OTIS R. BOWEN, SECRETARY OF HEALTH AND HUMAN SERVICES, PETITIONER
V. KENNETH KIZER, DIRECTOR OF THE CALIFORNIA DEPARTMENT OF HEALTH
SERVICES, ET AL.

   No. 86-863

   In the Supreme Court of the United States

   October Term, 1986

   On Writ of Certiorari to the United States Court of Appeals for the
Ninth Circuit

   Brief for the Petitioner

            TABLE OF CONTENTS
   Opinions below
   Jurisdiction
   Statutory and regulatory provisions involved
   Statement
   Questions presented
      A. The Medicaid program
      B. Proceedings in this case
   Summary of argument
   Argument:
      I. The Secretary correctly disapproved California's
         proposed amendment because it failed to link a
         family's Medical eligibility level to the AFDC
         eligibility level of a family of the same size
         A. Section 1903(f) and its implementing regulation
            expressly condition federal financial
            participation on a state's establishment of a
            Medicaid eligibility level that is no higher
            than 133 1/3% of the state's highest AFDC
            payment for "a family of the same size"
         B. The court of appeals erred when it elevated a
            provision in an agency field manual over the
            language of the statute and the Secretary's
            regulation
         C. The Secretary cannot be estopped from obeying
            the law on the theory that the state relied
            on the manual provision at issue
     II. The so-called "DEFRA moratorium" does not
         impair the Secretary's authority to disapprove
         California's proposed Medicaid plan amendment.
   Conclusion

                            OPINIONS BELOW

   The opinion of the court of appeals (Pet. App. 1a-19a) is reported
at 781 F.2d 1421.  The opinion dissenting from the denial of rehearing
en banc (Pet. App. 23a-35a) is reported at 794 F.2d 540.  The opinion
of the Administrator of the Health Care Financing Administration (Pet.
App. 38a-45a) is unreported.  The recommended decision of the hearing
officer (J.A. 7-15) is unreported.

                             JURISDICTION

   The judgment of the court of appeals (Pet. App. 21a) was entered on
February 7, 1986.  An order amending the panel opinion was entered on
March 6, 1986 (Pet. App. 20a).  A petition for rehearing was denied on
July 14, 1986 (Pet. App. 22a).  An opinion dissenting from the denial
of rehearing en banc was filed on July 18, 1986 (Pet. App. 23a-35a).
On October 3, 1986, Justice O'Connor extended the time within which to
file a petition for a writ of certiorari to and including November 26,
1986.  The petition was filed on that date, and was granted on
February 23, 1987 (J.A. 69).  The jurisdiction of this Court rests on
28 U.S.C. 1254(1).

             STATUTORY AND REGULATORY PROVISIONS INVOLVED

   The relevant portions of Sections 1902(a) and 1903(f) of the Social
Security Act, 42 U.S.C. (& Supp. III) 1396a(a) and 1396b(f), of
Section 2373(c) of the Deficit Reduction Act of 1984, Pub. L. No.
98-369, 98 Stat. 1112, of 42 C.F.R. 435.811 and 435.1007, and of
Section 14005.12 of the California Welfare and Institutions Code (West
Supp. 1987), are set out at Pet. App. 46a-49a.

                          QUESTIONS PRESENTED

   1. Whether language in an internal agency manual prepared for use
by field employees is a "legislative regulation" that binds the
Secretary of Health and Human Services, even though it was never
subjected to notice-and-comment rulemaking or published in the Federal
Register, and even though it is contradicted by a regulation duly
promulgated by the Secretary pursuant to the Administrative Procedure
Act.

   2. Whether Section 2373(c) of the Deficit Reduction Act of 1984,
Pub. L. No. 98-369, 98 Stat. 1112, prohibits the Secretary from
disapproving proposed amendments to state Medicaid plans that conflict
with statutory limitations on federal financial participation in the
Medicaid program.

                               STATEMENT

   This case involves an effort by the State of California to afford a
particular category of Medicaid recipients -- medically needy adult
couples -- a level of Medicaid benefits that exceeds the statutory cap
on federal financial participation.  As a rule, of course, a state may
be as generous or as parsimonious as it wishes with its own funds.  In
Section 1903(f) of the Social Security Act, however, Congress has
established a ceiling on the income levels of individuals toward whose
Medicaid benefits the federal government will contribute.  Because it
was clear that California's proposed amendment to its state plan would
increase Medicaid benefit levels to an amount in excess of this
statutory cap, and because the state sought federal participation in
financing that increase, the Secretary rejected California's proposal.

   The court of appeals reversed.  In holding that the Secretary was
bound to approve California's proposed amendment, the court ignored a
regulation duly promulgated by the Secretary that tracks the language
of the statutory cap on federal financial participation.  The court
relied instead on a statement that had appeared some years earlier in
an unpublished internal agency manual.  It did not matter to the court
that the Secretary had never endorsed the interpretation set forth in
the manual, that the manual contradicted the Secretary's previously
published regulation, that the manual satisfied none of the notice and
publication requirements that regulations ordinarily must meet, that
the statement in the manual was deleted from subsequent versions of
the manual, or that the Secretary had declared the manual provision to
be void ab initio.  The court held that the manual was nevertheless a
"proper legislative rule" that binds the Secretary (Pet. App. 13a).
The court also held that the Secretary had no authority to enforce the
income eligibility ceiling set forth as a condition of federal
financial participation in Section 1903(f).  For that conclusion the
court relied on a provision in the Deficit Reduction Act of 1984 that
by its terms her no bearing whatever on Section 1903(f).

                        A. The Medicaid Program

   1. Congress established the Medicaid program 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 (1980);  see Atkins v.
Rivera, No. 85-632 (June 23, 1986), slip op. 2.  Medicaid is a
cooperative federal-state program employing both state and federal
funds.  See 42 U.S.C. (& Supp. III) 1396b.  The decision whether to
participate in Medicaid is left to the discretion of each state.  Once
a state elects to participate, it must comply with requirements
imposed by the Medicaid Act and by the Secretary of Health and Human
Services.  See 42 U.S.C. (& Supp. III) 1396a;  Atkins v. Rivera, slip
op. 2;  Schweiker v. Gray Panthers, 453 U.S. 34, 37 (1981).  Upon
obtaining the Secretary's approval of its Medicaid plan, a state is
entitled to federal financial assistance for providing medical care to
individuals who qualify under that plan.  See 42 U.S.C. (& Supp. III)
1316(a), 1396, 1396a(b), 1396b(a).

   Individuals covered by certain cash assistance programs -- the
Supplemental Security Income (SSI) Program, 42 U.S.C. (& Supp. III)
1381 et seq., and the Aid to Families with Dependent Children (AFDC)
Program, 42 U.S.C. (& Supp. III) 602 et seq. -- automatically qualify
for Medicaid.  Thus, states that choose to participate in Medicaid
must provide Medicaid benefits to these persons, termed the
"categorically needy." See 42 U.S.C. (Supp. III) 1396a(a)(10)(A)(i);
42 C.F.R. 435.4, 433.110(a), 435.120(a);  Atkins v. Rivera, slip op.
2;  Gray Panthers, 453 U.S. at 37-39.  In addition, and at its option,
a participating state may provide Medicaid benefits to other "less
needy" individuals.  See H.R. Rep. 213, 89th Cong., 1st Sess. 66
(1965).  In general, these are individuals whose income or resources
somewhat exceed the eligibility levels for the SSI and AFDC programs,
but who incur substantial medical expenses.  These individuals are
generally termed the "medically needy." See Atkins v. Rivera, slip op.
3;  Schweiker v. Hogan, 457 U.S. 569, 572-573 (1982).  The "medically
needy" qualify for Medicaid only if they incur medical expenses that
reduce their income to the Medicaid eligibility income standard or if
their income is below that standard.  See 42 U.S.C. 1396a(a)(10)(C)
and 1396a(a)(17);  42 C.F.R. 435.831(c).

   2. At the beginning of the Medicaid program, federal reimbursement
was available to a state that elected to provide optional coverage to
the "medically needy" regardless of how high the state chose to set
its Medicaid eligibility income standard.  In 1967, however, Congress
determined that a limit on federal financial participation was
desirable to guard against improvident Medicaid spending by the
states.  See Schweiker v. Hogan, 457 U.S. at 573, 576.  Accordingly,
Congress passed legislation to ensure that "(f)ederal sharing * * *
not be available for families whose income exceeds 133 1/3 percent of
the highest amount ordinarily paid to a family of the same size * * *
in the form of money payments under the AFDC program." H.R. Rep. 544,
90th Cong., 1st Sess. 117, 119 (1967).  /1/ To effect that purpose,
Congress enacted Section 1903(f)(1)(B)(i) of the Social Security Act,
42 U.S.C. 1396b(f)(1)(B)(i).  That Section provides that federal
financial participation is available only to the extent that the state
limits its Medicaid eligibility income standard as follows:

         * * * the applicable income limitation with respect to any
      family is the amount determined, in accordance with standards
      prescribed by the Secretary, to be equivalent to 133 1/3 percent
      of the highest amount which would ordinarily be paid to a family
      of the same size without any income or resources, in the form of
      money payments, under the (AFDC) plan of (that) State * * * .

