In recent years, the ambulance industry has experienced several changes. In 2002, CMS implemented a new Medicare fee schedule for ambulance services, replacing the previous system that paid providers on a reasonable cost or reasonable charge basis. In addition, according to industry experts, many volunteer providers have reported greater difficulty maintaining adequate staff. Rural providers in particular have begun to rely more heavily on paid staff. Experts also told us that while many rural volunteer providers have not billed Medicare—or have billed nominal amounts— more of these providers have begun billing for services. Recently, both the number of ambulance providers that bill Medicare and the number of ambulance trips paid for by Medicare have increased. From 1998 to 2001, the number of ambulance providers that billed Medicare increased from just under 9,300 to over 9,700, and the total number of trips paid for by Medicare rose from roughly 8 million to over 10 million. Medicare ambulance providers include a wide variety of provider types. In 1998, about 8,200 freestanding providers and 1,100 hospitals and other institution-based providers billed Medicare for ground trips. Freestanding providers are a diverse group, including private for-profit, not-for-profit, and public entities. They range from small community one-vehicle operations to large fire and rescue departments serving major metropolitan areas. They include operations staffed almost entirely by community volunteers, public ventures that include a mix of volunteer and paid professional staff, and private firms that use only paid staff. In 1998, volunteer staff accounted for 80 percent or more of full-time equivalent personnel for over one-third of Medicare ambulance providers. About one-third of freestanding Medicare ambulance providers are managed by local fire departments. Medicare ambulance providers also vary in the types of services they provide. Some deliver only basic life support (BLS) while others deliver advanced life support (ALS) services. In addition to responding to emergencies, ambulance providers may provide nonemergency transportation, such as transfers from one hospital to another. For some ambulance providers, nonemergency trips account for a significant share of their trips; for others, such trips account for few or none of their trips. Some ambulance providers are the sole providers serving their communities, while others operate in areas with multiple ambulance providers. Medicare ambulance providers also differ in the percentage of their trips covered by Medicare and in their reliance on Medicare revenue. In 1998, Medicare beneficiaries on average accounted for about half of the total trips by providers that billed Medicare. However, Medicare beneficiaries accounted for less than one-quarter of trips for 13 percent of Medicare providers, and accounted for over 80 percent of annual trips for 9 percent of providers. On average, Medicare revenue accounted for 41 percent of providers’ cash receipts. Other sources of ambulance providers’ revenue include local tax subsidies and payments from private insurers, Medicaid, and individuals. Requirements affecting ambulance providers vary by location. States and localities may require certain training for ambulance staff, establish maximum payment rates that licensed providers are allowed to charge, or specify response times through contracts with providers. Some jurisdictions—such as those that provide financial support to ambulance providers—prohibit providers from billing for services. In addition, some communities require all ambulance providers to maintain ALS capacity on all vehicles. CMS recently implemented a Medicare fee schedule that changed the way Medicare pays for ambulance services. The fee schedule, mandated by the Balanced Budget Act of 1997 (BBA), recognizes seven levels of ground ambulance services, ranging from BLS services to specialty care transports. (See table 1.) Under the previous payment system, Medicare paid institutional providers on a reasonable cost basis and freestanding providers on a reasonable charge basis. This approach led to wide differences in payments across providers for the same services. The new fee schedule standardized payment rates across provider types by applying the same payment rates to both institutional and freestanding providers. The fee schedule’s payment rates are updated annually. Medicare’s payment is based on the lesser of the actual charge or the applicable fee schedule amount. For most ambulance services, the fee schedule payment is the sum of a base payment and a payment for mileage. The base payment for a trip, which is intended to pay for fixed costs such as staff and equipment, reflects both a base rate and a geographic modifier. The base rate varies by the level of ambulance service provided. The geographic modifier, which is applied to 70 percent of the base rate, is intended to account for wage differences across areas. The mileage payment reflects both the length of a trip and the per-mile payment rate. For trips in which the beneficiary is picked up in an urban area, the per-mile rate is $5.53. Because of the fee schedule’s rural adjustment, the per-mile rate for rural trips is 150 percent of the urban mileage rate for each of the first 17 miles ($8.30) and 125 percent of the urban mileage rate for miles 18 through 50 ($6.91). The urban mileage rate applies to every mile over 50 miles. The mileage payment applies only to “loaded miles”—the miles the beneficiary is