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“NHS self-pay”: a marketing analysis
If one thing “can be taken as red” from the interference by politicians introducing market mechanisms into the NHS, it is that there will be ‘entrepreneurial’ people; perjorative though this sounds, some of them will be gaming the system. Some of these initiatives may come under the general rubric of “rent-seeking behaviour.
Martin Rathfelder (@SocialistHealth) described on this blog yesterday in his blogpost two recent examples of “self-pay” from CareUK (images below from the same blogpost):
@richardblogger indeed observes this phenomenon in relation to assisted conception at King’s and at the Homerton (see his blogpost here), and cursory search on Google (link here) finds a number of Trusts using the same wording for these services.
This phenomenon has been growing in prominence, with Prof Clare Gerada (@clarercgp) having remarked on it in a previous Telegraph article [extract dated 24 Sep 2012]:
“GPs believe the numbers of patients asking about paying for operations including cataract removal and joint replacements has increased markedly in the last year, according to a poll. Dr Clare Gerada, chairman of the Royal College of GPs, said it was “incontrovertible” that increased NHS rationing was behind the increase in going private, a trend she described as “very sad”. The poll, carried out by ComRes for the firm BMI Healthcare, found that 70 per cent of GPs are now unable to refer a patient for further treatment on the NHS at least once a month because they do not qualify under local criteria.”
And the existence of this phenomenon has been made clear to another section of the population, the Daily Mail reader (for example in this article here).
What is intriguing, as observed by @richardblogger, is the precise wording of the Care UK advert:
“Self-pay is an option we have introduced for patients who do not use the threshold for NHS treatment, enabling them to pay for their treatment themselves at more favourable rates than other private organisations.“
This advert is in a GP magazine, and the provider is comparing themselves to other private organisations, not the NHS. They are therefore advertising to GPs, selling the same product but via a different route (or “micromarket”), and this is possible because the patient will trust the GP, as Richard observes.
This is significant for two classic textbook reasons in marketing.
First of all, it is feasible for the price for the Care UK product to be set higher than the price for the NHS product, as there is “price discrimination” going on – with the same product being sold to different markets (in one GPs, in the other the patient themselves). This is called “third degree price discrimination”, as helpfully defined here by Wikipedia:
Secondly, it is an interesting example of how prices are set in any market. One method of setting a price is to add up how much a product costs, and to sell it onto the consumer at a price which represents how much it cost to make the product with ADDED ON how much you think a consumer is willing to pay for it with any extra – i.e. “profit”. This is “cost-based pricing”. Another method is setting a price comparable to your competitor’s, but hoping that in a direct head-to-head the consumer will choose your one. This example of Care UK is interesting as it represents “value-based pricing” (link here), representing the “notion of value” the consumer will have for having Care UK provide the product. This is akin to why you would wish to go into a supermarket and pay triple for a jar of coffee which is essentially very similar to a jar of coffee of the same type sold in the “value range”. The fact that Care UK has sold the product to the GP rather than the patient himself or herself can be interpreted as a reflection of how much a GP might be willing to pay for it on the customer’s behalf (neither the GP or the patient is directly out-of-pocket but clearly private health providers will be seeking to ensure a shareholder dividend through their services in the NHS.)
Interestingly, the situation is different to Warrington and Halton Hospitals NHS Foundation Trust which has introduced instead “My Choice” (see here).
However, here there is a critical difference:
“Importantly, the fee charged is only the standard NHS cost for the operation or procedure. We do not charge an increased private price. It means that your patients. still access these procedures at your first class NHS surgical centre. They only pay the standard NHS price and will be treated to the high quality and safety standards that we have in place at Warrington and Halton Hospitals. The fee they pay goes directly into patient care at the hospitals.“
And here’s the rub. If you’re a patient, exerting patient choice, and if you’re paying for the repair of your varicose veins, you may prefer to go to your local A&E department than to present to your GP who may be offering the same treatment for a higher price, because of the effect of these marketing mechanisms. There is therefore an internal price discrepancy already in this privatised “neo NHS” market. Indeed, if you present with a complication of a varicose vein (as indeed the impetus for removing varicose veins is not simply cosmetic), and the list of complications is one which every medical student is obliged to learn before qualifying (link here), the NHS will treat you on the spot anyway.
I’ve often discussed in recent posts how the privatisation of the NHS throws up dangerous situations professionally, but in the name of patient choice the idea of a patient deliberately having to wait to maximise his or her chance of receiving acute medical treatment which is much cheaper (known to economists and behavioural neuropsychopharmacologists as “temporal discounting theory”) is a deplorable one and professionally repugnant.
The “Everyday” “stack-em-high” approach may not work for all parts of the NHS
Tesco everyday burgers
Right-wing commentators always attack the NHS by saying that it mustn’t be treated as a “sacred cow”, like a “national religion”. The public don’t wish to see it as a business either. I have no idea what the majority of members of the Royal College of Surgeons think.
