Make some room for private hospital patients

Much has changed since our last article on the profitability of private patients in the NHS.  Eighteen hospitals have published plans to increase private provision and the Competition Commission has released its provisional findings that are likely to reshape the geography and economics of private patient provision.

‘Having separate facilities, whose build cost is privately or charity funded, is the way to resolve inherent conflict of interest in using NHS facilities for private patients’

We have counted 18 hospitals that have announced plans to increase private provision since the passing of the Health Act 2012, which lifted the cap on private patient revenues.

Dominating the plans are the Forum project at Addenbrooke’s Hospital and the Guy’s and St Thomas’s Integrated Cancer Centre. In total, we believe that the plans amount to an additional £180m of private revenue over the next five years. 

Not all of these plans will go definitely ahead and of those that do, not all will definitely reach their target revenues. After subtracting 33 per cent from planned additional revenues, it can be projected that the listed NHS trusts will generate £120m in additional private revenues by 2018. 

This will result in a 25 per cent increase compared to the NHS’s current private revenues which total £500m. The large capacity increases in Cambridge and south east London are likely to be particularly significant to the local private health economies and may result in subscale or underinvested hospitals having to close.

It is significant that both the Cambridge and Guy’s schemes involve dedicated operating theatres. Having separate facilities, whose build cost is privately or charity funded, for the entire patient pathway is the only way to resolve the inherent conflict of interest in using NHS facilities for private patients. 

Market power

The Competition Commission announced its provisional findings and suggested remedies last year.

Broadly, the commission found that private hospital groups HCA, BMI and Spire have market power in negotiations with private medical insurers because a number of their hospitals have relatively few effective competitors.

‘The implications of the commission’s findings for existing NHS hospitals’ private patient units are significant’

While the findings are not yet final, we believe, based on our published analyses of previous market investigations, that the commission’s final findings are likely to follow the provisional findings quite closely.

HCA appears to be the hardest hit: the commission is likely to recommend divestiture of two or three of its six large London hospitals and it is likely to have to give up its joint ventures with University College London Hospitals, Queen’s Hospital, Romford and the London Gamma Knife Centre at St Bartholomew’s. In addition, it is unlikely HCA will be permitted to complete its plans to take over the large, four storey private patient unit at the new integrated cancer centre, which is currently being built at the Guy’s hospital site.

BMI and Spire have also been singles out and the commission speaks of up to 20 areas where they have market power. The exact list of hospitals under threat of divestiture is not public although the hospital groups have been informed. We think that all three hospital groups have good grounds to appeal the commission’s findings and that the matter will not be resolved before the end of 2015.

The implications of the commission’s findings for existing NHS hospitals’ private patient units are significant.

Private patient units’ current cost advantages will be eroded as increased competition drives down costs. The commission will require hospitals to negotiate pricing for each hospital separately with insurers so that they cannot use local market power to achieve higher pricing at a national level. 

Separate negotiations will make it easier for insurers to delist hospitals and private patient units, and will most likely lead to increased competition.

‘There is additional scope for major academic medical centres and specialist hospitals to take on private hospital groups in their home territory’

However, the units are likely to be in a better position to attract consultants as private hospitals are likely to be prohibited from offering incentives to consultants to practice there. Of the 570 consultants surveyed nationally, 11 per cent (we suspect are mostly surgeons who decide where to send patients) confirmed that they were aware of incentives, many of which are of substantial financial value.

Finally, private patient units are likely to be prohibited from partnering with the dominant provider in their area. We believe that HCA is likely to be required to unwind its London partnerships with UCLH, Queen’s, Barts and Guy’s and St Thomas’.

Having reviewed the schemes that have emerged in the wake of the Health Act, we think there is considerable additional scope for the major academic medical centres and for specialist hospitals to take on the private hospital groups in their home territory. They have the medical expertise on site.

Their proximity to level 3 intensive care facilities will enable the consultants to perform more complex procedures and afford their patients additional peace of mind. The independently funded theatres could be used for NHS patients in times of emergency or when waiting times are high. 

Dr Vishaal Virani, Dr Nael Taher, Adam Scott and Dr Victor Chua are consultants at Mansfield Advisors LLP