Jack
Stout
January 1984
The scene was a medium sized
Well over one-half million dollars a year in local
tax subsidy was going into the ambulance service system. Most of the BLS transport service was
provided by two private companies owned by the same people. The two private companies wanted to provide
ALS service to the surrounding areas, but so far were unable to obtain the
medical control approval required for state ALS licensure.
The local physicians were concerned about medical
control and accountability in a system relying upon two small ALS providers, each of whom provided non-transporting rescue
service and relied upon a “patient handoff” to a transporting BLS
provider. Call volumes were barely big
enough to support one good provider of ALS services, and with two government
agencies already licensed, how could the situation be helped by licensing a
third provider? Maybe a forth? Where would it stop? And what about those people outside the
cities served by the two government ALS providers?
In some ways, the private company owners had a
pretty good deal. The two biggest cities provided, at taxpayers’ expense, the
most expensive and sophisticated elements of ALS service delivery, but referred
every single transport to the private owners.
Not one dime of the system’s fee-for-service revenues was used to offset
the cities’ operating costs. On the other hand, the private owners wanted to
provide ALS service to the surrounding townships, and the surrounding townships
wanted ALS services.
Elected officials, some of them at least, began to
wonder about the efficiency of the whole thing.
Cost per emergency patient transport was way over $400, but you had to
add the private companies’ bills to local government’s costs to find that out. Some consumer groups wanted to get government
out of the ambulance business, and that sounded okay to at least one city
manager, provided some reliable service alternative could be created, and a
safe means of transition could be achieved.
As for the paramedics themselves, many were truly
tired of the annual political uncertainty.
The question came up every year, and every year the whole system design
was up for debate.
Sounds like a ripe situation for progressive change,
doesn’t it? Virtually everybody was
dissatisfied with the system, and given the size of local tax subsidy already
being spent, financing change should be easy.
But what change?
Let’s Go
Private
It’s not that umpteen ambulance studies hadn’t been
done by various groups over the past several years. Umpteen studies had been done. But for one reason or another, none of the
recommendations seemed to take root. But
then an idea caught the eye of city officials and a handful of involved
citizens. Get government out of the
ambulance business, and turn the whole thing over to a qualified private
company selected by competitive bid.
The logic was hard to dispute. If the private sector can do the job, why
have socialized ambulance services?
Several communities have already proven that the private sector can “do
the job”, even where “the job” is defined as ultra-high-performance ambulance
services. And several communities have
also proven that it is perfectly possible to design a safe and smooth
transition to such a system, and to gradually reduce local subsidies, even to
zero, in the process. Even more
important, a qualified private provider of ALS service could cover the entire
county, bringing ALS services to the rural townships, with or without tax
subsidy, and medical control and accountability would be infinitely enhanced
through bona fide central dispatching, eliminating the “patient handoff”, and
the spector of a growing hodgepodge of tiny ALS providers.
Going private would improve medical control and
accountability, save taxpayers’ dollars, bring ALS service to the rural
townships, and maybe even end the annual debate. Going private, it seemed, held
a smorgasbord of advantages, and disadvantages.
If It’s That Simple
It did occur to some people that if “going private”
was all that rosy, why did hundreds of American cities, large and small, “go
public” in the first place? Wasn’t the
private ambulance operator here first?
Some people thought about that. Some didn’t.
There are three kinds of private ambulance service
systems: those that deliver high-performance ALS service at reasonable costs;
those that don’t; and those that work okay for a while, but lack long-term
stability. If you want the first kind, experience shows there aren’t many
choices. Only a handful of cities have
systems like that, and their similarities are striking. And if you further narrow down the field to
include only unsubsidized private systems capable of an eight-minute maximum
paramedic response time on 90 percent of emergency requests, you’re down to one
or two types of single provider ALS systems-the old faithful Public Utility
Model and what I call, for lack of better term, the ”exclusive franchise”
model. They are both variations of the
same theme.
Everyone’s an
Expert
I’ll bet you have noticed it, too. When it comes to
Caught up in the zeal to promote the private sector,
the well-meaning but unsuspecting citizen may actually promote a system
structure which will ultimately destroy the most qualified private operator,
leaving his corporate bones to be picked over by cream-skimming competitors,
creditors, and even an occasionally attorney general.
As of this writing, there has arisen in this
Michigan community a great clamor, supported in part by the local private
ambulance owners themselves, in favor of not only going private-but also eliminating
all forms of local government regulation and involvement as well. I cannot predict the outcome for this
community, but we can all learn a lesson from this experience. We can learn that the theory of privatization
is easy to sell, but its safe and effective implementation is a great deal more
difficult. And we can learn what it
takes to make a safe place for qualified private providers- a community where
the good guys win and the bad guys, at least the less capable guys, lose.
