Air ambulance provider Air Methods filed for Chapter 11 bankruptcy protection in October, calling the decision a strategic move to position it for long-term success. The move could be unique to the company’s highly-leveraged balance sheet—or a harbinger of turbulence ahead for the entire air ambulance industry. This space is increasingly controlled by private equity investment firms seeking a high rate of return for investors while being squeezed by reimbursements that are significantly below costs from health insurers and government programs.
Air Methods currently operates 365 aircraft—mainly helicopters—from 275 bases in 47 states. Under terms of the pre-packaged bankruptcy filing with the U.S. Bankruptcy Court for the Southern District of Texas, Air Methods will wipe out $1.7 billion in debt. Approximately $1.25 billion of that was variable interest loan debt, tied to dramatically rising interest rates, that was due in April 2024. Another $500 million on 8 percent interest bonds was due in 2025.
Earlier this year, rating agency Moody’s graded those bonds as Caa3, deep into the highly speculative or “junk” category, and they were trading for as little as five cents on the dollar prior to the filing. Much of that debt was tied to the $2.5 billion acquisition of Air Methods by private equity firm American Securities in 2017 when the air ambulance company operated from more than 300 bases. AIN’s attempts to solicit comment from Air Methods were not successful.
As early as 2017, financial analysts were warning that the company’s business model was not sustainable. It was becoming dependent on ever-increasing transport price hikes charged to private payers/insurance companies in a saturated market. Those price hikes stemmed from Medicare/Medicaid transport reimbursements for patients covered by those programs that were substantially below costs.
That problem was exacerbated when Congress incorporated the “No Surprises Act” (NSA) into the second Covid relief package (the Consolidated Appropriations Act) in 2021. The act was supposed to insulate patients when it came to payment disputes between healthcare providers and payers, including insurance companies. Critics charged that provisions of the legislation gave insurance companies outsized power in settling billing disputes, providing them wide latitude to delay, discount, and deny claims.
The consequences hit providers with community-based air ambulance programs, such as Air Methods, particularly hard, and it began closing bases last year. Reports also surfaced that the NSA’s impact trimmed the company’s revenues in recent quarters by more than 50 percent. (Air Methods is privately held and does not disclose financial data.) And the reimbursement environment could get worse.
Reimbursement cost pressure triggered by low Medicare/Medicaid reimbursement rates could become a bigger issue for the industry if that reimbursement structure is adopted by the Veterans Administration (VA). A move by the VA to begin reimbursing non-contract ambulance and air ambulance transportation at those rates, which the industry argues are significantly below costs, is getting heavy pushback from federal legislators and providers. The new rule covering reimbursement would take effect this February.
Industry critics are charging that the move would force providers to downsize operations and reduce hours of availability while compromising the ability of veterans, particularly in rural areas, to receive prompt medical transport. As of 2021, there were an estimated 16.5 million military veterans in the U.S.
The VA currently pays for the actual costs of such medical transports. However, Congress has granted the VA the authority to pay the “lesser actual charge for the transportation or the Medicare Fee Schedule (MFS) amount unless the [VA] secretary has entered into a contract for that transportation with the provider.” (38 U.S.C. section 111(b)(3)(C))
This will allow the VA to impose the MFS payment schedule, which is invariably and significantly below actual costs, the industry charged in a suit filed against the VA with the U.S. Court of Appeals on October 26, 2023. It was filed by the Metropolitan Area EMS Authority, including Texas-based MedStar Mobile Healthcare and Pennsylvania-based Valley Ambulance Authority, Quaker Valley Ambulance Authority, and Amed. MedStar maintains that the new rule would cost it $1.4 million annually.
The air ambulance industry has long argued that MFS reimbursement rates are substantially below actual costs, and the rates force them to charge other patients more to make up the difference—a practice called “balanced billing.” The plaintiffs argue that the new rule exceeds granted Congressional authority, which authorized the secretary to only pay the lower rates when the transports were to or from a VA facility. The new rule would govern payments for transports to any location.
The move by the VA drew stinging rebukes from a bipartisan group of lawmakers including Senate Veterans’ Affairs Committee Chairman Jon Tester (D-MT) and ranking member Jerry Moran (R-KS). Along with Senators Patty Murray (D-WA) and John Boozman (R-AR), they have introduced the “VA Emergency Transportation Access Act” to “protect rural veterans’ access to quality, lifesaving emergency medical care and transport.”
