Pathology has, for several years now, been identified as an area in the NHS where the reconfiguration of existing services, and the establishment of larger scale operations that serve multiple hospital sites could deliver significant efficiencies.
The requirement for cost savings in the NHS has given renewed impetus to this agenda. But, at the same time there has been a degree of concern and uncertainty about whether the rules on NHS mergers would get in the way. This was particularly the case when Monitor considered it necessary to publish a note singling out the application of merger rules to the pathology sector.
The OFT’s decision late last year approving the proposed pathology joint venture between UCLH, Royal Free and The Doctor’s Laboratory (TDL) has gone a long way to clarifying how the merger rules operate with respect to pathology services.
Last week I was pleased to speak on this subject, and the application of competition rules to pathology more generally, at Frontiers in Laboratory Medicine 2014, the annual conference of the Association for Clinical Biochemistry and Laboratory Medicine (a professional association and trade union for UK pathologists). This post draws on that presentation.
The OFT decision on UCLH/Royal Free/TDL
In short, the OFT decision on UCLH/Royal Free/TDL is – on the whole – quite good news for those seeking to consolidate the provision of pathology services.
It sets out some ground rules that should allow a quite significant amount of consolidation to take place without troubling the competition regulators about a merger’s impact on competition (let alone whether any adverse impact on competition is offset by other benefits to patients).
In reviewing the JV, the OFT identified several different ways in which pathology services are delivered and analysed the merger’s impact in each area. In particular, it looked at the effect of the merger on competition in the delivery of:
- Routine hot and cold tests for Acute Trusts;
- Specialist cold tests for Acute Trusts; and
- Routine cold tests for GPs and community providers.
In relation to routine hot and cold tests for Acute Trusts, where a single supplier typically services a Trust (whether that is an in-house or outsourced supplier), the OFT found that the JV’s customers (ie UCLH and Royal Free), and other Trusts affected (eg North Middlesex) by the merger, would have sufficient competition for their business to keep their incumbent supplier on its toes, and to provide them with sufficient choice should their incumbent supplier no longer meet their needs. This was based on an assessment of the pathology services market and the interest (and credibility) of other potential suppliers in servicing Acute Trusts in North London.
This finding should give a good degree of comfort for those planning other pathology mergers, provided they are confident that there would still be a sufficiently large pool of credible pathology service providers willing to bid for customers in their locality following the merger.
There is an interesting parallel here with the former CCP’s review of the merger between the Norfolk and Suffolk mental health trusts. In this case, the CCP raised concerns about the merger as it was not confident that following the merger there was a pool of other potential providers willing to bid for mental health contracts in the Great Yarmouth area, in particular. This concern was driven by the difficulty that service providers (other than the merging mental health trusts) would have in offering services in a locality which would be some way distant from their core operations. In effect, the merging mental health trusts would face little competition for contracts in the Great Yarmouth area following the merger.
In relation to specialist cold tests for Acute Trusts, the OFT concluded that the merger would not adversely affect competition because these tests were not time urgent and could be sent to laboratories quite some distance away. In fact, it concluded that a laboratory with the capacity to offer the relevant tests could be located pretty much anywhere in the UK and compete to offer these services. As a result, any other local consolidation that providers are planning is not going to lead to adverse findings in relation to these services.
In relation to routine cold tests for GPs and community providers, the OFT’s concern was whether there would be other pathology providers to whom GPs and community providers could switch that were located within a reasonable distance of the GP or community provider’s premises.
The OFT was careful not to provide a definitive answer on what this reasonable distance would be. In clearing the UCLH/Royal Free/TDL merger, it said that it had looked at the area within an hour’s drivetime of the merging parties and concluded that there were sufficient alternative providers within this distance for it not to be concerned about the effect of the merger on competition for the provision of services to local GPs and community providers.
A key question then for those planning future pathology mergers is whether their own consolidation will create a situation in which local GPs and community providers will be more than an hour’s drivetime away from the laboratory facilities of an alternative pathology provider.
The OFT was careful not to say that one hour’s drivetime is the relevant benchmark that it will apply in looking at future mergers. However, until it does define what that benchmark is, there will be a degree of nervousness for those planning local consolidation where their local GPs will be some distance from an alternative provider. And moreover, even if there is a single alternative within an hour’s drivetime whether this will be considered enough if/when the OFT reviews their merger.
English geography and local markets
England’s geography means that in some areas problems of local market concentration are going to arise much more quickly than in others (regardless of whether the product is pathology services or something else).
Locations that quickly come to mind are Cornwall, the Fylde peninsula (the rectangular shaped peninsula that Blackpool is on), Whitehaven, Great Yarmouth, Southend and Withernsea.
Mergers of service providers in these areas will, as a rule, run into problems with the competition authorities more quickly than others simply because where they are located (eg on a peninsula) means there will be fewer alternative providers within easy reach.
Of course, whether this ultimately results in a referral to the Competition Commission, and a subsequent prohibition of a merger, is quite a different matter. Many factors will come into play, including the distribution of service users within the territory affected by the merger, the ease with which new providers could offer services, and whether customers would still have bargaining power with their supplier following the merger.
There is also, of course the issue of whether the merger generates benefits to patients that offset any adverse effect on competition.
Notwithstanding all this, it is easy to see that those planning further pathology services consolidation will welcome one or two more decisions on planned mergers from the OFT that give a better sense of their view of how pathology services outside London will be judged.