There are two ways of trying to understand the human body in medicine. One is to understand its anatomy and physiology in normal health, which gives you a definition of its structure and functions. Another approach is to understand what goes wrong in pathology and why. Both approaches give valid complementary information. The problem with singing the praises of the market is that it assumes that there is ‘perfect competition’, and that the relationship between supply and demand can be predicted accurately. There are very many reasons why markets do not obey this perfect competition. In fact, perfect competition is virtually unheard of. Many of us believe that the NHS does not meet the definition of a market anyway, but my article here is to try to explain to health policy works, many of whom are quasi-economists, how the failures of competition are patently clear in the current investigation of this market by the Competition Commission.

There are two highly influential ideas which have been applied in the NHS. One is from Professor Michael Porter and his “five forces of competition”, which provides a useful construct about how competitive factors interact in the market to determine a company’s competitive advantage. (Porter also has another strong theme called ‘strategy and society’, which is more to do with corporate social responsibility, which many believe to be the substrate of Ed Miliband’s ‘responsible capitalism’ theme). The second idea is that of “disruptive innovation”, also from Harvard Business School, first advanced by Professor Clayton Christensen.

The “Five Forces” model of competition assumes that there are five important forces that determine competitive power in a business situation.

Source

These are:

1. Supplier power: How easy it is for suppliers to drive up prices? This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have, and the more you need suppliers’ help, the more powerful your suppliers are.
2. Buyer power: How easy it is for buyers to drive prices down? Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on. If you deal with few, powerful buyers, then they are often able to dictate terms to you.
3. Competitive rivalry: The number and capability of your competitors are important here. If you have many competitors, and they offer equally attractive products and services, then buyers will go elsewhere if they don’t get a good deal from the supplier. On the other hand, if a supplier produces an offering no-one else can do, that supplier will have considerable ‘competitive power’.
4. Threat of substitution: This is affected by the ability of your competitors to find a different way of doing what you do – hence the growing importance of innovation in English health care policy. If substitution is easy and substitution is viable, then this weakens your power.
5. Threat of new entry: Power is also affected by the ability of people to enter your market. If it costs little in time or money to enter your market and compete effectively, if there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it. Monitor has of course been very keen to lower the barriers-to-entry so that ‘any qualified provider’ can compete with the NHS for contracts.

The Competition Commission ‘Issues Statement’ from February 2013 adopts the structural analysis of Porter, without saying so. The privately-funded healthcare sector is a relatively small part of the wider UK healthcare sector, most of which is funded via each nation’s respective public health- care systems. Certain treatments, including elective cosmetic surgery and standard maternity treatments, were not included. The five largest hospital operators account for approximately 70 per cent of privately- funded healthcare revenues in the UK.Almost 80 per cent of UK patients using privately-funded healthcare services are funded by insurance. The other 20 per cent are ‘self-pay’ patients. These healthcare services are also used by overseas patients, particularly in London. The four largest private medical insurers account for approximately 87 per cent of  insurance premium revenue with the two largest alone accounting for 65 per cent.

A key issue for this investigation is the way in which the privately-funded healthcare sector is affected by the conduct of, and interaction with, the private medical insurers (PMIs).Defining the market in itself is difficult. Local aspects may arise because patients may prefer not to travel far to hospitals or because there may be limits on patients’ ability to travel (eg limited geographic coverage by the insurer or GPs referring primarily to local consultants). On the other hand, patients may be willing to travel different distances depending on the type of treatment (eg patients may be willing to travel further for treatments for more serious conditions). There also seems to be differences in the type of ‘product’ being offered; for example, oncology (cancer management) is offered by a lower proportion of general private hospitals.

The analysis nicely falls into the factors described by Porter, as follows:

Supplier power:

Many PMIs expressed concerns that HCA hospitals in London have market power. There are a substantial number of private hospitals in London, and London private hospitals differ from those in the rest of the UK in that they offer different sets of specialties, some hospitals are very specialised and their patients may work in London but reside further away. Their analysis identified some ‘hospitals of potential concern’ in London but it may not fully capture the extent of any competition problems in London. Consultant market power may be caused by several factors, some specific to the location in which the consultant works and others reflecting the way in which privately-funded healthcare services are purchased.

These factors include:

(a) a limited number of consultants in a particular local area for specific treatments or specialties;
(b) the way that referrals are made and consultants selected; we note that the pro- cess of choosing anaesthetists for a patient differs from that for other consultants and typically involves less input from the patient and/or GP; and
(c) joint setting of prices by some consultant groups.

Buyer power:

This theory of harm hypothesises that insurers may possess buyer power in relation to consultants.The Competition Commission have stated that if insurers are suppressing consultant fees to a level below those which would prevail in a competitive market, this could lead to a reduction in the quality of service provided by consultants to patients and affect the incentives to innovate. They also considered that insurer conduct may distort competition between consultants when caps on the reimbursement of fees are applied to some consultants (eg newer or junior consultants) and not to others (eg more experienced ones).

