United States Court of Appeals
                                                                                Fifth Circuit
                                                                               F I L E D
                   IN THE UNITED STATES COURT OF APPEALS
                                                                               August 11, 2004
                              FOR THE FIFTH CIRCUIT                       Charles R. Fulbruge III
                                                                                  Clerk


                                     No. 03-50507



      United States of America, ex rel., TONI R. BARRON;
      VICKY J. SCHEEL,

                                                      Plaintiffs-Appellants,

                                        versus

      DELOITTE & TOUCHE, L.L.P.; DELOITE & TOUCHE
      CONSULTING GROUP, L.L.C.; DELOITTE & TOUCHE
      CONSULTING GROUP HOLDING, L.L.C.; MEDICAID
      CLAIM SOLUTIONS OF TEXAS, INC.; NATIONAL
      HERITAGE INSURANCE CO.,

                                                      Defendants-Appellees.


                  Appeal from the United States District Court for
                           the Western District of Texas
          _______________________________________________________



Before KING, Chief Judge, REAVLEY and EMILIO M. GARZA, Circuit Judges.

REAVLEY, Circuit Judge:

      This is a qui tam action under the False Claims Act, 31 U.S.C. § 3729, against

National Heritage Insurance Company (“NHIC”), Deloitte & Touche, and Medicaid

Claim Solutions of Texas (collectively, “Defendants”). Toni Barron and Vicky Scheel
(“Relators”) assert that Defendants participated in the knowing submission to the United

States of false claims for Medicaid reimbursement. Relators, who are both medical

professionals, maintain that they learned of Defendants’ false claims in the course of

providing therapeutic services to students in several Texas public school districts.

According to Relators, consultants from both Deloitte and Medicaid Solutions alerted

local school districts to the opportunity to gain reimbursement through Medicaid for

health services that the districts were already providing. Those consultants also allegedly

instructed the districts to maximize their recovery through improper billing practices.

Relators further aver that NHIC, which processes claims and distributes federal Medicaid

funds for the State of Texas, acquiesced in the fraudulent billing practices described in

the complaint. The district court concluded that any action arising out of NHIC’s role as a

Medicaid fiscal intermediary is barred by Texas’s Eleventh Amendment immunity. We

disagree.1

       This court reviews the issue of Eleventh Amendment immunity de novo. Cozzo v.

Tangipahoa Parish Council--Presidential Gov't.2 In order to determine whether the district

court properly concluded that NHIC is an arm of the state and thus entitled to sovereign

immunity from this damages action, we employ a six factor test:

       1. Whether the state statutes and case law view the agency as an


       1
         In an accompanying unpublished disposition, we reverse the district court’s dismissal of
Relators’ claims against Defendants under the public-disclosure bar of the False Claims Act.
       2
           

, 280 (5th Cir. 2002).

                                                2
       arm of the state;
       2. The source of the entity’s funding;
       3. The entity’s degree of local autonomy;
       4. Whether the entity is concerned primarily with local as
       opposed to statewide, problems;
       5. Whether the entity has the authority to sue and be sued
       in its own name;
       6. Whether the entity has the right to hold and use property.

Hudson v. City of New Orleans.3 This Clark test seeks to determine “if the state is the

real, substantial party in interest because the suit seeks to impose a liability which must

be paid from public funds in the state treasury.”4

       The second Clark factor – the source of the entity’s funding – is the weightiest

factor, and it is controlling here. See Vogt v. Bd. of Comm’rs.5 The Eleventh Amendment

exists mainly to protect state treasuries. See 

if the state treasury is being

protected, this court looks first to whether the state would be liable for a judgment against

the defendant and then to whether the state would be liable for the defendant’s “general

debts and obligations.” Hudson.6 In this case, the state is neither directly responsible for a

judgment, nor would it indemnify the defendant. The contract between NHIC and the

State of Texas resolves the matter because it dictates that NHIC is to pay its own




       3
        

, 679 (5th Cir. 1999) (summarizing six factor test developed in Clark
v. Tarrant County, 

, 744-45 (5th Cir. 1986)).
       4
           

(internal citation and quotation marks omitted).
       5
           

, 693 (5th Cir. 2002).
       

