MEDICARE AMBULANCE PAYMENTS

A Framework for Change 
Department of Health and Human Services

Office of Inspector General 

April 1999

OEI-12-99-00280
 MEDICARE AMBULANCE PAYMENTS 
A FRAMEWORK FOR CHANGE 
PURPOSE 
To summarize findings from past Office of Inspector General (OIG) reports and offer 
suggestions for the development of a fee schedule for Medicare-covered ambulance services. 
INTRODUCTION 
Current Medicare Coverage and Payment for Ambulance Services 
Ambulance services are a covered benefit under both Part A and Part B of the Medicare 
program.  Part A covers these services when a hospital inpatient is transported to and from 
another hospital for specialized treatment.  Payment for these services is included in the 
hospitals prospective payment for the patients stay.  Medicare Part B covers ambulance 
services when Part A coverage is unavailable and the following criteria are met: (1) the vehicle 
and crew meet certain requirements, (2) the transport is medically necessary, and (3) the trip, 
as a general rule, stays within certain distance and destination limitations. 
Medicare payments were approximately $1.8 billion in 1997.  (This does not include Medicare 
beneficiary co-payments.) 
The type of vehicle used to transport the patient affects payment, which is based on an 
ambulance suppliers historic charges.  Medicare pays for two levels of ambulance services-
basic life support (BLS) and advanced life support (ALS).  The two levels generally are 
distinguished by the credentials of the staff on board the vehicle.  Medicare does not cover 
other forms of transportation, such as a wheelchair or stretcher van. 
Medicare uses a reasonable charge methodology to pay for ambulance services.  Medicare pays 
80 percent of the reasonable (i.e., allowed) charge, and the beneficiary is responsible for the 
remaining 20 percent.  Under the reasonable charge methodology, payment is based on the bill 
from ambulance suppliers.  Carriers, the contractors that process Part B claims, develop 
separate base rates for BLS and ALS ambulances that reflect customary and prevailing charges 
in an area as well as separate rates for suppliers other charges, including mileage and supplies. 
For example, the maximum reasonable charge for mileage is the lowest of (1) the suppliers 
actual charge, (2) the suppliers customary charge for mileage, or (3) the prevailing charge for 
mileage in the area.  The Health Care Financing Administration (HCFA) authorizes carriers to 
raise or lower the reasonable charge based on the concept of inherent reasonableness.  For 
example, if charges are inflated because of lack of competition or the charges are significantly 
higher than acquisition costs, carriers may lower reimbursement. 
1
 The HCFA permits ambulance suppliers to bundle or unbundle their various charges, which 
generally include a base rate, a mileage charge, and a charge for supplies.  Suppliers typically 
unbundle their charges and bill separately for their base rates and mileage, which is the single 
biggest ancillary charge.  In 1997,  Medicare paid approximately $300 million, or 18 percent of 
total spending for ambulance services, for mileage.  Suppliers may bill different amounts for 
ALS and BLS mileage. 
Recent Legislation--Fee Schedule and Demonstrations 
The Balanced Budget Act of 1997 requires HCFA to develop a fee schedule for ambulance 
services effective January 1, 2000.  The law requires HCFA to use negotiated rulemaking and 
states that payments under the new fee schedule should not exceed payments under the old 
system.  The HCFA decided to delay implementation of the fee schedule in order to focus on 
completing Year 2000 programming changes on time.  Negotiations on the fee schedule began 
in February 1999. 
In addition to mandating a new payment system, Congress authorized HCFA to establish up to 
three demonstration projects, which would permit local government agencies to experiment 
with alternative models for the delivery and payment of ambulance services. 
Problems with the Current Reimbursement System 
The OIG has highlighted problems with the current reimbursement system for ambulance 
services for years (please refer to the bibliography for a complete list of OIG reports).  In 
1987, we reported that growth in Medicare payments for ambulance services was far 
outstripping inflation rates and recommended that carriers use their inherent reasonableness 
authority to limit payments. 
Later reports highlighted the problem of inconsistencies among carriers in their claims 
processing practices and allowed charges as well as the failure of the payment system to 
recognize the cost differences between scheduled and unscheduled ambulance trips.  A 1994 
report concluded that the payment system does not take advantage of the lower costs 
associated with high-volume, scheduled ambulance transports. 
In addition to documenting the problems with payment practices, OIG studies have shown that 
Medicares limited transportation benefit is highly vulnerable to abuse.  In a 1994 report, we 
found that 70 percent of sampled dialysis-related claims did not meet Medicare requirements 
for medical necessity.  A 1997 report showed that Medicare payments were continuing to 
grow rapidly.  More importantly, it pointed out unexplainably wide variations in payments for 
similar services and described the payment system as one lacking in common sense and 
particularly vulnerable to fraud and abuse. 
