COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No: 68/LM/Aug06
In the matter between:
Netcare Hospital Group (Pty) Ltd Acquiring Firm
And
Community Hospital Group (Pty) Ltd Target Firm
Panel : N Manoim (Presiding Member), U Bhoola (Tribunal Member)
and T Orleyn (Tribunal Member),
Heard on : 415 June 2007 and 18 July 2007
Order Issued : 2 August 2007
Reasons Issued: 5 November 2007
NonConfidential Reasons for Decision
Introduction
1] This is a merger between two groups of hospitals. Netcare Hospital Group (Pty)
Ltd (“Netcare”), the largest hospital group in the country is seeking approval to
buy all the shares in the Community Hospital Group (Pty) Ltd (“CHG”), which
owns five hospitals. Netcare presently owns 43.75% of CHG and seeks to buy
the remaining shares. When Netcare acquired its 43.75% stake in CHG, in
2002, it acquired joint control over CHG, but did not notify this transaction as a
merger, as the law requires it to do.
2] We are thus required to consider the effects of the merger not in relation to
whether the change from joint to sole control by Netcare will result in a
substantial lessening or prevention of competition, but whether the acquisition
of control by Netcare ab inititio, will have this effect. The Competition
Commission (“the Commission”) recommended that the merger be prohibited.
3] After hearings were concluded on 18 July 2007 we decided to approve the
merger on 2 August 2007. We now give reasons for that decision.
Transaction details
4] Netcare which currently owns 43,75% of CHG will acquire the remaining 56,25
% of the shares from Community Health Care Holdings( Pty) Ltd ( 43,75%) and
two management owned entities , Duelco Investments 65 ( Pty) Ltd (6,25%)and
Private Preview Investments 27 ( Pty) Ltd (6,25%). The total purchase price is
composed of a mixture of cash and shares in Netcare. As a result of the
transaction, CHG becomes a wholly owned and controlled subsidiary of
Netcare.
5] The material assets being acquired by Netcare in this merger are the five
private hospitals owned by CHG. They are Montana Private Hospital, and
Bougainville Private Hospital in Pretoria, Kuils River Private Hospital and UCT
Private Academic Hospital in Cape Town, and East Rand N17 Private Hospital.
Background
6] This is an unusual merger case. 1 In the ordinary course, mergers are notified
before they are implemented and our task is to evaluate, ex ante , whether they
are likely to be in contravention of the Competition Act, 1998 as amended (‘the
Act’). In this case it is common cause that:
The merger has at least been partially implemented. According to the
Commission this may have been as early as 2000. 2
1 Even the Merging parties’ expert Dr Stillman sees it this way. “Netcare’s failure to notify its
prior acquisition creates an unusual situation for analyzing the likely effects on competition of
the transaction under review.”
2 See Commission’s Recommendations p3.
2
That this implementation has taken place unlawfully. 3
7] Our merger regime is not designed for evaluating mergers after the fact. One
only need examine the language of the section to see its futuristic inclination.
For this reason we have a system of compulsory premerger notification. In
some other systems which also require mergers to be notified before they are
implemented this simply means the merging parties cannot implement for a
certain period. Thereafter, unless the authorities indicate an intention to stop
the merger the parties can consummate the transaction but still risk the
possibility of post merger scrutiny by either the authorities or private parties. 4
Our system requires an active decision by the competition authority once a
merger is notified and for this reason a merger cannot be challenged again
later; neither by the competition authorities nor private parties. In this sense,
merger approval gives the merged firm immunity from future challenges and
thus the comfort of business certainty going forward. In return for this benefit,
firms are obliged to notify mergers before they are implemented and to delay
implementation until they get regulatory approval. The entire edifice of merger
control; notification, evaluation, and recommendation, is premised on this
assumption of compliance. The leitmotif throughout this enquiry is “what will the
world look like after the merger”. When a merger has already been
implemented, and as in this case for some time, the premise of the entire
system is undermined; a system designed to look into the future now has to
gaze back in the past. Typically in the ex ante merger review, we, in the words
3 In a separate application the Tribunal is asked to confirm a consent agreement between the
3 In a separate application the Tribunal is asked to confirm a consent agreement between the
Competition Commission and Netcare in respect of this conduct. We have not heard this
application yet.
4 In the United States mergers can be challenged after they have occurred. As Areeda
explains: “ Finally, while the problem of post acquisition evidence is legally as important as it
has always been, its practical significance has been diminished considerably by the reporting
requirements of the HartScottRodino Act. That statute, which requires advance reporting to
the government of significant mergers, has largely created a new regime in which most
government merger challenges occur before the merger is consummated. In such cases
“postacquisition” evidence does not exist. Of course, the government is free to challenge a
merger after it has occurred, and nothing in the HartScottRodino statute limits private post
acquisition challenges.” See Areeda 1205
3
of the Competition Appeal Court, “forecast a likely possibility” 5. We use the
past to make an informed prediction about the future. When a merger has
already been implemented and, as in this case for some time, the entire
evidential premise of the system is compromised.
8] In the United States by contrast although a system of compulsory prior merger
notification exists, mergers may be implemented following the observance of a
statutory waiting period. Thus mergers can then be implemented by way of
default and this is typically the way most mergers proceed. In contrast to our
system however, the merger remains susceptible to later challenge, either by
the government or at the instance of a private party. As a result, when
adjudicating a merger a different approach is adopted depending on whether
the challenged merger has been implemented or not. Thus, in a recent decision
of the Federal Trade Commission (“FTC”) where a hospital merger had been
litigated post consummation, the FTC compared prices being charged at the
merged firm presently with those charged by the separate constituent hospital
groups before the merger. 6 In other words they looked backwards not
forwards.7
9] In this merger, the evidence has not been prepared on this basis, but rather on
the assumption of imagining what it would be like if the merger had not taken
5 In Mondi Limited and Kohler Cores and Tubes (a division of Kohler Packaging
Ltd) v Competition Tribunal [2003] 1 CPLR 25 (CAC) at 33c the CAC said that:
“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
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 possibility, that is, it makes a predictive judgment, based on evidence
which has been placed before it.”
6 According to Complainants’ Counsels Heads of Argument in this case, their economic
expert had demonstrated that price increases at the merged group had exceeded those of
other groups by a wide margin even after accounting for competitively neutral factors, and that
the only explanation for this was market power. Unlike in the present case, in Evanston, funder
witnesses testified to the fact of the harm caused by the merger. ( see heads page 18)
7 Cf Evanston Northwestern Healthcare Corp ., FTC Docket No. 9315, Initial Decision (Oct. 20,
2005), available at http://www.ftc.gov/os/adjpro/d9315/051021idtextversion.pdf [ Evanston
Decision].
4
place. Thus, witnesses are asked what the future would look like, if CHG was a
group independent of Netcare. But CHG has not been independent of Netcare
for some years and no witness can recall what it was like when it was. Since
part of CHG’s expansion took place at a time when it was already jointly
controlled by Netcare, it has never in its present form existed as an entity
outside of Netcare control. Thus any witness being asked to comment on what
the world would be like with an independent CHG is being asked to imagine
something that has never existed.
10] It is true, as Dr Stillman, the merging parties’ expert with whom we debated this
issue, argues, that all merger control requires a measure of hypothesis. The
witness in the premerger case, where there has not been implementation is
being asked to speculate on what might happen in the market when the
acquiring firm controls the target which, up till then, it had not. This requires an
exercise of imagining what might happen in the market if the target became the
object of the acquiring firm’s control.
11] But that is not the task witnesses in the present case have been required to
perform. They have been asked to imagine what CHG might be like at present
if it were independent of Netcare and then to ponder on what this hypothetical
present case scenario might look like in the future if CHG was once again part
of Netcare.
12] The response to this problem for the adjudicator is by no means clear. It may
mean that in relation to witness evidence we adopt a cautionary rule about their
ability to speculate. Even that is not helpful. Does it mean that we must be
cautious about their optimism or their pessimism about the future of competitive
inclinations of the merged firm? The other approach would be to presume
inclinations of the merged firm? The other approach would be to presume
against the interests of the merged firm. On the basis that no firm should
benefit from its unlawful action, it may be appropriate to treat evidence of
witnesses who testify that the merger will not give rise to anticompetitive effects
with caution, whilst not adopting the same approach with witnesses who testify
to concerns. The statute gives us no mandate to follow this approach and as an
administrative tribunal we should tread cautiously in developing evidential rules
5
or presumptions without the statutory remit to do so.
13] We are thus constrained to perform our functions under suboptimal conditions.
As we demonstrate later in this decision, when we evaluate the evidence of
industry witnesses, many laboured under the difficulties we have identified of
erecting a supposition about the future based on a hypothetical present. For
some witnesses this exercise proved difficult, not because they were wanting in
experience or intelligence, but because that was a conceptual demand they
found daunting; others fared better, but even then the task expected of them
was unfair and unreasonable.
14] The witness who did indeed have concerns would have to conjecture what
Netcare and CHG might look like without the other; a situation last seen in 2002
when both groups were of a different size and so was the rest of the market.
Some who testified were not in the industry at that time. The difficulty is further
bedevilled by the fact that competitive bargaining between hospitals and
funders is in its infancy. At the relevant premerger date, bargaining was still
centralised making an assessment more difficult. Little wonder indeed that
industry representatives either had difficulty in coming to any conclusion or
concluded that the merger was not going to make much difference. It is also a
question of degree. If the merger implicated half of Netcare’s hospitals or half in
a particular region one can imagine an informed observer still being able to
come to some meaningful conclusion. But located as it is with a small presence
in the major metropolitan areas, CHG does not present an obvious case for
easy post merger analysis.
15] Nevertheless we are required to make a decision on the case before us. We
have decided to evaluate the merger following two approaches. First a post
have decided to evaluate the merger following two approaches. First a post
merger analysis, and secondly, a premerger analysis (the approach we adopt
conventionally).
