As healthcare institutions scramble to fill critical staffing shortages, many are leaning on third-party staffing agencies to provide doctors, nurses and mid-level providers on demand. These companies promise convenience — handling recruitment, credentialing and onboarding — but they may also carry hidden risks that don’t become clear until it’s too late.
Insurance structures like rolling incurred-but-not-reported (IBNR) policies can backfire when lawsuits arise, leaving hospitals exposed to medical malpractice claims they thought were covered. And if a staffing company goes under, the ripple effects can leave hospitals legally and financially on the hook — even for care they didn’t directly manage.
Brian Kern
Brian Kern, shareholder of OneDigital, helps lead the company’s national professional liability and financial risk insurance divisions, said the type of medical professional liability (MPL) policy many of these businesses purchase — a rolling IBNR (incurred but not reported) — can be a major recurring source of exposure.
OneDigital acquired Acadia Professional (Acadia) and Deep Risk Management, LLC in January 2025.
“IBNR policies are a type of claims-made policy priced based on the entire MPL liability of a company,” Kern said. “Staffing companies are purchasing these policies because initially they are administratively simpler and cheaper. They are simpler because the underwriting is generally based on total number of patient visits/ encounters, rather than the physicians and healthcare professionals delivering care.”
As a result, Kern said staffing companies may not need to have each physician separately underwritten and priced.
Over time though, the total hours grow, as do the premiums, especially if/ when lawsuits start to roll in.
“What was once an administrative benefit — not credentialing and underwriting each physician — becomes a major detriment,” Kern said.
When a staffing company on a rolling IBNR policy wants to get competitive bids, Kern added that the new carriers will often not have the necessary details to underwrite it.
“The information staffing companies thought they would never need is now essential,” Kern said. “But it may be too late. The staffing company is forced to pay high premiums with few alternatives.”
If the growing costs are not properly budgeted for, they could contribute to bankruptcies, a reality that has plagued healthcare startups, including staffing companies, he said.
Compounding the problem, he added if the staffing company cannot afford an extended reporting (“tail”) policy, all MPL coverage is lost.
“This puts healthcare providers at risk personally and leaves the institutions that hired the staffing companies holding the bag,” Kern said. “The MPL risk gets transferred right back to the hiring institution.”
For example, if a hospital hires a company to manage and staff its emergency department the company will typically contractually indemnify and hold harmless the hospital for MPL claims related to the department.
However, if the company goes out of business and cannot afford tail coverage, claims filed thereafter would not be covered by the MPL insurer, Kern said, so the hospital would likely be liable, regardless of any contractual clause.
“If a plaintiff wins a case that a staffing company is contractually liable to pay, but can’t, the plaintiff will still collect from the hospital,” he said. “The plaintiff doesn’t care that the staffing company was supposed to indemnify it.”
Staffing companies have other inherent risks as well, he added. Like consistently doing more with less either because of competition, insufficient reimbursement rates or a lack of resources.
“Many staffing companies do go out of business,” Kern said. “They start off making a profit but down the road see their margins squeezed and their expenses rise.”
Despite the risks, Kern said there are good reasons that healthcare institutions work with staffing agencies.
“If you hire a staffing company, the company takes care of recruiting, credentialing and training doctors or nurses, which takes a lot of time and pressure off the hospital,” Kern said. “Staffing shortages are a reality in healthcare. Staffing companies fill a big void.”
Still, he cautions from a risk management perspective, it’s important “to monitor the financial stability and MPL coverage of these companies.”
Attracting and retaining staff
Attracting and retaining staff is particularly challenging for rural hospitals, which now have additional concerns related to the Medicaid cuts contained in the One Big Beautiful Bill (OBBB) Act.
Brock Slabach
Brock Slabach, chief operations officer at the National Rural Health Association, said the reductions are likely to make it harder for small rural hospitals to stay afloat.
“One of the issues is that Medicaid reimbursement rates are low, and given that about $1 trillion will be cut from Medicaid over the next ten years, hospitals and nursing facilities are expected to see a drop in reimbursement rates nationwide,” said Slabach, former chief executive officer of Field Memorial Community Hospital (now Field Health System) in Mississippi. “This will likely make staffing issues worse — about 43% of rural hospitals are already operating in negative margins.”
He said at least 216 rural hospitals are at high risk of closing because of these cuts, putting more pressure on the hospitals that are open to treat the overflow.
Slabach said rural hospitals had already seen funding drop due to more people switching to Medicare Advantage, which typically provides lower reimbursement rates to rural hospitals, as well as higher rates of denials.
He said the new 80-hour monthly work requirements for Medicaid patients are expected to result in more people losing their insurance, a significant source of revenue for rural hospitals.
In addition, Slabach said the OBBB Act will reduce the amount states can collect from the federal government through provider taxes and limit the use of state-directed payments to finance a state’s share of its Medicaid costs.
“Cutting these two programs will harm rural hospitals that have depended on these supplemental payments to make ends meet in their budgets,” Slabach said.
The OBBB Act did create a $50 billion fund known as the Rural Health Transformation Program — $10 billion annually administered by the Centers for Medicare and Medicaid Services from 2026 through 2030 — to help stabilize rural hospitals that are at risk of closing and improve health outcomes and access for residents.
However, critics say it is not enough to offset the cuts, with one Kaiser Family Foundation analysis predicting Medicaid spending in rural areas could decrease by as much as $155 billion over ten years.
Michael (Mick) Krasner, M.D. co-chief medical officer and vice president of education at EmPRO Insurance Company, is predicting institutions will continue to rely on staffing agencies to fill the void, especially in rural locations, given the high costs associated with healthcare training and the significant cuts to Medicaid ahead.
“There are a number of challenges that lie ahead,” Krasner said. “Some specialties, in particular primary care internal medicine, general pediatrics and family medicine are facing the greatest shortages.”
In many areas, he added, there are not enough primary care providers to meet demand.
“Because these clinicians are often the first point of contact for patients, shortages can have long-term consequences for care quality, costs, delayed diagnoses, poorer follow up and a host of other issues — many of which directly increase risk and liability,” Krasner said.
