Opinion
No. A 00 CA 527 SS.
November 14, 2000
ORDER
BE IT REMEMBERED that on the 25th day of September 2000 the Court held a hearing in the above-styled cause and specifically on Defendant National Heritage Insurance Company's Motion to Dismiss [#72] and Defendant National Heritage Insurance Company's Supplemental Motion to Dismiss [#104]; as well as Defendant Texas Department of Health's Motion for Protective Order [#98], the plaintiff's response thereto [#100] and defendant National Heritage Insurance Company's opposition thereto [#100]. After the hearing, the plaintiff filed responses to the motions to dismiss [#107, 112 and 114] and the defendant filed a reply thereto [#117] and a supplemental appendix [#110]. Finally, Defendant Texas Department of Health filed a supplemental protective order brief [#111] and the plaintiff filed a Motion to Strike Affidavits [#113]. After considering the motions, response and reply briefs, the file as a whole and the applicable law, the Court enters the following opinion and order.
Procedural Background
This case was originally filed in 1997 and assigned to the Honorable Lucius Bunton III. The plaintiff, William Churchill, brought this lawsuit as a qui tam action under the Federal False Claims Act against defendants The State of Texas, Texas Department of Human Services, Texas Department of Health, Texas Health and Human Services Commission ("the State defendants"), as well as against National Heritage Insurance Company ("NHIC"). The plaintiff is a former staff attorney for the Texas Department of Health ("TDH"). The gist of the plaintiff's complaint is that the defendants, when requesting federal Medicaid funds, falsely claimed the State was in compliance with a federal law requiring the State to pursue potential third party sources of Medicaid reimbursement (such as insurance or tortfeasors).
The federal requirement is found at 42 U.S.C. § 1396a, which requires a state receiving matching federal Medicaid funds to "take all reasonable measures to ascertain the legal liability of third parties . . . to pay for care and services available under the [state Medicaid] plan." Any money recovered from third parties is then used to reimburse state and federal Medicaid expenditures.
Soon after the complaint was filed, the State defendants moved to dismiss on Eleventh Amendment immunity grounds. The district court denied this motion in a written order on June 4, 1998 [#41], and the State defendants appealed to the Fifth Circuit. While the appeal was pending, NHIC filed its own motion to dismiss in November 1998 arguing that, if the State defendants were entitled to immunity from suit, NHIC was also entitled to such immunity because it was an arm of the State with respect to this lawsuit, and therefore the Court lacked subject matter jurisdiction.
On August 5, 1999 the Fifth Circuit entered its judgment, reversing the district court and finding the State defendants were entitled to sovereign immunity from suit under Foulds v. Texas Tech Univ., 171 F.3d 279, 292 (5th Cir. 1999), cert. denied, 120 S.Ct. 2194 (2000). The Circuit then remanded for entry of judgment dismissing the State defendants. As a result, NHIC is the only remaining defendant in this lawsuit.
The Circuit's judgment did not issue as mandate until nearly a year later, on June 8, 2000.
On August 16, 2000, the case was transferred to this Court. On September 15, 2000, NHIC filed its supplemental motion to dismiss. The sole issue on NHIC's pending motions to dismiss is whether NHIC is an arm of the State for purposes of this lawsuit; if so, it is entitled to immunity from suit.
Analysis
I. Motion to Dismiss
In deciding whether to dismiss for failure to state a claim, "the district court must take the factual allegations of the complaint as true and resolve any ambiguities or doubts regarding the sufficiency of the claim in favor of the plaintiff." Fernandez-Montes v. Allied Pilots Ass'n, 987 F.2d 278, 284 (5th Cir. 1993). The Court should dismiss only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 78 S.Ct. 99, 102 (1957). The same standard is used to analyze a motion to dismiss for lack of subject matter jurisdiction. See Benton v. United States, 960 F.2d 19, 21 (5th Cir. 1992).
