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

   Reply Memorandum for the Petitioner

   The principal holding of the court of appeals is that a statement
in an unofficial, unpublished, internal agency manual can rise to the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.  Recognizing
the evident weakness of this holding, respondents seek to defend the
judgment below mainly by reference to the court's alternative holding
concerning the "DEFRA moratorium" -- a holding upon which the court of
appeals placed only secondary reliance and which occupies but three
pages at the end of its decision.  As we shall show, respondents'
half-hearted efforts to salvage the court's principal holding are
quite inadequate.  And respondents' discussion of the DEFRA moratoium
consists largely of quoting fragments of authorities which, when read
in full, disprove the very points respondents proffer.

   1. Unable to muster any credible defense for the court of appeals'
holding that the regional office manual constitutes a "legislative
regulation," respondents abandon that holding altogether (Br. in Opp.
17 n.6).  Instead they suggest that the court "could well have rested
its judgment upon the ordinary deference which this Court and the
courts of appeals have given similar regulatory material" (id. at 19).
 But respondents can point to no instance in which this Court has
deferred to an unofficial, incorrect, unpublished and out-of-date
internal manual, much less treated such a document as a binding
"legislative regulation" as did the court of appeals.  /1/

   Respondents err in suggesting (Br. in Opp. 20) that the decision in
Skidmore v. Swift & Co., 323 U.S. 134 (1944), a case which antedated
the Administrative Procedure Act, "specifically sanctioned deference"
to agency materials like the office manual at issue here.  Quite the
contrary.  One need do no more than fill the ellipsis in respondents'
truncated quotation from Swift (323 U.S. at 140, quoted in Br. in Opp.
20) to see that Swift disproves respondents' point.  The court there
referred to "rulings, interpretations, and opinions of the
Administrator" (323 U.S. at 140 (emphasis added)), and both the
manual's own terms and the manner in which it was issued make it clear
that it was not a ruling or opinion "of the Secretary." In addition,
the Court in Swift pointed out, as the court below did not, that
unofficial regulatory materials are "not controlling upon the courts
by reason of their authority" (ibid.).  Finally, in describing the
circumstances in which a nonbinding agency interpretation might
nonetheless be entitled to some weight, the decision in Swift recited
several factors -- "the thoroughness evident in its consideration, the
validity of its reasoning, (and) its consistency with earlier and
later pronouncements" (ibid.) -- all of which are absent here with
respect to the HCFA regional office manual.

   Respondents' other efforts to salvage the principal holding of the
court below are equally unavailing because they, like the court of
appeals, fail to recognize three basic facts.  First, the manual
provision is inconsistent with the statute and therefore the manual
does not, as respondents contend (Br. in Opp. 22), "fill a gap" in the
Act.  Second, the manual provision is directly contradicted by a duly
promulgated regulation, and it is that regulation which must govern.
Third, whatever the status of the manual provision, it is clear that
the Secretary never regarded the manual as a "regulation" or as having
any binding force.  /2/ Despite respondents' fanciful suggestions to
the contrary, they cannot overcome the basic premise upon which the
government's position rests:  a family of three is not the "same size"
as a family of two.

   2. Respondents are on no firmer ground in defending the decision
below on the second question presented, the scope of the DEFRA
moratorium.  As we will show, the legislative history of DEFRA
specifically disproves every significant contention that respondents
put forward.  Preliminarily, however, it will be helpful to explain
how respondents' discussion of DEFRA confuses two entirely separate
points.

   This case involves the 133-1/3% cap on Medicaid benefits under
Section 1903(f) of the Social Security Act, 42 U.S.C. 1396b(f).  That
Section provides that the applicable income limitation for Medicaid
purposes is an amount "equivalent to 133-1/3 percent of the highest
amount which would ordinarily be paid to a family of the same size"
under the State's AFDC program.  For example, if a state's maximum
AFDC payment were $300 per month for a family of two, the Medicaid
income limitation or "cap" would be $400 per month for a family of
two.  Thus, the state would be in compliance with Section 1903(f) so
long as its Medicaid eligibility level for a family of two remained at
or below $400.

   An altogether different question -- not at issue in this case --
may arise under Section 1902(a)(10)(C)(i)(III) of the Social Security
Act, 42 U.S.C. 1396a(a)(10)(C)(i)(III).  That provision, added by the
Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No.
97-248, Section 137(b)(8), 96 Stat. 378, requires that a state's
Medicaid plan must establish a "single standard" for determining
income and resource eligibility.  That section 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 famiy 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, regardless of how many adults are in the family -- that
some Congressman criticized as an "overly literal" reading of TEFRA.
See H.R. Conf. Rep. 98-861, 98th Cong., 2d Sess. 1367 (1984).  And it
was this interpretation of the "single standard" provision that was
the subject of the DEFRA moratorium.

   A simplified example will show how the 133-1/3% cap of Section
1903(f) operates independently of the "single standard" provision of
Section 1902(a)(10)(C)(i)(III).  Assume a state, as in the example
above, 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.,
$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).

   During its deliberations preceding the enactment of DEFRA, Congress
considered changes to both the "single standard" provision and the
133-1/3% cap.  But Congress ultimately decided to amend the statute
only with respect to the former.  The DEFRA moratorium is expressly
directed to "regulatory action against a State * * * by reason of such
State's plan (for Medicaid) being determined to be in violation of
section 1902(a)(10)(C)(i)(III)." Pub. L. No. 98-369, Section
2373(c)(1), 98 Stat. 1112.  The language of the moratorium thus makes
plain that it is aimed at the "single standard" provision in Section
1902(a)(10)(C)(i)(III);  it makes no mention of the 133-1/3% cap
contained in Section 1903(f).  On its face, therefore, the DEFRA
moratorium does not apply to this case.

   The legislative history reinforces the statutory language.  It
shows that Congress not only limited the moratorium to subjects other
than those involved in this case, but also that Congress specifically
rejected a proposal which would have accomplished the 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 recommended amending Section 1903(f) to provide
explicitly that a state could set its Medicaid income level for two
adults at an amount equal to the highest AFDC payment ordinarily made
to a family of three.  H.R. 4136, 98th Cong., 1st Sess. Section 211
(1983);  see Br. in Opp. App. 17.  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 attempt 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 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 we have
explained, 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
to implication to Section 1903(f), since Congress expressly declined
to amend Section 1903(f) in that way.

   Respondents attempt to bridge this gap by pointing to language in
the Conference Report concerning "adult couple MNILs" (Br. in Opp. 6).
 Here again respondents have confused the "single standard" provision
with the 133-1/3% cap.  The Conference 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 because this would result in differences in
medically needy income levels among groups of the same family size
depending on the relative numbers of adults and children." H.R. Conf.
Rep. 98-861, supra at 1367 (quoted in Br. in Opp. 7-8).  This
statement refers only to the TEFRA "single standard" provision;  it
does not refer to the 133-1/3% cap.  There is no basis for assuming
that Congress intended the moratorium to apply to a provision that is
not mentioned in the Conference Report's description of the
moratorium's purpose, that is not within the scope of the moratorium's
statutory language, and that the Conference Report refused to amend
only six pages earlier.  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.  /3/

   At bottom, respondents' discussion of the DEFRA moratorium is an
effort to inject sufficient confusion into this case to deflect
attention from the court of appeals' principal, and profoundly
disturbing, holding as to the status of an agency manual as a binding
"legislative regulation." That holding does violence to settled
priciples of administrative law, thwarts specific congressional
intent, and substantially undermines federal fiscal control over the
Medicaid program.  It is a decision that should not be permitted to
stand.

   For these reasons and those stated in the petition, it is therefore
respectfully submitted that the petition for a writ of certiorari
should be granted.

   CHARLES FRIED

      Solicitor General

   FEBRUARY 1987

   /1/ Respondents make several errors of characterization.  For
example, they describe the regional office manual (Br. in Opp. 4) as a
document "published by HHS' Health Care Financing Administration." See
also Br. in Opp. 21 (referring to the manual as a "published
interpretation()," by which respondents mean that "it was published in
the CCH Medicare & Medicaid Guide").  The manual, of course, was not
"published" in the Federal Register or any other official source that
would be relevant to determining whether it is a "regulation." And its
foreword recites that it is "for the use of regional office employees
only" (Pet. App. 26a-27a).

   Respondents' contention that the manual is entitled to judicial
deference as "regulatory material" -- a contention that is wholly
without merit for the reasons explained in the test -- is at odds with
their effort to preclude consideration of the manual's foreword on the
ground that the manual was "never put in evidence" (Br. in Opp. 20).
A party need not "put in evidence" "regulatory material" that is to be
given "legislative effect."

   Although expressly disclaiming that their argument rests on
estoppel theories (Br. in Opp. 25), respondents frequently refer to
the State's "reliance" on the regional office manual when passing the
legislative amendments to the State Medicaid plan (see id. at 4, 21).
That supposed reliance is untenable in light of the fact that, as
respondents confirm (id. at 5), the State was advised of HCFA's
contrary view before the state legislation was enacted.  In any event,
the manual provision upon which the state legislature allegedly relied
in 1983 had been deleted from the manual in July 1980 (see Pet. 17).
Respondent's protestation that the revised manual is not "in evidence"
(Br. in Opp. 21-22 n.9) is no more persuasive than their observation
that the foreword to the earlier manual is "not in evidence" (Br. in
Opp. 20).

   /2/ The Secretary 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).

   /3/ A Senate Report (S. Rep. 99-520, 99th Cong. 2d Sess. 21 (1986))
issued in connection with a subsequent effort to clarify the DEFRA
moratorium makes it clear that the moratorium was not intended to
apply to the Secretary's interpretation of Section 1903(f):

      (T)he moratorium does not eliminate the limits on income and
      resources of eligible individuals and families under section
      1903(f) (including the requirements that the applicable
      medically needy income level not exceed the amount determined in
      accordance with standards prescribed by the Secretary to be
      equivalent to 133 1/3% of the most generous AFDC eligibility
      standard) * * * .