2
 More recently, a December 1998 report showed that two-thirds of the trips for a select group 
of beneficiaries were medically unnecessary.  The trips for these beneficiaries were suspect, 
because the patients were not admitted to the hospital or nursing home or treated in the 
emergency room on the same day as the transport. 
Finally, the OIG attempted to compare Medicare payment rates to those of commercial and 
other Federal payers.  The January 1999 report found that such comparisons were not possible 
due to the complexity of the payment methods of both Medicare and other payers.  The study 
also revealed that the current payment methods of all these entities are not based on reliable 
cost data.  Instead, they simply reflect historical charges. 
FRAMEWORK FOR CHANGE 
We prepared this report to offer advice to the HCFA and industry negotiators who are now 
engaged in the difficult task of developing the fee schedule mandated by the Balanced Budget 
Act.  We base this advice on the work we have done on Medicare ambulance services as well 
as other aspects of the Medicare program. 
With this broader perspective in mind, we offer the following suggestions for consideration 
when developing and eventually refining the fee schedule. 
I.  SIMPLIFY THE PAYMENT SYSTEM 
A 1997 OIG report detailed the complexity of Medicares payment system for ambulance 
services.  According to the report, the number of procedure codes that ambulance suppliers 
submitted had increased almost 35 percent in a one-year period to 240 codes.  In addition to 
the 37 specific ambulance codes that HCFA established, suppliers may bill separately for 
medical supplies, injections, and other services.  The 37 ambulance codes alone contribute to 
the complexity of the payment system, because suppliers may bundle or unbundle their various 
charges, and HCFA created different codes for ALS versus BLS services, emergency versus 
nonemergency transport, and specialized versus nonspecialized services. 
We believe that the complexity of the current payment system is one of its major 
vulnerabilities.  Therefore, we strongly urge that a much simplified structure be used for the 
new fee schedule.  There are many ways to do this; we suggest the following: 
<<	 Pay one rate for emergency transportation and one rate for nonemergency 
transportation. 
<<  Bundle all charges into the base rate, including mileage up to 10 miles. 
<<  Allow additional payments for miles above 10. 
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 General Considerations.  We base this proposal on a number of considerations.  First, the 
concept of bundling expenses into a single prospective rate is consistent with improvements 
made in Medicare payments for hospitals, nursing homes, home health services, and a variety 
of other Medicare program components.  It avoids vulnerabilities, particularly the opportunity 
to game the program by billing for excessive numbers and kinds of services whose review by 
Medicare carriers is impractical due to their number and small dollar value relative to the entire 
Medicare budget. 
More specifically regarding ambulance services, the distinction between emergency and 
nonemergency services appears particularly relevant to pricing.  Emergency ambulance services 
are costlier than nonemergency services, regardless of the type of vehicle.  Because time and 
skill affect medical outcomes when an emergency occurs, local communities regulate response 
times and staffing for emergency transportation.  To meet short response times for emergency 
calls, ambulance suppliers must station personnel and vehicles throughout a given area. 
Stringent response times and the use of paramedics, the highest level of emergency medical 
technician, increase the cost of emergency transportation. 
Medicare payments are now based on the type of vehicle (i.e., ALS or BLS) and type of 
service (i.e., emergency or nonemergency).  Our proposal would eliminate payment 
distinctions based on type of vehicle.  We believe that Medicare should pay for the kind of 
service rendered, not the type of vehicle used.  Paying by type of vehicle creates incentives for 
using a more expensive vehicle rather than incentives to organize services according to the 
kind of care rendered.  As noted above, it is the entire system--vehicles, locations, standby 
capacity, response time expectations, training, and the like--that drives costs, not just the 
vehicle.  The majority of emergency medical service systems (with the exception of very rural 
areas) provide ALS exclusively and require ambulance suppliers to use ALS ambulances for 
medical emergencies.1  Thus, while eliminating the ALS/BLS distinction would align Medicare 
reimbursement with the actual cost of delivering ambulance services, it would not jeopardize 
the financial condition of emergency service systems. 
The standards for ALS and BLS ambulances vary locally, and the actual cost differences 
between ALS and BLS ambulances are unknown.  In fact, in a recent final rule (with comment 
period), HCFA eliminated specific staffing requirements for ALS and BLS ambulances and 
deferred to State or local requirements.  Since the standards for ALS and BLS ambulances 
vary, we believe the type of vehicle is an inappropriate basis for payment in a national program 
such as Medicare. 
1The Emergency Medical Services Administrators Association of California, Issue Paper Regarding the 
Health Care Financing Administration Negotiated Rulemaking Process for the Establishment of an Ambulance 
Fee Schedule, September 1998. 
