Medicross Healthcare Group (Pty) Ltd and Another v Prime Cure Holdings (Pty) Ltd (55/CAC/Sept05) [2006] ZACAC 3; [2006] 1 CPLR 1 (CAC) (6 April 2006)

About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Competition Appeal Court
SAFLII
>>
Databases
>>
South Africa: Competition Appeal Court
>>
2006
>>
[2006] ZACAC 3
|

|

Medicross Healthcare Group (Pty) Ltd and Another v Prime Cure Holdings (Pty) Ltd (55/CAC/Sept05) [2006] ZACAC 3; [2006] 1 CPLR 1 (CAC) (6 April 2006)

IN
THE COMPETITION APPEAL COURT
CASE No.: 55/CAC/Sept05
In the matter between:
MEDICROSS
HEALTHCARE GROUP
(PTY)
LTD
First Appellant
PRIME CURE HOLDINGS (PTY) LTD
Second
Appellant
and
THE COMPETITION COMMISSION
Respondent
JUDGMENT
MHLANTLA, AJA: A. INTRODUCTION
[1] On 15 September 2005 the Competition Tribunal (“the
Tribunal”) prohibited a merger between the first and second
appellants
on the basis that the said merger was likely to lead to a
substantial lessening of competition. The appellants immediately
noted
an appeal to this Court against the said decision. The appeal
was heard on 7 December 2005. On 31January 2006 the appeal was
upheld.
This Court set aside the order of the Tribunal and replaced
it with an order that the merger be approved unconditionally. I now
set
out the reasons for the order.
2
B.
FACTUAL BACKGROUND
[2] The primary acquiring firm is Medicross Healthcare
Group (Pty) Ltd, the first appellant herein. The shares in the first
appellant
are owned by Network Healthcare Holdings Limited (80%) and
Netpartner Investments Limited (20%). The primary target firm is
Prime
Cure Holdings (Pty) Ltd, the second appellant. Its shareholders
are Brait Private Equity (34,2%); Praxis Private Equity (29,30%);
CDC
Financial Services Mauritius Ltd (11, 3%); Total Support Management
(Pty) Ltd (8,22%) and other minority shareholders (16,95%).
The first
appellant intends to acquire the entire issued share capital
(together with the shareholders’ claim and loan claims against)
in
the second appellant. The total purchase consideration is R85
million.
[3] On 5 March 2005 the merger was notified to the
Competition Commission in terms of section 13A of the Competition Act
89 of 1998
(“the Act”) as a large merger. On 30 June 2005 the
Commission recommended to the Tribunal that the proposed merger be
prohibited.
A hearing before the Tribunal was conducted where various
witnesses were called by the appellants, the respondent as well as
the
Tribunal respectively. At the end of the hearing the Tribunal
concluded that the horizontal dimensions of the merger were likely
to
lead to a substantial lessening of competition in the relevant
market. It is against this decision that the appellants have appealed
to this Court.
3
[4] It is apposite at this stage to set out the relevant
provisions dealing with
mergers. Section 12A of
the Act provides:-
“(1) Whenever required to
consider a merger, the Competition Commission or
Competition
Tribunal must initially determine whether or not the merger is likely
to substantially prevent or lessen competition,
by assessing the factors set out in
ss (2);
and-
(a) if it appears that the merger is likely
to substantially prevent or lessen
competition,
then determine-
(i) whether or not the
merger is likely to result in any
technological,
efficiency or other pro-competitive gain which will
be
greater
than
,
and
offset,
the
effects
of
any
prevention
or
lessening of competition,
that may result or is likely to result from
the
merger, and would not likely be obtained if the merger is
prevented;
and
(ii) whether the merger can or cannot be justified on
substantial public interest grounds by assessing the factors set out
in subsection
(3); or
(b) Otherwise, determine whether the merger can or
cannot be justified on substantial public interest grounds by
assessing the factors
set out in subsection (3).
(2) When determining whether or not a merger is likely
to substantially prevent or lessen competition, the Competition
Commission
or Competition Tribunal must assess the strength of
competition in the relevant market, and the probability that the
firms in the
market after the merger will behave competitively or
co­operatively taking into account any factor that is relevant to
competition
in that market, including/-(a) the actual and potential
level of import competition in the market;
the ease of entry into the market, including the tariff
and regulatory barriers;
the level and trends of concentration, and history of
collusion, in the market;
the degree of countervailing power in the market;
(e) the dynamic characteristics of the market, including
growth,
innovation, and product differentiation;
(f) the nature and extent of vertical integration in the
market;
(g) whether the business or part of the business of a
party to the merger or
proposed merger has failed or is likely
to fail; and
4
(h) whether the merger will result in the removal of an
effective competitor.