.

                                                 3
judgments and indemnify the State from any liability.7 Additionally, the parties do not

contend that the State is responsible for NHIC’s general debts and obligations. This

court’s inquiry about a judgment’s effect on state treasuries does not extend to

suppositions about whether NHIC will: (1) pay its judgment from funds derived from the

state for performing its contractual obligations; (2) attempt to pass on future litigation

costs to the state through higher prices; or (3) demand future indemnification agreements

or contribution to future judgments. See Williams v. Dallas Area Rapid Transit8;




       7
          The contract states:
        To the extent authorized by law, [NHIC], as an independent contractor, agrees to hold
        STATE AGENCY and its board members, contractors, subcontractors, independent
        consultants and their subcontractors and consultants and/or federal government harmless
        and to indemnify them from any and all liability, suits, claims, losses, damages and
        judgments, and shall pay all costs, fees and damages to the extent that such costs, fees and
        damages arise solely from performance or non-performance of CONTRACTOR under this
        Contract.
NHIC responds by pointing out that, under the parties’ contract, it is not required to indemnify
the State for losses caused by its prudent conduct in conformity with instructions given by the
State. Even so, the aspect of the contract that is significant for the Clark analysis is NHIC’s
obligation to pay any damages resulting from its performance. This clause conclusively establishes
that Texas will suffer no legal liability for any damages assessed against NHIC.
       8
        

, 319 (5th Cir. 2001) (stating that “we do not consider a state's
voluntary, after-the-fact payment of a judgment to be a liability against the state's
treasury”).

                                                 4
Pendergrass v. Greater New Orleans Expressway Comm’n9; see also United States ex rel.

Ali v. Daniel, Mann, Johnson & Mendenhall.10

        Turning to the other Clark factors, the court is to look at how state statutes and

case law characterize NHIC. Texas law does authorize the Texas Department of Health to

“use any fiscal intermediary” to assist in the administration of federally authorized

medical-assistance programs. TEX. HUM. RES. CODE ANN. § 32.029(b) (Vernon 2001). But no

indicia of state law – “constitution, laws, judicial opinions, attorney general’s opinions,

[or] other official statements”11 – identify NHIC as something other than a purely private

corporation. In particular, there is no state case law identifying NHIC as an arm of the

state. See Jacintoport Corp.12

        The third Clark factor, the entity’s degree of local autonomy, is difficult to

evaluate in the context of a private corporation. Most “arm of the state” cases address the

distinction between local and state control. See, e.g., Minton v. St. Bernard Parish Sch.




        9
          

, 346 (5th Cir. 1998) (finding the second Clark factor to weigh heavily
against immunity when the state would not pay the judgment and the possible loss of surplus
funds to the state to be “too indirect and too remote to characterize it as a potential liability of the
state treasury or to make the state the real, substantial party in interest.”).
        10
          

, 1147 (9th Cir. 2004) (denying Eleventh Amendment immunity to a
private contractor in part because there was no evidence that the state university that hired the
contractor would have “a legal obligation to pay a judgment against” the contractor).
        11
             

.
        

(focusing on state cases as a determinative inquiry under the Eleventh
Amendment).

                                                   5
Bd.13 NHIC has little discretion in executing its contract with the State; the State provides

NHIC with specific instructions on how to pay Medicaid claims for the school-based

health services that are at issue in this case. Yet, NHIC is an autonomous entity; the State

neither appoints nor approves of NHIC’s board of directors or its corporate officers. Cf.

Delahoussaye v. City of New Iberia.14 Moreover, to determine an entity’s autonomy, this

court is directed to look at the “‘extent of the [entity’s] independent management

authority,’ not just the independence of the individual [board members].” Jacintoport

Corp.15 As a private corporation, NHIC has the independent authority to make internal

decisions about compensation and the authority to contract for needed services.

