OTIS R. BOWEN, SECRETARY OF HEALTH AND HUMAN SERVICES, PETITIONER V. STANLEY CUBANSKI, DIRECTOR OF THE CALIFORNIA DEPARTMENT OF HEALTH SERVICES, ET AL. No. 86-863 In the Supreme Court of the United States October Term, 1986 Petition for a Writ of Certiorari to the United States Court of Appeals for the Ninth Circuit The Solicitor General, on behalf of the Secretary of Health and Human Services, petitions for a writ of certiorari to review the judgment of the United States Court of Appeals for the Ninth Circuit in this case. PARTIES TO THE PROCEEDING In addition to those named in the caption, the parties are: Donald A. Barrier, Alan Bierman, Lola Bierman, James Jones, and Ronald Kwiek, all of whom intervened in the administrative proceedings and in the court of appeals. TABLE OF CONTENTS Parties to the proceeding Opinions below Jurisdiction Statutory and regulatory provisions involved Question presented Statement Reasons for granting the petition Conclusion Appendix A Appendix B Appendix C Appendix D Appendix E Appendix F Appendix G OPINIONS BELOW The opinion of the court of appeals (App., infra, 1a-19a) is reported at 781 F.2d 1421. The opinion dissenting from the denial of rehearing en banc (App., infra, 23a-35a) is reported at 794 F.2d 540. The opinion of the Administrator of the Heath Care Financing Administration (App., infra, 38a-45a) is unreported. JURISDICTION The judgment of the court of appeals was entered on February 7, 1986 (App., infra, 21a). An order amending the panel opinion was entered on March 6, 1986 (App., infra, 20a). A petition for rehearing was denied on July 14, 1986 (App., infra, 22a). An opinion dissenting from the denial of rehearing en banc was filed on July 18, 1986 (App., infra, 23a-35a). On October 3, 1986, Justice O'Connor extended the time for filing a petition for a writ of certiorari to and including November 26, 1986. The jurisdiction of this Court is invoked under 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. 1396(a) and 1396b(f), of Section 2373(c) of the Deficit Reduction Act of 1984, Pub. L. No. 98-369, 98 Stat. 494, of 42 C.F.R. 435.811 and 435.1007, and of Section 14005.12 of the California Welfare and Institutions Code, are set out at App., infra 461-49a. 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 prohibits the Secretary of Health and Human Services from disapproving proposed amendments to state Medicaid plans that conflict with statutory limitations on federal financial participation in the Medicaid program. STATEMENT 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. 86-632 (June 23, 1986), slip op. 2. Medicaid is a cooperative federal-state program employing both state and federal funds. See 42 U.S.C. 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. II) 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. II) 1316(a), 1396a(b), 1396b(a). Individuals covered by certain cash assistance programs -- the Supplemental Security Income (SSI) Program, 42 U.S.C. 1381 et seq., and the Aid to Families With Dependent Children (AFDC) Program, 42 U.S.C. 602 et seq. -- automatically qualify for Medicaid. Thus, states that choose to participate in Medicaid are required to provide benefits to these persons, termed the "categorically needy." See 42 U.S.C. 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 "medically needy" people who would qualify for SSI or AFDC except that their income and resources exceed the levels set for those categorical assistance programs. 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. See 42 U.S.C. 1396(a)(17); 42 C.F.R. 435.831(c). At the beginning of the Medicaid program, no limit was placed on the amount of federal reimbursement to the states for optional coverage given the "medically needy." In 1967, however, Congress determined that a limit on federal participation was desirable to guard against improvident Medicaid spending by the states. See Hogan, 457 U.S. at 573, 576. Accordingly, Congress enacted legislation to ensure that "federal 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 mony payments under the AFDC program." H.R. Rep. 544, 90th Cong., 1st Sess. 117, 119 (1967). To effect that congressional purpose, Section 1903(f)(1)(B)(i) of the Social Security Act, 42 U.S.C. 1396b(f)(1)(B)(i), provides that federal financial participation is limited 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 the (relevant) State * * * . The Secretary issued regulations in 1971 pursuant to this directive. 36 Fed. Reg. 3871-3872. Those regulations, now codified at 42 C.F.R. 435.1007, reiterate the statutory requirement that Medicaid benefits bear a fixed mathematical relationship to the AFDC benefits that would be paid to "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 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). /1/ 2. Respondent Cubanski is the Director of the California Department of Health Services. In September 1983, California proposed to amend its Medicaid plan to provide more generous benefits. Specifically, California proposed to revise upward its "medically needy income level" (MNIL), which is the maximum amount of income that a medically needy individual or family may keep for nonmedical needs and still be eligible for Medicaid. /2/ Under the State's proposed amendment, the monthly MNIL for a family consisting of two adults would be 133 1/3 percent 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. 