Medics, markets, and Medicare.

Author:Perritt, Henry H., Jr.

    Too many helicopter air ambulances are flying, (1) and too many of them are crashing. A 2002 boost in Medicare reimbursement rates stimulated a threefold growth in the numbers of air ambulances, and now Helicopter Emergency Medical Services ("HEMS") (2) operators are scrambling for missions and flight time. Most air ambulances are helicopters, the HMS industry has the second worst accident record in aviation, and flying air ambulances is one of the most dangerous occupations the United States. (3)

    A central policy question is whether air ambulances are most appropriately regulated as part of a national airspace system or whether they should be regulated as part of the national healthcare system.

    Safety and patient care could be improved by letting the industry shrink. If it does shrink, either as a matter of public policy or because of simple governmental inertia, the question remains whether this aspect of healthcare deserves more public subsidy. If it does, where should that subsidy come from?

    This article begins by exploring the industry's economic crisis in the context of cost control in the healthcare industry more generally. Then, it explores the safety problem, explaining the risks, mitigating technology, and regulatory responses for the deadliest risks. It follows the factual sections by recommending solutions.


    The title of this section is only one verse accompanying a broader refrain: the United States cannot afford all the healthcare technology it has. An economic crisis in the air ambulance industry cannot be addressed coherently outside the context of a more general discussion of healthcare technology policy.

    About 900 air ambulances operate in the United States. Most of them are single engine, single pilot helicopters such as AS350. The industry is highly concentrated, with 65% of the fleet operated by the three largest operators. (4) Air Methods, based in Denver, is the biggest, (5) and it has been buying up smaller HEMS operators. (6) Fewer than half of the HEMS missions flown involve extraction of trauma victims from accident scenes; most involve inter-facility transport--picking up critically ill patients from one hospital and transporting them to another that can provide more appropriate advanced care.

    The federal government planted the seeds of the economic crisis by increasing Medicare reimbursement rates for air ambulances. In 2002, there were only a couple hundred HEMS operators, and most of them were operated in conjunction with hospitals. The hospital made the decision whether air transport of a patient was necessary and handled the billing. In 2002, United States Department of Health and Human Services' Centers for Medicare and Medicaid responded to a congressional mandate by changing the reimbursement system for air ambulances. (7) The previous system had followed the traditional healthcare reimbursement approach of fee for service, in which air ambulance transportation was paid for based on the cost of the transport or on the provider's customary, usual, and reasonable fees for the transport. (8) The fee-for-service system distinguished between hospital-provided air ambulance services and independent--what came to be called "community-based"--services. Hospital-based services were compensated based on costs, without a ceiling; community-based services were compensated subject to an overall cap on expenditures for that category of transportation. Air ambulance and ground ambulance reimbursement was treated essentially the same. (9)

    After 2002, Medicare replaced the fee for service system with a prospective payment system under which air ambulance transport was compensated according to a base rate augmented by a mileage rate, adjusted for different price levels of different parts of the country, for inflation, and subject to an overall cap. Now the same rate applied to hospital-based and community-based services, (10) but different rates applied to air ambulances compared to ground ambulances. (11) The basic requirements for reimbursement from the pre-2002 system remained unchanged: that HEMS transports be medically necessary and be to the nearest medical facility adequately equipped to care for the patient. (12) As with other Medicare reimbursements, no balance billing is permitted. (13)

    The market responded with a shift in favor of community-based systems (14) and in favor of air ambulances over ground ambulances. The rural premium created a substantial incentive to establish HEMS bases in rural areas, and rural community-based programs proliferated.

    The result was a threefold increase in the number of air ambulances as existing providers expanded and as new entrants jumped into the market. (15) Provision of HEMS by state and local governmental agencies is less common.

