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Vaughn v. Sullivan

May 14, 1996




Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. IP 93-1600 C B/S Sarah Evans Barker, Chief Judge.

Before FLAUM, EASTERBROOK, and MANION, Circuit Judges.

EASTERBROOK, Circuit Judge.


DECIDED MAY 14, 1996

Means-tested public assistance programs place a tax on earnings. Not a direct tax, after the fashion of the Internal Revenue Code, but an indirect one. Greater earnings yield less assistance. This is what it means to say that a program is means-tested, with benefits concentrated on persons with lower incomes or wealth. At what rate should extra earnings reduce the levels of assistance? If every dollar of earnings reduces public assistance by a dollar, then beneficiaries have little or no incentive to work, may even have a strong incentive not to work (for work not only requires effort but also exposes the worker to income tax; the effective tax rate can exceed 100 percent when explicit and implicit taxes are counted). Recipients who lack an incentive to work fall behind in the marketplace; skills do not keep up; and then even if the program's tax rate changes, to encourage employment, it may be too late. But if every dollar of earnings reduces benefits only by a little (say 10 percent), in order to reward employment and encourage the transition from public assistance to self-sufficiency, the cost of the program balloons. Suppose a program guarantees everyone a minimum of $5,000 per year in cash or benefits and imposes a tax rate of 10 percent. Then even someone who earns $40,000 per year will still receive $1,000 under the program. Public assistance programs would collapse if everyone who earned less than $50,000 a year were a recipient of net transfers. Those who earn more than $50,000 would pay a staggering rate of tax to finance the program -- if it could be financed at all -- and the disincentive to work would affect society's most productive members.

One way to reduce a high break-even point between net transfers and net taxes ($50,000 in this example) is to reduce the guaranteed minimum, but a low minimum may defeat the purpose of the program (to provide decent housing, basic nutrition, or essential medical care). Another is to increase the implicit tax on benefits, which reinforces the cycle of dependence. Still another approach is to vary the tax rate -- to have a low rate for a time (to encourage work) followed by a high rate later. This produces a notch in the relation between income and benefits. After earnings exceed some threshold, for some period of time, public benefits vanish (or are greatly diminished). The effective tax rate at the notch is huge (1 cent of additional earnings can cause the loss of a $5,000 package of benefits), and the existence of this precipice can cause people to keep their earnings under the threshold, but some participants may be able to land jobs so remunerative that they willingly forego all benefits and make the transition to self-sufficiency.

This is the premise of the Plan for Achieving SelfSupport (PASS) program, see 42 U.S.C. secs. 1382a(b)(4)(B)(iv), 1382b(a)(4), under which earnings from new employment may be disregarded for as long as four years in computing income for purposes of the Supplemental Security Income (SSI) program, a state-federal cooperative means-tested program. Congress and the states that have elected to participate in the PASS program hope that people achieve levels of earnings that will induce them to surrender their SSI benefits when the period of exclusion ends. When this happens, the short-run cost to the SSI program of maintaining full benefits for people with increased earnings is swamped by the long-run savings from terminating SSI payments for future years (and by the taxes collected on the former recipients' earnings). There is, of course, another possibility: when the exclusion period ends, recipients will quit their jobs (or scale back their work) to protect their benefits. When that occurs, the PASS program not only fails to achieve its objective but also increases the cost of the SSI program (by foregoing the implicit tax on the earnings in the interim). Which effect predominates is an interesting empirical question, which may differ across classes of recipients. For example, the chronically ill may have a lower success rate than those who filed claims to SSI benefits because of a decline in local employment opportunities.

