Trusts need to provide evidence to the Competition and Markets Authority when merger and acquisitions are being considered. It is a complex system for NHS providers looking to relieve pressures and meet targets, say Temi Akinrinade and colleagues
Mergers and acquisitions are often viewed as important strategic options for NHS providers seeking to relieve increasing financial and clinical pressures, and meet quality, service and safety targets.
However, following the Competition Commission’s decision to block the merger between Royal Bournemouth and Christchurch Hospitals and Poole Hospitals foundation trusts last year, providers that are contemplating these transactions face hurdles which may appear difficult to assess.
‘Providers contemplating mergers and acquisitions face hurdles which may appear difficult to assess’
In order to relieve some of these concerns and help NHS providers navigate competition investigations, the Competition and Markets Authority - which took over many of the functions of the Office of Fair Trading and the commission on 1 April - has recently published guidance, addressing among other things, the issues it will consider when determining whether a merger should be cleared.
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What mergers do to competition
Competition in the NHS occurs almost always on quality rather than price as most services are covered by fixed national tariffs and the payment by results rules.
Following a number developments that have facilitated choice for patients and commissioners, there is now a greater focus by providers of healthcare services on improving services to attract patients.
‘Having a good choice of NHS providers for the same service means they are more likely to compete to provide the best offering’
The CMA is seeking to ensure mergers are in the overall interest of patients and will, therefore, block mergers that substantially reduce competition, leading to worse outcomes for patients and/or commissioners, which cannot be resolved through appropriate remedies.
NHS providers are subject to a range of regulations relating to quality which has prompted questions as to how competition can influence levels of quality.
The competition authorities, however, have taken the view (in its assessment of the Royal Bournemouth and Poole merger) that regulation, whilst important in delivering minimum quality standards, does not lead to all providers delivering the same level of quality.
Moreover, that incentive remains to exceed minimum regulation standards, which is in the interest of patients.
Where NHS mergers involve parties providing “overlapping services” (i.e. the same services), the authority’s analysis will generally focus on two issues:
- Whether prior to the merger, the merging providers exert significant competitive pressures on each other, competing closely to win the same patients and contracts, thus compelling each other to improve quality and value for money. If so, this rivalry may be lost (or diminished) post-merger leading to worst outcomes for patients and commissioners (for example, reduction or lack of improvement in quality in services or higher prices where services are not subject to a national price).
- If the merged entity attempted to reduce quality post-merger, whether patients and commissioners would be able to “discipline” it by switching to the alternative providers in sufficient numbers to make the quality reduction or price increase by the merged provider unprofitable. If there are limited suitable alternative providers post-merger, the merged entity would be less constrained in this regard.
What the CMA looks at
The guidance identifies a wide body of evidence that the CMA may consider when examining these issues, which includes whether:
- the merging providers supply the same specialties in the same geographical area (which have been defined by reference to drive times) on the basis that location can be important in patients’ choice of hospital;
- GP patient referral data indicate that GP surgeries refer a large proportion of patients to both merging providers and only a limited number to alternatives, indicating that the merger might reduce patient choice;
- historical and upcoming supply tenders show the merging providers are frequently shortlisted for the same contract, implying commissioners consider them as important alternatives to each other;
- the merging providers’ internal documents - such as marketing strategies and business plans - or surveys indicate that they are each other’s closest competitor;
- third parties - such as patient groups, commissioners and other providers - see the merging parties as important alternatives, and do not consider other providers as offering comparable services. This might be assessed through surveys or other evidence indicating how choices are made among alternative providers (for example, evidence of where patients went in the event of a temporary closure);
- alternative suppliers are capacity constrained, reducing the switching ability of patients and commissioners post-merger;
- entry and expansion barriers - such as investment costs - are too high for new or existing providers to profitably start or increase service supply to provide alternatives to the merged entity; and
- the negotiating power of commissioners is sufficiently strong to prevent any incentive, post-merger, for the merged entity to reduce quality. In particular, whether commissioners could act to prevent a decrease in quality or increase in price at the margins by switching (or threatening to switch) to another provider or otherwise discipline the merged provider.
The CMA considered many of these factors when it cleared the merger between Frimley Park, and Heatherwood and Wexham Hospitals foundation trusts, announced in May, relying primarily on GP patient referral data, tender analysis and third party responses, which generally supported the merger.
Assessing customer benefits
Proposed mergers, which substantially reduce competition, may still be cleared by the CMA at the initial first stage of its investigation if they generate “relevant” benefits for patients and/or commissioners that outweigh the harm from lost competition.
These benefits do not need to accrue to the same patients which are harmed by the merger. For example, maternity patients may be harmed by the merger, while cardiology patients benefit.
Instead, the CMA will consider whether the benefits outweigh the harm in aggregate.
The CMA will consider evidence put forward by the merging parties, together with Monitor’s advice on the benefits accruing to patients, which are attributable to the merger. It will consider the magnitude of the identified benefits and the probability of them occurring, and assess whether they outweigh the adverse effects from a loss of competition (taking into account the scale of this loss and the probability of it occurring).