The "everyday" "stack-em-high" culture clearly doesn't work for all of the NHS
Right-wing commentators always attack the NHS by saying that it mustn’t be treated as a “sacred cow”, like a “national religion”. The public don’t wish to see it as a business either. It is not surprising that the Royal College of Surgeons as a College are in favour of the “reforms” increasing the scope for private provision, but most surgeons were indeed also trained by the NHS.
So, if it’s not a business, why are they such pains to keep the NHS branding and logo then? The lettering (even the font, size, colour and slant) is known on the national trademarks register, so is the exact Pantone colour. Why are Virgin and Circle not keen to get rid of the NHS branding and do all their NHS services in their own brand? This is simple. It’s because the NHS brand is incredibly strong, so much so that successive governments have wished to export it.
Tesco everyday burgers contain “no artificial preservatives, flavours or colours”, except some contained horsemeat apparently. Not being able to see inside the box with the benefit of a DNA reader is possibly to blame, but which corporate supplier is providing your hernia operation in future may not be so easy to tell in future either.
One thing is absolutely certain about the NHS “reforms”. It is most definitely a “top-down reorganisation”, it will not address the numerous concerns of the Francis Report, and it gives a clear green light to outsourcing a far greater number of contracts to private sector suppliers who are very slick at producing bids. Even the most unintelligent of spokespeople for the Conservatives’ policy, both official and unofficial, openly concede that it is hard to provide a service that is comprehensive and bitty through this route.
That’s why it best for the profitability of shareholders that the product is delivered in a short-sharp-shock, like an abdominal hernia repair, or a Tesco “everyday burger” containing horsemeat. They choose what offerings they wish to produce. Whilst the Ed Miliband conference speech on ‘predators and producers’ was on-the-whole “panned”, the new healthcare market is perfect for private equity investors. Their freedom to operate in a “liberalised market” is only constrained by the legal and regulatory constraints placed upon them. You can argue “til the cows come” home whether the abolition of the Foods Standards Authority created a climate for such cutting corners to occur – or maybe that should be “til the horses come home”.
While it’s well known that some high street firms have struggled, it’s noticeable that “value brands”, including Tesco everyday value items and Aldi, and “luxury” brands have withstood the recession quite well. There is of course no real market in healthcare, of people “shopping around”, with a customer not paying directly to the supplier of the healthcare product, the supplier using the NHS branding away, and dodgy metrics to judge the ‘quality’ of a healthcare intervention largely dreamt up by a busybody who has never set foot on a busy NHS ward.
However, that the NHS could offer its equivalent of “value” products, but not to enhance shareholder dividend, but for the benefit of treating as many people as possible efficiently to the highest of rigorous medical and nursing standards is a worthy cause. An unfortunate effect of the reaction to the Tesco “horsemeat” saga is that rather demeaning judgements about people who buy “everyday” products have entered through the back door. However, many people are desperately keen to avoid an emergence of a “two tier” service in healthcare where access-to-medical-treatment becomes dependent upon an ability-to-pay.
It’s possible that at the “everyday” end of the NHS, it might be possible to go for the “stack them high” approach which is pervading education and healthcare, which is perfect for private equity investors. However, this system is clearly not ideal for all, and this is clear not a market led by the “end-consumer”. Characteristics of markets where there is poor competition due to lack of participants include an inability of customers to lower prices and an ability for suppliers to increase prices, while providing the essentially the same product. This is what has happened in a whole string of privatised industries, including gas, electricity, water and railways, and the (relatively) “simple” hernia operation is going to be no different. Whose going to benefit from offering a contracted core NHS service? Of course, the corporates whom I don’t dare to name because of their legal teams. Will the patient benefit compared to a NHS ideal of “comprehensive” and “free-at-the-point-of-use”? Absolutely not.
Monitor has much work to do to produce a cogent analysis of pricing in healthcare
Monitor is in its infancy, but, pardon the pun, I would like to describe an example of childbirth to explain the mountain of problems that the new privatised NHS is yet to experience. Consider this a steep learning-curve that not many of us voted for at the last election.
“The new NHS provider licence: consultation document” was issued by Monitor on 31 July 2012 with a deadline for responses determined as 23 October 2012. According to section 5.1 of this Document on pricing,
“One of Monitor’s new functions will be to set prices for health care services funded by the NHS.Accurate pricing is essential to ensure that providers are paid appropriately for services they provide to patients. Accurate pricing information helps GPs, commissioners and providers to plan and budget for health care services to meet people’s needs. Pricing can also be used to encourage providers to improve the quality of services for patients, and to increase the efficiency with which services are provided. If providers are not properly reimbursed, this can reduce the quality and efficiency of care they offer and may, in some circumstances, threaten the sustainability of their services.”
