Simon Taylor, Keating Chambers:
In this post, Simon examines the changes in the new NHS (Procurement, Patient Choice and Competition) (No 2) Regulations 2013 (the NHS Regulations).
For his analysis of the old regulations, see Article, New procurement regulations for NHS healthcare services: big bang or evolutionary competition?
Take two: the new NHS (Procurement, Patient Choice and Competition) (No 2) Regulations 2013
The changes in the new NHS (Procurement, Patient Choice and Competition) (No 2) Regulations 2013 (the NHS Regulations) aim to allay fears that the NHS Regulations force open NHS services to competition.
The changes nod to the perception that the issue is binary – either there is competition or there is integration – and lend more support to integration. This is seen in the addition to the regulation 2 duty to act with a view to securing the needs of patients and improving service quality and efficiency “including through the services being provided in an integrated way”. It is also seen in regulation 3(5) by the addition of references to the statutory duty of promoting integration and in relation to the anti-competitive behaviour provisions (see below).
The changes omit the provision (the old regulation 5(2)) delineating the scope of the derogation to the obligation to tender where the commissioner is satisfied that the services are capable of being provided by one provider. The omitted provision tracked the sole supplier and urgency exemption from the Public Contracts Regulations 2006. This leaves a wider discretion under the NHS Regulations for the commissioner to decide that there is only one capable provider. In his letter to Parliament of 28 February, Earl Howe suggested that this derogation should be interpreted to cover a range of situations including where the requirement is for:
- provision of acute hospital services accessible on single sites;
- a range of integrated services delivered in the community; or
- where clinical volumes need to be maintained to protect patient safety.
The prohibition on anti-competitive behaviour contrary to patient interests by commissioners is maintained in regulation 10, though the wording is tweaked very slightly and a rider added that patient interests may justify services being provided in an integrated way or by way of cooperation between providers. The reference to the state action doctrine (whereby restrictions imposed by commissioners would not contravene this prohibition if they were mandated by other UK or EU law) has been removed. This is presumably on the basis that it does not need to be stated. Certainly, EU requirements would trump the NHS regulations due to the sovereignty of EU law.
Finally, it is expressly provided that Monitor may not direct a commissioner to hold a competitive tender for NHS healthcare services.
Is everything now clear?
Competition v Integration
The binary view of competition and integration as opposing forces is misleading. In other sectors, there are many instance of integration, whether vertical (for example, between manufacturer and distributor) or horizontal (between competitors), structural (for example, merger) or behavioural which are compliant with competition law. Sometimes, they do not appreciably restrict competition, sometimes they create more competition than they restrict and other times the consumer or industry benefits outweigh any restrictions on competition.
In markets where there is a large public buyer, integration is often the end result of a competitive tender process. Competition and integration are often fairly comfortable bedfellows.
Collusion is different – broadly speaking, that is when undertakings covertly fix prices, rig bids or share out markets in order to insulate themselves from competition. Collusion is anti-competitive, bad for consumers and a serious competition law infringement. There is a grey area between collusion and legitimate integration and that is where the competition case law and decisional practice at UK and EU level comes in to provide guidance.
In “beefing up” the references to integration, the redrafted NHS Regulations do not necessarily put a brake on competition. To take Lord Howe’s example, if the requirement is for a range of Community based integrated services, there may be a number of bidders or consortia of bidders able to deliver that requirement. The question is whether the law requires there to be a competitive tender to choose the integrated provider.
Requirement to tender?
If there is “cross border interest” in the contract and no available derogation, EU law will require a fair and transparent competitive tender. This need not follow any set process and can be quick and efficient.
If there is no cross border interest, the combination of duties under the Health and Social Care Act 2012 (the Act) and the NHS Regulations may still require a competitive tender, particularly if necessary to ensure that the provider most capable of securing patient needs and delivering value for money gets the work.
Where the NHS Regulations arguably fail to reassure is in not articulating a wider range of derogations which may be available to commissioners in deciding whether a competitive tender is required. It will often be difficult to satisfy themselves that there is only one capable provider. In Lord Howe’s other examples relating to the need for clinical volumes and single site provision, there may be more than one provider or hospital site able to deliver the requirement. The ongoing Bournemouth/Poole Competition Commission merger investigation shows the scope for competition between hospitals over a range of non-elective services.
The more difficult to pin down, but potentially helpful derogations, are those available under wider EU law relating, for example, to the protection of services of general economic interest. There may well be situations where there are two or three capable providers for a particular requirement for hospital based services, but the consequence of competing the contract may be the inability of the losing incumbent NHS Trust to continue to provide other healthcare services to the local population. A demonstrable risk of destabilising essential public services may well provide a robust justification for not tendering A&E or maternity services, for example, but there is little in the NHS Regulations to provide comfort on this.
Cost benefit analysis
Similarly, under the Act and the NHS Regulations (regulation 2, 3(4) and 3(5)), commissioners should have regard to their duty of efficiency and there is reference in regulation 3(3) to securing best value for money. The Explanatory Memorandum issued with the NHS Regulations states that:
“The overarching intention is to ensure that patients have access to the highest quality services and that best value is achieved for the taxpayer“.
However, there is no specific provision making it clear that commissioners are not required by the NHS Regulations to go out to tender when they could demonstrate that to do so would cost more time and money than they could possibly recoup through the benefits of competition. At the margins, there is a trade off between securing the services of the best possible provider and commissioning efficiently.
The prohibition on anti-competitive behaviour remains elusive. There is no specific reference to interpretation being in accordance with UK and EU competition law and the application of competition law to entities which are unlikely to be classified as “undertakings” is novel in any event. Nor is there provision for justifying conduct by reference to taxpayer savings.
The new wording seems to imply that integration and cooperation are always anti-competitive and must therefore be justified by patient benefits. In fact, much cooperation and integration will be pro-competitive or have no appreciable effect on competition.
This prohibition could reduce tendering as there is an argument that unnecessary or over-formal tendering distorts competition by raising transaction costs. Equally, it seems possible that a decision by commissioners not to tender could be attacked as anti-competitive on the grounds that it unfairly favours the incumbent.
Guidance from Monitor on what is and isn’t covered by the prohibition will be needed and the courts will, if seized of the issue (in a claim brought under section 76(7) of the Act), no doubt form their own view.
Finally, the statement that Monitor cannot instruct a commissioner to go out to tender may make little difference in practice.
If Monitor finds, for example, that a commissioner plans to enter into a contract without a tender with a provider who is not the most capable of delivering their objectives in relation to the required services further to regulation 3(3), it may order the commissioner not to enter into that contract and to put in place measures to ensure compliance with the NHS Regulations. Ultimately, the commissioner may be left with no choice but to go out to tender where there are a number of interested, capable providers and the only sure means of choosing the best one is to conduct a tender.