transported by ambulance. Under the fee schedule, rural areas are defined as areas outside of metropolitan statistical areas (MSA) and New England County Metropolitan Areas, as well as parts of MSAs that are identified as rural by the Goldsmith modification. MSAs are groups of counties containing a core of at least 50,000 people, together with adjacent areas that have a high degree of economic and social integration with that core. The Goldsmith modification identifies small towns and rural areas within large metropolitan counties that are isolated from central areas by distance or other features, such as mountains. About one-quarter of the roughly 3,100 counties in the United States are in MSAs, and about 75 of those counties have areas that are identified as rural under the Goldsmith modification. The ambulance fee schedule will be phased in over several years. During this period, payments will be based in part on the fee schedule’s service- specific payment rates and in part on the amounts that Medicare would have paid under the prior payment system. The proportion of the payment based on the fee schedule will increase each year until 2006, when provider payments will be based entirely on the fee schedule. In 2003, payments are based on 40 percent of the fee schedule payment and 60 percent of the rates under the prior system. Trip volume is the major determinant of differences across providers in the average cost per trip. Ambulance providers’ total costs primarily reflect readiness—having an ambulance and crew available when emergency calls are received. These readiness-related costs are fixed costs, meaning that they do not increase with the number of trips provided, as long as the provider has the excess capacity to make additional trips. Consequently, providers that can spread these fixed costs across more trips have a lower average cost per trip than providers that make fewer trips. The majority of ambulance providers’ total costs are related to readiness— the need to have an ambulance and crew available when emergency calls are received. Readiness-related costs include costs of labor, vehicles, building space, and administration, as well as the cost of any back-up vehicles and crew, which constitute a reserve that permits responses to multiple simultaneous calls as well as scheduled maintenance on other vehicles. (See table 2.) Readiness-related costs are fixed, meaning that they do not vary with the number of trips a provider makes, as long as the provider has excess capacity. For example, total vehicle costs do not increase significantly when a provider makes more trips. Likewise, building and administrative costs are largely unaffected by trip volume. However, if a provider were to add another ambulance and crew to respond to higher volume, its fixed costs would rise substantially. In contrast, an ambulance provider’s costs for fuel and supplies (such as drugs and oxygen) are variable because they increase with the number of trips. These costs, however, account for a small fraction of ambulance providers’ total costs. Providers that make fewer trips tend to have a higher cost per trip than those that make more trips. Figure 1 illustrates the average relationship between ambulance providers’ cost per trip and their total trip volume, for providers that made 5,000 or fewer trips. As trip volume increases, the cost per trip decreases. Our statistical analysis considered other factors that affect providers’ costs, notably trip length, but trip volume was most strongly related to the cost per trip. In addition, we found that providers surveyed by Project HOPE that averaged 3 or fewer trips per day had an average cost per trip that was nearly twice as high as the cost per trip among those that averaged 9 to 12 trips per day. (See table 3.) Providers that averaged 4 to 8 trips per day had a cost per trip that was 1.3 times as high as the average cost among providers with 9 to 12 trips per day. Although Medicare’s payments generally are higher for trips originating in the least densely populated rural counties than in other counties, the payment differential is probably not large enough to account for the higher costs incurred by low-volume providers likely to serve these areas. Far fewer Medicare-covered ambulance trips are typically provided in rural counties than in urban counties. Trip volume also varies widely across rural counties, with the least densely populated generally having substantially fewer trips than the most densely populated. This suggests that the cost per trip is likely higher for providers serving the least densely populated rural counties. Ambulance providers on average are paid more for trips originating in the least densely populated rural counties than for those in the most densely populated rural counties, but the payment differences are modest and unlikely to reflect the higher cost per trip of low-volume providers. Rural counties, as defined by Medicare’s ambulance fee schedule, tend to have a much lower volume of ambulance trips than counties defined as urban. In 2001, rural counties averaged about 1,200 Medicare-covered trips (both emergency and nonemergency), while urban counties averaged about 9,100 trips. The lower number of trips in rural counties suggests that providers that serve these areas likely have a higher cost per trip than other providers. The difference in the volume of Medicare ambulance trips provided in rural and urban counties largely reflects differences in their population density. Not surprisingly, the number