CMA decision on the anticipated hospital acquisition

Published 7 octubre 2019

Competition is no longer a primary organising principle in relation to the National Health Service (NHS) Trusts and Foundation Trusts and is not a key driver in their operational decision-making. That was the key finding from Competition and Markets Authority’s (CMA) decision that the proposed acquisition by Aintree University Hospital NHS Foundation Trust (AUHFT)  of the Royal Liverpool and Broadgreen University Hospital NHS Trust (RLBUHT) would not substantially lessen competition and that the merger would therefore not be referred under s 33(1) of the Enterprise Act 2002 (the Act), released on 30 September 2019.

The full text decision is available here.

For our previous update on this merger please see here.

The decision is likely welcomed by NHS England (NHSE), and by AUHFT and RLBUHT. For the NHS, it reflects the approach to the management of NHS Trusts and NHS Foundation Trusts under the NHS’s Long Term Plan, which reduced the role of competition by promoting greater levels of collaboration in delivery of health and care services. However, the decision also reflects a change in approach by the CMA to mergers in relation to NHS Foundation and NHS Trusts as well as a suggested change in the role of the Health and Social Care Act 2012 (HSCA) in those mergers.

The CMA’s decision is surprising not so much because of its outcome, that the proposed merger would not substantially lessen competition in any of the identified markets for health and care service, but because of how the CMA came to its conclusion.

Background to the decision

The background to this decision had seen the CMA stamp its mark as regulator in respect of mergers relating to NHS Foundation Trusts. The CMA, in a response to an inquiry from the House of Commons Health and Social Care Select Committee (Committee), had said that it was not prepared to relinquish its regulatory role in relation to those mergers.

The decision itself states that the intention of the HSCA is to promote competition within the NHS, necessitating the role of the CMA. The CMA made clear that the HSCA “strengthened the incentives for NHS providers to compete for patient referrals by maintaining and improving the quality of patient care, with a view to making the NHS more responsive, efficient and accountable”.

The decision

However, despite marking out its territory in response to the Committee, and by reference to the intentions of the HSCA, the CMA ultimately decided that the role of competition in the NHS was becoming more limited. That decision was based on two factors: changes in NHSE’s and NHSI’s policy regime, and challenges the NHS faced more broadly.

The CMA identified separate markets for: elective services, non-elective services, private patient services, specialised services, and community services, provided by each of the parties. In respect of each the CMA determined that either that competition was not a key driver for operational decisions (at least not in the Liverpool and north Mersey area), there was no material competition between the parties, or that (in the context of private patient services) that there were sufficient competitive constraints already in place which would remain post-merger.

At the heart of the decision, however, is the CMA’s recognition that as the NHS shifts towards Integrated Care Systems (ICTs)and Sustainability and Transformation partnerships (STPs) and a policy of collaboration, and away from individually competing NHS Trusts and Foundation Trusts, it also shifts away from competition being a primary organising principle and driver for operational decisions. The realities of the market these two NHS Trusts operate in, and likely the broader realities of the NHS environment, is defined by constraints on capacity and funding. These constraints reduce competition between NHS Trusts as a driving consideration, and therefore limit the role of the CMA. The CMA found that realities of the NHS environment instead required a collaborative approach to the provision of services. Those realities were reflected in NHSE’s and NHSI’s policy regime for organising and managing the NHS.

In that vein the CMA found that:

• The policy shift away from policies promoting competition between trusts towards ICSs and STPs had changed the relationship between NHS organisations in local health areas.
• NHS organisations were increasing the links between secondary and primary care such that rather than entering into transactional arrangements, NHS organisations would contract through ICSs to develop local area strategies (as opposed to individually competing strategies and incentives).
• There has been a shift to centrally managed performance of NHS Trusts through the Single Oversight Framework, established in 2016.
• There had been a shift from the Payment by Results system, which had provided a strong rational for the CMA’s involvement, towards a block contracting model. This broke the link, and reason for CMA’s involvement, between activity/provision of service and revenue and decreased the incentives for individual NHS Trusts to compete with each other.

The move away from the competition model in the HSCA were, according to the CMA, driven by challenges faced by the NHS which had shifted focus from increasing capacity to dealing with capacity constraints. The CMA agreed with the parties that competition is a less effective form of regulation where the incentives to compete on quality and increase market share are constrained by patient, doctor and nurse capacity. The CMA recognised that “capacity constraints experienced by the NHS trusts in recent years make it increasingly difficult for them to identify additional efficiently improvements that can be undertaken in order to accommodate increased in activity”. Additionally, the constraints meant that the majority of trusts were struggling to retain and reinvest surpluses, further reducing the competitive incentives. The CMA did not consider that the situation facing NHS Trusts would change in the near future.

The result of the above is that competition’s role in the NHS has been limited. With a limited role for competition comes a reduced role for the CMA in regulating mergers. Replacing competition as a key driver is collaboration. The CMA found no evidence to suggest that the parties made decisions based on competitive market forces and that similarly the proposed merger would not disrupt the incentives to compete with each other, as these had already dissipated.

Where does this leave the CMA and NHS mergers?

The decision is not a blanket permission to NHS Trusts and Foundation Trusts to pursue mergers at will. The decision is clear that the HSCA remains the core piece of legislating regulating how NHS Trusts and Foundation Trusts are to operate, and that they are still to operate in their own best interests. This means the CMA remains the regulatory authority with jurisdiction to decide on proposed mergers and that that jurisdiction has not been changed, reduced or otherwise altered.

However, the CMA also viewed the proposed merger through a practical lens, recognising the constraints the NHS was experiencing and that these constraints, although potentially transitory, would not end any time soon. It also recognised that NHSE had embarked upon policy endeavours which promoted collaboration and integration to such an extent that competition was, and would likely continue, to become a less important feature in NHS decision making. NHSE and NHSI told the CMA that the NHS is being moved further way from an individual market actor model. NHSE and NHSI had already proposed a number of changes, including removing NHS Foundation Trusts and Trusts from the scope of the Act and removing the current concurrent powers between the CMA and NHSI to review potentially anti-competitive conduct.

Although the timing of any of these changes is unknown, what is clear is that the CMA is already starting to step back from its regulatory role in relation to the NHS where practical constraints make it appropriate to do so.