Private Health Market: Competition Commission makes another controversial decision

27 January 2014

In the last 18 months, competition has been at the forefront of debate in the healthcare sector. NHS mergers, the Competition Commission's private health investigation, the interaction of both public and private sectors in private patient units and the consideration of competition law in relation to integrated care have all been hot topics.

The Competition Commission has now published its provisional decision on remedies arising from its private healthcare market investigation. The remedies report will potentially ring in further challenging changes for the healthcare sector.

In an investigation already tinged with controversy, we can expect further challenges to the courts if the remedies are finalised in their current format. Considering the Competition Commission's Poole/Bournemouth NHS merger prohibition decision in October 2013, it seems both the private and public health sectors can expect increasing oversight by the competition authorities, in particular, where there is a lack of local competition.

Those operating in the healthcare sector will need to ensure that they understand and are pro-active in dealing with competition law issues.

Background

The Competition Commission, in its provisional findings published last summer, found several structural and conduct features in the private healthcare market which gave rise to adverse effects on competition. It found, for example, that there were high barriers to entry for full service hospitals and that there were weak competitive constraints in a certain local markets. The Competition Commission had provisionally concluded that these features were likely to lead to higher prices for patients.

Indeed, the Competition Commission concluded that "our initial estimate of the detriment caused by the market power of HCA, BMI and Spire is between £173 million and £193 million a year between 2009 and 2011". The hospitals operators contest that they exercise market power or make excess profits at the expense of patients.

This month it has published its provisional decision on remedies arising from its private healthcare market investigation.

Competition Commission Chairman Roger Witcomb said:

"We've looked hard at how we can meet the challenging task of opening this market to increased competition. We're now proposing those measures which we believe will offer practical and effective ways of improving competition and ensuring private patients get a better deal".

The provisional remedies report, while not entirely unexpected given the results of the provisional findings report, will potentially ring in further challenging changes for the health care sector.

Key remedies

The Competition Commission has proposed five key remedies:

  1. The divestment of nine private hospitals (the sale of two HCA hospitals in Central London and seven BMI hospitals in various local markets across England).
  2. The review of arrangements whereby private hospital operators operate private patient units (PPUs) in NHS hospitals. Such arrangements would be subject to a competition test (if they do not fall within the merger control regime) and at risk of prohibition.
  3. The prohibition or restriction of clinician incentive schemes which encourage patient referrals to certain facilities or for certain tests.
  4. The collection and publication of information on private hospital and individual consultant performance.
  5. The requirement for private hospitals to introduce and enforce an obligation on consultants to provide fee information to patients in standard form.

1. Divestments

The Competition Commission has now proposed that HCA divest London Bridge and Princess Grace hospitals in London and that BMI should divest seven hospitals across the country (either Bishops Wood or Clementine Churchill, either Cavell or Kings Oak, either Shelburne or Chiltern, Chelsfield Park and either Sloane or Shirley Oaks, either Saxon Clinic or Three Shires, and Highfield). Divestments would need to be to suitable independent purchasers and the Commission has proposed several measures to ensure that the divestments would be effective.

The Competition Commission considers that the divestments will increase choice for both self-pay patients and private medical insurers and therefore competition on price, quality and innovation parameters.

This is a climb down from the some 20 hospitals identified in the Competition Commission's notice of possible remedies published in August 2013.

Competition Commission Chairman Roger Witcomb said:

"Requiring operators to sell hospitals is a big step and we have focused on those areas where a sale will be effective in increasing competition – where a single operator owns a cluster of hospitals which face little rivalry"

The recognition that divestment is an extreme step, and the reduction in the number of proposed divestments, will come as small comfort to HCA and BMI. Both organisations published statements contesting the Competition Commission's proposals and indicating that they will strongly contest the Competition Commission's provisional remedies decision in respect of these divestments if they are crystallised in the final report.