(3) When determining whether a merger can or cannot be
justified on public interest grounds, the Competition Commission or
Competition
Tribunal must consider the effect that the merger will
have on:-(a) a particular industrial sector or region;
(b) employment;
the ability of small businesses, or firms controlled or
owned by historically disadvantaged persons, to become competitive
;
and
the ability of national industries to compete in
international markets.
C.
RECOMMENDATIONS
OF
THE
RESPONDENT.
[5] After analysing the submissions by the parties as
well as additional information, the respondent identified only three
firms that
were competing in the market for managed care services
that have a national network of service providers namely, Prime Cure,
Medicross
and Carecross. It did not support the parties’ contention
of the existence of other players and their ability to enter the
market
with ease.
[6] The respondent found that the proposed merger would
strengthen the Netcare group and will reduce the number of players
from three
to two. According to the respondent the proposed merger
would significantly concentrate the market for the provision of
managed care
services and eliminate a likely potential entrant into
the bottom segment of the market. This would reduce the choice of
medical
aid schemes to enter into capitation agreements with managed
care companies. The respondent concluded thus:
“
[T]he market in which the parties compete is highly
concentrated. The barriers to entry into this market are immensely
challenging
and
5
according to Prime Cure extremely high. Sustainable and
successful market participants are few and far between. According to
the Commission
the likely entry into the market by other firms are
highly speculative and unlikely to occur. Considering all of the
above the Commission
is of the view that the transaction is likely to
substantially prevent or lessen competition in the manager healthcare
market with
a national network of service providers.”
[7]
The respondent went on to say:
“
Furthermore, the Commission is of the view that the
transaction raises significant public interest concerns relating to
the industry
as a whole and the effect that the transaction is likely
to have on small business and businesses controlled by historically
disadvantaged
persons.”
[8] The respondent then considered the efficiency
defences raised by appellants. It concluded that these did not
outweigh the effects
of the likely prevention or lessening of
competition. It also considered the public interest issues and
concluded that the transaction
could not be justified on public
interest grounds .
[9]
The respondent thus recommended that the merger be prohibited.
6
D.
FINDINGS
OF
THE
TRIBUNAL
[10] It has not proved easy to isolate the essential
reasoning upon which the Tribunal’s determination is predicated.
The following
summary seeks to read its key findings in the best
possible light. The Tribunal commenced its determination of whether
the merger
was likely to substantially prevent or lessen competition
(s 12A (2)(e) of the Act) with an analysis of the “general state of
healthcare
provisioning in South Africa the policy objectives of the
South African government in the realm of healthcare provision, the
mechanisms
whereby government intends achieving those objectives and
the place and role of the private section…”.(para 51). It
concluded
its analysis thus:
“
It is our view then, that in this extremely fluid
context , the absence of an established and stable regulatory
framework for this
embryonic market as well as for some related and
long-standing markets (for example, pharmaceuticals) demands that we
adopt a particularly
cautious and circumspect approach to private
interventions, such as this merger, that will inevitably impact on
the development of
the market under consideration. Public interest
considerations impinging on the outcome of interventions in this
area- be they interventions
by the State, by regulators or by private
market participants- are, for unimpeachably good reason unusually
intense and this also
predisposes us to particular circumspection.”
[11] The Tribunal found that the relevant product market
was that for the provision of capitated primary managed health care
products
with a national geographic market. The definition of
capitated managed primary care employed by the Tribunal was “a
method of
payment for health services in
7
which a provider is paid a fixed, per capita, amount in
advance for each enrolee without regards to the actual number of
nature of
services provided to each member in advance. This involves
a great deal of risk sharing” (para 109)
[12] The Tribunal thereafter examined the impact of the
merger on competition and found that the horizontal dimensions of the
merger
were likely to lead to a substantial lessening of competition
in the relevant market. In particular, it held that the barriers to
entry were formidable. The merger would serve to increase
concentration, and in effect reducing the three viable competitors to
two,
being first and second appella nts and Carecross. Accordingly,
the Tribunal found that “the removal of a rival – Prime Cure –
to Netdirect and Medicross, increases the likelihood of a
relationship between Netcare, on the one hand, and Mediclinic and
Life
Healthcare on the other and certainly aggravates our concerns
regarding the future state of competition in a vital related
healthcare
market”. (para 188). The Tribunal went on to hold that
the merger stood to be prohibited on its horizontal dimensions which
were
likely to lead to a substantial lessening of competition in the
relevant market. It found however that there was insufficient
evidence
to establish that ‘the vertical integration that
characterises Netcare distorted referrel patterns were sufficient to
justify a
conclusion that a substantial lessening, of competition
would occur on vertical grounds.
[13] The Tribunal prohibited the merger, having found
that the claimed efficiency grounds did not outweigh the costs
competitive effects
of the merger.
