Maintaining the competitive edge when trusts merge

Sarah Calkin’s excellent review of the Bournemouth-Poole merger in on hsj.co.uk in April concluded that the Competition Commission was likely to find that the merger would result in a substantial lessening of competition and that remedies would be imposed.

Taking this as a starting point, I thought it would be useful to review the types of remedies that can be imposed by the commission and how these might be applied where it concludes that a merger between two acute Trusts is problematic.

Remedies that can be imposed by the Competition Commission

Merger remedies can be broadly categorised as structural or behavioural. Structural remedies are one-off measures that change a transaction so as to prevent a competition problem from arising. Such a remedy should not require much by way of ongoing monitoring or other measures post-transaction. An example of a structural remedy would be a requirement to separate certain assets from the planned transaction (eg: a site or facility)and sell them to a third party.

‘As well as imposing structural or behavioural remedies, the commission can also make recommendations to governments and regulators’

Behavioural remedies, on the other hand, seek to constrain how the merged entity behaves post transaction. The goal is to limit the merged entity’s ability to exercise the market power it has acquired through the transaction to the detriment of consumers. Examples of behavioural remedies include price controls and requirements to allow third party access to facilities owned by the merged entity.

As well as imposing structural or behavioural remedies, the Competition Commission can also make recommendations to governments, regulators or other bodies. For example, a few years back when I led the commission’s inquiry into a merger between two clinical waste treatment firms as well as imposing various conditions on the transaction, we also made recommendations to the then NHS Purchasing and Supply Agency about the way in which it procured these services.

The greater complexity of behavioural remedies means that, in general, they carry greater risk of ineffectiveness and this, combined with their greater cost of their implementation, means that both the Competition Commission and the Office of Fair Trading have a preference for structural over behavioural remedies. The CC will generally only use recommendations to supplement other measures, and will only make recommendations when it lacks the jurisdiction to impose in its own right its preferred course of action.

How does the Competition Commission choose a remedy?

So, if the Competition Commission finds a merger to be anti-competitive, how does it choose a remedy?

In short, the commission identifies all of the possible remedies that would be effective in addressing the competition problem it has found, and then chooses the one that imposes the least cost or restriction on the merging organisations (and any third parties). In practice, it is often lucky to find more than one effective remedy. Prohibition of the transaction is always effective. It is just a matter of whether there are any other effective remedies as well.

‘In imposing a quality control, patients would most likely bear the cost of underachievement post-merger’

Having chosen its preferred remedy (ie: the effective remedy that imposes the least cost), the Competition Commission also has to conclude that it is not disproportionate to the competition problem that has been found. If it finds that the remedy is disproportionate (eg: due to excessive costs being imposed on third parties), then it can choose an alternative remedy (eg: one that is only partially effective) or it may choose not to impose any remedy at all. Needless to say, this does not occur frequently.

A further factor that the Competition Commission has to take into account in choosing a remedy is whether the merger gives rise to any “relevant customer benefits” as defined in the Enterprise Act. These can take the form of lower prices, higher quality services or greater innovation. Where customer benefits arise from the merger, and a remedy would extinguish these benefits, then the commission will treat this as a cost of that remedy and feed this into its choice of remedy. This can lead the Competition Commission to changing its choice of remedy to preserve these benefits or, in rare cases, it might decide that no remedy is appropriate.

For a more detailed exposition of these points readers may want to look at the Competition Commission’s merger remedy guidelines. In addition, Monitor is currently out to consultation on its guidance regarding the provision of advice by it to the competition authorities on “relevant customer benefits” and I will return to this subject in a future article.

What remedies might be imposed on a merger of acute trusts?

The $64 million question, though, is how all of this applies when the Competition Commission is looking at a merger between acute trusts and finds a competition problem.

As mentioned above, prohibition is always an effective remedy and so it is then a matter of whether the commission can identify any other remedies that are also effective in addressing any competition problem it identifies. A few possibilities spring to mind in this regard.

