The Department of Health (DH) is consulting on a range of radical initiatives linked to the Health White Paper.

One of these: 'Liberating the NHS: regulating healthcare providers', concerns its proposal to establish Monitor as an economic regulator for the healthcare sector. Monitor will have the duty to licence providers of NHS funded services, set tariffs and promote competition in the health and social care sector.

This analysis relates to the Government's plans for Monitor to promote competition in the sector. Further Wragge & Co briefings will be provided on other aspects of the proposed Monitor reforms.

The Government's plans for competition in the NHS represent a step change in the move towards patient choice and contestability in the NHS. This briefing summarises the key changes and comments on their implications.

Choice and competition

The DH explains in Liberating the NHS: Regulating healthcare providers (the Paper) that patient choice will be beneficial as it will make providers more responsive to patient's needs, stimulating innovation and improvements in the quality of care and increases in productivity.

Various measures will need to be taken to make patient choice a reality, including the provision of information and notably, regulatory oversight in order to promote competition.

It is therefore proposed to give Monitor a duty to promote competition, where appropriate and extend the scope of choice in the various areas set out in the White Paper.

Wragge & Co comment:

The duty on the economic regulator to promote competition where appropriate is common to other regulated sectors in the UK. For example, Ofcom - the regulator for the communications sector - has a similar obligation, as well as a power concurrently with the Office of Fair Trading to enforce the Competition Act 1998.

But competition in the healthcare sector is different to other regulated sectors.

In most other regulated sectors, consumer choice is now taken for granted. It is a relatively new concept in the NHS. The public and patients are generally unclear of what services they are entitled to under the NHS.

In other sectors, the consumer pays for the service that it receives. In the NHS, the service is free at the point of delivery and is only paid for indirectly via taxation. So the scope for price competition is more limited.

The promotion of competition in healthcare and social care services may focus on those areas where patient choice can viably be introduced – and thus where there is competition (at least non-price competition) "in the market". This will include an increasing range of elective, diagnostic and other services.

Measures currently promoting competition in the NHS include the Choice Directions (Primary Care Trusts (Choice of Secondary Care Provider) Directions 2009). Some PCTs are already finding it challenging to balance their budgets and comply with the Choice Directions.

Choice in the NHS can be costly where, for example, a local provider is willing to offer elective procedures at or below cost to fill capacity. Monitor will also be set the objective of "making best use of limited NHS and adult social care resources" and there will be a difficult balancing act between short term austerity measures and the longer term benefits of choice.

Choice will not be appropriate for services such as emergency, ambulance admissions to A&E, where referral to the local provider is automatic.

However, competition "for the market" may still be promoted - for example, by requiring that transparent and fair procurement procedures are followed before the A&E provider is commissioned in a particular area for a specified period.

It is not yet clear how far the promotion of competition for the market will be considered "appropriate". Nor is it yet clear where the boundaries between NHS and social care services are to be drawn.

Concurrent powers

The Government is to give Monitor concurrent powers to enforce competition law in the UK health and social care sectors. The scope of these powers is therefore broader than its licensing powers which are limited to the licensing of providers of NHS funded services.

Monitor will have the power to enforce the Competition Act 1998 against the full range of healthcare providers in relation to their NHS and private healthcare and social care activities.

In addition, Monitor will have the power to carry out market studies and make referrals of dysfunctional markets in the health and social care sector to the Competition Commission for investigation. This power has been used in other sectors by the Office of Fair Trading (OFT) to refer, for example, the groceries sector to the Competition Commission.

Monitor will have the power under its general licensing powers to set not only general licence conditions (applicable to all providers of NHS funded services), but also special conditions for some providers.

The DH refers to incumbents and other providers having the ability to prevent choice and quality developing as a result of their powerful position. These special conditions may include obligations to accept or provide services in certain circumstances.

Wragge & Co comment:

The Paper does not explore the question of whether, and how far, the Competition Act 1998 actually applies to NHS activities. Historically, the OFT has been reluctant to get involved in investigating conduct relating to NHS funded services.

Instead, the DH established the Cooperation and Competition panel (CCP) to help combat anti-competitive practices in relation to NHS funded services.