When a community decides to depend upon the private
sector for an essential public service, it must structure a business
opportunity that attracts the best, discourages the others, protects the
community from private sector failure and protects the private sector from destruction
from causes beyond the private company’s reasonable control. In the September “83 “Interface” column, we
discussed ways of protecting the public from private sector failure. In an upcoming “Interface” column, we shall
discuss bid processes which encourage the best and discourage the others. What follows here is a discussion of factors
which have either caused the collapse of or threatened the existence of some of
the finest private providers of ALS services.
Sell Them What
They Think They Want
A number of companies supplying paramedic ambulance
services under contract to cities have fallen into this trap. Inexperienced city staffers design a new
ambulance system on paper, sell it to the elected officials, and a request for
proposal is released. A well-organized
provider of ALS services makes an offer, often flattering the local people by
praising the system design and “business-like approach” the city is taking.
The private bidder had a choice. Faced with deciding whether to tell the city
the truth about the proposed design, or put a price on the service and go for
the deal, the company sacrificed its long-run reputation for short-term cash
flow. It’s an old story; I’ve seen it a
dozen times myself.
The company performs as required, but because the
overall system design is seriously flawed, service is less than adequate and
efficiency suffers. Over time, these
deficiencies become gradually exposed, and the public officials are faced with
the dilemma of either blaming their own system design or blaming the contracted
provider.
Later, perhaps even years later, the city officials
are contacted by other communities as a reference. The answer goes something like this, “Our
private provider is not technically
in breach of contract, but frankly we aren’t very happy with the service.” A capable private company’s service
reputation is gradually eroded, new awards go to others, and when business
volume begins to drop, the company is even less eager to decline a local
offering on grounds of poor system design.
The lesson is clear.
It is the responsibility of local
government- not private industry- to provide an
Cream-Skimmer
Competition
Private ambulance owners all over
Companies specializing in only non-emergency
transfer work are superb cream-skimmers.
The collection rate from non-emergency work is much higher than from
emergency work, sometimes nearly double, so even if emergency rates are higher,
the actual collections from a non-emergency transfer may be almost the same as
from an emergency run. But the cost of
performing non-emergency transfer work is considerably lower than the cost of
emergency work, especially if the emergency company fails to perform non-emergency
work using off-peak production capacity.
The non-emergency specialist company can literally drain half of the
revenues out of emergency ambulance systems.
To combat cream-skimming business practices, many
ALS companies have adopted some of the same techniques. In fact, in unregulated
environments, the successful emergency operator is almost forced to engage in
the same sort of competitive practices.
It’s a matter of survival.
The unsubsidized ALS provider faced with serious
cream-skimming competition must either cut back production capacity or somehow
control or eliminate competition. If
service cutback is not an option, the only choice left is to control the
competition. Here, the ALS provider can
borrow from the BLS industry. He can
form multiple companies, advertising numerous numbers in the yellow pages,
giving the appearance of added competition.
If the community
uses call rotation, he increases his own percentage of such
referrals, and decreases his competitor’s accordingly.
He can recruit the referral business of hospitals
and nursing homes, using a variety of both appropriate and questionable
marketing techniques. And when faced
with an intruder from a neighboring community, he can even place an ambulance
of his own in the intruder’s backyard, withdrawing from the competition when
the intruder gets the message.
He can also but out the cream-skimming competitor,
merge, or work some sort of business trade-any deal that will preserve the
market base necessary to sustain life-saving ALS response time performance.
The lesson
here is that a community does no one any favors when it relies upon a private
provider of ALS services but does not afford that provider with reasonable
protection from cream-skimming competition. As
long as the community is willing to subsidize the losses from cream-skimming
activities, such protection may be unnecessary.
But the community that wishes to “go private” must accept either the
responsibility to subsidize or to regulate to eliminate cream-skimming business
practices.
Anti-Trust
Quicksand
This complex legal issue will soon be dealt with in
greater depth by anti-trust attorney, George Leonard, writing as an “Interface”
guest columnist. For now, keep in mind
that while local government may risk exposure to anti-trust litigation by
regulating local ambulance providers, a private company may risk even greater
exposure by engaging in the kinds of anti-cream-skimming activities discussed
above.
Just as the BLS transport provider in a community
served by tax-supported non-transporting ALS service has a giant advantage over
any new competitor, the reverse is also true.
No ambulance company is more vulnerable to attack and destruction from
cream-skimming than an unsubsidized private provider of primary ALS service.
Such a company’s operating costs are higher, its responsibilities are
enormously greater, and its corporate attention must be devoted to clinical
excellence and response time performance.
Such a company had neither the time nor the price structure to do battle
with cream-skimming competitors who have no real responsibility other than to
themselves, and that to make money.
