<PAGE>   1

                                                                    Exhibit 10.7


                              EXTENSION SUPPLEMENT

     EXTENSION SUPPLEMENT, dated as of October 29, 1998 (this "Supplement"), 
between Northstar Health Services, Inc., a Delaware corporation (the 
"Borrower"), Cerberus Partners, LP and Bear Stearns & Co. (collectively, the 
"Lenders").

                                   WITNESSETH

     WHEREAS, IBJ Schroder Bank & Trust Company (the "Agent") and the Borrower 
are parties to that certain Forbearance Agreement, dated as of August 18, 1997 
(as amended, supplemented or otherwise modified prior to the date hereof, the 
"Forbearance Agreement"); and

     WHEREAS, the Forbearance Agreement shall by its terms terminate on October 
31, 1998 (the "Old Forbearance Termination Date");

     WHEREAS, the Borrower has requested that the Old Forbearance Termination 
Date be extended as contemplated by Section 4 of the Forbearance Agreement, and 
the Agent and the Lenders are willing to agree to such extension but only on 
the terms and subject to the conditions set forth herein;

     NOW, THEREFORE, in consideration of the premises and for other valuable 
consideration, the receipt and adequacy of which are hereby acknowledged, the 
Borrower and the Agent hereby agree as follows:

     1. Definitions. Terms defined in or by the reference in the Forbearance 
Agreement are used herein as therein defined.

     2. Forbearance Termination Date. The Forbearance Termination Date is 
hereby extended to November 20, 1998 (the "New Forbearance Termination Date").

     3. Effectiveness. This Supplement shall become effective upon receipt by 
the Lenders of evidence satisfactory to the Lenders that this Supplement has 
been executed and delivered by the Borrower.

     4. Representations and Warranties. To induce the Lenders to enter into 
this Supplement, the Borrower hereby represents and warrants to the Agent and 
the Lenders that, after giving effect to the extension of the Forbearance 
Termination Date and the other modifications to the Forbearance Agreement 
provided for herein, the representations and warranties contained in the 
Forbearance Agreement will be true and correct in all material
<PAGE>   2

respects as if made on and as of the date hereof and that no Forbearance Event 
of Default will have occurred and be continuing.

     5. No Other Modifications. Except as expressly modified hereby, the 
Forbearance Agreement shall remain in full force and effect in accordance with 
its terms, without any waiver, amendment or modification of any provision 
thereof.

     6. No Waiver. The parties hereto agree that the Agent and the Lenders have 
not waived or consented to any Default or Event of Default, waived any right or 
remedy they may have with respect to any such Default or Event of Default, or 
agreed to any modification or waiver of any of the terms and provisions of the 
Loan Documents.

     7. Counterparts. This Supplement may be executed by one or more of the 
parties hereto on any number of separate counterparts and all of said 
counterparts taken together shall be deemed to constitute one and the same 
instrument.

     8. Applicable Law. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND 
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

                            [SIGNATURE PAGE FOLLOWS]



                                      -2-
<PAGE>   3

     IN WITNESS WHEREOF, the parties hereto have caused this Supplement to be 
duly executed and delivered as of the day and year first above written.


                                      NORTHSTAR HEALTH SERVICES, INC.

                                      By: /s/ THOMAS W. ZAUCHA
                                          -------------------------------------
                                          Name: Thomas W. Zaucha
                                          Title: CEO

                                      CERBERUS PARTNERS, L.P.

                                      By: /s/ CERBERUS PARTNERS, L.P.
                                          -------------------------------------
                                          Name:
                                          Title:


                                      BEAR STEARNS & CO.

                                      By: /s/ BEAR STEARNS & CO.
                                          -------------------------------------
                                          Name:
                                          Title:


                                      IBJ SCHRODER BANK & TRUST COMPANY,
                                      as Agent

                                      By: /s/ IBJ SCHRODER BANK & TRUST COMPANY
                                          -------------------------------------
                                          Name:
                                          Title:


                                      -3-