History of CHG
6
16] The hospitals that comprise the present CHG have had an interesting history.
The rump of the present group originated in the stable of the now defunct
Macmed Health Group Limited (“Macmed”). Macmed was involved in the
supply of medical equipment and supplies to hospitals. In the mid 1990’s,
Macmed decided to enter the private hospital market so as to create a
customer base for its supplies. In pursuit of this strategy, Macmed acquired
certain hospitals, including those presently in the CHG portfolio, Montana Park
Clinic and Bougainville Hospital, in Pretoria, N17 Hospital in Springs and Kuils
River Hospital in Cape Town. In addition, it acquired the licences to the
Fourways Hospital, and Southgate Hospital.
17] Macmed’s ambitions to become a private hospital player soon displeased its
customer base who did not welcome competition from a supplier. According to
CHG’s chairperson Anna Mokgokong, Macmed tried to remedy the problem by
“appointing a black economic empowerment partner and by transferring control
of these hospitals to such partner.” 8
18] Such partner was to turn out to be the Malesela Hospital Group (Malesela), a
company controlled by Mokgokong and Joe Madungandaba. In 1998 control of
the hospitals was transferred to Malesela. At the time of the transfer Fourways,
Kuils River and N17 were then still under construction and the only operational
hospitals were Montana and Bougainville. The latter two were managed by a
company called Executive Health Management Services, a company owned
and controlled by Dewald Dempers and Gerhard Ferreira, who were later to
become minority shareholders in CHG.
19] Malesela’s stewardship of the hospitals was brief and unhappy. Cash flow from
the two operating hospitals was insufficient to service its debts and in addition,
the two operating hospitals was insufficient to service its debts and in addition,
the group was forced into an uneconomic and exclusive supply arrangement
with Macmed. Macmed had to advance funds to it on an ongoing basis, to keep
the group operating. By the last quarter of 1999, drowning in debt and overly
dependant on Macmed for survival, Malesela began to negotiate with Afrox in
the hope of finding a new and better partner. While these negotiations were
8 See witness statement of Anna Mokgokong, record page W 3.
7
taking place Macmed was liquidated. It was to prove one of the most notorious
in recent corporate history. But in the aftermath, Malesela, which had also
owned a stake in Macmed, suffered damage not only to its finances but also to
its reputation. During the period November 1999 to February 2000 all the
Malesela hospitals, which were owned by separate entities in the Malesela
Group were eventually liquidated.
20] Mokgokong was determined to rescue her hospitals out of liquidation, but was
unable to find any financier willing to support her. Instead, she looked to the
three private hospital groups. She says that neither Afrox nor MediClinic was
interested in supporting her – both seemed intent on capturing some of the
hospitals for themselves. Afrox, according to her, was keen on Fourways, N 17
and Montana. MediClinic, through its empowerment partner Phodiso was
intent on Kuils River. At this stage Netcare enters the picture as Mokgokong’s
saviour. On her version, Netcare was looking for an empowerment partner at
the time, as its previous partner had financial difficulties and had to dump its
Netcare shares.
21] Netcare it seems had more than social objectives in mind when it came to the
aid of Mokgokong. Anxious lest these hospitals fall into the hands of Afrox,
Netcare engineered a situation which led to all the hospitals emerging from
liquidation into the hands of CHG, which was to become the new creature of
Mokogokong and her erstwhile partners Madungandaba, Dempers and
Ferreira. All that is save for Fourways, which despite their best efforts fell into
the hands of Afrox, now Life, who have developed this hospital and which is
now operational. That Netcare was the lead partner in this rescue is not only
acknowledged by Mokgokong in her statement, but is also acknowledged by
acknowledged by Mokgokong in her statement, but is also acknowledged by
Netcare in minutes, where in the Chairman’s report of March 2002, credit for
this rescue is given to the way the process was “ smartly managed” by its
attorneys. 9
22] What Mokgokong does not say in her statement and perhaps this is because
9 See statement of Mokgokong record, W 7 and Netcare Chairman’s report dated 4 March
2002, record page 31920.
8
she never knew about it, was that when Malesela was placed into liquidation
the three private hospital groups had had an agreement amongst themselves
not to bid for the Malesela hospitals. The reasons for this arrangement are not
clear, we only have Netcare's comment on this that this was for “reasons which
seemed cogent at the time.” 10
23] Netcare then discovered that Afrox had “secretly breached this undertaking”
and was making overtures to the liquidators to acquire some of the Malesela
hospitals. Netcare then decided to assist Mokgokong to recover the hospitals.
Netcare commenced involvement as a consultant to CHG, and from then on its
involvement expanded. What seems clear is that because the hospitals subject
to the recovery strategy required government consent for their licences to be
transferred to the new owner, CHG had a competitive advantage over Afrox, as
it was a black owned group. 11 As Sacks observes:
“..the strategy was to develop and promote a contest between
Malesela [i.e. Mokgokong] and Afrox Healthcare, a contest which was
politically far more easily manageable.” 12
What emerges from this memo is why Afrox needed the hospitals more than
MediClinic or Netcare. N17 was a threat to its Parklands facility, whilst
Montana was a threat to its Eugene Marais hospital. Sacks recognised this as
well. He states in the same memo that once the ownership of N17 had been
settled (i.e. it had emerged from out of liquidation in CHG hands) the “ turnover
will increase through the recruitment of several medical specialists from
Parklands Hospital an old and tired Afrox hospital in Springs.” relation to
Montana, Sacks mentions that Afrox had made a ‘secret’ bid for this to the
liquidators as this hospital “is close to Eugene Marais Hospital which would be
seriously affected by an aggressive competitor in the area.”
seriously affected by an aggressive competitor in the area.”
10 See record page 1398 Netcare Memorandum to the Boarrd of Directors dated 22 March
2001, from Michael Sacks. Sacks is the chairman of Netcare.
11 See 1399 where Sacks notes that in relation to Montana Afrox would have to increase their
bid with “no warranty as to retaining the hospital licence.”
12 See record page 1398.
9
Interestingly, the one hospital which was in the Malesela group and which was
a potential threat to Netcare, was Fourways. According to Sacks;
“ This hospital when and if completed could potentially pose a threat
to Sunninghill Hospital and Olivedale Clinic and recognising the
potential prejudice CHG acquired LTA’s secured claim of
approximately ... [Confidential] to position itself in the project.”
Note that Sacks observes that CHG must act on a potential threat not to CHG,
which has no hospitals in that area, but to Netcare which owns Sunninghill and
Olivedale. Afrox ultimately secured the licence but only after considerable delay
in a contest over the licence something that Netcare would later take credit
for.13
24] It appears that the rescue was undertaken over a period, from early 2000 to
mid 2001. Initially the hospitals were acquired by separate shelf companies, but
the shares in these companies were then transferred to CHG, sometime in
2001. Mokgokong does not tell us who the initial shareholders of CHG were at
the time, but they appear to have been held by an attorney as nominee. 14 CHG
only acquired its present shareholder structure in 2002, when Netcare formerly
acquired joint control with Mokgokong and Madungandaba. Notwithstanding
this, prior to the conclusion of the shareholders agreement in 2002, the hand of
Netcare in the new group is writ large. Netcare provided the funding to acquire
the hospitals, provided initial financial assistance and paid the legal fees
involved in the recovery. EHMS managed the hospitals, except for Kuils River,
which, when it commenced, was run by Netcare’s coastal division. Netcare also
immediately implemented its IT systems across all the CHG hospitals and
managed its pharmacies. Its IT systems are significant, because they inter alia
managed its pharmacies. Its IT systems are significant, because they inter alia
contain the group’s billing, inventory and other hospital administration functions.
In his witness statement Ryan Noach the chief operating officer of Netcare
13 See record page 333, Netcare Chairman’s Report to directors meeting dated 26 March
2003 where after observing the prolonged conflict over the licence for Fourways the following
observation is made, “….” [Confidential].
14 See record page 1415 a memo from Dempers dated 16 September 2002. He refers to the
next step as the transfer of the shares in CHG to the shareholders as they are presently
constituted.
10
states as one of the reasons for the merger, the need to protect the intellectual
property that it (Netcare) has extended to the CHG hospitals. He states:
“all the CHG hospitals are operated using Netcare’s accounting
system, IT platform, nurse training programmes, management training
programme and pharmacy infrastructure.” 15
25] Thus, although the shareholders agreement in terms of which Netcare was to
acquire joint control over the CHG group was only concluded in late 2002, it
appears that from the outset of the socalled rescue operation, Netcare
exercised significant influence over the new CHG. 16
26] In terms of the 2002 agreement, the present shareholding in CHG was
structured as follows: Netcare (with a 43.75% shareholding), Community
Hospital Holdings (Pty) Ltd (CHH) (with a 43.75% shareholding), Duelco
Investments 65 (Pty) Ltd (“Duelco”) (with a 6.25% shareholding, and Private
Preview Investments 27 (Pty) Ltd (“Private Preview”) (with a 6.25%
shareholding). Duelco and Private Preview are the respective entities of
Dempers and Ferreira.
27] The group did not remain idle once reconstituted. Kuils River, which recall was
not yet complete in the Malesela days, commenced operating in July 2002. 17
In August 2002, CHG entered into a joint venture arrangement with the
University of Cape Town in respect of the UCT Private Academic Hospital 18
and a controlling interest was acquired in it in June 2003. 19 When CHG was
formed it had only 39% of UCT Private Academic, but the remaining 61% has
since been purchased from the doctors of the hospital. 20
15 See record W 147.
16 Indeed without Netcare it may not have survived. At the end of the 2003 financial year
board minutes of CHG report that the group... [Confidential]. See record page 341 Directors
report of CHG for the period ended 31 March 2003.
report of CHG for the period ended 31 March 2003.