The CCP was tasked with advising Monitor and the DH on anti-competitive practices by NHS providers and commissioners. This is further to a code of conduct drawn up by the DH - the Principles and Rules of Cooperation and Competition (PRCC).

Compliance with the PRCC is encouraged by the threat of directions imposed by the Secretary of State (against NHS Acute Trusts and PCTs) or licence enforcement by Monitor (against NHS Foundation Trusts).

There is no means of enforcement of the PRCC against private sector providers, though they are clearly affected by the CCP's rulings.

The PRCC therefore currently exists in parallel to the competition law rules.

Conferring concurrent competition powers on Monitor marks a departure from the PRCC and a move towards embracing the application of the more coercive and independently enforced competition law into the NHS funded healthcare sector.

It seems likely that, in time, the PRCC will be disbanded in favour of guidance on the application of competition (and procurement) law in the sector.

Significant uncertainties remain. Competition law will only apply to the activities of "undertakings" as defined in UK and EU case law. That definition encompasses the activities of bodies which are operating on economic markets.

As patient choice expands and competition (whether in or for the market) for is promoted, there will be an increasing array of NHS markets and thus an increasing scope for the application of competition law. This will apply to both primary and secondary care services.

It is possible that the Government will seek to limit the application of competition law to certain types of provider and activities. There is a sense in Europe that healthcare is culturally different to other markets and that the "solidarity" within a state funded system tends to indicate that the market players are not undertakings and can be subject to different rules.

But it seems likely that the move towards concurrency will simplify the UK rule framework by removing the need for the PRCC. It should also be more effective in safeguarding and promoting competition given the severity of the potential sanctions for competition law breaches (including fines of up to 10% of the turnover of the "undertakings" involved).

The provision for introducing special conditions where providers enjoy market power also replicates the position in other sectors. Notably, in the communications sector, the European Commission has introduced a "significant market power" mechanism for triggering the application of more onerous licence conditions.

Level playing field

The Paper refers to the fact that Monitor would be able to consider factors that may put particular providers at a relative disadvantage and make proposals to the Government or the NHS Commissioning Board to ensure that any differences are fair.

Wragge & Co comment:

This is a very brief reference to a much wider issue. One of the challenges faced by Monitor in promoting competition in the healthcare sector is that the types of provider who will be competing in the new markets have very different characteristics which may help or hinder their ability to compete fairly.

A case in point is the current restriction on a Foundation Trust's ability to provide services to private patients. This restriction is to be relaxed considerably under the new reforms. Foundations Trusts will thus be encouraged to find new sources of income.

At the same time, the independent sector may question some of the advantages enjoyed by, for example, Foundation Trusts in the market. These may include not only a position of incumbency, but also access to NHS staff pensions and NHS insurance cover.

As GPs expand into integrated care and private providers compete for primary care contracts, the advantages enjoyed by GPs, as well as their conduct on the market, may also come under increasing scrutiny.

The need to ensure a level playing field must be viewed in the context of the debate around ensuring competitive neutrality in mixed public/private markets. The OFT published a paper on this subject in July 2010, building on the 2006 CBI/Serco Institute Paper - A fair field and no favours: Competitive neutrality in UK public service markers.

The healthcare sector is one of the sectors where inherent advantages suffered by certain players in the market may lead to competitive distortions unless proactive action is taken.

There can be expected to be some significant proposals in this area, relating for example to the evaluation of public tenders or possible changes to taxation, pension and insurance arrangements. A further Wragge & Co briefing will be provided on the OFT's Competitive Neutrality paper.

Commissioner activity

The Paper notes that the Government is to introduce legal duties on the NHS Commissioning Board and Commissioners to promote choice, act transparently and in a non discriminatory manner in commissioning activities and to prohibit agreements or other actions to restrict competition against patients and taxpayers interests.

Monitor will have the power to investigate and remedy complaints relating to procurement decisions or other anti competitive conduct.

Wragge & Co comment:

The area of commissioning and procurement is another which is currently regulated by the PRCC and the CCP, as well as by Strategic Health Authorities (SHAs). Current CCP rules provide that any providers unhappy with a tender process must pursue a complaint to the SHA with the right of appeal to the CCP.