8
E
.
SUBMISSIONS
BY
THE
PARTIES.
[14] At the hearing of the appeal,
Mr Unterhalter,
who appeared with
Mr Cockrell
for the appellants, submitted
that the Tribunal misdirected itself in that it adopted a “cautious
and circumspect approach” to
the merger; that is it had conflated
public interest grounds with its primary task, that is an enquiry as
to whether there was a
likelihood that the merger would substantially
lessen competition.
[15] Mr Unterhalter contended that the misdirection
vitiated the Tribunal’s decision and that the appeal should
succeed. He submitted
that there was no textual support in the Act
for a conflation of public interest considerations with the
predictive task mandated
by the Act. He contended that the need to
consider “public interest grounds” comprises a separate and
subsequent enquiry to the
primary determination as to whether or not
the relevant merger is likely to substantially prevent or lessen
competition. Referring
to paragraph 71 of the Tribunal’s reasons
where it was stated that “public interest considerations”
predisposed the Tribunal
to particular circumspection when
considering this merger, he submitted that the Tribunal at no stage
had proceeded to a detailed
“second order analysis” in order to
consider whether the merger could or could not be justified on public
interest grounds within
the meaning of section 12A(3) of the Act. On
the contrary, the Tribunal had regard to public interest
considerations
at the first
stage of analysis
for the
purposes of determining whether the merger is like ly to
substantially prevent or lessen competition.
9
[16] Mr Unterhalter further contended that the public
interest grounds which the Tribunal purported to consider in its
determination
did not fall within the ambit of sectio n 12A(3). The
Tribunal had noted “Pertinent to our consideration of the general
state of
healthcare provisioning in South Africa, the policy
objectives of the South African government in the realm of healthcare
provision,
the mechanisms whereby government intends achieving those
objectives, and the place and role of the private sector, including
the
merging parties and many others who participate in these
hearings, in this wider context” (para 51). Mr Unterhalter
submitted that
the public interest concerns which appear to have
coloured this approach were not concerns which the Tribunal was
mandated to consider
at this stage of its enquiry. The mechanisms by
which Government intends to achieve its policy objectives and the
place and role
of the private sector in these objectives are issues
which fall within the purview of Parliament and the Executive; they
are not
issues that fall within the remit of the competition
authorities.
[17]
Mr Berger,
who appeared on behalf of the
respondent, submitted that the Tribunal had conducted a careful and
detailed analysis of the evidence.
The Tribunal did not purport to
adopt an approach that assessed whether the merger was likely to
substantially prevent or lessen
competition against the factors set
out in section 12A(3) of the Act or any other public interest
considerations. He thus contended
that no misdirection had been
committed by the Tribunal, alternatively; if such misdirection was
found, this Court
10
ought to assess the evidence placed before the Tribunal
and make an order in terms of section 17(2) and/or section 17(3) of
the Act.
[18] Accordingly the question arises as to the proper
approach to the enquiry mandated by s 12A of the Act. In
Schuman
Sasol SA (Pty) Ltd v
Price’s Daelite (Pty) Ltd
[2001-2002]
CPLR 84
(CAC) at 90d
this Court said the following:
“
The approach which this Court adopts to an appeal
against the decision of the Tribunal in respect of a merger should
take cognisance
of the composition and role of the Tribunal as a
specialist body which consists not only of lawyers but also of
members possessed
of the necessary financial and economic knowledge
and thorough grasp of the relevant policy issues required in these
kind of deliberations.
Section 12A requires that the Tribunal make a
determination after a holistic inquiry into whether the proposed
merger is likely to
substantially prevent or lessen competition. In
assessing such a decision, this Court should take account of the
composition and
expertise of the Tribunal as well as the nature of
the enquiry which entails an element of probabilistic investigation
into the effect
of the proposed merger In its decision as to whether
to set aside, amend or
confirm the decision of the Tribunal, this Court
must be cautious before imposing its own conception of the policy
considerations
upon the decision adopted by the Tribunal . The Court
should seek rather to examine and test rigorously the
justifications offered
by the Tribunal for the decision to which it
has arrived before it invokes its power in terms of section 17.”
This
dictum
made it clear that this Court
recognizes the expertise of the Tribunal with regard to the
evaluation of economic evidence and the
development of a sound policy
framework which informs this evaluation. However, recognition of the
specialist role of the Tribunal
does not mean that the Court should
not test whether the evidence led can justify the
11
conclusion reached by the Tribunal nor should this Court
be deferential to the manner in which the Tribunal engages with the
interpretation
of the structure of the Act or the mandated
legislative tests.
