Legal Opinions - U.S. 4th Circuit Court of Appeals: October 14, 2008

Daily Record, The (Baltimore), Oct 14, 2008

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. [section]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. [section]435.831.

In order to determine the amount of an applicant's countable income, states first subtract certain standard deductions from gross income. See [section]435.831(b). If that amount equals or is less than the state income standard, the applicant is deemed eligible for Medicaid benefits. See [section]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. See [section]435.831(d).

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. See [section]435.831. Upon successful completion of the spenddown process, medically needy applicants are eligible to receive Medicaid benefits, such as nursing home care.

Medicaid pays room and board costs for eligible nursing home residents through the nursing home per diem rate. See [section]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. See [section]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." [section][section]435.725, 435.726.

States calculate this amount by undertaking a process similar to the spenddown process. 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 contended is unreasonable and violative of Medicaid policy.

The portion of the Medicaid statute governing the calculation of post-eligibility income is found at 42 U.S.C. [section]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. See [section][section]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. In February 1988, however, CMS amended 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. See 53 Fed. Reg. at 3586.