WAR of Independents

By James T. McKenna | May 1, 2004
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With new, intensifying competition and pressure from customers and insurers to contain costs, the air medical services sector may be on the brink of transformation.

Aeromedical transport has long been a jewel of the helicopter industry. Since the inception in the early 1970s of civilian helicopter emergency medical services in the United States, it has been a source of revenue, growth and innovation for operators, manufacturers and vendors.

Air medical services also have been a showcase to the public of the capabilities and values of the helicopter. In a run of more than 10 years in the 1970s and early 1980s, for instance, the hit TV series M*A*S*H reminded the American public of the roots of those services in the Korean War and dramatized the helicopter's benefits to the severely injured. When the public watches an EMS helicopter whisk a patient from the scene of an accident today, they are more likely to dwell on its speed and agility than its noise and safety.


But that momentary glory for EMS helicopter operations is becoming overshadowed by harsh economic realities. Key participants in the sector say those realities are likely to transform everything from how operators do business with hospitals and insurers to how manufacturers and vendors support those operators.

"It's hard to see how this is all going to shake out," said Rich Hinkle, vice president of program development for Keystone Helicopters, Inc. "I think everyone is trying to figure that out." Keystone is both a major provider of EMS air services and a vendor to operators outfitting new and used aircraft for such roles.

The EMS sector has undergone major changes in recent years.

Operators have consolidated to achieve greater efficiencies of scale. Another EMS provider and vendor, Air Methods, purchased Mercy Air, ARCH and Rocky Mountain Holdings in successive waves. That created an integrated network with a more competitive cost structure and the efficiencies necessary to underwrite operational advancements. Building on the operational experience of Rocky Mountain staff members, for instance, Air Methods has launched a major program with hospital customers to equip their aircraft for night-vision operations.

Air medical service providers find themselves squeezed more and more to control costs and pressed to fight for reimbursement for their services. Both are the result of the shift of control of the $900-billion-a-year health care industry in the United States from doctors and local hospitals to health-management organizations, insurance companies and for-profit hospital chains.

"Hospitals are getting squeezed on reimbursements," said Mike Stanberry, president of Metro Aviation, the Shreveport, Louisiana company that operates about 30 helicopters in 15 hospital-affiliated EMS programs.

"Customers are becoming more and more cost-conscious," said Larry Pietropaulo, president and CEO of CJ Systems Aviation Group.

One result of that is that EMS operators who haven't done so already are bringing in-house the work of billing for their services. CJ Systems took that step March 1. "We have finalized plans to open a medical transportation billing operation to handle third-party billing of our air medical services transports," Pietropaulo said. Traditionally, CJ Systems's Critical Care Transportation Group had outsourced medical billing. Now its billing staff, including claims processors, will be responsible for invoicing and following up on Medicare and Medicaid claims, as well as those to health and automobile insurance parties and patients paying themselves for services. The company expects the staff will bill for 5,000 transports a year.

"When you're trying to collect $20 million," he said, "that's getting too important to contract out."

In the struggle to contain and recover their costs, EMS operators complain that they are hamstrung in the United States by red tape. Current federal rules, for instance, dictate that reimbursements be based on the diagnosis of a patient by doctors in an emergency room rather than medics on the scene who first treat the patient and judge whether air transport is needed to keep them alive. (The Assn. for Air Medical Services, based in Alexandria, Virginia, is lobbying to have the federal Centers for Medicare and Medicaid Services, which sets those rules, shift to ones permitting billing based on the on-scene medic's assessment of a patient.)

These chronic problems are aggravated by a new competitive environment for the EMS sector in the United States. Services partnered with hospitals under a common and longstanding business model find themselves confronting operators unaffiliated with a local outfit, vying to transport the same patients. Some top industry officials say this battle between "traditionals" and "independents" could fundamentally change the way customers view-and buy-their services.

The competitive environment is complicated by skepticism in some quarters of the emergency medicine profession about whether all helicopter transports are necessary to the survival and well-being of patients. These skeptics point to studies performed in California and in Hong Kong that found that a third of patients transported by helicopter to a hospital are treated and released from the emergency department without ever being admitted to the hospital.

The competition from independent or stand-alone operators is a reflection of the health of the EMS sector. One problem with a market segment generating enough cash flow to support expansion and the addition of aircraft (and one promising steady or growing demand for services) is that outfits not involved in the segment will want to get involved.

