Filed: October 23, 2008

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 07-1512

(SPA-05-06)

THE MARYLAND DEPARTMENT OF HEALTH AND MENTAL HYGIENE,

Petitioner,

v.

CENTERS FOR MEDICARE AND MEDICAID SERVICES,

Respondent.

--------------------

NATIONAL ACADEMY OF ELDER LAW ATTORNEYS,

Amicus Supporting Respondent.

O R D E R

The court amends its opinion filed September 25, 2008, as

follows:

On page 4, line 2 of footnote 4, the figure “93,000,000.00” is

corrected to read “23,000,000.00.”

For the Court - By Direction

 /s/ Patricia S. Connor 

 Clerk
PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

THE MARYLAND DEPARTMENT OF 

HEALTH AND MENTAL HYGIENE,

Petitioner,

v.

CENTERS FOR MEDICARE AND

MEDICAID SERVICES,  No. 07-1512

Respondent.

NATIONAL ACADEMY OF ELDER LAW

ATTORNEYS,

Amicus Supporting Respondent. 

On Petition for Review of an Order of the

United States Department of Health & Human Services.

(SPA-05-06)

Argued: March 20, 2008

Decided: September 25, 2008

Before MICHAEL and MOTZ, Circuit Judges, and

Irene M. KEELEY, United States District Judge for the

Northern District of West Virginia, sitting by designation.

Petition for review denied by published opinion. Judge Keeley wrote the opinion, in which Judge Michael and Judge

Motz joined. 
COUNSEL

ARGUED: Kathleen Evelyn Wherthey, OFFICE OF THE

ATTORNEY GENERAL OF MARYLAND, Baltimore,

Maryland, for Petitioner. Noreen Cornelia O’Grady, UNITED

STATES DEPARTMENT OF HEALTH & HUMAN SERVICES, Office of General Counsel, Philadelphia, Pennsylvania, for Respondent. ON BRIEF: Douglas F. Gansler,

Attorney General of Maryland, Lorie A. Mayorga, Assistant

Attorney General, OFFICE OF THE ATTORNEY GENERAL OF MARYLAND, Baltimore, Maryland, for Petitioner. James C. Newman, Chief Counsel, Region III,

UNITED STATES DEPARTMENT OF HEALTH &

HUMAN SERVICES, Office of General Counsel, Philadelphia, Pennsylvania, for Respondent. Ron M. Landsman,

Rockville, Maryland; Cyril V. Smith, ZUCKERMAN

SPAEDER, L.L.P., Baltimore, Maryland, for Amicus Supporting Respondent.

OPINION

KEELEY, District Judge: 

In this case, we consider the Maryland Department of

Health & Mental Hygiene’s ("Maryland") petition for review

of a final decision of the Centers for Medicare & Medicaid

Services ("CMS")1 that disapproved an amendment to Maryland’s State Medicaid Plan (the "SPA"). That SPA sought to

eliminate deductions for uncovered medical expenses Medicaid recipients incurred before becoming eligible for benefits.

Maryland’s petition asserts that CMS’s rejection of its SPA is

1Throughout this opinion we refer to both the Centers for Medicare &

Medicaid Services and its predecessor, the Health Care Financing Administration ("HCFA"), as CMS. CMS replaced HCFA on July 1, 2001 and

is the component of the Department of Health and Human Services that

oversees the Medicaid program. 

2 MARYLAND DEP’T OF HEALTH v. CENTERS FOR MEDICARE
based on an unreasonable interpretation of congressional

intent regarding the calculation of a recipient’s post-eligibility

income and violates Medicaid’s policy requiring medically

needy recipients to contribute to the cost of their care. We

have jurisdiction pursuant to 42 U.S.C. §§ 1316(a)(3) and (b),

and § 1396(c). Finding no error, we deny Maryland’s petition

for review and uphold CMS’s decision. 

I.

Through the Medicaid program, Congress extended medical assistance to unserved, low-income individuals and families. See Social Security Amendments of 1965, Title XIX,

Pub. L. No. 89-97, 79 Stat. 286, 343-353 (codified as

amended at 42 U.S.C. § 1396a (2006))(the "Medicaid statute"). As part of that program, states provide payment for certain medical and nursing home expenditures using a mix of

federal and state funds. As the federal agency charged with

providing program oversight, CMS promulgates rules that

state Medicaid agencies must follow. 