A. Plaintiff's Allegations
According to the complaint, NHIC, a Texas corporation, "administers the Texas Medicaid program through a contract with TDHS" and "serve[s] as the payment agent for all Medicaid claims in Texas." See First Amended Complaint [#18] ("Complaint"), at ¶¶ 19 and 29. As part of its State contract, "NHIC was delegated the State's authority and obligation to investigate all trauma cases for potential tort liability, to identify cases where potential tort liability existed and, in all cases where it was cost effective, to pursue collection of the amount paid by Medicaid for medical treatment for the tort-related injury." Id. ¶ 29; see also id. ¶¶ 24 and 31. The plaintiff alleges NHIC's State contract establishes "specific requirements" NHIC must adhere to when investigating and pursuing potential third party sources of recovery. See id. ¶ 29 (quoting detailed requirements from contract, including "State Agency's approval" required for any "procedures, controls, and guidelines designed to assure that all cases with the potential of involving such subrogated rights [to third party sources of recovery] are discovered and that all facts necessary to determine if a right of recovery exists are acquired and evaluated"); see also id. ¶¶ 45-46 (alleging "Contract require[d] NHIC and the State to establish a database file of all recipients with known third-party liability").
The plaintiff complains "NHIC has knowingly failed to comply with [these] provisions in its contract with the State." See id. ¶ 24. The plaintiff alleges the State defendants knowingly and intentionally participated in this non-compliance, and conspired with NHIC to misrepresent to federal regulators that the State was in fact in compliance:
Defendant NHIC and one or more of the other Defendants have conspired and colluded to obtain [federal Medicaid funds] without complying with the regulations. . . . Defendant NHIC and the State have conspired to prevent [federal regulators] from learning that NHIC has not complied with provisions in its contract with TDHS and TDH requiring NHIC to actively seek reimbursement from third party tortfeasors. . . .Id. ¶ 27; see also id. ¶¶ 26, 28 and 62.
More specifically, as part of this conspiracy, the plaintiff alleges the Texas Department of Human Services ("TDHS") in late 1994 "made a policy decision that pursuit of tort recovery in general would not be cost effective" and therefore did not require NHIC to fully pursue tort recovery as a source of Medicaid reimbursement. See id. ¶ 34. The plaintiff claims NHIC also inadequately evaluated TDH questionnaires sent to potential tort recovery victims, and as a result in early 1995 TDH established a "procedure . . . by which the NHIC tort recovery staff would refer to TDH Counsel's Office individual cases in which NHIC had identified that a tort settlement" had occurred or was pending. See id. ¶ 36. After that, TDH allegedly handled all settlement negotiations in Medicaid third-party liability claims. See id. ¶¶ 37-38. According to the plaintiff, from June to November 1995, TDH and NHIC representatives met and TDH outlined the procedures required for NHIC's referral of third-party liability claims, including hiring an attorney for this task. See id. ¶¶ 40-41. The plaintiff contends that in November 1995, however, the State "decided to terminate all efforts to hire a contractor or obtain a staff attorney" for NHIC. See id. ¶ 41. The plaintiff further contends that, during this time "TDHS and the TDH [had] policies of not requiring NHIC to comply with the Contract requirements in the area of tort recovery." See id. ¶ 48. The plaintiff also claims NHIC failed to exchange data with the Texas Department of Public Safety. See id. ¶ 52. Finally, the plaintiff alleges in November 1996 TDH realized this conduct violated federal Medicaid funding requirements, but decided "that this matter should be concealed from [federal regulators]." See id. ¶¶ 54-55.
The plaintiff alleges that, as a result of this intentional conspiracy to "fraudulently obtain" Medicaid funding, "federal funds were used to pay for medical care which should have been cost-avoided or for which reimbursement should have been sought and was not." Id. ¶¶ 25 and 28. The plaintiff claims NHIC violated the False Claims Act by participating in this conspiracy and because NHIC requested and received federal money as part of its fees under the State contract, but NHIC failed to provide required "third party liability program services" under the contract. See id. ¶ 61. Finally, as damages, the plaintiff seeks reimbursement of all overpaid federal funds — i.e., those funds which the plaintiff claims could have been recovered from third party sources but were not. See id. ¶ 65.
According to the complaint, "NHIC is paid monthly Pure Premiums for each of nine coverage groups plus Administrative Charges" that exceed $31 million per year, for NHIC's performance under the contract. See id. ¶ 30. The plaintiff alleges "[f]ederal funds comprise portions of the premiums and administrative fees paid to NHIC," and "the administrative fee is paid in part for tort recovery program services NHIC is to provide." Id.
