It was unsurprising to see that the Office of Fair Trading has chosen to refer the private healthcare market to the Competition Commission.
The full OFT report is here: I have copied the executive summary below for quick reference.
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It has been an open secret for many years that there is opaque pricing and very poor comparative data on the performance of private provision. Insurers have been trying to get traction on consultants and hospital chains for years without particular success.
The private healthcare market has had the car insurance industry's repairs problem: 'is it an insurance job, or are you paying for the work yourself?', garage staff will ask. This was neatly shown in 2009, when insurer WPA took on some, erm, curious pricing by Nuffield Health. This article contains the lovely quote from Nuffield's chair, who told the health select committee "'the insurers set our prices". Ahem.
Occasionally, this has made it out into public view, as when BUPA had a go at knee arthroscopy rates in 2011, insisting on referrals being reviewed, or a dispute with BMI.
A well-judged kicking from the Competition Commission might do interesting things to the dynamics of the provision market in the UK. Their website says "The Enterprise Act enables the OFT (and the sector regulators) to investigate markets and, if they are concerned that there may be competition problems, to refer those markets to the CC for in-depth investigation. The CC is required by the Enterprise Act to decide whether any feature or combination of features in a market prevents, restricts or distorts competition, thus constituting an adverse effect on competition (AEC). Market investigations enable the CC to undertake a broad, in-depth assessment of the complexities of a market and focus on the functioning of a market as a whole rather than on a single aspect of it or on the conduct of an individual firm within it.
"If the CC finds that features of a market are harming competition, it must seek to remedy the harm either by introducing remedies itself or recommending action by others".
OFT market study of private healthcare
1 EXECUTIVE SUMMARY
1.1 Following a consultation, the OFT has decided to refer the market for privately funded healthcare services in the UK (PH) to the Competition Commission (CC) for a market investigation. This report sets out the OFT's reasons for referring the market.
1.2 The market investigation reference follows an in-depth market study of PH by the OFT launched in March 2011, and a consultation document on a proposal to refer the market which was published in December 2011.
1.3 The market for PH encompasses a range of medical treatments which are privately funded, either directly by patients or through their private medical insurance (PMI) policies, and provided to patients by consultants, medical and clinical professionals in private hospitals, clinics or units (PH facilities).
1.4 The total value of the market for acute PH in the UK was approximately £5 billion in 2010. Private hospital and clinics account for the largest part of this figure, generating an estimated £2.89 billion in revenue during 2010.1 Approximately 78 per cent of acute PH purchases are made through patients' PMI policies.2 On average 15.8 per cent of people are covered by such a policy in the UK (PMI funded patients).3
1.5 The market for PH is likely to be an area of growing importance to the UK economy given, in particular, that demand for healthcare services is forecast to grow in line with an expanding and ageing UK population.4 It may also be increasingly important to the delivery of NHS services
Following the passage of the Health and Social Care Act enabling providers of PH to play a larger role in delivering NHS treatment.
1.6 Through market studies, the OFT is able to undertake a holistic analysis of markets, drawing on its experience and understanding of competition and consumer problems across a wide range of markets. In addition to this, the OFT has developed specific expertise on competition and consumer problems across a range of health markets, including pharmaceuticals and NHS equipment. It has previously considered the PH market in 1999 and in recent merger decisions in 2010.
1.7 While the focus of this market study has been on privately funded healthcare for private patients, the OFT has also been aware of the developing linkages between PH and NHS services. It has focused, therefore, where appropriate and relevant, on setting out the OFT’s analysis and conclusions in this report with a view to assisting those bodies with ongoing and new roles in regulating or reviewing healthcare services, such as Monitor as the sector regulator for health.
1.8 The PH market clearly provides a valuable service which benefits patients. However, having considered carefully the consultation responses, the OFT considers that there are a number of features of this market that, individually or in combination, prevent, restrict or distort competition. The consequence is that therefore the threshold test for making a market investigation reference (MIR) to the CC is met.
1.9 The OFT considers that the features of the PH market outlined below, in particular, the combination of information asymmetries, high concentration and barriers to entry in the PH market appears to result in reduced choice for patients. They may also restrict competition between PH providers and between consultants by impairing the ability of patients, GPs and PMI providers to choose between competing service providers, including new entrants, on the basis of superior quality and better value for money. This might be expected to result in higher prices and lower quality of services for patients and innovation in the PH market. The consumer harm that the features generate affects all PH patients to some extent.
1.10 Information asymmetries: As analysed in chapter 5, the OFT considers that there is a shortage of accessible, standardised and comparable information provided to patients and their advisors in relation to the quality of PH facilities and of consultants. There also appear to be difficulties for PMI funded patients in assessing the risk of shortfall from particular consultants, whereby a consultant's fees exceed the benefit maxima that the patient's PMI provider will reimburse resulting in the potential for an additional payment by the patient. In addition, for self- pay patients, there are difficulties in easily comparing the prices charged by different PH facilities.