The dispute between CMS and Maryland involves two

interpretations of 42 U.S.C. § 1396a(r)(1)(A)(2006), which in

part provides that "with respect to the post-eligibility treatment of income for individuals who are institutionalized . . . ,"

states should deduct expenses for "necessary medical or remedial care recognized under State law but not covered under the

State plan . . . subject to reasonable limits the State may establish on the amount of these expenses.2

 Pursuant to this statu2Section 1396a(r)(1)(A) reads in full: 

(r)(1)(A) For purposes of sections 1396a(a)(17) and 1396r5(d)(1)(D) of this title and for purposes of a waiver under section

1396n of this title, with respect to the post-eligibility treatment of

income of individuals who are institutionalized or receiving home

or community-based services under such a waiver the treatment

described in subparagraph (B) shall apply, there shall be disregarded reparation payments made by the Federal Republic of

MARYLAND DEP’T OF HEALTH v. CENTERS FOR MEDICARE 3
tory language, CMS promulgated regulations requiring states

to deduct uncovered but medically necessary expenses that

nursing home residents incurred before becoming eligible for

Medicaid benefits from the amount of post-eligibility income

those residents must contribute to the cost of their nursing

home care. 42 C.F.R. § 435.726(c)(4).3

 Maryland contends

that deducting these expenses amounts to "a transfer of money

from Medicaid to a [recipient’s] pocket," and undermines the

financial stability of its Medicaid budget.4 Accordingly, its

SPA would "[disallow] as a deduction any amount of medical

expenses for dates of service before the retroactive period

associated with the effective date of Medical Assistance eligibility." Md. Dep’t of Health & Hygiene, Reasonable Limits

on Amounts for Necessary Medical or Remedial Care Not

Covered Under Medicaid, SPA 05-06 (2004). In effect, Maryland seeks to eliminate from its post-eligibility income calculation all deductions for uncovered medical expenses

Medicaid nursing home residents incurred before becoming

eligible for benefits. 

At issue is the financial well-being of nursing home residents in Maryland who, under Medicaid policy, must contribute to the cost of their care. Should Maryland prevail, its

Germany, and there shall be taken into account amounts for

incurred expenses for medical or remedial care that are not subject to payment by a third party, including— 

(i) medicare and other health insurance premiums, deductibles, or coinsurance, and; 

(ii) necessary medical or remedial care recognized under

State law but not covered under the State plan under this subchapter, subject to reasonable limits the State may establish

on the amount of these expenses. 

3Although this opinion specifically addresses medical expenses incurred

by nursing home residents, we recognize that the policy in question affects

all institutionalized Medicaid recipients. 

4During oral argument, Maryland estimated the annual impact of these

regulations on its budget at $23,000,000.00. 

4 MARYLAND DEP’T OF HEALTH v. CENTERS FOR MEDICARE
financial burden under Medicaid certainly would be reduced.

Nursing home residents with incurred medical expenses, however, would no longer be able to use their own funds to pay

those bills because the SPA would deprive them of the means

to do so. 

II.

Our review of CMS’s decision is governed by the Administrative Procedure Act. 5 U.S.C. § 706(2) (2006). We may only

"‘set aside agency action, findings, and conclusions’ when

they are found to be ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.’" West Virginia

v. Thompson, 475 F.3d 204, 209 (4th Cir. 2007) (quoting 5

U.S.C. § 706(2)). We may also "set aside agency actions ‘in

excess of statutory jurisdiction, authority, or limitations, or

short of statutory right’" or "‘without observance of procedure

required by law.’" Id. (quoting 5 U.S.C. § 706(2)(C)-(D)).

We may not, however, "substitute our judgment for that of

the agency." Id. at 212. We will overrule the agency’s decision only if we find that it has failed to consider relevant factors and committed "‘a clear error of judgment.’" Id. (quoting

Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S.

402, 416 (1971)). In determining whether the agency’s action

was arbitrary, capricious or an abuse of discretion, we consider whether 

the agency has relied on factors which Congress has

not intended it to consider, entirely failed to consider

an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it

could not be ascribed to a difference in view or the

product of agency expertise. 

Id. (quoting Motor Vehicle Mfrs. Ass’n v. State Farm Mut.

Auto Ins. Co., 463 U.S. 29, 43 (1983)). 

MARYLAND DEP’T OF HEALTH v. CENTERS FOR MEDICARE 5
When CMS’s disapproval of an SPA depends on construction of the Medicaid statute, we view that administrative interpretation "through the lens of Chevron U.S.A. Inc. v. Natural

Resources Defense Council, Inc., 467 U.S. 837 (1984)." West

Virginia, 475 F.3d at 212. Chevron requires us to reject

administrative constructions that are contrary to clear congressional intent. 

First, always, is the question whether Congress has

directly spoken to the precise question at issue. If the

intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give

effect to the unambiguously expressed intent of Congress.