Pricing is pivotal in markets, and will obviously therefore be expected to the subject of considerable scrutiny by competition regulatory authorities. In future, Monitor will be responsible, in partnership with the NHS Commissioning Board, for setting prices for NHS services.Indeed, according to a statement produced on 20 June 2012,
“The Health and Social Care Act 2012 makes changes to the way health care is regulated in order to strengthen the way patients’ interests are promoted and protected. Monitor’s role will change significantly as we take on a number of new responsibilities. We will become the sector regulator for health care, which means that we will regulate all providers of NHS-funded services in England, except those that are exempt under secondary legislation.”
Take for example the cost to the taxpayer of a provider delivering a baby – not the antenatal or postnatal packages, but the cost of the actual labour and peri-partum process (“the package”). Like any other “product” in the market, a supplier will have to price its product carefully, to ensure that it offers a competitive price, but especially to ensure it does not price itself out of the market by being too costly. The price of “the package” might be determined through a number of different ways.
- Premium pricing (also called prestige pricing) is the strategy of consistently pricing at, or near, the high end of the possible price range to help attract status-conscious consumers. People might buy a premium priced product because they believe the high price is an indication of good quality.
- Cost-plus pricing is the simplest pricing method. The firm calculates the cost of producing the product and adds on a percentage (profit) to that price to give the selling price. This method although simple has two flaws; it takes no account of demand and there is no way of determining if potential customers will purchase the product at the calculated price. You only need to consider the complexity of doing the calculation for the package”, e.g. will the provider use cheap epipdural needs for the anaesthesia, will a foundation year doctor (who is cheaper) perform most of the medicine compared to a specialist registrar (who is more expensive, but more experienced, especially in dealing with medical emergencies).
- Value-based pricing – a price based on the value the product has for the customer and not on its costs of production or any other factor.. The relevant issue is how much would you be prepared to have provider A deliver your baby? This is a subjective issue, not easy to predict.
The problem with premium pricing is that providers can collude lawfully to set their prices as high as possible between them. Price fixing is illegal under Article 101 TFEU of the European Union:
Article 101
(ex Article 81 TEC)
1. The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which:
(a) directly or indirectly fix purchase or selling prices or any other trading conditions;
(b) limit or control production, markets, technical development, or investment;
(c) share markets or sources of supply;
(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.
2. Any agreements or decisions prohibited pursuant to this Article shall be automatically void.
3. The provisions of paragraph 1 may, however, be declared inapplicable in the case of:
– any agreement or category of agreements between undertakings,
– any decision or category of decisions by associations of undertakings,
– any concerted practice or category of concerted practices,
which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not:
(a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives;
(b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.
It has been incredibly hard to prove price-fixing, but numerous examples exist.
For example, the Daily Mail recently reported price-fixing at the petrol pumps:
“Motorists are being ripped off by profiteering oil companies and speculators, MPs suggested yesterday.They demanded an inquiry into allegations of price-fixing at the pumps, and called for the Government to replace its planned fuel duty rise with a windfall tax on oil company profits.
And last year they reported on the price-fixing of milk:
“Supermarkets and dairy firms have been fined almost £50million over price rigging on milk and cheese that cost families £270million. The collusion put up the price of milk by 2p a litre – 1.2p a pint – and added 10p to the cost of a 500g block of cheese. The punishment was announced by the Office of Fair Trading, following an investigation triggered by whistle blowers at the Arla dairy company. First revealed by the OFT in 2007, the ‘Great Milk Robbery’ took place in 2002 and 2003. But only now has a fine of £49.51million been handed down.”
For Monitor, regulating this will be a mammoth task. Private health providers have much scope for setting between them the most profitable way of delivering the patient’s baby, and it is a great market to be in: the country will never be short of a need for providers of safe deliveries of babies. Whilst other metrics might be important to the clinician, such as mortality or morbidity (infection rates), it could be that private providers are distinguished most themselves by the least cost to a GP practice. Or, it could be that people are genuinely fickle about not caring about who picks up the tab, but the preferred private provider might provide “extra frills”, like en-suite TV with 80 channels.
The problematic issue is what happens if an unconventional problem comes out-of-the-blue. The mother might experience a rare type of headache, such as trigeminal autonomic neuralgia, and there is effectively no “patient choice” involved, save for the GP having to refer the patient to a specialist unit like Great Ormond Street Hospital. You will notice here that the quality of patient choice is nothing to do with the innovation of the private health provider, nor indeed how “competitive” the market of private providers of childbirth is: it is entirely to do with the skill of the clinician in making a rare diagnosis, and having the astuteness of having a specialist unit such as Great Ormond Street Hospital deal with it safely, whatever the cost. You must note that I give this example of TAN at GOSH completely at random, and any similarity to a real-life scenario is of course completely unintentional.
Why is Apple so successful?
I have just completed my marketing course for my MBA. In this course, we have looked at the branding and market positioning of products, and how they are ultimately priced. Apple’s marketing strategy (and distribution channels) continues to interest me. I wonder how it chooses to develop new products, and retains its competitive advantage.
