He also did it with a camelback bladder. As long as the part with the water is over the flame (mind you, he adjusted the height constantly so that the flame didn't lick the container), the water should withdraw enough heat from the plastic to avoid its melting.

I'm pretty sure it would work, haven't you ever done the science experiments in school where you boil the water in a paper cup? The water draws away the heat fast enough to prevent burning.

Would you use this only to boil water as a way of heating up another bag, or have to food directly in the bag?

I was thinking about boiling water in the bag at first, but I see no reason a person could not boil food in the water.
Once you can boil water you can cook all sorts of things in it, have sterile water, and even make a cuppa tea.

I was thinking maybe I could poke a stick or something through the top part of it to hold it above the fire, or maybe tie a string to a top corner and hang it from that.
What worries me us the bag might get too soft above the water to hold any weight.

I think Saturday I will try the idea with a zip lock baggy or two and then look for a "boil in the bag" type baggy.
I don't think a zip lock will stand the heat of boiling water.
An oven bag would certainly stand the heat, but most I have seen are pretty flimsy.

It would not be as good as a real pot, but if I am carrying baggies in my emergency kit anyhow it might be a nice trick to have available.

I do pack some of those bags in my PSK as a water storage bag tho. They are quite tough and hold more than a ziplock bag. They also fold up quite small.

We used to use oven bags in our crock pot, then so many of them started to leak that we stopped wasting our money on them. But even if you get one that doesn't leak, I doubt that it could stand much open flame. Altho I have seen eggs cooked in a paper sack over open flame, so who knows...

It's important to note that that only works with paper cups. Plastic or foam cups melt. The Boy Scouts cook eggs and other food in paper cups full of water stuck down into the coals, the water carries off heat and keeps the cup from burning, water boils, food cooks. But, again, plastic cups melt, they don't conduct the heat fast enough for the water to carry it off before the plastic absorbs enough to melt.