467 U.S. at 842-43. 

We must uphold an agency’s permissible construction of a

statute and "may not substitute [our] own construction of a

statutory provision for a reasonable interpretation made by the

administrator of an agency." Id. at 844. Moreover, we accord

an agency’s interpretation "substantial deference" in determining whether its construction is permissible. Rust v. Sullivan, 500 U.S. 173, 184 (1991). Nonetheless, where "the

[agency’s] reasoning couples internal inconsistency with a

conscious disregard for the statutory text," we must reject the

statutory interpretation. Ark. Dep’t of Health & Human Servs.

v. Ahlborn, 547 U.S. 268, 292 (2006). 

We have recently held that deference in the interpretation

of the Medicaid statute is "particularly warranted." West Virginia, 475 F.3d at 212. In that case we determined that the

Secretary’s disapproval of a proposed plan amendment by

West Virginia did not exceed his authority, and noted that

"[t]he Medicaid statute is a prototypical ‘complex and highly

technical regulatory program’ benefitting from expert administration." Id. (quoting Thomas Jefferson Univ. v. Shalala, 512

U.S. 504, 512 (1994)). We also stated that "[t]he administra6 MARYLAND DEP’T OF HEALTH v. CENTERS FOR MEDICARE
tive process through which state plan amendments are considered also counsels deference." Id. Moreover,

[r]ecognizing the mechanisms for evaluation of

amendments at the agency level, "[w]e take care not

lightly to disrupt the informed judgments of those

who must labor daily in the minefield of often arcane

policy, especially given the substantive complexities

of the Medicaid statute."

Id. (quoting Cmty. Health Ctr. v. Wilson-Coker, 311 F.3d 132,

138 (2d Cir. 2002)). 

III.

Because the outcome of this case depends on an understanding of certain "spenddown" and "post-eligibility" provisions of the Medicaid statute, we begin with a brief summary

of the history and overarching purpose of those provisions. 

A.

Designed to provide medical assistance to persons whose

income and resources are insufficient to meet the costs of necessary medical care, the Medicaid program functions as a

partnership between the federal government and the states. 42

U.S.C. § 1396a(a)(10). After a state elects to participate in the

program, the federal government shares the costs of providing

medical assistance in a ratio that varies from state to state. 42

U.S.C. § 1396a(a)(2). In return, the state agrees to comply

with the Medicaid statute and any administrative regulations

properly promulgated by CMS. 42 U.S.C. 1396a(a)(1). 

Consistent with Medicaid’s character as a poverty program,

two basic categories of applicants are eligible to receive medical assistance under Medicaid: the "categorically needy" and

the "medically needy." 42 U.S.C. § 1396a(a)(10). The categorically needy are applicants whose low income alone qualiMARYLAND DEP’T OF HEALTH v. CENTERS FOR MEDICARE 7
fies them to receive Medicaid benefits. Id. By contrast,

medically needy applicants have become impoverished

through medical expenditures; while they have sufficient

income to afford basic living expenses, they cannot afford

expensive medical care. Id. It is the income of these medically

needy applicants that is impacted by Maryland’s SPA. 

Pursuant to § 1396a(a)(17), Congress has delegated to

CMS exceptionally broad authority to promulgate regulations

determining the extent of income and resources available to

medically needy applicants and recipients.5See 42 C.F.R.

§§ 435.831, 436.831 (2008). Each state, however, is allowed

some discretion in determining income limits. 

If a medically needy applicant’s pre-eligibility income

exceeds the Medicaid limit, CMS’s regulations direct states to

deduct incurred medical expenses in order to reduce that

income to the Medicaid eligibility level. § 435.831(d). CMS’s

regulations term this the "spenddown" process and require

states to calculate the amount of "countable income" medically needy applicants must "spenddown" before Medicaid

will cover their medical costs. § 435.831. 

In order to determine the amount of an applicant’s countable income, states first subtract certain standard deductions

from gross income. § 435.831(b). If that amount equals or is

less than the state income standard, the applicant is deemed

eligible for Medicaid benefits. § 435.831(c). If that amount

exceeds the state income standard, however, the applicant

may become eligible for benefits by "spending down"

incurred medical expenses to meet the state eligibility standard. § 435.831(d). 

5

§ 1396a(a)(17) in pertinent part provides ". . . for flexibility in the

application of such standards with respect to income by taking into

account, except to the extent prescribed by the Secretary, the costs . . .

incurred for medical care or for any other type of remedial care recognized

under State law[.]" (Emphasis added). 

8 MARYLAND DEP’T OF HEALTH v. CENTERS FOR MEDICARE
As defined by CMS’ regulations governing the spenddown

process, "incurred medical expenses" are any medically necessary expenses for which an applicant would otherwise be

liable. § 435.831. CMS requires states to deduct expenses that

the applicant is repaying either at the time of application or

that were incurred within three months prior to the filing of

the application. § 435.831(f).6 Although states may choose to

deduct more bills, CMS does not require them to do so.

