compet1t1on tribunal
I• II tJ. o1fr/t'ol
COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No: LM155Feb20
In the matter between:
Afrocentric Health (RF} (Pty} Ltd Primary Acquiring Firm
And
Dental Information Systems (Pty} Ltd Primary Target Firm
Panel
Heard on
Order Issued on
Reasons Issued on
Approval
Enver Daniels (Presiding Member)
Andiswa Ndoni (Tribunal Member)
Andreas Wessels (Tribunal Member)
25 August 2020
26 August 2020
28 January 2021
Reasons for Decision
[1] On 25 August 2020, the Competition Tribunal ("Tribunal") unconditionally
approved the transaction involving Afrocentric Health (RF) (Pty) Ltd and
Dental Information Systems (Pty) Limited.
[2] The reasons for approving the proposed transaction follow.
1
Parties to the proposed transaction
Primary acquiring firm
[3] The primary acquiring firm is Afrocentric Health (RF) (Pty) Ltd ("Afrocentric") .
Afrocentric is controlled by ACT Health Care Assets (Pty) Ltd ("ACT Health").
ACT Health is jointly controlled by Afrocentric Investment Corporation Ltd
("Afrocentric Investment") and Sanlam Ltd ("Sanlam").
[4] Afrocentric Investment and Sanlam are listed companies and are not
controlled by any single shareholder. Sanlam does not control any firms that
could be deemed relevant for the purposes of the competition assessment of
the proposed transaction. Afrocentric Investment and its subsidiaries will
collectively be referred to as the Afrocentric Group.
[5] The Afrocentric Group is an investment holding company invested in the
healthcare sector. It operates through various subsidiaries, providing
affordable and quality health administration, health risk management and a
range of complementary solutions across the healthcare value chain to
medical scheme clients and their members. Of relevance to the competition
assessment of the proposed transaction are the activities of the Afrocentric
Group as a health administrator and managed health care organisation.
Primary target firm
[6] The primary target firm is Dental Information System Holdings (Pty) Ltd
("DENIS"). DENIS is controlled by EOH Abantu (Pty) Ltd ("EOH Abantu"),
which is in turn controlled by EOH Holdings Ltd ("EOH Holdings"). EOH
Holdings is a listed company and as such it is not controlled by a single
shareholder.
2
[7] DENIS controls Dental Information Systems (Pty) Ltd ("Dental Systems"),
which in turn controls the DENIS Insurance Administrators (Pty) Ltd, Riverbend
Tarde and Investment 38 (Pty) Ltd and DENIS Underwriting (Pty) Ltd.
[8] DENIS is a registered managed care organisation specialising in managing
dental benefits. DENIS offers a set of dental benefits, managed by a rules-
based management system, which enables dental costs to be effectively
managed to the benefit of patients, the medical schemes, and dentists alike.
[9] DENIS and its subsidiaries will collectively be referred to as the DENIS Group.
Proposed transaction and rationale
(1 O] In terms of the Sale of Shares Agreement, the Afrocentric Group intends to
acquire 100% of the issued share capital of the DENIS Group from EOH
Abantu. On completion of the proposed transaction, the Afrocentric Group will
own and control the DENIS Group. The DENIS Group will operate as a
separate legal entity within the Afrocentric Group.
(11] The Afrocentric Group submitted that the proposed transaction will enable
them to
The acquisition will give
the Group, especially its subsidiaries like Medscheme, the capability to provide
their clients with comprehensive dental management solutions, which it is not
currently in a position to do.
(12] DENIS Group submitted that the proposed transaction would benefit its
business, as it would be aligned with the Afrocentric Group whose primary
focus is in the healthcare sector. Furthermore, the Seller EOH believes that
the DENIS Group and its employees will benefit from being part of the
Afrocentric Group, a black-owned, diversified group of companies with a
strong presence in the healthcare industry.
3
Impact on competition
[13] The Commission considered the activities of the merging parties and found
that the proposed transaction results in a horizontal overlap in the provision of
managed healthcare services, specifically in the provision of dental managed
healthcare services. The Commission also found that the merging parties offer
complementary services. The activities of the merging parties complement
each other in the following ways:
[13.1] Firstly, the managed dental care services offered by DENIS forms
part of the broad range of managed health care services which
Afrocentric offers to medical schemes; and
[13.2] Secondly, the managed dental care services offered by DENIS can
be sold together with the administration services which Afrocentric
as a licenced administrator offers to medical schemes.
