COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 53/LM/Sep01
In the large merger between:
AFROX HEALTHCARE LIMITED
and
AMALGAMATED HOSPITALS LIMITED
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Reasons
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Approval
1. On 16 October 2001 the Competition Tribunal issued a Merger Clearance
Certificate approving the large merger between Afrox Healthcare Limited (Afrox)
and Amalgamated Hospitals Limited (“AmaHosp”) without conditions. We set
out the reasons for our approval of the merger below.
The Parties
2. Afrox is a South Africanbased company listed on the Johannesburg Securities
Exchange whose main business is the provision of private healthcare services. It
owns and manages a large number of private hospitals that provide a range of
general and specialized medical care facilities and services. Most of these
hospitals are operated by separate subsidiary companies controlled by Afrox.
Afrox is ultimately controlled by British Oxygen Company PLC, an English
company listed on the London Stock Exchange.
3. AmaHosp is a South African company also specialising in the provision of private
healthcare services, it owns and manages four private hospitals in Kwazulu
Natal1. It also operates a small ambulance service. AmaHosp is controlled by
1 Namely, Westville Hospital, Mount Edgecombe Hospital, Crompton Hospital and Chatsmed Garden
Hospital.
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Durclin Limited. Its ultimate shareholders are individuals comprising doctors and
members of the communities in which its hospitals operate.
The Merger Transaction
4. Afrox proposes to acquire 76% of the shares in AmaHosp for a consideration to
be finalized subsequent to a due diligence exercise in relation to AmaHosp 2.
According to Afrox this transaction is part of its strategy to expand its presence in
KwazuluNatal where it currently owns two hospitals. Afrox claims that unless it
expands and creates critical mass it may be marginalized by the other players in
that province. It submits that this merger will create the critical mass that will
warrant future investment in that province resulting in Afrox becoming a more
effective competitor. Furthermore, this transaction will give Afrox an opportunity
to unlock certain synergies such as the consolidation of neurology, neurosurgery
and cardio thoracic and cardiology units into more specialised centers.
5. As mentioned above the majority of the shareholders in Amahosp are doctors and
members of the community where the hospitals operate. According to AmaHosp
one of the motivations for the sale is to offer these shareholders the opportunity to
release the value of their shareholding. More importantly, however, the parties
referred us to a policy document released by the Health Professions’ Council last
year which seeks to outlaw the practice of doctors owning shares in hospitals. The
aim of the policy is to remove the perverse incentive on the side of doctors to
refer patients to hospitals where they own shares. The adoption of this policy by
the Health Professions’ Council has made doctors, who are the majority
shareholders of AmaHosp, keen to realize their investment in the company.
Evaluating the merger
The relevant product/services market
6. Both parties operate in the market for the provision of private hospital services.
6. Both parties operate in the market for the provision of private hospital services.
Afrox owns and manages hospitals throughout South Africa while AmaHosp only
owns hospitals in KwazuluNatal. These hospitals provide a variety of general and
specialised medical services including medical, radiography, surgical, paediatrics,
obstetrics, urology and ophthalmology. 3 Apart from the obvious requirement that
the hospital has proper facilities and qualified staff there appears to be very little
2 Afrox currently has a shareholding of 19,2% in AmaHosp.
3 The Commission in addition indicated the following services were provided by hospitals in the respective
groups of the merging parties: Cardiology; Cardiothoracic surgery; Dermatology; ENT; GP’S;
Gynaecology; Obstetrics; MaxilloFacial; Neurology; Neurosurgery; Ophthalmology; Orthopaedic
Surgery; Paediatrics; Physicians; Plastic Surgery; Psychiatry; Radiology; Pathology; General Surgery and
Urology.
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preventing a hospital providing any healthcare service. A license is required from
the regional health authority to provide any healthcare service, but this will
presumably be granted to a hospital meeting the requirements of the license. All
the hospitals concerned in the merger provide a range of services. Although only
Westville provides a comprehensive range of services there are significant
overlaps.4 It appears unnecessary therefore to limit the market to the provision of
specific healthcare services.