17 See record page 336. When it did it seems to have made a significant difference to CHG’s
viability. The directors report of March 2003 notes that ... [Confidential].
18 Record page W8.
19 Record page 1047 and W178..
20 Record page 160.
11
28] In summary then, currently, CHG controls five hospitals, with a total of 594
beds. Two of CHG’s hospitals are located in the Pretoria region and these are
Montana Private Hospital (with 158 beds) and Bougainville Private Hospital
(with 60 beds). The other two hospitals are located in Cape Town and these
are Kuils River Private Hospital (with 120 beds) and UCT Private Academic
Hospital (with 126 beds). The last CHG hospital is the East Rand N17 Private
Hospital (with 130 beds).
Netcare
29] Netcare is the largest private hospital group in South Africa. It comprises 70
hospitals with over 8400 beds. 21 In addition to the hospitals, Netcare owns
Medicross, which comprises approximately 50 medical centres providing
primary healthcare services. Medicross has acquired Prime Cure, a network of
45 Medical centres located countrywide.
30] Netcare further controls a range of medical related businesses such as Netcare
911, Ampath, and pharmacies, to name but a few. Netcare has recently
extended its international business interest by acquiring a controlling interest in
the leading private hospital group in the UK, GHG.
Market definition
31] Defining relevant markets in hospital mergers is a complicated task for several
reasons. Firstly, this is not a conventional market where buyers and sellers are
in a direct relationship. Ninety percent of private hospital revenue emanates
from medical aid funds not individual patients. The presence of an intermediary
has consequences for behaviour in the market. One writer Lawrence Wu
explains it in this way:
“That is because substitution in hospital markets is not as
21 See Commission’s Recommendations page 8.
12
straightforward as it is in other markets where there are no
intermediaries between the seller and the consumer. In the case of
hospital services, third party payers (e.g. health plans and employers)
can take actions that could either facilitate or impede the ability of
individual consumers to turn to alternative hospitals.” 22
Secondly, demand patterns are not those of a conventional market. The
ultimate consumer of hospital services is of course the patient. Yet the patient’s
preference for a particular hospital is rarely the determining factor in the choice
of hospital. Frequently this choice is made by a general practitioner, who refers
a patient to a particular specialist who practices at a hospital, or it may be made
by the funder, an increasing likelihood with new products for low income
schemes as we consider later in this decision. 23 Even if a patient is on an
unrestricted medical scheme and is not channelled by a general practitioner the
choice of hospital is still more likely to be a contingent one, dependant on a
prior choice of specialist. I would like to see Dr X and I discover that he
practices at hospital Y hence I will go there.
Thirdly, the modalities of private healthcare funding are changing constantly. What we
call medical aid or the US would refer to as medical insurance is the subject of
constant bargaining and strategic game playing between hospitals and funders. As
Wu puts it:
“Arguments and evidence regarding the ability of consumers to turn to
competing alternatives are complicated due in part to the growth and
proliferation of new types of health insurance plans and innovative
contractual arrangements among hospitals, physicians and third party
payers. It is crucial to understand the commercial realities that
payers. It is crucial to understand the commercial realities that
influence these third party payors (sic) because they play an important
22 See, “ The evidence is In: A Review of the Market Definition debate in hospital merger
cases” Lawrence Wu, Antitrust Report, November 1998, page 23.
23 We use the term funder loosely to refer to both administrators of medical schemes as well
as schemes themselves as for our purposes in this decision the distinction does not matter.
13
role in determining the hospitals to which consumers can turn.” 24
32] As we examine later in this decision there is no consensus on the best funding
models, and to the extent that funders seek to impose their own solutions and
resist those sought to be imposed by hospital groups the degree of competition
matters – and this has been the primary focus of the Competition Commission’s
concerns in this merger. But it also impacts on how we define markets because
if new funding models change the rules in which healthcare has traditionally
operated the competition dynamics change as well.
33] Fourthly, hospitals provide differentiated services, because they typically
provide a bundle of services varying in range and kind. This means that the
closer the similarity in services the greater the likelihood that they compete with
one another or put differently, they may vary in the degree to which they may
be considered competitors. A consequence of this, conventional HHI analysis
may throw up a skewed picture of a market as the extent of concentration it
reveals may bear no relationship to the reality of competition.
34] Fifthly, hospitals do not just compete in providing services to patients. They
also compete for the services of specialists, since specialists are a channel for
patients. To this extent hospitals compete with one another to provide an
attractive venue for specialists by investing in the capital equipment and
facilities that will attract specialists.
35] Sixthly, the extent of geographic markets varies depending on what form of
competition we are dealing with. Patients who are members of schemes that
impose no restrictions on their choice of hospital would favour hospitals at a
convenient distance from their home or work. By contrast patients on a
restricted scheme that limits its members to a predetermined list of hospitals,
restricted scheme that limits its members to a predetermined list of hospitals,
may find that they travel much further to find a hospital. Nor are the geographic
choices of patients and doctors similar either. Specialists might be willing to
consider larger geographic boundaries for hospitals competing for their
24 See WU op cit page 24.
14
services, especially if they wish to establish a second practice, than might a
patient whose scheme gives her freedom of choice.
36] Seventhly, as we consider more fully later, new medical scheme products are
being introduced into this market all the time, which work differently to the
conventional reimbursement scheme with which we are most familiar. It is
possible that each of these products in turn may form a submarket subject to
different competitive forces. Thus a hospital may be less constrained in raising
prices to one class of consumers – say those on unrestricted schemes – than
those on restricted schemes.
37] Finally, hospitals operate in partly regulated markets and to some extent
regulation impacts on outcomes. Changes to the pricing regime for
pharmaceuticals impacted on the price of unregulated services. The evidence
from Netcare has been that when single exit pricing was introduced for
pharmacies it compensated for losses in this area of its business by raising
tariffs on nonregulated services. 25 Legislation also affects the design of
medical schemes. In the course of this merger we heard that open schemes
are required to accept members nationally even though it may be in their
interests to focus on securing a membership base regionally and hence
improve their bargaining power at a regional level. We are told that there are
plans to change the legislation in this respect. 26 This has implications for
whether in a hospital merger one should be concerned more with regional
concentrations than national ones.
38] In this merger we will eschew the adoption of any rigid market definition. This is
not to say this is the approach we will always take to hospital mergers in the
not to say this is the approach we will always take to hospital mergers in the
future. Rather, given the uniqueness of this case we will test theories of harm
25 See Roberts witness statement record W 303 paragraph 4.18. See also record page 349
where in a Netcare minute dated 26 March 2004, it states, ”..in the face of Government’s
medicine pricing policy, J Shevel noted that ward and theatre fees would have to be increased
to compensate for the potential loss of revenue.” Shevel was the chief executive of the group
at the time.
26 See witness statement of Alex Van den Heever record W 288 paragraph 3.4.
15
that have emerged during the proceedings and which posit different market
definitions to assess whether the theory of harm is valid.
39] We will however accept that there is a consensus view that the product
definition adopted in previous hospital mergers – the provision of private
hospital services will suffice for the present. 27 As will appear more fully from
this decision because the merger of hospitals implicates various forms of
competition and that those forms of competition have different implications for
the size of geographic markets, we lay down no hard and fast rule of what the
geographic market is. Rather we identify areas where hospitals compete with
one another and examine how the geographic market may differ.
40] We will examine the merger from two perspectives. First by adopting the post
merger analysis approach and ask if there is evidence now that the merger has
significantly lessened competition. We then ask if the merger will in the future
significantly lessen competition. This second approach is the one we normally
follow in our merger analysis.
Post merger evidence.
41] This analysis will be brief. Because the Commission has approached the matter
on a prospective basis it has not led any evidence to compare the premerger
market with the present one. Even if it had, this would not have been a simple
task. The premerger market would have been an independent CHG before any
Netcare investment. This takes one back to about 1999. Then the CHG group
was smaller than it is presently 28 and Netcare, although roughly the same size
in terms of numbers of hospitals, would have had fewer beds. But adding to this
difficulty is that prices, which might be the basis for comparison, were at that
time the subject of an industry wide tariff negotiation and hence would not
27 See slide presentation by Dr Stillman Exhibit 22 page 3. See also Phodiclinics (Pty) Ltd
&Others and Protector Group Medical Services (Pty) Ltd (in liquidation) & Others Case
Number 122/LM/Dec05 (“Phodiclinics decision”) paragraph 24.
28 Recall that prior to the liquidation of Malasela Kuils River, N17 and Fourways were still
under construction and only Montana and Bougainville were fully commissioned. (See record
pageW4)
16
provide a meaningful basis for comparison with rates of the merged entity of
today. As we noted in the discussion of the Evanston case this comparison
formed an important part of the conclusion of the FTC that the merger had had
an anticompetitive effect.
42] Most of the witnesses who testified for the Commission indicated that they had
not been in the market for long. Perhaps the most knowledgeable, David
Strauss of Discovery, put it best when he said that he had been in the business
for six years and during that time he had never known of CHG as independent
from the control of Netcare.
43] We conclude that we have no evidence to be able to make this comparison and
hence we are not able to conclude that on the basis of a post merger analysis,
the merger has led to a significant lessening of competition.
Prospective evidence
44] The Commission identifies three prospective theories of harm
1) the effect of the merger on competition for specialists;
2) The effect of the merger on competition for patients in a region; and
3) The effect of the merger on funders in respect of reimbursement rates and
funding models
We will examine each one in turn.
1) Effect of the merger on competition for specialists.
45] This is the least developed part of Commission’s case. The Commission argues
that hospital mergers can dampen competition for specialists, if hospitals
competing for those services premerger, are inclined to make investment
decisions independently. An independent CHG would make decisions to invest
in infrastructure to attract specialists even though that investment may
17
duplicate what has been made at a neighbouring Netcare hospital. Post
merger, however, the combined group would have the incentive to avoid
duplication in investment and from having its hospitals compete with one
another.
