Vernell, Louis, In Re:

SHANDS TEACHING HOSPITAL AND CLINICS, INC., Plaintiff-Appellant,

BEECH STREET CORPORATION, Unisys Corporation, Defendants-Appellees.

No. 99-10114.

United States Court of Appeals,

Eleventh Circuit.

April 13, 2000.

Appeal from the United States District Court for the Northern District of Florida.(No. 98-00087-1:CIV-
MMP), Maurice M. Paul, Judge.

Before CARNES, BARKETT and MARCUS, Circuit Judges.

BARKETT, Circuit Judge:

Shands Teaching Hospital and Clinics, Inc. appeals the dismissal of its complaint against Unisys

Corporation and Beech Street Corporation. Shands sued Unisys and Beech Street for the non-payment of

monies due to Shands for medical services provided to employees of the State of Florida pursuant to the state

health insurance plan. The district court concluded that although the State of Florida was not named as a

defendant in the suit, a judgment granting the relief sought by Shands would have to be satisfied from the

state coffers, and thus the suit is barred by the Eleventh Amendment. Accordingly, the district court

dismissed the claim pursuant to Federal Rule of Civil Procedure 12(b)(6), for failure to state a claim upon

which relief can be granted.

BACKGROUND

Shands Hospital provides health care services to enrollees in the Florida State Group Health Insurance

Plan. The plan, established in accordance with Florida Statutes § 110.123 for the benefit of state officers,

employees, retirees and their eligible dependents, is a self-insured plan funded by annual appropriations from

the state legislature and premium payments by enrollees. Under the statute, the Department of Management

Services ("DMS") is responsible for contract management and day-to-day management of the state program,

including the determination of health care benefits to be provided, and the negotiation of contracts for health
care and health care administrative services. See Fla. Stat. Ann. § 110.123(3)(d) (West 1992 & Supp.2000).

The statute authorizes the DMS to employ a professional administrator to process claims, and in 1995, after

a competitive bidding process, the DMS contracted with Unisys to fulfill this function. Although Unisys is

responsible for employee enrollment, premium collection, payment to health care providers and other

administrative functions related to the program, the DMS retains final decision-making authority concerning

the existence of coverage or benefits under the plan. Id. at § 110.123(5)(c).

In addition to serving as third party administrator, Unisys is also required under the contract with the

State to provide a preferred provider organization (PPO) network. To fulfill the PPO component of its

contract, Unisys, with the approval of the State, entered into a subcontract with Beech Street, a national

managed care company that maintains a network of health care service providers with whom it has negotiated

preferred rates.1 Shands had been a provider in the Beech Street PPO network since 1989. Thus, by virtue

of the contract between Beech Street and Unisys, Shands became a covered hospital for state plan enrollees.

The gravamen of Shands' claims against Unisys and Beech Street is that Shands has not been paid

for medical services in accordance with its PPO network agreement with Beech Street or in accordance with

Unisys' administrative responsibilities pursuant to Unisys' agreement with the State. The district court found,

however, that any judgment for Shands would necessarily come from state funds, and thus that the State's

Eleventh Amendment immunity bars this suit. Accordingly, the district court dismissed Shands' complaint

pursuant to Rule 12(b)(6) for failure to state a claim upon which relief can be granted. Shands now appeals.

We review the dismissal of a complaint for failure to state a claim de novo, construing all allegations

in the complaint as true and in the light most favorable to the plaintiff. See Lowell v. American Cyanamid

Co., 177 F.3d 1228, 1229 (11th Cir.1999). Dismissal under Rule 12(b)(6) is appropriate "only if it is clear

1
Beech Street, as PPO subcontractor, is never in possession of any state funds, but simply is paid an
access or rental fee for the term in which its network is used.

2
that no relief could be granted under any set of facts that could be proved consistent with the allegations" of

the complaint. Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984).

DISCUSSION

In its complaint, Shands asserts two different claims: (1) that Unisys refused to reimburse Shands

for certain medical services which Shands contends are "covered services" under the state plan; and (2) that

Unisys made only partial payment for some medical services rendered. Shands argues that its cause of action

is directed against the two private corporations, not against the State, and that Eleventh Amendment immunity

does not extend to Unisys or Beech Street under such circumstances.

The Eleventh Amendment provides that:

The Judicial power of the United States shall not be construed to extend to any suit in law or equity,
commenced or prosecuted against any one of the United States by Citizens of another State or by
Citizens or Subjects of any Foreign State.