§ 435.831(g). Upon successful completion of the spenddown

process, medically needy applicants are eligible to receive

Medicaid benefits, such as nursing home care. 

B.

Medicaid pays room and board costs for eligible nursing

home residents through the nursing home per diem rate.

§ 413.53. This is a specific payment per day that nursing

homes agree to accept from Medicaid as full payment for providing care. Id.

CMS requires nursing home residents with income remaining after the completion of the spenddown process to contribute that income to the nursing home to defray the cost of their

care to the extent possible. § 435.725(a). In order to determine

the amount of income a resident has available after eligibility,

states calculate an amount CMS’s regulations term the "posteligibility contribution to care." §§ 435.725, 435.726. 

States calculate this amount by undertaking a process similar to the spenddown process. First, they determine a nursing

home resident’s total income, including income disregarded

during the spenddown process. § 435.726(c). They then subtract from that total any incurred medical expenses deducted

6This three-month period in CMS’s regulations is drawn from a requirement in the Medicaid statute that allow applicants to qualify for benefits

retroactively for a three-month period prior to application. 42 U.S.C.

1396a(a)(34). 

MARYLAND DEP’T OF HEALTH v. CENTERS FOR MEDICARE 9
during spenddown. If a resident has available income remaining, CMS assumes the resident will use it to defray room and

board costs and directs states to subtract that amount from

Medicaid’s payment to the nursing home. § 435.725(a). Thus,

during the post-eligibility process, CMS’s regulations require

states to deduct incurred medical expenses in the same manner as they deducted those expenses during the spenddown

process. It is this requirement of consistent treatment of

deductions that Maryland contends is unreasonable and violative of Medicaid policy. 

C.

The portion of the Medicaid statute governing the calculation of post-eligibility income is found at 42 U.S.C.

§ 1396a(r)(1)(A). By longstanding policy predating the enactment of that statute, CMS had mandated consistent deduction

of incurred medical expenses in both the spenddown and posteligibility processes. §§ 435.726(c), 435.831(c)(ii) (1987); 43

Fed. Reg. 45,176-01, 45,212-45,213 (Sept. 29, 1978). CMS’s

regulations governing each were extremely similar. Both

required the agency to deduct

[a]mounts for incurred expenses for medical or

remedial care that are not subject to payment by a

third party, including—

. . . 

(ii) Necessary medical or remedial care recognized under State law but not covered

under the State’s Medicaid plan, subject to

reasonable limits the agency may establish

on amounts of these expenses. 

§ 435.726(c)(4) (1987); See § 435.831(c)(ii) (1987). 

States were unhappy with these regulations, and complained that they were inflexible and burdensome. 53 Fed.

10 MARYLAND DEP’T OF HEALTH v. CENTERS FOR MEDICARE
Reg. 3586-01, 3586 (Feb. 8, 1988); 50 Fed. Reg. 10992-01,

10993 (Mar. 19, 1985). They also contended that, by requiring states to deduct uncovered medical expenses incurred

before Medicaid eligibility, CMS was unfairly subsidizing

services not covered under state Medicaid plans while reducing the amount nursing home residents were obligated to contribute to the cost of their care. 53 Fed. Reg. at 3586. 

CMS addressed these concerns by undertaking a lengthy

review of its post-eligibility rules in 1985. 50 Fed. Reg. at

10993. Eventually, in February 1988, it announced its intent

to amend those rules to allow states "maximum flexibility" in

deciding whether to limit, or eliminate entirely, deductions for

incurred medical expenses when calculating a nursing home

resident’s post-eligibility income. 53 Fed. Reg. at 3586.

This amendment, which became effective on April 8, 1988,

amounted to a substantial change to CMS’s traditional policy

of requiring consistent treatment of deductions for incurred

medical expenses. As CMS explained, under its new rule

"[s]ervices furnished to an individual during a period of ineligibility are services not covered under the State plan." Id. at

3589. Thus, "the State is not required to deduct medical

expenses for services furnished during a period of ineligibility" from its post-eligibility income calculation. Id.

Congress’ reaction was swift and negative. In July 1988, it

enacted 42 U.S.C. § 1396a(r)(1)(A),7 which incorporated in

whole CMS’s prior regulatory language regarding the posteligibility treatment of incurred medical expenses. Congress

also made § 1396a(r)(1)(A) retroactive to April 8, 1988.8

7

42 U.S.C. 1396a(r)(1)(A) is part of the Medicare Catastrophic Coverage Act of 1988, Pub. L. No. 100-360, § 303(d), 102 Stat. 683. 