46] At a theoretical level this is a valid concern. However the Commission produces
little evidence to dress its theory in. The Commission tells us almost nothing of
how this market operates in the present merger. Are specialists obliged to have
exclusive relationships with hospitals? If they are it has more serious
implications for a merger. If they are not, and the evidence in this case from
Netcare suggests that they are not, it means that even if hospitals merge,
because specialists can practice elsewhere they are still free to practice at
hospitals not part of the merged firm. Dr Stillman has some figures for the
number of CHG specialists who specialise elsewhere including, it seems, at
nonNetcare facilities. Thus he tells us the 8 of the 19 specialists who regularly
practice at CHG’s Montana in Pretoria also practice at Life’s Eugene Marais.
On its own this a meaningless statistic; we do not know why the 8 practice at
Eugene Marais and why the other eleven do not or if they practice elsewhere.
A similar statistic is put up about CHGs’ East Rand facility N 17. Here we are
told 12 of the 35 specialists also practice at Life’s Springs Parklands which is
less than 1 kilometer away. The only documentary evidence on record emerges
from a Netcare memorandum to its board where in March 2001, Sacks notes
that CHG would be able to lure away specialists from Parklands, which he
describes as an old and tired Afrox Hospital, to N 17. 29 The fact that Netcare
saw N17 as a threat to Afrox’s Parklands and not its own facilities would
support Stillman’s analysis on where competition for specialists was coming
from in this area.
47] Presumably the reason that specialists will practice at more than one facility is
to expand their practice to a patient base not served by their existing facility. 30
This means that specialists will be willing to travel further than patients. No
29 See record page 1400.
30 Dr Stillman states that specialists sometimes work in different areas to obtain patients from
GP’s in different areas. See exhibit 22 page 4. See also Noach who states “by practicing at
more than one hospital a specialist can secure larger patient numbers.” See record page W
147.
18
specialist unless for some technical reason (access to theatre or equipment not
available at their present facility) will practice in the area of a hospital serving
an existing patient base – the duplication in rentals would make no commercial
sense. 31
48] Thus a geographic market for specialists is not necessarily coextensive with
that for competition for patients. The geographic market for specialists would
differ depending on whether a specialist wanted a single location for a practice
or more. If a specialist wanted only one practice, the market for specialists
might be one of hospitals in closer proximity. Nevertheless for the best
opportunity a specialist may be willing to relocate or to travel a great distance to
work, greater than might a patient similarly located. A specialist wanting to
establish a second practice, will in order not to cannibalise his /her patient
base, be willing to travel even further. Since most of the CHG hospitals are
located in metropolitan areas there is much choice left in this wider notion of
the geographical market for specialists to find alternatives. Of the CHG
hospitals, two are unlikely to be implicated in competition for specialists.
Bougainville is a modest facility, seeming unlikely to invest further under
anyone’s control. UCT Academic was formed precisely as an outlet for
academic doctors at the university and hence is not competing for anyone else.
What remains behind is too modest to pose a concern about the market for
competition for specialists. No specialists have given any information to the
Commission indicating any concerns.
2) Effect of the merger on competition for patients.
49] As with the market for specialists, this is not a particularly welldeveloped part
49] As with the market for specialists, this is not a particularly welldeveloped part
of the Commission’s case. The Commission’s case here is mostly reliant on the
increase in concentration in the three regions where there is an overlap
between CHG and Netcare hospitals. Based on the number of beds in the
respective hospitals the Commission has calculated HHI’s which, when
31 This may explain why in the examples of N17 and Montana given by Dr Stillman, the
specialists seem to also practice at the nearest hospital. See also a submission by Wilmed
Hospital an independent hospital where writer refers to the fact that specialists at its hospital
who also practice at a rival do so because Wilmed has the equipment they need. See record
page 1362.
19
reworked by Dr Stillman, yield the following:
Table 1: Market Shares and HHI’s in the Pretoria region
Hospital Group Hospital Number of beds Market Share
(%)
CHG 218 6.1
Netcare 1230 34.7
Life Healthcare 1077 30.4
MediClinic 685 19.3
Independent Louis Pasteur Private
Hospital
191 5.4
Wisani Medical Centre 12 0.3%
Zuid Afrikaans 135 3.8
Total 3548 100
Premerger HHI 2 577
Postmerger HHI 3 003
Delta 426
Source: Robert Stillman Expert Report pW165.
Table 2: Market Shares and HHI’s in the East Rand Area
Hospital Group Hospital Number of beds Market Share (%)
CHG 170 7.3
Netcare 733 31.6
Life Healthcare 754 32.5
Independent Arwyp Medical Centre 336 14.5
Benmed Park Clinic 125 5.4
Sunshine Hospital 200 8.6
Total 2318 100
Premerger HHI 2 425
Postmerger
HHI
2 889
Delta 464
Source: Robert Stillman Expert Report pW166.
20
Table 3: Market Shares and HHI’s in the Cape Town Area
Hospital Group Hospital Number of beds Market Share (%)
CHG 294 8.9
Netcare 476 14.4
MediClinic 1 795 54.4
Life Healthcare 387 11.7
Melomed 265 8.0
Independent Newlands Surgical
Clinic
81 2.5
Total 3 298 100
Premerger HHI 3 458
Postmerger HHI 3 716
Delta 257
Source: Robert Stillman Expert Report pW167.
50] Looked at from a purely HHI perspective, with nothing else, these figures look
alarming.32 But as Dr Stillman argues, and Dr Roberts does not dispute this,
HHI’s are a starting point a filter for agencies to determine whether a merger
requires a more in depth look. Viewed in isolation they could offer a distorted
picture of the state of competition. This is because hospitals are not
homogenous providers of services. Modern private hospitals provide
differentiated services. Whilst some offer a full range of services others choose
to narrow their focus. To take an extreme example a maternity hospital may be
next door to a hospital providing geriatric services despite their proximity they
are not competitors. Thus as Vistnes, in an article both the Commission and
merging parties rely on for different propositions, states:
“HHI’s are likely to underestimate the competitive problem when the
two hospitals are very similar (compared with other hospitals in the
market) and to overestimate the problem if the merging parties are
highly differentiated” 33
32 As we have stated often previously a market with an HHI is considered highly concentrated
and a change in concentration of over 100 is considered significant in the context of a highly
concentrated market.
33 See G Vistnes, “ Commentary – Hospital mergers and Antitrust Enforcement”, Journal of
21
51] The merging parties in contrast went to great lengths to establish that no single
CHG hospital has, as its nearest comparable competitor, a Netcare hospital. In
his witness statement, Dr Stillman takes each of the five CHG hospitals and
argues why its nearest competitor is a hospital of another group (Life or Medi
Clinic) or another independent (Melomed, Louis Pasteur) This evidence is
largely established on the basis of interviews that Dr Stillman had with the
respective hospital managers of the hospitals concerned. At only one hospital,
Bougainville in Pretoria, did Dr Stillman conduct an independent test of these
assertions by examining the postal codes of patients, but for the rest his
research relied on the statements of managers.
52] Although the Commission in cross examination of Dr Stillman exposed his
uncritical acceptance of his Netcare sources in certain instances, or
inconsistency in his approach to issues such as distance, it has not given us
any better picture of the extent to which CHG hospitals compete with their
Netcare counterparts in a region. We are not in a position to dispute Stillman’s
assumptions, serendipitous as the outcome always seems, that no Netcare
hospital is ever the nearest competitor of its CHG counterpart and where it is
(UCT Academic for instance is located close to Netcare’s Christian Barnard)
there is an explanation for why they are not considered substitutes by
patients.34 However, given their location in the metropolitan areas even if
Netcare hospitals may in some cases be strong potential competitors, the
presence of other hospital choices makes CHG a less compelling competitive
restraint to Netcare, than might be the case if its hospitals were located in
underserved areas. Again, analysing this merger without a recent history of an
independent CHG, makes it extremely difficult to hypothesise how it would
operate as a competitive pressure on neighbouring hospitals, even if one took a
Health Politics, Policy and Law. See Stillman witness statement, record p W 168.
34 Stillman states that the reason they are not considered substitutes is because UCT
Academic suffers from a perception problem – it is not seen as independent hospital but as a
“dressed up state hospital.” Although Stillman says that UCT’s administrator strongly denies
this perception exists, he found this problem addressed as an issue on its website at the time,
and was told , by unnamed ‘others’, that medical schemes continue to have this perception of
UCT operating “under a Groote Schuur cloud”. See Stillman witness statement record page W
179. In the case of CHG’s Montana Stillman was told by its hospital manager that her patients
were reluctant to travel “over the mountain” to the city centre, where inter alia, Netcare has its
Jakaranda hospital.
22
less benign view of its metaphorical distance, competitively, from any Netcare
hospital in the respective regions, than do the merging parties. The best
evidence we have of how Netcare saw this issue at the time it began its
relationship with CHG in 2001 was that it saw Fourways as the only immediate
threat to itself of the erstwhile Malasela Group hospitals that CHG was
attempting to recover and saw Montana and N17 as a threat to their respective
neighbouring hospitals as we alluded to earlier. 35 As we know CHG failed to
acquire Fourways which then was acquired by Life. Had CHG succeeded in
obtaining Fourways this may have raised potential competition problems.
53] We cannot find that it has been shown that the merger will substantially lessen
or prevent competition in the market for private patients in the regions identified
by the Commission.
3) Market for funding
54] As we indicated earlier, more than ninety percent of private health care patients
are funded by some form of medical insurance. Since funders do not operate
according to the same incentives as self paying patients, it is necessary to
separately examine the effects of the merger on funders.
