A permanently disabled Medicaid recipient residing in a nursing home challenged an informal rule issued by the federal Department of Health and Human Services which requires that, for purposes of determining the benefits due to a Medicaid eligible individual, states must consider income placed in a Special Needs Trust for that individual’s benefit. (Medicaid provides joint federal and state funding of medical care for individuals who cannot afford to pay their own medical costs.) The challenged rule effectively prevents Medicaid recipients from using Special Needs Trusts to shelter their monthly Social Security Disability Insurance (SSDI) income from certain Medicaid determinations. In the case before the court, the plaintiff’s legal guardian had created a Special Needs Trust on the plaintiff’s behalf and had been depositing into it the plaintiff’s monthly SSDI benefits, minus some income deductions that were not at issue.

The end result of applying the challenged agency rule is that income placed in a Special Needs Trust is not considered in making the first determination of eligibility for Medicaid, but is considered in making the second determination of the extent of benefits to which an eligible individual is entitled. Relying on the agency rule, appropriate officials may count the income that an institutionalized individual places in a Special Needs Trust when determining how much of the individual’s income he or she must contribute to the cost of his or her care.

In his class action lawsuit, the Medicaid recipient, on his behalf and that of similarly situated persons, unsuccessfully argued that the rule conflicts with the express language of a part of the Medicaid laws. A federal appeals court rejected the plaintiff’s reading of the pertinent statute, instead concluding that Congress did not speak to the precise question presented by his claim. Under accepted principles of administrative law, this meant that the federal agency was free to “fill the gap” left by Congress. When it did so, that was an appropriate exercise of the agency’s authority, to which the court deferred.