   The Secretary issued regulations in 1971 pursuant to this
directive.  36 Fed. Reg. 3871-3872.  Those regulations, now codified
at 42 C.R.F. 435.1007, reiterate the statutory requirement that a
state's Medicaid eligibility income level must bear a fixed
mathematical relationship to its AFDC eligibility income level for "a
family of the same size." The regulations provide that, for couples
and families of two or more, federal financial participation is
available only when the state's Medicaid eligibility income level does
not exceed "133 1/3 percent of the highest money payment that would
ordinarily be made under the State's AFDC plan to a family of the same
size without income and resources." 42 C.F.R. 435.1007(a)(1).  See
also 42 C.F.R. 435.811(c).  /2/

                      B. Proceedings in this Case

   1. Respondent Kizer is the Director of the California Department of
Health Services;  the other respondents are Medicaid recipients who
intervened below.  From 1976 to 1982, California had allowed a
so-called "special income deduction" to medically needy adult couples
(J.A. 58;  see C.A. App. 80, 111, 275).  The effect of this deduction
was to set California's "medically needy income level," or "MNIL," for
adult couples at a point above the ceiling established in Section
1903(f) as a condition of federal reimbursement.  For that reason, the
Secretary had disapproved California's pre-1982 eligibility levels
(see C.A. App. 127, 275).

   In June 1982, the California legislature amended the statute
underlying the State's Medicaid plan by repealing the "special income
deduction" (J.A. 58).  The effect of this repeal was to revise
downward the state's MNIL for medically needy adult couples and bring
it into conformity with the ceiling set forth in Section 1903(f).  /3/
Consistently with Section 1903(f) and 42 C.F.R. 435.1007(a)(1),
therefore, the State's 1982 amendment computed MNILs for all medically
needy families, including medically needy adult couples, as 133 1/3%
of the maximum AFDC grant for a family of the same size.  That formula
produced an MNIL of $544 for a family of two (J.A. 58).

   One year later, the California legislature perceived (see J.A. 60)
what this Court had recognized in 1982, and what Congress had
recognized in 1967 when it enacted the cap on federal financial
participation:  that because Medicaid eligibility income levels are
linked to those for AFDC, which are typically "the lowest that are
used in the categorical assistance programs" (H.R. Rep. 544, supra, at
119), the medically needy may end up with less income after paying
their share of medical expenses than will some of the categorically
needy.  See Schweiker v. Hogan, 457 U.S. at 583, 584-588, 589-593
(rejecting statutory and constitutional challenges based on that
fact).  Thus, as a consequence of California's lowering of its
Medicaid MNIL in 1982, the State's "(m)edically needy aged and
disabled people experienced a very sharp increase in the share of
(medical expenses) which they were required to meet each month in
order to qualify" for Medicaid (J.A. 58-59).

   In 1983, "under considerable pressure from recipient groups" (C.A.
App. 127;  see generally id. at 611-822;  J.A. 60), the California
legislature set about undoing the effects of the 1982 amendment.  What
California sought to do, in essence, was to increase Medicaid benefits
for elderly couples, without making a correlative increase in AFDC
benefits for families consisting of a parent and a child.  Thus, while
adjusting AFDC grant levels only slightly, California proposed a far
more generous increase in benefits for two-person Medicaid families
comprised exclusively of adults by raising the Medicaid MNIL for that
class of recipients.  The State sought to accomplish this revision by
providing that the monthly MNIL for a family consisting of two adults
would now be 133 1/3% of "the highest amount that would ordinarily be
paid to a family of three persons without income or resources under
(the State's AFDC program)." Cal. Welf. & Inst. Code Section
14005.12(c) (West Supp. 1987) (emphasis added).  Since AFDC benefit
levels were of course higher for a family of three than for a family
of two, California's proposal would have had the effect of raising
Medicaid benefits for elderly couples without necessitating a
correlative increase in AFDC spending.

   California's proposed 1983 amendment would thus have produced two
significant changes in the State's Medicaid plan.  First, it would
have provided a different MNIL for a family of two adults than for a
family of two comprising one adult and one child.  Second, for a
two-adult family, the statute would have established an MNIL with
reference to an AFDC family of three rather than an AFDC family of
two.  In financial terms, the result would have been to leave the MNIL
for a two-person family comprised of one adult and one child at $567
(133 1/3% of the slightly higher 1983 AFDC grant for a family of two),
while raising the MNIL for a two-person family comprised of two adults
to $709, or $142 in excess of the maximum level permitted by Section
1903(f).  See J.A. 24.  The California legislature also provided
specific instructions that the state agency was to follow in the event
that the 1983 amendment was found to violate federal law.  /4/

   2. Following enactment of California's 1983 legislation, /5/
respondent Kizer's predecessor wrote to the Administrator of the
Health Care Financing Administration (HCFA), a subdivision of HHS, to
request a "formal ruling" about the validity of California's provision
setting new, higher Medicaid levels.  Respondent stated that "(o)ur
staff analysis has concluded that this provision not only exceeds the
maximum limitation on Federal Financial Participation specified (in
Section 1903(f)), but also that this provision is not in conformity
with Section 1902(a)(10)(C)(i)(III) of the Social Security Act which
specifies that the State must apply a single income standard to
medically needy families of the same size regardless of family
composition" (C.A. App. 140-141).  /6/ The HCFA Administrator's
response, dated September 6, 1983, concurred in respondent's
conclusion that the 1983 California amendment, which fixed the
two-adult MNIL by reference to the AFDC level for a family of three,
violated federal statutory and regulatory requirements.  The
Administrator accordingly informed respondent that federal financial
participation would to that extent not be available (C.A. App.
142-143).

   California nonetheless attempted to implement its 1983 amendment,
formally transmitting its proposal to amend its Medicaid plan to HCFA
on September 20, 1983 (J.A. 22-24).  The State's submission indicated
that its proposed MNILs complied with Section 1903(f) "except for (the
MNIL) for 2 adults," for whom the MNIL was "equal to 133 1/3% of (the)
AFDC payment level for 3 persons" (J.A. 23).  Although the State
expressly acknowledged that its proposed MNIL for two-adult families
would exceed the federal participation cap by $142 per month (J.A.
24), it sought federal financial participation for the full amount of
the proposed benefits to be provided to recipients whose incomes
exceeded the federal limits.  This was indicated by the State's having
crossed out the following language that appears at the bottom of the
preprinted transmittal form:  "The agency has methods for excluding
from its claim for (federal financial participation those) payments
(which are) made on behalf of individuals whose income exceeds these
limits" (ibid.).

   3. In December 1983, the HCFA Administrator disapproved
California's proposed plan amendment because it did not comply with
the statutory and regulatory requirement that federal financial
participation not be available where a state's Medicaid MNILs exceed
133 1/3% of the maximum AFDC payment "to a family of the same size."
See Section 1903(f);  42 C.F.R. 435.1007(a);  J.A. 25-26.  On February
16, 1984, the State requested reconsideration of the Administrator's
decision (J.A. 31-33).  A hearing was held on July 2, 1984 (J.A. 8).

   The hearing officer recommended (J.A. 7-15) that the disapproval of
California's proposed plan amendment should be affirmed.  The State's
main contention was that its proposed amendment was supported by
language that appeared in a HCFA regional office manual issued in June
1979.  In contrast to the statute and to the regulation promulgated by
the Secretary in 1971, which require that a state's Medicaid MNIL be
no more than 133 1/3% of the state's maximum AFDC payment for a family
"of the same size," the field manual said (Section 2572D) that "the
States may set a separate * * * (MNIL) for two adults which would be
established between 133 1/3 percent of the AFDC payment level for a
family of three persons" (see J.A. 21).  The field manual also said
that states "should have the option of establishing separate * * *
(MNILs) for a two-person family consisting of one adult and one child
and for a two-person family composed of two adults" (ibid.).

   The hearing officer rejected the State's contention, concluding
that the manual provision "is not a regulation, has no legal force and
does not bind HCFA" (J.A. 14).  He explained that the manual was
"intended for internal regional office use, i.e., for the use of
regional office employees only," emphasizing that the manual's
foreward "instructs regional office employees not to cite (the manual)
to others" (id. at 10).  The hearing officer accordingly found (id. at
11) that HCFA's office manual "if anything, has less, but certainly no
more importance than the SSA Claims Manual" that was held not to
constitute a binding regulation in Schweiker v. Hansen, 450 U.S. 785
(1981).  At all events, the hearing officer concluded that "Congress
(had) specifically rejected (the manual's) interpretation of section
1903(f)." J.A. 14;  see id. at 12.

   The hearing officer also rejected the State's alternative
contention that Section 2373(c) of the Deficit Reduction Act of 1984
(DEFRA), Pub. L. No. 98-369, 98 Stat. 1112, prohibited the Secretary
from disapproving California's proposed amendment.  The hearing
officer explained that Section 2373(c) of DEFRA, the so-called "DEFRA
moratorium," was "limited to violations of section
1902(a)(10)(C)(i)(III) of the (Social Security) Act." /7/ The hearing
officer pointed out that California's proposed amendment had been
disapproved under Section 1903(f), not under Section
1902(a)(10)(C)(i)(III), and that the DEFRA moratorium "does not touch
upon violations of section 1903(f)." J.A. 13.