The private company whose experience has been
acquired providing transportation services referred by a tax-supported non-transporting
ALS service is itself a sort of ultimate cream-skimmer. It has enjoyed the system’s fee-for-service
revenues while a great deal of system costs have been absorbed by the
government rescue agency. This is the
most profitable possible market position attainable in the American ambulance
industry. No company in this position
has ever failed to make money. It is the
one thing to be confident that you can hold off other cream-skimmers from such
a secure business position: but it is a mistake to think that such experience
is in any way analogous to defending one’s self from cream-skimmers, without
risk of violating anti-trust laws, when your company has accepted a range of
service obligations and responsibilities that extend far beyond the simple
business world of the BLS provider.
The lesson
here is that, however brave the novice ALS provider may be, the community is
wrong to expect that provider to risk anti-trust litigation in order to protect
itself from unfair cream-skimming competition, in order to protect the
community from the ALS provider’s own possible financial collapse. The community that desires largely
unsubsidized private ALS service cannot protect itself against private sector
failure without also eliminating the need for its private provider to risk
serious anti-trust litigation.
(Street competition at the retail level has been
proven to be both ineffective and dangerous to the public. However, restructured competition in the form
of periodic bidding may, according to some legal experts, be viewed as a
reasonable restructuring of competition, and under certain circumstances, might
be found pro-competitive.)
Unregulated
(Unapproved) Rates
ALS service with life-saving response time
performance doesn’t come cheap. When a community’s ambulance service system
consists of a conglomeration of public agencies and private companies,
subsidization takes several forms. Even
when a city decides to hire a private ALS contractor, leaving BLS and non-emergency
service to others, the total cost to the public (subsidies and fees) remains
hidden. (Alan Jameson’s four-part jems series documented these factors in
detail.)
But when an unsubsidized private provider is relied
upon by a community to furnish clinically excellent services meeting the
eight-minute maximum response time requirement, and especially if that provider
is expected to serve all neighborhoods of the community with equal reliability,
the actual cost of good ambulance service becomes immediately apparent to
everyone. The problem is that even if
the total cost to the public of such service is entirely reasonable, even
extremely low by industry standards, chances are the private provider will be
subjected to uninformed and unfair criticism, or even attack, because of his
rate structure.
Imagine yourself the owner of a really efficient
high-performance ALS company delivering state-of-the-art service to your
community at a true cost to the public that is far below, perhaps even less
than half, that of government operated systems. Imagine also that your rates are at least
comparable to and in most cases lower than rates charged for similar level of
service by other unsubsidized private providers around the country.
Now try to explain that to the local newspapers, the
city council, the county commission, your local association of retired persons,
and a great many of your customers after receiving the bill. You are reminded how cheap it used to be, how
fast the price inflated, how much cheaper it was when there were multiple
private companies, how much lower ambulance prices are in neighboring
communities, and even how much less expensive ALS service is in the town the
mayor’s brother, a physician, lives in.
No one locally has even heard of an ambulance service with rates as high
as yours.
In one real-world case, one of the most efficient
companies in the
In another case, a 24-year old company, one of the
most sophisticated if not efficient private ALS of its time, had its rates
frozen by an increasingly troubled local government. One of the big eight accounting firms was
retained to go over the company’s books, but the issue dragged on for so long
that the company went bankrupt before the city could decide.
Sometimes communities faced with what they feel are
high rates will decide that the system needs “a little more competition” to
hold prices down. New competition drains
off the revenue base, destroys economies of scale, increases costs and
eventually wipes out the financial base which allowed high performance ALS to
exist without subsidy in the first place.
A good ALS provider needs rate regulation more than
the community does. He needs it for its
limited but essential protection from unfair criticism. Professionally conducted, a periodic rate
review hearing can be the absolute salvation of high-performance unsubsidized ALS
provider. But it must focus upon adjusted
comparisons.
What does the term “adjust comparisons” mean? It
means a comparison of the services and prices offered by the local provider
with other services and prices in other cities, adjusted to account for
differences in clinical sophisticated, response time reliability, geographic
difficulty of service delivery, and above all direct or indirect local tax
subsidy.
The unsubsidized rates of high performance ALS
providers are almost always compared, formally and informally, with subsidized
rates of similar providers, unsubsidized rates of less sophisticated service
delivery, rates of public and private providers (subsidized and unsubsidized)
rendering similar services but with far less reliable response time
performance, and so on. Useless and unfair comparisons.
The less in this is that any community that wishes
to depend upon the private sector for the delivery of really excellent
ambulance services owes it to the provider to establish rate regulation through
local ordinance, and to structure the rate control mechanism using an
independently and professionally prepared analysis of adjustable comparable
costs.