55] Competition between hospitals matters to funders in two areas. Firstly, around
price or expressed differently, the rates at which funders are prepared to
reimburse hospitals for services; secondly, over the form of product which
funders can offer to their members. We examine each separately as the
competition implications of the merger differ, depending which issue.
(i) Price
56] The hospital pricing regime has changed in recent years. Previously, until 2003,
negotiations took place centrally between the hospital groups represented by
their association, HASA, and the funders, through their association, the Board
their association, HASA, and the funders, through their association, the Board
of Health Care Funders. Due to enforcement action taken by the Competition
35 See section on the history of CHG and record page 1401.
23
Commission, alleging that joint negotiations were collusive, both sides to this
negotiation agreed in separate consent agreements with the Commission, to
negotiate individually. Thus from 2003 onwards the hospital groups and funders
have negotiated individually not collectively.
57] Thus, administrators negotiate separately with each of the three major groups
and it appears collectively, via the NHN, with the independents. 36 Some are of
the view that the change from centralised industry negotiations to a series of
individual negotiations has suited hospitals more than funders. Among them
are Alex Van den Heever, the witness from the Council for Medical Schemes,
who stated that;
“The central weakness of the system lies in the mistake by the
Competition authorities in outlawing centralised negotiations (i.e.
market level) in respect of general tariffs. In reaching this decision it
was presumed that forcing each scheme to negotiate their general fee
for service tariff with every individual medical service provider (an
impossibility) that competition would be enhanced. However, all that
has occurred is a market power imbalance has been permitted that has
enabled hospital costs increases to rise significantly where they were
constrained before.” 37
58] We are not in a position to come to any judgment on this point, but it does
appear that hospitals have huge informational advantages over all but the
largest of funders and that this manifests itself in their ability to bring much
greater sophistication to the bargaining table. Netcare and the Commission
differed sharply during the hearing on whether funders have what competition
law recognises as countervailing power. Netcare asserts that they have and
that it (Netcare) does not get its own way in negotiations, because funders can
that it (Netcare) does not get its own way in negotiations, because funders can
refer members to other hospitals or threaten copayment.
59] In their unsigned witness statements the Commission’s funder witnesses all
36 NHN in a submission to the Commission states it has an exemption in term of section 10 of
the Act, presumably to be able to negotiate collectively. See record page1357
37 See Report by Van den Heever record page 1628.
24
stated that they lacked countervailing power. During their oral testimony and
especially under crossexamination by Netcare’s counsel, some conceded that
this was not always the case, whilst others introduced more nuance into what
may have been a categorical denial 38 and still others left us baffled with what
they had to say. 39 Funders vary in size, resources and acumen, so it is unlikely
that we can generalise about their ability to exercise some form of
countervailing power. Certainly Discovery, the largest and most sophisticated
funder, appears to be an equal in negotiations with any of its counterparts. If we
judge it by the tone of its correspondence with Netcare, and on the evidence of
its negotiations it can use its volumes relatively successfully. The same cannot
be said of the others, albeit that they professed they had countervailing power.
Presumably a funder which must compete with other funders is not about to
make such a confession of weakness public. Yet there was little in their
correspondence with Netcare or their descriptions of negotiations that
suggested that there was any equality of arms at the negotiating table. 40
Netcare suggested that funders have a range of weapons open to them to force
concessions. They can boycott a hospital or force members to make co
payments. Some have even published advertisements advising members not to
go to a particular hospital. The funder witnesses whilst acknowledging that
these tactics are open to them, suggested that they are more useful as threats
than as weapons that have been successfully applied in practice. In practice
members are not willing to boycott hospitals they wish to attend and co
payments may have as negative an effect on a funder as on the hospital.
38 See comments of Wambach who says equivocally we would like to believe its not take it or
38 See comments of Wambach who says equivocally we would like to believe its not take it or
leave it.(Transcript page611) Strauss is more confident of his position on this stating in relation
to Discovery there is a balance of power between them and the big groups. Transcript page
647.
39 Dr Good in his testimony did his best to try and explain the distinction in treatment of those
issues on which he negotiates with Netcare for all the schemes he represents and those on
which he negotiates separately for each individual scheme. The relevance of the distinction
was whether he brings in all his schemes members to the negotiating table or just those of a
particular scheme. Netcare suggested that the initial collective negotiation settled all the ‘big
picture issues’ and the second individual negotiations were to tie up the loose ends. Good
whilst acknowledging that there are two stages of negotiations puts the emphasis more on the
importance of the second rather than the first negotiation( See transcript page 212)
40 An email sent to Samwumed a union scheme is illustrative of Netcare’s confidence.
Although Bishop who writes the email has never met Samwumed before in negotiations he
suggests what the tariff should for 2007, in “bold anticipation of your acceptance” See Exhibit1
email to Neil Nair dated 19 December 2006.
25
60] Despite the end of central negotiations between hospitals and funders its
culture still prevails. Negotiations occur once a year at the same time as they
used to. Because hospitals have so many line items negotiations over tariffs
appear to revolve more around the general than the specific. What happens in
practice is that there is first a discussion on what medical inflation for that year
is and once established, a negotiation of what increase will be on the previous
year’s tariff for that group. Although the Council for Medical Schemes publishes
recommended guidelines known as the National Health Care Reference
Pricelist (“NHRPL”). 41 Netcare negotiates off its own tariff for the previous year.
It negotiates once a year with funders and agrees a rate that applies to all its
hospitals. Until the end of 2006 the tariffs it negotiated applied to CHG as well.
However, due to the Commission’s investigation of the nonnotification of the
present transaction they were advised by inhouse counsel to negotiate
separately.42 What happened then was that Netcare did all the negotiations
first. Once concluded, CHG contacted the various funders and announced that
it would be negotiating separately from Netcare. This appeared to confuse
many funders who did not know why this break with past practice had
occurred.43
61] It seems that in general CHG settled on an increase slightly less than that of
Netcare’s. Dr Stillman uses this as a basis for suggesting that when Netcare
and CHG have negotiated separately the degree of difference was so slight so
as to make a likely harm to competition as a result of the merger insufficient to
raise concerns. However, this exercise in separate negotiations can hardly be a
proxy for what would have happened had the groups been genuinely
independent. CHG presumably knew where Netcare had settled, as this
independent. CHG presumably knew where Netcare had settled, as this
negotiation according to the witnesses had taken place first, knew that it was
part of the larger grouping and hence the economic pressure on it was never
akin to that of a small hospital group needing to fight the larger competitors it
faces in the market place. The negotiation by their own admission was driven
by legal not economic considerations. It would be highly artificial to regard this
exercise as a proxy for what would happen in the market if CHG was
41 See Transcript page 1122.
42 See transcript page 1155 evidence of Bishop.
43 See Strauss testimony at 694, Dawson 524 and Good 191.
26
independent of Netcare’s control.
62] However, despite this it appears that Netcare would still get what it does at the
bargaining table over national tariffs, without CHG. Thus in cross examination
by counsel for Netcare the following proposition is put to Mr Strauss of
Discovery:
MR UNTERHALTER: And I assume that you will accept that whether
the Community hospitals are in Netcare or wholly on their own or in the
NHN network, ultimately in terms of their overall importance for
Discovery’s tariffs and then ultimately premiums to members, these
are just trivial in the big scheme of things.”
MR STRAUSS: That will be correct. 44
63] The Commission despite a diligent attempt to do so was unable to produce a
funder witness who was either willing or able to state that the merger would
make any difference on the outcome of national tariff negotiations on price.
This leaves us with the Netcare evidence on this point which is that when
negotiations take place, the big three have regard to the competition amongst
themselves and no regard is had to the tariffs suggested by independents. 45
64] At best for the Commission was the evidence of Mr Allie of Melomed who
claimed that his group is cheaper than its larger rivals. Part of the
44 Transcript page741.
45 Mr Bishop said:
“”A common threat in all these discussions, the schemes play the major groups off
against each other. We might get told, you know, we are settled with Life and you
better come to the party. We never get told the independents have settled, and we are
happy, because they are just not relevant to our negotiations. They don’t affect our
tariff negotiations. They don’t affect our pricing in any way, simply because they do
not pose a threat of market share and market volume loss, as it would be to one of the
groups”. (Transcript pages 10751076); and
groups”. (Transcript pages 10751076); and
“The impact of CHG, and this is the same for any independents, they have no impact on
national negotiation, tariff negotiations. For me, and I would assume any of the other major
groups, they are not an issue for us. They are not raised there. We are not threatened by
them, by the schemes, implicitly and explicitly. There is not impact on their ability to offer a
national backbone. They cannot do it cohesively, service level, etc. None of the CHG
hospitals is a must have in any network that might be set up by a scheme” (Transcript
page10801081).
27
Commissions’ case is to suggest that Melomed is a proxy for an independent
CHG and hence if it is cheaper than the three majors, so too would be an
independent CHG. Yet internal correspondence from a funder suggests it
considered Melomed to have made them a less competitive offer for a
designated provider scheme than one of the major groups. 46
65] One of the difficulties with this is that hospital pricing is notoriously difficult to
compare. Strauss in his evidence talks of the four factors determining the cost
of hospital care. In the first place one has the pricing of tariff items (ward,
theatre and equipment fees etc) and then one has the prices for non–tariff
items, such as pharmaceuticals supplied by the hospital. But the cost is not
only dependent on the price of these services. How much usage is made of
tariff and nontariff items is just as determinative when costing services. When
hospitals negotiate over tariffs it is a negotiation over only one of these three
factors. Thus pricing the overall cost of treatment in a hospital is extremely
difficult. Netcare and Discovery are engaged in an ongoing dispute over the
former’s costs. Discovery claims in a study it conducted that Netcare is ... %
[Confidential] more expensive than other hospitals. Netcare rejected this
claiming that the methodology used was flawed and failed to account for the
role specialists play in determining the extent of usage. As a result both firms
agreed to commission a neutral party to conduct a further study. Using a
different methodology, the firm concluded that Netcare was ...% [Confidential]
more expensive.
