OFT report on procurement suggests further investigations into healthcare markets

The OFT has published a research report on the impact of public procurement on competition. The report is general in nature but proposes that further investigations be carried out by the OFT in relation to perceived competition problems existing in "human health activities" and "manufacture of pharmaceuticals, medicinal chemicals and botanical products".

The report:

• provides an economic analysis of when and how public procurement might affect competition;
• suggests an approach for identifying sectors in which further investigation of public procurement processes might be justified; and
• identifies a number of particular sectors needing further consideration by the OFT.

The report was commissioned by the OFT with the aim of identifying areas which could be the subject of market studies. Market studies by the OFT are aimed at identifying structural problems within markets and can have a variety of outcomes, including the making of recommendations for changes to Government regulation and the making of market investigation references for detailed scrutiny by the Competition Commission.

The report considers that in relation to "human health activities" (including hospitals, nursing homes, medical practices and dental practices) there is a concern that the public sector is failing to prevent or is contributing towards a reduction in competition. In relation to the manufacture of pharmaceuticals, medicinal chemicals and botanical products the report suggests that there may be a "failure to exercise countervailing buyer power to help overcome entry barriers and arrest increasing concentration". It can therefore be anticipated that these areas will be the subject of market studies by the OFT in the future.

The report also highlights the dangers of the public sector focusing on short-term value-for-money gains where "there may be a risk that competition is reduced over time". In particular, in relation to contract aggregation the report considers that "[t]oo much emphasis on the administrative costs of procurement might be responsible for too much contract aggregation. In addition, there may be concerns about too much emphasis being given on short-term cost savings at the expense of maintaining competitiveness in the long term".

The report attaches a set of case studies, including a case study into the procurement of continence care products. The study is based on information obtained during the Competition Commission's report into the acquisition by Coloplast A/S of the continence care business of SSL International plc. The case study concludes that in relation to supplies of continence care products to the community the Drug Tariff is likely to restrict price competition, act as a barrier to entry, and distort competition for distribution. It goes on to say that "the prevailing system is arguably a blunt and uncertain way of encouraging high levels of clinical effectiveness".

Click here for the OFT's summary of the report.

Click here for a full copy of the report.

Click here for the case studies.

For further information please contact David Marks E: [email protected]; T: 020 7367 2136 or Simon Leathley E: [email protected]; T 020 7367 3736.