   On further administrative appeal, the HCFA Administrator issued a
final decision upholding the hearing officer's recommended
determination (Pet. App. 38a-45a).  The Administrator observed that
Section 1903(f) "provides for a single MNIL for a family of two" and
that this limit is 133 1/3% of the maximum payment ordinarily made
under the State's AFDC plan "to a family of the same size without
income and resources" (Pet. App. 42a).  The Administrator further
noted that the Secretary's regulation, which likewise speaks of AFDC
payments "to a family of the same size" (42 C.F.R. 435.1007), was
"absolutely clear regarding a family of two" (Pet. App. 42a).  The
Administrator found the language in the HCFA field manual to be
"patently contrary to the statute and * * * , therefore, invalid from
its origination," since "the Secretary is bound to follow the
direction of Congress" (id. at 44a).  /8/

   4. On petition for review, a panel of the Ninth Circuit reversed
the agency's determination (Pet. App. 1a-19a).  The court acknowledged
that Section 1903(f) restricted federal financial participation to
cases where the state's Medicaid MNIL was no higher than 133 1/3% of
the highest AFDC payment "to a family of the same size." But the court
said that this directive was tempered by other language in Section
1903(f), which required that the federal cap be determined "in
accordance with standards prescribed by the Secretary" (Pet. App. 7a,
citing 42 U.S.C. 1396b(f)(1)(B)(i) (emphasis omitted)).  In the
court's view, HCFA's 1979 regional office manual had prescribed just
such a "standard," so that California could therefore set its
adult-couple MNIL as high as "133 1/3 percent of the AFDC payment
level for a family of three persons." The court concluded that the
manual set forth "a proper legislative rule" because it is a "rule
'issued by an agency pursuant to statutory authority and * * *
implements the statute'" (Pet. App. 13a, quoting Batterton v. Francis,
432 U.S. 416, 425 n.9 (1977)).

   Citing this Court's decision in Schweiker v. Hansen, 450 U.S. 785
(1981), the court of appeals acknowledged that "agency office manuals
generally do not prescribe legislative rules with binding effect"
(Pet. App. 11a).  But the court held that this case represented "an
exception" to that principle, asserting that the office manual
involved here was "not a field-level instructional guide" because it
was supposedly "directed not at office-level agency employees and
specific recipients but at states and a major category of recipients
under state plans" (ibid.).  The court said that the 1979 version of
the HCFA regional manual "establishe(d) the right of states to
increase their adult couple MNIL" and "establishe(d) a new MNIL
maximum * * * and thereby 'effect(ed) a change in existing law or
policy'" (ibid., quoting Powderly v. Schweiker, 704 F.2d 1092, 1098
(9th Cir. 1983)).

   Although the language in the field manual had never been subject to
notice-and-comment rulemaking, and although it had not been published
in the Federal Register or the Code of Federal Regulations, the court
of appeals held that the manual had been properly promulgated as a
"legislative regulation." The court noted (Pet. App. 13a) that the
notice-and-comment procedures of the Administrative Procedure Act
(APA) are generally inapplicable to matters relating to public
benefits (5 U.S.C. 553(a)(2)).  Although the Secretary by formal
notice (36 Fed. Reg. 2532 (1971)) has voluntarily imposed the full
panoply of APA procedural requirements upon HHS in such matters, the
court stated that, in promulgating the manual, the Secretary had
simply "failed to abide by her predecessor's promise to adopt APA
rulemaking procedures" (Pet. App. 14a).  On that basis, the court
concluded that the absence of notice-and-comment proceedings did not
deny the manual the force of law (ibid.).

   With respect to the requirement of the Freedom of Information Act
(FOIA) that agency regulations be published in the Federal Register (5
U.S.C. 552(a)(1)(D)), the court concluded that the FOIA requirement
attaches only where nonpublication "would adversely affect a member of
the public," a situation that the court found was not present here
(Pet. App. 15a).  The court therefore held that the manual was a
lawfully promulgated regulation, exempt from the procedural
requirements of the APA and the FOIA.  And the Court held as an
alternative ground of decision that "the DEFRA moratorium" in any
event barred the Secretary from disapproving the proposed amendment to
California's Medicaid plan (id. at 16a-18a).

   5. The Secretary's suggestion for rehearing en banc was denied,
with Judges Kozinski, Sneed, Hall and Noonan dissenting (Pet. App.
22a-35a).  In the dissenters' view, "(t)he panel err(ed) in almost
every respect" (id. at 26a).  The dissent pointed out that HCFA's
regional manual was "not a body of regulations," but rather was "an
office manual, an internal directive from the agency's headquarters to
its field offices" (ibid. (emphasis in original)).  The manual's
"(f)oreward," the dissent observed, stated that it was "'for the use
of regional office employees only,'" that it was "'not intended to
stand alone,'" and that it "'should not be cited when addressing
contractors, State agencies, providers, etc.'" (id. at 26a-27a
(citation omitted)).  Thus, even if the manual were the only statement
on the subject emanating from the government, the dissent concluded
that the manual would not, under Schweiker v. Hansen, supra,
constitute a "legislative regulation" with the force and effect of
law.

   The dissent went on to argue that this conclusion followed a
fortiori here, since the Secretary had in fact promulgated valid
regulations that "plainly conflict" with the manual section (Pet. App.
29a).  Instead of deferring to these regulations, which explicitly
link a family's Medicaid entitlement to that of an AFDC family "of the
same size," the panel "effectively read( ) the regulations out of
existence without any explanation or admission of the fact" (id. at
30a).  By subordinating formally promulgated regulations to an
internal agency publication, the panel opinion, in the dissent's view,
"tears asunder (the) tenets of administrative law" (id. at 31a) and
"create(s) uncertainty where stability is vital" (id. at 32a).  Judge
Kozinski expressed concern that the panel opinion "will cause no end
of headaches for agency officials who will now have to guess which of
their informal, unsigned, internal guidelines will be found
'exceptional' enough to outrank regulations" (ibid.).  And he pointed
out that, even if the manual could be thought to be a "regulation," it
would be invalid "because it violates the plain language of the
statute" (id. at 30a).

   The dissent also took issue with the panel's alternative holding
based on the DEFRA moratorium.  Relying in part on this Court's
decision in Atkins v. Rivera, supra, the dissent pointed out that the
DEFRA moratorium "has nothing at all to do with this case" since it
was intended to restrict the Secretary's authority under a portion of
the statute not involved here (Pet. App. 34a).  In Judge Kozinski's
words (ibid.), "(t)he two provisions have about as much in common as
apples and pineapples:  They sound vaguely similar but they grow on
entirely different statutory trees."

                          SUMMARY OF ARGUMENT

   The court of appeals has raised the curtain on a revolution in
administrative law.  The court's principal holding is that a statement
in an unofficial, unpublished, obsolete, internal agency manual can
rise to the status of a "legislative regulation" that binds the
agency, even though the statement is contrary to the plain language of
the relevant statute and to the agency's own, duly promulgated rules.
That holding does violence to settled principles of administrative
law, thwarts specific congressional intent, and substantially
undermines federal fiscal control over the Medicaid program.

   1. In setting the statutory cap on federal financial participation
in the Medicaid program, Congress spoke clearly and directly.  A state
is entitled to federal participation in Medicaid if the state's
Medicaid eligibility level for a family of a given size does not
exceed 133 1/3% of the highest amount ordinarily payable in monthly
AFDC benefits "to a family of the same size" (42 U.S.C.
1396b(f)(1)(B)(i)).  There is no mystery to this language;  no enigma
that can be deciphered only by Medicaid cognoscenti.  California's
proposed amendment failed to qualify under this statute because a
family of three is not the "same size" as a family of two.

   Although the clarity of the statutory language makes resort to its
legislative history unnecessary, we note that the legislative history
fully supports our view.  In adopting the House version of Section
1903(f) in preference to the more expansive limit proposed by the
Senate, Congress evidenced its intent to keep on a relatively short
tether those states that chose to provide federally-supported
assistance to the medically needy.  Nothing in the legislative history
supports the construction of the statute that the court of appeals has
advanced.

   Even if the statutory language or the legislative history left room
for uncertainty, it would be eliminated by the consistent official
interpretation of the agency charged with administering the statute.
Duly promulgated regulations issued by the Secretary have, since 1971,
incorporated verbatim the statutory "same size" requirement;  these
regulations fit comfortably within the category of regulations that
are entitled to "legislative effect" (Atkins v. Rivera, slip op. 7).
At all events, the Secretary has never interpreted the statute as
conferring the authority discovered by the court of appeals:  the
authority to decree that a family of two is the "same size" as a
family of three.

   The court of appeals, brushing aside the agency's officially
published rules, chose instead to treat as a "legislative regulation"
a statement contained in a regional office manual in 1979.  That
statement, which was contrary to the plain language of the statute,
which was never endorsed by the Secretary, which was never published
in the Federal Register or the Code of Federal Regulations, which was
deleted shortly after it first appeared in the manual, and which was
rejected in the administrative proceedings in this case as a nullity,
is not a "regulation" at all, much less a "legislative regulation."
Indeed, even if the manual provision had been the only relevant
pronouncement emanating from the agency, it would still have to be
rejected as contrary to Congress's stated intent.

   Unless reversed, the decision below will undermine Congress's
longstanding requirement that the cap on federal financial
participation in Medicaid be set according to the "family of the same
size" standard.  More generally, the decision below would seriously
disrupt the orderliness and regularity of the administrative process.
If rules duly promulgated by the Secretary can be subordinated, as the
court of appeals held, to informal, internal communications by
lower-level employees, then all government officials -- and those
subject to regulation -- will be left to guess which statutes and
regulations will be similarly supplanted by ill-considered and
anonymous memoranda.