8

"The amendment made by subsection (d) [§ 1396a(r)(1)(A)] is effective on and after April 8, 1988. The final rule [CMS] published on February 8, 1988 (53 Federal Register 3586) is superseded to the extent

inconsistent with the amendment made by subsection (d)." Medicare Catastrophic Coverage Act, § 303(g)(4) (citations omitted). 

MARYLAND DEP’T OF HEALTH v. CENTERS FOR MEDICARE 11
A House Conference Report commenting on

§ 1396a(r)(1)(A) recognized that, until February 1988, CMS’s

longstanding policy had required states to deduct uncovered

medical expenses from the income of nursing home residents

before calculating their post-eligibility contribution to care.

H.R. Rep. No. 100-661, at 266 (1988) (Conf. Rep.), as

reprinted in 1988 U.S.C.C.A.N. 923, 1044. Noting that

CMS’s amendment permitted states to substantially reduce or

eliminate this deduction, the Report stated that Congress’

avowed purpose in enacting § 1396a(r)(1)(A) was to "reinstate" CMS’s prior rule. Id.

Consistent with that prior rule, § 1396a(r)(1)(A) allowed

states to set "reasonable limits" on the age of incurred medical

expenses to be deducted post-eligibility. § 435.726(c)(4)

(1987). It did not, however, define the contours of such limits

or state explicitly whether they were subject to CMS’s

approval. Nevertheless, the House Conference Report emphasized that any limits "must ensure that nursing home residents

are able to use their own funds to purchase necessary medical

or remedial care not covered by the State Medicaid program,

while minimizing opportunities for providers to take financial

advantage of either the program or the residents." H.R. Rep.

No. 100-661, at 266. 

Following the enactment of § 1396a(r)(1)(A), CMS promulgated guidelines in its State Medicaid Manual subjecting

the states’ discretion to define "reasonable limits" to CMS’s

review. Id. Those guidelines directed states to: 

[d]educt from the individual’s total income amounts

for incurred expenses for medical or remedial care

that are not subject to payment by a third party,

including:

. . .

o Necessary medical or remedial care recognized under State law but not covered

12 MARYLAND DEP’T OF HEALTH v. CENTERS FOR MEDICARE
under the State plan, subject to reasonable

limits the agency may establish on amounts

of these expenses. 

Reasonable limits (if any) must be submitted by you

for approval by [CMS] in the Medicaid State plan.

The reasonable limits must ensure that institutionalized individuals be able to use their own funds to

purchase necessary medical or remedial care not

covered by the Medicaid program, while minimizing

opportunities for providers to take financial advantage of either the Medicaid program or the individuals. 

State Medicaid Manual § 3703.8 (1989).9 Consequently, while

states could propose limits on post-eligibility deductions of

incurred medical expenses, consistent with its prior rule CMS

reserved the power to review those proposals for reasonableness on a case-by-case basis. 

IV.

Within this historical and regulatory context, we turn now

to CMS’s disapproval of Maryland’s SPA. During the administrative process, Maryland argued that § 1396a(r)(1)(A) does

not require states to treat deductions for incurred medical

expenses consistently. It contended that CMS’s regulations

requiring consistent treatment actually undermined Medicaid’s purpose of assisting the truly needy by creating a "loophole" that subsidized uncovered medical care for people with

income. It also asserted that those regulations unreasonably

contravened clearly articulated congressional policy requiring

medically needy recipients to contribute to the cost of their

care. Maryland relied heavily on comments regarding

§ 1396a(r)(1)(A) in the House Conference Report to support

its contention that (1) CMS lacks the authority to prohibit a

9Section 3703.8 has not been amended since 1989. 

MARYLAND DEP’T OF HEALTH v. CENTERS FOR MEDICARE 13
state from imposing income limits the state believes are reasonable, and (2) Congress has forbidden consistent treatment

of deductions for incurred medical expenses in the spenddown

and post-eligibility processes. 

Following a full procedural review,10 CMS disapproved

Maryland’s SPA, finding it would unreasonably limit deductions for incurred medical expenses in the post-eligibility process, violate CMS’s rule requiring consistent treatment of

these deductions, and violate Medicaid policy by depriving

medically needy nursing home residents of income needed to

pay uncovered medical expenses. It based its disapproval on

its authority under 42 U.S.C. § 1396a(a)(17) to promulgate

rules governing the states’ management of the spenddown and

post-eligibility processes. Decision of the Administrator, In

re: The Disapproval of the Maryland State Plan Amendment

05-06, 5, 9-10. 

CMS’s final decision pointed to its long-standing policy

requiring states to treat incurred medical expenses "not covered under the State plan" consistently in both the spenddown

and post-eligibility processes. § 435.726(c)(4), 435.831(c)(ii).