1986) (emphasis added). In December 1983, the Health Care Financing Administration (HCFA), a subdivision of HHS, notified the State that its proposal was rejected because it did not comply with the statutory and regulatory requirement that Medicaid payments not exceed 133 1/3 percent of the maximum of AFDC payment "to a family of the same size" (42 U.S.C. 1396b(f)(1)(B)(i); 42 C.F.R. 435.1007(a)). On administrative appeal, that decision was ultimately upheld by the HFCA Administrator (App., infra, 38a-45a). The State's principal argument throughout the administrative process was that its proposed amendment was supported by language that appeared in a HCFA regional office manual that was issued on June 30, 1979. In contrast to the regulation promulgated by the Secretary in 1971, as amended in 1978, which required that a state's Medicaid MNIL be no more than 133 1/3 percent 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 medically needy income level for two adults which would be established between 133 1/3% of the AFDC payment level for one person and 133 1/3% of the AFDC payment level for a family of three persons." The manual also said that states "should have the option of establishing separate medically needy income levels for a two-person family consisting of one adult and one child and for a two-person family composed of two adults" (ibid.). These sentences were deleted from a superseding edition of the manual issued in July 1980. The HCFA Administrator rejected the State's contention. She concluded that "the statute provides for a single MNIL for a family of two" and that this limit is 133 1/3 percent of the maximum payment ordinarily made under the State's AFDC plan "to a family of the same size without income and resources" (App., infra, 42a). The Administrator concluded 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" (App., infra, 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" (App., infra, 44a). /3/ 3. On petition for review, the court of appeals reversed the agency's determination (App., infra, 1a-19a). The court concluded that the statutory directive limiting federal financial participation to 133 1/3 percent of the highest AFDC payment "to a family of the same size" was tempered by language requiring that this limit be determined "in accordance with standards prescribed by the Secretary." App., infra, 7a, citing 42 U.S.C. 1369b(f)(1)(B)(i). In the court's view, the 1979 office manual prescribed just such a "standard," and a state was therefore permitted to set its MNIL for two adults as high as "133 1/3 percent of the AFDC payment level for a family of three persons." The manual, the court concluded, set forth "a proper legislative rule" because it is a "rule 'issued by an agency pursuant to statutory authority and . . . implements the statute'" (App., infra, 13a, quoting Batterton v. Franics, 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" (App., infra, 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(s) 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 (App., infra, 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 said that these were not "'procedural requirements imposed by Congress'" and hence concluded that the absence of notice-and-comment proceedings did not deny the manual the force of law (App., infra, 14a, quoting Chrysler Corp. v. Brown, 441 U.S. 281, 303 (1979)). 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 (App., infra, 15a). The court therefore held that the manual was a lawfully promulgated regulation, exempt from the notice-and-comment procedures 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 (App., infra, 16a-18a). 4. The Secretary's suggestion for rehearing en banc was denied, with Judges Kozinski, Sneed, Hall and Noonan dissenting (App., infra, 22a-35a). In the dissenters' view, "(t)he panel err(ed) in almost every respect" (id. at 26a). The dissent pointed out that the HCFA's regional office 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" (App., infra, 26a (emphasis in original)). The manual's "foreward," 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). 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 (App., infra, 29a). Instead of deferring to these regulations, which explicitly link Medicaid entitlement to AFDC families "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 (App., infra, 34a). In Judge Kozinski's words, "(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." REASONS FOR GRANTING THE PETITION The decision below elevates to the status of a binding regulation language in an internal agency manual that was never published in the Federal Register or the Code of Federal Regulations, that was never intended as an official agency pronouncement, and that is flatly inconsistent both with a validly promulgated regulation of the Department of Health and Human Services and with the plain language of the statute. The court of appeals' decision reaching this odd result directly conflicts with decisions of this Court and with settled principles of administrative law. See Schweiker v. Hansen, 450 U.S. 785 (1981); Morton v. Ruiz, 415 U.S. 199 (1974). If it is permitted to stand, the decision below will generate enormous confusion as government officials -- and those subject to regulation -- are left to guess which statutes and regulations will be subordinated to the views expressed in documents such as the manual at issue here. The court of appeals' alternative holding is equally devoid of merit. By expanding the DEFRA moratorium far beyond Congress's intent, the decision below prevents the Secretary from ensuring that proposed amendments to state plans are consistent with all requirements of the Social Security Act. It substantially undermines federal fiscal control over the Medicaid program. The Department of Health and Human Services estimates that the particular plan amendment proposed by California in this case would increase federal Medicaid expenditures by $50 million annually. 