By Norm Alster
The Investor’s Business Daily
GREENWOOD VILLAGE, Colo. — “In good times, people get sick. In bad times, people get sicker.”
Bill Sanger, chief executive officer of Emergency Medical Services, figures there’s a lot of truth in that old saw.
And he should know. His firm provides ambulance service and also staffs and manages emergency rooms. Business during these stressed times is flourishing.
“They are centered very strongly on the entire emergency medical care spectrum,” said Andreas Dirnagl, an analyst with Stephens & Co. Providing contracted ambulance service to cities and counties in 40 states accounts for just over half of Emergency Medical’s revenue.
“They are the largest provider of ambulance services in the U.S.,” added Dirnagl, regarding Emergency Medical’s AMR unit.
Once AMR wins a contract with a city or county, it has monopoly-like powers, said Dirnagl.
The company has done a good job leveraging its entrenched status in those communities, he notes. Once it is entrenched in a community, AMR will begin to approach local hospitals, seeking contracts to move patients between facilities.
Transfer Patients
Patients, for example, who must be moved from a hospital to a nursing home could be taken in AMR ambulances. This incremental business allows AMR to leverage its infrastructure and juice profits.
But the ambulance business, solid as it is, is not Emergency Medical’s major growth engine. It is the management and staffing of hospital emergency rooms and other departments, the work of Emergency Medical’s EmCare unit, that is powering growth.
In its second quarter, Emergency Medical reported revenue of $637 million, an increase of 11.6 percent over last year. AMR contributed growth of 3.7 percent as rate increases overcame a slight drop in transport volume. But the EmCare unit posted organic growth of 19 percent even before acquisitions. Net income of $29 million, or 67 cents a share, climbed by 57 percent as both revenue gains and increased efficiency padded the bottom line.
Management was encouraged enough to raise guidance for all of 2009 to $2.38-$2.48. That’s up 15 percent from earlier guidance.
The revenue gains resulted in part from the increased patient visits to emergency rooms, partly the result of concerns over swine flu. The company will not discuss the impact of swine flu fears on the current quarter. But, as Sanger allowed of the swine flu scare: “It’s still out there.”
The fundamental case for EMS, though, goes well beyond swine flu traffic. As an entrenched emergency room manager, it now sees expanded opportunity for managing other hospital departments.
“Hospitals are increasingly out-sourcing non-core operations,” noted Arthur Henderson, an analyst with Jefferies & Co.
EmCare has its eye on several categories. At the top are radiology and anesthesiology departments. EmCare also offers hospitalist staffing. Hospitalists are general practitioner physicians who take control of a case once a patient is hospitalized.
Many doctors don’t like working directly for hospitals. And with hospitals looking to cut costs with outsourcing, these staffing opportunities loom large.
CEO Sanger notes that EmCare currently holds about 8% of the emergency department management market. But it commands less than 1 percent of what he estimates to be the $5 billion market for managing other hospital units.
“There’s tremendous opportunity to grow these businesses. It’s not a difficult sell. As times get tougher, the trend to outsourcing has accelerated,” said Sanger. He estimates that EmCare has a $3 billion to $4 billion opportunity to cross-sell to existing customers.
Gains outside the emergency room are not included in analyst Henderson’s 10 percent earnings growth estimate for 2010. With the opportunity to win new contracts beyond the ER, Henderson expects Emergency Medical to be a strong double-digit grower over the next three to five years. Every new department contract win is worth about a penny a share in earnings, said Henderson.
As with other players in the health care sector, Emergency Medical is trying to figure out how it might be affected by health care reform. Sanger argues that Emergency Medical stands to gain from a new system.
“We do believe that at the end of the day, we should be a net beneficiary,” he said. There may, he allows, be some cuts in the Medicare and Medicaid reimbursement schedules. Such programs now account for 30 to 35 percent of Emergency Medical revenue. But any cuts would be offset by gains from bringing more people under the insurance coverage.
Last year, Emergency Medical claimed interactions with more than 11 million patients. Sanger estimates roughly 20% of patients have no insurance. The company winds up collecting 10 or 12 cents on the dollar from the uninsured, he says. Emergency Medical would benefit from any measure that brings more coverage to more people.
Emergency Medical may also be hurt less than most by reimbursement cuts. Providers of primary care, says analyst Dirnagl, will probably suffer least if there are cuts.
“There is general agreement that primary care does need to be supported,” he said. Emergency Medical services generally come under the codes for primary care, he adds. So it should see smaller cuts than most. And many analysts question whether there will be any cuts at all.
EmCare and AMR once belonged to Laidlaw International. But in early 2005, they were purchased by a group led by the private equity firm Onex Partners.
Private Equity Investor
In December of that year, an IPO established Emergency Medical as a public company. But Onex still holds 59 percent of outstanding shares and, more importantly, 93 percent of voting shares, Oppenheimer analyst Michael Wiederhorn estimated in an August report. Many private equity firms have taken out one-time dividends from the firms they continue to control after IPOs. There has thus far been no such move by Onex. And CEO Sanger emphasizes that he has heard of no such rumblings. “I am not aware of any such ideas or notions on their part,” he said.
Still, public investors must be wary when buying shares of a firm so strongly controlled by private parties. “The Onex entities could cause corporate actions to be taken even if the interests of these entities conflict with the interests of our other stockholders,” Emergency Medical states in its most recent 10 K. It’s an issue “for public shareholders to be aware of,” said analyst Dirnagl.
But right now, both public and private investors can enjoy the ride in an emergency medical investment vehicle that seems to have the run of the road.
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