U.S. Const. amend. XI. The Eleventh Amendment largely shields states from being sued in federal court

without their consent, leaving parties with claims against a State to bring them, if the State permits, in the

State's own tribunals. See Hess v. Port Authority Trans-Hudson Corp., 513 U.S. 30, 48, 115 S.Ct. 394, 130

L.Ed.2d 245 (1994). The amendment is rooted in a recognition that the States, although a union, maintain

certain attributes of sovereignty, including sovereign immunity. See Hans v. Louisiana, 134 U.S. 1, 13, 10

S.Ct. 504, 33 L.Ed. 842 (1890). It is well established that Eleventh Amendment immunity encompasses not

only cases in which the State itself is named as a defendant, but also certain actions against state agents and

state instrumentalities. See Regents of the Univ. of Cal. v. Doe, 519 U.S. 425, 429, 117 S.Ct. 900, 137

L.Ed.2d 55 (1997).

Shands recognizes that Eleventh Amendment immunity may extend to defendants other than the State

based upon: (1) how state law defines the entity; (2) what degree of control the State maintains over the

entity; and (3) from where the entity derives its funds and who is responsible for judgments against the entity.

See Stewart v. Baldwin County Board of Education, 908 F.2d 1499, 1509 (11th Cir.1990); Tuveson v.

3
Florida Governor's Council on Indian Affairs, Inc., 734 F.2d 730, 732 (11th Cir.1984). However, Shands

argues that Unisys and Beech Street cannot be deemed arms of the state under any of these analytical prongs

because they are autonomous private corporations that are not controlled by the State of Florida, and do not

derive their funding from the State of Florida.

Shands' argument misses the mark. The pertinent inquiry is not into the nature of a corporation's

status in the abstract, but its function or role in a particular context. Thus the question in this case is whether

and to what extent these corporations are contractually acting as representatives of the State. Under the laws

of Florida and the contractual provisions between the parties, it is clear that Unisys and Beech Street are

simply administrators acting at the behest of the State with reference to Florida's health insurance program.

The program is funded through annual legislative appropriations, and the State of Florida retains virtually

complete control over the actions of its administrators.2 Although we have found no case directly on point

that has accorded Eleventh Amendment immunity to a private corporation such as Unisys, in analogous

circumstances courts have found that sovereign immunity bars suits against private corporations acting as

fiscal intermediaries in actions relating to federal Medicare reimbursement. See e.g., Pani v. Empire Blue

Cross Blue Shield, 152 F.3d 67, 72 (2d Cir.1998); Anderson v. Occidental Life Ins. Co., 727 F.2d 855, 856

(9th Cir.1984); Pine View Gardens, Inc. v. Mutual of Omaha Ins. Co., 485 F.2d 1073, 1074-75

(D.C.Cir.1973); see also Matranga v. Travelers Ins. Co., 563 F.2d 677, 677 (5th Cir.1977); Peterson v.

Weinberger, 508 F.2d 45, 51 (5th Cir.1975). Thus, although these are private corporations that are neither

controlled nor funded by the state, they are protected by governmental immunity when they are clearly acting

as agents of the state. This is not to say that an agent of the government, be it federal or state, is totally

immune to liability either in tort or in contract, or for actions exceeding their authority to act on the

2
For example, contractual provisions between the State and Unisys reserve to the State the right to
terminate the third party administrator contract for convenience, to inspect Unisys' records and work, and to
conduct an audit. In addition, the State must approve all subcontracts and all printed materials. The State
has on-line access to files, approves the claims administration manual, and owns all the program information
and data.

4
government's behalf. These cases do not extend blanket immunity to Medicare fiscal intermediaries, rather,

immunity has been granted only to the extent that a judgment would expose the government to financial

liability or interfere with the administration of government programs.

In line with the reasoning of these cases, we look to "the effect of the relief sought," Pennhurst State

School & Hospital v. Halderman, 465 U.S. 89, 107, 104 S.Ct. 900, 79 L.Ed.2d 67 (1984) in order to

determine whether Shands' claims are barred. The dispositive question for Eleventh Amendment purposes

is whether a judgment against Unisys or Beech Street would implicate the state treasury or interfere with the

administration of the state group insurance program, or whether the claims constitute a private cause of action,

arising out of tort or contract, for which Beech Street or Unisys would be financially responsible.

1. Dispute over "covered services."

Shands maintains that certain medical services which it has provided for the benefit of plan enrollees,

and which Unisys has declined to reimburse under the state plan, are in fact "covered services" within the

meaning of the state plan. In Count I of its complaint, Shands seeks declaratory judgment on the rights and

liabilities of the parties under the implementing contracts for the state insurance plan. We agree with the

district court that this claim is in substance one against the State of Florida.

