Anita Charlesworth: The economics of integration
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Anita Charlesworth: The economics of integration






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Anita Charlesworth: The economics of integration Presentation Transcript

  • 1. The economics of Integration: Regulatory issues Anita Charlesworth Chief Economist The Nuffield Trust t: 0207 631 8450 e:
  • 2. Service Integration and Organisational Integration • Economic regulators interested in integration if it reduces competition through: – Organisational merger reducing patient choice; or – Abuse of market power but organisationally independent organisations.t: 020 7631 8450e:
  • 3. Principles and rules for cooperation and competitionObligations on Cooperation and agreements Conduct of individual Mergers and verticalcommissioners organisations integration1. Commissioners must 4. Commissioners and providers 7.Providers must not refuse 10. Mergers, includingcommission services from must cooperate to improve to accept services or to vertical integration,the providers who are services and deliver seamless supply essential services to between providers arebest placed to deliver the and sustainable care to patients commissioners where this permissible when thereneeds of their patients restricts commissioner or remains sufficient choiceand populations patient choice against and competition or where patients’ and taxpayers’ they are otherwise in interests. patients’ and taxpayers’ interests for example2. Commissioning and 5. Commissioners and 8. Commissioners and because they will deliverprocurement must be providers should promote providers must not significant improvementstransparent and non- patient choice including – where discriminate unduly in the quality of care.discriminatory and follow appropriate – choice of any between patients and mustthe Procurement Guide willing provider, and ensure that promote equality.issued in July 2010 patients have accurate and reliable information to exercise more choice and control over their healthcare.3. Payment regimes and 6. Commissioners and providers 9. Appropriate promotionalfinancial intervention in should not reach agreements activity is encouraged asthe system must be which restrict commissioner or long as it remainstransparent and fair. t: 020 7631 8450 patients’ and taxpayers’ consistent with patients’ e: interests. best interests and the brand and reputation of the NHS.
  • 4. The Health and Social Care Bill • Establishment of Monitor as the new economic regulator. • Monitor’s role: – Licensing providers across public, private and third sector to deliver care funded by NHS under tariff (with CQC) – Pricing methodology and levels (NHSCB responsible for price structure) – Promoting competition where appropriate and regulating where necessary – Ensuring continuity of services for designated services • Prices above tariff; • Special administration regime. – Designated services: • Commissioner applies to Monitor for a service to be designated • Criteria if ceasing to provide for the NHS would: – Have a significant adverse impact of the health of the people in need of the service; – Have a negative impact on equality of access.t: 020 7631 8450e:
  • 5. The Health and Social Care Bill • Monitor required to have regard to 4 duties of the Secretary of State: – Comprehensive service; – Quality improvement; – Tackling inequality; and – Promoting autonomy. • Monitor given concurrent powers with the OFT under: – The Competition Act 1998 • Power to investigate practices by organisations to restrict competition and patient choice e.g. Price fixing, limits or control of production and market share and abusing a dominant position. Has power to impose remedies for breach requiring change of conduct and power to issue fines. – The Enterprise Act 2002 • Enables Monitor to make market references to the Competition Commission used if Monitor believes features of the market might prevent, restrict or distort competition • Control of mergers – OFT and the Competition Commission responsible for reviewing mergers involving all FTs. • Competition Commission duty to review development of competition in health care and Monitor every 7 years starting in 2019 • Procurement and competitive tendering – Enabling power for the Secretary of State to impose requirements on the NHSCB and Consortia to ensure good procurement practice to promote choice and competition.t: 020 7631 8450e:
  • 6. The economic perspective • Market concentration allows providers to act against the best interest of customers and make excess profits. • Competition laws exist to prevent providers from securing or abusing a dominant position in the market. • The exception is ‘natural monopolies’ where the existence of economies of scale or scope so that productive efficiency is achieved when output is a high percentage of the total market demand.t: 020 7631 8450e:
  • 7. The regulatory response to natural monopoly • setting up competition for the market franchising - Rail • setting up common carrier type competition Communications and Electricity (it involves the break-up of existing vertically integrated organisations) • setting up surrogate competition ("yardstick" competition or benchmarking) Water • public ownershipt: 020 7631 8450e:
  • 8. The empirical evidence • Is health care a natural monopoly? Evidence from volume-outcome literature in the US suggested positive relationship between volumes and outcomes - Gaynor et al 2005 based on data from California 1983-99. If CABGs could only be performed in hospitals with a volume of 200 or greater the average mortality rate would fall from 2.5% to 2.05%. - But gains are exhausted at relatively low thresholds (NHS Centre for Reviews and Dissemination 1997) - Evidence on costs does not support widespread economies of scale and scope. A number of DEA studies find average total costs flat or increasing with scale. - Evidence suggests economies of scale exhausted in the 100-200 bed range range - Diseconomies begin between 300-600 beds (Ferguson, Sheldon and Posnett 1997) - No evidence for economies of scope (Lynk 1995, Treat 1976)t: 020 7631 8450e:
  • 9. The empirical evidence • But evidence on mergers reducing cost is inconsistent: – Dravnove et al (2003) • Consolidation into systems does not generate savings even after 4 years. • Significant and persistent savings from mergers after 4 years (14%). ‘These savings may be primarily due to capacity reductions’. – Kjekshus and Hogen study of Norwegian mergers • Significant negative effect of 2%- 2.8% on cost efficiency. • Impact on payers – Where merger results in less competition prices rise Vita and Sacher 2001 mergers between not-for profit hospitals found increase in prices (+23%)t: 020 7631 8450e:
  • 10. Merger – CCP position • All mergers (vertical and horizontal) assessed based on: – size of deal (£15 million threshold) – impact on market share and concentration • CCP undertake a cost – benefit analysis of the merger considers impact on patients and the taxpayer: – Benefits – improved clinical outcomes, better services and greater efficiency; – Costs – adverse effects on patients and / or taxpayers from reduction or loss of choice and competition.t: 020 7631 8450e:
  • 11. Vertical Integration – CCP approach • ‘The impartiality of the clinician referring patients from one organisation to another is essentially lost for referrals with the merged entity. This means that a patients’ ability to make an informed choice about which acute trust to go to may be compromised. The merged entity has a financial incentive to refer patients within the merged entity which arises from the PBR system’ (CCP merger guidelines October 2010)t: 020 7631 8450e:
  • 12. Vertical Integration • A key issue for CCP with Transforming Community Services mergers. • CCP has agreed a fast track procedure for most. • 2 key criteria: – Parties provide assurances regarding choice along the pathway – Merger does not include transfer of any PMS or APMS contract. • Among cases CCP has had concerns about 2 factors seem critical: – Market share post merger – Involvement of GP gatekeeper increasing foreclosure risk.t: 020 7631 8450e:
  • 13. Conclusions • CCP current approach is likely to be a very good guide to new economic regulator’s stance. • Mergers of all kinds often fail to deliver their promise it is probably healthy to have a robust external challenge in the process. • The impact on patient choice will be critical – models of integration need to be compatible with patient choice if they are to pass regulatory hurdles. • Size matters – vertical integrated organisation that cover large geographies will struggle to pass the regulatory test.t: 020 7631 8450e:
  • 14. t: 0207 631 8450 e: