Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Ambulance Companies
Transcript
- Lucas: If you called 911 in most American cities in the 1970s, whoever showed up might have been a funeral home hearse with a couple of volunteer attendants. That's not hyperbole. Ambulance services were often run by mortuaries because they already had vehicles that could carry a person lying down. Luna: So the same vehicle that takes you to the hospital could also take you to the morgue. That's… dark, but I see the practical overlap. Lucas: Exactly. And it tells you how fragmented and underinvested the industry was. Fast forward to the 2020s, and private equity has rolled up much of it into two dominant players: American Medical Response, or AMR, and Global Medical Response, which now owns both AMR and many of its former rivals. Luna: Right, so we're looking at a consolidation story that started earlier than some of the other roll-ups we've covered. When did PE first get interested in ambulances? Lucas: The big entry point was the mid-1990s. Laidlaw, a Canadian transportation conglomerate, bought several regional ambulance companies and merged them into AMR. Then in 1997, Laidlaw sold AMR to a group led by investment firm Welsh, Carson, Anderson & Stowe. Welsh Carson is one of the old-school healthcare PE shops. They saw a fragmented market with steady, predictable cash flows from Medicare and insurance reimbursements. Luna: Predictable cash flows, yes, but also a lot of regulatory complexity. Reimbursement rates are set by government programs, not by market demand. That seems like a risky bet. Lucas: It is if you're betting on organic growth. But the PE play here was all about scale. If you consolidate dozens of small local operators, you can centralize dispatch, billing, and vehicle maintenance. You can also negotiate better rates with hospitals and insurers — though, to be fair, the rates are still heavily dictated by Medicare. The real profit lever was reducing overhead through scale. Luna: And AMR became the biggest. But now Global Medical Response owns AMR too. How did that happen? Lucas: In 2018, a private equity firm called American Securities and a Canadian pension fund bought AMR and merged it with another large operator, Rural/Metro, to create Global Medical Response. Rural/Metro itself had been through private equity ownership — Warburg Pincus owned it at one point. So GMR today controls about a quarter of the U.S. ambulance market by revenue. The rest is still thousands of mom and pop operations and fire-department-based services. Luna: A quarter might not sound huge, but in many regions, especially suburban and rural areas, GMR is the only option. They have effective monopolies on 911 contracts in lots of counties. Lucas: That's the core of the business model. If you win the exclusive 911 contract for a county, you get a steady stream of calls. The downside is that the contract usually caps the rates you can charge for emergency transports. So to make money, you need high volume and low cost per trip. And that's where the controversy starts. Luna: Critics say that cost-cutting has led to longer response times, understaffed ambulances, and low pay for paramedics. There have been lawsuits and investigations. In 2016, AMR paid a $4.6 million settlement for allegedly failing to meet response-time standards in California. Lucas: And then there's surprise billing. Even if you have insurance, if you're taken to a hospital in an ambulance that's out of network, you can get a bill for thousands of dollars. The No Surprises Act of 2022 addressed surprise billing for air ambulances and some ground transport, but ground ambulance is actually exempt in many cases. So it's still an issue. Luna: Let's talk about the pandemic. Call volumes went up, and staffing got even harder. Paramedics were quitting in droves. Did that hurt the pe backed companies more than the independents? Lucas: I think it hurt everyone, but the large companies had more resources to throw at recruitment bonuses and temporary pay hikes. Still, the turnover rate in EMS is around 20 to 30 percent annually. That's a structural problem. GMR and AMR have tried to improve working conditions, but the business model depends on keeping labor costs low because reimbursement rates are essentially fixed. Luna: So the question is: can private equity make this work long-term? Or is it like some of the other roll-ups we've seen where the debt load crushes the company? Lucas: GMR carries a significant debt load. S&P Global Ratings downgraded its credit rating in 2020, citing high leverage and pandemic-related stress. But they've managed to refinance. The key variable is whether Medicare reimbursement keeps pace with inflation. If not, margins get squeezed, and the only lever left is cutting costs further — which hurts service quality. Luna: And if service quality drops, counties might not renew contracts. That's the existential risk. Lucas: Right. A few years ago, the city of Portland, Oregon, dropped AMR and switched to a fire-department-based model. That's a warning sign. On the other hand, most counties don't have the resources to build their own EMS system from scratch. So they stick with the private provider, even if they're unhappy. Luna: You also mentioned rural areas earlier. Is the model viable there, where call volumes are low? Lucas: It's tough. In rural counties, you might have one ambulance covering hundreds of square miles. The reimbursement per call might not cover the cost of keeping that truck staffed 24/7. That's where subsidies from local governments come in. Some pe backed companies have actually pulled out of rural contracts because they couldn't make the numbers work. Luna: So the industry is consolidating, but it's consolidating in the places that are profitable to serve. That leaves rural America with even fewer options. Lucas: Exactly. And that's a public policy issue as much as a business story. We could talk for another hour about the role of volunteer fire departments and community paramedicine, but the bottom line is that private equity saw an opportunity to bring efficiency to a fragmented market, and they've largely succeeded in building scale. The question is whether that efficiency comes at the cost of emergency response quality. Luna: And whether the debt-fueled consolidation can survive a downturn. If interest rates stay high and reimbursement doesn't keep up, the whole model gets shaky. Lucas: We've been digging into these consolidation stories every week, and we don't run ads on these episodes. If you get value from understanding how private equity shapes the businesses that affect your daily life, you can support that choice at buy me a coffee dot com slash fexingo. It's a simple way to keep the show ad-free and independent. Luna: Yeah, we really appreciate the listeners who have contributed. It lets us keep the focus on the analysis, not on selling you something. And speaking of analysis — let's zoom out and look at what happens next. If GMR were to struggle, who would buy the pieces? Lucas: That's a great question. There's already been speculation that a larger healthcare company — maybe a hospital system or a health insurer — might acquire ambulance assets to vertically integrate. UnitedHealth or HCA could potentially buy their way into the market. But that would raise antitrust concerns in local markets. Luna: Alternatively, the fragmented independents could get acquired by another PE firm in a roll-up, starting the cycle over. Lucas: Right. The industry is still ripe for consolidation. We've gone from thousands of operators to two big ones, but there's still a long tail. The question is whether the next wave of consolidation will come from private equity or from strategic buyers. And that depends on the regulatory environment and reimbursement trends. Luna: One more thing: there's also the air ambulance side of GMR. They own Air Evac, which is the largest air ambulance provider. That's a whole other can of worms — surprise bills can be $50,000 or more. Lucas: True, and that's actually been more heavily regulated by the No Surprises Act. But ground ambulance is still the Wild West in many states. For a show about private equity buying up everyday businesses, this one hits close to home — literally, it could be the ambulance that shows up at your door. Luna: Next week we're going to look at another industry that PE is quietly rolling up. Any hints? Lucas: Let's just say it's something you use every day but probably never think about — and it involves a lot of small trucks.