YES, IT’S COMPLICATED
The Competition Commission does not prove collusion between Discovery Health, MMI and Mediclinic but implies that crossownership enhances their scope for price fixing
Investors would do well to take note of the health market inquiry’s provisional report on why medical aid prices keep rising while benefits decrease. The Competition Commission report may not bode well for the consumer but it notes that profits of the large hospital groups — Netcare, Mediclinic and Life Healthcare — are “consistent” and “sustained”, with no chance of slowing down.
Even better were the profits of administrator Discovery Health, “multiple” times those of competitors “with no sign of effective challenge from incumbent or new firms”.
The numbers illustrating Discovery Health’s dominance were erased from the report and instead pictures of a pair of scissors were drawn in their place.
This is no doubt due to Discovery Health’s concerns about confidentiality of its data, said by inquiry director Clint Oellermann to be a reason for the delay in the provisional report’s release.
The report, released after nine months of delays, highlights that there could be a substantial conflict of interest between two of the three largest administrators, which are supposed to negotiate good value for medical aid members and drive down hospital costs.
Administrators are companies that are paid by medical aid companies to manage claims, payment to doctors and hospitals, deal with fraud and recruit new members.
The commission notes that both administrators in question, MMI and Discovery Health, which should be competing to provide cheaper benefits to medical schemes, have shared ownership (see graphic).
The commission implies that having competitors owned by the same company benefits investors and could lead to price fixing.
But analysts have downplayed the conflict of interest, saying the commission did not prove any collusion.
In a research note, the inquiry explains why cross-ownership of competing companies matters: “If a firm has participation in a competitor, even without controlling it, the scope for collusion will be enhanced.”
Falcon & Hume competition lawyer Heather Irvine says: “There is a reasonable amount of economic theory which indicates that cross-ownership (common shareholders) may have anticompetitive effects in certain circumstances.
“However, this risk arises only when the companies in which the common shareholder holds [shares] are competitors (because then it may lead to information exchange between competitors, which in turn leads to price-fixing or other collusive conduct).”
Both MMI and Discovery have large shareholders that are themselves owned by investment group Remgro.
It gets complicated. Remgro has a 28% shareholding in RMB Holdings, which through Firstrand has an unknown stake in MMI. Remgro also has a stake in Rand Merchant Investment Holdings, which has a 25.8% stake in Discovery and a 25% stake in administrator MMI.
It gets worse. Remgro, with 42%, is also the largest shareholder of hospital group Mediclinic. This raises the question: do Discovery Health or MMI have an interest in driving down hospital prices for medical aid members or keeping profits high for their shared owners of Mediclinic?
Do the two administrators compete in adding shared value to medical aids for whom they pay claims; or choose not to compete as they share shareholders? The inquiry poses these questions but doesn’t answer them.
What it means: Profits of the big hospital groups are seen as consistent and sustained, with no chance of slowing down
It does, however, describe the links between owners of MMI, Discovery and hospital group Mediclinic as substantial. “A substantial commercial relationship therefore exists between the largest and most influential owners of Discovery Limited, the owners of MMI and one major hospital group, Mediclinic.”
But whether the ownership of Mediclinic makes Discovery Health less likely to bargain for good prices for hospital stays is never proven.
Irvine is not convinced. “This concern about cross-shareholding would not arise in relation to, for example, a medical scheme and a hospital group, which are not competitors in the same level of the market.”
She says the commission loves to focus on cross-ownership, but the small number of institutional shareholders in SA means many companies share owners.
“The Competition Commission is obsessed with cross-ownership and likes to draw diagrams showing that there are lots of common interests held by shareholders throughout the SA economy. That is of course true — large institutional shareholders like the banks and the PIC all hold some shares in almost every listed company. However, this doesn’t necessarily lead to a lack of competition,” she says.
The commission gives no evidence that administrators are allowing Mediclinic to charge more than other hospital groups. It finds that out of all the administrators, Discovery Health was the only one with enough