of Medicare ambulance trips in a county is strongly related to its population, with counties with fewer residents having fewer trips. Trip volume is also related to a county’s land area, although to a lesser extent. Population density—the ratio of population to land area—reflects both of these measures. (See table 4.) The number of Medicare ambulance trips provided in rural counties varies markedly with population density, with the least densely populated rural counties tending to have fewer trips than other rural counties. For example, the quarter of rural counties that are the most densely populated, with 52 or more persons per square mile, averaged over 2,200 Medicare trips in 2001. (See table 5.) In contrast, only about 300 Medicare trips, on average, were made in the quarter of rural counties that are the least densely populated, with 11 or fewer persons per square mile. Even fewer Medicare trips—only about 200—were made in frontier counties, which are counties with 6 or fewer persons per square mile. This suggests that the cost per trip is likely higher for providers serving the least densely populated rural counties. The dominant providers in the least densely populated rural counties tend to have far fewer trips than the dominant providers serving other rural counties. Overall, rural counties vary little in the number of providers serving them. However, in most rural counties, one or two providers dominate, delivering the bulk of Medicare trips, with others having a much smaller share. We found that in 2001, about 70 percent of the trips in a rural county were typically supplied by two providers. The number of trips made by these dominant providers varied with counties’ population density. In the quarter of rural counties with the lowest population density, the median number of Medicare trips made by each of the top two providers—in all of the counties they served—was 275. (See table 6.) In contrast, the median number of Medicare trips made by the top two providers was much higher—over 2,100 trips—in the quarter of rural counties that were the most densely populated. Ambulance providers on average are paid 16 percent more for trips originating in the least densely populated quarter of rural counties than for trips in the most densely populated quarter. (See table 7.) Payments for those trips are higher because the trips are generally longer, resulting in a higher mileage payment. In 2001, while trips that began in the most densely populated quarter of rural counties averaged 18 miles, trips in the least densely populated quarter averaged 30 miles. The rural adjustment, which provides a higher per-mile rate for the first 50 miles of rural trips, also contributed to the higher mileage payments. The modest difference in Medicare payment across rural counties is dwarfed by the difference in trip volume: The difference in trip volume between the least and most densely populated quarters of rural counties is nearly eightfold. Because trip volume is an indicator of costs, the Medicare payment differences likely do not fully reflect differences across rural counties in providers’ cost per trip. Refining Medicare’s ambulance fee schedule to adequately account for cost differences in providing ambulance services across various geographic areas is important to ensuring beneficiaries’ access to services. Access is a particular concern in rural areas, since providers’ cost per trip is likely to be higher because they provide fewer trips. Moreover, our analysis shows that the cost per trip is likely to be highest in the least densely populated rural counties. While the fee schedule incorporates a rural adjustment to raise payments for trips provided in rural areas, its definition of “rural” is broad. As a result, the fee schedule’s rural payment adjustment does not sufficiently target trips provided in the least densely populated rural counties. In implementing the fee schedule, CMS adjusted the mileage rate for rural trips to account for the higher cost per trip of providers serving rural areas. However, trip volume is a better indicator of providers’ cost per trip than is trip length. Thus, adjusting the base rates for rural trips—the portion of Medicare’s payment that is designed to pay for providers’ fixed costs—is a more appropriate way of accounting for rural low-volume providers’ higher cost per trip than adjusting the mileage rate. To help ensure that Medicare beneficiaries’ access to ambulance services is adequate, we recommend that the Administrator of CMS better target the rural payment adjustment to trips provided in rural counties with particularly low population density by adjusting the base rates, rather than the mileage rate, for ground ambulance services provided in those counties. We received written comments on a draft of this report from CMS. We also received comments from eight ambulance associations: American Ambulance Association, American Hospital Association, Association of Air Medical Services, National Association of State Emergency Medical Services Directors, National Volunteer Fire Council, Rural EMS Advocate, American College of Emergency Physicians, and the National Association of EMS Physicians. CMS stated that the report will be useful as the agency develops a proposed rule to address appropriate payment for ambulance services furnished in rural, low-volume areas. CMS also noted that the report reflects the complexity of the issues and the need for careful analysis to ensure that payment adjustments are made only for those ambulance