[14] In light of the above, the Commission assessed the effect of the proposed
transaction in the following markets:
[14.1] The national narrow market for the provision of managed dental
healthcare services;
[14.2] The national broad market for the provision of managed healthcare
services; and
[14.3] The national market for the provision of medical scheme
administration services.
4
[15]
[16] In the national broad market for the provision of managed healthcare services,
the Commission found the merged entity will have an estimated market share
of 36%, The Afrocentric Group has an estimated
market share of 31%, whereas DENIS has an estimated market share of 5% .
The Commission notes that the merged entity will continue to face competition
from several players such as Discovery Health, Universal Health, Old Mutual
Healthcare, Metropolitan Health Risk Management and Providence Healthcare
Risk Managers, amongst others.
[17] In the national market for the provision of medical scheme administration
services, the Commission found that Afrocentric Group is a significant player
with an estimated market share of 32%. The Afrocentric Group competes with
the likes of Discovery Health (32%), Metropolitan Health (17%), and MMI
Health amongst others. The target firm is however not active in this market. As
such, there is no horizontal overlap between the activities of the merging
parties in this regard. However, given the complementary nature of the
merging parties' services, the Commission also considered this market for the
purposes of its portfolio effects assessment.
5
Theories of harm:
[18] In light of the above, the Commission identified the following as the relevant
theories of harm:
[18.1] Unilateral effects: the Commission considered whether or not
Afrocentric will be able to unilaterally increase its prices in the
provision of managed dental care services, being the market where
the activities of the merging parties overlap horizontally and the
parties have a high combined market share of more than 70%.
[18.2] The second theory considered is portfolio effects and/or if
foreclosure concerns are likely to result from the proposed merger
due to the complementarity of the merging parties' activities.
[19] In conducting the unilateral effects assessment, the Commission considered
whether or not the merging parties are close competitors in the market for the
provision of managed dental care services. The Commission found that the
AfroCentric Group and DENIS are not close competitors as the Acquiring
Group does not focus on the dental managed care services. This was also
confirmed by customers and competitors contacted by the Commission.
According to customers of the merging parties, the closest competitor to
DENIS is Dental Risk Company ("DRC"). Polmed, a customer of DENIS,
indicated that it is only aware of two companies which provide managed dental
healthcare services, namely, DENIS and DRC. However, through its
investigation, the Commission established that there are other players active
in the market such as MMI Dental Risk Management, Supplementary Health
Services, Discovery Health, Universal Health, Agility Health, Metropolitan
Health Risk Management and Knowledge Objects Healthcare amongst others.
[20] In light of the above, the Commission concluded that the proposed transaction
is unlikely to result in significant merger-specific unilateral effects in the market
for the provision of managed dental care services.
6
[21] In assessing the portfolio effects, the Commission considered whether
Afrocentric will be able to leverage the dominance of DENIS in the provision
of managed dental care services to the broader market for the provision of
managed care services; and secondly, whether, as a direct result of the
proposed transaction, Afrocentric will be able to leverage the dominance of
DENIS to dominate the market for the provision of administration services to
medical aid schemes.
[22] In assessing whether the proposed merger will enable the Afrocentric Group
to leverage the dominant position of DENIS in the narrow market for managed
dental healthcare services in the broader market for managed healthcare
services, the Commission found that the Afrocentric Group focusses on three
managed care sub-markets being (i) hospital benefit management; (ii)
pharmacy benefit management; and (iii) disease benefit management. The
DENIS Group only provides dental benefit management services. Thus, as a
direct result of the proposed merger, the Afrocentric Group will focus and
specialise on 4 (four) sub-markets out of 7 (seven) sub-markets of broad
managed health care services.
[23] The Commission furthermore assessed whether the merging parties will have
the ability or incentive to leverage the dominant position of DENIS in the narrow
market for the provision of managed dental care services and in the broader
market for managed care services. The Commission also considered the
potential effects of such a leveraging strategy on competition. With respect to
ability, the Commission found that the merging parties will have the ability, as
the Afrocentric Group is one of the large players in the broad market for
managed health care services and DENIS is a dominant player in the narrow
market for managed dental care services. With respect to incentives, the
Commission concluded that the Afrocentric Group would have incentives to
leverage the dominance of DENIS, because the services are complementary
leverage the dominance of DENIS, because the services are complementary
and are offered to similar customers. The Commission submitted that this is
also reflected in the rationale for the proposed transaction and some internal
documents provided by the parties indicating that the merger will help the
7
Afrocentric Group to enhance the benefits it offers to medical scheme
members.
