Wellpath Bankruptcy Plan Pivot Follows Inmate Claim Concerns

Bankrupt prison health-care firm Wellpath Holdings Inc. failed to drum up qualified bids for one of its business divisions, forcing it to explore new options as incarcerated people who have sued the company worry about how their claims will be treated.

Wellpath in November became the second prison health-care provider to file for bankruptcy in the past two years.

Like Tehum Care Services Inc. in 2023, Wellpath was deep in personal injury, medical malpractice, and wrongful death claims when it sought Chapter 11 protection—a pattern that has prompted prisoner-rights advocates and Sen. Elizabeth Warren (D-Mass.) to air concerns over the use of Chapter 11 to address mass litigation.

But as Tehum prepares to seek court approval of a proposed settlement to end its bankruptcy, Wellpath is still working to resolve allegations that its initial restructuring proposal insufficiently addressed tort claims.

Wellpath is also dealing with professional liability expenses that it says are due to past settlements and a lack of third-party insurance.

Many creditors holding tort claims are current and former incarcerated people, as well as deceased prisoners’ families.

In the event of a deal that would wipe out those tort claims, Wellpath “can be able to move forward and those cases will never actually get to a final judgment and they can pretend like they never happened,” said Bianca Tylek, executive director of Worth Rises, an advocacy group that opposes privatization of the criminal justice system.

Wellpath’s Creditors

Wellpath, which serves about 200,000 patients in around 420 facilities across 39 states, was attempting to quickly resolve more than 1,500 claims across the bankruptcy.

However, after Judge Alfredo R. Perez of the US Bankruptcy Court for the Southern District of Texas expressed concern in early January over the lack of information about treatment for prisoners under the proposed restructuring plan, Wellpath shifted gears.

Wellpath plans to submit revised plan disclosures by Feb. 10.

The private-equity backed company has faced pushback to parts of the initial restructuring proposal, including insurance coverage. Under its insurance policy, third-party coverage kicks in after a claim reaches $15 million—which few claims do.

Tehum also faced issues over claimants’ access to information and fair treatment, but that private equity-backed company, owned by Corizon Health Inc., reached a $75 million settlement last July.

Warren has called for fair treatment of incarcerated creditors in both bankruptcies.

The existence of two bankrupt prison health-care firms could reveal a systemic issue in the industry, Tylek said. Although the Justice Department’s bankruptcy watchdog, the US Trustee, has objected to elements of both cases, more could be done, she said.

“The US Trustee, or someone, should be questioning the use of bankruptcy specifically to reveal whether there is a pattern and how to interrupt it,” Tylek said.

‘Bare Minimum’

Wellpath had sought to resolve its financial strains by selling assets, spinning off parts of the business, or restructuring its corrections division while selling its recovery solutions business.

The amended documents will outline a materially different proposal, Rachel Chesley, a Wellpath representative, said. She declined to discuss the initial proposal in light of the upcoming changes.

Although the corrections business didn’t receive a qualified bid by its Jan. 27 deadline, Wellpath secured approval of the sale of its recovery solutions assets to lenders on Jan. 21 for $24.25 million.

Wellpath’s initial plan proposal denied even “bare minimum” payouts to junior claimholders—who are largely prisoners—according to an filing from a committee for claimholders.

Moreover, the committee said, the initial plan would’ve forced them to release claims against outside parties that aren’t in bankruptcy.

Wellpath provided “shoddy care that has led to the harm and sometimes death of those incarcerated,” and is now hiding from lawsuits through bankruptcy, Tylek said.

“Our goal is to never see it happen again to someone else what happened to their family members,” she said.

Insurance Complications

A majority of Wellpath’s claims surround professional liability insurance, which includes medical malpractice and wrongful death. Wellpath also has a behavioral health segment, which faces at least one lawsuit.

Between 2019 and 2023, Wellpath litigated several lawsuits, resulting in about $110 million worth of settlements, according to court records.

Wellpath had layers of “self-insured retention” on top of fronting policies from third-party insurance companies where no payments would be made by those insurers, according to court records.

Most claims don’t reach the $15 million cap, causing issues for claimants who would be left without a route to recovery if they aren’t able to receive anything through Wellpath’s proposal, said attorney Marc Ginsberg of Mandina & Ginsberg PLLC.

Ginsberg represents a woman who suffered a traumatic brain injury and was involuntarily admitted to a Wellpath-run hospital, where she says she was allegedly sexually assaulted by a male patient after staff lost track of her.

Trouble on the Horizon

Clues about Wellpath and Tehum’s future could be found in Armor Health Management LLC’s case.

Armor, a privately owned prison health-care provider, asked a Florida state court in October 2023 for permission to assign its assets to an estate to be liquidated.

It faced more than 100 lawsuits, including ones from current and former inmates and families of deceased prisoners, with some cases receiving judgments totaling more than $12 million.

The assignee asked the Florida court in November to approve a $2 million settlement.