Marketing Mix - When the Whole Industry’s Prices are Too High

There is a huge amount of business studies in this news story from the BBC in which a senior executive from private healthcare provider Bupa suggests that the whole industry in the UK has set its prices too high.

According to Dr Damien Marmion of Bupa, prices for private healthcare are at least 15% too high across the market. He draws this conclusion partly from Bupa market research which suggests that a substantial percentage of their customers are struggling to afford private healthcare premiums.

The private healthcare market in the UK has been through some substantial change in recent years. not the least in terms of the shareholder / ownership. Venture capital funds ("private equity") have invested heavily in the sector, in particular funding the large healthcare groups (which operate many locations).

Trust me - the last thing that private equity funds are interested in is the health of their company's customers. However, in recent years, some of the private healthcare investments made by private equity firms have looked sick as the poor, over-charged patients. The Southern Cross collapse and subsequent scandal in 2011 was perhaps the best-known example.

In 2013 the Competition Commission reported on their investigation into the market and found that most patients in UK private hospitals are paying more than they should for treatment because of a lack of local competition.

The Competition Commission also concluded that three of the largest groups (BMI, Spire and HCA) had been "earning returns substantially and persistently in excess of the cost of capital. In other words they were earning excess profits, largely as a result of the lack of competition in the market.

The comment by Bupa is therefore quite significant. It suggests that the industry as a whole is, indeed, charging customers too much. Does this suggest that the industry remains uncompetitive? What incentives are there for the private equity-backed groups to do anything about over-pricing when they appear to be enjoying high returns on their investment?

Part of the answer might lie in the concept of capacity utilisation - which is referred to in the BBC article.

Damien Marmion comments that:

"Hospitals are like airlines or hotels - the more you fill them the cheaper it is for everyone."

The operating costs of hospitals are predominantly fixed. If prices were lowered to make private healthcare more affordable, then this might allow the suppliers of healthcare (often public sector hospitals) to reduce their prices themselves. Everyone could be a winner.

But don't hold your breath. The private equity investors are only concerned with profit maximisation and the current lack of genuine competition in the market looks like it suits them just fine.