B. Is NHIC an Arm of the State?
NHIC's motion turns on whether it is an arm of the state for purposes of this lawsuit. To make this determination, the Court "must examine the particular entity in question and its powers and characteristics as created by state law to determine whether the suit is in reality a suit against the state itself." Farias v. Bexar County Bd. of Trustees for Mental Health Mental Retardation Servs., 925 F.2d 866, 874 (5th Cir. 1991), cert. denied, 112 S.Ct. 193 (1991). The Fifth Circuit recently stated the Court should examine the following six factors in this inquiry:
(1) whether the state statutes and case law characterize the agency as an arm of the state;
(2) the source of the funds for the entity;
(3) the degree of local autonomy the entity enjoys;
(4) whether the entity is concerned primarily with local, as opposed to state-wide problems;
(5) whether the entity has authority to sue and be sued in its own name; and
(6) whether the entity has the right to hold and use property.Hudson v. City of New Orleans, 174 F.3d 677, 681 (5th Cir. 1999), cert. denied, 120 S.Ct. 498 (1999). The Fifth Circuit also has stated the Court should look "most importantly at whether the funds to defray any award would be derived from the state treasury." Laje v. R.E. Thomason Gen. Hosp., 665 F.2d 724, 727 (5th Cir. 1982). Taking the allegations of the complaint as true, and examining the record evidence submitted by both parties, the Court concludes the above factors weigh heavily in favor of finding NHIC is an arm of the State for purposes of this lawsuit.
With respect to the first factor, courts within the Fifth Circuit (including this Court) have uniformly characterized NHIC as an arm of the State. See United States v. Mack, 48 F. Supp.2d 708, 713 (S.D. Tex. 1999) ("NHIC is also an arm of the State of Texas entitled to Eleventh Amendment immunity."); Texas Hosp. Ass'n v. National Heritage Ins., 802 F. Supp. 1507, 1512 (W.D. Tex. 1992); ("Defendant NHIC is also an arm of the State and immune under the Eleventh Amendment."); St. Joseph Hosp. v. Electronic Data Sys. Corp., 573 F. Supp. 443, 450 (S.D. Tex. 1983) ("[T]he sovereign immunity doctrine bars maintenance of the instant suit against the NHIC Defendants."). This factor points strongly to finding NHIC is an arm of the State.
The second factor is the source of NHIC's funds; the most important inquiry in this area is whether an award in this lawsuit would be derived from the State's treasury. According to the plaintiff, NHIC holds the State's Medicaid funds in a "Texas Title XIX Trust Fund Account and the Texas Title XIX Provider Disbursement Account." See Plaintiff's Response [#107], at 4 (citing contract provisions). The plaintiff claims these funds are used for payment of Medicaid claims and "[u]pon termination of the Contract . . . must be returned to the State." See id. at 4-5. It is these very State funds, held by NHIC, that the plaintiff seeks as damages in this case. Specifically, these funds contain the federal matching funds at issue — the money plaintiff claims was "overpaid" based on the defendants' misrepresentations and which therefore must be returned to the federal government. Thus, a judgment against NHIC in this case, that the funds held by NHIC contain "overpaid" federal monies that must be returned, would clearly affect the State treasury. In addition, it is undisputed that the State pays NHIC to administer the State's Medicaid program. Thus, NHIC also would use these state funds to pay an award in this lawsuit. As one district court stated in similar circumstances:
[A]n award against NHIC would affect state funding. NHIC may be a privately owned company with its own resources to pay a damage award; however, it is undisputed that NHIC generates at least a portion of those resources by contracting with the State of Texas. Thus, an award of damages against NHIC would be paid out of funds NHIC receives from the State of Texas. Put another way, NHIC would not be in a position to be sued by [plaintiff] if it was not paid by the State of Texas to run the state's Medicaid program. Mack, 48 F. Supp.2d at 713 (finding NHIC an arm of the State). Finally, the plaintiff's primary complaint (aside from the alleged intentional misrepresentations by all defendants) is that NHIC, as part of a conspiracy with the State, had an understaffed tort recovery program. The plaintiff also complains NHIC violated federal law because it failed to work with the State — specifically the Texas Department of Public Safety — to establish a database. Thus, a judgment that this conduct violated the False Claims Act would require the State to change its tort recovery program and establish a database with NHIC; such changes would be paid for by the State. See Deposition of Dr. David Smith, at 61-63 and 119-24; Deposition of Linda Wertz, at 92-99. A judgment for the plaintiff in this lawsuit therefore would affect the State treasury. Cf. Texas Hosp. Ass'n, 802 F. Supp. at 1512 ("[I]t is clear that the relief would ultimately control the actions of the State of Texas and affect its treasury, not funds of NHIC, insofar as Medicaid payments would be increased."). In sum, the second factor also weighs in favor of finding NHIC is an arm of the State.