   2. The court of appeals also erred in concluding that the DEFRA
moratorium precludes the Secretary from enforcing the statutory cap on
federal financial participation contained in Section 1903(f).  On its
face, the DEFRA moratorium is expressly confined to the Secretary's
authority under a different section of the statute, and the moratorium
makes no mention of Section 1903(f), the section on which the
Secretary based his action here.  The legislative history of the DEFRA
moratorium confirms that Congress had no intention to prevent the
Secretary from enforcing the cap on federal financial participation;
indeed, Congress specifically rejected a provision that would have
accomplished the very result that respondents urge.  There is,
ultimately, no conceivable reason why DEFRA, a deficit reduction
measure, should be interpreted in a way that divests the Secretary of
authority to enforce the statutory limit on the federal government's
fiscal participation in Medicaid.

                               ARGUMENT

 I. THE SECRETARY CORRECTLY DISAPPROVED CALIFORNIA'S PROPOSED
AMENDMENT BECAUSE IT FAILED TO LINK A FAMILY'S MEDICAID ELIGIBILITY
LEVEL TO THE AFDC ELIGIBILITY LEVEL OF A FAMILY OF THE SAME SIZE

 A. Section 1903(f) And Its Implementing Regulation Expressly
Condition Federal Financial Participation On A State's Establishment
Of A Medicaid Eligibility Level That Is No Higher Than 133 1/3% Of The
State's Highest AFDC Payment For "A Family Of The Same Size"

   1.  This Court has often observed "'that the legislative purpose is
expressed by the ordinary meaning of the words used.'" United States
v. James, No. 85-434 (July 2, 1986), slip op. 6.  There can be no
serious doubt that the ordinary meaning of the words used in the
Social Security Act appears to settle the question presented here.
Section 1903(f) of the Act provides that, for Medicaid purposes, "the
applicable income limitation with respect to any family" is "133 1/3
percent of the highest amount which would ordinarily be paid to a
family of the same size without any income or resources, * * * under
the (AFDC) plan of the State" (42 U.S.C. 1396b(f)(1)(B)(i)).
California proposed, by contrast, to compute its Medicaid income
limitation for certain families of two as 133 1/3% of the highest AFDC
benefits ordinarily payable to a family of three.  Under normal
English usage, a family of three and a family of two would not be
regarded as being "the same size." The plain language of the statute
thus makes clear that California cannot claim federal reimbursement
for the added Medicaid costs occasioned by its 1983 plan amendment.

   Because the statutory language is unambiguous, there is no need in
this case to "turn to the legislative history as an additional tool of
analysis" (Garcia v. United States, 469 U.S. 70, 75 (1984);  see
United States v. Rojas-Contreras, No. 84-1023 (Dec. 16, 1985), slip
op. 4).  But examination of that legislative history lends no support
whatever to respondents' contentions.  Rather, it adds compelling
support to our view that Congress never intended to authorize the
Secretary to compute Medicaid eligibility in the manner California
wishes.  Cf. INS v. Cardoza-Fonseca, No. 85-782 (Mar. 9, 1987), slip
op. 10-11 n.12.

   At the inception of the Medicaid program, Congress left it to the
states to establish Medicaid eligibility and benefit levels, and hence
placed no limit on the amount of federal reimbursement that a state
could claim for providing optional benefits to the "medically needy."
"Within a year," however, "Congress recognized that it was fiscally
improvident to rely exclusively on the States to set income limits"
(Schweiker v. Hogan, 457 U.S. at 575).  In 1967, therefore, Congress
established a limit on federal financial participation.  After
extensive hearings, the House reported a bill that proposed to limit
federal financial participation to "133 1/3 percent of the highest
amount ordinarily paid to a family of the same size (without any
income and resources) in the form of money payments under the AFDC
program." H.R. Rep. 544, supra, at 119.  The House Report specifically
noted that "AFDC income limits are, generally speaking, the lowest
that are used in the categorical assistance programs." Ibid.

   The Senate acknowledged that the House bill had the objective of
"substantially limiting Federal financial participation in the
Medicaid program." S. Rep. 744, 90th Cong., 1st Sess. 176 (1967).  But
while it agreed that some restriction on federal financial
participation was needed, the Senate devised "an alternative way of
accomplishing the basic purpose of the House bill" (ibid.).  The
Senate alternative was to cap federal financial participation by
limiting Medicaid eligibility to 150% of the state's Old Age
Assistance (OAA) level.  Because the OAA program was typically the
most generous of the federal cash assistance programs, the Senate
alternative would have permitted states to obtain federal funding for
much higher Medicaid benefits than under the House bill.  S. Rep. 744,
supra, at 177.

   The Senate alternative was rejected in conference.  See Schweiker
v. Hogan, 457 U.S. at 579-580 n.15;  H.R. Conf. Rep. 1030, 90th Cong.,
1st Sess. 63 (1967).  Senator Robert Kennedy observed that "(t)he
Senate conceded, in conference, almost every provision where its
approach was more liberal than that of the House * * * ." 113 Cong.
Rec. 36783 (1967).  Senator Mondale explained the House provision,
which he had opposed, as follows (id. at 37819):

         The House bill limits Federal participation in title 19
      programs to those whose income is less than 133 percent of the
      highest amount ordinarily paid families of similar size under
      the State aid-to-dependent-children programs.

   It was this provision of the House bill, firmly linking a family's
Medicaid eligibility to the AFDC eligibility of a family of the "same
size," that was enacted into law.  No mention was made of giving the
Secretary authority to alter that legislative determination in any
respect.  /9/

   2. If the statutory language left any doubt about Congress's intent
to peg the "medically needy" eligibility standard for Medicaid
benefits to the state's AFDC level for a family of the "same size,"
that doubt would be resolved by the Secretary's lawfully promulgated
regulation.  Consistently with the language of the statute, the
Secretary has prescribed by regulation that federal financial
participation is available only when the state's MNIL does not exceed,
for couples and families of two or more, "133 1/3 percent of the
highest money payment that would ordinarily be made under the State's
AFDC plan to a family of the same size without income and resources"
(42 C.F.R. 435.1007(a)(1)).  The Secretary has administered the
Medicaid program in this fashion, pursuant to this regulation and its
predecessors, for more than 16 years.  See 43 Fed. Reg. 45217 (1978);
36 Fed. Reg. 3871-3872 (1971);  see note 2, supra.  Regulations of
this type are entitled to "legislative effect," as this Court recently
explained (Atkins v. Rivera, slip op. 7 (citations omitted)):

         Because the Secretary's regulation appears supported by the
      plain language of the statute and is adopted pursuant to the
      explicit grant of rulemaking authority * * * , it is "'entitled
      to more than mere deference or weight.'" * * * Indeed, it is
      entitled to "legislative effect," * * * and is controlling
      "unless (it) is arbitrary, capricious, or manifestly contrary to
      the statute(.)"

   3. Although the court of appeals quoted the Secretary's regulation
(Pet. App. 6a), it proceeded at once to ignore it.  The panel did not
find the regulation unclear or ambiguous, nor did it explain how the
regulation could be read to permit the result California wanted.
Rather, the court purported to find ambiguity in the statute itself.
It theorized (Pet. App. 7a, 14a) that the express statutory cap in
Section 1903(f) was qualified by other statutory language, language
that delegated authority to the Secretary to prescribe standards for
determining the amount that is "equivalent to 133 1/3 percent of the
highest amount which would ordinarily be paid" to an AFDC family of
the same size.  In essence, the court held that this latter language
granted the Secretary discretion to determine that a family of three
is the "same size" as a family of two, and that the Secretary had in
fact prescribed such a standard.

   This reasoning suffers from a variety of defects.  To begin with,
if the court wished to consult the Secretary's "standard" for
performing the mathematical exercise set forth in the statute, the
court was obligated to look to the regulation, described above, which
the Secretary had promulgated.  See 42 C.F.R. 435.1007.  As we have
explained, that regulation contains no suggestion that a family of
three could be deemed to be the "same size" as a family of two.  Thus,
if the statute were thought ambiguous or incomplete in the absence of
"standards prescribed by the Secretary," that ambiguity, as Judge
Kozinski said, "is neatly excised by these regulations" (Pet. App.
30a).

   Moreover, even if the Secretary had never promulgated a regulation,
it is obvious that Section 1903(f) would not authorize him to
prescribe a standard under which a family of two and a family of three
would be judged to be "the same size." Rather, the "standards" that
the Secretary was authorized to prescribe are those for determining
which of a state's AFDC payment levels for a family of a given size is
the "highest" that would "ordinarily be paid" to a family of that
size.  For example, because a state's AFDC program may allow
additional benefits to be paid for "special needs" (see 45 C.F.R.
233.20(a)(2)(v)), /10/ a state may sometimes pay different amounts to
families of a given size depending upon the recognized special needs
of family members.  There are also certain situations, specified by
statute, in which a MNIL must be determined for a medically needy
family for which the state's AFDC plan may have no counterpart --
e.g., a family of one or a very large family.  See 42 U.S.C.
1396b(f)(3), 1396b(f)(1)(B)(ii).  It is in these situations that the
Secretary was meant to prescribe standards for determining the
"highest amount which would ordinarily be paid" to an AFDC family of
the same size.  Once those standards have been employed, one can then
multiply that "highest amount" by 133 1/3% to derive the maximum MNIL
the State may establish for a Medicaid family of that size.