Benefits will only be considered “relevant” if the following conditions are met:
- generate benefits in the form of lower prices, improved quality or choice, and increased innovation, including financial savings arising from efficiencies. Merging parties must provide evidence to support their claims;
- the benefits must accrue within a reasonable period, assessed on a case by case basis. The CMA is likely to allow larger scale projects (for example, merging of maternity wards) a longer implementation timescale;
- the benefits must be deliverable. The CMA is more likely to be persuaded of this if merging providers submit detailed and advanced implementation plans setting out, for example the rationale and timescales. The incentives of the merging providers to implement the benefits is also considered relevant to the likelihood of implementation, and the CMA indicates that it will take into account the competitive constraints post-merger in this regard. Even if relevant customer benefits can be shown, therefore, the CMA may doubt the realisation of these benefits if the merged entity does not face sufficient competitive pressure to drive implementation; and
- the benefits must be unlikely to accrue absent the merger. For instance, merging parties must be able to prove that neither provider would have the ability or incentive to achieve the benefits as standalone entities, or through other less anticompetitive transactions (such as a merger with an alternative provider). This is likely to be a tricky area as services reconfiguration due to the merger (which will deliver patient benefits) are likely to be achievable through other means than a full merger, and therefore the assessment will need to focus on the likelihood of achieving these gains through other means. In short, the availability of an alternative option in principle does not mean it will occur absent the merger).
If a merger does proceed to a second stage investigation, customer benefits are taken into account as part of the consideration of any remedies to identify competition problems (for example, a remedy might be modified to ensure retention of a relevant customer benefit).
In the Royal Bournemouth and Poole proposed merger, the commission concluded that none of the benefits claimed by the parties sufficiently satisfied the above conditions, and accordingly the only effective remedy was to prohibit the merger.
In particular, it noted that:
- project plans lacked clear explanations of how it would benefit patients;
- appraisal and implementation plans were not sufficiently advanced;
- NHS financial pressures were likely to constrain the ability to achieve the claimed benefits; and
- many of the service improvements were considered to be achievable without the merger.
In this regard, Monitor and the CMA encourage merging parties to engage with Monitor at an early stage (even as early as comparing possible strategic options for transactions) in order to obtain informal advice on the likelihood of the merger generating relevant benefits.
The CMA will not commence an investigation until it considers that the merging providers have provided sufficient information on relevant customer benefits or indicated in the merger notification that they will not be submitting any in phase 1.
Mergers involving failing NHS providers
In order to determine whether a merger substantially reduces competition, the authority will compare competition in the merger scenario against the “counterfactual”, that is, competition in a situation where the merger had not taken place.
The CMA will generally consider the counterfactual by reference to prevailing market conditions. However, where compelling evidence shows that prevailing pre-merger conditions are unlikely to persist in the absence of the merger, the CMA may adopt an alternative.
‘Many NHS mergers are motivated by one or more of the providers being in clinical or financial difficulties’
Many NHS mergers are motivated by one or more of the merging providers being in clinical or financial difficulties.
In these circumstances, merging providers often argue that these problems are so significant that the appropriate counterfactual is one where, absent of the merger, one merging provider would exit the market, or would remain in the market but as a substantially weaker competitor.
Both circumstances could reduce any potential loss in competition and, accordingly, the likelihood of the merger being anticompetitive.
However, the “exiting firm scenario” is very difficult to prove.
In order for the CMA to accept such a counterfactual, merging parties must prove that:
- the failing NHS provider would exit the market if the merger does not take place;
- there would be no alternative, less anticompetitive purchasers; and
- in the event that the failing NHS provider exited the market, patients and commissioner contracts would be awarded to the other merging party.
In the Frimley Park and Heatherwood merger, the CMA did not accept the claim that Heatherwood and Wexham - placed in special measures by Monitor - would exit the market absent of the merger because the parties did not submit compelling evidence.
However, the CMA did account for Heatherwood and Wexham’s financial and clinical difficulties in its competitive assessment.
The Competition Commission also considered it unlikely that Poole Hospital would be put into special administration, and that its services would exit the market in the foreseeable future, taking into account the likely application of Monitor’s publicly administrated failure regime for NHS hospitals.
This regulatory context and the treatment of an NHS provider plays a role in the assessment of the counterfactual.
To merge or not to merge?
One tension in the healthcare sector is that conventional analytical approaches to market and competition analysis which assess substitutability, in part by reference to catchment area overlap, are likely to identify competition issues where hospitals are situated close to each other. Conversely, this provides a strong base for service reconfiguration that should yield benefits to customers.
‘Providers should seek to engage with Monitor at the earliest opportunity in order to obtain guidance’
Despite the commission’s decision to block the Royal Bournemouth Poole merger last year, it is clear from the regulators’ decisions that if a proposed merger does not give rise to a material reduction in competition, the CMA will clear it without the need to carry out efficiencies analysis.
By contrast, if a proposed merger would result in material overlaps, merging parties (alongside their advisers) should seek to ensure they are able to put forward a strong case in respect of patient benefits arising out of the merger, and that they engage with Monitor at the earliest opportunity in order to obtain guidance.
Proving that, benefits to meet the required test (that they accrue within a reasonable time and would be unlikely to accrue without the merger) can be challenging.
Monitor’s view is that parties need to assemble clear evidence on benefits including internal assessment and implementation plans setting out, for example rationale and timescales.
Moreover, the “exiting firm scenario” is very difficult to prove in the context of NHS mergers, as the CMA will take into account the regulatory framework as well as Monitor’s publicly administrated failure regime for NHS hospitals.
Here too, providers should seek to engage with Monitor at the earliest opportunity in order to obtain guidance.
This will assist NHS providers to determine whether a merger is the most appropriate strategic option, and will help them plan and execute mergers that deliver real benefits to patients and commissioners.
The authors of this article work in Ashurst LLP’s competition and EU law department in London. Joanna Christoforou is a senior associate specialising in all aspects of UK and EU competition law, and has previously been seconded to the NHS Cooperation and Competition Panel (now Monitor). Emily Clark is a director economist providing economic advice and analysis in relation to a range of competition matters, including mergers and acquisitions. Temi Akinrinade is an economist providing economic insight and quantitative expertise across a variety of competition matters. She previously worked as an analyst in the Department of Health