Ailing private health group BMI comes under pressure to sell hospitals Competition Commission is discussing forcing BMI to sell 10 of its 64 private hospitals to smaller rivals.
The private equity backers behind BMI Healthcare, Britain's biggest private hospital group, are coming under mounting pressure to inject capital into the rump of the financially stretched group as it comes under fierce attack from the Competition Commission, accused of extracting excessive profits from insurance firms and patients.
Competition regulators are privately discussing forcing BMI to sell 10 of its 64 hospitals to unwind its competitive dominance, the Guardian has learned. Among the sites it may be forced to surrender are Alexandra hospital in south Manchester and the Priory hospital in Birmingham – two of BMI's biggest operations.
Meanwhile, without additional capital from its backers, led by South African firm Netcare, Apax Partners and London & Regional, the business behind BMI – which next month is expected to jettison its debt-laden property arm – could be brought down by the Competition Commission's intervention. Since the failure of nursing home group Southern Cross two years ago, health and social care regulators have been growing increasingly concerned about the impact on vital services of aggressively financed private providers loaded with unsustainable rent or debt commitments.
As well as wreaking havoc on private insurance groups, any financial crisis at BMI would also trigger knock-on disruption for the NHS. Referrals to BMI hospitals from primary care trusts – now clinical commissioning groups – have ballooned in recent years. Today, one in three of the 276,000 patients treated by BMI Healthcare each year is paid for by the NHS. Six years ago, the NHS accounted for just 3% of BMI patients.
The health service regulator Monitor, which next April assumes powers to regulate private hospitals that subcontract work from the NHS, could eventually play a critical role in pressing the owners of General Healthcare Group – the business behind the BMI brand – to restructure the under-fire business and provide fresh financial support.
Apax, the private equity group, and London & Regional, the investment vehicle of property tycoon brothers Ian and Richard Livingstone, may well chose to ditch their interest in BMI entirely rather than put in more cash. That would leave South African stockmarket-listed Netcare, which currently holds just over half of shares in the company behind BMI, under pressure to lead any restructuring.
BMI's stretched finances have been ignored by the Competition Commission, which has been looking into the private hospital market since April last year. In a 352-page explanation of its provisional findings published last month, the commission insists BMI, which operates 64 hospitals across Britain with 3,000 beds, is – together with smaller rivals Spire and HCA – exerting too much dominance over private healthcare markets. It concludes these firms are extracting excessive profits at the expense of insurers and patients.
In a thinly veiled reference to BMI, the commission acknowledges that some hospital groups may superficially appear to be very far from making the excessive returns implied by its study. But that, it argues, is because their private equity backers acquired these companies in aggressively structured leveraged buyouts. "We are interested in understanding the economic rather than the accounting profitability of the relevant firms," the commission report explains.
One official put it more simply: "If the profits you make are wiped out by [onerous interest or rental costs] that doesn't remove the competition problem."
Behind the scenes, however, the commission is taking a more flexible view and may be close to conceding some ground. Initially, it had suggested BMI, Spire and HCA might, between them, be forced to surrender 20 hospitals to rival operators. That figure is now expected to be revised down to 13, according to one well-placed source. Of these, however, 10 proposed disposals are likely to be singled out within the BMI group.
That would be a heavy blow for an already struggling company, and is likely to provoke legal challenges. Even before the commission's threat to enforce selloffs, BMI's finances have been stretched close to the limit. Unable to cope with financial liabilities of more than £2bn, the property arm will soon be surrendered. Ownership of most of the BMI hospital buildings will next month therefore effectively transfer to lenders, led by Barclays and Rabobank as well as a group of bondholders, who will act as landlord to the rump operating company, which will continue to trade as BMI Healthcare.
BMI insists this will have no impact on the financial health of the ongoing business. However, the latest accounts show the remaining operations are also under financial strain. Last year, BMI generated a top line operating profit of about £195m, but had to meet £150m in rent and £14m in interest bills. In addition, it spent £40m on keeping the hospitals in good functioning order.
One sector analyst said lenders typically insist on a healthcare business generating operating profits of at least two-and-a-half to three times the sum required to meet rent and interest bills. Last year, BMI's figure was about 1.2 times. As a result, it saw a net cash outflow after its £40m bill for capital expenditure. Last year, debtholders sold £65m of secured loans, issued by BMI, to the hospital group's largest shareholder, Netcare, at the distressed price of 70p in the pound — a move seen by some as showing a lack of faith in BMI's financial strength.
Last month, BMI struck a deal with lenders to reduce its interest bill and delay repayments. Dipping into cash reserves and selling off interests in Transform, a low-cost cosmetic surgery business, and the Care fertility clinic chain, helped cut borrowings from £233m a year ago to £145m.
Privately, however, management admit BMI still does little more than cover its rent and capital expenditure commitments, struggling in a depressed market with record low numbers of insured lives.
In an statement to the Guardian, BMI said: "The truth is that, in a challenging market, we are continuing to succeed by efficiently providing high quality independent healthcare and making sensible returns, all of which are reinvested in our hospitals."In response to tough trading conditions, last December BMI said it was implementing "volume-enhancing and cost-saving initiatives to further shield the group from the impact of the global economic downturn." However, some analysts are concerned that a company under financial pressure might fall behind on investment, or even risk compromising patient care. One noted that the group's nearest rival Spire — a smaller concern, treating 233,000 patients last year — had a budget of about £55m for capital expenditure, compared to £40m for BMI.
In June the NHS temporarily stopped referrals to BMI's Mount Alvernia hospital, in Surrey, following a Care Quality Commission report which found serious failings on patient consent, care, cleanliness, staffing levels and service quality monitoring. The report noted some staff had told inspectors breaches had been caused by initiatives designed to "save money" or for "logistical and financial reasons".
At the time chief executive Stephen Collier apologised for the failings, which he said had since been remedied. The company is adamant they were an aberration, and that BMI cost-cutting measures are achievable without threatening patient care. Levels of spending on maintenance and new medical equipment, while they could always be higher, were "sustainable".
Paul Saper, chief executive of analyst firm LCS International, said: "Stephen Collier will now want to win a battle for a capital injection and restructuring, but it is not going to be easy given the new uncertainties created by the Competition Commission and the likelihood any of its recommendations will be subject to years of legal challenges." The Guardian