7. In their definition of the market the merging parties argued that state hospitals
belong in the same market as private hospitals. The parties claim that some state
hospitals have set aside wards to accommodate private feepaying patients in
competition with the private hospitals. The parties allege a strategy on behalf of
some health authorities not only to use spare capacity in some of their hospitals to
cater for private patients, but to build, within the state hospitals, “private”
hospitals that will accommodate private patients exclusively. They also state that
some medical schemes, for example Transmed, have recently adopted an option
that only offers hospitalisation at state hospitals as a benefit. They argue that all
these factors put state hospitals in direct competition with the private hospitals.
8. The Commission disagrees with this assertion. It argues that state hospitals
provide mainly primary healthcare compared to private hospitals, which, while
also providing some primary healthcare, mainly provide secondary, and tertiary
healthcare. Furthermore, the Commission argues, there is a huge difference
between the prices charged by state and private hospital making it unlikely that
they compete for the same clients. Firstly the rates of private hospital are much
they compete for the same clients. Firstly the rates of private hospital are much
higher than those of state hospitals. Secondly, the scale of benefits prescribed by
the Board of Healthcare Funders for private hospitals, which is the rate that
healthcare funders pay for services provided by private hospitals, is above that for
state hospitals. There is also a vast difference in the quality of the facilities and
standard of service. Typically private hospitals attract patients who have some
4 See Table 1 below:
TABLE 1: SERVICES PROVIDED BY AHL AND AMAHOSP
HospitalABCDEFGHIJKLMNOPQRSTWestvilleXXXXXXXXXXXXXXXXXXXXCr
omptonXXXXXXXXXXXXXXXChatsmedXXXXXXXXXXXXXXXXXXMount
EdXXXXXXXXXXXXXXXXEntabeniXXXXXXXXXXXXXXEmpangeniXXXXXXX
XXX
A: Cardiology; B: Cardiothoractic surgery ; C: Dermatology; D: ENT; E: GP’S;
F: Gynaecology; G: Obstetrics; H: MaxilloFacial; I: Neurology; J: Neurosurgery;
K: Ophthalmology; L: Orthopaedic Surgery ; M: Paediatrics; N: Physicians; O:
Plastic Surgery ; P : Psychiatry; Q: Radiology; R: Pathology; S: General Surgery;
T: Urology
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form of medical aid or medical insurance whilst state hospitals attract patients
without.
9. On the evidence before us it appears that the type of service and the discrepancy
in the tariffs charged for services provided that exists between the private and
state hospitals militates against a single market for both. It may well be that the
attempts by government to compete for private patients alluded to by the merging
parties may change the face of this market in the future. However, we are not
convinced that the services currently provided by state hospitals may be regarded
as substitutes for the services offered by the private hospitals at best they may
act as a deterrent to any anticompetitive conduct on the part of the merged entity
in the future.
10. In our opinion therefore the relevant product market is the market for the
provision of a range of private hospital services.
The relevant geographic market
11. As mentioned above AmaHosp’s businesses are all in KwazuluNatal, more
specifically the Greater Durban/Pinetown Area. Afrox owns two hospitals in
KwazuluNatal, namely, Entabeni Hospital and Empangeni Clinic. Only the
former is situated within the Greater Durban/Pinetown Area.
12. The Commission suggests that the relevant geographic market is a local one,
comprising private hospitals within a 20 to 40 kilometre radius around the Durban
area. The Commission’s view is that it becomes increasingly inconvenient for
patients to use hospitals that are beyond the radius of 20 to 40 kilometres 5.
13. Predictably, the merging parties propose a wider market that includes the whole
province of KwazuluNatal 6. They claim that because the Greater
Durban/Pinetown Area is the major metropolitan area in KwazuluNatal, it
attracts patients from all over the province.