4  Mileage Rates for Urban and Rural Suppliers.  Medicare historically has allowed suppliers 
to bill separately for miles, and we believe that many ambulance suppliers do so to compensate 
for what they perceive as an inadequate base rate.  Commercial insurers commonly bundle a 
specific number of miles in the base rate, and bundling would simplify administration of the 
ambulance benefit.2  Also, since payments for mileage are the biggest single ancillary charge, 
bundling miles may save money without penalizing rural suppliers that must travel great 
distances.  Based on our analysis of HCFA data, we estimate that bundling 10 miles would 
cover 78 percent of the ambulance trips in metropolitan statistical areas (MSAs) and 56 
percent of the trips in non-MSAs. 
Allowing reimbursement for miles greater than a minimum number (e.g., the 10 miles we 
propose to be included in the base fee) provides a convenient way to compensate rural 
providers for their greater operational costs without overly complicating the fee schedule.  In a 
1991 report, Project HOPE found that mileage costs greatly contributed to higher total costs 
for rural ambulance companies, which generally travel greater distances than urban ambulance 
suppliers.3  In 1997, rural suppliers continued to travel farther than urban suppliers as a 
general rule, but long trips for Medicare beneficiaries were atypical in both urban and rural 
areas.4  For example, 78 percent of the trips in rural areas and 95 percent of the trips in urban 
areas were 25 miles or less.  The median number of miles per trip for rural suppliers was eight; 
the comparable number for urban suppliers was five (the figures reflect trips in both ALS and 
BLS ambulances).  Viewed another way, the mean number of miles per trip for rural suppliers 
was 17; the mean for urban suppliers was eight. 
II.	 BASE THE FEE SCHEDULE ON ACTUAL COSTS, NOT HISTORICAL 
CHARGES 
Historical charge data contain distortions and variations that undermine their usefulness as a 
basis for the new payment system.  We documented these anomalies at length in our 1997 
report.  We found many examples where Medicare paid more for nonemergency transportation 
than emergency transportation as well as tremendous variation in payments for mileage.  The 
report concluded that the reasonable charge methodology results in inflated payments for some 
ambulance services and motivates suppliers to unbundle their charges and upcode to maximize 
reimbursement.  The current system also fails to reflect the lower costs associated with high-
2We obtained information from seven commercial health plans about their rates for ambulance 
transportation, including the number of miles bundled in the base rate. 
3Project HOPE Report--Study of Payments for Ambulance Services under Medicare, Final Report, Project 
HOPE, October 21, 1991. 
4We defined urban areas as counties that are Metropolitan Statistical Areas, or MSAs. Rural areas are 
defined as non-MSAs. 
5  volume, scheduled transports.  One industry analyst estimates that the cost of scheduled 
transport is 50 to 67 percent less than the cost of unscheduled transport.5 
The current reimbursement system drives billing patterns but does not reflect actual costs in the 
ambulance industry.  For example, Medicare allows suppliers to bill separately for their various 
charges, which may include supplies, oxygen, and mileage.  Ambulance suppliers, however, 
incur nominal costs for supplies and oxygen.  Direct labor is by far the biggest component of 
ambulance expenses (63 percent), followed by profit (10 percent), and administrative support 
(9 percent).  Medical supplies comprise only 2 percent of expenses.6 
As noted earlier, our most recent report comparing Medicare payments to those of commercial 
and other Federal payers concludes that these other payment systems also are based on 
unreliable historical data.  Furthermore, we were unable to locate any sources of cost data that 
we could use to determine the reasonableness of Medicare rates overall.  As far as we can tell, 
this type of information is not widely available, even in the ambulance industry.  For example, 
we understand that the American Ambulance Association (AAA), which represents 750 
ground ambulance suppliers, does not have such cost data and has contracted with Project 
HOPE to survey AAA members and evaluate the cost of ambulance services. 
The Balanced Budget Act requires that the fee schedule be budget neutral when compared to 
payments under the current methodology, subject to interim payment reductions.  Thus, the 
total amount to be spent on Medicare ambulance benefits already is determined.  The task, 
then, is to weight the elements of the fee schedule to achieve the budget neutrality prescribed 
by the law.  We recognize that it may be necessary initially to base these weights on a 
professional assessment of what can be gleaned from currently available data.  But at best, this 
will be a rough approximation. 
For the longer run, we suggest that HCFA: 
<<  develop a cost model that can be used as a basis for refining the fee schedule 
as needed to respond to emerging conditions and program changes and 
<<	 verify the data and concepts underlying the model before it can be used to 
adjust Medicare payments. 
