Midlands alliance leaves questions unanswered

The announcement of an alliance between three acute trusts in the West Midlands (Walsall Healthcare Trust, Sandwell and West Birmingham Hospitals Trust, and Dudley Group Foundation Trust) raises at least two interesting questions from a competition perspective.

First, is the alliance a merger that is subject to review by the Competition and Markets Authority?

Second, if the alliance isn’t a merger, is it an anti-competitive agreement that breaches the Competition Act?

No doubt the trusts are confident that the answers to these questions are “no” and “no”. However, it seems worth exploring the issues around both of these points.

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Merger test

Is the alliance a merger?

The test that the CMA applies when deciding whether a merger has taken place is whether previously separate “enterprises” have “ceased to be distinct”.

Foundation trusts have been considered enterprises since the Health and Social Care Act, and the CMA basically treats NHS trusts as one big enterprise under the control of the health secretary. As a result, when a foundation trust (in this case, Dudley) and an NHS trust (in this case, Walsall, and Sandwell and West Birmingham) merge, this is a transaction that has involved previously separate enterprises.

‘Foundation trusts have been considered enterprises since the Health and Social Care Act’

The “ceased to be distinct” test is an interesting one. In commercial situations, debate about whether two previously separate enterprises have “ceased to be distinct” often revolves around the size of the shareholding that one business has in the other, and whether this is sufficient for the shareholding business to exercise control or influence over the other.

The former Competition Commission required BSkyB to reduce its 17.9 per cent shareholding in ITV to less than 7.5 per cent, and also required Ryanair to reduce its 29.8 per cent shareholding in Aer Lingus to less than 5 per cent so that BSkyB and Ryanair would no longer be able to influence ITV and Aer Lingus, respectively.

That is, these shareholdings (and other contributing factors) were sufficient for BSkyB/ITV and Ryanair/Aer Lingus to no longer be separate enterprises.

Even when there are no shareholdings, the CMA can still find that one enterprise is able to exercise “material influence” over another (perhaps through some form of agreement), and this is enough to conclude that the enterprises have “ceased to be distinct”.

If it isn’t a merger…

In the case of the Dudley/Walsall/Sandwell and West Birmingham alliance, the CMA will no doubt take a view on whether the programme board that the three trusts are establishing allows the joint exercise of material influence over all three trusts.

Of course, even if the CMA was to decide that this alliance was a merger, it would not automatically follow that it resulted in a lessening of competition that needed to be addressed. Meeting the “cease to be distinct” test just means that the CMA can validly reach a view on whether the merger has brought about a substantial lessening of competition.

What if the alliance isn’t a merger?

‘If it isn’t a merger, it won’t be subject to CMA review but this is not a get out of jail free card’

If the Dudley/Walsall/Sandwell and West Birmingham alliance isn’t a merger, then it won’t be subject to CMA review under the Enterprise Act. But this is not a get out of jail free card.

There is then the question of whether the agreement between the three trusts breaches the Competition Act as a result of restricting, preventing or distorting competition. This, in itself, may not be a problem if the merger delivers benefits to patients that offset the adverse effects of any loss of competition.

The shared rotas that the three trusts are planning in several specialties may well count towards this. For example, Monitor recently advised the CMA that the joint rotas that would be delivered as a result of the planned merger between Ashford and St Peter’s Hospitals, and Royal Surrey County Hospital FTs would indeed deliver patient benefits that should be weighed against any loss in competition.

Alliance strategy

HSJ’’s story also talks about several initiatives around gaining back office synergies, and these are unlikely to be problematic from a competition perspective.

But the more the agreement moves into the delivery of clinical services, joint bidding for contracts sand the planning of healthcare services across the three trusts, the greater the risk that the trusts will breach the Competition Act.

By coincidence, the CMA has also announced its first Competition Act case in healthcare, fining the ophthalmologists association nearly £500,000, and it may have an appetite for more.

‘The certainty of a merger decision may look better than the uncertainty of trying to ensure Competition Act compliance’

The trusts have said that they are keen to avoid the distractions (and no doubt costs) associated with a merger. This is completely understandable.

The trick, however, will be to minimise the costs and uncertainty associated with ensuring ongoing compliance with the Competition Act in delivering their alliance strategy.

At some point, the certainty of a merger decision may look better than the uncertainty of trying to ensure Competition Act compliance.

Andrew Taylor is a partner at Aldwych Partners and former director of the NHS Cooperation and Competition Panel

• This article was originally published on Andrew Taylor’s blog NHS Competition Regulation