are entitled to be given weight, St. Mary's Hospital v. Blue
Cross & Blue Shield Association, 788 F.2d 888, 890 (2d Cir.1986), and, as
Judge Friendly observed in our earlier "spend-down" case, DeJesus v. Perales,
770 F.2d 316, 327 (2d Cir.1985), cert. denied, --- U.S. ----, 106 S.Ct. 3301, 92
L.Ed.2d 715 (1986), "courts must exhibit particular deference to the Secretary's
position with respect to legislation as intricate as Title XIX." The seasoned
judgments of administrators about Title XIX's application should not lightly be
overturned. See id. at 321.
33

It might be said that the language of the ATL is ambiguous as to whether the
agency intended to mandate a three-month spend-down period or merely to
respond to assumed facts set forth in the ATL. But the ATL has been in place
since 1976, and since then has consistently been treated by the agency as
requiring a three-month spend-down period to determine eligibility for
retroactive Medicaid applicants, and as precluding the use of a combined
budget period to determine such eligibility. The consistency with which HHS,
with its considerable expertise, has maintained this interpretation is a factor that
supports judicial deference to the agency. See Batterton v. Francis, 432 U.S.
416, 425 n. 9, 97 S.Ct. 2399, 2405 n. 9, 53 L.Ed.2d 448 (1977). See generally 2
K. Davis, Administrative Law Treatise Sec. 7-14 (2d ed. 1979). The ATL, then,
as consistently interpreted by the agency, is in direct conflict with 18
N.Y.C.R.R. Sec. 360.5(d)(1).

34

True, in September 1983 HHS issued a Notice of Proposed Rulemaking

("NPR") proposing a rule that would allow New York to use a combined sixmonth budget period. 48 Fed.Reg. 39,960-39,961 (proposed Sept. 2, 1983). But
the appellant Liegl applied for Medicaid in November 1981, to cover an August
1981 hospital bill for her daughter. Her application was denied in December
1981 and the denial affirmed by the State Commissioner in June 1982.
Throughout the application and review process, the governing federal policy
was that a single three-month spend-down period be used in determining
Medicaid eligibility in circumstances such as those in which Liegl found
herself.

35

While not required by the governing statute, as noted in the preamble to the
proposed rule, id. at 39,961, neither is this established policy inconsistent with
the statute. Where a statute leaves open a number of possible interpretations,
the agency may be expected to adopt the interpretation that it believes best
effectuates the policies of the statute. It may refine its interpretation over time:
"An initial agency interpretation is not instantly carved in stone. On the

contrary, the agency, to engage in informed rulemaking, must consider varying

interpretations and the wisdom of its policy on a continuing basis." Chevron
U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 863-64,
104 S.Ct. 2778, 2792-93, 81 L.Ed.2d 694 (1984). But such refinements do not
automatically have retroactive effect.
36
Retroactive
application of policy is disfavored when the ill effects of such
application will outweigh the need of immediate application, NLRB v. Majestic
Weaving Co., 355 F.2d 854, 861 (2d Cir.1966), or when the hardship on affected
parties will outweigh the public ends to be accomplished. SEC v. Chenery Corp.,
332 U.S. 194, 203, 67 S.Ct. 1575, 1580, 91 L.Ed. 1995 (1947).
37