Additionally, even if we were to conclude this factor weighed in favor of NHIC’s

immunity, control is not a dispositive factor. See Hess v. Port Auth. Trans-Hudson

Corp.16

       The fourth Clark factor, the entity’s concern with “local, as opposed to statewide,

problems,”17 is also difficult to assess for a private corporation. The usual test is “whether

       13
         

, 131-32 (5th Cir. 1986) (emphasizing school boards’ discretion in
“performing their functions and addressing their innately local concerns”).
       14
          

, 148 (5th Cir. 1991) (finding this factor points toward immunity when the
state appoints members of the organization as well as supervises and manages the entity’s
functions).
       

.
       16
         

, 48 (1994) (explaining that “rendering control dispositive does not home in
on the impetus for the Eleventh Amendment: the prevention of federal-court judgments that must
be paid out of a State's treasury”).
       17
            

.

                                               6
the entity acts for the benefit and welfare of the state as a whole or for the special

advantage of local inhabitants.” Pendergrass.18 In acting as Texas’s claim administrator,

NHIC demonstrates a concern for a statewide rather than local problem. But, of course,

private corporations operate for the benefit of their investors, rather than the State. See

generally TEX. BUS. CORP. ACT ANN. art. 13.06 § A (Vernon 2003); Dunagan v.

Bushey.19

       The last two Clark factors also weigh against granting immunity. NHIC has the

“authority to sue and be sued in its own name” and may “hold and use property.” Clark.20

       We conclude that NHIC is not an arm of the State of Texas and is therefore not

shielded by Eleventh Amendment immunity.

       We observe, however, that several district courts have held NHIC to be an arm of

the State of Texas. See Texas Hosp. Ass’n v. National Heritage Ins. Co.;21 United States

ex rel. Churchill v. Texas;22 United States v. Mack;23 St. Joseph Hosp. v. Elec. Data Sys.



       

.
       19
         

, 152 (Tex. 1953) (“The directors of a corporation stand in a
fiduciary relationship to the corporation and its stockholders, and they are without
authority to act as such in a matter in which a director’s interest is adverse to that of the
corporation.”)
       

.
       21
            

, 1512 (W.D. Tex. 1992).
       22
            

, at *6 (W.D. Tex. Nov. 15, 2000).
       23
            

, 713-14 (S.D. Tex. 1999).

                                                7
Corp.24 These cases rely primarily on a combination of four arguments: (1) the requested

or ultimate relief in a given case would be an increased outlay of Medicaid funds which

would come directly from the State; (2) since some NHIC funds come from the State, the

judgment is inevitably paid by the State; (3) all fiscal intermediaries are immune under

Fifth Circuit precedent; and (4) NHIC’s lack of discretion renders it an agent of the State.

We do not find these arguments to be persuasive.

       First, some of the decisions rely in part on the fact that the relief requested by the

plaintiffs would involve an increased outlay of Medicaid funds coming directly from the

State. See Churchill;25 see also Texas Hosp. Ass’n.26 But, here, the requested damages

sought by Relators would not come from Medicaid outlays; those damages would be paid

by NHIC from its corporate funds.27




       24
            

, 449-50 (S.D. Tex. 1983).
       25
            

at *4.
       

.
       27
           Both the Churchill and Texas Hospital Ass’n courts also assert that NHIC is entitled to
immunity because a judgment against it would require Texas officials to take certain actions to
comply with federal law. See Churchill, 

, at *5; Tex. Hosp. Ass’n, 802 F.
Supp. at 1512. But, under the doctrine of Ex parte Young, 

(1908), the Eleventh
Amendment does not bar suits seeking to compel state officers to comply prospectively with the
requirements of federal law, even when the costs of those prospective compliance efforts could be
quite high. See Quern v. Jordan, 

, 337 (1979). Thus, even if we were to treat NHIC
like a state official (as it maintains we should do), established principles of state-sovereign
immunity would permit an award of relief affecting the future administration of Texas’s Medicaid
program.

                                                8
        A second (related) line of reasoning contends that NHIC should be granted

immunity simply because it might use funds earned through its contract with the State to

pay any damages award. Churchill;28 Mack.29 Accepting this argument would convert all

private contractors, not just fiscal intermediaries, into immune agents whenever they are

doing work for the State. In addition, as we explained above, the prospective impact on

the state’s treasury is not the same as the Clark inquiry into direct implications for the

state fisc.