   Congress plainly did not delegate to the Secretary the authority to
determine that a family of three is the same size as a family of two.
To conclude, as did the court of appeals, that the Secretary may
prescribe standards that treat two as equal to three is to nullify the
statutory requirement of equivalence.  "Read in this fashion," Judge
Kozinski aptly stated in his dissent, "the statute provides no limits
whatsoever on the Secretary's discretion and might as well say 'the
Secretary may set the MNIL any way he pleases'" (Pet. App. 31a).  In
any event, the Secretary has never sought to utilize the discretion,
attributed to him by the court of appeals, to pronounce that two
equals three.

 B. The Court Of Appeals Erred When It Elevated A Provision In An
Agency Field Manual Over The Language Of The Statute And The
Secretary's Regulation

   Even if the Secretary were thought to have discretion to prescribe
standards under which a family of two would be deemed to be "the same
size" as a family of three, the court of appeals plainly erred in
concluding that the Secretary had in fact prescribed such a "standard"
in the guise of HCFA's regional office manual.  The court ruled that
language contained in the 1979 version of the manual -- language that
was never published in the Federal Register or subjected to normal
rulemaking procedures, and which was in conflict with the statutory
mandate -- was a "legislative rule" that "establish(ed) the right of
states to increase their adult couple MNIL" (Pet. App. 11a).  That
ruling cannot be reconciled with established principles of
administrative law.

   1. It is well settled that "not all agency publications are of
binding force" (Lyng v. Payne, No. 84-1948 (June 17, 1986), slip op.
11).  Indeed, if agencies were bound by every pronouncement made on
their behalf, there would be little reason for Congress to have
codified notice-and-comment procedures in the Administrative Procedure
Act.  Agency manuals, in particular, are a species of agency
pronouncement that lack the force and effect of law.  Schweiker v.
Hansen, 450 U.S. at 789;  United States v. Caceres, 440 U.S. 741
(1979);  American Farm Lines v. Black Ball Freight Service, 397 U.S.
532 (1970);  Sullivan v. United States, 348 U.S. 170, 172-174 (1954).

   In Schweiker v. Hansen, supra, a Social Security claims
representative incorrectly told a claimant that she did not qualify
for statutory insurance benefits.  He also failed to advise her that
she should file a written application for benefits, although the
Social Security Claims Manual instructed claims representatives to
give such advice.  In refusing to estop the government from enforcing
a lawful condition on the receipt of benefits, this Court acknowledged
that the claims representative failed to follow the procedures
specified by the Claims Manual.  The Court held, however, that "the
Claims Manual is not a regulation.  It has no legal force, and it does
not bind the SSA." 450 U.S. at 789.  The Claims Manual, rather than
being a compilation of binding regulations, was considered to be only
a "handbook for internal use by thousands of SSA employees * * * ."
Ibid.  /11/

   The court of appeals acknowledged that "agency office manuals
generally do not prescribe legislative rules with binding effect," but
said that the manual provision at issue here, for two reasons,
constituted "an exception" (Pet. App. 11a).  First, the court asserted
that this provision "establishes a new MNIL maximum in (the
adult-couple) category and thereby 'effect(s) a change in existing law
or policy'" (ibid., quoting Powderly v. Schweiker, 704 F.2d 1092, 1098
(9th Cir. 1983)).  As Judge Kozinski pointed out, however, the panel's
reasoning in this respect "merely assumes the conclusion.  A provision
can effect a change in existing law or policy only if it has the force
of law;  if it does not, it cannot" (Pet. App. 28a).  Under the
panel's reasoning, moreover, an incorrect manual provision would
almost always be deemed a "legislative rule with binding effect,"
since an incorrect manual provision would typically "effect a change
in existing law or policy." Conversely, a manual provision that
conformed to existing law would not have "binding effect" because it
would correctly state the law rather than change it.  This would be
quite an odd result.

   The second reason advanced by the panel to justify treating the
manual provision as a "legislative rule" was that the manual was
assertedly not directed to office-level agency employees, but instead
to "states and a major category of recipients under state plans" (Pet.
App. 11a).  But, as Judge Kozinski explained, the panel's rationale
"flies in the face of (the manual's) own description of itself," for
the manual explicitly says that it "'is for the use of regional office
employees only and should not be cited when addressing contractors,
State agencies, providers, etc.'" (id. at 28a (emphasis and citation
omitted)).  Plainly, the manual was not intended for use by anyone
other than HCFA employees.  See Schweiker v. Hansen, supra.

   The court of appeals failed to acknowledge both the expressly
limited purposes of this manual, and the limited purposes of agency
manuals in general.  Moreover, the court failed to explain how the
manual, despite its explicit disclaimer, could be regarded as "a
legislative rule issued pursuant to statutory authority" (Pet. App.
16a).  Even respondents did not contend below that the manual
constituted a "legislative rule," and in this court they expressly
disavow any reliance on the court of appeals' characterization (see
Br. in Opp. 17 n.6).  /12/

   2. A principal factor showing that the manual provision does not
have the force and effect of law is that it was not issued pursuant to
statutory rulemaking authority of the Secretary.  "(T)o have (lawful)
'force and effect,'" this Court has stated, a regulation must be
"'issued by an agency pursuant to statutory authority.'" Chrylser
Corp. v. Brown, 441 U.S. 281, 301-302 (1979) (citation omitted).  As
Judge Kozinski correctly observed (Pet. App. 29a), Congress has
granted authority to promulgate rules and regulations implementing the
Medicaid program to "the Secretary alone" (see 42 U.S.C. (Supp. III)
1302).  The Secretary, moreover, has never delegated the authority to
promulgate regulations to the Administrator of HCFA, much less to any
subordinate HCFA employee.  See 42 Fed. Reg. 57352 (1977);  44 Fed.
Reg. 31045 (1979).  "Like thousands of other internal guidelines
issued every year by scores of federal agencies," Judge Kozinski
explained, the manual provision at issue here was "issued anonymously;
 the Foreword alone is signed and that by the Director of the Bureau
of Health Insurance, an official far subordinate to the Secretary"
(Pet. App. 29a).  "Guidelines issued by someone without authority to
promulgate regulations are simply not regulations" (ibid.).  See
General Electric Co. v. Gilbert, 429 U.S. 125, 141 (1976).

   Agency discretion to promulgate rules is also circumscribed by the
"procedural requirements imposed by Congress." Chrysler Corp. v.
Brown, 441 U.S. at 303.  Both the Administrative Procedure Act and the
Freedom of Information Act require that a rule be published before it
can be deemed to have any force and effect.  The manual provision was
never published in either the Federal Register or the Code of Federal
Regulations.  /13/ The United States Court of Appeals for the District
of Columbia Circuit, speaking through Judge (now Justice) Scalia,
recently observed:  "The real dividing point between regulations (and
other agency pronouncements) is publication in the Code of Federal
Regulations, which the statute authorizes to contain only documents
'having general applicability and legal effect.'" Brock v. Cathedral
Bluffs Shale Oil Co., 796 F.2d 533, 539 (1986) (quoting 44 U.S.C.
1510(a) (emphasis in original)).  A statement in an agency field
manual that does not spring from the Secretary's statutory rulemaking
power, that was not the subject of notice-and-comment rulemaking, and
that was never officially published cannot "bind" the Secretary.

   3. Finally, even if the manual provision could be deemed a
procedurally-sound substantive rule issued under a proper grant of
statutory authority, the manual provision would still be invalid
because it obviously conflicts with the language of the Social
Security Act.  The Act prescribes a strict formula for the calculation
of the cap on federal financial participation:  a state's Medicaid
MNIL for a family of a given size can be no higher than 133 1/3% of
the state's maximum AFDC payment to a family of the same size.  In
sharp contrast, the manual suggests (Section 2572D) that the states
may set a standard for two adults "between 133 1/3 percent of the AFDC
payment level for one person and 133 1/3 percent of the AFDC payment
level for a family of three persons" (J.A. 21).  In light of the
statutory language, the manual provision was, as the HCFA
Administrator held, a nullity (Pet. App. 44a).  The Secretary's
long-standing regulation mandates the same conclusion.  That
regulation has been in effect since 1971 and has never been repealed,
unless the court of appeals means to say that the manual provision
"repealed" the regulation.  Administrative regularity dictates that as
between a duly promulgated, officially published regulation and an
agency field manual, it is the former, not the latter, that is
binding.  /14/

   4. There is nothing persuasive about the verbal and logical
gymnastics in which the court of appeals engaged in an effort to fit
the manual provision into the mold of a regulation.  The court
suggested, for example, that notice-and-comment procedures were not
applicable here because the manual provision concerns matters relating
to "public benefits" (see 5 U.S.C. 553(a)(2)).  But in 1971 the
Secretary had voluntarily waived the "public benefits" exception by
formally stating that HHS regulations would comply with the APA
procedural requirements.  See 36 Fed. Reg. 2532 (1971).  Quite apart
from the question whether this voluntary waiver is binding on the
Secretary to the same degree as procedural requirements imposed
directly by Congress (see, e.g., National Welfare Rights Organization
v. Mathews, 533 F.2d 637 (D.C. Cir. 1976)), the Secretary's decision
not to subject the HCFA manual to notice-and-comment procedures
plainly shows that the Secretary did not regard that manual as a
regulation.  And it is certainly no answer to infer, as did the court
of appeals (Pet. App. 14a), that the Secretary in issuing the manual
simply "failed to abide by her predecessor's promise to adopt APA
rulemaking procedures," for that is to posit a presumption of agency
irregularity.

