                                               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 Kee-
ley wrote the opinion, in which Judge Michael and Judge
Motz joined.
2       MARYLAND DEP’T   OF   HEALTH v. CENTERS FOR MEDICARE
                              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 SER-
VICES, Office of General Counsel, Philadelphia, Pennsylva-
nia, for Respondent. ON BRIEF: Douglas F. Gansler,
Attorney General of Maryland, Lorie A. Mayorga, Assistant
Attorney General, OFFICE OF THE ATTORNEY GEN-
ERAL OF MARYLAND, Baltimore, Maryland, for Peti-
tioner. James C. Newman, Chief Counsel, Region III,
UNITED STATES DEPARTMENT OF HEALTH &
HUMAN SERVICES, Office of General Counsel, Philadel-
phia, Pennsylvania, for Respondent. Ron M. Landsman,
Rockville, Maryland; Cyril V. Smith, ZUCKERMAN
SPAEDER, L.L.P., Baltimore, Maryland, for Amicus Sup-
porting 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 Mary-
land’s State Medicaid Plan (the "SPA"). That SPA sought to
eliminate deductions for uncovered medical expenses Medic-
aid recipients incurred before becoming eligible for benefits.
Maryland’s petition asserts that CMS’s rejection of its SPA is
    1
    Throughout this opinion we refer to both the Centers for Medicare &
Medicaid Services and its predecessor, the Health Care Financing Admin-
istration ("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.
        MARYLAND DEP’T       OF   HEALTH v. CENTERS FOR MEDICARE               3
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 medi-
cal assistance to unserved, low-income individuals and fami-
lies. 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 stat-
ute"). As part of that program, states provide payment for cer-
tain 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 treat-
ment of income for individuals who are institutionalized . . . ,"
states should deduct expenses for "necessary medical or reme-
dial care recognized under State law but not covered under the
State plan . . . subject to reasonable limits the State may estab-
lish on the amount of these expenses.2 Pursuant to this statu-
  2
   Section 1396a(r)(1)(A) reads in full:
      (r)(1)(A) For purposes of sections 1396a(a)(17) and 1396r-
      5(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 disre-
      garded reparation payments made by the Federal Republic of
4     MARYLAND DEP’T      OF   HEALTH v. CENTERS FOR MEDICARE
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 eligi-
bility." 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, Mary-
land seeks to eliminate from its post-eligibility income calcu-
lation 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 resi-
dents in Maryland who, under Medicaid policy, must contrib-
ute 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 sub-
    ject to payment by a third party, including—
         (i) medicare and other health insurance premiums, deduct-
         ibles, or coinsurance, and;
          (ii) necessary medical or remedial care recognized under
          State law but not covered under the State plan under this sub-
          chapter, subject to reasonable limits the State may establish
          on the amount of these expenses.
   3
     Although this opinion specifically addresses medical expenses incurred
by nursing home residents, we recognize that the policy in question affects
all institutionalized Medicaid recipients.
   4
     During oral argument, Maryland estimated the annual impact of these
regulations on its budget at $23,000,000.00.
     MARYLAND DEP’T    OF   HEALTH v. CENTERS FOR MEDICARE     5
financial burden under Medicaid certainly would be reduced.
Nursing home residents with incurred medical expenses, how-
ever, 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 Adminis-
trative 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 discre-
tion, 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 deci-
sion only if we find that it has failed to consider relevant fac-
tors 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 con-
sider 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 expla-
    nation for its decision that runs counter to the evi-
    dence 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)).
6    MARYLAND DEP’T    OF   HEALTH v. CENTERS FOR MEDICARE
   When CMS’s disapproval of an SPA depends on construc-
tion of the Medicaid statute, we view that administrative inter-
pretation "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 con-
gressional 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 mat-
    ter; for the court, as well as the agency, must give
    effect to the unambiguously expressed intent of Con-
    gress.

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 deter-
mining whether its construction is permissible. Rust v. Sulli-
van, 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 Vir-
ginia, 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 admin-
istration." Id. (quoting Thomas Jefferson Univ. v. Shalala, 512
U.S. 504, 512 (1994)). We also stated that "[t]he administra-
     MARYLAND DEP’T    OF   HEALTH v. CENTERS FOR MEDICARE     7
tive process through which state plan amendments are consid-
ered 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 under-
standing of certain "spenddown" and "post-eligibility" provi-
sions 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 nec-
essary 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 medi-
cal assistance under Medicaid: the "categorically needy" and
the "medically needy." 42 U.S.C. § 1396a(a)(10). The cate-
gorically needy are applicants whose low income alone quali-
8       MARYLAND DEP’T    OF   HEALTH v. CENTERS FOR MEDICARE
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.5 See 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" medi-
cally needy applicants must "spenddown" before Medicaid
will cover their medical costs. § 435.831.

   In order to determine the amount of an applicant’s count-
able 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 stan-
dard. § 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).
      MARYLAND DEP’T      OF   HEALTH v. CENTERS FOR MEDICARE           9
   As defined by CMS’ regulations governing the spenddown
process, "incurred medical expenses" are any medically nec-
essary 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 pro-
viding care. Id.

   CMS requires nursing home residents with income remain-
ing after the completion of the spenddown process to contrib-
ute 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 "post-
eligibility contribution to care." §§ 435.725, 435.726.