1.11 In general, the OFT considers that this shortage of accessible, standardised and comparable information weakens the ability of patients and GPs to drive efficiencies and stimulate enhanced competition between rival PH facilities and between consultants, and may give rise to a dampening of competition in the market overall. The lack of access to information on quality and price for consultants appears to produce a situation where both the patient and PMI provider cannot differentiate between consultant performance and fees in order to judge whether they represent value for money. This may be preventing the development of more flexible, less distortive methods for PMI providers to control consultant costs, whereby patients can choose between consultants on the basis of their respective fees and quality and pay a top-up fee to the consultant, above the maximum provided by their insurance cover, if a patient judges it to be worthwhile.
1.12 Finally, the OFT notes that information asymmetries are a factor across a number of other features examined in this report, including the limits on the ability of PMI providers to exercise buyer power which is examined in chapter 6. The lack of access to comparable quality information on PH facilities may also facilitate a competitive dynamic whereby competition between PH providers is based less on the quality of services provided to patients and, since a consultant often effectively seems to choose at which PH facility the patient is treated, more on attracting consultants to their PH facilities through the use of a variety of contractual and non- contractual incentives. This may increase the cost of PH without necessarily driving improvements in the quality of services provided to patients. The development of consultant incentives is examined in chapter 8.
1.13 Concentration: PH provision appears to be concentrated at the national level. At the local level there appear to be examples of extreme concentration, such as areas where there is no alternative fascia PH facility within a 30-minute drive time of a particular PH facility (solus PH facilities). In addition, the OFT notes widespread concerns raised in submissions in response to the consultation document about the existence of ‘must-have’ facilities. While the OFT has not taken a definitive view on whether particular facilities are ‘must have’, it considers that there are likely to be a number of local markets with a high degree of concentration, such as those areas with only two PH facilities within a 30-minute drive time.
1.14 For the reasons set out in chapter 6, including the desire of patients to be treated locally, there are reasonable grounds to suspect that these levels of concentration restrict competition in the provision of PH.
1.15 The purchasing of PH provider services is also concentrated at the national level. The size of the largest PMI providers appears to provide them with some buyer power in that PH providers are, to an extent, dependent on access to, and inclusion on, the networks of these larger PMI providers for the financial viability of their PH facilities. The emergence of ‘low cost’ PMI networks, open referrals and the recent delisting of hospitals by one of the largest PM providers support the existence of some buyer power at least among the largest PMI providers.
1.16 However, there may be limits on the PMI providers' ability to exercise such buyer power. Firstly, the degree of any such buyer power is likely to vary by size of the PMI provider in terms of its share of subscription income, and it is likely that not all PMI providers are large enough, on this basis, to exercise buyer power. Secondly, any buyer power may be constrained by the need for PMI providers to purchase PH in most local markets, including areas with solus PH facilities as described above, in order that their policyholders can be treated locally. Thirdly, PMI providers are likely to face at least some reputational costs if they carry out a threat to delist or exclude PH facilities from PMI networks. Further, beyond the exclusion of PH facilities from their networks, PMI providers have limited ability to direct patients to different PH facilities since in most cases GPs rather than PMI providers recommend the consultants, and consultants often determine a patient's choice of PH facility.
1.17 The OFT notes that the development of partnership arrangements between the PPUs of NHS/Foundation Trusts and PH providers has the potential to either exacerbate or alleviate any concentration concerns in local PH markets. Local market concentration may increase if a PH provider that is already present in the local market partners with the PPU. This is because the partnering arrangement may lessen the competitive constraint on the relevant PH provider offered prior to the partnering arrangement and reduce choice for PH patients and PMI providers. On the other hand, a partnership arrangement between a PPU and a new PH provider in the local market has the potential to provide a platform for entry and thereby to increase competition. As a result of this market study, the OFT has made a recommendation to the NHS/ Foundation Trusts in relation PPU partnering arrangements.
1.18 Concentration of anaesthetists: As examined in chapter 7, 44 per cent of anaesthetists are part of a group (AG). Prior to, and during the course of, the market study, the OFT received a number of complaints from patients regarding their inability to find an anaesthetist who will charge within PMI provider fee schedules. These complaints have been supported by submissions and evidence from PMI providers as part of the market study that high concentration of AGs in some local markets may raise prices. In the light of these complaints, the OFT suspects that the prevalence of AGs is also a feature of the market which may reduce price competition in local markets (particularly in view of switching costs such as the costs associated with postponing treatment or travelling to an alternative facility).
1.19 Barriers to entry: For the reasons analysed in Chapter 8, the OFT considers that a number of features of the PH market combine to create significant barriers to entry. These are:
• Certain conditions imposed by larger PH providers as part of the recognition of their facilities on PMI networks which may restrict the ability of PMI providers to recognise new entrants attempting to offer competing PH services on their networks. For example, some PH providers impose conditions on PMI providers that they be consulted on the recognition of a new entrant on a PMI providers' network, or that impose price rises on a PMI provider should a new entrant be recognised.