Dr. Smith was the Commissioner of TDH from 1992 to 1996, and Ms. Wertz has been the Deputy Commissioner for the Texas Health and Human Services Commission's Medicaid Division since 1996. The plaintiff has moved to strike the affidavits submitted by Smith and Wertz. However, the Court in this order is relying only on the deposition testimony of Smith and Wertz — not their affidavits. Therefore, the plaintiff's Motion to Strike is moot.
The third factor is NHIC's degree of local autonomy. It is abundantly clear that NHIC — particularly with respect to the tort recovery program at issue — is controlled by the State. The plaintiff's allegations clearly show NHIC's complained of actions were taken under the express direction and/or consent of TDH and the State. Specifically, the plaintiff alleges: NHIC was acting as part of a general conspiracy coordinated by TDH and the State; the State's approval was required for any "procedures, controls or guidelines" NHIC implemented regarding third party recovery; TDH established the required procedures for NHIC's referral of third-party liability claims; the State made the decision to "terminate all efforts to hire a contractor or obtain a staff attorney" for NHIC; and TDH and TDHS had "policies of not requiring NHIC to comply with the Contract requirements in the area of tort recovery." See Complaint ¶¶ 27, 29, 40-41 and 48. The finding that NHIC was controlled by the State for the conduct at issue is further supported by the testimony of State officials who worked with NHIC regarding the third-party recovery program. As Ms. Wertz testified:
A: NHIC is a contractor of the State, and we set out — the State sets out the policies and procedures.
Q: And is it NHIC's obligation to follow those policies and procedures?
A: Yes, it is.
Q: Is it free to deviate from those policies and procedures?
A: No.
Wertz Deposition, at 93; see also Smith Deposition, at 116 and 130-32. Finally, Terry Cottrell, a TDHS employee who "had responsibility for the acute care Medicaid tort recovery subrogation program" and served as the "liaison . . . with NHIC for the NHIC Medicaid Contract," see Complaint ¶ 34, testified that the State had significant control over NHIC's third-party recovery program and that with respect to this program NHIC had no authority to modify the State's procedures or rules, and no authority to engage subcontractors. See Deposition of Terry Cottrell, at 238, 243-44, 252-60 and 262-67. Thus, because the State controlled NHIC, particularly with respect to the third-party Medicaid recovery program at issue, the third factor weighs heavily in favor of sovereign immunity for NHIC. See Mack, 48 F. Supp.2d at 713 (finding sovereign immunity in part because "NHIC is not autonomous.").
The fourth factor is whether NHIC is concerned primarily with local, as opposed to state-wide problems. It is undisputed NHIC, with respect to the programs at issue in this lawsuit, addresses state-wide problems. As the plaintiff alleges, NHIC "serve[s] as the payment agent for all Medicaid claims in Texas." See Complaint ¶ 29. Thus, as the district court found in Mack, "NHIC . . . is concerned with state-wide problems; namely, the processing of Medicaid claims for the doctors of this state." Mack, 48 F. Supp.2d at 713. This factor also weighs in favor of sovereign immunity for NHIC.
The parties do not significantly address the Hudson fifth and sixth factors — whether NHIC can sue or be sued in its own name, and whether it can hold and use property. Obviously, as a private corporation, NHIC has the ability to sue in its own name and to use and hold property. However, the Court does not find these factors particularly determinative here. More important, the Court finds the other four factors overwhelmingly point towards NHIC as an arm of the State in this case, and outweigh any contrary indications under the fifth and sixth factors. See, e.g., Mack, 48 F. Supp.2d at 713 (finding sovereign immunity despite fact that NHIC is "privately owned company").