Eligibility for SSI benefits potentially affects other benefits too. As a rule, for example, anyone who is eligible for SSI benefits also is eligible for Medicaid benefits -- and, for many recipients, the cost to the state of medical care delivered under Medicaid substantially exceeds the cash transfers the state provides under the SSI program. States accordingly are tempted to break the link between SSI and Medicaid, providing the cheaper SSI payments while withholding or limiting Medicaid benefits. Federal law prevents states from yielding to this temptation -- unless the state in question is a "sec. 209(b) state." When Congress linked the SSI and Medicaid programs in 1971, it feared that states would find Medicaid costs prohibitive and withdraw from the SSI program in order to limit their outlays. To avoid this, Congress gave states the option to treat eligibility for SSI and Medicaid programs separately, provided the state's benefits were no less generous than those the state provided on January 1, 1972. This option, extended by sec. 209(b) of a statute whose name no longer matters, is codified in 42 U.S.C. sec. 1396a(f). See generally Schweiker v. Hogan, 457 U.S. 569 (1982); Herweg v. Ray, 455 U.S. 265 (1982); Schweiker v. Gray Panthers, 453 U.S. 34 (1981); Mattingly v. Heckler, 784 F.2d 258 (7th Cir. 1986). Indiana took advantage of the sec. 209(b) option and uses different formulas to determine eligibility for, and the amount of, SSI and Medicaid benefits. One difference is under attack in this litigation: Indiana disregards earnings under a PASS program when determining the Medicaid benefits of blind persons, but it counts these earnings for everyone else. 405 Ind. Admin. Code secs. 2-3-3(8), 2-3-15(c)(9).

Matthew Ravin and Karen Vaughn, the two representative plaintiffs in this class action, are severely disabled. Ravin, who has multiple sclerosis, cannot control his legs or use his hands well enough to feed himself. Vaughn is a quadriplegic, paralyzed below the neck as a result of a shooting accident. Like other members of the plaintiff class, Ravin and Vaughn incur heavy medical expenses that have exhausted their resources; they receive Medicaid benefits. Vaughn and Raven have personal PASS programs approved, for purposes of the SSI program, by the Social Security Administration. But because they are not blind, Indiana treats half of their earnings in excess of a threshold as available for the payment of medical bills; it also requires them to devote all liquid assets exceeding $1,500 to medical care before the state will cover remaining expenses. See 405 Ind. Admin. Code secs. 2-3-3 through 2-3-10. They are somewhat better off with the PASS program than without; the PASS program enhances the SSI payments they receive at a given level of income from employment, and Indiana does not require them to use current SSI income for medical care (though it did count a lump-sum payment of back SSI benefits against Raven's resource limit). But they would be better off still if employment earnings were disregarded for Medicaid purposes -- as the earnings of blind persons under PASS programs are disregarded. Raven wants to save $9,000 from his PASS earnings to buy a handicapped-accessible van, but Indiana would kick him out of the Medicaid program as soon as his savings exceed $1,500. Plaintiffs contend that Indiana's more favorable treatment of blind persons violates two federal statutes and the equal protection clause of the fourteenth amendment. The district court granted Indiana's motion for summary judgment. 906 F. Supp. 466 (S.D. Ind. 1995).

Like the district court, we start with the argument that Indiana has violated the Medicaid statute -- in particular, 42 U.S.C. sec. 1396a(a)(17), which provides that every state plan must "include reasonable standards (which shall be comparable for all groups . . .) for determining eligibility for and the extent of medical assistance under the plan". The district court held that this requirement does not apply to Indiana, because sec. 209(b) negates "any other provision of this subchapter" except for a short list, on which sec. 1396a(a)(17) does not appear. Section 209(b) and sec. 1396a(a)(17) are part of the same subchapter (indeed, the same section) of the United States Code. Given the rule that unambiguous statutory text prevails over arguments based on statutory purpose and history, that ought to be the end of matters.