providers that require additional payment because of their low volume, rather than, for example, inefficiency or competition from another provider. CMS’s comments appear in appendix III. CMS also provided technical comments, which we incorporated as appropriate. The associations that reviewed the draft report generally agreed with our findings and recommendation. All of the associations agreed with the need to address the higher cost of providing ambulance services in rural areas. Six agreed that an area’s ambulance trip volume reflects its population density, while the remaining two associations did not address this issue. The majority of the associations agreed that CMS should adjust the base rates to recognize the higher cost per trip of providing ambulance services in areas with low population density. However, three associations went further, proposing to use both mileage and base rates to address the higher costs in rural areas. While supporting the principle of paying higher base rates to providers in rural areas where costs are high, the state EMS directors’ and EMS physicians’ associations were concerned that higher payments for rural providers could be at the expense of other providers. Four associations raised concerns about using counties as the geographic areas for applying the adjustment. These associations said that a system that used counties would not accurately target rural ambulance payments. Three of these associations noted that, because counties may include both densely and sparsely populated areas, a system that used counties could overpay some providers and underpay others. They proposed using zip codes as the geographic areas for assessing population density and applying the adjustment. The rural ambulance association, in particular, also advocated the use of multiple rural categories based on population density to adjust payments for rural trips. The fourth association emphasized the need for a system that ensures that all areas with sufficiently low population density are eligible for an appropriate payment adjustment. GAO and the ambulance associations agree with the need to adjust payments for rural trips and that the adjustment should be applied to the base rate. With respect to adjusting payments for rural trips in low population density areas, we believe the adjustment should be applied to the base rate. We believe that the mileage rate for any trip, rural or urban, is best suited to compensating ambulance providers for costs that vary with trip length. As stated in the report, a base rate adjustment is a more appropriate way of accounting for rural low-volume providers’ higher costs per trip because base rates reflect fixed costs, and because trip volume is a better indicator of providers’ cost per trip than is trip length. With respect to possible payment reductions for other providers, implementing our recommendation could have this effect. If a revised rural adjustment is implemented in a way to keep total Medicare expenditures the same, some providers could face lower payments. With respect to the geographic unit used to identify trips for the rural adjustment, we agree that, since counties are relatively large geographic units, it is possible for trips in some areas to be overpaid and others underpaid. Moreover, in principle, a rural classification system that uses a smaller geographic unit, such as zip codes, might better target payments to trips in areas with low population density. Yet our analysis indicates that zip codes do not explain variation in trip volume as well as counties. Further, county boundaries tend to be more stable over time than zip code boundaries. In addition, a variety of technical difficulties hinder the use of zip codes for ambulance payments, including the absence of zip codes for some rural areas. With respect to multiple adjustment categories, we did not address whether there should be a single adjustment or whether there should be multiple adjustment amounts to reflect differing levels of population density. A decision on single or multiple categories would require balancing increased precision with increased complexity. We are sending copies of this report to the Administrator of CMS, appropriate congressional committees, and other interested parties. We will also make copies available to others upon request. This report is also available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions, please call me at (202) 512-7114. Other GAO contacts and staff acknowledgments are listed in appendix IV. 1999 National Survey of Ambulance Providers. To identify the factors that influenced ambulance provider costs, we used the 1999 National Survey of Ambulance Providers. This survey, conducted by the Project HOPE Center for Health Affairs under the sponsorship of the American Ambulance Association, is the only nationally representative source for ambulance providers’ costs. Project HOPE selected a stratified random sample of providers that had billed Medicare in 1997, obtained 421 completed questionnaires, and reported a response rate of 56 percent. The survey included questions on costs, total number of trips by type of service, geographic location, and total mileage. We took several steps to ensure that the Project HOPE data were suitable for our analysis. We examined the accuracy and completeness of the data by testing for implausible values and internal consistency. In addition, we questioned an anomalous result in Project HOPE’s initial analysis of its data, which raised concerns about the credibility