   The court of appeals acknowledged, moreover, that the Freedom of
Information Act does not exempt benefits-related regulations from the
publication requirement.  The court parried that thrust by asserting
(Pet. App. 15a (citation omitted)) that the FOIA publication
requirement attaches only where nonpublication "'would adversely
affect a member of the public,'" and that the HCFA manual, although
unpublished, was nevertheless a valid "legislative rule." But putting
to one side the question whether an agency's failure to publish a
regulation in the Federal Register will invariably invalidate it, the
Secretary's action in not publishing the instant manual provision
plainly shows that the Secretary did not regard it as a "regulation"
at all, least of all a regulation effectively revoking prior
regulations duly promulgated under the APA.

   5. The practical effect of the decision below will be to make every
agency publication, however informal, a "potential regulation," and
thereby wreak havoc on federal agencies and the public.  Under the
administrative regime contemplated by the court of appeals, the
regulations set forth in the Federal Register and the Code of Federal
Regulations will be subject to contradition, revision or repeal by far
less formal, and certainly less official, pronouncements made by
lower-level employees.  As Judge Kozinski put it, agency officials
"will now have to guess which of their informal, unsigned, internal
guidelines will be found 'exceptional' enough to out-rank regulations"
(Pet. App. 32a).  That is surely not the law.  Schweiker v. Hansen,
supra;  Heckler v. Community Health Services, 467 U.S. 51, 63-64
(1984);  Federal Crop Insurance Corp. v. Merrill, 332 U.S. 380, 384
(1947).

   Even more damaging than this, perhaps, is the court of appeals'
statement that anonymous, internal agency pronouncements retain "the
force and effect of law" unless "repealed," or, possibly, until
"removed from publication" (Pet. App. 13a, 16a).  The manual provision
at issue here was in fact deleted from the superseding HCFA regional
manual issued in July 1980, three years before California proposed the
instant plan amendment.  Until the decision below, one would have
thought that an agency's revision of its office manual would terminate
whatever effect (binding or otherwise) a predecessor version might be
deemed to have.  Apparently not.  Although the government in its
petition for rehearing (at 9 n.3) informed the court of appeals that
the HCFA manual had been revised and the relevant language deleted in
1980, the panel took no cognizance of that fact.  The court seems to
have held, in other words, that the Secretary must engage in formal
notice-and-comment rulemaking to revise an office manual, even though
the manual's supposed status as a valid "legislative rule" rested on
the court's antecedent conclusion that notice-and-comment rulemaking
was not required when the manual was issued in the first place.

 C. The Secretary Cannot Be Estopped From Obeying The Law On The
Theory That The State Relied On The Manual Provision At Issue

   In their brief in opposition (at 4, 20, 21), respondents refer to
California's supposed "reliance" on HCFA's regional office manual when
it passed the 1983 amendment to California's Medicaid plan.  These
statements have the flavor of an "estoppel" argument.  But the court
of appeals found no estoppel, and respondents themselves seem to
disavow any estoppel theory in another part of their brief.  See Br.
in Opp. 25.  If that is so, assertions about California's "reliance"
on the manual are completely beside the point.

   In any event, it is clear that California did not in fact rely on
the manual.  The hearing officer found that California did not rely on
it (J.A. 12, 14).  The Administrator of HCFA agreed that "reliance was
never established" (Pet. App. 44a), and the court of appeals did not
disturb that finding.  The manual provision upon which the legislature
allegedly relied in 1983 had in fact been deleted from the manual in
July 1980 (see page 38, supra);  and the affidavit submitted by a
"principal co-author of the bill in the (State) Assembly" makes no
reference to the manual (J.A. 61).  Moreover, California's legislative
enactment itself evidences an awareness that the proposed amendment
would be disapproved by federal authorities, for it contains explicit
and rather unusual instructions to be followed by the state agency in
the event the 1983 amendment was found to violate federal law (see
note 4, supra).

   The administrative record likewise demonstrates that California
officials were well aware that the proposed 1983 amendment was
contrary to federal law.  The 133 1/3% federal reimbursement cap was
scarcely unknown to the State, since it was the basis for HCFA's
disapproval of the "special income deduction" that California had
employed prior to 1982 (see page 7, supra).  While the 1983 amendment
was pending 0efore the California legislature, respondent Kizer's
predecessor wrote to the Administrator of HCFA, advising that "(o)ur
staff analysis has concluded that this provision * * * exceeds the
maximum limitation on Federal Financial Participation" specified in
Section 1903(f) and 42 C.F.R. 435.1007 (C.A. App. 140-141;  see id. at
135).  An earlier "Decision Memo" prepared by the state agency
acknowledged the perceived conflict with federal requirements and
assessed several options that could be employed to secure the
"intended results," including a proposal to "implement (the) State
statute to the extent possible without incurring loss of federal
monies" (id. at 135-138).  Respondent Kizer's predecessor had advised
the author of the pending California legislation that his agency
opposed the amendment in question, stating that "we don't believe
federal approval of (the Assembly bill) would be granted" (C.A. App.
327;  see J.A. 54).  The HCFA Administrator in September 1983
explicitly told California that its proposed adult-couple MNIL would
exceed the 133 1/3% cap of Section 1903(f), and respondents concede
(Br. in Opp. 5) that the State was advised of the problems with the
amendment well in advance of the legislative enactment.  /15/

   At bottom, respondents' reliance argument seems to be that, while
state officials knew that California's proposed 1983 amendment would
be disapproved by federal authorities, they were unsure what the exact
basis of that disapproval would be.  Respondent Kizer's predecessor
had identified two potential problems with the state's proposal --
that it would produce an adult-couple MNIL in excess of the 133 1/3%
cap of Section 1903(f), and that it arguably violated the "single
standard" rule of Section 1902(a)(10)(C)(i)(III).  /16/ Respondents
seem to argue that California "relied" on the expectation that its
proposed plan amendment would be rejected as violative of the "single
standard" provision, whereas the basis for the HCFA Administrator's
rejection was in fact the 133 1/3% federal cap.  But that scarcely
bolsters respondents' contention that the State Plan amendment should
therefore have been approved.

 II. THE SO-CALLED "DEFRA MORATORIUM" DOES NOT IMPAIR THE SECRETARY'S
AUTHORITY TO DISAPPROVE CALIFORNIA'S PROPOSED MEDICAID PLAN AMENDMENT

   The court of appeals overturned the Secretary's determination on
the alternative ground (Pet. App. 16a-18a) that the Secretary was
barred by the so-called "DEFRA moratorium" from disapproving
California's proposed plan amendment.  The court of appeals reasoned,
in other words, that even if the HCFA field manual was not a
"regulation," with the result that disapproval of California's
proposal was mandated by Section 1903(f), the Secretary was
nevertheless prevented from taking that course by Congress's action in
1984.  This reasoning betrays a serious misunderstanding of both the
Secretary's decision and the scope of the DEFRA provision.

   1. As we have explained, the sole basis upon which the hearing
officer and the HCFA Administrator relied in disapproving California's
proposed plan amendment was the 133 1/3% cap established by Section
1903(f) of the Social Security Act, 42 U.S.C. 1396b(f).  An altogether
different question -- not implicated in the agency's decision to
disapprove California's proposal -- may arise under Section
1902(a)(10)(C)(i)(III) of the Act, 42 U.S.C. 1396a(a)(10)(C)(i)(III).
That provision, added to the statute in 1982, required that a state's
Medicaid plan establish a "single standard" for determining income and
resource eligibility.  That latter provision was initially read by
some HHS employees (though not by the Secretary) to require that a
family of two consisting of one adult and one child must have the same
Medicaid eligibility level as a family of two consisting of two
adults.  It was this interpretation of the "single standard" provision
-- i.e., requiring that all families of the same size be treated
identically under Medicaid, regardless of how many adults are in the
family -- that some Congressmen criticized as an "overly literal"
reading of the enactment.  See H.R. Conf. Rep. 98-861, 98th Cong., 2d
Sess. 1367 (1984).  And it was this interpretation of the "single
standard" provision (and of another provision that had also been
enacted in 1982) /17/ that was the subject of the DEFRA moratorium
enacted in 1984.

   The DEFRA moratorium, Pub. L. No. 98-369, Section 2373(c)(1), 98
Stat. 1112, reads as follows (emphasis added):

         The Secretary of Health and Human Services shall not take any
      compliance, disallowance, penalty, or other regulatory action
      against a State during the moratorium period described in
      paragraph (2) by reason of such State's plan under title XIX of
      the Social Security Act being determined to be in violation of
      section 1902(a)(10)(C)(i)(III) of such Act on account of such
      plan's having a standard or methodology which the Secretary
      interprets as being less restrictive than the standard or
      methodology required under such section.

   The "moratorium period" was defined as "the period beginning on the
date of the enactment of this Act and ending 18 months" after the
Secretary submitted a specified report to Congress.  Pub. L. No.
98-369, Section 2373(c)(2) and (3), 98 Stat. 1112.

