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The good times are over for private hospitals The good times are over for private hospitals
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For a decade now, private hospitals have prospered thanks to a combination of NHS business transfers and anti-competitive behaviour. In order to give NHS patients increased choice and to reduce waiting times, the Blair government encouraged the use of private hospitals. Furthermore, it invested in privately run independent sector treatment centres (ISTCs), by offering some remarkably inefficient contracts which initially paid providers even when promised hip replacements and cataract surgery were not delivered.For a decade now, private hospitals have prospered thanks to a combination of NHS business transfers and anti-competitive behaviour. In order to give NHS patients increased choice and to reduce waiting times, the Blair government encouraged the use of private hospitals. Furthermore, it invested in privately run independent sector treatment centres (ISTCs), by offering some remarkably inefficient contracts which initially paid providers even when promised hip replacements and cataract surgery were not delivered.
These policies were a boon to private hospital providers. They rescued what would otherwise have been an ailing industry. These hospitals had unused capacity, which could be utilised by NHS patients at national tariffs that augmented their revenues. They developed their NHS business rapidly, particularly because they had superior facilities, such as single rooms and better meals.These policies were a boon to private hospital providers. They rescued what would otherwise have been an ailing industry. These hospitals had unused capacity, which could be utilised by NHS patients at national tariffs that augmented their revenues. They developed their NHS business rapidly, particularly because they had superior facilities, such as single rooms and better meals.
The initial report of the Competition Commission, published over the summer, concluded that private hospitals dominate private insurers and discriminate by price against the insurers and self-paying patients. Because of their power to determine prices, private hospitals are making unfair profits by charging different prices for the same service in different parts of the country.The initial report of the Competition Commission, published over the summer, concluded that private hospitals dominate private insurers and discriminate by price against the insurers and self-paying patients. Because of their power to determine prices, private hospitals are making unfair profits by charging different prices for the same service in different parts of the country.
The commission focused primarily on three hospital providers: HCA, BMI and Ramsey, and concluded that their use of local monopolistic power enabled them to charge prices above the average and make high profits. These companies deny that they are doing this, but the commission is expected to require them to sell off some hospitals to reduce their monopolistic power and increase local competition. The commission focused primarily on three hospital providers: HCA, BMI and Spire, and concluded that their use of local monopolistic power enabled them to charge prices above the average and make high profits. These companies deny that they are doing this, but the commission is expected to require them to sell off some hospitals to reduce their monopolistic power and increase local competition.
For organisations such as BMI this is bad news. It is owned by a private equity organisation. Increased competition will reduce profits and make owners reluctant to invest in their assets. The owners of BMI are the South African firm Netcare, Apax partners and London and Regional. All three organisations are aggressive private equity profit maximisers who, if returns are threatened, may well divest themselves of their involvement. Then the problem will be who will invest in an industry where competition is being increased and profits reduced by regulator intervention?For organisations such as BMI this is bad news. It is owned by a private equity organisation. Increased competition will reduce profits and make owners reluctant to invest in their assets. The owners of BMI are the South African firm Netcare, Apax partners and London and Regional. All three organisations are aggressive private equity profit maximisers who, if returns are threatened, may well divest themselves of their involvement. Then the problem will be who will invest in an industry where competition is being increased and profits reduced by regulator intervention?
The capital costs of maintaining quality are considerable. The healthcare regulator, the Care Quality Commission, is becoming increasing aggressive in its inspection and reporting work following the Mid-Staffordshire hospital problems and the failure of a major private sector home care provider, Southern Cross. If lack of investment means the quality of care becomes a concern, NHS purchasers, private insurers and self-paying patients will reduce their expenditure and add to the woes of financially stressed companies such as BMI.The capital costs of maintaining quality are considerable. The healthcare regulator, the Care Quality Commission, is becoming increasing aggressive in its inspection and reporting work following the Mid-Staffordshire hospital problems and the failure of a major private sector home care provider, Southern Cross. If lack of investment means the quality of care becomes a concern, NHS purchasers, private insurers and self-paying patients will reduce their expenditure and add to the woes of financially stressed companies such as BMI.
The role of private insurers remains problematic. This market is dominated by Bupa and Axa. Like insurers in the US, these organisations have failed to ensure value for money for their clients. They have proved unable to regulate prices and avoid excess provider profits. Is more competition also needed in the insurance industry?The role of private insurers remains problematic. This market is dominated by Bupa and Axa. Like insurers in the US, these organisations have failed to ensure value for money for their clients. They have proved unable to regulate prices and avoid excess provider profits. Is more competition also needed in the insurance industry?
The private hospital providers are facing increased NHS competition. NHS managers are investing in private patient provision as a way of raising revenue to subsidise public provision of care. More NHS care is going out to tender but may stay "in house" if there are quality concerns about certain private providers.The private hospital providers are facing increased NHS competition. NHS managers are investing in private patient provision as a way of raising revenue to subsidise public provision of care. More NHS care is going out to tender but may stay "in house" if there are quality concerns about certain private providers.
The report from the Competition Commission has robust and radical proposals, in particular the divesting of a dozen hospitals by BMI. It is likely to be the subject of a legal appeal. These proposals will deplete frail profit margins in the private sector at a time when NHS competition for private patients is intensifying and the demands of care quality regulators require investment and better performance management. These pressures are likely to disappoint private equity investors and pose major value for money concerns for insurers and people paying for private care out of their own resources. Buyer beware!The report from the Competition Commission has robust and radical proposals, in particular the divesting of a dozen hospitals by BMI. It is likely to be the subject of a legal appeal. These proposals will deplete frail profit margins in the private sector at a time when NHS competition for private patients is intensifying and the demands of care quality regulators require investment and better performance management. These pressures are likely to disappoint private equity investors and pose major value for money concerns for insurers and people paying for private care out of their own resources. Buyer beware!
• This article was amended on 25 September 2013. An earlier version said the initial report of the Competition Commission focused primarily on three hospital providers: HCA, BMI and Ramsay. It did not focus on Ramsay but on HCA, BMI and Spire.
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