1. We start with the language of the statute. Congress provided that a state's entitlement to federal fiscal participation in Medicaid is limited by reference to the state's level of AFDC benefits paid "to a family of the same size" (42 U.S.C. 1396b(f)(1)(B)(i)). The House Report makes clear the intent that "(f)ede l sharing will 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." See H.R. Rep. 544, 90th Cong., 1st Sess. 119 (1967); Schweiker v. Hogan, 457 U.S. at 577. The Secretary has interpreted this provision in a way that is consistent with the plain language and evident purpose of the statute. To implement the Act's limitation of federal participation in Medicaid to 133 1/3 percent of the AFDC benefit paid to a family of the "same size," the Secretary has prescribed by regulation that federal financial participation is available only when it 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)). This regulation and its predecessors have been in force for more than 15 years. See 43 Fed. Reg. 45217 (1978); 36 Fed. Reg. 3871 (1971); note 1, supra. As this Court recently explained, regulations of this type are entitled to "legislative effect" (Atkins v. Rivera, slip op. 7): Because the Secretary's regulation is "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." Gray Panthers, 432 U.S. at 44, quoting Batterton v. Francis, 432 U.S. at 426. Indeed, it is entitled to "legislative effect," id. at 425, and is controlling "unless (it) is arbitrary, capricious, or manifestly contrary to the statute," Chevron U.S.A., Inc. v. National Resources Defense Council, Inc., 467 U.S. 837, 844 (1984). 2. In contrast to the statute and regulation, which both refer to families of "the same size," California's proposed plan amendment would calculate Medicaid benefits for a family of two by reference to the highest AFDC payments to a family of three. Recognizing that a family of three is not the "same size" as a family of two, the Secretary properly disapproved California's proposal. In overturning the Secretary's determination, the court of appeals relied on the Act's delegation of authority to the Secretary to prescribe standards for determining what amount is "equivalent to 133 1/3 percent of the highest amount which would normally be paid to (an AFDC) family of the same size" (42 U.S.C. 1396b(f)). But this delegation of authority plainly does not grant the Secretary the latitude to conclude that a family of three is the same size as a family of two. The "standards" that the Secretary was directed to prescribe are those establishing the State's determination as to which of its AFDC payment levels for a family of a given size is the "highest" that would "ordinarily be paid" to a family of that size. Once such standards have been employed, one can then multiply that "highest amount" by 133 1/3 percent to derive the maximum Medicaid MNIL the State may establish for a family "of the same size" (42 U.S.C. 1396b(f). If, as the court below ruled, the Secretary may prescribe standards that treat two as equal to three, then the statutory requirement of equivalence is a nullity. "Read in this fashion," Judge Kozinski aptly put it, "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'" (App., infra, 31a). 3. 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 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 which 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 "establishe(d) the right of states to increase their adult couple MNIL" (App., infra, 11a). 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 no reason for Congress to have codified notice-and-comment procedures in the Administrative Procedure Act. Agency manuals in particular are examples of agency pronouncements 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); Sullivan v. United States, 348 U.S. 170, 172-174 (1954); American Farm Lines v. Black Ball Freight Service, 397 U.S. 432 (1970). In Hansen, 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 provided for in the Claims Manual. The Court held, however, that "the Claims Manual is not a regulation * * * (i)t has no legal force, and it does not bind the (Social Security Administration)." 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. The court of appeals concluded that this case justified an exception to the established rule because, in the panel's view, the HCFA manual was not directed to office-level agency employees, but instead to "states and a major category of recipients under state plans" (App., infra, 11a). But, as the dissent demonstrates (id. at 28a (emphasis omitted)), 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." Quite plainly, the manual was by its terms not intended for use by anyone other than HCFA employees -- the same use for which the manual involved in Schweiker v. Hansen was intended. The court of appeals failed to acknowledge the manual's expressly limited purpose. And the court failed to explain how the manual, despite its explicit disclaimer, could be regarded as "a legislative rule issued pursuant to statutory authority" (App., infra, 16a). 4. The court's holding that the manual provision is a "regulation" becomes even more difficult to fathom when the manual is measured against the requirements that must be met before any agency publication has the force and effect of law. Ordinarily, published agency rules must "have certain substantive characteristics" and "be the product of certain procedural requisites." Chrysler Corp. v. Brown, 441 U.S. at 301. These include the procedural limitations and protections prescribed by the APA. The manual provision upon which the court of appeals relied was never published in either the Federal Register or the Code of Federal Regulations. That nonpublication serves as a bright beacon showing that the agency did not regard the manual as its binding official interpretation. The United States Court of Appeals for the District of Columbia Circuit recently noted that an agency's "(f)ailure to publish in the Federal Register is (an) indication that the statement in question was not meant to be a regulation," Brock v. Cathedral Bluffs Shale Oil Co., 796 F.2d 533, 538 (1986) (emphasis in original). "The real dividing point" between regulations and agency statements that are not regulations, the court continued, "is publication in the Code of Federal Regulations, which the statute authorizes to contain only documents having general applicability and legal effect" (id. at 539 (emphasis in original)). A further reason why the manual provision cannot be regarded as a regulation is that the provision was never the subject of notice-and-comment rulemaking. The court below suggested 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 departmental regulations would comply with the statutory procedural requirements. 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 App., infra, 14a), 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 no answer to infer, as did the court of appeals (ibid.), that the Secretary in issuing the manual simply "failed to abide by her predecessor's promise to adopt the APA rulemaking procedures," for that is to posit a presumption of agency irregularity. Another reason why the manual provision cannot be regarded as a regulation is that the provision was never published in the Federal Register, as both the FOIA and the APA require. Unlike the APA, the FOIA has no "public benefits" exception and therefore plainly mandates that regulations must be issued by publication. The court of appeals asserted that FOIA's publication requirement attaches only where nonpublication "'would adversely affect a member of the public'" and hence concluded that the HCFA manual, although unpublished, was nevertheless a valid "legislative rule." App., infra, 15a (quoting Zaharakis v. Heckler, 744 F.2d 711, 714 (9th Cir. 1984)). 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 manual here 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. /4/ Finally, even if the manual provision were deemed to be a "regulation," the judgment below would still be incorrect. The language of the manual is so inconsistent with the Social Security Act that, as the HCFA Administrator concluded, it was "invalid from its origination" (App., infra, 44a). The judges dissenting on rehearing agreed, stating that the manual "violates the plain language of the statute" (id. at 30a). For this reason, even if the language in the manual reflected the Secretary's interpretation and satisfied all procedural requirements of rulemaking, it could not lawfully be given effect. Morton v. Ruiz, 415 U.S. 199 (1974). 5. The decision below would warrant this Court's review if the court of appeals had done nothing more to thwart congressional intent than subordinate the plain language of the statute and the consistent interpretation of the Secretary to contradictory language in an internal agency document. By itself, that holding would wreak havoc on federal agencies and on the public by casting into doubt the certainty that federal rules and regulations are set forth in the Code of Federal Regulations and the Federal Register. Under the decision below, those official compilations of departmental rules would be subject to contradiction, revision, or repeal by far less formal and certainly less official pronouncements made by lower level employees. That is not the law. Schweiker v. Hansen, supra; Heckler v. Community Health Services, 467 U.S. 51, 63-65 (1984); FCIC v. Merrill, 332 U.S. 380, 384 (1947). But the court of appeals did more than that. It held that anonymous, internal agency pronouncements retain "the force and effect of law" unless "repealed" or, possibly, until "removed from publication" (App., infra, 13a, 16a). The manual provision at issue in this case was 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 binding effect a predecessor version might be deemed to have. Apparently not. Although the government in its petition for rehearing (at 9 n.3) advised 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. 