One of the conclusions drawn by the CMA following its review of the private healthcare market was that the existence of certain benefits commonly provided by private healthcare operators to clinicians had an adverse effect on clinical independence and therefore on competition.
The general prohibition
The Private Healthcare Market Investigations Order 2014 (which introduces regulations to enforce the conclusions in the CMA’s final report) contains a broad prohibition against any arrangement which could be regarded as inducing a clinician to refer patients to or to treat patients at a particular hospital. The prohibition applies to both private hospital operators and referring clinicians. Any such arrangement which is in force must be terminated by no later than 6 April 2015. The prohibition applies even if the arrangement will only have effect for a stated period of time or includes an overriding requirement for the clinician to act in the patient’s best interests.
The Order also prohibits “direct” incentives from being put in place between private hospital operators and referring clinicians. Although the value of the direct incentive often relates to the activity generated from patients referred by the referring clinician, they are not always linked in this way. Examples of direct incentives set out in the Order include:
- Cash payments
- The allocation of shares in an equity participation scheme
- The use of services and facilities.
Higher value and low value services
There are exceptions to the general prohibition. These include:
- Higher value services such as the use of secretarial and administrative services; consulting rooms and contributions to PI insurance cover.
- Low value services such as training aimed at clinical safety; operational services such as hospital admissions; basic workplace amenities such as free tea, coffee and newspapers, general marketing services and proportionate corporate hospitality.
In order to come within the exception, higher value services must be:
- Charged to and paid for by the referring clinician at market value.
- Available on a non-discriminatory basis to all referring clinicians practising at the facility.
- Disclosed (including the amount charged) on the hospital operator’s website for the relevant facility. There is no requirement for the receiving clinicians to be identified.
Low value services must also be disclosed on the hospital operator’s website. Only the cost of general corporate hospitality needs to be disclosed.
Equity participation schemes
Equity participation schemes (whether direct or indirect) are prohibited unless certain pre-conditions are met. The scope of what could be an “equity participation scheme” is broad, and a share or financial interest alongside a private hospital operator in any of the following could fall within its scope:
- A facility owned or operated by the private hospital operator.
- Any diagnostic equipment or equipment used for treating patients.
- Any partnership or other arrangement created for the purpose of enabling a private hospital operator to offer private healthcare services.
The pre-conditions are:
- The financial interest must be paid for at market value.
- Any option must be exercised not more than 24 months from the date of its grant.
- The resulting shareholding must not exceed 5% of any class of shares.
- There must be no accompanying obligation to refer patents or to carry out a minimum proportion of the referring clinician’s private patient’s activity at the facility in question.
- Any dividend or profit share must be proportionate to the financial interest held.
- There can be no restriction against the referring clinician treating patients at other facilities or participating in any other equity participation schemes.
- Details of all referring clinicians with a financial interest in a facility should be published on the private hospital operator’s website in respect of that facility. The information to be provided comprises the name of the clinician; the percentage of the interest held and the valuation methodology used.
Both private hospital operators and referring clinicians will need to review carefully those incentives that currently form part of wider benefits arrangements. It is difficult to see how any incentive that does not have a market value payment flowing from the recipient can survive the prohibitions set out in the Order. Similarly, the Order heralds the end of any benefits which are calculated by reference to activity levels which are relevant to a referring clinician. The terms of any linked transactions (for example payments which reimburse referring clinicians with sums they have themselves paid to the operator by way of market rent) and which could fall foul of the general prohibition will also need to be reviewed carefully.
Private hospital operators will also have to bear in mind the new obligation to be transparent as to the benefits that are made available to referring clinicians.
The prohibitions within Part 3 (which include the general prohibition and the specific prohibition against direct incentives) are subject to an exception in the Enterprise Act which means that they do not apply to employment terms and conditions. As such, although this will not be an acceptable option to all clinicians, it is possible for the private hospital operator to employ the referring clinician. If the referring clinician was to be employed on a part-time basis (and had practising privileges at the relevant hospital), this arrangement would need to be published on the operator’s website in relation to the facility.
Where referring clinicians practise in an identifiable business unit which they own, it is also possible for any employment-based arrangement to be accompanied by the sale of that entity to the private hospital operator without contravening the Order. However, if the consideration payable for the business was equity in the purchasing private hospital operator, it would be necessary to consider whether the arrangement amounted to a compliant equity participation scheme.
Any earnout payable in connection with such a sale would need to be structured carefully and would need to exclude any income generated by the referral of work to the acquirer. The reason for this is that the exception relating to employees applies to terms and conditions of employment which would not include any earnout arrangement in place between the owners (acting in that capacity) and the acquirer.
The timing of any sale is important. The general and specific prohibitions do not come into force until 6 April 2015, so provided that any corporate acquisition was completed and any earnout period had ended prior to this date, the selling referring clinicians would not need to concern themselves about any aspects of the sale (including the price and the terms of any earnout) which would otherwise be caught by the Order.
Equity participation schemes are still possible but will need to be structured to achieve compliance with the new conditions. The prohibition against non-compliant equity participation schemes is already in place in relation to post-6 April 2014 arrangements. Those in place prior to this time have until 6 April 2015 to become compliant.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.