66] Approaching the issue from a different perspective, Alex Van den Heever, an
economist who presently serves as an advisor to the Registrar of Medical
Schemes, the industry regulator, noted that there had been a 45,5% increase in
the real per capita cost of hospital services to medical scheme members for the
period 2001 to 2005. Van den Heever’s thesis is that there has been a steady
rise in hospital expenditure since 1990. However, he contends that there has
46 See transcript page 234 evidence of Mr. Ridwaan Allie, the CEO of Melomed where he
testifies that funders tell him that our tariffs are generally lower than the bigger groups. But in a
letter from BP attached to his witness statement the principal officer of the BP fund remarks on
Melomed’s offer to be appointed its designated service provider, “Therefore from a price
perspective your offer compares unfavourably with our current arrangement.” See W
256.Letter dated 14 December 2004 from Cheryl Roberts to the Chairman of Melomed.
28
been a much higher increase since 1999 than before. According to Van den
Heever:
“It is very probable that the key factor differentiating the period from
1999 onward was the fact that the hospital market in the main
metropolitan areas became concentrated for the first time from
1999.”47
67] Van den Heever believes that this merger should be prevented to at least
retard this trend. Netcare disputes much of what Van den Heever has to say, in
particular his contention that the increases we have seen in hospital
expenditure must be a function of market power. Netcare has filed a report from
its inhouse analyst, Melanie Da Costa, who proposes an alternative theory of
why costs have increased – a theory that predictably introduces several
possible reasons for the increase in hospital expenditure, none of which is
attributable to market power. Most importantly Da Costa alleges that Van den
Heever confuses increased expenditure on hospital services with increased
prices. Whilst Da Costa concedes that rising prices contribute to rising
expenditure on hospital care, she points to the fact that there has also been
increased utilisation of hospitals and this too contributes to increased
expenditure, which she suggests, Van den Heever does not properly account
for in his thesis. 48
68] Like the debate between Netcare and Discovery this debate is not one we are
capable of resolving in the course of this merger. 49 It may well be that an
enquiry into hospital pricing is indicated, something on the lines of the present
Commission enquiry into bank charges.
69] What is required for us to assess is whether CHG adds to Netcare’s pricing
47 See report by Van den Heever, record page 1590
48 For a discussion of this see witness statement of Melanie Da Costa W 44 onwards. Ms Da
48 For a discussion of this see witness statement of Melanie Da Costa W 44 onwards. Ms Da
Costa is the Health Policy Executive at Netcare.
49 In Phodiclinics similar evidence was led and the panel declined to take a view on the matter
stating that it would go far beyond the confines of a merger hearing and might not provide
complete and conclusive answers. See par 161 of the decision.
29
power or expressed differently, if it was lost to Netcare would it diminish its
present pricing power. It does not seem it does. Netcare’s pricing power arises
from its size as the largest hospital group in the country that can, negotiating
nationally, bring that to the table. It seems unlikely that if it were to lose the five
CHG hospitals that that power would be significantly diminished so as to meet a
significant lessening of competition test. Nor is it likely, since tariff negotiations
are national, that if CHG helped bulk up the independents that they would be
able to constrain Netcare or either of the other majors from their present pricing
strategies. None of the industry witnesses have expressed this view.
70] We conclude that the merger will have no significant effect on Netcare’s already
existing bargaining power in national tariff negotiations.
(ii) Form of products
71] In the conventional model of reimbursement, a hospital charges a patient a fee
and the funder pays it in accordance with an agreed upon tariff with the hospital
or absent such, in terms of an agreed amount with the member, who pays the
balance, referred to as a copayment.
72] However, the medical rand is not infinite and funders and hospitals bargain to
get their share of it. If costs continue to escalate as they appear to be doing
and given that hospitals account for approximately 35% 50% of contributions,
unless something in the system gives, fewer people will be able to afford
medical aid. As it is the pool of beneficiaries has not increased beyond 7 million
over a number of years. Fully alive to this both hospitals and funders are
looking at ways to solve the problem.
73] In this hearing we have been told of two models that are in the process of being
implemented. The first is referred to as alternative risk management (ARM), the
second preferred provider networks or PPN’s. An ARM although subject to
second preferred provider networks or PPN’s. An ARM although subject to
variation, broadly involves a hospital and a funder agreeing on what various
procedures ought to cost and then agreeing that the hospital will be reimbursed
30
at that standard rate for all procedures of that kind performed for that funds
members, irrespective of what the actual cost may have been. The scheme can
only work if it results in medical aid rates being reduced for a member, so that
the pool of members on medical insurance is increased. This is good for
hospitals as it increases their volume of patients and good for funders, as it
increases their pool of contributors and hence risk profile.
74] But this type of scheme exposes both hospital and funder to risk. Both are
bargaining over the cost of procedures and so the party with the best access to
information will have an advantage. The risk for the funder is that it agrees to
pay too much and that it does not recover enough in fees from members to
meet the costs of treatment. For the hospital the risk is that it charges too little
and that actual expenses exceed the agreed reimbursement rate.
75] But there is an added risk for both, a risk that applies equally to PPN’s. Since
this type of scheme must charge cheaper rates than existing ones (if it is not it
defeats the whole purpose of expanding the beneficiary pool) there is a danger
that existing beneficiaries will, in the industry parlance “buy down”, that is if
members see that they can get an equivalent benefit at a cheaper rate they will
opt for the cheaper rate. For funders this is a serious threat and so they need to
design a scheme that is capable of attracting new members, but repelling
existing members on higher cost schemes. For hospitals the threat is much the
same. Unless the low cost schemes bring in new patients to private hospitals,
they have no interest in discounting fees on existing patients who are paying
higher fees.
76] The key factor becomes freedom of choice. Funders and hospitals recognise
that members used to freedom of choice in practitioners and hospitals, will be
that members used to freedom of choice in practitioners and hospitals, will be
willing to pay for that privilege. Conversely, those unable to afford medical
insurance presently will be willing to forego freedom of choice for the
opportunity to access private health care. The art in constructing a viable low
cost scheme is curtailing freedom of choice sufficiently to curtail buydowns,
whilst at the same time making the scheme sufficiently attractive so as to attract
new members.
31
77] The object of the second type, the PPN, similarly involves an attempt to
increase the beneficiary pool, but does not involve risk management. PPN’s
involve schemes bargaining with a network of hospitals to get discounts in
return for the promise of increased volumes in the form of new patients.
78] Strauss, whose company Discovery has developed KeyCare, which appears to
be the only low cost PPN open scheme presently operating, explained the
economics of such schemes.
79] Discovery’s market research indicated that members would require a ...%
[confidential] discount to forgo a plan where they had freedom of choice. In
order to achieve this because hospital costs account for ... % [confidential] of
the costs of contributions, they would need to get a ...% [confidential] discount
on hospital costs. 50
80] Here too, there is great art in the construction of the scheme. A funder setting
up a network needs to be able to provide enough hospitals to make the scheme
attractive to its target membership, who may be located nationwide. If the
scheme’s hospital base is too narrow, take up will be slight and the scheme will
be unable to secure sufficient discount on volume. From the hospital group’s
perspective it wants to drive volumes to underutilised facilities. The group would
also want some degree of exclusivity. As Mr. Bishop of Netcare put it:
“All I would like is some level of geographic exclusivity, in other words
don’t put me on and the Life Hospital next door. Try and give me
something so I do gain in volume but feel free to choose any of the
hospitals and add them to a network of [your] design …” 51
81] Another complicating factor is the nature of the scheme. Our legislation
recognises two types of schemes, closed and open. Closed schemes are
recognises two types of schemes, closed and open. Closed schemes are
50 See transcript page 669 70.
51 See transcript page 1275.
32
termed such because they confine their membership in some way, typically the
employees of a firm. Closed schemes may be regional in nature and thus
confined to the employees of a firm in one area if that is where the firm is
located. Some closed schemes are national because the firm has branches
nationally e.g. a large retailer. Open schemes are open to anyone willing to pay
the fees charged. At present we are advised open schemes are required to
accept members on a national basis. For this reason a good local deal from a
hospital may not be that attractive if members located outside of the region are
paying full rates elsewhere. What matters is the density of members in the
discount region versus the density of members in nondiscount regions. Some
witnesses have suggested that regional membership will be allowed soon in
terms of proposed amendments to legislation. 52 Others have found means to
make a scheme attractive for members in a region, but not others without
contravening the right of anyone nationally to join the scheme. 53 We will
assume for the Commission’s benefit that in the near future open schemes can
be constructed regionally. Were CHG a hospital group with a substantial
presence in any of the regions in which it is located, this might matter. As it
happens it is not. Even in the Western Cape and Pretoria, the regions where it
has two hospitals each, it is still not a major force.
82] To construct a national scheme requires more hospitals in more places. It is
common cause that not even the big three have a sufficiently ubiquitous
national footprint to construct a single scheme around, and while strong in
some regions, may be under represented or not represented at all in others.
some regions, may be under represented or not represented at all in others.
Thus, a hospital group like MediClinic has no presence on the East Rand, but
has the only hospitals in some other smaller and growing regions such as
Nelspruit. If a scheme is constructed around members who reside in Nelspruit
and who already go to this hospital or if it has little room left for more patients,
MediClinic will have no incentive to offer a scheme a discount at Nelspruit – it
is getting that business anyhow. If the scheme however has members
elsewhere and they may be future patients at other MediClinic hospitals not
fully utilised or in markets where competition for patients is more intense, Medi
52 See Supplementary Witness Statement by Van Heerden, record pp W290292.
53 Discovery has its Coastal plan which offers a reduced premium to members provided they
use coastal hospitals. Thus the scheme is open to all but members who use inland hospitals
have to make copayments. See Strauss witness statement on record p W 286 paragraph 21.
