UK Merger Control v NHS Hospital Mergers Patient and Commissioner Benefits Anyone?

Transcription

1 July 2014 INSIGHT Healthcare UK Merger Control v NHS Hospital Mergers Patient and Commissioner Benefits Anyone? Bruce Den Uyl, Mat Hughes and John Maloney, AlixPartners Monitor, the sector regulator for health services in England, has acknowledged that there is considerable concern as to the impact of UK merger control on NHS foundation trusts seeking to reorganise through a merger. These concerns arise in large part from the UK Competition Commission s (CC) decision in October 2013 to prohibit the merger of the Royal Bournemouth and Christchurch Hospitals NHS Foundation Trust (RBCH) and Poole Hospital NHS Foundation Trust (PH), with the CC finding that this merger would not lead to any relevant customer benefits. This paper considers the assessment of relevant customer benefits under UK merger control, and the evidence required for compelling submissions. Is UK merger control a real barrier to mergers involving NHS Foundation Trusts? The UK Competition and Markets Authority (CMA) is now responsible for both Phase 1 merger decisions and for detailed Phase 2 merger reviews and decisions, taking over the roles of the Office of Fair Trading and CC respectively. The CMA published draft guidance on NHS mergers in May This summarised the competition concerns in terms of some NHS mergers adversely affect[ing] patient interests by reducing incentives for the providers to maintain and improve services for patients thereby leading to reduced quality or choice for patients or commissioners. Notwithstanding this, the CMA optimistically asserts that the majority of NHS mergers will not raise competition concerns and therefore may not require investigation by the CMA. However, in our view it is likely that many potential NHS foundation trust hospital mergers will be investigated under UK merger control for a number of reasons. First, where any organisation focuses on serving customers in local areas, any competitive rivalry will tend to be local as the CC held was the case in proposed RBCH/PH merger. This has been a consistent theme of UK merger control assessments across a diverse range of service sectors, from grocery retailing to cinemas to bus services. If there are few local providers, competition concerns may arise even if local competition is predominantly on non-price matters (such as quality), with uniform prices being set throughout the UK. Second, depending on a consideration of alternative remedies and relevant customer benefits, the CC has proved willing to prohibit mergers or require divestments in many cases even where the CC has concluded that a substantial lessening of competition would only affect a minority of the parties turnover. Indeed, the CC prohibited the RBCH/PH merger, notwithstanding that the substantial lessening of competition was limited to services which accounted for only 21-30% of each hospital s clinical income. Will customer benefits make a difference? Whilst customer benefits fall for consideration at three stages of UK merger control assessment, the harsh reality is that they have rarely influenced merger decisions since the merger provisions of the Enterprise Act 2002 (the EA) came into force in June

