A federal judge yesterday upheld the Reagan administration against charges that it had set illegal quotas on the number of Social Security disability cases the government's administrative law judges must hear and had ordered a ceiling on the granting of benefits.

In a lawsuit filed last year, the Association of Administrative Law Judges Inc., representing about 540 judges employed by the Department of Health and Human Services, complained the rules threatened the judges' independence and violated the rights of would-be disability recipients.

U.S. District Court Judge Joyce Hens Green ruled yesterday that while the judges were alarmed "with reason" by some HHS policies regarding their independence, the department -- "perhaps in response to this litigation" -- had recently improved its rules "significantly for the better."

HHS administrative law judges hear appeals from individuals who have been denied Social Security disability benefits by state agencies.

The association alleged in its complaint that HHS had singled out judges who granted benefits in more than two-thirds of their cases for special review and potential disciplinary action or even firing.

Green agreed that the government had had "an unjustifiable preoccupation" with the number of cases in which benefits were allowed and that that focus "created an untenable atmosphere of tension and unfairness" among the administrative law judges.

She also criticized HHS for showing "insensitivity" to the judges' independence by the "injudicious use of phrases such as 'targeting,' 'goals' and 'behavior modification.'"

Because HHS officials more recently "appear to have shifted their focus," however, the need for court action to change department policy has ceased, Green wrote.