NHS mergers - Successful mergers in a changing environment

19 December 2013

The Office of Fair Trading (OFT) is now examining two proposed mergers between foundation trusts (FTs) under the Enterprise Act, following a clarification of the law in the summer. These are the merger between Poole Hospital FT and Royal Bournemouth and Christchurch Hospitals FT, and the acquisition of Royal Free London Hospital FT's neurosurgery services by University College London Hospitals FT.

With 102 trusts still to achieve FT status before the government's April 2014 deadline, as required by the Health and Social Care Act 2012, many will be considering a merger option. So, the clarification in the law and current OFT policy in this area are crucial factors in helping trusts decide which path to take.

NHS mergers - Changes in law and the OFT getting into its stride

These two proposed mergers are new territory for the OFT. Generally speaking, if the OFT concludes a merger is a "relevant merger situation" and "may be expected to result in a substantial lessening of competition", then it is under a duty to refer it to the Competition Commission for an in-depth review.

There are a number of exceptions to the referral rule however, including whether any "customer benefits" outweigh the reduction in competition. On the whole, the Commission will prohibit mergers which result in a substantial lessening of competition and deliver insufficient customer benefits or will seek remedies to mitigate anticompetitive effects.

In the summer, the law relating to the merger of FTs was clarified so that mergers between two FTs may now be considered under the general merger regime contained in the Enterprise Act 2002. The OFT and the Competition Commission are now responsible for regulating mergers between two FTs and also between an FT and another enterprise; namely, the activities or part of the activities of a 'business'.

Under the Enterprise Act, the term 'business' extends to a professional practice and any other undertaking carried out for gain or reward, or which is an undertaking where goods or services are supplied otherwise than free of charge (s.129 Enterprise Act 2002). Therefore, acute trusts with private patient income should be alive to this risk. They should also note that the Cooperation and Competition Panel (CCP) and the OFT have differing (albeit overlapping) considerations when analysing mergers.

In terms of what constitutes a "business", it is also arguable that even an acute hospital without private patient income could be included here, as it charges commissioners for services. However, ultimately, the matter is down to the courts to decide.

Under a non-statutory regime (the "Principles and Rules of Co-operation and Competition"), the CCP examines whether the merger is likely to give rise to costs to patients and taxpayers. It does so based on any consequent loss of patient choice or competition which is not offset by the benefits provided. The CCP makes a recommendation following its analysis.

In contrast, the consideration of taxpayer interests has no formal part in mergers examined under the Enterprise Act per se. The decision of the Competition Commission in these cases is usually final.

When it comes to FT mergers, the law now requires Monitor to provide the OFT with advice on any such benefits - a useful mechanism for injecting sector expertise into the process. It also means that, if competition issues are likely, parties need to engage effectively with Monitor and the OFT ahead of any merger.

It's likely that many of the trusts yet to achieve FT status will be considering a merger option. But for these organisations to make an informed choice, clarification of the law and OFT policy is imperative.

Successful merger clearances in healthcare

Where a merger is likely to reduce competition, the parties will need to demonstrate "customer benefits", for instance, gains through service reconfiguration and efficiency improvements. Under the Enterprise Act, customer benefits are defined as lower prices, higher quality, greater choice of goods or services or greater innovation.

In relation to the non-statutory scheme, the CCP Merger Assessment Guidelines set out the relevant customer and taxpayer benefits. Clearly, the limits on freedom of pricing under the Health and Social Care Act 2012 (HSCA) remove one possible customer benefit.

It is hoped that gains to efficiency from a merger would translate into improvements in the quality and scope of services to patients. However, this is not necessarily the case and does need to be demonstrated. Doing so becomes harder where the merged organisations enjoy significantly greater market power compared to the situation before the merger. This is because competitive constraints and incentives, which would encourage this transfer of benefit, are more limited.

As well as arguing customer benefits, it is possible for the parties to offer undertakings regarding "remedies" which would allow a merger to proceed. Such remedies were instrumental in the Barts, Newham and Whipps Cross merger for instance and the Dartford/Medway merger. Both were decided by the CCP under the non-statutory scheme and demonstrate the value of effective stakeholder engagement.

It is worth noting that in these examples, where the mergers were cleared, the remedies accepted by the CCP were behavioural in nature. Under the Enterprise Act regime however, the position is somewhat different. The Competition Commission's guidance states (in relation to those under the Enterprise Act):

"... [remedies which seek] to regulate the ongoing behaviour of the relevant parties (so-called behavioural remedies...) ...are unlikely to deal with an SLC and its adverse effects as comprehensively as structural remedies and may result in distortions compared with a competitive market outcome."

So it is quite reasonable to speculate that parties might have encountered stronger resistance to behavioural remedies if the mergers had fallen under the Enterprise Act.

Interestingly, under the HSCA, Monitor is prohibited from requiring a licence condition which mandates providers giving access to a third party to their facilities (so-called third party access or TPA). However, there is no such limitation on parties to a merger giving undertakings regarding TPA, which may help to address some of the concerns surrounding the anticompetitive aspects of the merger.

The future

The combination of increasing cost and demand pressures on FTs and acute trusts, together with the requirement for all acute trusts to reach Foundation status, is leading a growing number of providers to seek a merger option. However, where the merger involves neighbouring providers with similar service offerings, such deals are likely to be scrutinised very carefully under either the non-statutory CCP scheme or the Enterprise Act.

To avoid mergers being automatically prohibited, the parties involved will need to ensure the merger delivers clear improvements to patient service. They should also consider the potential impact of the merger on competition and how any concerns might be realistically addressed through remedies.

For acute trusts which, by virtue of private patient income, could be deemed 'businesses' under the Enterprise Act, (and therefore considered under either regime), every effort needs to be made to understand and mitigate such risks.

There are several reasons why parties to mergers between FTs and acute trusts might prefer to have a proposed merger considered under the non-statutory scheme. These include the test applied by the CCP, the role of the CCP and its apparent approach to remedies.


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