Moran charged that the VA rule “threatens to upend access to care for veterans and all Americans by disrupting the air and ground industry from coast to coast.” Among other things, the legislation would “ensure the new rates reflect the actual cost of transportation.”
“Americans who have served their country honorably deserve the highest quality healthcare, regardless of whether they live close to a hospital or not. This care should include access to life-saving technology, such as emergency air medical services, that can often make the difference between life and death,” said Treg Manning, vice president of sales and marketing, Airbus Helicopters, Inc. Airbus is a leading provider of civil helicopter air ambulances in the U.S.
“The VA Emergency Transportation Access Act introduces a thoughtful approach to protecting emergency transport access for veterans,” said Jana Williams, president and CEO of the Association of Air Medical Services (AAMS), the air ambulance lobby. The bill is strongly supported by leading helicopter air ambulance providers including Air Methods, PHI Air Medical, and GMR (Global Medical Response).
Aside from its financing debt and an increasingly difficult reimbursement environment, Air Methods settled several high-profile and high-cost civil cases in recent years. A 2015 crash near Frisco, Colorado, of an Air Methods Airbus AStar triggered a $100 million civil settlement paid by the company and the OEM to a surviving crewmember with severe burns.
In 2018, another Air Methods AStar crashed in northern Wisconsin, killing all three crew aboard, after the pilot apparently fell asleep (according to video evidence). In April of this year, two of three crew members aboard an Air Methods-operated Airbus EC130T2 were killed when the helicopter crashed during an attempted scene pickup.
In 2020, the company settled a class-action claim by its California crewmembers that they were illegally denied overtime pay for $78 million, or more than $100,000 each. Also that year, Air Methods agreed to pay an $825,000 civil penalty for operating a helicopter with severely corroded pitot tubes in Florida.
For now, the company will continue normal operations. Air Methods’ pre-packaged bankruptcy filing will increase its liquidity with $80 million of debtor-in-possession financing from the first lien lenders who are party to its related restructuring support agreement (RSA). In return, those debtors are expected to receive a substantial portion of the company’s equity.
In its bankruptcy filing, Air Methods listed liabilities estimated at between $1 billion and $10 billion. The filing covers most of the company's entities, including MRO United Rotorcraft. Other entities covered by the filing include Air Methods Corporation, ASP AMC Holdings Inc., ASP AMC Intermediate Holdings Inc., Air Methods Telemedicine LLC, Mercy Air Service Inc., LifeNet Inc., Rocky Mountain Holdings LLC, Air Methods Tours Inc., Tri-State Care Flight LLC, Advantage LLC, Enchantment Aviation Inc., Native Air Services Inc., Native American Air Ambulance Inc., AirMD LLC, and Midwest Corporate Air Care LLC.
Air Methods stressed in a statement issued after the filing that vendors, suppliers, and employees would be paid in full and without interruption during the bankruptcy process—which it expected to complete by the end of the year—and that all of its subsidiary companies would continue normal operations. The filing and its terms, according to Air Methods, had the support of the “majorities of its first lien lenders and bondholders.”
Air Methods CEO JaeLynn Williams said the bankruptcy filing, coupled with recent performance improvements, would allow the company to continue to provide “the highest level of service and patient care.”
“Over the past year, we have made meaningful progress optimizing our field operations, going in-network with leading commercial [health] insurers, and improving our cost structure. We’ve also seen record numbers of transports, and we’ve opened several new bases across the country this year as there is a great demand for air medical services,” Williams said.
But in the face of a reimbursement environment that is growing ever more difficult, will these moves be enough—for Air Methods or any other community-based air ambulance program?
The industry has had some limited success with pushback. Certain implementation rules for the No Surprises Act have been successfully challenged in federal court. This includes last year when air ambulance provider LifeNet brought suit, which is likely a temporary reprieve as the relevant federal agencies, including Health and Human Services and Labor, tweak those rules to pass legal muster.
Last year, Christopher Eastlee, Association of Air Medical Services vice president for public affairs, expressed doubt that enough of the No Surprises Act could be sufficiently changed and done soon enough to provide needed relief. “Can we wait it out? I don’t know if we can,” he said.