The UK Competition Commission (the CC) has provisionally found that there are anti-competitive features in the supply or acquisition of privately-funded health care services, which give rise to adverse effects on competition. If the CC’s provisional position is indicative of its final position, private healthcare providers—in particular, private hospital groups—may face significant changes in how they do business in the United Kingdom, and potential new entrants may find additional opportunities.

On 28 August 2013, the UK Competition Commission (the CC) issued provisional findings in its on-going market investigation into privately-funded health care services in the United Kingdom. The CC provisionally found that there are anti-competitive features in the supply or acquisition of these services, mainly due to the market structure, certain incentive schemes used by private hospitals and information asymmetries. The CC found that these features led to adverse effects on competition, which were estimated to cost patients between £173 million and £193 million per year between 2009 and 2011, which is equivalent to approximately 10 to11 per cent of the revenues of the three leading private hospital operators in the United Kingdom.

In view of this finding, the CC proposed the imposition of a variety of structural and behavioural remedies. If the CC’s provisional position is indicative of its final position, private healthcare providers—in particular, private hospital groups—may face significant changes in how they do business in the United Kingdom, and potential new entrants may find more opportunities for meaningful entry.

Background

Under the UK Enterprise Act 2002, the UK competition authorities can investigate a market to determine if there are features that prevent, restrict or distort competition, and thus give rise to an adverse effect on competition. Market investigations are primarily initiated by the UK Office of Fair Trading (OFT), and can be referred to the CC if the OFT has reasonable grounds to suspect that features in the market under investigation adversely affect competition in the United Kingdom. If the CC finds there are features that have an adverse effect on competition, the CC is obliged to intervene to remove or mitigate the concerns, for example, by ordering structural remedies or imposing behavioural remedies. In this case, the OFT referred the privately-funded health care services market (in particular, the supply or acquisition of these services) to the CC for a market investigation in April 2012.

The CC’s provisional findings represent only its initial conclusions and views on possible remedies. Its final report will come after it considers comments from interested and third parties (due 20 September 2013) and a hearing on remedies (currently scheduled for September/October 2013). The CC must publish its final report by 3 April 2014. Nevertheless, the provisional findings and proposed remedies provide a strong indication of the direction the CC is likely to take.

Provisional Findings

The CC’s investigation focused solely on the privately-funded health care sector. This is a relatively small part of the overall UK health sector, most of which is funded by the National Health Service (NHS).

The majority of consumers of privately-funded health care services in the United Kingdom have private medical insurance, typically provided by their employers. The remainder usually “self-pay” for the services they use. Although the CC acknowledged that each NHS interacts with the privately-funded health care sector in a number of ways, the CC considered the markets for privately-funded health care as separate from the NHS.

On a national basis, the CC observed characteristics of privately funded healthcare that signal high concentration among hospital groups and private medical insurance providers. According to the CC, the five main hospital groups—on a national basis—account for approximately 70 per cent of privately funded health care revenues in the United Kingdom and the four largest private medical insurance providers account for approximately 87 per cent of UK insurance premium revenue. In contrast, the CC observed that the provision of consultant services is highly fragmented. The CC also observed that new entry is very costly, citing the high costs associated with designing, building and equipping a private hospital to provide a full range of services. The CC also noted that the five main private hospital groups all show some degree of excess capacity and generally static revenues since 2005. In view of these characteristics, the CC concluded that high barriers to entry exist for full-service hospitals.

However, the CC analysed the competitive situation much more narrowly, focusing in particular on private hospitals that provide inpatient care in a particular (local) catchment area. The CC stated that there are other relevant markets, including a market for each specialty offered by a private hospital, as well as markets for day-patient and outpatient care. The CC focused on the provision of inpatient care because i) this accounted for a substantial share of revenue generated by private patients, (ii) the market for inpatient care is more concentrated and (iii) barriers to entry are especially high (as compared to day- or outpatient care). In the CC’s view, hospital operators face weak competitive constraints in many local markets, including central London. 

The CC considered several theories of harm. It ultimately concluded that three key areas of harm adversely affect competition in the United Kingdom. The CC found that

1. Competition is adversely affected because the markets are highly concentrated among hospital operators, with entry unlikely due to high sunk costs. In the CC’s view, this means that self-pay patients face higher prices due to a lack of competition in the local market. Insured patients also face higher prices because their insurers lack sufficient market power vis-à-vis hospital operators. More specifically, the CC cited the ability of private hospital operators to offer access to their hospitals on a bundled “all in” basis, leveraging market power at the local level into their negotiations with insurers, which take place on a nationwide basis. Although the CC conceded that private insurers also have market power, the CC concluded that the hospital operators’ greater market power vis-à-vis private insurers leads to patients paying higher prices.

2. Private hospital operators offer incentive schemes to consultants to encourage patient referrals for treatment at their facilities. The CC concluded that this adversely affects competition because it distorts hospital choice and treatment options, and can lead to over-diagnosis and unnecessary procedures being performed.

3. Patients have insufficient public information concerning performance and fees of private hospitals, on the one hand, and consultants on the other hand. This lack of publicly-available information reduces competition on the basis of quality and choice because patients are not able to effectively choose the private hospital in which to be treated, or the consultant by whom to be treated.

In summary, the CC provisionally found that competition in privately-funded health care is adversely affected by the concentrated market structure, the conduct of private hospital operators and a lack of public information available to patients concerning private hospitals and consultants.

To address the observed harm to competition, the CC has identified seven distinct potential structural and behavioural remedies. They include possible structural remedies, such as the divestiture of hospitals in certain markets with insufficient competitive constraints and a variety of possible behavioural remedies. The CC identified a possible eighth remedy—price controls—but indicated that it is not minded to pursue this remedy at this time. 

Implications

Neither the CC’s decision nor the proposed remedies are final, and the CC will consider comments received from parties under investigation and any other interested persons by 20 September 2013.

Although they are not final, the provisional findings issued on 28 August indicate that the CC is prepared to intervene and significantly change the market dynamics in privately-funded health care by changing the market structure and the rules that apply to market participants.

This would dramatically change the terms under which privately-funded health care is delivered in the United Kingdom, and could potentially facilitate new entry. In addition, the changes currently under consideration in the United Kingdom could provide a basis for action in other EU Member States, where privately-funded health care could fall under the microscope.