STEVE INSKEEP, HOST:
In 2002, the U.S. government introduced a new policy that allowed private players to enter the air ambulance industry. This decision brought more competition to the market, yet the cost of an air ambulance trip soared. So why do the normal rules of supply and demand not apply?
Here's Cardiff Garcia and Rachel Cohn from our daily economics podcast The Indicator from Planet Money.
RACHEL COHN, BYLINE: To understand how air ambulance services became so expensive, you actually have to go back to a time when they were cheaper, a time when hospitals were the largest provider of the service.
MARTY MAKARY: Air ambulances really grew out of emergency rooms that decided, hey, we want to have a way to get people here faster. They were owned by hospitals. They were part of the hospital system. They were on the master hospital bill and often covered by insurance because it was a hospital service.
CARDIFF GARCIA, BYLINE: So that is Dr. Marty Makary. He's a surgeon and a professor of health policy and management at Johns Hopkins University. He says that for a long time, hospitals were not making money from their air ambulances. They provided that services because they could start charging patients once they got to the hospitals. There were virtually no for-profit providers, companies that were trying to make a profit.
COHN: But in 2002, this began to change. The government rolled out a new policy that changed the amount of money that air ambulance providers could make from transporting Medicare and Medicaid patients. Basically, what you need to know is that the new policy made it more lucrative for independent air ambulance providers - that's groups other than hospitals - to offer the service.
GARCIA: And what this did was to incentivize outside groups thinking of investing in air ambulances because now they were assured more money for transporting Medicare and Medicaid patients. But also they could now provide these services for this whole other group of patients, people not covered by Medicare and Medicaid - in other words, people who had private insurance.
COHN: The result is that the number of air ambulances in the U.S. nearly doubled, and the vast majority today are owned by for-profit providers.
GARCIA: And so here is where the normal dynamics of supply and demand start to go askew. They start to get a little weird. See, in a normal market, that big increase in supply - the supply of air ambulance providers - would usually mean a good thing for consumers because consumers now have more choice. It means more competition between those providers, and it usually means cheaper prices for consumers.
COHN: But in the air ambulance market, that's not what happens. That's because customers in this market can't shop around and compare prices and services. In an emergency situation, the customer doesn't choose which air ambulance provider to call.
GARCIA: And Rachel, you spoke to a couple who experienced this firsthand.
COHN: So the story takes place back in 2008. Back then, this man named David Jones (ph) got into a terrible accident on a New Jersey highway. He was driving with his girlfriend at the time - now his wife - Juliet (ph), when their car flipped over and tumbled at 65 miles an hour onto the highway shoulder.
GARCIA: First responders arrived at the scene and called an air ambulance. David was flown out first.
DAVID JONES: So I remember hearing the ambulance land. You know, I was completely out of the car getting treated.
COHN: So Juliet was actually still trapped in the car. So emergency services had to cut her out, which took a while. And so they ended up calling a second air ambulance a few hours later.
GARCIA: Eventually, they made a full recovery, but a nasty surprise awaited them.
COHN: Exactly. So they were actually going over their bills for their treatment together when they realized that they were charged different amounts for their air ambulance transports.
JONES: Had a note written, you know, contemporaneously that - like, it's funny just looking at the note. It says, you know, $1,700 for me and $13,000 for Juliet.
GARCIA: Seventeen hundred for David and $13,000 for Juliet even though they were transported the exact same distance from the same accident site to the same hospital.
COHN: I mean, there was one difference aside from the price, and that's who flew them. So David was flown by a public provider, but Juliet was flown by a for-profit company. So this big increase in supply, it doesn't bring down the price for people getting air transported.
GARCIA: So the median price, for example, charged by an air ambulance for a helicopter transport in the United States, that is now more than $36,000.
COHN: If you ask the Association of Air Medical Services about this - they're the industry group that represents air ambulances - they suggest that air ambulances have become more expensive to provide.
GARCIA: But Dr. Makary, he sees things differently. So he says that the main reason these companies are charging so much for their services is because they can. There's nothing to stop them
MAKARY: And so quickly, this second back industry grew of private equity companies buying up these air ambulances from hospitals, managing the services and price-gouging patients going around the master hospital bill.
GARCIA: This has created a situation where people have gotten into a lot of debt and are straining their finances just to be able to pay off their hefty air ambulance bill.
COHN: Rachael Cohn.
GARCIA: Cardiff Garcia, NPR News.
(SOUNDBITE OF HELIOS' "SHOULDER TO HAND") Transcript provided by NPR, Copyright NPR.