III.	 USE DEMONSTRATIONS TO TEST INNOVATIVE DELIVERY AND 
PAYMENT SYSTEMS 
5Telephone conversation with Richard A. Keller, Partner, Fitch & Associates, July 27, 1998. 
6We obtained this information at a December 1997 conference organized by Kaiser Permanente and 
attended by Western Region Emergency Medical Service Directors, Kaiser Permanente medical and administrative 
staff, and OIG staff. 
6  The Balanced Budget Act, which authorizes three local government demonstration projects, 
offers a way to experiment with alternative models for the delivery and reimbursement of 
ambulance services. 
It should be possible to systematically develop and evaluate innovative payment systems for 
ambulance services which will promote more cost effective services.  This is especially true for 
recurring nonemergency services.  For example, we have recommended the use of preferred 
providers, competitive bidding, rebate agreements, add-ons to composite Medicare payment 
rates for dialysis facilities, and specialized fee schedules for end-stage renal disease patients. 
(See OIGs March 1994 report, Ambulance Services for Medicare End-Stage Renal Disease 
Beneficiaries:  Payment Practices.)  Other approaches to pay for nonemergency services 
based on practices of State and local Medicaid agencies, approaches used by managed care 
organizations, and ideas of other interested parties might be of interest. 
At the same time, caution needs to be exercised to avoid the danger of implementing promising 
approaches without ensuring their feasibility or measuring their costs.  Thus, we suggest that 
HCFA: 
<<	 promptly initiate demonstrations of innovative practices, as authorized by the 
Balanced Budget Act, but 
<<	 avoid adopting any changes to Medicares scope of coverage for ambulance 
services or widespread adoption of innovative approaches (other than the fee 
schedule itself) until their feasibility has been tested and their costs or savings 
have been evaluated through demonstration projects. 
IV.  IMPROVE ADMINISTRATION OF THE MEDICARE AMBULANCE BENEFIT 
The method by which the fee schedule will be administered is an important element of its 
success.  For example, under the approach which we are suggesting, it will still be necessary to 
distinguish emergency from nonemergency services and for Medicare carriers to ensure that 
claims for additional miles are properly documented and are verifiable.  Numerous other facets 
of administration will need to be considered to reduce the susceptibility of the new system to 
fraud and abuse.  We suggest that HCFA: 
<<	 consider centralizing claims processing for ambulance services to one or 
several  carriers with specialized capacity for reviewing ambulance claims and 
<<	 choose one carrier, or some other appropriate contractor, to aggregate and 
analyze data. 
7
 In our studies we have repeatedly documented inconsistent claims processing practices and 
payments among the carriers.  The implementation of a new payment system is an opportune 
time to standardize claims processing for ambulance services.  The HCFA has centralized 
claims processing in the past for other Medicare benefits, notably medical equipment and 
supplies and home health care.  Centralized processing may facilitate verification of medical 
necessity, a major concern for nonemergency ambulance transportation.  We wish to clarify 
that we are not necessarily suggesting that a distinct and separate carrier be chosen for this 
function.  Although that approach certainly has merit, one or more of Medicares current 
carriers could be used to handle Medicare ambulance bills in addition to their normal workload. 
This latter approach could avoid the cost of creating an additional carrier just for ambulance 
services. 
A statistical analysis unit could play a crucial role in ensuring the integrity of Medicare 
payments.  This is now being done for medical equipment and supply claims.  This function 
could be organized in any one of several different ways.  For example, it could be performed 
by one of the existing carriers or even one of the specialized ambulance carriers which we are 
suggesting.  But also it could be performed by a program integrity contractor, either one 
specializing in ambulance services or one with a broader scope of responsibilities. 
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 BIBLIOGRAPHY OF OIG REPORTS 
Medicare Payments for Ambulance Services--Comparisons to Non-Medicare Payers, 
OEI-09-95-00411, January 1999. 
Medical Necessity of Medicare Ambulance Services, OEI-09-95-00412, December 1998. 
State Ambulance Policies and Services, OEI-09-95-00410, February 1998. 
Medicare Ambulance Payments, OEI-05-95-00300, November 1997. 
Follow-Up to Review of Medical Necessity for Ambulance Services, A-01-94-00528, June 
1995. 
Ambulance Services for Medicare End-Stage Renal Disease Beneficiaries:  Medical 
Necessity, OEI-03-90-02130, August 1994. 
Ambulance Services for Medicare End-Stage Renal Disease Beneficiaries:  Payment 
Practices, OEI-03-90-02131, March 1994. 
Review of Medical Necessity for Ambulance Services, A-01-91-00513, October 1992. 
Medicare Part B Ambulance Services, OAI-03-86-00012, March 1987. 
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