Under public procurement law, healthcare is a Part B service and not therefore subject to the full rigour of the Public Contracts Regulations 2006. But Regulation 4 imposes a duty on contracting authorities to treat economic operators equally and in a non-discriminatory and transparent way.

And EU law principles require an advertised tender process where there is a "cross border effect" (for example, where a non-UK provider would be interested in the tender). These legal principles are enforced by the courts, but their application to NHS healthcare services has not yet been tested.

As with competition law, the PRCC relating to commissioning therefore currently operates in parallel to the public procurement law rules.

The Paper envisages the introduction of new legal rules and duties to be enforced by Monitor. However, the change may, in substance, be little more than the transfer of the Secretary of State's responsibility for enforcing the PRCC against NHS commissioners to Monitor. Going forward, this will involve taking action against GPs in their commissioning capacity and the relevant PRCC rules will need to be changed to reflect this.

The possibility of bringing a direct action in the courts under the generic public procurement rules will remain. Care will need to be taken to ensure that the new commissioning rules are consistent with public procurement law, given the need to avoid confusion and given the supremacy of EU law.

They key issue will be how market entry is to be fairly and transparently controlled. How will private providers gain access to markets that have been the traditional preserve of NHS Trusts? How will Foundation Trusts with a national reputation secure "out of area" referrals?

In areas where patient choice is being introduced, a flexible and dynamic accreditation system enabling all qualified and willing providers to operate may be the solution - without the need for local tender procedures. But if Monitor wants to enable price competition below a regulated tariff cap, then tenders will probably be needed (as the patient will not be influenced by the price in making his or her choice).

In other areas, where competition "for" the local market is a possibility, open tender procedures may be needed before contracts are placed (for example, with a provider of A&E services). This will be subject to exceptions where, for example, there is only one capable provider available.

Mergers

The Government's proposals in relation to mergers are equally radical. It is envisaged that the OFT and Competition Commission are to have sole responsibility for investigating mergers in the health and social care sector.

Under current law, Monitor (in relation to Foundation Trust mergers) and the Secretary of State for Health (in relation to NHS Trust mergers) investigate and approve mergers, with the advice of the CCP on the competition implications. This has led to the CCP developing a complex merger control analysis in relation to NHS mergers, without there being any clear statutory basis for assessing the competition implications of mergers between NHS bodies.

Given that the Enterprise Act 2002 does not expressly take into account the specific characteristics of the health sector, the Paper recognises that modifications may be needed. The Paper notes, in particular, that these may seek to ensure that the full range of NHS providers are subject to the merger controls rules and that the Secretary of State (for Business Innovation & Skills) will be able to intervene in healthcare mergers on public interest grounds.

Wragge & Co comment:

While the OFT has been involved in reviewing a number of mergers in the social care and private healthcare area, it has not to date looked at mergers involving NHS Healthcare Trusts. This will change under the new rules.

Reform, or at least guidance, may be needed to clarify that the definition of an "enterprise" under the Enterprise Act encompasses NHS Trusts and GP partnerships/consortia. This will highlight the fact that GP practices are effectively small businesses and consideration will need to be given to the competition and other implications of consolidation in this area.

Given the current roles of Monitor and the Secretary of State in relation to mergers between NHS Trusts and the evident need to take into consideration factors other than just competition, it seems likely that a specific healthcare related power of intervention will be introduced into the Enterprise Act.

This may not need an amendment to the primary legislation as the Secretary of State can issue an intervention notice in respect of a sector where he or she deems that a specified consideration (such as safeguarding the availability of key healthcare services) should be taken into account.

In conclusion, the Government's White Paper and specifically its proposals for turning Monitor into an economic healthcare regulator are radical and wide ranging.

The NHS is already a mix of competition and monopoly provision, encompassing a wide range of providers including NHS Acute and Foundation Trusts, GPs, independent sector providers and third sector organisations. Economic interests are clearly already at stake and markets are developing. There is therefore already a role for competition and procurement law.

These new proposals will lend weight and specialist expertise to the application of competition and procurement law in the sector and should, in time, help enable the benefits of competition to be enjoyed.

Comments are invited to the Paper from interested parties prior to 5 October.