In healthcare, using Letters of Protection (LOPs, also referred to as attorney liens) to secure payment for services involving patients in personal injury cases is becoming more common, benefiting both patients and providers. An LOP is a legally binding contract between the patient, their attorney, and the provider for payment of the provider’s services after their legal claim has been resolved. Because this approach allows injured patients to receive immediate medical treatment without any upfront costs while potentially strengthening a future legal case, personal injury businesses rely heavily on LOPs. Providers can also benefit from LOPs because of higher reimbursement rates compared to typical fee-for-service reimbursement arrangements with traditional payers. 

The use of LOPs in personal injury cases has grown in recent years due to greater awareness among attorneys and healthcare providers, rising medical costs (deductibles), and recent legal rulings that have reinforced their role in litigation. For instance, in 2023, Florida Governor Ron Desantis signed House Bill 837 into law, requiring LOPs to be disclosed when claiming medical expenses in personal injury cases. This enacted legislation further highlights the growing importance of these agreements. 

Pros & Cons 

LOPs are not without challenges and risks. The outcome of personal injury cases can be unpredictable; there’s no guarantee that a settlement will be reached, and the provider may not receive any payment for services. This uncertainty, known as the “drop rate,” affects the provider’s ability to collect payments. Additionally, a settlement’s timing can impact cash flow, as providers mainly receive payments when cases are resolved—a process that can take years if a case goes to a jury trial. As a result, the collection cycle for LOP payments can be lengthy, placing potential strain on a provider’s financial statements.

Providers should assess key aspects of each case, such as the caliber of the attorney and the likelihood of a successful settlement, to better estimate payment timing. A well-regarded personal injury attorney with a proven track record can significantly improve the chances of a positive outcome for both the patient and the provider. It’s also vital to maintain clear communication with both the attorney and the patient to manage expectations and avoid payment delays. Managing LOP cases requires dedicated staff and administrative resources. Providers must also account for the potential loss of value due to inflation, as they typically do not charge interest on deferred payments.

As previously mentioned, LOPs can offer higher reimbursement rates compared to standard payer fee-for-service rates. Since providers can charge their full rates under an LOP, they aren’t bound by the discounted rates negotiated by insurance companies. Insurance companies usually negotiate lower rates to control costs, but LOPs bypass these negotiations, allowing providers to bill at their full standard rates. Additionally, juries often base their decisions on the billed amounts presented during a trial, and since LOPs allow providers to bill higher amounts, this can sometimes lead to increased damage settlements in personal injury cases. 

LOPs can also attract patients who may not otherwise be able to afford medical care, expanding the provider’s patient base and potential revenue streams. 

Revenue Considerations 

Revenue recognition and managing accounts receivable (A/R) are crucial when dealing with LOPs. According to the revenue recognition standard ASC 606, healthcare providers must recognize revenue when services are rendered. However, in LOP cases, payment depends on the settlement of the patient’s legal case, which can result in significant delays and uncertainty. Providers must assess the collectability of revenue at the time of service and may require the provider to use historical data to estimate future payment likelihood. This estimation process is complex and involves evaluating factors like the attorney’s reputation, the case’s strength, and typical settlement timelines for similar cases. 

Managing accounts receivable for LOP cases adds further complexity. Extended payment cycles can lead to significant A/R balances, days sales outstanding (DSO), and financial risk to the business owner. Providers need robust revenue cycle management systems to track and manage the status of LOP cases and ensure timely follow-up on outstanding receivables. Providers should also consider the possibility of bad debt and account for it by setting aside allowances for doubtful accounts. Since not all LOP cases will result in full payment, adopting best practices in revenue cycle management, such as performing regular A/R aging analysis and using proactive collection strategies, can mitigate financial risks and maintain healthy cash flow. 

Key Regulatory Factors 

Managing an LOP business requires an understanding of state regulations, which can vary significantly. Healthcare providers must stay informed on legal and regulatory updates to ensure their agreements are compliant and enforceable. Keeping up with legislative changes and court rulings can also help providers anticipate shifts in reimbursement. Staying proactive helps providers

navigate these considerations while maintaining the ability to offer care through LOP arrangements.  

With LOPs comes the potential risk of perceived conflicts of interest. Insurance defense attorneys often scrutinize LOPs, questioning whether medical providers who accept LOPs are acting as investors in litigation rather than impartial healthcare professionals, as cited by a lawsuit filed by The American Transit Insurance Company (ATIC) in the Eastern District of New York during December 2024. The lawsuit alleges the defendants took advantage of New York’s no-fault auto insurance laws by requiring the insurance companies to reimburse the patients for “necessary and documented medical care” up to the policy maximum for accidents regardless of fault.  

To mitigate this risk, providers should maintain transparent communication with attorneys and patients, ensuring medical opinions and billing practices prioritize patient needs. Separating clinical and financial records can help prevent bias. Additionally, VMG Health’s Coding Audit & Compliance team can help support potential transactions by evaluating a business’ billing and coding procedures and the adequacy of documentation practices. 

How VMG Addresses These Considerations 

When acquiring or selling a business that handles LOPs, thorough financial analysis is essential. VMG Health conducts extensive revenue analyses, including a cash waterfall and zero-balance account analyses to ensure the revenue accuracy. In doing so, VMG Health’s Financial Due Diligence team assesses critical considerations, such as determining drop rate by reviewing historical claim level detail on LOP collections to identify trends and patterns. Assessing drop rate includes:  

  • Analyzing past cases to determine the percentage of LOPs that resulted in full, partial, or no payment.   
  • Considering the referral source and the medical provider’s track record in LOP management. Providers with robust processes for handling LOPs and strong relationships with legal professionals may experience lower drop rates.  
  • VMG Health also assesses reimbursement by case type, CPT® code, provider, and geography to evaluate the collectability of LOP revenue 

By systematically analyzing these factors, VMG Health’s industry experts estimate the drop rate, collection rate, and overall collectability of LOP revenues. The analyses provide accurate estimates of net patient revenue and accounts receivable, which are necessary for the determination of purchase price and normalized levels of net working capital—both often contentious in healthcare transactions.

Disagreements over revenue or collectability of accounts receivable often necessitate unique terms within the purchase agreement, such as earnouts or extended working capital lookbacks. The VMG Health team can analyze the historical collection curves to understand the distribution of expected future collections, which can be useful for these working capital true-ups or earnout calculations. Given the extended collection periods, accounts receivable for these businesses can approximate a full year’s revenue or more. 

To successfully navigate the complexities of LOP transactions, turn to industry experts like VMG Health. Our insights help mitigate risks and ensure the accuracy of reported and future estimated revenues, leading to a smoother transaction process. 

Conclusion 

When buying or selling a business that generates revenue from LOPs, it’s critical to evaluate the collectability and timing of these revenues. Because of LOPs’ inherent uncertainty and complexity, a detailed analysis of historical collection rates, case resolution times, and the legal environment is necessary. VMG Health’s credentialed team of financial due diligence professionals can ensure accurate revenue reporting, minimize risks, and ultimately facilitate a more successful transaction.