• A combination of the need for wide PMI network recognition and the ‘consultant drag’ effect. As many consultants prefer to treat most of their private patients at one main PH facility, and patients are insured by different PMI providers, new entrants need to be recognised on all of the main PMI networks in order to attract a sufficient number of consultants to practice at their facility.
• Incentives paid directly or indirectly by PH facilities to consultants to encourage them to treat all, or a higher number, of their patients at their facility. These incentives may further discourage consultants from treating patients at the facilities of new entrants, attempting to offer competing PH services.
• In addition, in this context, the OFT notes the possibly emerging trend of the provision of financial incentives to GPs by PH providers with local market power, in order to encourage those GPs to refer patients to the PH provider's facilities. This trend may also have the potential to develop as a barrier to entry.
1.20 The OFT notes that many of these features are intrinsically linked to the other aspects of this market examined in chapters 5 and 6. For example, the shortage of comparable quality information on PH facilities, examined in chapter 5, may make it harder for new PH provider entrants to establish a reputation for quality in the market by which to attract consultants and patients away from incumbent PH providers.5
1.21 This combination of concerns around information asymmetries, aspects of local concentration and wider barriers to entry, either individually or in combination, has the potential to prevent, restrict or distort competition in the PH market. The OFT considers that these significant underlying features of the PH market are more appropriately investigated further by way of a MIR and that the CC has recourse to the range of remedies which may prove appropriate if the CC concludes that any features of the market have an adverse effect on competition. Such remedies could include, for example, compelling the provision of certain information, the imposition of supply or pricing obligations on certain PH facilities, or potential bans on the imposition by PH providers of certain types of contractual provisions.
1.22 The OFT considers that the statutory test in section 131 of the Enterprise Act 2002 for making a reference is met and, taking into account the relevant criteria set out in the OFT's guidance document on MIRs, has concluded that the evidence points in favour of exercising the OFT's discretion to make a reference to the CC for the supply and acquisition of PH. These reasons are set out in chapter 10.
Conclusion on the reference
1.23 Having regard to all the evidence received during the market study and the consultation, the OFT finds that there are reasonable grounds to suspect that there are features of the PH market which, both individually and in combination, prevent, restrict or distort competition in the UK. The statutory threshold test for a reference to the CC is therefore met.
1.24 Furthermore, the OFT considers that it is appropriate to make a reference to the CC, considering in particular that:
• The PH industry is of growing importance to both the nation’s population and economy.
• There is a reasonable prospect of finding appropriate remedies if the CC concludes that there are competition concerns.
• In all the circumstances, an MIR is the most appropriate tool for investigating and potentially remedying the market features identified in this first phase enquiry. Further, the CC has the investigatory and remedial scope and powers needed to analyse and address (if appropriate) these features.
1.25 A number of the larger PH providers made submissions in response to the consultation document opposing a reference. In this context, the OFT notes that the threshold test in section 131 requires the OFT to have reasonable grounds to suspect that there are features of a market that may restrict, distort or prevent competition. While the OFT accepts that it has a discretion on whether or not to make a reference in circumstances where the threshold test is satisfied, this is exercised within the context of the first phase enquiry. The OFT is satisfied that it s appropriate, following this first phase enquiry, for there to be a detailed investigation of this market, and the appropriate body to carry out that investigation is the CC. The making of this MIR does not imply any pre-judgment as to what the CC's findings or conclusions will be.6
1.26 The OFT has therefore decided to make a reference to the CC under section 131 of the Enterprise Act 2002 for an investigation into the PH market in the UK. This confirms the OFT’s proposed decision.
1.27 The terms of reference are set out in Annexe A.
Other market study findings
1.28 This report makes two recommendations to address particular issues that arose in the course of the market study.
1.29 First, responding to concerns expressed by consumers as to the level of extra payments sought from some consultants that are not covered under their PMI policies (shortfall payments), the OFT has engaged with the Financial Services Authority (FSA) on this issue. As a result, the Association of British Insurers (ABI) has confirmed to the FSA, on behalf of its members, that PMI providers will either cover the total cost so that no shortfall arises, or will make clear the possibility of a shortfall payment as a result of the limits which apply to the amount payable under their policies. The aim will be to ensure that PMI providers make the risk of shortfall payments clear to their customers both at the point of sale and at the time a patient makes a claim under a PMI policy. The OFT welcomes this development.
1.30 Second, noting the development of partnership arrangements between PPUs of NHS/Foundation Trusts and PH providers, as discussed above, the OFT has made a recommendation to the NHS/Foundation Trusts when seeking to agree partnership arrangements to consider whether
PPUs may be at a potential competitive advantage in PH markets due to any implicit, non-market benefits they could receive from their connections to NHS/ Foundation Trusts. Chapter 9 therefore considers how the principles of competitive neutrality might apply to publicly funded organisations competing in the PH market.
It was unsurprising to see that the Office of Fair Trading has chosen to refer the private healthcare market to the Competition Commission.