Air Methods and the New Healthcare Law: How Long Will They Survive?

| About: Air Methods (AIRM)

While the problems with the health care bill that passed in March are no longer front page news, that doesn’t mean American businesses still aren’t scrambling to assess the damage.

Just last week we learned why the House Democrats really cancelled a hearing scheduled for April where they were planning on excoriating business like AT&T (NYSE:T), Caterpillar (NYSE:CAT), and AK Steel (NYSE:AKS) for taking write-downs on future health care retiree expenses caused by the bill. It turns out they were just following proper accounting practices, as the companies had said all along.

That wasn’t the real reason the hearings were cancelled though. In the document requests to these companies, internal emails showed they were considering simply canceling coverage for employees, paying the necessary fine, and pushing employee coverage off to the government. Health care bill advocates had promised this wouldn’t happen, so they didn’t want to publicize it.

Not only that, but emails also showed companies would be raising the amount they would make employees pay towards their premiums which, again, bill proponents said wouldn’t happen.

The news cycle has turned, but these problems with the bill haven’t disappeared. While advocates sought to increase coverage and reduce prices, the opposite will be occurring, starting much sooner than when the bill is in full effect. As a bottom-up stock picker, I’d like to discuss a case study in price controls.

My favorite example is a company named Air Methods (NASDAQ:AIRM), and it would be worthwhile for politicians to examine this company and their revenue and expenses. The health care bill will both cause Air Methods to increase prices charged to insurance companies, who will then have to pass along those costs to customers. When their inevitable future price increases don’t stick with insurers, Air Methods will eventually be forced to curtail service.

One of my favorite places to find new companies to analyze is Forbes Magazine’s annual list of the 200 best companies. I usually pick out a few that seem easy to understand, and then spend some time researching them and determining their valuations. The stock prices for these companies can be pretty volatile, so it’s good to have them on our watch list.

That’s how I came across Air Methods. They provide emergency medevac services to individuals either from the scene of the accident or from a hospital that doesn’t have the necessary equipment or skills to effectively care for a patient. I think we can all agree that Air Methods provides a service that saves lives. We, as Americans, should be very thankful that it exists.

Air Methods has a two-pronged model. One prong will get hurt by this health care bill in the long term, and the other will get hurt immediately. One part of Air Methods business contracts with trauma centers where they pay a fixed fee for Air Methods to fly in patients from other hospitals. This business is a bit more stable because the onus is on the trauma center to collect the money and pay Air Methods. In the long term, though, as the trauma centers collect less money from insurance companies due to price controls forced upon them by states or the federal government, the trauma centers will cut their payouts. Additionally, as more people get into Medicare and Medicaid, the losses from these centers will be exacerbated.

The second part of Air Methods’ business is collecting payments directly from patients. They do this when they set up a helicopter at a local airport or fire station, and then respond to emergencies and deliver patients to the hospital. Air Methods never turns away a patient. For the latest quarter, 36% of patients had private insurance, 29% were on Medicare, 21% were on Medicaid, and 14% were uninsured. The only group among these where Air Methods makes money is the insured. The private insurers, like in so many other areas of health care, subsidize Medicare, Medicaid and the uninsured.

On average, the cost for a flight to Air Methods is about $7,000. Again, they never ask if the patient has insurance before picking them up and they never turn away a patient. For insured patients, they get about $14,700. For the other patients they only get $5,000 from Medicare, $2,500 from Medicaid, and $1,000 from the uninsured. This is precisely why insurance premiums are so high and rising. This part of the business is immediately threatened.

Although Air Methods was able to raise rates they charge to insurance companies by 5% recently, they won’t be able to do that forever. This health care bill implements certain price controls onto insurance companies which will then cause them to cut their payouts to companies like Air Methods. Not only that, but the mix of patients is shifting away from private insurance into Medicare and Medicaid to the tune of 10% last year alone.

As it stands now, I am not optimistic about the effect the bill will have on Air Methods. Yes, the number of uninsured patients will go down, but it won’t go to zero. As Medicare and Medicaid continue to go broke, the amount they pay to Air Methods will either be cut, or won’t keep up with Air Methods’ increased costs year over year. As for the insurance companies, if the government won’t allow them to charge rates that allow them to cover their costs, they won’t be able to pay for services to companies like Air Methods.

As government continues to get more involved, the effect is that a company like Air Methods either won’t exist in 15 years, its services will be greatly curtailed, or its maintenance and safety costs will have to be cut. That will be a tragic loss for us, as Americans, and a very bad thing for the health care system.

Disclosure: No positions