Noting that Congress had been aware of that requirement

when it enacted § 1396a(r)(1)(A) and had allowed it to stand,

CMS pointed out that it has traditionally regarded medical

services provided during a period of ineligibility as services

"not covered under the State plan." Further, it stated that,

except for a brief three-month period in 1988, it has always

required states to deduct expenses for these services from a

recipient’s post-eligibility income. § 435.726(c)(4)(ii)(2008);

§ 435.726(c)(4)(ii) (1987). CMS reasoned that, by incorporating the phrase "not covered under the State plan" verbatim

from CMS’s regulation into the text of § 1396a(1)(r)(A), Con10Because Maryland has not argued that the administrative process

before CMS was procedurally unfair, we limit our review to the substance

of CMS’s decision and need not address the procedure used to reach that

decision. 

14 MARYLAND DEP’T OF HEALTH v. CENTERS FOR MEDICARE
gress also ratified CMS’s interpretation of that phrase. Decision of the Administrator, In re: The Disapproval of the

Maryland State Plan Amendment 05-06, 8. 

Additionally, CMS justified the reasonableness of its regulatory scheme on two grounds. First, unlike Maryland’s

amendment, its regulations requiring consistent treatment of

deductions of incurred medical expenses furthered the intent

of Congress expressed in § 1396a(r)(1)(A) "to afford an institutionalized individual with income the ability to actually pay

non-covered medical expenses for medical and remedial

care." 70 Fed. Reg. 48155-02, 48,156, 48,157 (Aug. 16,

2005). Second, Maryland’s SPA actually undercut congressional policy expressed in § 1396a(a)(17) that medically needy

residents should pay their uncovered medical bills to the

extent possible. Id.

V.

To determine whether CMS properly rejected Maryland’s

SPA, we direct our inquiry first to whether CMS’s interpretation exceeds its regulatory authority or is otherwise impermissible. West Virginia, 475 F.3d at 209. We also examine

whether its interpretation is unambiguously rejected by the

plain language of § 1396a(r)(1)(A). See Cetto v. LaSalle Bank

Nat’l Ass’n, 518 F.3d 263, 274 (4th Cir. 2008). We conclude

that neither of these circumstances exists. 

A.

Section 1396a(a)(17) of the Medicaid statute outlines congressional policy regarding the states’ responsibilities for

determining Medicaid eligibility. There Congress commands

states to "include reasonable standards . . . in accordance with

standards prescribed by the Secretary." Id. (Emphasis added).

Significantly, that statute also limits the authority of the states

to specifically calculate income. States must

MARYLAND DEP’T OF HEALTH v. CENTERS FOR MEDICARE 15
provide for taking into account only such income

and resources as are, as determined in accordance

with standards prescribed by the Secretary, available

to the applicant or recipient . . . and provide for flexibility in the application of such standards with

respect to income by taking into account, except to

the extent prescribed by the Secretary, the costs . . .

incurred for medical care . . . . 

Id. (Emphasis added). 

It is the Secretary therefore, not the states, to whom Congress has explicitly delegated the authority to prescribe the

standards for determining eligibility, available income, and

deductions for medical expenses. We thus conclude that, in

promulgating regulations for states to follow in calculating the

post-eligibility income of nursing home residents, CMS has

not clearly exceeded its authority. 

B.

We next determine whether the portions of the Medicaid

statute relating to deductions for uncovered medical expenses

use ambiguous terms. Chevron, 467 U.S. at 842-43. If not, we

apply the statute’s plain language. Id.; Cetto, 518 F.3d at 274.

If an ambiguity does exist, however, we will not substitute our

own construction of the statute, Chevron, 467 U.S. at 844, but

must instead determine whether CMS’s interpretation is reasonable and entitled to substantial deference. Rust, 500 U.S.

at 184.

We have already noted that § 1396a(a)(17) unambiguously

authorizes CMS to promulgate regulations to determine a

Medicaid applicant’s available income. Regarding the calculation of post-eligibility income, § 1396a(r)(1)(A) unambiguously commands states to take into account "medical care

recognized under State law but not covered under the State

plan." It does not, however, define the phrase "not covered

16 MARYLAND DEP’T OF HEALTH v. CENTERS FOR MEDICARE
under the State plan." CMS has traditionally interpreted that

phrase to refer to medical services a recipient obtained prior

to Medicaid eligibility, that is any medical service not paid for

by Medicaid. As we have already noted, this interpretation is

consistent with CMS’s longstanding interpretation of the

phrase as used in its regulations governing the spenddown

process. See 59 Fed. Reg. 1659-01, 1671 (Jan. 12, 1994); 53

Fed. Reg. at 3588, 3590. 

