On 7 October 2008, the Office of Fair Trading (OFT) announced its decision to refer the anticipated acquisition of Premier by Hospedia, owner of Patientline, to the Competition Commission (CC) on the grounds that it "gives rise to a realistic prospect of a substantial lessening of competition in the supply of Bedside Entertainment and Communication Systems (BECS) to NHS hospitals".

Patientline and Premier together supply more than 200 NHS hospitals with 'free-managed' BECS. These offer patients a pay-as-you-go bedside telephone and TV service, without charge to the hospital trust.

The OFT has highlighted the fact that Patientline alone accounts for over 70% of BECS installed in NHS hospitals. Although Premier has a much smaller share of the market, it is the closest alternative to Patientline for hospitals. A third provider, HTS, has installed services in 18 hospitals.

The OFT is concerned that the BECS providers are insulated from competition as the NHS will not pay the up-front installation costs of potential new providers. It is also concerned that the use of patients' own portable TVs and mobile telephones is not an effective substitute.

This is not the first time that the activities of Patientline and Premier have been subject to regulatory investigation. In July 2005, Ofcom launched an investigation into the concession agreements entered into between NHS Trusts and BECS providers. They considered, in particular, the high incoming call charges to beside units, the long-term nature of the concessions and a clause which encouraged the trusts to limit mobile phone use. Ofcom closed its file in January 2006, effectively handing the matter back to the Department of Health (DH) and the parties for resolution.

In February 2007, the DH published its response to a report by the specially convened Patient Power Review Group. The DH said that it would continue to work with suppliers to consider ways of reducing incoming call charges, including the use of the units for other hospital services (e.g. food ordering and patient records) but this is ultimately up to the NHS Trusts.

While media attention has died down and a number of different BECS products and tariffs are now available, concerns over pricing remain.

If the proposed merger is approved, Hospedia has promised that significant sums will be invested in updating BECS, as well as adding new services. It has been reported that Hospedia wishes to lower incoming call charges (from 49p per minute rate) to Premier's rate of 20p per minute.

The CC Investigation

The CC has until 23 March 2009 to decide whether the merger gives rise to a substantial lessening of competition and, if so, what remedies are needed to address this.

In carrying out merger investigations, it is common practice for the CC to send detailed questionnaires to the customers of the merging parties. Customers may also be invited to give evidence to the CC in person.

This means that NHS trusts which currently have BECS or may, in the future, procure BECS will be key witnesses in this investigation. The CC will rely heavily on them for verification of the evidence given by the parties on the way the market operates and the possible effects of the merger.

This is likely to be a resource intensive process for trusts. It is a legal requirement to answer any questions asked by the CC and co-operate fully with the investigation.

Comment

Companies seeking regulatory approval for consolidation often make promises about the benefits which will be passed through to customers following the merger. The CC is generally suspicious of such promises and concerned that, insulated from competition, the merged entity will increase prices and reduce quality. This is why mergers leading to high market shares, where there are significant barriers to entry, are often blocked.

The pricing issue is all the more sensitive here as Premier and HTS have both brought down incoming call charges rather more than Patientline. Some might say these price reductions have resulted from the price of competition for long-term concessions contracts. When you consider that the BECS pricing issue (like car parking charges) has been a political hot potato, passed between various government and regulatory institutions for some years now, the concerns are all the more vital.

That said, this is not a typical market. First, NHS trusts enjoy buyer power when procuring BECS. They have discretion as to whether to introduce or renew the service (the DH made it clear in February 2007 that its roll-out target under the 2000 NHS Plan had already been met).

Second, given Patientline Plc's administration, it is apparently not a high-margin market. The parties may be arguing the 'failing firm' defence, that in the absence of the merger one or both of the parties would go out of business so the alternative to the merger (the 'counterfactual') is far less attractive to customers.

Third, the ultimate 'customer' is not the hospital trust, which does not itself pay for BECS, but the patient. One criticism of the current market may be that the end-customer's interests are not being sufficiently protected when concession contracts are tendered. Expect the CC to pay particularly close attention to the views of patient groups – and their families who foot the bill of incoming calls – in this investigation.

This market is not a typical candidate for a CC referral – a costly and lengthy process which will drain the resources of busy NHS trusts with other priorities. Surely a better solution would have been agreement with the OFT on 'undertakings in lieu' of a referral whereby Hospedia would commit to the Premier incoming call charges and other tariffs. Perhaps this was not on offer.

One thing is for sure, the CC will take the opportunity to scrutinise the financial models of the providers very closely to determine what BECS delivers for patients. If they conclude that the merger does substantially lessen competition, they can be expected either to block the merger or, perhaps more likely, mandate a solution which delivers a satisfactory deal for patients.