        Another ground offered in favor of immunity relies on Fifth Circuit precedent

where Medicare fiscal intermediaries are entitled to federal immunity.30 See Matranga v.

Travelers Ins. Co.;31 Peterson v. Blue Cross/Blue Shield of Texas;32 Peterson v.

Weinberger.33 In Weinberger (the case on which Matranga and Blue Cross/Blue Shield

depend), the fiscal intermediaries in question were governed by regulations that provided

that “[i]n the performance of their contractual undertakings, the carriers act on behalf of


        28
             

at *5.
        

(“[A]n 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.”)
        30
          This view is taken in 

; Texas Hosp. 

; St Joseph’s 

.
        31
             

, 677 (5th Cir. 1977) (per curiam).
        32
             

, 57-58 (5th Cir. 1975).
        33
             

, 51-52 (5th Cir. 1975).

                                                   9
the Secretary, carrying on for him the administrative responsibilities imposed by law. The

Secretary, however, is the real party in interest in the administration of the program . . . .”

20 C.F.R. § 405.670 (1973) (emphasis added). There is no similar state regulation here to

make Texas the real party in interest in this suit against NHIC, a Medicaid fiscal

intermediary.

       Two district court cases rely on a fourth rationale, holding that, since NHIC lacked

discretion and acted as an “agent of the state,” it should be immune. Texas Hosp. Ass’n;34

St Joseph’s Hosp.35 NHIC presses this reasoning, arguing that it should be immune from

damages just like a state agent or a state employee sued in her official capacity. We are

not persuaded. An individual state officer sued in her official capacity for damages is

entitled to Eleventh Amendment immunity precisely because the state that employs her is

the real party in interest. But, when an entity (as opposed to an individual) is the

defendant, the Clark analysis conducted above is designed specifically to determine

whether a suit against that entity is, in fact, one against the state itself. See Daniel, Mann,




       

.
       

.

                                              10
Johnson & Mendenhall.36 And, here, that analysis reveals that Texas is not the real party

in interest in Relators’ action against NHIC.37

       Nevertheless, NHIC urges us to follow the Eleventh Circuit’s decision in Shands

Teaching Hospital & Clinics, Inc. v. Beech Street Corp.38 Shands held that Eleventh

Amendment immunity precluded a hospital’s state-law claims against two private

contractors – an administrator for Florida’s employee health plan and a managed-care

company that maintained a preferred-provider network for the plan – for declaratory

relief and damages.39 Although the court “found no case directly on point that has

accorded Eleventh Amendment immunity to a private corporation,” it granted the

defendants immunity nonetheless, relying on cases extending federal sovereign immunity

to Medicare fiscal intermediaries.40 Further, the court emphasized that the contract



       

(holding that the “arm of the state” test for sovereign immunity is the
proper analysis to be undertaken in determining whether a private contractor is immune from suit
under False Claims Act).
       37
          We also note that performance of state functions alone is insufficient to create
immunity. Indeed, the Supreme Court has demonstrated its willingness to allow disparate
treatment for state and private employees performing the same functions. See Richardson
v. McKnight, 

, 413 (1997) (holding that employees of private prisons are not
entitled to qualified immunity in § 1983 suits, even though employees of state-run prisons
do enjoy that immunity). While Richardson was concerned with the lack of governmental
control over private prisons, the Court stressed that the bar against suing individuals in
their official capacities is designed to protect the state as the real party in interest.
       38
            

(11th Cir. 2000).
       39
            

       40
            

For the reasons discussed above, such cases are inapposite here.

                                                  11
between the hospital and the State, under which the hospital agreed to provide care for

state employees, “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.”41 Thus, in Shands, Florida would have

been legally liable for any judgment rendered. By contrast, NHIC has not shown that

Texas would bear any legal liability for any damages assessed against NHIC in this case.

       Because NHIC has not shown that Texas would be subject to any legal liability for

any damages assessed against it, we reverse the district court’s judgment granting NHIC’s

motion to dismiss based on Eleventh Amendment immunity.

       REVERSED and REMANDED.




       41
            

                                            12