Procurement in a nutshell – CMA approves hospitals’ merger

This update outlines the details of the arrangement as well as identifying the CMA’s logic in authorising the deal without feeling obliged to carry out a more thorough examination.

What happened?

The proposed deal concerned the merger between the University Hospitals Birmingham NHS Foundation Trust (UHB) and the Heart of England NHS Foundation Trust (HEFT) and followed the appointment of the UHB management team to HEFT’s executive team in October 2015 as part of an attempt to solve a number of ongoing issues.

However, due to the sizes of UHB and HEFT, combined with the fact that the merger would have resulted in a combined trust with a turnover greater than that of any counterpart trust (£1.4bn), the CMA decided to investigate whether the deal would result in a substantial lessening of competition within any UK market.

When will the CMA review a transaction?

Under s.79 of the Health and Social Care Act 2012 and Part 3 of the Enterprise Act 2002, mergers of NHS foundation trusts, or those involving NHS foundation trusts and another business, are subject to merger control by the CMA.

In its regulation of such transactions, CMA guidance states that it will always look to ensure that a proposed deal will not adversely affect patients through the reduction of competition between providers.

On that basis, only transactions which raise specific competition concerns will be subject to scrutiny by the regulator. As such, mergers where the providers do not provide the same healthcare services, or mergers which are unlikely to affect providers’ incentives to improve quality, are unlikely to be reviewed.

In addition to this, certain threshold criteria must also be satisfied. In general, in the UK this is likely to take place where the turnover of the acquired organisation exceeds £70m, or if the merged organisation will supply or acquire at least 25% of particular goods or services in a substantial part of the UK and the merger increases that share.

The different stages of an investigation

Phase 1

In its Phase 1 investigations, the CMA will carry out an initial examination into whether a merger is likely to raise competition concerns, as well as whether the associated adverse effects are outweighed by benefits to patients.

This stage can last for up to 40 days and, in an NHS foundation trust merger, where there is no finding that the patient benefits are greater than the competition concerns, the CMA has a duty to refer the matter for a more detailed Phase 2 investigation.

Phase 2

Where a merger progresses to a Phase 2 review it will be subject to a more detailed assessment under which the CMA has 24 weeks to conduct its investigation and publish its report.

It is at this stage that the regulator must decide on the appropriate course of action going forward. Accordingly, the CMA may:

• Prohibit the merger;
• Allow the merger to proceed subject to certain conditions; or
• Clear the outright where no competition concerns are identified.

What was the foundation trusts’ argument in this case?

Both foundation trusts argued that UHB’s previous appointment to HEFT’s executive team had been crucial in achieving various patient benefits such as advances in the safety and quality of patient care as well as reduced patient waiting times.

Further to this, the parties, along with NHS Improvement, argued that if no merger were to take place then these improvements would be lost due to the absence of UHB management at HEFT.

What was the CMA’s conclusion?

The CMA stated that it had considered the various competition concerns but decided to allow the deal to proceed because without the merger “HEFT would be a relatively weak competitor to UHB” and the quality of service would suffer.

As such, “this is the first time the CMA has cleared an NHS hospital merger on the basis of patient benefits at Phase 1 and reflects the quality of the benefits case put forward in this instance and the consistent and detailed advice of NHS Improvement.”

Why is this important?

The case represents an important development due to it being the first time that the CMA identified the potential competition concerns associated with an NHS foundation trust merger as being overshadowed by the associated patient benefits, to the extent that it had no duty to refer the matter for a more detailed Phase 2 investigation.

In addition to this, the regulator’s assertion that “competition currently plays a limited role in the NHS, as health commissioners and regulators have instead emphasised co-operative working to handle growing demand for NHS services” suggests that going forward, when considering such arrangements the CMA will place an increased focus on the merits of a proposed deal instead of focussing purely on competition issues.

How can I find out more?

If you have any queries on the issues raised or on any aspect of procurement, please contact us via our procurement hotline on 0191 204 4464.