The recent report by The Competition Commission into the Private Healthcare sector has drawn some surprising conclusions, with the major private hospital groups having been found to hold an unreasonable level of pricing control over the leading insurance groups, thereby artificially inflating the premiums paid by consumers.
Many in the industry would not have been surprised in the findings that the London market would benefit from more competition, nor finding that incentive payments made to consultants to encourage referrals is an industry practice which has long needed closer scrutiny.
However, the lack of competition derived from the dominance of major hospital groups in regional markets is a more controversial conclusion. Equally surprising is that the significant market share in the medical insurance market held by the two largest players, Bupa and AXA PPP is not felt to be an issue.
More detail on what needs to be addressed will be forthcoming over the coming weeks, but it is hard to see what good might come out of this for the UK healthcare sector.
Insurers and hospital groups have been at loggerheads for many years, highlighted recently by the very public pricing negotiations between BUPA and BMI Healthcare.
In early 2012 this resulted in Bupa delisting a large number of BMI Hospitals on the basis that it refused to “subsidise” BMI’s debt laden business. Whilst compromise was reached, and inevitably preferable deals for insurers struck, the damage to Bupa’s reputation was surely significant and did little to bolster their flagging number of UK customers.
Policy holders being told that they could not undergo treatment at their convenient local hospital because of the dispute created considerable concern and anxiety. There are parallels in this case: BUPA remains the UK’s dominant healthcare brand and headlines surrounding “expensive private healthcare” will surely not help their overall cause to recruit new members.
Considering Bupa has been a major supporter of the investigation and, according to their recent comments, they are supportive of the findings, they may want to be careful they do not shoot themselves in the foot.
Currently, the Competition Commission is investigating why the premiums they have to charge to corporate and individual customers are increasing. Despite its public perception of being an organisation based on “provident” principles, Bupa is a highly commercial multi national corporation.
It used to own a significant number of private hospitals before selling its estate to private equity investors (thereby actually directly or indirectly creating much of the industry debt referred to above) and using the proceeds to fund a huge international expansion.
It is something of a surprise that Bupa’s profit margins were not viewed as being as much of a concern as the private hospital groups, especially as the market is no more competitive in insurance than in hospitals.
So what next? BMI and Spire need to sell some hospitals – but who to? These hospitals are likely to be those on the periphery of the estate, and quite probably not able to operate independently without the support of a decent sized corporate HQ and the attendant cost efficiencies.
Ramsay is reported as having a war chest, but swapping the name over the door is not going to change anything as far as the competitive landscape is concerned. There will always be a level interest from Private Equity, but at what price, and, indeed, as they will be looking for an exit, the Competition Commission is effectively saying that consolidation is not an option and that will limit its attractiveness.
Circle Health, a new entrant in the market and another driver behind the original investigation has a business model based around building brand new facilities and changing the face of the industry – buying second hand facilities is not their priority. It is not going to be viable for them or anybody else to develop brand new buildings in the vicinity of exiting hospitals struggling to operate at capacity.
What is certain is that the conclusions will take time and money to resolve. Time and money better spent on investing in private hospitals and creating a proposition that is needed to provide insured patients with a service that is clearly distinct from the NHS and worthy of a premium.