HI Uplift: US EMS market reshaped by No Surprises Act

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by Mike Stones

30 August 2024

Joe Hawke (centre) makes a point about EMS to David Fowkes, FTI Capital Advisors (right) and Oliver Althoff, Seabury Corporate Finance.

It seemed such a good idea. The US No Surprises Act [NSA] of 2022 aimed to protect patients against surprise medical bills from an out-of-network provider or at an out-of-network facility. The reality, at least in the emergency medical services (EMS) helicopter sector, is still reshaping the market – contributing to one major provider, Air Methods, filing for Chapter 11 bankruptcy protection.

“The industry has undergone seismic changes over the past couple of years since the advent of the No Surprises Act,” according to Oliver Althoff, MD, Seabury Corporate Finance. He joined two other industry insiders to take the temperature of the US EMS market at Helicopter Investor’s London 2024 conference in June.

The US market is significantly different from the European sector, which favours funding from club subscription-based flying, provisional governments and, in the UK, charities, said Althoff. The US market has always been private insurance-orientated, subsidising the revenue from the government insurance Medicare/Medicaid system, which reimburses only a fraction of the actual cost of the flight. Pre-Covid and pre-NSA, the remaining cost of private insurance flights was charged to the patients on the transport for the unpaid balance after the insurance companies had made their payments.

Drove them into bankruptcy

“Whatever the reimbursement rates were from the insurance companies, the remainder was billed to the patient [balanced billing],” said Althoff. Surprise medical bills resulted in liens being placed on patients’ houses and in some cases drove them into bankruptcy, prompting congressional action in the form of the NSA.

But with balance billing no longer permitted, some argue the new act affords insurance companies too much power in settling billing disputes. Some have not been slow to wield this power in the form of challenging claims and delaying payments, runs the argument.

Althoff put it like this: “As part of the NSA, where you do not have the ability to balance billing to patients, greater transparency, greater compliance is required and ultimately operational efficiencies need to be delivered.”

Built into the act was independent dispute resolution (IDR), said Joe Hawke, founder, Hawke Aerospace Group. IDR was supposed to ensure that all claims were resolved 30 days after the transport. Before the act, commercial insurance receivables were generally being collected in less than 90 days, said Hawke. He considers the implementation of the NSA act to be particularly uneven across the US.

‘Big contributary factor’

“Post the passage of the NSA, because insurers largely took advantage of this IDR and lack of co-ordination and so forth, [the payment of] receivables ballooned to over 200 days,” he said. “That was a big contributory factor to what happened to Air Methods.”

David Fowkes, senior MD, FTI Capital Advisors said the EMS sector experienced fundamental change with the advent of private equity investment. “15 years ago, the sector was mostly Mom and Pop [small players],” he said. “Now we have four providers that were all privately owned before the bankruptcy – so four fleets of helicopters that are doing most of the flying in the US.” The four biggest operators are GMR, Air Methods, PHI and Metro Aviation. Supplementing their services are smaller regional or community operators.

The combined size of the US EMS fleet has historically been about 1,200 units, according to Hawke. “If you take the top four in aggregate, they account for almost 1,000 of those helicopters,” he said. “So, the unconsolidated tail is maybe 250 helicopters.”

Patient transfer between hospitals makes up somewhere between two-thirds to 80% of EMS flights, said Hawke. “The motor vehicle accident or emergent care sector – where someone is showing up at scene of an accident is typically about 20% of the volume.”

Another segment of the market, key for Blade and potentially a lot of other operators too, is tissue transport, according to Althoff. “Something like 75% of their growth in the past two years has come from having contracts with hospitals for tissue transport,” he said.

Growth is underpinned by two factors. First, the operator charges a base lift-off rate to which a loaded mile rate is added to generate the list price of the flight. The fact that many tissue flights take place at night complements day-time operations can improve utilisation. Second, scientific and technical improvements are enabling tissue to remain viable for longer – enabling lengthier and consequently more profitable flights.

Non-existent margins

Despite the still unfolding impact of the NSA shaving already slim or non-existent margins, none of our speakers thought further consolidation of the top four operators was likely. “If you talk to the big guys, it doesn’t make sense for them to get together,” said Fowkes of FTI Capital Advisors. “It does make sense for them to opportunistically pick up geographies and hospitals they don’t have.”

Also, there is an opportunity for some of the smaller operators to become Number 5 – the fifth biggest operator. But he added: “I just don’t see the impetus for this at this point.”

Althoff also saw little evidence of further consolidation in the big players – apart from Air Methods rationalising its bases. They benefited from the “heft of their negotiation” power with insurance companies and compliance is easier to enforce at the larger end of the market. And he did see opportunity for smaller operators playing a more prominent role with some now negotiating directly with hospitals.

Returning to the 250 helicopters controlled by operators outside the Big Four, Hawke described them as belonging to the “never-going-to-be-consolidated-tail” of the EMS helicopter market in the US. Another model that has taken hold quite successfully are the consortia of definitive care hospitals, for example in the Pacific Northwest, he said. “They collectively own the Part 135 operator [LifeFlight Network] that provides their EMS service [via rotary and fixed-wing aircraft].” He also highlighted the potential to improve EMS coverage in the currently under-serviced native American territories.

Capital injection of $185m

Meanwhile, at the end of last year, Air Methods confirmed it had received approval from the US Bankruptcy Court for the Southern District of Texas for its Chapter 11 restructuring plan. The plan will cut the air ambulance provider’s debt by $1.7bn and included a capital injection $185m.

So, ironically, the No Surprises Act did indeed bring some surprises – and not happy ones – for US EMS helicopter operators. There have been legal challenges to the act – some of which have achieved minor modulation. But all the panellists expected the NSA legislation to stay in place for the foreseeable future.

Althoff took a philosophical view: “Often the pendulum tends to swing from one end of the spectrum to the other. Here, it did the same thing. Legislation will go back and forth. But that will sort itself out – as it does – over the next couple of years.”

One thing is clear, Althoff said: “The PE [private equity] backed operators are not going to fly if they are going to lose money. They’re learning how to do that now, so it will come back relatively quickly.”

The biggest question facing not just the EMS sector but all US society, he concluded, is: “How we allocate to save lives – or not.”

Watch the video recording of the conference session here.

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