For example, on the structural side, where one of the merging trusts has multiple sites, the Competition Commission could consider whether the competition problem could be fixed by requiring that one or more of these sites be sold (or transferred) to a third party (eg: another acute trust). Whether such a solution has the potential to fix a competition problem would depend on factors such as the type of facilities available on the site, and thus the services that could be provided, and its geographic location. The Competition Commission would also have to consider whether other Trusts would be interested in acquiring the sites in question. If no-one was interested, there would not be much point in choosing this remedy.

I don’t think that there is anything to prevent the commission from requiring that a site be transferred to, or managed by, a private operator (although I have not considered this in any detail). However, if extensive opposition to such a course of action emerged during consultations on possible remedies, which led the Competition Commission to be concerned about the effectiveness of this course of action, then it would be unlikely to proceed.

In terms of behavioural remedies, the Competition Commission might consider requiring the merging trusts to provide access to their property and facilities by one or more third parties for the delivery of services in competition with the merged Trust. There are already examples of NHS facilities where multiple Trusts provide services (eg: Queen Mary’s Hospital in Roehampton). However, most cases that I am aware of where this happens in the NHS involves a relatively neutral third party owning the facility in question.

Alternative remedies

As mentioned above, price controls are another form of behavioural remedy. The underlying idea is that the control prevents the merged entity from using its newly acquired market power to increase prices. In the NHS, however, a merged trust would only be able to increase prices for non-tariff services (given that tariffed services have a centrally set price). While a price control could, in theory, be imposed on non-tariff services, there may well be significant practical difficulties given potential changes in the services covered by the price control. There would also be a question of whether such a control addressed the underlying competition problem if this was centred on price-controlled elective services.

In the water sector, whether there is also a centrally set tariff, the Competition Commission in selecting a remedy generally imposes a remedy that involves reducing the tariff compared with the five-year settlement that had previously been imposed by the water regulator, Ofwat. However, this doesn’t translate particularly well to the NHS because it would result in the merged entity charging a lower tariff than other providers in an area, which could then distort referral and other behaviour. (The Cooperation and Competition Panel report on “any willing provider” discusses this issue extensively.)

‘Remedies that involve price or quality controls seem likely to run the risk of being ineffective or costly to design and implement’

One possibility, however, is that the price reduction take the form of a lump sum payment from the merged Trusts to their commissioners. This would give commissioners an effective price reduction, but would not distort relative prices. But, if the competition problem is the potential impact on service quality in elective services, then it is not clear that this remedy addresses the underlying problem.

Another possibility, if the concern relates to the potential effect of the merger on the quality of elective services, is to implement a remedy that seeks to control quality outcomes. The Dutch Competition Authority imposed a condition along these lines on the merger between Walcheren and Oosterschelde Hospitals in 2009. A detailed review of this experience would no doubt be instructive. Clearly, however, it has not been all smooth sailing in that in March this year the authority instructed the merged hospital to comply with the merger condition related to the provision of intensive care facilities.

My sense is that such a remedy would be difficult to implement and may end up focusing on inputs rather than outputs or outcomes. Even assuming that an additional level of service quality regulation could be imposed, say with the assistance of the CQC, there are incentive issues that don’t arise with a price control. With a price control, if the merging parties don’t realise the efficiency gains they believe will stem from the merger, then the shareholders in the merged entity bear the cost. However, in imposing a quality control, patients would most likely bear the cost of underachievement post-merger.

As mentioned above, the choice of remedy for a merger between two acute trusts can be affected by the presence of  “relevant customer benefits”, and I will come back to this topic in a future article.

Conclusion

In summary, once the Competition Commission finds that a merger between acute trusts gives rise to a competition problem, its remedy options will most likely be fairly limited. Prohibition of the merger will always be an option, and it will then be a matter of whether any other effective remedies can be identified. If more than two sites are involved in the merger, than a partial sale to a third party may come into play.

It might also be possible to design an access regime that could be effective in addressing any competition problems, but this is likely to be complex in both design and implementation. Remedies that involve price or quality controls seem likely to run the risk of being ineffective or costly to design and implement.

Andrew Taylor was founding director of the Cooperation and Competition Panel for NHS-funded services, now part of Monitor