Discovery, Netcare take issue with findings of industry probe
CEO Broomberg disagrees with finding of ‘market failure’
● South Africa’s biggest healthcare companies, Discovery Health and Netcare, have defended their success in the market after the health market inquiry singled them out as examples of how highly concentrated the local market is.
The Competition Commission initiated the inquiry into the private healthcare sector because it believed some features of the sector “prevent, distort or restrict competition”.
The inquiry’s findings come as the government continues to grapple with how to provide South Africans with access to quality, affordable public and private healthcare.
Former chief justice Sandile Ngcobo, the inquiry panel chair who presented the provisional report at a media briefing on Thursday, said the inquiry ultimately found that the private healthcare sector was characterised by the high cost of healthcare.
“The claims analysis shows that the commission’s initial concern with affordability and escalation of healthcare expenditure is well founded,” said Ngcobo.
South Africa’s healthcare market consists of 22 open medical schemes with two medical schemes constituting about 70% of the total open market. Of the two schemes, Discovery Health Medical Scheme accounts for 55% of the market.
The inquiry found that Discovery Health recorded sustained high profits in the 20062015 period, much higher than competitors Metropolitan and Medscheme.
“Under normal competitive market conditions, such a situation would see incumbents or new entrants into the market disciplining as it were, a highly profitable firm. Making a profit as a first entrant is what is often seen, sustaining over years and maintaining difference between the most profitable firm and its competitors is what leads us to conclude that the market is not competitive,” said Ngcobo.
Discovery Health CEO Dr Jonathan Broomberg disagreed that this was a sign of market failure.
“Discovery Health was started up 25 years ago without any members, at a time when our competitors already had substantial scale and brand recognition. Our growth has been totally organic, every member and every employer group has chosen to join Discovery Health Medical Scheme because premiums are more than 16% lower on average and the scheme’s benefits are the most comprehensive, and members receive excellent service,” he said.
Broomberg added that Discovery Health’s growth was not the result of any market advantage but rather a direct result of competitive advantage, a strong, competent management team, and continued major investment in systems, innovation and risk management skills.
On the high cost, he said: “The true yardstick for consumers to assess the value they receive from their medical scheme administrator is the scheme premium, which is the actual ‘exit’ price paid by consumers for their benefits and services. When compared on a like-for-like basis, Discovery Health Medical Scheme premiums are on average 16.4% lower than the next eight competitor open schemes. This is due to a combination of effective procurement, claims and fraud risk management by Discovery Health.”
Broomberg pointed out that fees charged to Discovery Health Medical Scheme are the
Discovery growth not the result of any market advantage Jonathan Broomberg
Discovery Health CEO
14th-lowest out of 22 open medical schemes when measured on a rand per beneficiary per month basis, or 10th out of 22 open schemes when measured as proportion of contribution income.
With regard to schemes, the inquiry’s recommendations include a change to the structure of scheme options to increase comparability and competition in the market. It also recommended a system that increases transparency on health outcomes to allow for value purchasing and a set of interventions to improve competition in the market through a supply-side regulator.
South Africa’s three biggest hospitals, Netcare, Mediclinic Southern Africa and Life Healthcare, were also a focus of the inquiry’s examination of competition in the hospital market. The three have a combined market share of 83% of South Africa’s private hospital facilities in terms of the number of beds and 90% in terms of admissions.
In its profitability analyses for the period 2006 to 2015, the inquiry found that Netcare achieved an average return on capital employed (ROCE) of 18.5%, Life Healthcare achieved 22%, while Mediclinic Southern Africa achieved 22.5%.
“One of the most important consequences
Private healthcare characterised by high costs
Sandile Ngcobo
Inquiry panel chair
of the dominance of the three large hospital groups is that no funder can afford not to contract with any of the three groups or to totally exclude one of these groups from any provider networks,” the report read.
In its response, Netcare said it remained cognisant of the need for adequate, reliable and affordable hospital care for all South Africans. However, the hospital group took issue with certain aspects of the provisional findings, which its director of strategy and health policy Melani Da Costa said “appeared flawed and unsupported by the evidence which has been made available to Netcare or its experts”.
She said Netcare would provide substantive comment after studying the document.
Mediclinic Southern Africa said it was studying the report and was not in a position to respond to questions at the time of going to print.
Dr Shrey Viranna, Life Healthcare Group CEO, said the group had reviewed the draft report’s recommendations and believed that they have the potential to address the broader changes that the private healthcare industry is facing. He added that Life Healthcare looked forward to continued participation in the process of the inquiry.