6. The panel also erred in overturning the Secretary's determination on the alternative ground that the Secretary was barred by Section 2373(c) of DEFRA from disapproving California's proposed plan amendment. DEFRA imposed a moratorium to preclude the Secretary from taking regulatory action against state Medicaid plans that might be inconsistent with the "single standard" or "same methodology" language that had been added to 42 U.S.C. 1396a(a)(10)(C)(i)(III) by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, Section 137(b)(8), 96 Stat. 378. /5/ As this Court recently explained, in the context of the "same methodology" provision, the TEFRA language deals with determining what resources are to be regarded as income for purposes of Medicaid eligibility. Atkins v. Rivera, slip op. 8. This Court's opinion in Atkins makes it clear (slip op. 11) that the relevant TEFRA amendment was intended "solely to invalidate" certain post-1981 regulations "permitting the income and resources standards in state Medicaid plans to deviate from those used (in other welfare programs)." Congress later sought to stay the Secretary's hand in implementing the "same methodology" language and enacted the DEFRA moratorium for that purpose. In so doing, Congress reaffirmed that its sole intent was to override regulations the Secretary had issued following the Omnibus Budget Reconciliation Act of 1981, Pub. L. No. 97-35, 95 Stat. 357 et seq. See H.R. Rep. 98-861, 98th Cong. 2d Sess. 1366-1368 (1984); Atkins v. Rivera, slip op. 12 n.10. /6/ The regulations at issue in this case were promulgated in 1978 (with predecessors dating back to 1971) and hence were not affected by TEFRA or the related DEFRA moratorium. Thus, the Secretary had no occasion to rely on the "single standard" or the "same methodology" provisions in disapproving California's proposed plan amendment. And, since the Secretary's action here was not an exercise of a power affected by the moratorium, the moratorium is totally irrelevant. There is, ultimately, no conceivable reason why DEFRA, a deficit reduction measure, should be interpreted in a way that limits the Secretary's ability to enforce the statutory cap on federal financial participation in Medicaid. This case alone will result in a $50 million annual drain on the Treasury to fund one plan amendment in one state. A result so contrary to clearly expressed congressional intent should not be permitted to stand. /7/ CONCLUSION The petition for a writ of certiorari should be granted. 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 NOVEMBER 1986 /1/ The regulations promulgated in 1971 were initially codified at 45 C.F.R. 248.21(b)(2) and (3) (1972 ed.). 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). 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. /2/ The effects of a change in the MNIL may be illustrated by a simplified example. Assume a "medically needy" individual with monthly "countable" income of $300 and monthly medical expenses of $150. If the state's MNIL is $200, that individual may retain $200 for nonmedical needs; Medicaid will pay for $50 of his medical expenses and he will be responsible for the $100 balance. Now assume that the state raises its MNIL to $250. That same individual would then keep $250 for nonmedical needs; Medicaid would cover $100 of his medical bills, and he would be responsible for only $50 per month. As this illustration shows, the higher the MNIL, the greater the proportion of medical expenses covered by Medicaid. Program costs further escalate with a higher MNIL because greater numbers of people qualify for benefits. /3/ The Administrator also rejected the State's alternative argument 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 the posposed amendment of the state plan. /4/ The court's alchemy in turning into a regulation something that is immutably not a regulation is further undermined by two basic principles of administrative law. First, properly enacted regulations -- such as 42 C.F.R. 435.811 and 435.1007 -- are binding on the government until properly repealed. United States ex rel. Accardi v. Shaughnessy, 347 U.S. 260, 267 (1954). Second, "the government cannot supersede regulations by means of internal operating instructions." Flores v. Bowen, 790 F.2d 740 (9th Cir. 1986); see Schweiker v. Hansen, 450 U.S. at 789. /5/ That section requires a state to use the same methodology in determining eligibility for Medicaid as it would in determining eligibility for the categorically needy welfare programs and to use a single standard for determining income and resource eligibility for the medically needy. /6/ In contrast to the decision below, the Second Circuit, in another context, has correctly read the DEFRA moratorium in the circumscribed fashion of Atkins v. Rivera. See Camacho v. Perales, 786 F.2d 32, 42 (1986). /7/ The decision below has already had repercussions. The Secretary advises that at least one other state (Nebraska) has proposed to amend its plan in accordance with the California proposal in this case. In the Secretary's estimation, if the California amendment were adopted by all states participating in the Medicaid program, the added cost to the federal Treasury would be approximately $150 million. In addition, California has now proposed further plan amendments, that would impose an additional burden on the federal fisc; under the court of appeals' holding on DEFRA, the Secretary may well be powerless to disapprove any of those proposals that are contrary to the statute. Nor can the decision below be regarded as a sport. The Ninth Circuit has already relied on both alternative holdings in this case in a subsequent case in which it rejected the Secretary's implementation of a different portion of the Medicaid Act. Vance v. Hegstrom, 793 F.2d 1018 (1986). APPENDIX