   By its terms, the DEFRA moratorium speaks only of regulatory action
against a state under Section 1902(a)(10)(C)(i)(III) of the Social
Security Act.  The moratorium makes no mention of Section 1903(f), or
of the 133 1/3% cap set forth therein.  As we have explained (note 6,
supra), moreover, Section 1902(a)(10)(C)(i)(III) and Section 1903(f)
impose wholly distinct limitations on a state's Medicaid plan.  The
former Section arguably requires that all Medicaid families of a given
size must have the same income eligibility level;  it thus focuses on
relative entitlements within the Medicaid system.  Section 1903(f), by
contrast, specifies an absolute dollar cap on federal financial
participation in Medicaid, linking the Medicaid eligibility of any
family to the AFDC eligibility of a family of the same size.  Thus,
regardless of whether, under Section 1902(a)(10)(C)(i)(III), a
two-person family consisting entirely of adults must be treated the
same as a two-person family consisting of one adult and one child,
Section 1903(f) says that federal financial participation will not be
available if the Medicaid MNIL for either family exceeds 133 1/3% of
the state's highest payment to a two-person family under its AFDC
program.

   2. The legislative history reinforces the statutory language.  It
shows that Congress not only limited the DEFRA moratorium to subjects
other than those involved in this case, but also that Congress
specifically rejected a proposal that would have accomplished the
precise result that respondents obtained in the court of appeals.

   Some members of the House of Representatives did disagree with the
Secretary's implementation of Section 1903(f).  The House Committee on
Energy and Commerce therefore recommended amending Section 1903(f) to
provide explicitly that a state could set its Medicaid income level
for two adults by reference to the State's highest AFDC payment
ordinarily made to a family of three.  H.R. 4136, 98th Cong., 1st
Sess. Section 211 (1983).  But that amendment was rejected in
conference, and DEFRA contains no such provision.  The Conference
Report explained (H.R. Conf. Rep. 98-861, supra, at 1361):

                              Present law

         Medically needy income levels for an SSI-related family of
      two adults with no income or resources, many (sic) be set at a
      level no higher than 133 1/3 percent of the AFDC standard for a
      two-person family with no income or resources.

                              House bill

         The House bill permits States to establish medically needy
      levels for a family of two adults up to 133 1/3 percent of the
      three-person AFDC standard.

                           Senate amendment

         No provision.

                         Conference agreement

         The conference agreement does not include the House
         provision.

   Respondents have attempted to disengage themselves from the
consequences of that legislative determination by attributing to
Congress motives that appear nowhere in the legislative history.
Thus, respondents suggest that Congress rejected the proposed House
amendment to Section 1903(f) because it was "too limited" and would be
redundant in light of the "broader" moratorium (Br. in Opp. 6).  But,
as the plain language and the legislative history show, the moratorium
provision is not as broad as respondents propose.  To the contrary, it
is expressly limited to Section 1902(a)(10)(C)(i)(III), and it cannot
rationally be thought to apply by implication to Section 1903(f),
since Congress expressly declined to amend Section 1903(f) in that
way.  /18/

   Respondents' remaining contentions are similarly flawed by their
deliberate confusion of the "single standard" provision with the 133
1/3% cap.  For example, respondents point to language in the
Conference Report concerning "adult couple MNILs" (Br. in Opp. 6).
That report states that the moratorium was directed inter alia at the
"position that the 'single standard' requirement of the TEFRA
amendment prohibits States from establishing less restrictive
medically needy income levels for single adults and couples." H.R.
Conf. Rep. 98-861, supra, at 1367 (quoted in Br. in Opp. 7-8).  This
statement obviously refers only to the TEFRA "single standard"
provision;  it does not refer to the 133 1/3% cap.  As we have noted,
an "adult couple MNIL" like California's may be objectionable on two
distinct grounds:  (1) in relative terms, because it treats some
two-person families better than other two-person families for Medicaid
purposes, in violation of the "single standard" rule;  and (2) in
absolute terms, because it sets Medicaid benefits for a two-person
family at a level higher than 133 1/3% of the maximum AFDC benefits
for a two-person family, in violation of Section 1903(f).  In
addressing "adult couple MNILs" in the context of the DEFRA
moratorium, Congress was referring only to the former ground of
invalidity.  This case concerns the latter.  /19/

   In sum, there is no basis for assuming that Congress intended the
DEFRA moratorium to apply to the situation involved here.  Section
1903(f) is not within the scope of the moratorium's statutory
language, is not mentioned in the Conference Report's description of
the moratorium's purpose, and is a provision that the Conference
Report expressly refused to amend only six pages earlier.  Cf. Gulf
Oil Corp. v. Copp Paving Co., 419 U.S. 186, 200 (1974) (Conference
Committee's deletion of phrase from bill "strongly militates against a
judgment that Congress intended a result that it expressly declined to
enact.").  And once the clear statutory distinction between Section
1903(f) and Section 1902(a)(10)(C)(i)(III) is recognized, respondents'
attempt to draw support from DEFRA's legislative history evaporates.

                              CONCLUSION

   The judgment of the court of appeals should be reversed.

   Respectfully submitted.

   CHARLES FRIED

      Solicitor General

   RICHARD K. WILLARD

      Assistant Attorney General

   ALBERT G. LAUBER, JR.

      Deputy Solicitor General

   JERROLD J. GANZFRIED

      Assistant to the Solicitor General

   ROBERT S. GREENSPAN

   RICHARD OLDERMAN

      Attorneys

   RONALD E. ROBERTSON

      General Counsel Department of Health and Human Services

   MAY 1987

   /1/ Typically, income levels for AFDC eligibility are the lowest
among the categorical assistance programs.  H.R. Rep. 544, supra, at
117, 119;  see Schweiker v. Hogan, 457 U.S. at 577.

   /2/ The regulations promulgated in 1971 were initially codified at
45 C.F.R. 248.21(b)(2) and (3) (1972).  They were recodified in 1974
at 45 C.F.R. 248.4(b)(4) (1974), and again in 1978 at 42 C.F.R.
448.4(b)(4) (1977).  In September 1978, the regulations were amended
to their present form and recodified at 42 C.F.R. 435.1007.  The
language at issue in this case ("family of the same size") has not
undergone substantive change since the initial regulations were issued
in 1971.

   /3/ The effects of a reduction in the MNIL may be illustrated by a
simplified example.  Assume a "medically needy" family with monthly
countable income of $300 and monthly medical expenses of $150.  If the
state's MNIL is $250, that family must pay the first $50 of its
medical expenses, bringing its monthly income down to the Medicaid
eligibility standard;  at that point, the family may retain the
remaining $250 of its monthly income for nonmedical needs and Medicaid
will pay the other $100 of its medical costs.  Now assume that the
state lowers its MNIL to $200.  That same family would then keep only
$200 for nonmedical needs;  Medicaid would cover only $50 of its
medical bills, and the family would be responsible for the remaining
$100 of its monthly medical expenses.  As this illustration shows, the
lower the MNIL, the smaller the proportion of medical expenses covered
by Medicaid.  Program costs further decrease with a lower MNIL because
fewer people qualify for benefits.

   /4/ Section 124.7 of 1983 Cal. Stat. provided in part (C.A. App.
144-145):

         (a) * * * No provision of Section * * * 14005.12 of the
      Welfare and Institutions Code shall be considered to be in
      conflict with any federal statute or regulation until after a
      final determination of the Secretary of the United States
      Department of Health and Human Services * * * .

         (b) In the event of an initial determination by the Secretary
      of the United States Department of Health and Human Services
      that any provision of this act is in conflict with any federal
      statute or regulation, the State Department of Health Services
      shall take all available and necessary steps to obtain a final
      determination reversing that decision.  In the event of a final
      determination finding a conflict with federal law, the State
      Department of Health Services shall immediately request the
      State Attorney General to seek judicial review of the
      determination, and shall immediately notify the appropriate
      policy and fiscal committees of both houses of the Legislature.

         (c) In the event of a final determination finding that any
      provision of this act conflicts with federal law, the State
      Department of Health Services shall adopt emergency regulations
      * * * if necessary to avoid withholding of federal
      reimbursement.  The department shall further seek a federal
      waiver to permit implementation of the provision (found) to be
      in conflict with federal law, and shall continue to implement
      all (other) provisions of this act * * * .

   /5/ Even before the 1983 legislation was passed, it was recognized
within the California Department of Health Services that the pending
bill conflicted with federal requirements (C.A. App. 135, 327).  The
state agency had therefore considered several options as against the
probability that the proposed amendment would be found to violate
federal law.  Among the options considered were a delay in
implementing the portion of the amendment establishing a higher MNIL
for two-adult families, implementing that provision and risking
federal sanctions, and implementing the provision without seeking
federal financial participation for benefits paid to persons whose
income levels exceeded the federal limits (C.A. App. 136-137).

   /6/ Section 1902(a)(10)(C)(i)(III) of the Social Security Act,
added by the Tax Equity and Financial Responsibility Act of 1982
(TEFRA), Pub. L. No. 97-248, Section 137(b)(8), 96 Stat. 378, 42
U.S.C. 1396a(a)(10)(C)(i)(III), requires that a state's Medicaid plan
must establish a "single standard" for determining income and resource
eligibility of a family of a particular size.  This is the provision
that later became a subject of the "DEFRA moratorium," the proper
interpretation of which is involved in the second question presented
by our petition in this case.  See pages 41-47, infra.  As respondent
noted in his 1983 letter to the HCFA Administrator, Section 1903(f)
and Section 1902(a)(10)(C)(i)(III) represented entirely distinct
grounds for invalidating California's 1983 amendment to its Medicaid
plan.