Although Maryland does not challenge CMS’s interpretation of the phrase as used in the spenddown process, it argues

that, in § 1396a(r)(1)(A), "not covered under the State plan"

refers to medical care excluded by the Medicaid program, in

other words, medical services that Medicaid never covers and

for which it never pays. Relying heavily on the House Conference Report, Maryland contends that, in the post-eligibility

process, states may impose any limit they deem reasonable on

deductions for incurred medical expenses without obtaining

prior approval from CMS. Further, it contends that

§ 1396a(r)(1)(A) actually prohibits consistent treatment of

such deductions in the spenddown and post-eligibility processes. 

C.

Because we find that the phrase "not covered under the

State plan" is "susceptible to more precise definition and open

to varying constructions," we must determine whether CMS’s

interpretation is reasonable. Gonzales v. Oregon, 546 U.S.

243, 258 (2006) (noting that, when Congress properly delegates authority to an agency, the agency’s interpretation of an

ambiguous statutory phrase "often demands Chevron deference"). By failing to define the phrase, Congress left an interpretive gap that CMS may fill. Chevron, 467 U.S. at 843-44.

CMS’s interpretation properly fills that gap by requiring nursing home residents to contribute to the cost of their care while

still allowing them to pay any necessary medical expenses not

covered by Medicaid. This result comports with the broadly

MARYLAND DEP’T OF HEALTH v. CENTERS FOR MEDICARE 17
stated goals of the Medicaid statute, as well as Congress’

incorporation of CMS’s traditional interpretation of the phrase

when it enacted § 1396a(r)(1)(A). 

Maryland’s contention that Congress "unequivocally

rejected" CMS’s traditional interpretation of "not covered

under the State plan" when it enacted § 1396a(r)(1)(A) is not

supported by the statute’s legislative history. Although Maryland argues that statements in the House Conference Report

authorize states to establish reasonable limits on posteligibility deductions unimpeded by CMS’s oversight, a careful reading of that Report belies Maryland’s interpretation. In

pertinent part, the House Conference Report states:

As under the previous regulation, States will have

the ability to place "reasonable limits" on a resident’s expenditures for medical or remedial care.

. . . 

For example, it would be reasonable for a State to

provide that only uncovered services prescribed by

a physician may be deducted. It would also be reasonable for States to impose specific dollar limits for

specific services or items, provided that these limits

reflect annual increases in the cost of medical care

services and supplies. 

. . . 

In providing these examples of "reasonable limits for

deducting of medical expenses incurred by nursing

home residents, the conferees do not intend any

approval of comparable limits in the "spenddown"

process for medically needy programs. However, it

would not be reasonable for States to set an overall

dollar limit, such as $50 per month, for all noncovered services. Similarly, it would not be reason18 MARYLAND DEP’T OF HEALTH v. CENTERS FOR MEDICARE
able for States to impose a limit on the number of

medically necessary services or items that an individual could deduct in any one month. 

H.R. Rep. No. 100-661, at 266 (Emphasis added). These

statements merely provide guidance about reasonable limits

on deductions that a state might consider; they do not authorize states to impose any limits they choose on post-eligibility

deductions. Nor do they forbid consistent treatment of these

deductions in the spenddown and post-eligibility processes. 

While Maryland notes correctly that § 1396a(r)(1)(A) permits states to impose "reasonable limits" on deductions of

incurred medical expenses, it ignores § 1396a(a)(17)’s

explicit delegation of authority to CMS to establish income

standards for the Medicaid program. When these two statutes

are read in pari materia, they neither strip CMS of its authority to regulate the post-eligibility process nor authorize states

to exclude deductions for uncovered medical expenses without obtaining prior approval from CMS. 

Further, the House Conference Report’s use of examples of

"reasonable limits" on deductions, and its comment that "the

conferees do not intend any approval of comparable limits in

the ‘spenddown’ process for medically needy programs," in

no way prohibit CMS from requiring states to treat deductions

for incurred medical expenses consistently in the spenddown

and post-eligibility processes. At most, the Report’s comment

and examples illustrate how Congress, by not specifically

deciding an issue, delegated the decision to the administrative

agency. 

D.

Ultimately, we are not the arbiter of whether Maryland or

CMS has correctly interpreted § 1396a(r)(1)(A). We may only

uphold the SPA if the relevant statutory language unambiguously favors Maryland’s interpretation. Cetto, 518 F.3d at

MARYLAND DEP’T OF HEALTH v. CENTERS FOR MEDICARE 19
274; see Chevron, 467 U.S. at 842-43. We conclude that it

does not. 