[24] With respect to effects and the presence of alternative players, the
Commission found that there are other players in the market that can replicate
the offering of the merged entity should they engage in any anticompetitive
bundling strategy. These include amongst others Discovery Health; MMI
Group (including Metropolitan Health and Momentum Health), Universal
Health, and Sechaba Medical Solutions. These players can provide different
types of managed care services that the AfroCentric Group will be able to offer
post-merger.
[25]
[26] In light of the above, the Commission concluded that the proposed merger is
unlikely to result in significant portfolio effects that could substantially foreclose
the merging parties' rivals as there are other players in the market who are
able to replicate any possible bundling by AfroCentric Group. Furthermore, the
Commission found that the medical schemes' current way of contracting will
constrain the parties from engaging in any anticompetitive bundling or
foreclosure strategy.
[27] In assessing whether as a direct result of the proposed merger, the Afrocentric
Group will be able to leverage the dominant position of DENIS in the narrow
market for managed dental care services in the market for the provision of
administration services, the Commission considered whether the proposed
8
merger will result in Afrocentric getting significant additional clients and
whether the Afrocentric Group is likely to combine its administration services
with managed dental care to obtain or enhance its dominance in the
administration market. The Commission also assessed whether there are other
players active in market for the provision of administration services which
could offer a full suite of services like AfroCentric which will be able to
constrain the merged entity from monopolising the entire value chain.
[28] With respect to Afrocentric obtaining significant additional clients from the
transaction, the Commission finds that currently
These medical aid schemes are currently administered by the Afrocentric
Group. As such, the merger is unlikely to enhance the position of the
Afrocentric Group in the administration market, as DENIS' main clients are
already administered by Afrocentric.
[29] Thus, the Commission found that the proposed merger does not introduce
significant new clients to Afrocentric. If Afrocentric wished to administer other
clients of DENIS, it will have to compete with the current administrators in the
market. The Commission is of the view that the proposed merger is unlikely to
substantially increase the market position of Afrocentric by adding significant
new medical aid schemes.
[30] With respect to whether the Afrocentric Group will have the ability to combine
its administration services with managed dental care to obtain or enhance its
position in the administration market, the Commission finds that the merging
parties will have the ability to engage in a leverage strategy, given DENIS'
dominant position in the narrow market for the provision of dental managed
care services. However, the merged entity will be constrained by medical aid
schemes. Medical aid schemes determine the services they require from
managed care providers and appoint different service providers through a
tender process.
9
[31] With respect to incentives, the Commission notes that the Acquiring Group's
rationale for the merger included that
. Considering the above, the Commission is of the view that
there are incentives for the Afrocentric Group to leverage the dominance of
DENIS in the medical scheme administration market.
[32] In relation to the effects, the Commission found that there are at least 4 (four)
players active across all levels of the value chain. These include Afrocentric ,
MMI Group, Discovery, and Universal Health amongst others. Discovery, the
largest player in the provision of medical aid scheme administration services,
is also active across the value chain with its own in-house managed healthcare
services and managed dental healthcare services.
[33] The Commission concluded that the proposed merger will not result in
Afrocentric being able to offer a unique product to medical aid schemes, as it
will continue to face competition from other players that are able to replicate
any possible offering by Afrocentric to medical aid schemes.
[34] In light of the above, the Commission is of the view that the proposed merger
is unlikely to result in substantial portfolio effects as the merging parties will
continue to face competition from players active at both the administration level
and managed care services level. Furthermore, any leveraging strategy will be
constrained by medical aid schemes which have the power to appoint
managed care services separately from administration services. In addition,
the Commission notes that membership of DENIS' network is voluntary and
non-exclusive. DENIS' membership currently amounts to approximately 1900
dental practices out of a market of 2500. The benefits to members include
assured scheme member visits, transparent benefit sets and claims settlement
terms, as well as improved ease of practice management.
10
Third party concerns:
[35] The Commission also received various concerns from third parties which can
be summarised as follows:
[35.1] Post-merger, the Afrocentric Group will use DENIS' relationships
with other medical aid schemes to grow its presence in the industry.