33
Clinic may be willing to offer a national discount (thus including its Nelspruit
hospital) to get more volume at its other hospitals, but if the scheme was only
regional it would have no incentive to do so.
83] Bargaining between schemes and hospitals takes place in the first place when
the scheme is set up and secondly when hospitals are added or removed from
the scheme.
84] A hospital merger may have consequences for this type of negotiation if it
strengthened the bargaining power of a hospital group by either extending its
national footprint or giving it dominance in a region where a scheme has
members which it wishes to channel to a particular hospital. Thus if a scheme
had a preponderance of members in Region X and premerger a choice
between hospital A and B in that region to include on is network, A and B might
be willing to bargain to get exclusivity in Region X. Post merger as the merged
firm would be guaranteed that volume anyway it would have no incentive to
bargain.
85] The focus of the Commission’s case in this merger has been to advance
precisely that thesis. As expressed by the Commission’s expert, Dr Roberts:
“...market power at a regional level is clearly significant in negotiations
by hospital groups to have their hospital included on preferred provider
lists”.54
He goes on to say:
“The presence of independents represents a significant source of
competitive discipline in this regard, highlighted by the ability of
hospital groups to exert influence in regions where there are no
competitors.”55
54 See witness statement of Simon Roberts record page W 305.
55 See witness statement of Simon Roberts record page W 305
34
86] The problem for the Commission has been to translate this theoretical concern,
which even Dr Stillman concedes is a valid theory of competitive harm, to the
facts of this case. Stillman’s concession does not amount to an admission that
it works in this case, because, as he puts it, none of the CHG hospitals are
“must have” hospitals for any funder trying to develop a network. 56
87] The point Roberts makes is that this analysis is impeded by the fact that
Netcare has been running CHG and so the evaluation exercise is about
“assessing the likely future without the benefit of the immediate past.” 57 Note
that this is the concern that we alluded to earlier in this decision.
88] What the Commission then seeks to do in the absence of a diagnostic history
of an independent CHG is to use a proxy independent hospital group to draw
conclusions of how an independent CHG may have behaved. The group
chosen is Melomed, an independent group of a similar size to CHG. Melomed
has 265 beds 58 and owns three private hospitals. Two of Melomed’s hospitals
are in the Cape Flats and these are Gatesville Medical Centre and Mitchell’s
Plain Medical Centre. Melomed’s third hospital is the Bellville Medical Centre
(previously known as Jan S Marais hospital). 59
89] The problem for the Commission is that neither Melomed’s internal documents
nor the views of those funders who testified, supports the fact that it offers more
competitive pricing than the three majors or that it has been used as an
alternative in the bargaining process. In short, nothing about Melomed, if it is to
operate as a proxy for an independent CHG, supports the thesis that the
Commission wishes to advance.
90] Roberts also argued that competition from independents mattered, not so much
for the construction of a network, but for the replacement of hospitals on the
for the construction of a network, but for the replacement of hospitals on the
network. Again while this may be a sound theoretical proposition the
56 See Transcript pages 1408, 1424, and14281430.
57 See witness statement of Simon Roberts record page W 306.
58 See witness statement of Robert Stillman record page W167
59 See witness statement of Ridwaan Allie, the CEO and executive director of the Melomed
Hospital Group, record page W251252.
35
Commission did not develop a model for how this could be applied to the facts
of this case. Bear in mind that hospital groups offer discounts based on
volumes of new patients that funders introduce through a scheme. Removing a
hospital that is part of a group offering discounts, in favour of an independent,
could jeopardise the group’s willingness to offer a discount. The Commission
needed to provide more analysis of how the merger would affect this bargaining
in order to show that competition for replacement is likely and its implications.
91] Perhaps the most devastating blow to the Commission’s case comes from the
testimony of Strauss. The Commission filed a witness statement from Strauss
indicating the testimony it was anticipated he would give. This was drafted by
the Commission on the basis of interviews with Strauss, but was not signed by
Strauss, who had indicated that he was not willing to do so and required to be
subpoenaed if the Commission wanted him to testify. Strauss in his oral
testimony went through this written statement very carefully making a number
of corrections. Crucially, he was to correct a paragraph in the statement that
dealt with the type of discounts that could have been secured by Discovery
from CHG for its KeyCare option. In the statement, paragraph 22 reads as
follows:
“An independent CHG is not essential to the success of the Key Care
Plan. Due to its size Discovery has been able to negotiate sufficient
discounts with the major hospitals to ensure the viability of the plan.
However, it is possible that if Discovery had known that the CHG
hospitals were not part of the Netcare group, Discovery could have
included certain of the CHG hospitals in the network sooner and at
better rates.” 60
better rates.” 60
92] However, in going through this paragraph in his statement in his oral testimony,
Strauss makes the following comment:
“ The point is that now that Netcare have come on to the network we
have managed to secure from Netcare a better discount than I believe
60 Strauss witness statement record W 287.
36
we would have from CHG had they been part of the NHN group. So it
is actually the converse to what the statement says.” 61
93] What makes this comment crucial is the centrality of the KeyCare option to the
Commission’s case. At present KeyCare is the only private sector low cost
PPN. It is run by Discovery, the largest administrator of open schemes. If
Discovery does not see an independent CHG as a significant price competitor
then it is very difficult to see how the Commission can establish this without this
evidence. Nor can Discovery be accused of being a sweetheart scheme for
Netcare. Indeed a good deal of time spent on the dispute over pricing indicates
the tensions between the two firms. Nor was Strauss for that matter a witness
who was suggestible. His answer was given in chief, not during cross
examination and he certainly indicated during the remainder of his testimony
that he was not easily intimidated. 62
94] Strauss also states that negotiations over the KeyCare option do not have a
bearing on the national tariff negotiation.
95] The other witness who testified about establishing a low cost option was Mr
Wambach from Old Mutual Healthcare. He testified about his company’s
attempts to establish a low income scheme, but the plans have been put on ice.
While he testified that independents had indicated that they could offer
discounts, the scheme was never discussed with Netcare and so it is
impossible to compare the discounts that were offered by the independents
with those that Netcare may have offered.
96] Of course low cost PPN’s are not the only products being conceived of by
funders and so we must consider the impact of the merger on other options. Mr
Dawson, from an administrator known as Oxygen, testified about an attempt to
Dawson, from an administrator known as Oxygen, testified about an attempt to
establish a scheme based on managing doctor networks. The aim is to find low
61 Transcript page 693
62 See cross examination at 752 of the transcript where counsel for Netcare warns Strauss to
be very careful before answering a question as to whether a comment made by one of his
colleagues about alleged Netcare policy that impacts adversely on pricing, is “the Discovery
position”. Strauss, notwithstanding the dramatic prologue to the question, stands his ground
and says it is.
37
cost doctors who will, if they need to, refer patients to specialists, be required to
channel patients to specialists who are also low cost. 63 Where a specialist is
practicing at two hospitals the scheme will require channelling to the lower cost
hospital. This scheme is still a work in progress. Dawson concedes that the aim
of this scheme is not to influence hospital tariffs but doctor behaviour. Again he
expresses no view on how the merger might impact on the efficacy of this
scheme.
97] The one major PPN scheme beside Discovery, which has a low cost option, is
the newly launched Government Employees Medical Scheme (GEMS). The
Commission interviewed, but did not call any GEM’s representative as a
witness. Netcare then approached GEMS to comment on the merger and
elicited this comment from Eugene Watson of GEMS in an email to Richard
Friedland of Netcare, dated 7 June 2007:
“I do not have a specific objection to the proposed acquisition.The
number of hospitals represents a small percentage of the total number
of private hospitals and our pricing strategy would not be significantly
altered. If the transaction was not permitted and the hospitals
remained independent, we would still need to negotiate reimbursement
rates with all hospital groups, especially the larger ones who are
responsible for a large proportion of the Schemes hospital spend.” 64
98] When asked in cross examination why the Commission had not called anyone
from GEMS as a witness, Roberts explained that his impression was that
GEMS was still in the process of formulating its strategy and that it would be
premature to get from them an understanding of what may happen in the
future.65
99] This may be a fair assessment, given that Watson’s views in the email do not
future.65
99] This may be a fair assessment, given that Watson’s views in the email do not
63 By low cost we refer not only to the fees of the practitioner in question but also his/her
approach to the incurring of other costs related to the treatment.
64 See Exhibit 15. He adds in a qualifier that these represent his views on the merger and
“should not be seen as a reference to my views on the broader private hospital sector”.
65 Transcript page 759
38
seem to indicate any past experience in negotiating with hospitals, but rather
an assessment of what is likely to happen. Yet even if this explains why GEMS
were not called, it does not fill in the gaps in the evidence on this point. GEMS
is a significant player in this segment. One would have expected to hear from it,
if it thought the merger would have an adverse impact on its future strategies.
100] If the industry moves to an ARM model rather than PPN’s, the outcome is no
different. These products, as we noted earlier, require an assessment of likely
risk by the two players to the negotiation, the hospital and the funder.
According to Strauss ARM’s are difficult for small players, be they funders or
hospitals as they do not have the volume to offset volatility. 66 He agreed with
the proposition made in an internal CHG document that small groups will find it
difficult to compete if the industry drifts towards ARM as the model requires
advanced IT systems, integrated services, strong buyer power and a track
record.67 Bishop also makes the point that ARM’s require a strong balance
sheet something that independents typically do not have. 68
101] Of course this may beg the question as to whether ARM's are not products
favoured by the larger hospital groups, precisely because they protect hospitals
margins at the expense of funders and ultimately beneficiaries. Large hospital
groups with their sophisticated IT systems can leverage the informational
asymmetries in a risk based system and hence prevent erosion of their pricing
power. Roberts in his testimony correctly refers to the fact that competition
matters for the development and introduction of products. If a new product
might erode the pricing power of hospitals they will have an incentive to resist
its implementation. For this reason he holds that the presence of independents
its implementation. For this reason he holds that the presence of independents
matters as it creates competition over the acceptance over new products. The
difficulty in this merger is that we don’t know if the independence of CHG would
have made any difference given the preexisting market power enjoyed by the
large groups and the relative insignificance of CHG.
