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Bankruptcy: financial risk and patient impact

What are your risks if one of your vendors goes bankrupt?

Health insurers have gone belly-up in the past, in some cases leaving hundreds of millions in unpaid claims.

Here’s a potential scenario, where a payer – say a TPA or insurer – contracts with a vendor to handle certain types of medical services. The vendor schedules the patient, the patient gets the care, the provider bills the vendor; the vendor bills and is paid by the payer. 30-60 days later the vendor pays the provider.

At least, that’s how it is supposed to work.

Now let’s say the vendor runs into cash flow problems. Provider payment delays increase, and soon there are complaints from providers to the payer, or worse, regulators.

Some savvy payers who stay on top of this stuff immediately require the vendor pay their treating providers immediately after the payer reimburses the vendor. Others figure it’s no big deal and it will work out.

This goes on for a little while longer, until the vendor’s owners – let’s say a big investment firm – decide to walk away and write off their stake in the vendor. The new “owners” are the debt holders, the firms that bought bonds issued by the vendor’s owners. Now, the value of those bonds has dropped , and the bondholders need to quickly re-organize the vendor to cut their losses.

The new owners declare bankruptcy so they can buy some time while they figure out what to do.

No big deal, you say…companies go bankrupt all the time…someone will buy the vendor, and all will be fine.

Uh, no.

The treating providers who are delivering care to your patients now demand that you – the payer – guarantee payment for past bills and for scheduled care. You protest that you’ve already paid those past bills. The treating providers point out that no one’s paid them, and now that the vendor is in bankruptcy, there is no assurance they will ever be paid all they are owed.

The potential consequences include:

  • the patient gets billed, and/or;
  • the Insurance Commission weighs in, and/or;
  • treating providers refuse to continue or deliver treatment until payment is guaranteed by the payer.

So, payers may have to A) pay twice for the care that has been already billed and paid, and B) do so immediately or risk angry patients not getting treated, calling lawyers, and staying out of work even longer.

That’s the immediate problem – and it has to be addressed immediately.

There’s a bigger problem, though, and it’s almost as urgent. 

If the bankrupt vendor is a dominant player in its niche(s), do other vendors have enough capacity to quickly step in and take over? 

If not, how quickly can they ramp up?

If the answer is “not for a while”, how are you going to schedule treatment, collect and review data, manage care – all those functions the vendor was performing?

If you’re a TPA, the problem is even knottier. How do you go back to your employer/insurer clients and tell them they need to pay again for services they already paid for? Oh, and the vendor in question is one you – the TPA – recommended?

What does this mean for you?





6 thoughts on “Bankruptcy: financial risk and patient impact”

  1. Hey Joe,

    Are you referring to a specific company in the work comp space?

    Anyways, your post is very relevant as I’ve been asked that very question several times in the past few months. Seems that some astute people are getting worried.

    There is a simple solution that can eliminate the whole risk you mention… Don’t use any medical services or supplies vendor that re-sells medical services. Don’t let the money flow through their hands.

    There are alternative choices available today with ZERO risk that can provide the same services.

    1. Dick – re your comment that in part states:

      T”here is a simple solution that can eliminate the whole risk you mention… Don’t use any medical services or supplies vendor that re-sells medical services. Don’t let the money flow through their hands.
      There are alternative choices available today with ZERO risk that can provide the same services.”

      Three issues with this assertion.

      1. You’re attempting to use the comments section to market your company. That isn’t what the comments section is for; I’ll allow it in this instance as it merits a response.

      2. There are any number of ways to reduce risk, but the blanket statement “Don’t use any medical services or supplies vendor that re-sells medical services. Don’t let the money flow through their hands.” is superficial and naive and reflects a lack of understanding about how workers’ comp patients get services today – and more importantly WHY this service model has arisen..

      It doesn’t take into account the real value provided by many entities that deliver value in the form of better patient care and lower cost. Your recommendation would eliminate PBMs, medical case management, IMEs, peer review, transportation/translation services, check-cutting services, implant negotiation, most value-based care/bundled service providers, some bill review models, DME and home healthcare providers and other services.

      The reality is your company – like any other – could also face financial issues, which might lead to service disruption. No “alternative choices” – including your company – “eliminate the whole risk.”

      1. Hi Joe,

        To clarify my comment…

        I was suggesting a solution to your “Bankruptcy: financial risk and patient impact” post. A solution that will significantly lower the specific risk you described. I am NOT proposing in any way to eliminate all the entities you list, as many of them add great value to improving patient care and lower total claims costs.

        I am proposing that:

        (1) To eliminate the financial risk you mention, Payers should simply pay network medical providers directly, as they do now for all not-network cases. This will instantly eliminate the risk in your blog to ZERO. Continuing to pay network vendors for medical services they did not perform, expecting and hoping that the medical providers who rendered services get paid, will lead to a future blog post by you when another company runs out of money.

        (2) Payers would continue to use all the network vendor companies you mention, but would pay them separately for the vendors’ services – apart from the true “medical cost”. That way, the “hidden markups” go away, a vendor’s value can be better assessed and the true cost of “medical” care will become clearer.

        More transparency is coming to work comp. It just takes much longer to arrive. I’d love to hear everyone’s comments.

        1. Dick – Again, you’re missing a chunk of the value delivered by these entities.

          They handle the billing, state reporting, and related matters on behalf of their payer clients. This reduces payer workload significantly.

          You also misunderstand the workflow and reasons it has evolved. Specifically specialty networks are integral to patient care. These entities must have all medical records, bills, and related information if they are to perform the services the payers want from them. Payers recognize that many of the service providers are more expert in their narrow areas than the payers could be.

          In reality there is a much simpler way to address the potential problem of a specialty network’s financial problems; require the network pay the provider within a defined, and very tight, time period.

  2. The picture at the top of your posts ( navigating rough waters) is especially appropriate for this post. Not a lot of options for the payer, other than to pay twice and be more careful picking vendors.

  3. The providers
    ‘s contracts with you should include a hold harmless provision against the patient, that would – under contract, prevent them from billing the patient under any circumstances, including non-payment of their claim. Then there is a question as to what criteria are you suing to qualify a vendor for such a contract, a delegation of payment responsibility? Reserves? Insolvency Insurance? and are you monitoring their financial health.

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Joe Paduda is the principal of Health Strategy Associates



A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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