Iowa Power & Light Co. v. Burlington Northern, Inc., 647 F.2d 796, 812 (8th
Cir.1981), cert. denied, 455 U.S. 907, 102 S.Ct. 1253, 71 L.Ed.2d 445 (1982).
Here no need for retroactive application of the new policy articulated in the
NPR has been shown, either in the NPR or the briefs submitted by HHS or the
New York Department of Social Services. Nor has it been suggested that the
public ends accomplished by changing the policy retroactively would outweigh
the hardship to Medicaid applicants such as the appellant Liegl. At the time her
application for Medicaid was denied under the 18 N.Y.C.R.R. Sec. 360.5(d)(1)
eligibility requirements, the New York regulation was inconsistent with
established federal policy, and no adequate reasons have been provided why
that regulation should be saved retroactively by the NPR's proposed new
policy. Furthermore, it is in just the circumstances here, where a retroactive
change of a settled policy, rather than a retroactive settling of unsettled policy,
is involved, that courts are most reluctant to allow a regulation retroactive
effect in the absence of very good cause being shown. See 2 K. Davis,
Administrative Law Treatise Sec. 7-23, at 115-16 (2d ed. 1979) (favorably
discussing Anderson, Clayton & Co. v. United States, 562 F.2d 972 (5th
Cir.1977), cert. denied, 436 U.S. 944, 98 S.Ct. 2845, 56 L.Ed.2d 785 (1978)).

38

Another point in Liegl's favor is that the proposed new policy has never been
adopted as a regulation. Although modification of the policy articulated in the
ATL does not require notice or comment, see Administrative Procedure Act
Sec. 553(d)(2), 5 U.S.C. Sec. 553(d)(2) (1982); see, e.g., Continental Oil Co. v.
Burns, 317 F.Supp. 194 (D.Del.1970), nevertheless it would be premature to
regard the NPR as fixing current policy. The whole purpose of a proposal for a
rule--even a rule that does not require notice and comment--must be to air a
change before that change is finalized. The majority, I fear, threatens to close
off a potentially valuable mode in which agencies may proceed to rulemaking
when it treats a mere proposal as establishing current policy and as replacing an
agency's long established interpretation of a statute. A proposed rule is just that;

it does not itself change established policy.

39

The most compelling argument in favor of the court's construction is that, if the
ATL is enforced, Medicaid applicants may be in a better position if they apply
after expenses have been incurred and thus have their eligibility judged under
the retroactive three-month spend-down test than if they apply prospectively, in
which case a six-month test would be used. But there was presumably a valid
administrative reason for the distinction between prospective and retrospective
Medicaid applications brought about by the rule in the ATL, and while the
NPR shows a concern with bringing the prospective and retrospective spenddown periods into line, the agency's concern with doing so cannot be very
great, because in the three years since the proposal was made, no new rule has
resulted.

40

I would accordingly reverse.

Under New York Social Services Law Sec. 366(2)(a)(8) (as amended in 1981),
the yearly exemption for a family of two was $5,800 or $484.00 per month.
Therefore, the excess income of $377.73 per month resulted from the
difference between $861.73 and $484.00

The Notice of Proposed Rulemaking stated:

B. Medically Needy Budget Period
Current regulations at 42 CFR 435.831 and 436.831 specify that States having a
medically needy program may set a prospective budget period of between 1 and
6 months, during which an applicant's countable income is measured. Incurred
medical expenses in this period are then deducted, and when the individual's
income reaches the standard, he or she becomes eligible. In addition to the
prospective period, section 1902(a)(34) of the Act and regulations at 42 CFR
435.914 provide that Medicaid must be made available up to 3 months prior to
the month in which an application is filed if the individual received services
covered under the State plan at any time during that period, and would have
been Medicaid eligible at the time services were received if he or she had
applied. However, there is no statutory requirement that the budget periods
used to compute income to determine retroactive and prospective eligibility be
separate, as Medicaid policy now requires them to be. States have pointed out
the administrative difficulties involved in separating the budget periods and
have suggested that they be permitted to combine them. States have also noted
that individuals can avoid the application of budget periods of more than one

month by applying monthly for retroactive eligibility.

Therefore, in the interest of allowing States to impose more flexible budget
periods, we are proposing to revise regulations at 42 CFR 435.831 and 436.831
to provide that States may use a medically needy budget period of no more than
6 months that may include all or part of the 3 month retroactive period noted
above.
48

Fed.Reg. 39,959, 39,961 (proposed September 2, 1983)