Sovereign Immunity in Managed Care Litigation: Federal Court Rejects Bid by State Plan Administrator to Dismiss Provider Suit

The 11th Amendment of the US Constitution bars private parties from suing a state agent acting in an official capacity unless US Congress or the state waives the immunity. As a result, administrators contracting with state health plans often claim that the 11th Amendment affords them immunity from suits arising out of the services they provide to such plans. Courts then examine the nature and effect of the proceeding, as well as the nature of the specific relationship between the administrator and the plan to determine whether to treat the administrator as an arm of the state.

In ER Addison LLC v. Blue Cross Blue Shield of Texas, seven free-standing emergency centers and associated physician groups sued BCBSTX to recover underpayments for medical services provided to members of a state health plan. Specifically, the providers alleged that BCBSTX, as administrator of the plan, failed to timely process and pay the claims. BCBSTX moved to dismiss, claiming it had sovereign immunity as the administrator for the plan.

Notably, the US District Court for the Western District of Texas previously concluded, in Kirby v. Health Care Serv. Corp., that the 11th Amendment provided BCBSTX with immunity for its actions as administrator for the same plan, albeit under a different contract. The court focused on three points, all related to the contract language. First, the contract made BCBSTX subordinate to the plan in making claim determinations. Second, the indemnity clause did not conclusively insulate the plan from liability. And third, a separate clause indicated that any judgment for failing to pay claims would fall at the feet of the plan, not BCBSTX.

In ER Addison, the US District Court for the Northern District of Texas distinguished Kirby and denied BCBSTX's motion to dismiss. Again, the court focused on the contract language. Initially, the court observed, nothing in the contract gave the plan, rather than BCBSTX, final decision-making authority as to claims. Thus, unlike in Kirby,BCBSTX did not function as a subordinate to the plan. Furthermore, the court explained, the indemnity clause conclusively insulated the plan from liability. Finally, the court emphasized, there was no other language that would tend to indicate that the plan would be liable for any judgment, debts, or obligations incurred by BCBSTX.

Looking forward, both Kirby and ER Addison demonstrate the fact-specific nature of 11th Amendment immunity in cases with administrators of state health plans. Courts will scrutinize the contract language to determine whether the plan, and not the administrator, would be on the hook if the suit succeeds. Accordingly, providers, plans, and administrators should review the contract language carefully in assessing potential liability for underpayments.

The ArentFox Schiff ERISA and Managed Care team is a national leader in advising on managed care law, payer disputes, and reimbursement on behalf of health care providers. Drawing experience from the firm's leading Health Care and Complex Litigation practice groups, we provide both a deep and broad understanding of the industry and the know-how to get payer relationship issues resolved.

• Caroline Turner English

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• Pascal Naples

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