[19] Within the context of mergers, section 12A provides
for a two stage analysis. The first phase involves the determination
by the
Tribunal whether the merger is likely to substantially lessen
or prevent competition, having regard to the evidence and argument
presented before it by the respondent and the parties. The inquiry is
conducted by assessing the factors set out in section 12A(2).
The
word likely has its prime meaning of “probability” whilst the
word “substantially” means materially or considerably in
amount
or duration.
[20] The manner in which the Tribunal justifies its
finding on the evidence before it is of critical importance. In
Mondi
Ltd and Kohler Cores and
Tubes v Competition Tribunal
[2003] 1
CPLR 25
(CAC) at 33c
, this court said:
“
The decision required by section 12A(1) must be made
on evidence which is available to the Tribunal. In other words the
Tribunal cannot
base its decision upon speculation of a kind which
cannot be attributed to any evidential foundation placed before the
Tribunal.
But the prohibition against unjustified speculation should
not be confused with the need for a predictive judgment. The section
enjoins
the Tribunal to forecast a likely possibly, that is, it makes
a predictive judgment, based on evidence which has been placed before
it.”
[21] It follows therefore that if the Tribunal finds on
the evidence available that the merger is capable of
having
the anti-competitive effect
12
contemplated, the test would have been satisfied.
However, the Tribunal can only move to the second stage after it has
made this finding.
[22]In the present case, the Tribunal adopted a
“cautious and circumspect” approach based, to a considerable
extent, on public
interest considerations. As the Tribunal observed:
“
we are, to state the obvious, dealing with a
transaction in a market that is central to the interests of the
state, to the private
sector and to ordinary consumers. It may well
be that in a year’s time, or, more likely, in five years’ time,
the regulatory
framework and the parameters of the markets implicated
in this transaction will be more certain and that the consideration
of an
identical or similar transaction will produce a different
outcome. However, it is in the nature of merger analysis that
changing
eras and contexts produce different outcomes. There is no
single answer that stands for all time” (at para 72).
[23] It is extremely difficult to determine the weight
which the Tribunal gave to these public interest grounds. in its
probabilistic
enquiry. But, as I have already said, these issues
should have been of no relevance to the first stage of its enquiry
which needed
to examine the evidence relating to the proposed
merger’s impact upon competition. These public interest
considerations would have
been more appropriately considered during
the second phase in terms of section 12A(3), as the need to consider
public interest grounds
is a separate and subsequent enquiry to that
of the primary determination.
13
[24] In the result, the Tribunal misdirected itself by
adopting an incorrect test when assessing the evidence. It failed to
engage
fully with the probabilistic enquiry of the evidence presented
before it. It failed to apply the test set out in section 12A(1) and
(2) before considering the public interest grounds. In the result,
this Court is at large to assess the evidence that was placed
before
the Tribunal and make an order in terms of section 17 of the Act. It
is to that evidence that I now turn.
Definition
of the relevant market
[25] The assessment of the effects of the merger on
competition must be preceded by a proper definition of the relevant
market. The
need for market analysis must be viewed within the
context of the S 12A(1) of the Act which uses the phrase ‘likely to
substantially
present or lessen competition’ In this case, the
Tribunal found that there would be a ‘lessening of competition’.
Such a conclusion
requires a full market analysis. By contrast,
‘preventing competition appears to concern impediments or
hindrances which retard
or keep back that which might otherwise have
happened. An enquiry about impediments may well have allowed the
Tribunal to escape
an engagement with a comprehensive market
analysis. However its finding was based on a lessening of
competition; hence an analysis
of the market is essential to this
enquiry.
[26]There is a dispute between the parties in regard to
the definition of the market. The Tribunal found that the relevant
product
market is the market for the provision of capitated primary
managed healthcare products.
Mr
14
Unterhalter
submitted that the Tribunal
restricted the market definition to the provision of capitated
primary managed health care products and
failed to recognise that a
number of other primary managed care options are substitutable for
managed care options . He contended
that the Tribunal ought to have
found that the relevant market is the market for the provision of
primary managed healthcare products
for low cost medical schemes,
irrespective of whether or not the products are capitated.
Mr
Berger
on the other hand argued that the focus ought to be on the
contractual arrangements between managed care organisations and
medical
schemes when defining the relevant market.
[27] It is apposite at this stage to provide a brief
overview of the medical schemes environment before determining the
definition
of the relevant market.
[28] Regulations made in terms of the Medical Schemes
Act 131 of 1998
(the “Medical Schemes Act”)
make provision for managed health care.
Regulation
15 defines managed health care as:-
“ Clinical
or financial risk assessment and management of health care with a
view
to facilitating appropriateness and cost
effectiveness of relevant health services
within
the constraints of what is affordable, through the use of rules based
and
clinical management based programmes.”
