Affected market: Medical record encoding software
The OFT's decision on reference under section 22 of the Enterprise Act
2002 given on 15 August 2003
3M United Kingdom plc (3M) is part of the US group 3M that operates in
60 countries and produces over 50,000 different products for
industrial, commercial, health care and consumer markets worldwide. 3M
has been active in encoding software for 20 years and supplies primarily
in the US, Canada and Australia where the ICD9 standard is applicable.
3M supplied encoding software in the UK until 1995 but withdrew when the
ICD10 standard became compulsory. In the year to 31 December 2001 3M had
total sales of £467.9 million. Vantage Health Ltd (Vantage) is a
subsidiary of Vantage Technologies Ltd and is a leading provider of
encoding software to the healthcare sector in the UK. Vantage supplies a
full range of encoder applications to a customer base of over 150 UK
hospitals and healthcare organisations. Vantage also supplies services
such as clinical coding training packages. Its total turnover in 2002
was approximately £1.3 million.
3M acquired the business and assets of Vantage for a consideration of
£2.5 million on 7 July 2003.
The transaction was notified to OFT on 7 July 2003. The 40 day
administrative deadline expires on 2 September 2003. The statutory
deadline will expire on 6 November 2003.
As a result of this transaction 3M and the business of Vantage have
ceased to be distinct. The parties overlap in the supply and
maintenance of encoding software for use in the healthcare sector and
the share of supply test in section 23 of the Enterprise Act 2002 (the
Act) is met. A relevant merger situation has therefore been created.
The software supplied by Vantage and others enables patient data to be
encoded electronically in line with NHS regulations which require that
all Admitted Patient Care Episodes or Finished Consultant Episodes
(FCEs) are clinically encoded by acute care NHS Trusts as soon as a
patient is discharged. The relevant standards in the UK include ICD10,
OPCS4 and HRGs. The information is used by the Department of Health for
healthcare planning and financing.
As an alternative to using software, encoding can be undertaken
manually. It is estimated that around 50 per cent of acute care hospital
trusts encode manually although this figure is expected to decrease as
Trusts seek to generate efficiencies. For this reason, manual encoding
is not thought to be an effective demand side constraint. Software is
vastly more efficient and accurate and it is highly unlikely that
automated encoders would switch (back) to manual coding.
Encoding software forms only a small specialised part of the software
needs of a NHS Trust hospital. It is conceivable that providers of other
types of healthcare software could move into the encoding segment. This
aspect is dealt with under barriers to entry below.
Encoding software suppliers also provide support and maintenance
services for their software including upgrades, helpdesk facilities and
repairs. The parties submit that services are usually supplied by the
software provider and that customers factor in maintenance costs when
they purchase the software.
Based on the above analysis, the appropriate frame of reference appears
to be the supply of encoding software and related services to the
The parties maintain that the relevant geographic focus is UK wide.
Relevant coding standards are specified by the NHS and are applicable to
the UK. Servicing is conducted remotely on a national basis. One third
party highlighted that 3M supplies its product worldwide. It also noted
however that in exporting the product, localisation was required
particularly in terms of language, support and compatibility with
national coding standards.
On this basis the appropriate geographic focus appears to be the UK.
Vantage is the leading UK supplier of encoding software for the
healthcare sector with a share of supply of about 80 per cent for
software and servicing in the UK. 3M is a leading supplier of encoding
software on a global basis but currently has only a very limited
presence in the UK. The overlap with Vantage is limited to servicing of
software and the resultant increments in servicing, and the overall
supply of encoding software and servicing, are minimal at around 1 per
cent. The other main providers of encoding software and related services
are Woodward Associates and System C, as well as a number of other
3M effectively withdrew from supplying new encoding software in the UK
in 1995 when the ICD10 system became compulsory in the UK - its current
customer base was acquired from HMI in the late 1990s. Since then the
number of 3M's customers has fallen from 25 to six relating to the
provision of maintenance and servicing of existing installed software.
Its turnover in the servicing segment in the UK is minimal. 3M has not
supplied a new encoding product in the UK since 2000 and is thus not
currently a direct competitor in the supply of encoding software.
Barriers to entry and expansion
Barriers to entry do not appear to be high. The main constraint on entry
is thought to be the small size of the encoding software 'market'
worth £1.25 million in 2002. However there is potential for growth, as
NHS Trusts move from manual to software systems. The most probable new
entrants are software companies already active in supplying to the
healthcare segment or those with knowledge of NHS procedures.
Significant new entry recently occurred from Woodward Associates who
entered this sector in 2002.
End customers for encoding software are acute care hospitals. Their
buyer power is believed to be constrained by switching costs which limit
the customer's ability or incentive to change supplier. Encoding
software is supplied on the basis of a perpetual licence at a one-off
price which the customer will incur when switching to an alternative
provider. Buyer power is therefore believed to be limited.
There are no vertical issues associated with this case.
THIRD PARTY VIEWS
Third parties who were contacted raised no significant concerns about
This case qualifies on the share of supply test with respect to the
supply and servicing of encoding software for the healthcare sector. The
overlaps between 3M and Vantage are minimal with increments of less than
one percent since 3M is not currently active in the provision and
installation of new encoding software. This, combined with low barriers
to entry particularly for healthcare software suppliers, suggests that
this transaction will not create a substantial lessening of competition.
The merger does not therefore appear to result in a substantial
lessening of competition within a market or markets in the United
Kingdom for goods or services.
This merger will therefore not be referred to the Competition Commission
under section 22(1) of the Act.