The plaintiff argues NHIC is not an arm of the State, however, because the conduct complained of in this lawsuit is NHIC's breach of its contractual obligations with the State, not NHIC's exercise of its State-controlled duties. This argument fails. The complaint clearly alleges NHIC was acting at the behest of TDH and the State, and with the express consent of TDH and TDHS, in running the Medicaid tort recovery program in the manner complained of by the plaintiff. The complaint also alleges NHIC acted as part of a conspiracy coordinated by the State, to intentionally conceal its tort recovery operations from the federal government. Thus, to the extent NHIC was not performing its contractual obligations or was running an inefficient tort recovery program, it was doing so — according to the plaintiff's own allegations — at the direction of the State. If anything, this further demonstrates NHIC was acting as an arm of the State.
In addition, there is no substantial allegation or evidence that NHIC acted beyond the scope of the State's alleged directives with respect to the tort recovery program. In fact, the testimony of Mr. Cottrell indicates just the opposite, that the State "would direct" NHIC on "anything that has to do with policy . . . in the area of Third Party Resources." See Cottrell Deposition, at 460; see also id. at 129-32, 262-67, 276-78, 341-43, 348-49 and 370-71. Again, this supports a finding of sovereign immunity. See Mack, 48 F. Supp.2d at 713. ("While [plaintiff] may argue NHIC did not run the program effectively, there is no argument or evidence that NHIC exceeded the scope of its authority in any manner in administrating the Medicaid program.").
In sum, it is clear that the State of Texas is the real substantial party in interest in this lawsuit. The State delegated its Medicaid obligations to NHIC, and controlled NHIC's performance of these obligations, including the third-party recovery program at the heart of the plaintiff's complaint. The State did not simply hire NHIC to construct a light rail system or supply State offices with bottled water. The State hired NHIC to take over a State function — to administer and implement an ongoing State program. Indeed, if State had not contracted with NHIC, the State itself would have performed the conduct complained of by the plaintiff. See Wertz Deposition, at 98; Cottrell Deposition, at 239 and 279.
This amount of State control and supervision distinguishes NHIC's situation from that of a private corporation running a State prison with little control or input from the State. Compare Richardson v. McKnight, 117 S.Ct. 2100, 2108 (1997) (holding guards who worked for private corporation running a State prison were not entitled to sovereign immunity for § 1983 claim in part because the record reflected "limited direct supervision by the government").
The Fifth Circuit has already determined the State defendants are entitled to sovereign immunity from suit in this case. Because NHIC is an arm of the State, the sovereign immunity doctrine bars federal jurisdiction over NHIC in this lawsuit as well.
II. Motion for Protective Order
The Texas Department of Health seeks a protective order regarding various documents produced by the plaintiff in deposition, which TDH argues (a year after the documents were produced) are subject to the attorney-client privilege. Both the plaintiff and NHIC have cited the documents in arguing the motion to dismiss, and therefore both the plaintiff and NHIC oppose the motion. Although the Court believes these documents further demonstrate NHIC was substantially intertwined with TDH and TDHS with respect to the tort recovery program at issue, they are not necessary to the Court's ruling on the motion to dismiss. Accordingly, this motion is moot.
In accordance with the foregoing, the Court enters the following orders:
IT IS ORDERED that Defendant's Motion to Seal [#116] is GRANTED;
IT IS FURTHER ORDERED that Defendant's Motion to Dismiss [#72] and Supplemental Motion to Dismiss [#104] are GRANTED; and
IT IS FINALLY ORDERED that all remaining pending motions are DISMISSED AS MOOT.
JUDGMENT
BE IT REMEMBERED that on the 14 day of November 2000, the Court entered its order dismissing the plaintiff's claims in the above-styled cause against defendant National Heritage Insurance Company for lack of subject matter jurisdiction, and thereafter enters the following judgment:IT IS ORDERED, ADJUDGED, and DECREED that plaintiff's claims against defendant National Heritage Insurance Company are DISMISSED WITHOUT PREJUDICE and that defendant National Heritage Insurance Company go hence without delay and with its costs, for which let execution issue against the plaintiff.