Plaintiffs say that it is not. They appeal to legislative purpose. Congress enacted sec. 209(b) to break the link between SSI and Medicaid, a link that appears in sec. 1396a(a)(10)(A). This means, plaintiffs insist, that the sole effect of sec. 209(b) is to entitle Indiana to disregard sec. 1396a(a)(10)(A). Section 209(b) states cannot adopt Medicaid plans that would have been unlawful in 1971, see Norman v. St. Clair, 610 F.2d 1228, 1235 (5th Cir. 1980), and a version of sec. 1396a(a)(17) has been in the Medicaid statute since that program's creation in 1965. Plaintiffs point to several cases that have entertained arguments that one or another sec. 209(b) state was out of compliance with sec. 1396a(a)(17). E.g., Gray Panthers; Mattingly; Roloff v. Sullivan, 975 F.2d 333 (7th Cir. 1992). These cases rejected the "comparability" claims on the merits, which leads plaintiffs to argue that they implicitly hold sec. 1396a(a)(17) applicable to sec. 209(b) states.

Indiana responds that "implicit" means that there was no "holding"; the opinions could bypass the effect of sec. 209(b) because it turned out not to matter. One may say that the purpose of sec. 209(b) was to cancel sec. 1396a(a)(10)(A), but statutes often are written more broadly than their immediate objectives, in order to avoid the risk that narrow language will undermine the objective in ways not yet contemplated. Cf. Rodriguez v. United States, 480 U.S. 522, 525-26 (1987). Contentions of the kind plaintiffs present illustrate that risk. Indiana is free to use different eligibility and resource standards for the SSI and Medicaid programs; that is what sec. 209(b) is about; but if plaintiffs are right, the "comparability" requirement of sec. 1396a(a)(17) withdraws much if not all of that freedom once Indiana grants Medicaid benefits to a single person -- not only because almost any variance in the standards can be said to treat "comparable" cases differently, but also because it transfers decisionmaking authority from the state to the federal judiciary. Congress required equality in deductions elsewhere in the web of social welfare programs, see 42 U.S.C. sec. 1309, and we take the plaintiffs' silence about that statute as a concession of its inapplicability to this dispute. Would it not be strange to introduce the same rule through the back door, when it is barred at the front by sec. 209(b)? The course most compatible with the Supreme Court's instructions about statutory interpretation is to take sec. 209(b) literally, covering the entire subchapter except for listed exclusions (of which sec. 1396a(a)(17) is not one).

Even if this is wrong, the second part of plaintiffs' argument does not follow. They concede that Indiana may maintain any distinction between Medicaid and SSI that was lawful in 1971. Back in 1971, Indiana practiced the same distinction: it allowed blind persons, but not other disabled persons, to disregard PASS income when calculating eligibility for Medicaid benefits. The Secretary of Health and Human Services has approved this distinction for almost three decades. (Each state needs the Secretary's approval for its program; see 42 U.S.C. sec. 1396a(b).) "Comparable" is a fuzzy term, as we remarked in K.R. v. Anderson Community Schools Corp., No. 95-2497 (7th Cir. Apr. 12, 1996), when considering another program that drew distinctions on the basis of physical conditions. Agencies must have leeway when dealing with such open-ended words. "Comparable" cannot mean "identical," for that would make sec. 209(b) illusory; but if states can comply with sec. 1396a(a)(17) without using identical standards, how great may the difference be? That's a question for the responsible administrator, in this case the Secretary. In what dimensions must standards be "comparable?" Plaintiffs answer "with respect to income and medical needs," but again that bids fair to eviscerate sec. 209(b). Other dimensions may be relevant -- perhaps the reason the person requires assistance (e.g., permanent disability versus transitional unemployment) and the prospect that equal treatment would produce equal results. Because the objective of a PASS program is self-sufficiency, a state might differentiate according to the likelihood of achieving that goal. A state might conclude that the blind have greater employment opportunities than do quadriplegics, coupled with lower medical costs. No one will leave the SSI and Medicaid programs unless employment income exceeds the benefits foregone, and a state may conclude that this is more likely to occur for blind persons than for other participants in the program, and therefore represents a better investment of limited funds (recall that PASS programs impose shortterm costs in the form of the foregone implicit tax on earnings). Perhaps this is why the Secretary has approved Indiana's program year in and year out.

Indeed, Congress itself may have expressed a similar judgment -- and in sec. 1396a(a)(17), no less. Here is the ...

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