of the data: emergency advanced life support (ALS) trips cost less than nonemergency basic life support (BLS) trips. In response, Project HOPE provided us with information about its subsequent analysis, which showed the expected result—ALS trips cost more than BLS trips, after controlling for providers’ volume. This result resolved our major concern about the data. We limited our analysis of the factors affecting differences in providers’ costs to full cost providers—those providers that paid for 80 percent or more of their staff and paid for 80 percent or more of their office and garage space. The costs reported by these providers are more likely to reflect the full cost of providing ambulance services. We also excluded ambulance providers that were part of fire departments, because about half could not separate ambulance costs from other costs. Finally, we excluded one provider that reported implausible values. After these exclusions, we had 114 cases for analysis. Certain analyses that did not pertain to all full cost providers used a smaller number of cases. (See tables 8 and 9.) Area Resource File. The Area Resource File (ARF), which is maintained by the Health Resources and Services Administration (HRSA), is a county- based health resources information database that contains data from many sources, including the U.S. Census. From the 2001 ARF, we obtained county data on land area in 1990 and total population in 2000, which we used to calculate population density. We also obtained data on the number of persons age 65 and over in each county in 1999, which we used as a proxy for Medicare beneficiaries. The ARF is a standard data source that is well documented and widely used, so we did not independently verify its accuracy or completeness. Medicare claims files. We used Medicare claims data to determine the volume and length of all ground-based Medicare-covered trips, as well as Medicare’s payments for those trips. We used the 2001 national claims history 100 percent nearline file for physicians and suppliers to identify claims for ambulance services by freestanding providers, and the 2001 outpatient 100 percent standard analytic file to identify claims for ambulance services by institutional providers. We used the zip code of the beneficiary’s primary address as a proxy for the point where the ambulance picked up the beneficiary because the point of pickup is not recorded in the 2001 data. Although we did not independently verify the reliability of the national claims files, we screened the files and excluded claims that were denied, claims that were superseded by an adjustment claim, and claims for services in other years. We retained all final claims for 2001. Provider interviews. To gain an understanding of the ambulance industry, we interviewed experts from eight industry and professional organizations. We also interviewed several individual ambulance providers. Factors affecting ambulance providers’ costs. To examine the effect of selected factors on ambulance providers’ costs, we analyzed the Project HOPE survey data using a simplified version of a model reported by Project HOPE. In our model, the natural logarithm of total costs is a function of the number of trips, the number of trips squared, and the proportion of the total trips that are ALS. We tested a number of additional terms, including length of trips, but they were all either statistically insignificant or significant but with very small effects. We restricted our model to providers with 5,000 or fewer total trips per year because we were primarily interested in rural providers, which generally have fewer trips. However, our sensitivity analyses showed that the results were broadly similar when the model was applied to all full cost providers. Our model has an adjusted R of 0.48, indicating that the model explains 48 percent of the variance in costs. In general, when trip volume declines, the estimated cost per trip increases, although less than proportionately. That is, a 10 percent decrease in trip volume is associated with an increase in cost per trip of less than 10 percent. Analysis of variation in factors affecting costs across geographic areas. To examine differences between urban and rural areas in factors affecting ambulance costs, we grouped counties with similar characteristics. We followed CMS in classifying counties in metropolitan statistical areas (MSA) as urban counties and counties outside MSAs as rural. However, for our analysis we did not apply the Goldsmith modification that CMS uses to identify as rural certain areas within MSAs. These rural areas are typically small, so we did not treat them as rural counties because that would distort our urban and rural comparisons. Our sensitivity analyses determined that our findings would have been generally the same if we had considered these areas as rural counties, although in some cases the differences between urban and rural counties would have been heightened. To examine differences among rural counties, we grouped them based on their population density. Population density—the ratio of population to land area—is a commonly used measure of rurality. We used population density to group counties into quartiles, and then divided the least densely populated quartile of rural counties into frontier counties—those with six or fewer persons per square mile—and nonfrontier counties, because of our interest in the most sparsely populated rural areas. Using this grouping, we found that ambulance trip volume decreased steadily from