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Healthy Competition

surgeons handing a pair of scissors between each other Print publication

30/01/2014

Background: market investigation reference

In April 2012 the Office of Fair Trading (OFT) referred the private healthcare market to the Competition Commission (CC) for investigation. The Enterprise Act 2002 gives the OFT power to make such a reference if it has reasonable grounds for suspecting that competition for the supply or acquisition of goods or services is not working effectively.

The CC had to decide whether any feature(s) of the market for private healthcare prevented, restricted or distorted competition in the UK. If so, the CC then had to decide whether it should introduce remedies to tackle this.

After over a year of investigation, the CC published its provisional findings in August 2013. It found that many private hospitals faced little competition in local areas across the UK, which led to higher private medical insurance (PMI) premiums and charges for private patients. It identified 101 hospitals that faced little local competition. Some of them were in clusters under the common ownership of one of the major hospital groups: BMI; Spire and HCA.

New hospitals are rare due to the high costs of setting one up, the likely response from existing operators and the flat demand for private health services in recent years. There are therefore high barriers to entry to the market and little likelihood of new hospitals being established to promote competition.

Although the majority (around 80 per cent.) of private patients fund their treatment through PMI, and the prices that the operators charge the insurers are set nationally, the CC believed that the lack of competition in many local areas resulted in higher premiums for all patients. Even the market power of PMIs like Bupa was not enough to offset the hospital groups’ strong position.

The CC also found that incentive schemes that encouraged consultants to choose particular private providers for diagnosis and treatment of patients, and the lack of available information on the performance of hospitals and consultants, were further restrictions on competition.

Proposed measures to increase competition

In January 2014 the CC published its provisional decision on the remedies it proposes to alleviate these restrictions on competition. The proposed remedies are:

  • divesting nine private hospitals – HCA would have to sell two of its London hospitals and BMI would have to sell seven of its hospitals in various local markets across England (London, the Home Counties and part of the North West). This would introduce greater rivalry in local markets where a private hospital operator currently controls a cluster of hospitals, increasing competition on both price and quality
  • reviewing arrangements for private patient units (PPUs) – PPUs can be set up within NHS hospitals and are likely to increase as a result of the Health and Social Care Act 2012 lifting the cap on the amount of private income an NHS Trust can earn. The CC considers that PPUs can offer a lower-risk means of market entry or expansion for private hospital operators and so it wants the Competition and Markets Authority (the body due to replace the CC and the OFT from 1 April 2014) to be able to review any proposed PPU arrangements and prohibit them if they fail a competition test. The aim is to restrict existing private hospital operators that face little competition in a local area from operating such PPUs and enable other private hospital operators to come into the market or expand their market share in that area
  • prohibiting or restricting clinician incentive schemes – this would be an order prohibiting private hospital operators from providing direct incentives to clinicians (including consultants) to encourage them to treat or test patients at their hospitals. This remedy aims to ensure that competition between private hospitals for patients is on the basis of quality and price rather than the value of inducements paid to clinicians
  • publishing information on hospital and consultant performance – this will enable patients, other clinicians and PMIs to make meaningful choices between private hospital providers and stimulate competition between them
  • providing consultant fee information – as a condition of practising at their facilities, private hospital operators would require all consultants to provide fee information to patients in a standard prescribed format. Again this would help patients and clinicians to make more effective choices.

Next steps

The CC is continuing to assess the responses to its provisional decision published in August 2013, and will now consult on these proposed remedies. Interested parties need to respond in writing by 6 February 2014. The CC expects to publish its final report in March 2014.

Links to all the documents regarding this market investigation are on the CC website.

Comment on the divestment remedy

It is not particularly common for the CC to impose orders for divestment of businesses or assets at the end of a market investigation. Buoyed perhaps by its success in the BAA Airports market inquiry, where the CC’s decision on divestment (Final Report, March 2009) was challenged through the courts but ultimately upheld, we are seeing a greater willingness for the CC to implement structural remedies in markets with persistent competition concerns (as occurred recently in the Aggregates, Cement and Ready-mix Concrete market inquiry (Final Report, January 2014)). Forced divestments can present an excellent opportunity for investment and expansion by rivals. Assuming the CC affirms its choice of remedy in the final report on private healthcare, prospective buyers of the hospitals will need to secure CC approval for any acquisition and prove they have access to the appropriate financial resources and expertise to run the establishment. In deciding which of a number of competing buyers to approve in a forced divestment sale, the CC’s concern will be to ensure that the sale goes to the buyer most likely to provide effective competition with the other private hospitals in the area. The forced seller’s interest in getting the best price in the deal is of no priority for the CC. Early engagement with Monitor (the regulatory body for the healthcare sector) is also advisable.

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