    The usual mechanisms at the state level for moderating new capital investment in healthcare facilities did not reach air ambulances because air ambulance operators were defined as "air carriers," and the 1980 Airline Deregulation Act preempted state economic regulation of air carriers. (16) So certificate-of-need requirements for new capital investment in healthcare did not apply to air ambulances. The overall result was that air ambulance capacity expanded much more rapidly than the need, and high fixed costs occasioned by the multimillion dollar cost of helicopters and ongoing expenditures for hangers and crew bases was spread over fewer and fewer flights for each operator.

    The industry shifted from being predominately hospital-based to being predominately community-based. (17) Almost all community-based air ambulance services are outside provider networks, leaving the patient rather than a third-party payer primarily responsible for paying the fees, which escalated from the $15,000-$20,000 level to the mid $40,000 level as average costs rose due to fewer flights to cover fixed costs.

    As price levels increased, air ambulance providers were able to collect a smaller portion of the fees billed to individual patients, and third-party payers reimbursed less and less of the total fee. All HEMS operators get much of their revenue from third-party payers: private healthcare insurers, Medicare, or Medicaid. (18) Medicare reimbursement is more important than suggested by the percentage of revenue accounted for by Medicare payments. Most private health insurers follow Medicare's lead and typically set their reimbursement levels at a fixed percentage, more than 100%, of the Medicare reimbursement rates. (19)

    More HEMS operators and helicopters in the face of relatively constant or declining demand means that average costs are increasing much faster than the Medicare and typical insurance reimbursement levels. (20) Utilization has decreased dramatically in the HEMS sector in the last few years. (21) HEMS operators therefore must greatly increase the prices to a diminishing pool of individuals who can afford them. While some individuals may have sufficient liquid assets to pay a $40,000 air ambulance bill, a sudden expense of that magnitude represents a serious disruption to the economic welfare of anyone except the truly wealthy.

    Public opposition to high HEMS bills to individuals is blossoming. The New York Times ran a feature story in 2015 under a headline, Air Ambulances Offer a Lifeline, and Then a Sky-High Bill. (22) ABC News broadcast a feature, Sky-Rage: Bills, Debt, Lawsuits Follow Helicopter Medevac Trips, in 2016. (23) Senators Hoeven from North Dakota and Tester from for Montana, gave back-to-back speeches on the floor of the Senate urging legislation to allow state regulation of air ambulances. (24) Each described instances of large bills and aggressive collection efforts in their state. Senator Hoeven described a HEMS transport after a snowmobile accident resulting in a bill of $40,000, for which the patient's insurer paid $15,000, leaving the patient responsible for $25,000. (25) Senator Hoven also described two instances of interfacility transport resulting in patient liability of $40,000 and $70,000. (26) Senator Tester described a constituent who paid $1,000 per month for healthcare insurance but was presented with a HEMS bill for $85,000. (27) "[T]hey are taking financial advantage of families who are in crisis--families who may be forced to cash out their retirement accounts, drain their life savings, and even sell their homes to cover air ambulance bills that can climb up to $100,000" he said. (28)

    As with many other areas of expensive healthcare technology, a debate rages over HEMS, with one side arguing that reimbursement rates are too generous, encouraging an oversupply and overutilization of air ambulances. (29)

    The industry, however, claims that it provides a valuable lifesaving service and that, if anything, many areas of the country are still underserved by air ambulances. The industry has endorsed legislation introduced in 2015 (30) that would increase Medicare reimbursement rates by 20% for 2017, and by 5% per year for 2018-2019, (31) and require HEMS providers to submit certain cost data after the increases go into effect. (32)

    Air Evac, the second largest operator, sued an Ohio healthcare insurer to compel it to increase its reimbursement rates. (33) Trial on the merits is not likely any time soon, (34) but the filing of the lawsuit reflects the growing sense of a reimbursement crisis in the industry.

    In Texas, PHI and other operators abandoned their historical acceptance of the 125%-of-Medicare-rate standard for workers comp reimbursement, established by the state workers compensation division and argued that the workers compensation carriers were...

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