14. The Commission argues that it is very inconvenient for patients to travel long
14. The Commission argues that it is very inconvenient for patients to travel long
distances to get to a hospital and that patients would generally prefer to be
admitted to hospitals close to their homes. They concede that hospitals in the
Greater Durban/Pinetown metropolitan area sometimes attract patients from all
over the province, but point out that this normally occurs where the hospitals
around the patients’ place of residence do not offer the type of specialist service
required.
5 The obvious exception is that of patients who have no choice but to travel longer distances (usually to the
city centre) in search of specialized services not offered by the local hospitals.
6 There was some reference in the parties papers to the possibility of a national market but this submission
was not pursued at the hearing.
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15. We suspect that the Commission’s definition of the geographic market is the more
probable one. However, given our finding below, that even on the very narrow
conception of the relevant geographic market contended for by the Commission
the merger is unlikely to lessen competition, we do not consider it necessary to
make a finding on this issue.
16. On the narrow market comprising only private hospitals in the Greater
Durban/Pinetown area (where all AmaHosp’s hospitals are situated and which is
the major metropolitan with the largest concentration of private hospitals in
KwazuluNatal) Afrox has one hospital, Entabeni Hospital, with 273 hospital
beds. This translates to about 10% market share for Afrox. AmaHosp’s share of
this market is about 26% (702 beds). This would result in a postmerger market
share of about 36% for the merged entity making it the biggest player in the
market. Netcare will be the second biggest player with 31% (844 beds) and Joint
Medical Holdings Limited third with 11% or 316 beds. The rest of the market
shares will be divided between independent hospitals as follows: St Aidens
Hospital will hold about 10%, McCord Hospital 9% and Nu Shifa Hospital the
remaining 3% of the market.
17. The above market shares suggest a concentrated market. The HHI figures indicate
a post merger HHI of 2568, representing an increase of 620 points from the pre
merger 1948 points. In terms of the 1992 US Horizontal Merger Guidelines this
figure would lead to a presumption that the merger will result in the creation or
enhancement of market power, or facilitate its existence but this presumption may
be overcome by “a showing that nonstructural factors reveal that such an exercise
of market power is unlikely”.
18. On the wider market comprising all private hospitals in KwazuluNatal as
proposed by the parties, Netcare is by far the biggest player with over 28% of the
market (1150 beds), AmaHosp has just over 17% (702 beds) and Afrox is third
with a 9% share equaling 368 beds. Joint Medical Holdings and MediClinic hold
8% (316 beds) and 5% (183 beds) respectively, with the rest of the market,
comprising 1335 beds or 33% of the market, divided amongst many smaller
independent hospitals. On this market the merged entity would become the second
biggest competitor with 26% of the market. 7
Impact on competition
19. Despite the significant concentration in the market, we find that the merger is
7 It is not possible for us to accurately work out the HHI figures in this wider market because we do not
have adequate information on the breakdown of the 33% of the market shared by smaller independent
hospitals. In any event, since our finding is that the merger raises no competition concerns at the narrower
market proposed by the Commission, which in our opinion is the more probable one, the concentration
levels in this wider market are of no consequence to our decision.
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unlikely to adversely affect competition in either of the markets referred to above.
A number of factors peculiar to this market make it unlikely that the merging
parties may acquire market power as a result of this transaction. We set out fully
our reasons for this conclusion below.
20. In addition to competition from other big players such as Netcare 8, Joint Medical
Holdings and Mediclinic the structure of this market makes it unlikely that the
merging parties may acquire market power. Private healthcare funders, who foot
the bill for the majority of the patients admitted to private hospitals, possess
significant countervailing power in this market. Each year the Board of
Healthcare Funders, in consultation with the private hospitals, sets a benchmark
tariff to be paid for particular hospital services provided by private hospitals. This
tariff is known as the scale of benefits and is generally adopted by all the funders
as the amount of medical cover they are willing to provide for each specified
service provided by the hospital 9. According to the Commission and the merging
parties, to survive in the market private hospitals have to charge prices within the
scale of benefits set out by the Board of Healthcare Funders. A private hospital
charging above this tariff would have to recover the premium from the patient,
thereby running the risk of nonpayment and/or default. Consequently, hospitals
are disincentivised from charging prices above the tariff set by the Board of
Healthcare Funders. Therefore the power of any private hospital or hospital group
to control prices is severely limited.
