Is the Competition and Markets Authority good news for mergers?

The Competition and Markets Authority officially took responsibility last week for the competition law functions currently entrusted to the Office of Fair Trading and the Competition Commission.

‘The CMA has jurisdiction to review mergers between FTs and NHS trusts, leaving Monitor responsible for providing advice on mergers between NHS trusts’

Of particular relevance to foundation trusts planning mergers, acquisitions or service reconfigurations, the CMA combines the merger control responsibilities of the two authorities (the initial “phase I” merger reviews conducted by the OFT and the commission’s in-depth “phase II” reviews), while retaining the voluntary nature of the regime and separate phase I and phase II review periods and procedures.

Apart from this effective “merger” of the OFT and Competition Commission, the Enterprise and Regulatory Reform Act 2013 has introduced a number of procedural changes to the UK’s merger control regime, including:

• a new binding 40 working day review deadline for Phase I mergers and new binding timetables for the formulation of remedies at the end of both Phase I and II;
• strengthened “hold separates” powers, including the ability to suspend all integration steps, including prohibiting completion, in non-completed mergers during CMA’s review, and to reverse integration steps that have already taken place;
• a new CMA merger notification form – with extensive information provision requirements; and
• new information gathering powers at phase I (equivalent to those that previously existed at phase II) requiring merging parties or third parties to provide information or documents, or to give evidence as a witness.

Developments in merger control

The Health and Social Care Act 2012 confirmed the OFT’s jurisdiction to review mergers between foundation trusts and between FTs and other “businesses” or enterprises. In March 2013, the OFT issued guidance in which it expressed the view that NHS trusts were “enterprises” for the purposes of the UK’s merger regime. As such, the CMA now has jurisdiction to review mergers between FTs and NHS trusts, leaving Monitor responsible for providing advice to the NHS Trust Development Authority on mergers between NHS trusts.

• How the CMA can improve the NHS merger regime

The combination of the OFT’s jurisdiction covering mergers between FTs, and between FTs and NHS trusts, and the broad definition of an “enterprise” extends the CMA’s net to cover a potentially very broad range of transactions, including not only full mergers but also a variety of service reconfigurations.

For example, the OFT has reviewed and cleared two such reconfigurations: University College London Hospitals’ acquisition of the Royal Free London’s neurosurgery services, and a pathology joint venture between the same two foundation trusts and the private sector Doctors Laboratory. The OFT is currently reviewing another pathology joint venture, between Cambridge University Hospitals, Colchester Hospital University, East and North Hertfordshire, Hinchingbrooke Health Care, the Ipswich Hospital and West Suffolk.

‘Trusts should consider engaging proactively with Monitor at the earliest possible stage when considering a possible merger’

In cases where the CMA investigates, the Health and Social Care Act requires Monitor to provide the CMA with advice on the effect of the merger on patient benefits and on such other matters relating to the merger under investigation as Monitor considers appropriate. 

The first full merger to fall within the OFT’s jurisdiction – between the Bournemouth and Poole foundation trusts – was blocked by the Competition Commission in October following an in-depth phase II review.  

The same day as the commission’s decision, it issued a joint statement with Monitor and the OFT which sought to address concern among hospitals about the impact of statutory merger controls on trusts seeking to reorganise through merger. The statement explained how the three authorities were working together to reduce the number of mergers requiring notification and minimize the risk of lengthy review. In particular, it noted that Monitor will offer informal advice to trusts on how they might assess prospective patient benefits and also on the possible competition implications of their proposal, and that in the context of any formal merger review, the OFT and commission would place significant weight on Monitor’s advice on the patient benefits case.

A subsequent letter from Monitor’s chief executive to all foundation trusts elaborated on Monitor’s plans to support FTs contemplating mergers, which includes a three stage approach to ensuring the robustness of the underlying business case, the competition assessment and the relevant patient benefits case. 

Implications for trusts

Early engagement: It is clear that, as a result of recent developments, trusts should consider engaging proactively with Monitor at the earliest possible stage when considering a possible merger, acquisition or major service reconfiguration, with a view to developing a strong business case which includes an assessment of any potential competition issues and patient benefits. 

In addition, they will need to consider setting aside time for detailed pre-notification discussions with the CMA. Such discussions are not mandatory but are highly recommended. While they may lengthen overall “face time” with the CMA, they can be helpful in: 1) educating the CMA case team on the affected markets; 2) providing a forum to discuss the CMA’s likely approach to assessing the merger; and 3) identifying useful items of evidence that may assist the parties’ case.

Develop a robust patient benefits case: Where there is a risk of potential competition concerns, trusts will need to demonstrate that relevant customer benefit outweigh any such concerns. Relevant customer benefits must be merger specific (meaning that the benefit would not occur without the merger) and have accrued or be expected to accrue within a reasonable period of time.

‘Trusts should incorporate the competition process into their stakeholder plans, with the aim of ensuring that key stakeholders understand the business case for the merger’

According to the Competition Commission’s decision on Bournemouth and Poole, this entails the merging trusts 1) determining what the preferred benefit proposal is and evidence for the need for change, 2) establishing clinical assessment groups to evaluate the benefits, 3) developing a model of care, and 4) producing an assessment of the clinical benefits and any disbenefits, as well as a robust assessment of the financial or economic viability of the plan.

While the OFT has never accepted relevant customer benefits to clear an otherwise anti-competitive merger, certain features of the healthcare sector and Monitor’s involvement in the review process suggest that NHS mergers may lend themselves to CMA clearance at phase I based on evidenced benefits.

Prepare for the possibility of being “held separate”: The CMA will have the ability to impose “hold separate” orders on trusts to prevent any integration that might prejudice the outcome of its review (and any remedial action that is required), regardless of whether the merger has completed. Trusts should consider how such an order would impact them in practice, and whether there could be a case for seeking certain derogations from the CMA (for example, on the basis that a particular aspect of the order would place a disproportionate burden on them).

Preparation is key: Organisationally, trusts should develop and follow a competition work plan incorporating the timing of all discussions with the CMA and Monitor, the preparation and submission of the merger submission to the authority and the development of the relevant customer benefits case, including the submission to Monitor.  

A programme management team should be set up at both trusts to oversee the merger notification process – the information/data demands on the trusts are likely to be extensive and so having a team as a central point of contact is critical.

Trusts should also incorporate the competition process into their stakeholder plans, with the aim of ensuring that key stakeholders such as local commissioners and NHS England understand the business case for the merger, in particular in relation to any customer benefits.

Robust business case

It is hoped that the new CMA will spell the start of a more effective statutory regime for NHS hospital mergers. Potential merging trusts will, however, need to develop a robust business case, in particular in relation to any potential competition issues and patient benefits. This will require considerable preparation and pro-active engagement with Monitor and, for those mergers that need to be notified to it, the CMA. 

In spite of a new binding 40 working day deadline for phase I reviews, trusts should not underestimate the timescales involved in the overall competition process.

Alastair Mordaunt is a partner at Clifford Chance LLP and was previously director of mergers at the OFT, Michael Rueter is an associate at Clifford Chance LLP