[29] A health care provider concludes a contract with a
medical scheme in terms of Regulation 15A and undertakes to provide a
relevant
health service to the beneficiaries of the medical scheme
concerned. There are two sorts of managed health care arrangements
envisaged
by the Regulations:
15
the medical scheme may choose to render managed
healthcare to its member “ in house” in which case the medical
scheme (or administration)
will enter into contractual arrangements
directly with a network of participating health care providers.
A medical scheme may choose to outsource the provision
of its members’ managed healthcare.” In this case the scheme
enters into
a contractual arrangement with a managed healthcare
organisation. The latter then enters into contractual arrangements
with a network
of participating healthcare providers.
[30] The proper approach to the definition of a market
is set out by Brassey
et al
, Competition Law (2002) at 183
thus:
“
The market does not define itself…... The approach
that is ordinarily adopted by economists to define the
market is
the hypothetical monopolist test, [commonly known
as the SSNIP test] which is of a piece with the definition of the
market
in merger control. The relevant market is best defined
according to the 1992 United States Department of Justice Guidelines
as follows:-‘
A market is defined as a product or group of products
and a geographical area in which it is produced or sold such that a
hypothetical
profit-maximising firm, not subject to price regulation,
that was the only present and future producer or seller of those
products
in that area, likely would impose at least a “small but
significant and non-transitory” increase in price, assuming the
terms
of the sale of all other products are held constant.”
Massimo Motta Competition Policy: Theory &
Practice
(2004) at 102-103 provides a useful example of the SSNIP
test:
“
Suppose that there exists a hypothetical monopolist
that is the only seller of bananas. Would this hypothetical
monopolist find it
profitable to increase the price of bananas above
the
current
level in a non-transitory way, say by 5-10%
Imagine that the answer to this question is yes, that such a price
rise would be
16
profitable. This will mean that bananas do not face
significant competitive constraints from other products, that is
there are no
other products that substitute enough for bananas for
the hypothetical monopolist to lose much demand when it raises the
prices of
bananas. Accordingly, bananas should be considered as a
separate market, and the test has already given its response.
Suppose now instead that the hypothetical monopolist
would not find it profitable to increase prices by that amount, for
instance
because after the price rise a significant part of demand is
redirected from bananas to kiwi fruits and to a lesser extent to
pineapplies
and other fruits. Then this will imply that bananas
should not be considered as a separate market on their own, as their
exist other
products that exercise a competitive constraint on
sellers of bananas. The test should then continue, to consider a
wider market,
for instance bananas and kiwi fruits together. Would a
hypothetical monopolist that is the only seller of banana and kiwi
fruits
find it profitable to increase the price of these fruits above
their current level by 5-10%. Again, if the price rise is profitable
the relevant market for our investigation will be found. Otherwise,
the test should continue to include those products/fruits that
exercise a constraint on bananas and kiwi fruits, and so on until a
separate market has been found.”
In short, a market does not define itself. It is
determined by the demand side substitution and the supply side
substitution of customers
and producers respectively. In so assessing
the scope of the referral market, there is a need to enquire as to
the extent to which
customers may switch to alternate products in the
event of a price increase and the ability of competing producers to
other alternate
product offerings employed by the Tribunal in
arriving at its finding. Hence there is a need to enquire into the
evidence employed
by the Tribunal in arriving at its finding.
[32]
Mr Berger
contended that the appellants seek
to widen their market definition. It was his contention that
appellants should be bound to their
17
original statements of the merger information filed of
record, where they had described the relevant market as ‘the
administration
of capitated managed care options’. He further
submitted that the evidence that was placed before the Tribunal
established, on
a balance of probabilities, that capitated managed
care is the only effective arrangement of providing affordable
medical insurance
to the poorest of the employed.
[33] It does appear that the appellants may have created
the confusion when they stated in their original statements of the
proposed
merger that the relevant market was described as
“administration of capitated managed care options.” The
Tribunal’s reliance
upon the initial filing does run the risk of
elevating the CC 4(2) form to the status of pleadings It also ignores
subsequent exchanges
between the parties. By the time the respondent
submitted its recommendation on 30 June 2005, the information
provided by the merging
parties extended far beyond the initial
merger filing – particularly in relation to the definition of the
product market. That
this had been imparted to respondent is borne
out by the recommendation itself, where the respondent concluded that
the relevant
product market is “the market for the provision of
managed care services with a national network of service providers.”
[34] It must also be borne in mind that regard must be
had to the totality of the evidence as well as the applicable
principles set
out above in determining the market. That evidence
includes the testimony of witnesses called by the Tribunal and
respondent, which
evidence reveals that capitation is but a model
used by a party within a market.
Mr Dorfling, who testified on behalf of appellants said:
18
“
I think capitation is normally sort of seen as
managed care and I think that’s an incorrect perception. As I said,
capitation is
only one of the tools. It’s sort of the impression
that’s been given is that capitation equals managed care due to the
American
experience and the Kiaza, the Kiaza, which is one of the big
managed care models in America, which primarily used capitation.”
