Merger analysis is about assessing how much competition will be lost if two organisations merge, and deciding whether this matters. My last blog talked about how GP referral analysis could be used to answer this question for NHS hospital mergers.

Analysing NHS hospital mergers, however, is different to most non-NHS mergers because deciding whether a loss of competition matters is more complex than usual.

The link between competition and acute trust behaviour is more complex than in other industries because of the number and importance of other influences on acute trust behaviour (e.g. regulation, public service behaviours by acute trusts and so on).

These other influences arise because the NHS is not like a normal market. It is, in large part, a centrally-managed service, operating under a fixed annual budget, that also has market-based structures and incentives.

This unusual combination of central administration and market incentives means that competition can be expected to have less influence on acute trusts than it has on companies in typical private sector markets.

This, in turn, means that the significance of any loss of competition as a result of a merger needs to be carefully considered.

Notwithstanding this, academic studies of competition in the NHS, which are typically heavily quantitative, econometric studies, have identified a link between the presence (or extent) of competition and the quality of care offered by NHS hospitals.

For example, the literature review published by the CMA as part of its review of the planned merger between Ashford & St Peter’s Hospitals NHS FT (ASP) and Royal Surrey County Hospital NHS FT (RSC) reported that these studies showed that competition in the NHS has resulted in 300 fewer AMI deaths annually across the NHS in England and 1,000 fewer overall deaths.

Consistent with these results, we should also expect to see evidence of service improvement decisions in acute trusts’ internal documents that have been taken in response to service improvements at other acute trusts. It is this rivalry between providers that is the essence of competition.

What did the internal documents at ASP and RSC show?

In the ASP/RSC merger, we (i.e. my firm, Aldwych Partners) worked with ASP and RSC to systematically review their internal documents for evidence of acute trust decision making that was influenced by rivalry between providers (i.e. competition).

In doing so, we also identified decisions that were motivated by factors other than competition, including:

  • regulation,
  • commissioner requirements,
  • public service objectives (i.e. the Trust responding to what it believes is in the best interests of patients without any external motivating forces),
  • ad hoc interventions by government, and
  • the threat of patient litigation.

The two sets of documents that our review focused on were: (i) the minutes of Board meetings at each Trust; and (ii) business cases involving expenditure of more than £500k. It seemed to us that these two sets of documents should capture senior-level decision making by each Trust on key issues facing those Trusts.

The importance of regulation as a driver for acute trust behaviour clearly shone through in the results.

  • At 18 RSC Board meetings between May 2012 and September 2014, there were 96 discussions of regulatory issues (5.3 per meeting) compared with 16 discussions of competition-related issues (0.9 per meeting).
  • At 20 ASP Board meetings between January 2013 and February 2015, there were 117 discussions of regulatory issues (5.9 per meeting) compared with 8 discussions of competition-related issues (0.4 per meeting).
  • Further, in 22 business cases at ASP and RSC authorising expenditure of more than £500k in the past 2-3 years, only one (a hospital development decision) was clearly motivated by competition considerations. The remainder were motivated by concerns such as a desire to improve services for its own sake (i.e. public service type motivations), regulatory requirements and the need to accommodate overall demand growth.

These results do not mean that competition has no effect on acute trust behaviour, or plays no role in influencing acute trust decisions. However, they do show that the role played by competition in influencing acute trust behaviour is limited.

(The CMA’s own review of internal documents also concluded that there were examples of decisions influenced by factors related to competition, but it was not clear that the factors used by the CMA solely related to competition, and the lack of any systematic approach to the documents reviewed by the CMA means that their review could not be used to make judgements about the importance of competition versus other factors.)

In many ways the results from our review of ASP and RSC board minutes and business plans is not surprising. As mentioned above, the NHS, is in large part, a centrally-managed service, operating under a fixed annual budget, with some market-based elements.

Further, there is good reason to believe that regulation of the NHS is more extensive than for any other UK industry. The many different regulatory regimes for the NHS determine:

  • Who can provide services (licensing by both Monitor and the CQC).
  • The services that can be supplied (CCGs, NHS England, Monitor), the price at which they can be sold (NHS England, Monitor), the quantity that can be supplied(CCGs, NHS England), and the quality of these services (CQC, CCGs, Department of Health, Monitor, Royal Colleges, Coroners, Local Safeguarding Boards, Health & Safety Executive, PHSO).
  • The type, quality and price of the inputs that providers use in supplying services and the process for combining these inputs (GMC, NMC, other professional regulators, Royal Colleges, Department of Health, MHRA, NICE, Cancer Drug Fund).

This goes far beyond the usual scope of market regulation. The closest parallel, in terms of highly regulated industries, is probably the utilities sector. However, even the utilities have much more freedom than this.

And the implications are?

The relatively small role played by competition in acute trust decision making has two key implications.

First, if competition plays a limited role in influencing how acute trusts supply services, then the amount of competition that needs to be lost before there is a ‘substantial lessening of competition’ is going to be greater in an acute trust merger than for mergers in other industries.

One way of thinking about this is that while in many markets the CMA will be relatively relaxed if it can see four strong competitors after a merger, perhaps it should be similarly relaxed if can see two or three strong competitors following an NHS merger.

Second, even if the loss of competition from a merger is viewed as ‘substantial’, the evidence from these internal documents is that the size of any impact on patients will be small. This, in turn, needs to be taken into account when quantifying the adverse impact on patients arising from a merger compared with the benefits of the merger.