Under the Florida statute establishing the state insurance plan, Unisys' duties as third party

administrator extend to employee enrollment, premium collection, payment to health care providers and other

administrative functions related to the program, but the DMS retains final decision-making authority over the

existence of coverage or benefits under the plan. Fla. Stat. Ann. § 110.123(5)(e) ("Final decisions concerning

the existence of coverage or benefits under the state group health insurance plan shall not be delegated or

deemed to have been delegated by the department."). Indeed, the state plan specifically provides a process

whereby initial benefits determinations may be appealed to the DMS, to be reviewed in conjunction with the

Agency for Health Care Administration. The agency's denial of an appeal is subject to an administrative

hearing and judicial review pursuant to Florida Statutes Chapter 120.

5
It is clear from the state law establishing the plan, and the implementing contracts to which the State

and Unisys are party, that the DMS retains ultimate authority over Unisys' administrative actions with respect

to benefits determinations. The denial of coverage is an administrative action within the scope of Unisys'

duties as an agent of the DMS. Moreover, although Shands seeks only declaratory judgment on this issue,

it is clear that such a judgment would ultimately affect the state treasury, insofar as the state insurance fund

would be obliged to increase payouts on the number of covered services. Any analysis by the court of the

State's obligations under the various contractual provisions would impermissibly intrude upon the future

administration of the state program. For these reasons, we affirm the district court's dismissal of Shands'

claim regarding covered services.

2. Partial Payment

Shands' second claim seeks damages arising from Unisys' failure to pay the full amount due to

Shands for medical services which it rendered to state plan enrollees. The 1989 Hospital Provider Agreement

whereby Shands agreed to become part of the Beech Street PPO network entitles payors3 to a "courtesy

adjustment" or discount of thirty-five percent, "except [when] the Hospital has not received payment within

thirty (30) days after the date the claim is approved in writing by Beech Street." Shands contends that

although payments were not made within the requisite thirty days for the application of the discounted rate,

Unisys nonetheless only paid at the discounted rate.4

3
Because the Hospital Provider Agreement is a standard contract, and Beech Street makes its PPO
network available to a number of different insurance plans, the third party payor is not expressly designated
in the contract. For the purposes of the state plan, although the State of Florida was the ultimate payor of
benefits, Unisys acted as administrative payor on behalf of the State.
4
Shands' claim against Beech Street is based upon a contractual provision in the Hospital Provider
Agreement that "Beech Street will use its best efforts to ensure that its Payors make payment to [Shands] on
all approved claims within thirty (30) days of receipt of claim by Beech Street. If payment is not received
within thirty (30) days of receipt of approved claim by Beech Street, then Payor will pay [Shands] the amount
of the approved claims." Shands' complaint does not allege that Beech Street failed to perform any specific
duties required under the "best efforts" clause. The mere fact that payment was not made by Unisys within
thirty days is not sufficient to sustain a claim that Beech Street failed to use best efforts.

6
Here again, we find that a judgment on this claim would implicate state funds. The Hospital Provider

Agreement expressly provides that the penalty for the failure to reimburse claims within thirty days is

payment of the full amount of the claims. Such payment for medical services rendered is an obligation of the

State. We reject Shands' contention that because Unisys may be contractually obligated to indemnify the

State for the additional expense,5 Unisys is also directly liable to Shands in the first instance. In the event that

the State is obliged to make full payment to Shands due to negligence on the part of Unisys or Beech Street,

the State may seek its remedy from the party at fault. However, the availability of this avenue to the State

does not invest Shands with a cause of action against Unisys. Nor does the fact that the State may ultimately

seek indemnification from a third party bear on the State's liability in the first instance. As the district court

found such indemnification provisions are immaterial for purposes of Eleventh Amendment. "The Eleventh

Amendment protects ... [a] State from the risk of adverse judgments even though the State may be

indemnified by a third party ... it is the entity's potential legal liability, rather than its ability or inability to

require a third party to reimburse it, or to discharge the liability in the first instance, that is relevant." Regents

of the Univ. of Cal. v. Doe, 519 U.S. 425, 431, 117 S.Ct. 900, 137 L.Ed.2d 55 (1997).

For the foregoing reasons the judgment of the district court is

AFFIRMED.

5
Under the contract with Unisys, the State may institute proceedings to seek liquidated damages as the
remedy for errors and delays in claims processing. The contract also obligates Unisys to post a performance
bond with the DMS as beneficiary to protect the DMS against loss if Unisys fails to faithfully perform
required services, and to indemnify the State for claims or losses resulting from its erroneous, negligent or
willful acts.