Unit 1 Micro: Market Failure in Private Health Care

The supply of health care in the UK is an important economic, social and political issue. Demand for health care treatments grows year by year as the population expands, ages and as incomes rise. For millions of people private health care is regarded as a necessity even though the NHS provides a vast range of services free at the point of use. Treatments such as cosmetic surgery, hand surgery, laser eye treatment, physiotherapy, weight loss services and hip and knee replacements are offered by a range of private sector providers in addition to state health care facilities.

The distinction between state and private-sector providers continues to blur as the years go by. High quality global journalism requires investment. Private sector companies appear to be making ground in providing a growing range of services for the NHS; in January 2012 Hinchingbrooke Health Care Trust in Cambridgeshire became the first all-purpose general hospital to be managed by a private company - Circle, the Aim-listed healthcare provider. In March 2012 a £500 million, five-year contract to run a wide variety of community health services in Surrey was won by Virgin Care

Health care spending in the UK (% of GDP)

Data from Timetric.

To view this graph, please install Adobe Flash Player.

United Kingdom from Timetric

The National Health Service

• In 2010 total NHS spending was £122bn, or 8.5% of GDP
• Mental health services, circulation problems and cancer treatment account for almost a third of total NHS total expenditure
• Health care spending per capita for over-65s is approximately 4 times higher than for the under-65s
• The vast majority of NHS funding ultimately derives from taxation
• Some funding comes from patient charges including prescriptions charges
• Wales, Scotland and Northern Ireland have abolished prescription charging (£470m in England in 2010)
• Hospitals can also raise revenue through car parking charges, patient telephone services
• Currently, around 80% of NHS funding in England is allocated to 152 Primary Care Trusts, according to a population and needs-based formula.
• Under controversial Coalition healthcare reforms, PCTs are to be abolished, with responsibility for local commissioning, and hence the bulk of the NHS budget, passed to groups of GPs.

Supporters of the NHS fear a gradual privatisation of the NHS whilst others claim that the private sector provides an important source of choice for some consumers and that private healthcare insurance takes some of the financial and resource pressure off the NHS helping waiting-lists to fall.

Data from Timetric.

To view this graph, please install Adobe Flash Player.

United Kingdom from Timetric

Circle figures heavily in news that the Office of Fair Trading is referring the private health care sector to the Competition Commission. A recent OFT market study was initiated in response to a formal complaint from Circle on the anti-competitive nature of the private healthcare market in September 2010. Circle is a new entrant into the UK health care sector - it is an employee co-owned partnership and has quickly become the largest partnership of healthcare professionals in Europe. Circle complained about what it thought are anti-competitive agreements (or network agreements) between national private healthcare providers and private medical insurance providers which it claims reduces consumer choice, stifles innovation (dynamic efficiency) and keeps prices for different treatments at high levels.

The Private Health Care market in the UK

1. Total value of market for private acute care in the UK was estimated to be £5 billion in 2009.
2. Of this figure, Fees to surgeons, anaesthetists and physicians generated an estimated £1.64 billion in 2009
3. 80% of health care purchases are made through private medical insurance policies (PMI)
4. 69 per cent of PMI sales in 2009 were to corporate customers
5. 16% of people in the UK have some form of private medical coverage – that equates to around 3.6 million people
6. 23% of the population are covered by private medical insurance in the South East compared to just 10% in the North East
7. If a patient does not have PMI cover, they can choose to fund their treatment themselves
8. Self pay patients account for around 13% of private health care treatments - and self-pay patients typically either rarely or never negotiate fees with Consultants. This suggests that the price elasticity of demand for treatments is low. The proportion of patients who choose to self-pay is related to NHS waiting times

Market Structure

Private Health care suppliers

There are five main PH provider groups active in the UK, each of which owns a network of PH facilities located throughout the UK.
1. General Healthcare Group (GHG) / BMI Health Care: www.generalhealthcare.co.uk and www.bmihealthcare.co.uk
2. Spire Healthcare (Spire) www.spirehealthcare.com
3. Nuffield Health (Nuffield) www.nuffieldhealth.com/Individuals/Facilities
4. HCA International (HCA) www.hcafacilities.co.uk
5. Ramsay Healthcare (Ramsay) www.ramsayhealth.co.uk

The market is highly concentrated – it is an oligopoly. These top five PH providers accounted for approximately 77 per cent of the PH market by revenue in 2010

Private Medical Insurance Providers (PMI)

These are insurance companies who attract personal and corporate buyers and who are purchasers of health care for their insurance holders. There are five main PMI providers active in the UK (the most recent market share is shown in brackets)

1. Bupa (42%)
2. AXA PPP (26%)
3. Aviva (10%)
4. PruHealth (which owns Standard Life Healthcare) (10%)
5. WPA (3%)

The buying side of the private healthcare market is also highly concentrated. Together, these five PMI providers account for well over 90% of the total revenue from PMI sales ‘subscription income’. This gives the private medical insurance businesses significant buying (monopsony) power in the market. For many private health care providers it is vital for them to be listed on the health care choice options listed by Bupa and AXA PPP which together account for nearly 70 per cent of PMI funded patients

Market Failure: Private patients paying too much according to the regulator

The OFT has found some market failures in the private health care industry and in April 2012 a decision was made to refer the market to the UK Competition Commission

The April 2012 Office of Fair Trading report found evidence of

1/ Information asymmetries - they claim that there is a lack of easily comparable information available to patients and their GPs on the quality and costs of private healthcare services. The full costs of treatment may not always be transparent for private patients and this makes it hard for patients to know if they are getting value for money. Certain information asymmetries are inevitable in healthcare markets given that patients are unlikely to know more about their condition than a GP or other medical professional. Many people do not have the knowledge, experience or time to search for the most appropriate course of treatment

2/ Monopoly control / entry barriers - There are only a limited number of significant private healthcare providers and larger health insurance providers at a national level. Most patients prefer to be treated locally but often there is a very limited choice of hospital. The OFT also points to barriers to entry - there are significant barriers to new competitors entering the market and being able to offer private patients greater choice. The typical cost for a new two-theatre twenty-bed private health facility is £21m-£25m. Smaller ten-bed PH facilities could be built for approximately £3-5m. These costs include capital expenditure, obtaining land and planning permission and meeting regulatory requirements.

Revision questions

1. Distinguish between healthcare needs and wants using examples of your choice
2. Explain two reasons why total spending on healthcare in the UK is likely to increase in the years ahead
3. To what extent is healthcare provided by the NHS likely to be more efficient than that provided by the private sector?