Bankrupt Hospitals Sue Insurers in Hunt for Creditor Recoveries

A wave of hospital bankruptcies has brought in its wake high-stakes lawsuits aiming to boost creditor payouts by targeting health insurers over allegedly systemic claim denials.

At least nine different health insurers in the past six months have been sued by bankruptcy estates or trustees appointed under bankruptcy plans for three major health-care businesses, according to court documents reviewed by Bloomberg Law.

Lawsuits against insurers for Steward Health Care System LLC, CarePoint Health Systems Inc., and Jackson Hospital & Clinic Inc. seek a combined $427.9 million and represent 32,000 patient claims across 32 hospitals and providers and six states.

The litigation is ramping up as hospital bankruptcies accelerate amid disputes over private equity ownership, real estate investment trust structures, and federal cuts.

The suits lay bare a war of attrition in which insurers allegedly use tactics such as claim denials, changing medical codes submitted by hospitals to lower-paying classifications, market dominance, and payment delays to reduce costs. Such disputes have existed for years, but are expected to grow within bankruptcy as Medicaid cuts loom—and they now incorporate questions about artificial intelligence use.

“As we see an increasing number of health-care providers file for bankruptcy relief, we’re also seeing the trusts from those confirmed plans more aggressively litigating against the insurance companies,” said Melanie Cyganowski, a former bankruptcy judge now with Otterbourg PC.

Recent Lawsuits

A trustee for CarePoint, which operated three New Jersey safety-net hospitals before it filed for Chapter 11 in November 2024, sued Cigna Health & Life Insurance Co. in February. It argued Cigna underpaid its hospitals for various services by more than $114 million.

Steward’s trustee filed at least seven lawsuits against insurers, including Blue Cross of Florida, CareSource Ohio, and Aetna Health, seeking to recover more than $63 million and alleging they withheld valid reimbursements.

Jackson Hospital took a different approach, bringing a more than $250 million antitrust suit against Blue Cross and Blue Shield of Alabama in December. The insurer used market domination to allow for a pattern of baseless claim denials for emergency care, the suit said.

Insurers are being targeted because they’re generally considered to have deep pockets, said Gerard Anderson, a professor at Johns Hopkins University’s Bloomberg School Public Health. The lawsuits reflect a common problem across the health-care system, he noted.

Anderson said the conflicts represent a give-and-take between providers and insurers, with providers sometimes “upcoding"—performing unnecessary services and procedures to increase revenue. In response, insurers use “downcoding,” or finding other reasons to deny claims.

Allegations across the suits include overbooking legal teams to delay arbitration, aggressive reviews to reclassify inpatient stays, and slowing reimbursements by failing to implement a provider portal.

Litigation of this sort can be complicated by hospitals’ own conduct, however.

While insurers sometimes inappropriately decline claims, providers also “upcode” bills to receive higher payments, said Michal Horný, a University of Massachusetts Amherst health policy professor.

“Insurers are no saints, but neither are health systems,” Horný said.

AI Questions

Amid the disputes, providers and insurers are both employing AI to their advantages, said David U. Himmelstein, a public health professor at Hunter College.

“Part of what’s going on is really an AI war,” Himmelstein said.

The Steward trustee has subpoenaed Oscar Insurance Co. of Florida and Blue Cross and Blue Shield affiliates in Texas and Massachusetts, demanding records about how they rely on AI, machine learning, or large language models in making coverage determinations.

The subpoenas could show how AI is being applied or lead to a deescalation where the standard of care is to over-bill and under-reimburse, said Alex Hoagland, a University of Toronto health economist.

“These lawsuits are important, as they should be a chance to get more information about both hospital and insurer practices that may be leading to the inefficient provision of care,” Hoagland.

Getting Paid

Even when trustees win, creditor recoveries can be slow.

The structure of the Steward trust is unusually complex, with funds recovered by the trustee first paying down large senior debts and litigation funding costs before reaching junior creditors. The Steward case faces more pressure than most due to a combination of potential administrative insolvency, a push for results by a judge, and alleged delay tactics by insurers.

For Jackson Hospital, a successful lawsuit would pay hospital creditors such as employees and vendors under a proposed reorganization plan. Funds that CarePoint’s trustee recovers from Cigna or others would go to the Hudson Regional Hospitals and unsecured claimholders.

Claim denials and prior authorizations have become a flashpoint between health-care providers and insurers where commercial insurers pay higher rates than government programs, sometimes up to three times more than Medicare, Anderson said.

While hospitals target insurers for “low pay, slow pay, and no pay” models, the root causes of systemic failure are flawed corporate strategies, complex conglomerate models, and shifts in market power dynamics, said Lawton Robert Burns, a professor of health-care management at the University of Pennsylvania.

“With all the fiscal pressures in health care, we’re going to see more and more health-care bankruptcies,” Burns said.

Bankruptcy courts typically favor settlements among litigants. But Steward’s trustee, for instance, has said any recovery must account for litigation risks. A major factor pushing Steward’s litigation forward is a June 15, 2027, deadline by which the trustee must prove the estate is administratively solvent—meaning it can pay its administrative debts, including legal fees—to implement its court-approved wind-down plan.

If the trustee can’t meet that deadline, the case could be converted to a Chapter 7 liquidation.

Houston bankruptcy Judge Christopher Lopez during Steward’s plan confirmation hearing last year acknowledged the inherent uncertainty of the legal battles but said the potential claims were legitimate enough to proceed to trial. He emphasized the estate doesn’t need a total litigation victory to be successful for the purpose of paying back creditors.

“You don’t need to hit home runs,” Lopez said. “You just need a couple of singles.”