66 Transcript page 712.
67 Transcript page 710.
68 Transcript page 1074.
39
102] It seems clear from the history of the only successful low cost PPN, KeyCare,
that Netcare was resistant to it from the start, but failed in its attempts to
establish an alternative, and eventually participated, offering a discount on its
nationally negotiated tariff. This outcome suggests that notwithstanding the
presence of CHG in its stable, Netcare was unable to impose its own product
choice on funders and had to reluctantly accept one designed by a funder,
albeit a very powerful one.
103] Let us briefly consider the history of how this came about. In about 2006 69
Netcare attempted to develop its own full capitation product called Netcare Plus
with Discovery. The product failed. On Bishop’s version it failed because of so
called adverse selection. As the scheme had no savings plan the healthy
avoided it while the unhealthy embraced it. As Bishop put it the last thing a
scheme like this need is ‘bums in beds’. In other words, a risk management
scheme can, if poorly designed from the hospital perspective, increase volume
but not revenue. MediClinic also attempted a scheme at its hospitals that was
low cost and volume based but it too failed because of adverse selection.
Consumers who were in areas where MediClinic was the only provider ‘bought
down’ as they were going to these hospitals in any event. This paved the way
for the KeyCare option which suffered from none of these deficiencies, but
required the funder to cherry pick which hospitals went on.
104] Initially the main backbone of the KeyCare plan was the Life Group, which had
exclusivity in Gauteng and the MediClinic group which had exclusivity in the
Cape. Netcare did not participate and played hardball in negotiating access to
its hospital in Uitenhage where no other private hospital existed and which
Discovery was anxious to bring on to KeyCare because it was targeting
employees of a large manufacturer in the area who were members of a rival
scheme involving capitation.
105] That Netcare resisted this scheme initially, is best expressed in an internal
document drafted by Bishop entitled “Summary of Netcare strategy regarding
Preferred Provider contracting with Medical Scheme” In the document Bishop
69 See Bishops testimony, Transcript page 1068.
40
outlines the development in PPNs’ and concludes:
......
......
[Confidential]
106] He goes on to argue why Netcare’s strategy should be to partner schemes on a
risk transfer basis. He explains that while Netcare could easily become the PPN
for many schemes, if it was willing to discount tariffs, the discount would have
to be “significant”in order for the scheme to offer members the kind of
substantial discount that would make it worth their while to opt for a restricted
option. Since, according to Bishop hospital costs are 35% of schemes costs, he
describes the need for the discount to “exponential”. From the hospital’s point
of view to earn back the discount, the increase in patient volume would need to
be substantial.
107] Despite this reluctance Netcare came on board with KeyCare in 2007. It
allowed Discovery to cherry pick hospitals, something it had resisted
strenuously before. The reason for this change according to Bishop is that:
“it was a game we weren’t playing well enough in. We had made
significant changes to our own strategy around cherry picking of
hospitals etc, and we wanted in. It was on that basis that we asked,
and we approached and we discuss and negotiated to be included”,
and
“I think this is the area where the real growth in our industry exists, the
low income market and Key Care has been a success and it was a
concern for us that we weren’t playing enough in this game” 70
108] Thus Netcare is acknowledging that its strategy to impose a rival product has
failed and that it needed to come to an accommodation with the PPN product or
70 See transcript 1070.
41
risk losing market share to rivals who had opted for the scheme. The probable
reason for Netcare’s change in strategy was the rapid growth in numbers of
people insured in 2007. After years of static figures this was the first increase in
ten years driven by low cost options coming on to the market. The Commission
suggests that this factor drove Netcare to realise that it had to change its policy
against cherry picking. 71 In short, Netcare, notwithstanding its control over
CHG, c ould not defeat the launch of this new low cost product that requires
hospitals to offer discounts off its tariff to members of the low cost scheme.
109] In brief the KeyCare concept requires hospitals to offer a discount from their
nationally negotiated tariff in return for volume. 72 Members of the scheme are
attracted to it because its rates are lower than other available products. In
return for the lower rates members’ choices of hospitals are restricted to those
listed by KeyCare from time to time. This avoids the buy down problem referred
to earlier as members are not referred to hospitals in areas with a wealthy
demographic profile, but may be a less preferred choice. At present all the
major groups have hospitals, selected by Discovery, on the plan, as well as
some independents. 73
110] Melomed are also on the KeyCare list. But significantly, given that this group
could be a proxy for an independent CHG they were not included on the list
initially as MediClinic was given Western Cape exclusivity. Only after Melomed
laid a complaint with the Competition Commission does it seem that Discovery
relented and included them on the network in January 2007. 74
111] We have no evidence about whether Netcare was able to defeat the
implementation of any other proposed funding product. Some have failed
implementation of any other proposed funding product. Some have failed
71 See Commission’s heads of argument paragraph 115. See also Bishop transcript page
12347. Bishop acknowledges that the market is showing its first growth in some time in 2007.
( 1234)
72 We only have the terms of KeyCare’s agreement with Netcare in terms of which patients on
KeyCare will receive a discount for what is described as any tariff based hospital incident. An
incremental discount is then offered in respect of not an increase in volumes in terms of
numbers of patients but volumes in terms of KeyCare incidents or events. Thus the
incremental volume discounts are offered in respect of Netcare’s increased market share of
KeyCare not the total volume of patients using the scheme (See page 7 of the agreement
between Netcare and Discovery).
73 See Strauss witness statement W 285 paragraph 18.
74 See witness statement of Ridwaan Allie W 252 paragraph 8.
42
because consumers did not like them, others are still works in progress, but
those are the only ones we know of. There is therefore no evidence to suggest
that control over CHG would give Netcare the market power to resist innovative
new products that would inhibit its pricing power. Expressed differently
whatever power Netcare may have presently to resist the implementation of
new products, it has notwithstanding its control of CHG.
112] The merging parties also argue that PPN’s are a new product, have a very low
market share out of present funding arrangements and are not the preferred
choice of many players. 75 We would be reluctant to dismiss concerns about
the effect on this segment of the market simply because it is presently de
minimus. If GEMS and Key Care are the growth plans, and they seem to be at
the moment, their trajectory for growth may outstrip the rest of the market for
private healthcare funding. In that case if a hospital merger was to lessen
competition in relation to this segment of the market that might suffice to show
a lessening of competition in the market, even if viewed as a market for private
healthcare as a whole. But here the theory and the facts depart. Despite an
elegantly crafted theory of harm the Commission has failed to find customers to
support it.
Conclusion
113] We have considered carefully the various theories of harm advanced by the
Commission and cannot find that on any, the merger with CHG will lead to a
substantial lessening of competition. That is not to say that the Commission
was misplaced in its concerns about this merger. Many of the witnesses,
including some solicited by the merging parties, seem concerned about the
private hospital sector. 76 What they have not been able to say is that the
75 See Heads of Argument paragraph 268. They rely for the de minimus contention on figures
from Van den Heever who said “hospital network arrangements amount to R 26 million out of
a total of R 1,4 billion in managed care products. And that R1,4 billion represents about 2,7%
of medical scheme gross contribution income.” See transcript page 3501. These figures are
for 2004 and given that KeyCare and GEMS were not around then the statistic means little.
76 Van den Heever, Strauss and GEMS. GEMS as we noted, don’t object to the merger but
they made the beguiling comment that this should not be taken to apply to their views on the
broader private hospital sector.
43
merger has contributed to this problem or whether it is a problem inherent in
the present market structure, dominated as it is by the three major groups.
Without such testimony it is difficult to impugn this merger. Whether such
testimony might have been forthcoming if the merger had not been
implemented already for some years, is one of those imponderables we cannot
resolve. We can certainly say that many of the funder witnesses found it difficult
to conceptualise an independent CHG – something they had never known
and then to hypothesise as to how it might have behaved differently outside of
Netcare’s grasp. That this has redounded to the benefit of Netcare in defending
the merger and to the detriment of the Commission in opposing it is also clear.
It reinforces the reason why under our system prior implementation is
unlawful.77
114] In these circumstances the merger cannot be found to lead to a substantial
lessening and prevention of competition and it is approved without conditions.
There are no public interest considerations raised in this merger that would
lead to a different conclusion.
115] A matter of some concern that arose during the course of this merger is the
documentary evidence, which suggests that the three major hospital groups
had at one stage entered into an agreement not to buy the erstwhile Malasela
hospitals whilst in liquidation. Although the Commission had pertinently referred
to this minute in its recommendation, no senior person from Netcare put up a
witness statement, and thus noone in a position to explain this comment, was
tendered as a witness. Given that competition in the private health care sector
is now so wholly dependant on competition between the three major groups
any evidence that they may reach secret understandings over issues is
any evidence that they may reach secret understandings over issues is
disturbing. The Commission should not let this issue go without further enquiry.
________________ 5 November 2007
N Manoim DATE
77 Even in Evanston despite a finding by the FTC that the merger had led to a substantial
lessening of competition they felt prohibiting the merger so long after consummation would be
impossible and so they imposed behavioral conditions on it instead.
44
Tribunal Member
U Bhoola and T Orleyn concur in the judgment of N Manoim
Tribunal Researcher : R Kariga
For the merging parties: D Unterhalter (SC) assisted by J Wilson, instructed by
Webber Wentzel Bowens Attorneys
For the Commission : D Berger (SC), assisted by B Shabalala, instructed by
Eric Mabuza Attorneys.
45