[35]The following exchange between Dr Stillman and Mr
Berger was also relevant to this determination, particularly in the
light of
the importance placed by the Tribunal and Mr Berger upon Dr
Stillman’s memorandum of 20 June 2000 in arriving at its conclusion
about the referral market:
“
ADV BERGE R
: According to Dr Nauta and I
believe Dr Walters, the aim of such an environment is to move towards
capitating the service provider
as well, but that’s not necessarily
the position. In Carecross for example some of the doctors are paid
on a capitated basis, other
doctors are not paid on a capitated
basis. Do you understand that?
DR STILLMAN:
My understanding is that when it
comes to the providers, that there are various kinds of models that
are used and in some cases the
provider has to bears and in other
cases the provider is on a fee-for-service basis.”
[36] In its determination, the Tribunal also relied upon
the evidence of Mr Strauss of Discovery Health who testified on
behalf of
respondent but with regard to this key question of the
market, nowhere did Mr Strauss gainsay
19
the evidence of Dorfling and Stillman that capitation
was but one of a variety of managed care techniques.
A further exchange between Mr Berger and Dr Stillman
reveals the approval adopted by the latter to capitation:
“
Yes, but Dr Stillman, you will forgive me. I am
concentrating on the capitated managed care market.
DR
STILLMAN
:
But I don’t understand what you mean by that.
ADV. BERGER: Well I thought we had gone through that,
but let me try again The capitated managed care market is the market
where a
managed care organisation takes the risk, assumes the risk
from the scheme in return for a capitation fee.
DR
STILLMAN
:
That is a business model. That doesn’t make it a
market.”
The distinction between a market and a business market
was never adequately gainsayed by other witnesses. The Tribunal’s
use of
evidence in support of its conclusions at least in part,
somewhat problematic. For example, the Tribunal employed the evidence
of
Dr R Nauta, the founder of Carecross, to justify its conclusion
that
“much of the evidence before us
regards capitation
as an essential element of a managed care product
directed at
providing health insurance for low-income consumers. This is
not
to deny Dr Walters’ contention that full capitation lies at th e
end of a
long journey that may begin with varying mechanisms
for managing a fee-
for-service arrangement and that ultimately
ends with full risk transfer, (in
the form of capitation) is
required if healthcare provision is to be extended
20
on a significant scale to low-income earners. Dr
Nauta contends that the transfer of risk “…is really critical too
the success
in this market. You’ve got to ultimately transfer risk
from you as entity in the middle, that buys this from various options
and
various schemes, to the doctor” (para 113).
In
context, this passage of Dr Nauta’s evidence reads:
“
Are you aware of any other managed care companies
that have attempted or companies that have attempted to enter this
capitated managed
care market?
DR NAUTA
:
Yeah, no, I think it’s true what I
heard earlier. There are…many people enter this. They go as fast as
they come. It’s not difficult
to enter this market. You basically
need to have a spreadsheet and a few bop in your pocket, because to
say I’m going to do this
and then the examples of that and the
skeletons, you know, in the past are there. We only think that there
are about 3 of us that
got enough lives and members to retain the
attention of the doctor and of the member, so that members didn’t
churn, what we say
in the medical industry – in other words, come
and go and come and go – which is normally a broker induced thing
if there’s
unhappiness in a particular scheme or platform.”
This is hardly a definitive statement in support of the
Tribunals caution regarding capitation as a market.
[37] In summary, the evidence shows that a capitation
agreement which is a subset within the range of managed healthcare is
an arrangement
entered into between a medical scheme and a person in
terms of which the medical
21
sche me pays to such a person a pre-negotiated fixed fee
in return for the delivery or arrangement for the delivery of
specified benefits
to some or all of the members of the medical
scheme. Apart from capitation, there are many options by which the
provision of managed
healthcare can be achieved. These include
risk-adjusted global fee for service; risk-adjusted fee for service;
performance-based
re-imbursement of global fee for service; peer
review management, preferred provider accreditation and benefit
design.
[38] The Tribunal’s own approach is also not free of
contradiction. In its market definition, the Tribunal concluded that
the relevant
market included firms that provide capitated primary
managed care options for both low-income and high/middle-income
options. In
short, the defined market was not qualified by income
sectors. When analysing barriers to entry however, the Tribunal
changed the
scope of its analysis and deferred the market as the
provision of managed care options to the low income sector only. In
other words,
the Tribunal now imposed a further restriction and
excluded the high-income and middle-income sectors. Thus it states at
para 162:
“
We note that the schemes which Walters claims are
about to desert Prime Cure and Carecross in favour of Solutio, appear
to fit this
profile. If one accepts that much of the growth in the
low -income market is going to be in large, national open schemes,
this does
not, on its own, suggest a significant future role in the
relevant market for Solutio.”