Prior to April 1988, CMS had interpreted the phrase "not

covered under the State plan" to include medical services for

which Medicaid does not pay, and had required states to

deduct expenses for such services consistently in both the

spenddown and post-eligibility processes. See 50 Fed. Reg. at

10993. Congress allowed that traditional interpretation to

stand without intervention until CMS amended its regulations

to permit states "maximum flexibility" to limit or eliminate

those deductions in the post-eligibility process. Id. Congress

effectively overturned that amendment by incorporating

CMS’s prior rule verbatim into the text of § 1396a(r)(1)(A)

and making that statute retroactive to the effective date of

CMS’s new rule. By doing so, it foreclosed any possibility

that states could limit or eliminate post-eligibility deductions

for incurred medical expenses without CMS’s prior approval.

We reject Maryland’s argument that the legislative history

of § 1396a(r)(1)(A) supports the conclusion that CMS’s regulatory scheme is unreasonable. Nowhere does the House Conference Report state that by enacting § 1396a(r)(1)(A)

Congress intended to prohibit a policy requiring consistent

treatment of incurred medical expenses in the spenddown and

post-eligibility processes. To the contrary, although Congress

has twice amended § 1396a(r)(1)(A) since first enacting it in

1988, it has left intact CMS’s longstanding policy requiring

consistent treatment of deductions.11 This comports with the

comment in the House Conference Report that, by enacting

§ 1396a(r)(1)(A), Congress intended to "reinstate" CMS’s

prior rule. 

11See Balanced Budget Act of 1997: Medicaid Payment Rates for Certain Medicare Cost-Sharing, Pub. L. No. 105-33, § 4714, 111 Stat. 251,

509-10 (1997); Omnibus Budget Reconciliation Act of 1990: Disregarding

German Reparation Payments from Post-Eligibility Treatment of Income

Under the Medicaid Program, Pub. L. No. 101-508, § 4715, 104 Stat. 1388

(1990). 

20 MARYLAND DEP’T OF HEALTH v. CENTERS FOR MEDICARE
Nor does § 1396a(r)(1)(A) cede to the states the sole

authority to determine reasonable limits on deductions for

incurred medical expenses. Congress’ silence on that issue

left the decision about how to treat such deductions to CMS.

Chevron, 467 U.S. at 843-44. We therefore agree with CMS

that its interpretation of the phrase "not covered under the

State plan" is reasonable. Id.

VI.

In conclusion, 42 U.S.C. § 1396a(a)(17) unambiguously

confers on the Secretary the power to "stand[ ] in the shoes of

Congress" and interpret the Medicaid statute. A.T. Massey

Coal Co. v. Holland, 472 F.3d 148, 166 (4th Cir. 2006) (citing

United States v. Mead Corp., 533 U.S. 218, 229-30 (2001)).12

Moreover, CMS has not clearly exceeded its authority in promulgating its post-eligibility income regulations. Further,

CMS’s traditional interpretation of the phrase "not covered

under the State plan" is reasonable in light of Congress’

expressed policy permitting nursing home residents to pay

down medical expenses incurred prior to Medicaid eligibility,

as well as the clear purpose of the Medicaid statute to provide

medical services to low-income recipients. 

We need not pass judgment on the merits of the parties’

competing policy arguments, nor decide whether CMS’s

interpretation of "not covered under the State plan" reflects

the true intent of Congress. Our review is restricted solely to

a determination that, in its interpretation, CMS has neither

exceeded its administrative authority nor clearly erred in its

judgment. West Virginia, 475 F.3d at 209, 212. Thus, even if

we agreed that Maryland’s SPA is more reasonable, CMS

would still prevail because we must defer to its interpretation

so long as it is reasonable. Chevron, 46 U.S. at 843-44. 

12In A.T. Massey Coal Co., we recognized that when an agency’s decisions and procedures resemble those of the legislature "the agency stands

in the shoes of Congress, and its decisions carry the force of law." 472

F.3d at 166. 

MARYLAND DEP’T OF HEALTH v. CENTERS FOR MEDICARE 21
CMS’s requirement that states deduct uncovered medical

expenses incurred before Medicaid eligibility from a nursing

home resident’s post-eligibility contribution to care is a reasonable interpretation of Congress’ intent in enacting

§ 1396a(r)(1)(A). It does not "couple[ ] internal inconsistency

with a conscious disregard for the statutory text." Arkansas,

547 U.S. at 292. In accord with the reasonableness of that

interpretation and the "substantial deference" we afford to the

authorizing agency, Rust, 500 U.S. at 184, we therefore

uphold CMS’s interpretation as a permissible construction of

the statute. Chevron, 467 U.S. at 843. 

VII.

Accordingly, we deny Maryland’s petition for review and

uphold the decision of the Administrator of the Centers for

Medicare & Medicaid Services. 

PETITION FOR REVIEW DENIED

22 MARYLAND DEP’T OF HEALTH v. CENTERS FOR MEDICARE