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Competition Commission announces adverse provisional finding in its first NHS hospital merger investigation

    • Competition, EU and Trade - Competition e-briefings
    • Health and life sciences - Healthcare e-briefings

    24-07-2013

    Background to the investigation

    On 11 July 2013, the Competition Commission (“CC”) published its provisional findings into its examination of the anticipated merger of the Royal Bournemouth and Christchurch Hospital NHS Foundation Trust (“RBCH”) and Poole Hospital NHS Foundation Trust (“PH”). The merger had been referred to the CC by the Office of Fair Trading for an in-depth investigation on 8 January 2013.  The final report has been delayed until October to allow the Competition Commission more time to consider the potential patient benefits.

    This is the first merger between two NHS Foundation Trusts to be examined by the CC following the enactment of the Health and Social Care Act 2012, which confirmed the Office of Fair Trading and CC’s roles in assessing the competition aspects of mergers involving foundations trusts.

    Summary of the findings

    The CC has provisionally concluded that the merger would lead to patients losing choice in:

    • 20 elective inpatient services.
    • 36 outpatient services.
    • One non-elective inpatient service (maternity comprising obstetrics and gynaecology).
    • One private service (cardiology).

    However, the CC has provisionally found that the merger is not likely to substantially reduce competition in relation to:

    • The supply of non-elective services.
    • Community services.
    • Any future tenders by commissioners.

    The CC will now consider evidence relating to any benefits arising from the merger and possible remedies.

    Counterfactual 

    The CC considered the situation that would have prevailed absent the merger (the counterfactual). Its provisional conclusion is that the counterfactual is the pre-merger situation in which neither party would have exited the market and that both would remain as stand-alone entities.

    Market definition

    RBCH and PH both provide a range of hospital based services including elective and non-elective secondary inpatient care, specialised clinical services and community and outpatient services. These services can be classified as specialties, which can be further sub-divided into sub-specialties. The CC has provisionally concluded that: 

    • Each specialty constitutes a separate market.
    • Within each specialty:
    • Outpatient and inpatient activities are separate markets.
    • Outpatient services are a single market including services provided in community settings; but certain services provided only in the community are separate markets.
    • Non-elective and elective services are separate markets.
    • Private services are separate markets from NHS services. Within private services, each specialty constitutes a separate market and with each specialty, markets can be defined along inpatient and outpatient lines (as with NHS services).

    In terms of the geographic market, the CC has provisionally determined that the catchment area is a drive time of 17 minutes for RBCH and of 22 minutes for PH.

    Competitive effects of the merger

    The CC concluded that the parties overlapped in the provision of:

    • Inpatient services in 20 elective specialties;
    • Inpatient services in 21 non-elective specialties; and
    • Outpatient services in 36 specialties.

    Elective services (outpatient and inpatient services)

    The CC found that the parties are the closest alternatives to one another for patients and GPs in the local area and that there is little overlap between the catchment areas of the parties and any other acute hospital.  The CC further found that the parties each have an incentive to compete for referrals.  Going forward, the CC concluded that, absent the merger, competition between the hospitals would strengthen.  The CC felt that this loss of actual competition would result in less pressure to maintain or improve quality of overlap specialties and at the hospital level.  Accordingly, the CC provisionally concluded that the merger would lead to a substantial lessening of competition (“SLC”) in the 20 overlap specialties and 36 overlap outpatient specialties.

    Non-elective services

    The CC found that there were areas of substantial overlap between the parties in relation to the provision of non-elective services.  However, many patients do not have a choice of hospitals because they are transported by emergency services according to ambulance protocols. For those that are not, there is no guarantee of choice (unlike elective services).  Accordingly, the link between quality and choice was likely to be less clear than with elective services.  Therefore, the CC provisionally concluded that the merger was unlikely to result in a reduction of competition in non-elective services.

    Maternity services

    The CC found that the parties were the closest alternatives to each other in their catchment area and that absent the merger the incentive for PH to attract more expectant mothers would increase.  Accordingly, the CC provisionally concluded that the merger would be likely to lead to an SLC in maternity services

    Community services

    Other than certain maternity services (see above) and a general dermatology outpatient service (see above), there is no material overlap between the parties’ in the supply of community services. Therefore, the CC provisionally concluded that the merger would not reduce competition.

    Private services

    The CC found that the parties overlapped in the provision of a number of private services. The CC considered that for most of these services, the parties were likely to be constrained by competing providers of private services, who offered the same services in larger volumes than the parties in close proximity to the parties. However, the CC found that there no major alternative competing providers of inpatient cardiology services in the relevant area who would be likely to constrain the merged entity. Therefore, the CC provisionally concluded that the merger would be likely to give rise to an SLC in relation to the supply of inpatient cardiology services.

    Relevant customer benefits

    The parties had made a submission on the relevant customer benefits flowing from the merger.  Relevant customer benefits for these purposes are benefits to customers in the form of lower prices, higher quality, greater choice or greater innovation.  In line with normal practice, the CC will consider these claimed efficiencies in the context of their analysis of possible remedies which is the next stage of the process.

    Remedies

    The CC will now consult on remedies to address the competition issues it has provisionally identified. It is considering the following options:

    • Prohibition of the proposed merger.
    • Alternative remedies to prohibition – structural or behavioural (for example, a partial prohibition).

    Comment

    The UK Government requires all NHS Trusts to have achieved Foundation Trust status by April 2014. NHS Trusts can do this either on their own or by merging with an existing Foundation Trust. Furthermore, a number of Foundation Trusts are expected to merge because of the financial challenges facing the NHS. Accordingly, the CC’s provisional findings are an important guide for NHS hospitals considering merger opportunities.

    The exceptionally long duration of the OFT and CC review and the detail of the analysis reflect the fact that this is a test case in a new market for the competition authorities.  The analysis in the provisional findings reflects the CC’s normal methodology for substantive assessment, albeit in a novel market.

    The next step is for the CC to consider the relevant customer benefits claimed by the parties and, in particular, whether relevant benefits may be lost as a result of the implementation of a given remedy.  If so, it may amend the remedy or, in rare cases, it may decide no remedy is appropriate.  In other words, a prohibition decision is not yet a foregone conclusion.  The next stage of the process and the CC’s treatment of relevant customer benefits will be crucial to the final outcome.

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