No. ME/01008
Report under section 125(4) of the Fair Trading Act 1973 of the Director General's advice, dated 14 March 2001, to the Secretary of State for Trade and Industry Under section 76 of the Act
General Healthcare Group Limited ('GHG') is the largest operator of private hospitals in the UK in revenue terms, trading through its wholly-owned subsidiary BMI. GHG turnover was £435.6 million for the year to 31 December 1999.
GHG is controlled by funds advised by B C Partners ('BCP') a venture capital firm which provides funds for management buy-outs in return for equity stakes. BCP's equity is divided among a number of its investment funds. BCP's funds' principal investors are financial institutions and pension funds. BCP does not have any interests in competing healthcare companies. Around 10% of GHG equity is owned by the GHG management. For the sake of clarity I will refer to GHG as BMI in the rest of the submission except where it is necessary to refer to the group as a whole.
Community Hospitals Group plc ('CHG') owns and operates 22 private hospitals. The gross assets of CHG were £270 million at 30 June 2000. The Group turnover in the year to 30 June 2000 was £123.9 m with a profit before tax of £19.4 million.
GHG proposes to acquire the entire share capital of CHG and would re-brand the hospitals under a common name. GHG would close CHG's Head Office, transferring some of the staff to BMI's corporate and regional management teams.
The merger satisfies the assets test in section 64(1)(b) of the FTA. The share of supply test in section 64(1)(a) and (3) also appears to be satisfied with respect to Private Medical Services (PMS) but it is not necessary to determine this. The EC Merger Regulation does not apply.
The parties overlap in the provision of PMS. These take the form of private hospitals which sell their services to Private Medical Insurers (PMIs) and to self-pay patients. The latter account for around 20% of the total PMS business.
I consider that Private Patient Units (PPUs) associated with NHS hospitals provide an effective substitute for private hospitals. While clinical standards are generally comparable, I do not consider that the wider NHS is able to offer a service with the same characteristics as PMS. In general, it cannot match the PMS characteristics of early appointments and high standards of accommodation.
With respect to the supply of PMS to PMIs, there appears to be a distinction between the four groups which are able to offer services in many parts of the country, including BMI and CHG, and smaller operators, which are limited to a particular locality. From the information supplied by customers, these four groups appear to be practically indispensable trading partners for PMIs of all sizes.
Annual negotiations take place between PMS providers and PMIs. PMS providers usually set prices on a national basis, and the four national providers feature strongly in PMI networks. I therefore consider that the appropriate geographic market is national.
There is a case for taking the relevant product market to be that for the supply of private medical services by organisations with a significant presence throughout Great Britain (BMI and CHG are not present in Northern Ireland). It is also possible to consider a somewhat broader definition which would include all PMS providers.
The parties would have a combined share in the broader PMS market of just over 25% of all private hospital beds (increment 7%). If the market were defined more narrowly as national PMS providers, the parties would have just over 46% of the revenue received by those providers (increment 9%).
The merger would result in a reduction from four to three in the number of national groups. It would also provide the merged entity with enhanced seller power.
Third parties have suggested that the merged group would have the scope to raise prices. They have provided evidence that such price rises have occurred in the past when BMI has taken over individual hospitals. Third parties also allege that BMI prices are generally higher than CHG's. I note that this view is consistent with the independent analysis contained in the recent Competition Commission report on the proposed merger between BUPA and CHG. Finally, small PMIs claim that BMI has imposed price rises upon them, and assert that they do not have sufficient bargaining power to prevent this. They believe their position would be weakened if the merger were permitted.
BMI does not accept that its prices are necessarily higher than its main competitors. It has claimed that its hospitals often contain superior facilities which would justify higher prices for particular procedures. It has also provided information on the price rises implemented with PMIs in recent years. Without further investigation it is not possible to resolve these claims.
The merger would also lead to significant overlaps in six local areas. These raise concerns about a loss of choice for self-pay patients. They are also an element in the concern, as noted in the national context, about a possible strengthening of negotiating power and indispensability.
No substantive vertical issues arise as a result of this merger.
Almost all PMIs were concerned by the proposed merger. Their views have been discussed above.
I have not been able to identify any remedies which I could be confident would address the competition issues arising at national level in this case.
The reduction in the number of national PMS providers raises significant competition issues. I have been unable to reach firm conclusions on the relative level of BMI prices. It appears possible, however, that BMI might have the scope to raise prices if the merger proceeded and I believe that this matter should be examined in more detail than is possible during a first phase investigation.
I have also concluded that this merger raises competition issues associated with local overlaps. These also merit further investigation.
For the reasons set out above, I conclude and recommend that you should refer this proposed merger to the Competition Commission.
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