In this regard, the Commission found that
These clients are currently administrated by the Afrocentric
Group.
[35.2] Post-merger, the Afrocentric Group will potentially control prices
and member volumes. The Commission's investigation found that
by acquiring DENIS, it is unlikely that the Afrocentric Group will
obtain market power in the broad market for the provision of
managed care services that will result in any substantial unilateral
effects. The Commission found that there are other players in the
market which can mimic any possible bundling by Afrocentric.
Furthermore, the Commission found that DENIS' network contracts
are non-exclusive. This allows practitioners to retain the option to
join other Managed Care Organisation ("MCO") networks while
remaining part of the DENIS' network.
[35.3] Post-merger, DENIS will have access to its competitors' pricing
structures. The merging parties confirmed that as an administrator
they get access to the medical aid schemes' contracts with service
providers to effect payments. The Commission noted that there are
internal restrictions that apply even to entities within the same
group of companies wherein an administrator is prohibited from
sharing client information. The Commission submits that the
administrators within the Afrocentric Group, such as Medscheme,
would be prohibited from sharing the information of DENIS'
competitors with other entities in the Afrocentric Group. Further,
11
[35.4]
[35.5]
[35.6]
the Commission submits that the merging parties highlighted that
as DENIS will operate as a distinct and separate entity within the
Afrocentric Group, it will not have access to the confidential
information of the clients, sub-contractors or other managed care
services providers used by other entities within the Afrocentric
Group given the stringent confidentiality provisions in place.
GEMS raised a concern that the merger will increase AfroCentric's
bargaining power. The Commission found that the acquisition of
DENIS by the Afrocentric Group is unlikely to give the Afrocentric
Group significant market power or bargaining power as medical
schemes will still have the ability to switch to other players active in
the market. Furthermore, the Commission's investigation found that
big medical aid schemes such as GEMS enjoy some countervailing
power. The merger is unlikely to negatively affect this power.
The Commission also received a concern that the merger creates
a conflict of interest in that the merged entity will be able to award
dental managed care contracts to itself. The Commission found that
the contracting relationship is between the managed care service
provider and the medical scheme, rather than between the
managed care service provider and the administrator of the medical
scheme. As such, the Afrocentric Group as an administrator does
not have the powers to appoint a managed care service provider; it
is the medical aid scheme that appoints a service provider.
Another concern that the Commission received was that the
remuneration of dentists will continue to decline. The Commission
is of the view that this concern is not merger specific. Furthermore,
the Commission noted that the decline in remuneration was mainly
as a result of the responsibility given to MCOs as appointed by
medical schemes to contain schemes' costs while ensuring that
practitioners provide members with the highest quality and most
practitioners provide members with the highest quality and most
clinically appropriate healthcare services. To achieve this, the
12
Commission notes that MCOs negotiate value-based remuneration
with healthcare service providers. MCOs play an important role in
monitoring claims by members and practitioners to prevent
overcharging, clinically inappropriate services being provided and
improper billing practices. In addition, the Commission considered
the Health Market Inquiry's (HMI) findings in the case Study of DPA
vs DENIS. The HMI case study found that:
"remuneration is monitored by the CMS, profit and losses
disclosed by scheme annual returns and audited financial
statements of the MCOs provides an approximation for the
reasonableness of the fees charged. Further, during
accreditation or review, the CMS Accreditation Unit compares
fees charged by different MCOs offering similar services and will
request detailed explanations from MCOs who charge higher
prices to justify the difference."
[36] The Dental Professionals Association ("DPA") applied to and was granted the
right to intervene on a limited basis. The Tribunal issued a directive, directing
the DPA to participate in the merger proceedings by making written
submissions prior to the hearing, and oral submissions at the hearing.
[37] DPA is a not-for-profit organisation, which represents the interest of its
members who are not only predominantly black, but who work mainly in
disadvantaged, rural and peri-urban areas, although some of its members also
practice in the urban areas.
[38] According to the DPA, the merger raises great public interest issues, which the
Commission, according to the DPA, did not consider broadly.