2 1. Rivalry enhancing efficiencies In either a Phase 1 or Phase 2 investigation, the CMA may decide that the merger does not lead to a substantial lessening of competition due to rivalry enhancing customer benefits. However, Monitor s draft guidance, published in March 2013, on customer benefits indicates that it will not advise on the existence of such benefits, since this is part of the substantial lessening of competition assessment undertaken by the CMA. There are very few Phase 1 decisions in which the rivalry enhancing customer benefits have been found and only one Phase 2 case which arose in connection with the healthcare risk waste joint venture (Tradebe/Sita (2014)). In this case, the CC s concerns were alleviated by the strength of a much large competitor, SRCL, as a rival to the joint venture, and as merger efficiencies would enhance rivalry by enabling the parties to bid more competitively. 2. Relevant customer benefits outweigh the substantial lessening of competition and any adverse effects One exception to the CMA s duty to refer a merger for detailed Phase 2 investigation is if it would lead to relevant customer benefits which outweigh the substantial lessening of competition and any adverse effects. However, this exception has never been applied in any sector since the EA came into force. Nevertheless, in January 2014, Nelson Jung (Director of Mergers at the CMA) and Sophie Purressel (who leads the healthcare mergers team at the CMA) have expressed the personal view that NHS mergers may lend themselves to first-phase clearances based on evidenced relevant customer benefits. 3. Relevant customer benefits may influence the appropriate remedies to adopt If, following a detailed Phase 2 investigation, the CMA concludes that a merger may be expected to lead to a substantial lessening of competition, then it will have regard to relevant customer benefits (including price, quality, choice and innovation in any market in the UK) in considering the appropriate remedies (if any) to adopt. However, any such relevant customer benefits need to be likely to accrue within a reasonable period and unlikely to accrue without that or a similar substantial lessening of competition. In fact, since the EA came into force, relevant customer benefits have only explicitly influenced the CC s choice of remedy in two cases Macquarie UK Broadcast Ventures/National Grid Wireless (2008) and Imerys/Goonvean (2013). The hunt for relevant customer benefits A potential challenge to hospitals developing highly detailed merger plans which fully appraise customer benefits arises due to their obligations to consult before reconfiguring their services. However, in RBCH/PH, the CC was clear that hospitals did not need to have consulted, reached final decisions or implemented their plans. However, the CC did indicate that it expected the parties to have: identified their preferred proposal and set out the evidence of need for change; established the groups necessary to evaluate the benefits (such as a clinical advisory group, commissioner review group etc.); developed a model of care, reflecting its consultation with these groups; produced an assessment of the clinical benefits/dis-benefits, and assessed the financial/economic viability of the plans (the CMA s draft guidance reiterates these points.) Hospitals will need to have a detailed implementation plan, which sets out which clinical services will be developed/ expanded, relocated and/or consolidated, including detailed timelines, and to have paid close regard to the financial/ economic implications of this integration plan. Monitor s draft guidance emphasises the importance of such implementation plans, and that it is likely to give more weight to them when they have been scrutinised by independent third party experts. The Devil is in the detail : What efficiency claims might make the difference? Monitor s draft guidance sets out a non-exhaustive list of different types of potential customer benefits: 1. Rollout of best practice across the merged trust, but: these benefits must be demonstrated in terms of the specific practices that will be rolled out, the timeframe envisaged, and which services and patients will be affected; and it is necessary to consider why these practices cannot be implemented independently by the merger parties. 2. Reconfiguration/integration of services, but it is necessary to consider: in detail the proposals, services and patients affected, the benefits to patients and the timetable for these benefits to be delivered; and why these benefits cannot be achieved by the parties independently, or through a service level agreement) or led by commissioners. 2

3 The CC s analysis in the RBCH/PH case provides a good illustration of the difficulty in establishing the first of these requirements. Firstly, the benefits in question need to be a likely consequence of the merger. The CC accepted that a new maternity unit would be a benefit in the RBCH/PH case and one that was unlikely to accrue in the absence of the merger. However, it concluded that it was unlikely that a new unit would be built within the next five years given that no final decision had been made, the hospitals would be under financial pressure and there was no clear plan for the new unit. Secondly, reconfiguration/integration may yield dis-benefits as well as benefits. In the RBCH/PH case, the parties proposed a reconfiguration of their Accident and Emergency ( A&E ) services, so that there would be a major and minor A&E unit, with the major A&E unit having a dedicated emergency theatre 24 hours a day, seven days a week. The CC observed that this might have dis-benefits as well as benefits, which had not been assessed as no detailed model of care had been prepared. Commissioners were therefore unable to support the specific reconfigurations proposed. 3. Staffing arrangements improved rotas, recruitment and retention of staff, but it is necessary to assess: the number of doctors, current rotas and gaps in the rotas, and how rotas would be improved to deliver patient benefits (such as more continuously available care); and why these benefits cannot otherwise be achieved by service level agreements or other staff sharing arrangements. Similarly, there may be other ways to attract and retain staff without merging. In the RBCH/PH case, the parties proposed a single dedicated rota of cardiologists across the two sites and consolidating acute cardiac patient admissions at RBCH. The CC found that this would be a benefit, but one which could otherwise be achieved in the absence of the merger. 4. Financial benefits, but the parties will need to: provide detailed costings; and demonstrate why the savings cannot otherwise be achieved and how the surplus will be passed on to benefit relevant customers. At one level, merger specific financial savings are the most obvious category of merger efficiencies. However, the parties need to consider how the financial savings affect patients. For example, savings may lead to the rationalisation of services so services are less available, or to fewer employees, which might affect the quality of care. In RBCH/PH the CC observed that the parties had not yet undertaken quality impact assessments or any strategic HR planning and thus the CC had insufficient evidence that financial savings would benefit patients. The CC also found that some of the benefits would accrue in the absence of the merger, and it had not seen detailed implementation plans or business cases for all the proposed savings. 5. Improved research and development as a larger group might be more able to attract R&D funding, but: it is necessary to quantify any such benefits and why they could not otherwise be achieved. 6. Benefits in the round Finally, there may well be cases where the determining factor is the overall level of benefits in the round. This point was specifically emphasised by the Co-operation and Competition Panel (CCP) (the body that, prior to the Health and Social Care Act 2012, reviewed all hospital mergers) in its 2011 review of the proposed merger of Oxford Radcliffe NHS Trust and the Nuffield Orthopaedic Centre NHS Trust. In particular, mainly due to the unique proximity of the merging parties sites, the CCP concluded that the merger would lead to a range of benefits which would outweigh the loss of commissioner choice and competition, with these benefits being wide ranging (namely the provision of better services, improved out of hours care at the Nuffield Orthopaedic Centre, improved medical research, Public Finance Initiative cost savings and optimisation of estate across the merged organisation). Conclusion: weighing it all up Establishing relevant customer benefit in relation to hospital mergers may require a compelling body of evidence. This is consistent with the overall scheme of UK merger control, which is aimed at safeguarding the benefits of competition customer benefits are primarily relevant where the CMA considers either in Phase 1 that a substantial lessening of competition may arise or in Phase 2 that a substantial lessening of competition may be expected (and thus relevant customer benefits may influence the remedy required). It is also important to appreciate that if relevant customer benefits are identified, a merger might still be prohibited if this is judged to be proportionate. To date no mergers have been cleared unconditionally under UK merger control on the basis of relevant customer benefits, but there are cases where the CCP had 1 This remedy envisaged a survey-based approach to monitoring quality, with escalation procedures if surveyed quality deteriorated. 3

