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Many private hospitals face little competition in local areas across the UK, leading to higher private medical insurance premiums and charges for private patients, the Competition Commission (CC) has found.

In its provisional findings on privately-funded healthcare services published today, the CC has also pinpointed incentive schemes, which encourage consultants to choose particular private providers for diagnosis and treatment, and the lack of available information on the performance of hospitals and consultants as further restrictions on competition.

The CC has identified 101 hospitals facing little local competition, some of them in clusters of hospitals under the common ownership of one of the major hospital groups, namely BMI, Spire and HCA. Entry into the private health market—or expansion into other areas—is rare due in particular to the high costs of setting up a hospital, the likely response from existing operators and the flat demand for private health services over recent years.

The majority (about 80 per cent) of private patients fund their treatment through private medical insurance companies (PMIs) very often paid for by employers. The prices charged by operators to insurers are set nationally, but the CC believes that the lack of competition in many local areas, where insurers will have little choice but to use the local operator, results in higher premiums for all patients. Self-pay patients also face higher charges in areas with little local competition.

The CC has also considered whether the market power of the major hospital groups is matched by the buyer power of the insurance companies. It has provisionally concluded that whilst the larger insurers such as AXA PPP and particularly Bupa have some countervailing strength, it is not enough to offset the hospital groups’ strong position.

The CC has also today published a Notice of possible remedies for consultation on measures which could improve competition, including requiring operators to sell hospitals in areas where they derive significant market power from the ownership of local clusters; a ban on some incentive schemes; prevention of ‘tying or bundling’ when an operator might respond to a loss of business in one area by raising prices nationally; possible entry enhancing measures; and the provision of better information on prices and quality for patients.

CC Chairman and Chairman of the Private Healthcare Inquiry Group, Roger Witcomb said:

‘The lack of competition in the healthcare market at a local level means that most private patients are paying more than they should either for private medical insurance or for self-funded treatment. The lack of available and comparable information, often less than is available to NHS patients, also makes informed choices—which could help drive competition—for these patients difficult.

‘We’ve also seen the existence of a range of incentives which encourage medical professionals to choose facilities on grounds other than price and quality—and we struggle to believe these can be in the interests of patients.

‘Our job has been to look specifically at competition in private healthcare rather than health insurance but clearly we have had to consider the role of the larger insurers in particular. Although Bupa and AXA PPP have some clout, we haven’t found that this completely offsets the power of the hospital operators.

‘Curing these ills and trying to get a better deal for patients is not going to be straightforward. High costs and other factors mean that new competing facilities are not going to spring up so we may look to increase competition and require sales of hospitals to other operators where we can. We will also look at ways that will stop hospital operators using local strength in one area as leverage in their negotiations nationally.

‘Although many patients don’t pay directly for the services as they do in other markets, we think that greater comparable information of the sort that is available elsewhere would help drive greater competition on price and quality, potentially improving both. We now want to discuss which of these measures and in what form will be most effective in bringing about the change this market needs.

‘We’re aware of the disquiet expressed by some patients and consultants in relation to the actions of some health insurers. To the extent that they are trying to keep premiums down and promote competition on price and quality, they are doing exactly what their customers would expect. However, companies like Bupa need to ensure that they communicate better with policyholders about what their premiums entitle them to.’

A summary of the main findings is as follows:

• HCA charges significantly higher prices to insurers than other operators, even allowing for higher costs in London. Of the other hospital operators, BMI has consistently charged the highest price to insurers in recent years. Higher levels of local concentration lead to higher prices for self-pay patients.
• BMI, HCA and Spire have, during the period under review, been earning returns substantially and persistently in excess of the cost of capital. Ramsay did so for some of the period.
• There are high barriers to entry and expansion in this market in particular due to high entry and exit costs, likely response to entry by incumbents, reluctance by consultants to move activity to a new hospital and little or no growth in demand. Few firms have entered the market in recent years and entry by existing operators into new areas has also been uncommon.
• Private hospitals offer access to resources which will make using their facilities more convenient for a clinician by, for example, making consulting rooms or secretarial services available. They may also operate schemes which provide financial benefits to consultants using their facilities. The schemes could affect consultants’ referral decisions and create an incentive for excessive diagnostic tests or consultations.
• The two larger insurers, Bupa and AXA PPP, achieve significantly lower prices than the smaller insurers and have some countervailing buyer power, Bupa more than AXA PPP. However, no insurer has countervailing buyer power that can fully offset the market power of BMI, Spire and HCA.
• Bupa and AXA PPP have some buyer power in relation to consultants but the CC has found no evidence to suggest that it is being exercised in such a way as to harm competition. Although the incentive is on PMIs to promote competition among consultants and maintain innovation and quality, the CC considers that PMIs, and in particular Bupa, need to ensure that their policyholders are provided with clear and accurate information about consultants.
• Information on the performance of hospitals and consultants is not yet as good as it should be to promote effective quality competition between private hospitals and between consultants.
• The CC has found no evidence that local market power possessed by consultants, either individually or in groups, is giving rise to competitive harm.

The CC’s possible remedies as set out in the notice of possible remedies include:

• Divestiture of hospitals in areas where one operator owns a cluster of hospitals. Our preliminary analysis has identified slightly fewer than 20 potential divestitures.
• In areas with just one or two hospitals, preventing the incumbent(s) from expanding and deterring entry by partnering with NHS hospitals to operate Private Patient Units.
• Preventing hospital operators from offering to consultants any arrangements, in cash or kind, which create incentives for consultants to refer patients to or treat them at its hospitals.
• Measures to prevent tying and bundling—where a hospital operator seeks to use its position in local areas as leverage in its negotiations with insurers—by stopping hospital operators responding to a loss of business or reduction in price in one area by raising charges in another.
• Measures to improve available information on consultant fees and quality, and on the quality of individual hospital’s services.

The summary of the provisional findings report and Notice of possible remedies is now available on the private healthcare market home page along with other information relating to the investigation. The redacted full provisional findings report will be published shortly. The CC is required to publish its final report by 3 April 2014—the inquiry timetable (PDF, 29 Kb)  sets out the remaining stages for the investigation.

Any interested party is invited to respond to the provisional findings report and notice of possible remedies in writing by 20 September 2013.

To submit evidence, please email private-healthcare@cc.gsi.gov.uk or write to:

Inquiry Manager
Private healthcare market investigation
Competition Commission
Victoria House
Southampton Row
LONDON
WC1B 4AD

Notes for editors

1. The CC is an independent public body, which carries out investigations into mergers, markets and the regulated industries.

2. The members of the private healthcare market investigation group are: Roger Witcomb (Chairman of the Group and CC Chairman), Jayne Almond, Tony Morris, Jeremy Peat, and Jonathan Whiticar.

3. The Office of Fair Trading referred the market to the CC for investigation in April 2012. Under the Enterprise Act 2002, the Office of Fair Trading can make a market investigation reference to the CC if it has reasonable grounds for suspecting that competition for the supply or acquisition of certain goods or services is not working effectively.

4. In its inquiry, the CC is required to decide whether ‘any feature, or combination of features, of each relevant market prevents, restricts or distorts competition in connection with the supply or acquisition of any goods or services in the United Kingdom or a part of the United Kingdom’. If so, then there is an adverse effect on competition and the CC will also consider whether this is resulting in a detrimental effect on customers such as higher prices, lower quality or less choice of goods or services. The CC will then decide whether the CC should introduce remedies to tackle the adverse effect on competition or detrimental effect on customers or whether the CC should recommend action be taken by other bodies to remedy the adverse effects on competition, and if so, what actions or remedies should be taken. If the CC finds that there is no adverse effect on competition, the question of remedies will not arise.

5. The Enterprise Act 2002 requires the CC to consult the main parties on its proposed decisions and it will also publish notice of its provisional findings on the CC website as required by its rules. Full details on the CC’s guidelines for market investigation references (PDF, 2.7 Mb)  are available on the CC website.

6. Enquiries should be directed to Rory Taylor or Siobhan Allen or by ringing 020 7271 0242.