Legal Finance Is an Emergent Tool as Health-Care Industry Shifts

Rising health-care costs in the US are driving up prices for consumers and adding financial strain on health-care companies. The industry also has seen a rise in consolidation, intensifying power struggles among providers, payors, and others.

Pursuing legal claims in a cost-effective manner has become crucial for health-care companies seeking to defend their interests and recover losses in this environment. Legal finance is emerging as a valuable tool to help them achieve these goals.

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Economic Pressures

US hospitals and health-care providers are grappling with unprecedented financial challenges. They face an economic crisis caused by escalating costs and insufficient reimbursements, according to the American Hospital Association. The costs of labor, medication, and supplies have surged since the Covid-19 pandemic, while government reimbursement rates haven’t kept up—Medicare margins plummeted to a historic low of negative 12% by late 2023.

Because Medicare accounts for a significant portion of hospital revenue, providers must rely on commercially insured patients to fill the gap. Almost half of US hospitals now operate with negative margins. Physician groups are struggling under similar pressures.

Cost-conscious commercial health insurers meanwhile are reluctant to increase reimbursements. Though cost control is necessary to prevent higher premiums for consumers, insurers’ efforts can lead to tensions with providers, who may feel that valid reimbursement claims are being denied or underpaid.

These disagreements often result in significant litigation, such as claims by in-network providers against insurers for withholding payments owed under their contracts. These disputes have resulted in large awards in some cases, reaching high eight- or nine-figure sums, as seen in recent lawsuits by Radiology Partners and Envision Healthcare against UnitedHealthcare.

Similarly, insurers may bring their own claims against providers, accusing them of improper billing practices such as upcoding or pass-through billing. Such payment disputes are becoming more frequent as both sides seek to improve their bottom lines under difficult economic conditions.

Antitrust Litigation

Consolidation within the health-care industry has further raised the stakes in this struggle. Large health-care systems and insurers wield greater bargaining power, allowing providers to push for higher reimbursements and insurers to resist those demands.

Mergers and acquisitions also have triggered regulatory scrutiny due to concerns over anticompetitive practices. For example, private equity-backed consolidations of provider groups have caught the attention of the Federal Trade Commission, while the Department of Justice is investigating UnitedHealthcare’s acquisition of physician groups through its Optum subsidiary.

Allegations of anticompetitive conduct have led to major litigation. A class of health-care providers in one case claimed that Blue Cross Blue Shield engaged in market division, limiting competition between its member companies. Blue Cross agreed to pay a $2.8 billion settlement to resolve the case. Providers, especially large hospital systems, must now decide if they stand to recover more by opting out of the settlement and bringing a direct action.

Large hospital systems have faced lawsuits for imposing anticompetitive provisions in their contracts with payors, such as all-or-nothing clauses forcing insurers to include all of the system’s facilities in their networks. Sutter Health, for instance, has settled such claims for $575 million, and similar cases against others are moving forward.

Health-care companies are increasingly opting out of class-action settlements to pursue individual claims in pursuit of higher recoveries. Antitrust cases present important opportunities for both payors and providers to claim compensation for harm caused by anticompetitive practices, whether from being overcharged or underpaid.

Legal Finance’s Role

Given the volume and complexity of disputes in the health-care sector, many companies hold claims that could generate valuable recoveries. However, litigating these claims can be expensive and time-consuming, often requiring significant expert analysis and legal work. Legal finance offers a way for health-care companies to pursue these claims without bearing the full financial burden upfront.

In a typical legal finance arrangement, a company receives funding to cover its litigation costs, with the finance provider receiving some of any successful settlement or award. This arrangement allows businesses to pursue litigation without affecting their cash flow.

Alternatively, companies can opt for portfolio financing, where funding is provided for a group of cases. This approach diversifies the risk and can result in more favorable financing terms. Portfolio financing is particularly useful for large health-care organizations that are involved in both defense and affirmative litigation, allowing them to manage legal costs more effectively.

Another financing option is monetization, which enables a health-care company to receive an upfront payment based on the expected recovery from a pending legal claim or judgment. This allows companies to unlock the value of these claims without waiting for the legal process to conclude, which can take years. Monetization is a non-recourse financing arrangement, meaning that the company only repays the funding if the litigation is successful.

Outlook

Rising costs and increasing consolidation within the US health-care system have created a challenging environment for providers and payors. These pressures are leading to a growing number of complex legal disputes, from payment disagreements to antitrust claims. Legal finance has become an essential tool for health-care companies seeking to manage litigation costs while pursuing their rights.

As legal finance continues to evolve, more health-care businesses are recognizing its impact. Whether through single-case financing, portfolio arrangements, or monetization, these tools allow health-care companies to protect their financial interests and navigate an increasingly litigious industry.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.