The outcome of any potential challenges by BMI and HCA remains to be seen (assuming that the provisional remedies are finalised in their current form). However, outside of the scope of this investigation, it can be expected that the competition authorities (including the new Competition and Markets Authority (CMA) when it fully takes the reins in April) will continue to keep a keen eye on both public and private healthcare sectors and closely analyse local competition in any forthcoming healthcare mergers.

2. Competition Test for PPUs

The Health and Social Care Act 2012 removed the private patient income cap on NHS hospitals and, as such, there is increased scope for the growth of PPUs within NHS hospitals. The Competition Commission is keen to ensure that new market entry and expansion of private hospital operators occurs at the local level.

The proposed remedy effectively creates mandatory notifications for all proposed transactions between NHS Trusts and private operators for the operation of a PPU. In particular, even if the OFT/CMA jurisdictional threshold tests are not met, such transactions will be required to be notified and assessed "applying a competition test equivalent to the significant lessening of competition test under the UK merger control regime." The Competition Commission has made it clear that any transactions failing the test would be prohibited. This comes at a time when the new competition regime coming into force in April 2014 already sees a much stronger merger control procedure, bordering on the mandatory.

While the goal of increased local competition for the benefit of patients is to be lauded, this may be seen as a step too far by some in the health care community who are already struggling to get to grips with the application of competition law to their sector. The need for careful consideration of merger partners and upfront examination of the application of the merger control rules will be of paramount importance to ensure the introductions of a PPU in an NHS hospital.

3. Clinician incentive schemes

The Competition Commission closely examined clinician incentive schemes (such as providing financial incentives to consultants for the use of hospital facilities) in the course of its investigation. The Commission noted that the use of such schemes was common and provisionally concluded that incentive schemes affected consultant behaviour and distorted the market, including by leading to 'overtreatment'.

The Competition Commission's proposed remedy seeks to prohibit the provision of direct incentive schemes to clinicians (even if a caveat is made in reference to General Medical Council guidelines). The Competition Commission also intends to place restrictions on equity sharing arrangements between private hospital operators and clinicians and require increased transparency by the publication of information regarding the value of services provided by clinicians and payments made to them.

Given the widespread nature of these schemes, it can be expected that many hospital operators will be affected by this proposed remedy. In this regard, the devil is in the detail. Thus, it will be important for hospital operators to examine their current contractual arrangements and determine what changes, if any, will need to be made.

It will be important to understand the detail of the 'restrictions' which the Competition Commission is proposing be placed on equity sharing arrangements, in particular given that the Commission notes that the requirements aim to maintain "the customer benefits associated with clinicians' engagement through equity participation" (for example, incentivising clinicians to work at new hospitals through equity participation which can lower entry barriers for new services / facilities).

In this regard, the Competition Commission has provisionally decided that equity participation schemes should be permitted subject to certain conditions (including the upfront payment of the equity stake at fair market value, limits on the size of equity holding in certain circumstances and ensuring that the acquisition of equity stakes is not linked to referral requirements) and if those conditions are not met within six months of the date of the Competition Commission's final order, existing schemes would need to be unwound or suitably amended.

4. Collection and publication of information

The least controversial of the Competition Commission's proposed remedies is likely to be the publication of information on hospital and consultant performance. In particular, private hospital operators and private medical insurers will be required to fund jointly an organisation to collect and publish information on the performance of hospitals and individual consultants. This increased transparency is aimed at the facilitation of patient choice on price and quality and the stimulation of competition.

5. Obligation for consultants to provide fee information to patients

Also perhaps less controversial is the requirement for consultants to provide fee information to patients. It is anticipated that this requirement will be a condition of granting practising privileges to consultants. Standard letter templates are to be used and it will be for private hospital operators to ensure that consultants comply with the obligation. The aim of this remedy is to ensure that both insured and self-pay patients have increased awareness of fees and to facilitate patient choice.

The provisional decision on remedies is still subject to change following consultation and the Competition Commission has requested views be provided in writing by 5pm on 6 February 2014. The Competition Commission's final report is expected at the end of March.

Next steps

  1. Consultation on provisional remedies decision.
  2. Challenge by private providers?
  3. Final decision

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