Why health’s big four dominate

Failures in regulation make for uncompetitive medical aids and private hospitals.

Failures in regulation have contributed to high levels of concentration in the medical aids and private hospital market. Moneyweb

The Competition Commission’s Health Market Inquiry (HMI) has blown the lid on why Discovery Health Medical Scheme and hospital groups Netcare, Mediclinic Southern Africa and Life Healthcare continue to gain dominance in SA’s private healthcare industry.

Failures in regulation and governance have contributed to a lack of competition and high levels of concentration in the medical schemes and private hospital market, according to the 484-page and serially-delayed HMI report.

Proving this point is the astounding success and profitability of players such as Discovery at the expense of its few rivals, says former chief justice Sandile Ngcobo, who chaired the HMI.

“Discovery has, over a sustained period of time, earned profits that are a multiple of those of its main competitors, with no sign of effective challenge from incumbent or new firms … This is an indication of market failure and there are no signals that the market will self-correct,” says Ngcobo.

While he acknowledges how skilled and agile Discovery’s management is in running the business, its roaring dominance and success relative to its peers is no accident. Higher than necessary service fees given its scale, not sourcing medical services from any other industry professionals, risk selection, and broker management contribute to its dizzying profitability.

A profitability analysis by the HMI has shown that between 2010 and 2014, the profits of Netcare, Mediclinic and Life Healthcare have been consistent and sustained. “One of the most important consequences of the dominance of the three large hospital groups is that no funder [medical aid scheme] can afford not to contract with any one of the three big facility groups or to totally exclude one of these groups.”

If the market was less concentrated, a funder would likely have the option not to contract with one of the groups. This would create a completely different bargaining dynamic, to the benefit of patients.

The HMI has recommended a moratorium in terms of which the hospitals would not be granted licences for new facilities, or permission to increase the number of beds within existing facilities, until their individual market share is not more than 20%.

Dr Shrey Viranna, Life Healthcare Group CEO, says the HMI’s recommendations “have been considered and have the potential to address the broader challenges that the private healthcare industry is facing.”

Melanie da Costa, director of strategy and health policy at Netcare, says the hospital group is still studying the report.

“However, there are certain aspects of the provisional findings which appear flawed and unsupported by the evidence which has been made available to Netcare or its experts,” Da Costa tells Moneyweb. “Netcare intends making further submissions in response to the provisional findings to address a number of these issues in the interests of the panel reaching evidence-based conclusions.”

Mediclinic Southern Africa says it also plans to respond to the findings.