"What you have is good businessmen with new money looking at the segment and saying, 'I want in'," said CJ Systems' Pietropaulo.

That creates a problem for those already in the market, he said, for while the segment is healthy, it is not overflowing with riches.

"We see a little over-proliferation of the market."

Operators like CJ Systems, Keystone Helicopters and Metro Aviation run the majority of their EMS programs in partnership with a local hospital. Typically, they'll operate under contracts that pay a flat fee plus a rate for hours flown on EMS missions.

That's generally a good set-up. "But if somebody comes in on the fringes and takes 10-20 percent of your volume," Pietropaulo said, "that's going to hurt."

Advocates of independent operators argue that the competition is beneficial since it will drive down costs for medical providers, patients and insurers.

(The debate on that point is complicated by the fact that many EMS operators are hybrids. They have a traditional partnership in one area, but seek independent ones outside that area. A case in point is STAT Medevac. That operator is affiliated with six hospitals in and around Pittsburgh, Pennsylvania, but has expanded beyond there. It is lobbying now for approval to transport emergency patients in Maryland, where that work is dominated under state law by the Maryland State Police.)

It may be inevitable that the market will prevail and "traditional" EMS operators will face competition until just a handful of large ones are left surviving. Obviously, a major concern in that process would be that the flight and medical operations stay safe in the heat of competition. Keystone's Hinkle sees some others, including the prospect that such a competitive battle will make air medical services a commodity.

The high end of the market-the university or big-city hospital with a great demand for its services-will always be able to charge transport rates high enough to support advanced, high-quality helicopter EMS services "because of who they are," he said.

Stanberry agreed. "There are always going to be certain hospitals that do not want to lose control over the transport part of the treatment." Such hospitals recognize that the helicopter service is valuable-and should even be underwritten-because it brings to the hospital patients requiring extensive and expensive treatment for which the hospital can charge.

But hospitals not in that group will focus on costs. Hinkle sees such hospitals reaching the point, in a competitive shakeout of EMS operators, of believing that "the value is the transport. Whatever operator can do that transport at the best cost" will get the work.

That could alter life for suppliers to the EMS sector, particularly if it undercut the rationale for acquiring new aircraft.

Hospitals generally started out wet-leasing EMS aircraft from operators. But after five or 10 years into the lease, hospital administrators would realize they may have paid for the aircraft several times over. They then opted to buy their own aircraft and have outside companies staff and operate them. That trend was facilitated by the fact that, as non-profit businesses, hospitals could get less expensive financing than helicopter operators. But if the focus gets set on the cost of the commodity of air transport, the incentive to buy expensive new aircraft could fade. Hinkle said he's already encountering customers looking to replacement their aircraft.

They're not necessarily looking for new aircraft, he said. "They say they're looking for new-er aircraft."

EMS operations certainly have been an engine of aircraft sales. The latest forecasts of the market for new helicopters agree that EMS will continue to be a major driver of new aircraft acquisitions, especially in North America and Europe.

Most recent aircraft acquisition activity has come as a result of the replacement of older twin-engine EMS aircraft like the BK117 and BO105 with newer ones like the EC135 and Agusta A109E.

Rolls-Royce and The Teal Group note in their latest market forecast that acquisitions also have been spurred by "a concurrent spread of EMS services to smaller and rural communities through lower-cost, single-engine EMS aircraft."

CJ Systems Aviation Group is among those replacing aircraft. Like other operators, it put BK aircraft and Bell 222s in service 15-20 years ago. "Our aircraft are aging quickly," said Pietropaulo. "That's costing us time and money."

Honeywell notes that its survey 949 chief pilots and flight department managers around the world that the percentage expecting to acquire new aircraft for EMS applications in the next 10 years fell from 27 percent last year to 19 percent this year.

Upgrading is always a judgment call on a newer aircraft's acquisition costs versus its lower operating and maintenance costs. To replace its existing fleet, for instance, CJ Systems is looking at aircraft costing $1.5-3.5 million per new hull.

"But in a program with good utilization rates," he said, the new aircraft's better operating costs, fuel efficiency and reliability can make an acquisition sensible.

(The company in March reconfirmed its order for six Eurocopter EC135s, which are to be powered by the Turbomeca Arrius engine. Slated for delivery starting in early 2005, those aircraft would bring to 27 the number of EC135s the company operates.)

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