the most densely populated rural counties to the least densely populated. We also examined several other classification systems: urban influence codes (UIC), which classify counties based on each county’s largest city and its proximity to other areas with large, urban populations; rural-urban continuum codes (RUCC), which classify metropolitan counties by the size of the urban area and nonurban counties by the size of the urban population and proximity to a metropolitan area; and rural-urban commuting areas (RUCA), which classify census tracts using patterns of urbanization, population density, and daily commuting patterns, and then map the census tracts into zip codes. These systems are more complex than the system we used, and we found that they did not help explain variation in trip volume as well as counties grouped by population density. To confirm the effect of population density on trip volume, we did several additional analyses. We regressed counties’ annual volume of Medicare trips (expressed as natural logarithms) on population and land area (expressed as natural logarithms). Population had a positive effect on the number of trips, while land area had a negative effect. An increase of 1 percent in population increased the number of trips by about 1 percent in a county, while an increase of 1 percent in land area decreased the number of trips by about 0.1 percent. Population density combines the two effects: a 1 percent increase in population density increases the number of trips by 0.7 percent. is a measure of the proportion of the variation in the dependent variable (the natural logarithm of trips) accounted for by the independent variables (the natural logarithms of land area and population). Total population density is strongly related to Medicare population density. (See table 10.) For example, 525 rural counties with the lowest total population density were also lowest in terms of Medicare population density. In total, 83 percent of all rural counties were in the same density quartile, regardless of whether total population or Medicare population was used to group rural counties. Our results with respect to county characteristics and ambulance services would have been similar had we used Medicare population density to group counties rather than total population density. (See tables 11, 12, and 13.) Major contributors to this report were Martha Kelly, Robin Burke, Eric Wedum, Michael Kendix, and Jessica Farb. Ambulance Services: Changes Needed to Improve Medicare Payment Policies and Coverage Decisions. GAO-03-244T. Washington, D.C.: November 15, 2001. Rural Ambulances: Medicare Fee Schedule Payments Could Be Better Targeted. GAO/HEHS-00-115. Washington, D.C.: July 17, 2000. 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Summary: The Centers for Medicare & Medicaid Services (CMS) recently implemented a Medicare ambulance fee schedule in which providers are paid a base payment per trip plus a mileage payment. An adjustment is made to the mileage rate for rural trips to account for higher costs. CMS has stated that this rural adjustment may not sufficiently target providers serving sparsely populated rural areas. The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) directed GAO to examine rural ambulance costs. GAO identified factors that affect ambulance costs per trip, examined how these factors varied across geographic areas, and analyzed whether Medicare payments account for geographic cost differences. GAO used survey data on ambulance providers and Medicare claims data. Trip volume is the key factor affecting differences in ambulance providers' cost per trip. Ambulance providers' total costs primarily reflect readiness--the need to have an ambulance and crew available when emergency calls are received. Readiness-related costs are fixed, meaning that they do not increase with the number of trips provided, as long as a provider has excess capacity. As a result, providers that make fewer trips tend to have a higher cost per trip than those that make more trips. We also found that the length of providers' trips had little effect on their cost per trip. The modest variation in Medicare payments to ambulance providers that serve rural counties probably does not fully reflect their differences in costs because the key factor affecting provider costs--the number of trips--varies widely across rural counties. In 2001, the least densely populated quarter of rural counties averaged far fewer trips than the most densely populated quarter. This suggests that the cost per trip is likely higher for providers serving the least populated rural counties. On average ambulance providers are paid somewhat more for trips in the least densely populated rural counties than for those in other rural counties. However, those payment differences are dwarfed by the difference in trip volume. Because trip volume is a strong indicator of costs, the Medicare payment differences across rural counties likely do not fully reflect differences in providers' cost per trip. In implementing the fee schedule, CMS adjusted the mileage rate for rural trips to account for the higher cost per trip of providers serving rural areas. However, trip volume is a better indicator of providers' cost per trip than is trip length. Thus, adjusting the base rates for rural trips--the portion of Medicare's payment that is designed to pay for providers' fixed costs--is a more appropriate way of accounting for rural low-volume providers' higher cost per trip than adjusting the mileage rate.