   A simplified example will show how the 133 1/3% cap of Section
1903(f) operates independently of the "single standard" rule of
Section 1902(a)(10)(C)(i)(III).  Assume a state where the highest
monthly AFDC benefit ordinarily paid to a family of two is $300.  If
that state were to establish a Medicaid eligibility level of $350 for
a family consisting of one adult and one child, and a separate level
of $400 for a family consisting of two adults, a question could
thereby be raised under the TEFRA "single standard" provision.  But
the 133 1/3% cap of Section 1903(f) -- viz., 133 1/3% of $300, or $400
-- would not be exceeded in either event.  Conversely, if that same
state were to set its Medicaid eligibility level for all families of
two (whether consisting of two adults or of one adult and one child)
at $450, there would be no question raised under the "single standard"
provision.  But the state would be in violation of the 133 1/3% cap of
Section 1903(f).

   /7/ The operation of Section 1902(a)(10)(C)(i)(III) of the Act is
described in note 6, supra, and is more thoroughly discussed at pages
41-47, infra.

   /8/ As had the hearing officer, the Administrator also rejected the
State's alternative argument based on the DEFRA moratorium (Pet. App.
40a, 41a).

   /9/ In view of the legislative history of Section 1903(f), the
concerns that prompted California to propose its 1983 plan amendment,
no less than the literal terms of that amendment, are at odds with
congressional intent.  California's proposal was animated by the
perception that some "medically needy" persons, after paying their
share of medical expenses, could end up with less income than some
"categorically needy" persons, such as SSI recipients.  See J.A. 58.
But Congress plainly recognized that this could happen and intended
that result, since it deliberately chose to link Medicaid eligibility
to income levels under the least generous (AFDC), rather than under
the most generous (OAA), categorical assistance program.

   The fact that Congress chose to limit federal financial
participation in this way, of course, does not preclude a state from
establishing more generous Medicaid benefits payable out of the
state's own funds.  Indeed, the printed form on which proposed state
plan amendments are transmitted to HCFA (see J.A. 24) specifically
contemplates that a state desiring to exceed federal limits will
confirm that it has established methods for excluding from its claim
for federal financial participation those payments made to individuals
whose income exceeds federal limits.  A state that so confirms will
continue to receive the federal share of Medicaid payments made to
individuals whose incomes do not exceed the federal limits.  In other
areas, California has decided to pay benefits exclusively from state
funds, e.g., Cal. Welf. & Inst. Code Section 14005.4 (West Supp. 1987)
(medically indigent program).  But, as we have noted (see pages 11-12,
supra;  J.A. 24), California did not pursue that course here;  it
opted instead to exceed the federal limits and to seek federal
participation.  See C.A. App. 272-274, 570, 572, 573, 590-592, 598,
600, 835-837.

   Another option available to a state seeking to provide more
generous Medicaid benefits to adult couples without exceeding federal
limits is simply to increase the amount of its AFDC payments to a
family of two.  Since the Medicaid 133 1/3% cap is keyed to the AFDC
level, an increase in the latter necessarily increases the former.
Once again, however, California did not pursue that course;  it left
the AFDC level substantially unchanged while attempting to raise the
Medicaid level above the 133 1/3% cap.  Thus, the issue in this case
is not whether California may provide additional assistance for the
medical needs of adult couples, but rather whether California may
enlist in that effort federal financial participation in excess of the
limits set by Congress.

   /10/ "Special needs" payments may cover such circumstances as
special nutritional needs or diets, utilities, transportation,
education, day care, pregnancy-related needs, clothing, and
catastrophic events.  Thirty states, the District of Columbia, and
Guam have chosen to make AFDC "special needs" payments.  See generally
Office of Family Assistance, Social Security Administration, U.S.
Dep't of Health & Human Services, Characteristics of State Plans for
Aid To Families With Dependent Children Under the Social Security Act
Title IV-A (1986).

   /11/ In the administrative proceedings in this case, the hearing
officer observed that the regional manual on which the court of
appeals relied "if anything, has less" authoritative force than the
Claims Manual that this Court ruled in Hansen was not a binding
regulation (J.A. 11).

   /12/ Respondents suggest that the court of appeals'
characterization of the manual as a "legislative rule" was
superfluous, and that the court "could well have rested its judgment
upon the ordinary deference which this Court and the court of appeals
have given similar regulatory material" (Br. in Opp. 19).  This
suggestion is without merit because characterization of the manual as
a "legislative rule" was essential to the court of appeals' reasoning.
 The court distinguished Schweiker v. Hansen and similar cases on the
ground that, "(u)nlike the statutes interpreted by the agency manuals
in (those) cases * * * , Section 1903(f) expressly authorized the
Secretary to prescribe 'standards'" (Pet. App. 13a).  The court
reasoned that the instant manual was such a "standard," and that,
because it was supposedly issued pursuant to an explicit statutory
directive, it was a "proper legislative rule" and hence to be
distinguished from the agency manuals involved in previous cases.  In
any event, contrary to respondents' statement, a manual provision that
contradicts the express language of the statute and of duly
promulgated regulations, and that suffers from the other deficiencies
we have described, is not "regulatory material" to which any
"difference" is due.

   /13/ Respondents describe the regional office manual (Br. in Opp.
4) as a document "published by HHS' Health Care Financing
Administration." Respondents also refer to the manual as a "published
interpretation( )," by which they mean that "it was published in the
CCH Medicare & Medicaid Guide" (Br. in Opp. 21).  This sort of
"publication," of course, is irrelevant in determining whether printed
matter is an agency "regulation."

   /14/ Although one can only speculate about the genesis of the
erroneous manual provision, the error may have stemmed from an
incorrect extrapolation from Medicaid rules governing families of one
person.  The manual states (see J.A. 18) that the provision at issue
here was drafted in response to an inquiry concerning the
establishment of a separate MNIL for two adults;  the manual surmised
that this question was "similar" to the establishment of an MNIL for a
family of one, a question that had been addressed in response to an
inquiry made in 1976 (ibid.).  There are, to be sure, similarities
between setting MNILs for families of one and two.  But there are also
substantial differences, which the manual provision ignored.  The most
important distinction is that Congress dealt separately with each, in
different sections of the Social Security Act.  Section
1903(f)(1)(B)(i), which is at issue here, and which establishes the
133 1/3% cap in relation to AFDC families of the "same size,"
addresses family sizes for which the state's AFDC program has specific
income levels.  The statutory prescription for establishing the MNIL
for a family of one is contained in Section 1903(f)(3);  it does not
employ the 133 1/3% cap based on a family of the "same size," since an
AFDC family of one is not the norm and, as Congress anticipated, some
states may not have established AFDC income levels for a family of
one.  Rather, Section 1903(f)(3) says that the state shall calculate
its Medicaid MNIL for a family of one "on the basis of reasonable
relationship to the amounts payable under such plan to families
consisting of two or more persons" (42 U.S.C. 1396b(f)(3)).  The
manual thus appears to have erred in transposing to a family of two
the statutory standard that applies to a family of one.  This is also
suggested by the manual's citation of 45 C.F.R. 248.4(b)(4)(ii)(A)
(1976) as the source for the manual's description of "'reasonably
related' income levels." See J.A. 21.  That regulation is expressly
limited to single-member families.

   /15/ The Chief of the Eligibility Policy Section of California's
Department of Health Services (see C.A. App. 231) explained that her
department had initially opposed implementing the 1983 amendments
inasmuch as "every federal official and staff member that I talked to
and all of our letters indicated there is no way they are going to
approve it, it seemed like a futile exercise" (id. at 281).

   /16/ We discuss the latter provision more fully in the context of
the "DEFRA moratorium" below.

   /17/ The 133 1/3% cap was of course enacted in 1967, some 15 years
previously.

   /18/ This Court recognized in Atkins v. Rivera, slip op. 12 n.10,
that Congress's sole purpose in enacting the DEFRA moratorium was to
override regulations the Secretary had issued following the Omnibus
Budget Reconciliation Act of 1981, Pub. L. No. 97-35, 95 Stat. 357.
See H.R. Conf. Rep. 98-861, 98th Cong., 2d Sess. 1366-1368 (1984);
Camacho v. Perales, 786 F.2d 32, 42 (2d Cir. 1986).  The regulations
at issue in this case were initially promulgated in 1971, and have
been unchanged since 1978;  these regulations were accordingly not
affected by TEFRA or by the related DEFRA moratorium.

   The context of the DEFRA moratorium further bolsters the conclusion
that Congress did not intend to limit the Secretary's authority to
enforce the 133 1/3% cap.  DEFRA was, after all, primarily a deficit
reduction measure.  There is, therefore, no reason why Congress would
have enacted, as part of budget-cutting legislation, a provision that
would preclude the Secretary from enforcing the statutory cap on
federal financial participation in Medicaid without at least
explicitly stating its intent to do so.

   /19/ Even as to the effect of the DEFRA moratorium on the
Secretary's powers under Section 1902(a)(10)(C)(i)(III), Judge
Kozinski noted (Pet. App. 34a) that the moratorium "prohibits the
Secretary from taking any regulatory action against a 'State's
(Medicaid) plan.'" Since California's "proposed amendment does not
become part of its plan (until approved by the Secretary)," Judge
Kozinski observed, the State "therefore cannot benefit from the
moratorium" in this case.  Ibid.