4 previously recommended that hospital mergers be allowed to proceed unconditionally despite considering that competition and choice would be adversely affected. Whilst the CC rejected the Friends and Family behavioural remedy 1 in RBCH/PH as being ineffective, alternative arrangements which sought to increase the financial incentives to maintain and improve the quality of their services might have been successful. There is already extensive regulation of quality standards in the NHS and any such incentive-based remedy would need to fit with these arrangements, but this seems worthy of further consideration if the alternative is prohibiting hospital mergers which do yield customer benefits. We consider that there is ample scope to develop synergy plans which deliver real patient benefits, particularly as regards re-configuration/ integration of services which yield patient benefits and cost savings which can fund service improvements. 4

5 FOR MORE INFORMATION, PLEASE CONTACT: Bruce Den Uyl +1 (312) Mat Hughes John Maloney +44 (0) ABOUT ALIXPARTNERS AlixPartners is a leading global business advisory firm of resultsoriented professionals who specialize in creating value and restoring performance at every stage of the business life cycle. We thrive on our ability to make a difference in high-impact situations and deliver sustainable, bottom-line results. The firm s expertise covers a wide range of businesses and industries whether they are healthy, challenged, or distressed. Since 1981, we have taken a unique, small-team, action-oriented approach to helping corporate boards and management, law firms, investment banks, and investors respond to critical business issues. For more information, visit alixpartners.com. AlixPartners. When it really matters. The opinions expressed are those of the author, and do not necessarily reflect the views of AlixPartners, LLP, its affiliates, or any of its or their respective professionals or clients. This publication is the property of AlixPartners, LLP, and neither the publication nor any of its contents may be copied, used or distributed to any third party without the prior written consent of AlixPartners. This publication ( Article ) was prepared by AlixPartners, LLP ( AlixPartners ) for general information and distribution on a strictly confidential and non-reliance basis. No one in possession of this Article may rely on any portion of this Article. This Article may be based, in whole or in part, on projections or forecasts of future events. A forecast, by its nature, is speculative and includes estimates and assumptions which may prove to be wrong. Actual results may, and frequently do, differ from those projected or forecast. The information in this Article reflects conditions and our views as of this date, all of which are subject to change. We undertake no obligation to update or provide any revisions to the Article. North America Boston / Chicago / Dallas / Detroit / Los Angeles / Nashville / New York / San Francisco / Washington, DC EMEA Dubai / Düsseldorf / London / Milan / Munich / Paris Asia Hong Kong / Seoul / Shanghai / Tokyo 2014 AlixPartners, LLP