21. With limited price competition, private hospitals compete most vigorously on the
quality of service to attract patronage. Although patients are the clients of the
private hospitals, they have very little influence over the choice of hospital to
private hospitals, they have very little influence over the choice of hospital to
which they are admitted. It is the doctor’s decision 10 whether a patient needs to
be referred to a hospital, and if so, which hospital. Competition between the
hospitals is therefore for the patient referrals from the doctor it is marketing to
the doctors that exercises the determinant influence. The hospitals compete by
winning the favour of the referring doctor. Location, provision of quality care to
patients, a multidisciplinary pool of healthcare providers and possession of state
oftheartequipment are the most important competitive tools used to attract
doctors.
22. Given this peculiar market structure, competition concerns are likely to arise
8 Netcare is the biggest supplier of private hospital services in KwazuluNatal and, according to the parties,
announced a R73 million expansion and upgrading programme for its hospitals in KwazuluNatal shortly
after the parties announced their plans to merge.
9 For example, a specified maximum amount is paid for accommodation, use of specific equipment and
pharmacy expenses. The parties claim that in recent years the annual tariff increases set by the Board of
Healthcare Funders has been lower than the medical inflation rate resulting in a financial strain on the part
of the private hospitals. They cite this as a manifestation of the countervailing power of the healthcare
funders.
10 Both GP’s and specialist doctors refer patients to private hospitals.
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primarily where a merger has the potential to adversely affect the ability of other
hospitals to compete for the doctors’ referrals or negate the countervailing power
of the Board of Healthcare Funders. In our opinion this merger has no such
potential.
23. With regards the potential for new entry into the market, the Commission found
that there has been no new entry into this market in KwazuluNatal over the last
three years; the trend has been to consolidate or extend existing businesses. As
mentioned above a license is required to operate a private hospital, and even to
make extensions to an existing private hospital. The license regulates the
specialties and facilities to be provided by the hospital and the number of beds
and theatres allowed. According to the merging parties a major barrier to entry in
this market is a moratorium by government on the establishment of private
hospitals that has been in place for the last few years. The moratorium makes it
virtually impossible to get a license to build a new private hospital at the moment.
This may be the major reason for the absence of new entrants into the market
recently. According to the Commission the attitude of the National Department of
Health is that while they will currently grant no licenses for the building of new
private hospital in the urban areas, they are willing to consider applications for
licenses in the rural areas. The Commission consulted with both the national and
provincial health authorities and neither expressed any opposition to the merger.
24. Afrox argues that the merger will in fact benefit both doctors and patients in
KwazuluNatal. They claim that as one of the leading hospital management
companies in South Africa, AmaHosp hospitals will benefit from the management
expertise, significant skills and knowledge and technology that Afrox will bring
expertise, significant skills and knowledge and technology that Afrox will bring
into the merged entity. Afrox also claims to have in place a plan to cooperate
with the University of Natal in the training of specialists in the field of cardiology
and neurosurgery once they have set up these specialists units.
Public interest issues
25. The merging parties anticipate no job losses. The Commission received no
representations from the unions representing employees of the merging parties 11.
Accordingly no public interest concerns arise from the merger.
Conclusion
26. based on the above information we find that the merger between Afrox and
AmaHosp is not likely to reduce or lessen competition in the market.
11 According to the Commission copies of the Merger Notice were served on NEHAWU, HOSPERSA,
DENOSA and CEPPWAWU who represent the employees of the merging parties.
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____________ 02 November 2001
N.M Manoim Date
Concurring: D.H. Lewis, C. Qunta
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