22
In my view it is inconsistent for the Tribunal to rely
on a market definition including “capitated primary managed
healthcare”
generally (which market includes first appellant) and
then later in the same determination to insist that the relevant
barriers ar
e those in respect of entry into the lower income sector
(a sector in which first appellant does not operate),
[39] For these reasons, the Tribunal erred in its
definition of the product market. To return to the Tribunal’s
approach regarding
market definition, there is an unfortunate absence
of a rigorous exercise to determine the scope and nature of the
market. The Tribunal
did not perform any of the traditional exercises
used for determining the dimensions of product market. There is no
analysis in its
determination which sector to compare prices of
competing products or the functionality of those products from a
consumer perspective.
No customer substitution test was performed:
that is an analysis of price substitutability or functional
substitutability. On the
available evidence, the relevant product
market appears to be the provision of primary managed healthcare
products for low cost medical
scheme options.
Competitors.
[40] The next question that has to be determined is the
identification of the competitors. The evidence reveals that there
are various
entities which competed with second appellant, including
third party managed care organisations, (“the MCO’S”) , the
medical
scheme administrators as well as the independent
practitioners’ associations commonly known as IPA’s.
[41] In regard to the managed care organisations, the
evidence revealed that Carecross as well as Faranani compete with the
second
appellant. Dr Nauta
23
testified that Faranani was established by IPA members
and has fewer lives than Carecross and the second appellant, but
continues
to compete in the same market. He then went on to testify
as follows:
“
Mr Unterhalter
: But let’s just examine some
of the facts. I was asking you a question as to who you would think
your competitors are and I think
we had got to, well, you don’t
think Medicross, you do think Prime Cure. Who else? Is that it?
DR NAUTA
: No, look I think there are probably
let’s say a new world that you may have in your mind somewhere
there, that I don’t really
see as a competitor, but they are the
managed care entities within administrators. The ones that jump to
mind immediately would be
Qualsa, who have in fact poached 920 lives
from us and then sent a letter to all our doctors and that was a
little (inaudible) group.
So we were a bit vulnerable there. There is
the Solutio Group, who look at hospital risks and they’re part of
the medscheme stable
and then you have a lot of little ones.
[42] The medical scheme administrators also compete in
the same market, some of which provide the service “in house”. Dr
Strauss
testified that Discovery had previously engaged the second
appellant and Carecross to provide all primary health care benefits
on
their behalf. Subsequently Discovery has terminated that contract
and intends to render the service on its own from 1 January 2006.
Significantly, it has 90 000 of the 342 000 lives which comprise the
number of lives covered by capitated options.
24
[43] Solutio is the managed care division of Medscheme.
Dr Walters testified that Solutio has since 2002 contracted 4000
practices
to its network. Some of these practices have two to three
doctors. Furthermore, twelve schemes have contracted with Solutio to
gain
access to its network of medical practitioners. Dr Walters
testified that Solutio regarded the second appellant, Carecross,
Faranani,
Discovery and Qualsa as its competitors and that it has on
certain instances been appointed to provide services which had been
previously
provided by the second appellant.
[44] Qualsa is a managed healthcare organisation within
the Metropolitan Health Group. It provides primary care services for
Wooltru,
previously provided by Carecross and the second appellant.
It has 40 000 lives. Mr Dorfling testified that Qualsa also provides
managed
care services to the Pick ’n Pay Medical Scheme. Mx Health
is a large administrator that has a managed care division, thus
providing
similar services provided by the second appellant.
Enablemed has recently been awarded a contract in respect of the
Nissan Medical
Scheme involving 6000 lives. This scheme was
previously handled by the second appellant .
[45] The Independent Practitioners Associations also
have a national footprint. Mr Singh testified that the IPA’s are
all doctors
and the location of their practices is convenient for the
member and his or her family. The IPA’s have organised themselves
as
businesses in order to provide managed care services to medical
schemes. In this regard Sizwe Medical Fund has concluded contractual
arrangements with the IPA’s only .
[46] It is evident that there are a number of
organisations with financial resources and administrative networks in
the market, whilst
some are
25
preparing to enter the market. In my view, the Tribunal
did not attach sufficient we ight to this evidence. It is highly
unlikely
that Discovery, an experienced administrator, will encounter
any major difficulties when it commences providing the service “in
house” from January 2006. It has the financial means and network,
and furthermore has 90 000 lives with which to commence with.