Threat of substitution:

There are real problems with the substitution arguments. Private hospitals may be able to change the treatments they supply if they supply a range of different treatments and may be able quickly to change how they operate. Supply-side substitution by consultants is likely to be more limited than supply-side substitution by private hospitals. In the absence of demand-side substitution, treatments (or specialties) that should be defined as separate markets may be aggregated into clusters of treatments (or specialties).

Threat of new entry:

These are complicated. For example, one source of a ‘barriers to entry’ could be that of customers into privately-funded healthcare resulting from bargaining between insurers and hospital chains. This theory of harm hypothesises that bargaining between PMIs and hospital chains creates barriers to new local entrants. In particular, it may result in contractual terms that disincentivize PMIs from recognizing new entrants. This bargaining pattern may lead to a hospital operator placing pressure on PMIs to continue to recognize all the hospital operator’s hospitals and not to recognize hospitals of new entrants. High fixed costs of hospitals make it attractive for hospital groups to offer ‘volume for discount’ deals to PMIs, if by doing so they can secure business from the insurer that they would not otherwise receive.

However, the Porter analysis is notorious for its poor comprehension of anti-trust of anti-competitive regulation across a number of jurisdictions. That’s why the Competition Commission is unable to address competitive rivalry at all – this is still extremely disappointing for a statutory legal authority for the regulation of competition, and provides for ultimately a weak, incomplete analysis whatever is finally returned. The analysis is traditionally attacked from the perspective that the conclusions from Porter’s analysis, originally achieved from the automobile industry, do not easily extrapolate. Whilst there have been attempts at applying Porter to the internet or telecoms in general, there is a real paucity of data looking at the application of Porter either in private healthcare markets. Therefore, one can only be immensely frightened to consider how such an analysis can be properly applied to the NHS, which can described as a ‘hybrid market’ at best (avoiding the flawed term ‘quasimarket’); it is beyond the scope of this article to consider how it may not be possible to consider the current NHS as an example of market socialism.

 

 

 

 

 

The political lesson here is that privatisation of the utilities under the Conservative governments has been an unmitigated disaster from the perspective of the UK citizen. From the viewpoint of a company director or shareholder in a privatised utility, it is of course a ‘cash cow’ as there is no competitive rivalry. The competition authorities have immense difficulty in regulating this market, such that prices continue to go up under the pretense of ‘returning investment’ to the infrastructure. This argument cannot be easily applied to the NHS, as the Health and Social Care Act (2012) has totally demolished the ‘national’ nature of the NHS, delivering a highly fragmented service which is beginning to bear a resemblance to the disasters of the privatised railways industry in England.

The biggest problem with the fact that the new NHS is not a real ‘market’ is that in an oligopoly, a market with few players, the participants can easily bump up prices when they are not really competing with each other anyway. They either are offering the same product at the same inflated price (e.g. a ‘standard hernia operation’), or they can easily cherrypick what services they wish to provide at high volume and low cost to maximise their shareholder profitability. As the Secretary of State no longer has a duty for the NHS to offer a universal national health service, this is no longer an issue legally.

We can argue until the cows come home about the efficacy of the current political coalition in the UK, but the problems of ‘forming coalitions’ is well known in the legal academic press and increasingly so in the business press. For example, in an excellent paper called “Michael Porter’s Missing Chapter: The Risk of Antitrust Violations” from Fried and Oviatt in February 1989, the authors describe that:

“Porter also proposes forming coalitions to raise entry barriers, although he does not provide any detail or exam- ples of what he means. Statutory prohibitions on conspiracies and combinations show that antitrustlaw takes a dim view of coalitions formed to raise entry barriers unnecessarily. In addition to the cases previously discussed involving coalitions, organizations (sic) in many industries have attempted to form “associations” for the purpose of limiting competi- tion in a trade by limiting access to suppliers. Diamond dealers, kosher butchers, and golf club manufacturers have all been ordered at one time or another to stop this behavior. Much more prominent is a Supreme Court case that dealt with the garment industry.^s Fashion Originator’s Guild of America, Inc, (EOGA) was an association of designs, manufacturers, and distributors of women’s clothes. The manufarturers in FOGA controlled over 60% of the high- price segment of the market, FOGA members were upset because after original clothes designed by FOGA members entered the retail market, competitors would copy the designs and sell identical garments. To combat this “style piracy” guild members refused to sell to any retailer who sold copied fashions. The Court ruled that in so doing FOGA was in violation of antitrust laws.”

One suspects that if the UK competition authorities, such as Monitor, OFT and Competition Commission, fails to regulate properly even the private healthcare market, they are going to have a pretty disastrous time with the NHS at general. But the people who wished to introduce the market in the NHS in the first place should have thought about. None of us, as such, voted for it.