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.