   States calculate this amount by undertaking a process simi-
lar 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 sub-
tract from that total any incurred medical expenses deducted
  6
    This three-month period in CMS’s regulations is drawn from a require-
ment 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).
10   MARYLAND DEP’T   OF   HEALTH v. CENTERS FOR MEDICARE
during spenddown. If a resident has available income remain-
ing, 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 man-
ner as they deducted those expenses during the spenddown
process. It is this requirement of consistent treatment of
deductions that Maryland contends is unreasonable and viola-
tive of Medicaid policy.

                               C.

   The portion of the Medicaid statute governing the calcula-
tion of post-eligibility income is found at 42 U.S.C.
§ 1396a(r)(1)(A). By longstanding policy predating the enact-
ment of that statute, CMS had mandated consistent deduction
of incurred medical expenses in both the spenddown and post-
eligibility 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 rec-
         ognized 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 com-
plained that they were inflexible and burdensome. 53 Fed.
      MARYLAND DEP’T      OF   HEALTH v. CENTERS FOR MEDICARE         11
Reg. 3586-01, 3586 (Feb. 8, 1988); 50 Fed. Reg. 10992-01,
10993 (Mar. 19, 1985). They also contended that, by requir-
ing states to deduct uncovered medical expenses incurred
before Medicaid eligibility, CMS was unfairly subsidizing
services not covered under state Medicaid plans while reduc-
ing the amount nursing home residents were obligated to con-
tribute 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 ineli-
gibility 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 ineligibil-
ity" 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 post-
eligibility 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 Cover-
age 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 effec-
tive on and after April 8, 1988. The final rule [CMS] published on Febru-
ary 8, 1988 (53 Federal Register 3586) is superseded to the extent
inconsistent with the amendment made by subsection (d)." Medicare Cata-
strophic Coverage Act, § 303(g)(4) (citations omitted).
12   MARYLAND DEP’T    OF   HEALTH v. CENTERS FOR MEDICARE
   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 "rein-
state" 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 empha-
sized 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 pro-
mulgated 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 rec-
         ognized under State law but not covered
      MARYLAND DEP’T    OF   HEALTH v. CENTERS FOR MEDICARE   13
          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 institutional-
      ized 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 advan-
      tage of either the Medicaid program or the individu-
      als.

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 reasonable-
ness 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 admin-
istrative 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 Medic-
aid’s purpose of assisting the truly needy by creating a "loop-
hole" 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
  9
   Section 3703.8 has not been amended since 1989.
14     MARYLAND DEP’T    OF   HEALTH v. CENTERS FOR MEDICARE
state from imposing income limits the state believes are rea-
sonable, 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 deduc-
tions for incurred medical expenses in the post-eligibility pro-
cess, 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 cov-
ered 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 incorporat-
ing the phrase "not covered under the State plan" verbatim
from CMS’s regulation into the text of § 1396a(1)(r)(A), Con-
  10
    Because 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.
     MARYLAND DEP’T     OF   HEALTH v. CENTERS FOR MEDICARE     15
gress also ratified CMS’s interpretation of that phrase. Deci-
sion of the Administrator, In re: The Disapproval of the
Maryland State Plan Amendment 05-06, 8.

   Additionally, CMS justified the reasonableness of its regu-
latory 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 insti-
tutionalized 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 congressio-
nal 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 interpreta-
tion exceeds its regulatory authority or is otherwise impermis-
sible. 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 con-
gressional 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
16    MARYLAND DEP’T    OF   HEALTH v. CENTERS FOR MEDICARE
     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 flexi-
     bility 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 Con-
gress 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 rea-
sonable 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 calcu-
lation of post-eligibility income, § 1396a(r)(1)(A) unambigu-
ously 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
     MARYLAND DEP’T    OF   HEALTH v. CENTERS FOR MEDICARE    17
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 interpreta-
tion 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 Confer-
ence 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 pro-
cesses.

                                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 dele-
gates authority to an agency, the agency’s interpretation of an
ambiguous statutory phrase "often demands Chevron defer-
ence"). By failing to define the phrase, Congress left an inter-
pretive gap that CMS may fill. Chevron, 467 U.S. at 843-44.
CMS’s interpretation properly fills that gap by requiring nurs-
ing 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
18    MARYLAND DEP’T   OF   HEALTH v. CENTERS FOR MEDICARE
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 Mary-
land argues that statements in the House Conference Report
authorize states to establish reasonable limits on post-
eligibility deductions unimpeded by CMS’s oversight, a care-
ful 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 resi-
     dent’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 rea-
     sonable 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 non-
     covered services. Similarly, it would not be reason-
     MARYLAND DEP’T    OF   HEALTH v. CENTERS FOR MEDICARE    19
    able for States to impose a limit on the number of
    medically necessary services or items that an indi-
    vidual 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 autho-
rize 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) per-
mits 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 author-
ity to regulate the post-eligibility process nor authorize states
to exclude deductions for uncovered medical expenses with-
out 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 unambigu-
ously favors Maryland’s interpretation. Cetto, 518 F.3d at
20     MARYLAND DEP’T    OF   HEALTH v. CENTERS FOR MEDICARE
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 regu-
latory scheme is unreasonable. Nowhere does the House Con-
ference 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.
  11
    See Balanced Budget Act of 1997: Medicaid Payment Rates for Cer-
tain 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).
       MARYLAND DEP’T     OF   HEALTH v. CENTERS FOR MEDICARE         21
   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 pro-
mulgating 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.
  12
    In A.T. Massey Coal Co., we recognized that when an agency’s deci-
sions 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.
22   MARYLAND DEP’T   OF   HEALTH v. CENTERS FOR MEDICARE
   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 rea-
sonable 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