Indeed
respondent’s own expert, Mr J Hodge, conceded that Discovery was ‘a
real competitor’. Similarly, Solutio is a competitor
of the second
appellant. Dr Walters provided evidence that Solutio had entered the
market to provide primary care services for managed
care options and
had done so in competition with second appellant and Carecross.
[47] Th e Tribunal erred in rejecting this evidence
without justification. It erred in its identification of the
competitors of the
second appellant. It is evident that the
competitors of Prime Cure, the second appellant, consisted of various
entities namely, Carecross,
Solutio, Discovery, Qualsa, Enablemed,
Faranani, Mx Health as well as the IPA’s.
[48] Having defined the product market and identified
the competitors, I turn to deal albeit, briefly, with the remaining
issues raised
by the parties. These related to the findings by the
Tribunal on price sensitivity; switching between medical schemes;
competition
in the market as well as barriers to entry.
(i)
Price sensitivity
[49] In regard to price sensitivity the evidence clearly
reveals that the low income members are sensitive to price
increases and
that members will
26
migrate if there was any mention of a price increase,
however minute. This view was held by various witnesses, including Mr
Van der
Heever called by the Tribunal who replied to a question of
sensitivity to price changes as follows:
‘
I think that yes, I think that looking at the sort of
absolute levels, the sort of price elasticity at the lower end, I
would expect
they would be very price sensitive to changes as well to
the absolute level of cost at this point in time. Mr Hodge’s
testimony
in this regard is particularly telling. We also acknowledge
this is a price sensitive market, as a low-income market, but what
the
parties are actually suggesting is that it’s perfectly price
sensitive, which is a completely different game and from our
perspective,
if we are going to take pr ice sensitivity on the
low-income market to its logical conclusion, then we wouldn’t be
hearing cases
in the Competition Tribunal on low-income products.’
To elevate the indicated test to that of perfect price
sensitivity is to construct a test in favour of respondent which in
practice
will hardly, if ever be met!
[50] Mr van der Heever’s concession was wisely made.
Members or consumers with very little disposable income are likely to
remain
sensitive to price increases. If the price is increased, they
may not be able to afford membership of the scheme and this will
cause
them to move or switch to a medical scheme that will suit their
needs and pockets. Any attempt by the appellants to increase the
price if the proposed merger is granted may well be met by an exodus
of members who are price sensitive. This prediction finds clear
support in the evidence of Dr Nauta who conceded under the cross
examination that low income earners would ‘simply move away’
if
27
price was increased significantly. It follows therefore
that the Tribunal erred when it found that the low income consumers
become
insensitive to price once they have joined the scheme.
(ii)
Switching between medical schemes
[51] The Tribunal found that the members are unlikely to
switch from one medical aid to another due to price increases. In my
view
there is no clear impediment precluding the members from
switching. They do not forfeit any money if they move but may be
required
to wait for a period before the benefits accrue to them. In
any event this finding by the Tribunal is not clearly supported by
any
evidence.
(iii)
Barriers to entry
[52] The Tribunal concluded that the entry barriers are
formidable. It is difficult to comprehend how that finding was made
when regard
is had to the evidence. There are competitors in the
market. The evidence of Dr Nauta on whom the Tribunal relied was that
it was
not difficult to enter the market. Dr Nauta’s evidence is
revealing.
As noted, when he was asked the question: “Are you
aware of any other managed care companies that have attempted or
companies that
have attempted to enter this capitated managed care
market?”, Dr Nauta replied that entry into the market is easy; the
difficulty
of being successful was another matter.
But, Discovery has a good network and sound financial
backing with 90 000 lives and would not face any barriers upon entry.
Solutio
has more than
28
4000 practices in its network. Old Mutual has the
financial and administrative resources necessary to enter the market.
It has also
acquired Sizwe Medical Scheme, which has an arrangement
with IPA’s.
In coming to its conclusion the Tribunal sought to
circumvent Dr Nauta’s evidence by emphasizing the tests of
continued presence
in the market as opposed to focusing upon entry.
But as I have noted, not even that predictive conclusion has been
justified nor
is there a basis to conclude with confidence that it
can be sustained on the evidence. The Tribunal accordingly erred in
finding
that there were significant barriers to entry.
Conclusion.
[53] It follows therefore that this was not a “three
to two merger” as found by the Tribunal. There are other
competitors with
sound financial and administrative networks. Some of
the competitors have managed to secure market share which had
previously been
held by the second appellant. The evidence has
clearly established that there is aggressive competition, that each
player has to
provide good if not excellent service, in order to keep
its contracts. On the evidence presented to the Tribunal there was an
insufficient
basis to conclude that the horizontal dimensions of the
merger would result in a lessening of competition in the deferred
market.
[54] It follows that the appeal was upheld and the order
approving the merger was granted.
29
DAVIS
J P AND SELIKOWITZ JA AGREED
MHLANTLA
AJA