[39] In terms of the Tribunal's directive, the DPA addressed the following issues:
[39.1] Whether the proposed merger is likely to substantially prevent or
lessen competition;
13
[39.2] The levels of concentration, and history of collusion in the market;
[39.3] The ability of small and medium businesses ("SMEs") or firms
controlled or owned by historically disadvantaged persons
("HDPs") to effectively enter into, participate in, or expand within
the market; and
[39.4] The promotion of a greater spread of ownership, in particular to
increase the levels of ownership by HDPs and workers in firms in
the market
[40] According to the DPA, the private healthcare market has 81 medical schemes,
consisting of 21 open and 60 restricted schemes. In the restricted medical
scheme market, GEMS had a market share of 46%, POLMED 13% and the
remaining medical schemes each have a market share of less than 6%.
[41] DPA members were exposed mainly to GEMS, POLMED and Bonitas. Two
administrators, Discovery Health and Medscheme Holdings (Pty) Ltd control
40% and 39% of the market respectively while MMI Health has a market share
of 5%. The 14 self-administered schemes collectively account for 10% of the
market.
[42] The dental care market is divided between DENIS and DRC. DENIS, with the
exception of its contract with GEMS, operates in the open schemes market,
while DRC services the restricted scheme market and the low benefit options
offered by Discovery Health. Of importance is the DPA's statement that
Medscheme has the capacity to provide dental managed care and it does so
for the majority of the medical schemes it administers such as POLMED and
is thus a competitor to DENIS and DRC. The merger will remove the benefits
of competition, according to the DPA.
[43] DENIS and Medscheme are competitors in the managed care administration
from which the DPA members derive their livelihoods. According to the DPA,
14
DENIS has been "stripping" benefits of the consumers under GEMS and
Bonitas, but its members are able to derive benefits from claims administered
by Medscheme such as POLMED.
(44] The DPA fears that post the merger, DENIS and Medscheme will cooperate
and DENIS will overtake Medscheme which will lead to the eradication of
SME's and the HDl's who are members of the DPA, because a merger
between DENIS and Medscheme will remove competition in the dental
managed care administration completely.
[45] According to the DPA, the remuneration of dentists by medical schemes
continues to decline and will decline even further. This decline the DPA
attributes solely to the dental managed care administrators. This will be
exacerbated should DENIS take over the Medscheme dental managed care
administration.
(46] The DPA also submits that the merger will not facilitate an increase in the
ownership of businesses by HDl's. The DPA states that the various issues it
has with DENIS are merger specific, as the DENIS Network is a Preferred
Provider Network (PPN). Membership of this network guarantees the members
work, but on terms stipulated by DENIS.
(47] The merging parties point out that membership of the scheme is purely
voluntary and practitioners may leave the network at any time. The Network
has been rejected by the DPA members because of the tariff structure which
DPA members regard as being too low. DPA members believe that the
Network serves to capture the market by making itself attractive to potential
clients, the medical schemes.
(48] The real issue appears to be the tariffs paid to the dentists. Put differently, the
fees they generate when doing dental work for clients who belong to DENIS
administered medical schemes are, according to the DPA, too low.
15
[49] The Commission has investigated the merger thoroughly in accordance with
its mandate and obligations in terms of the Act. It has paid particularly close
attention to the submissions made by third parties, including the DPA.
[50] We have considered the submissions made by the DPA. Although the DPA
appear to have complaints relating to the treatment meted out to their members
by DENIS, those complaints are either not merger specific or fall outside of the
factors which we must consider in terms of section 12A of the Act.
[51] We have also considered the submissions of and the recommendations made
by the Commission in relation to the third-party concerns and the merger and
conclude that those submissions and recommendations have been carefully
made in accordance with the provisions of the Act.
[52] The DPA is, understandably concerned about the issues which impact on its
members and should raise those with the appropriate bodies .
[53] Given all the issues mentioned herein and, in its recommendations, the
Commission concluded that the proposed transaction is unlikely to
substantially prevent or lessen competition in any relevant market in South
Africa. We concur with the Commission that the proposed transaction is
unlikely to substantially prevent or lessen competition in any relevant market.
Public interest
[54] The merging parties confirmed that the proposed transaction will not have a
negative impact on employment as it will not result in job losses. However, the
Commission found that the Afrocentric Group had engaged in pre-merger
operational retrenchments of approximately employees. The Commission
found that these retrenchments are unlikely to be merger specific as the
retrenchments are as a result of
The Commission concluded that the
proposed transaction will not result in any job losses and there are no other
public interest concerns.
16
[55] We concur with the Commission that the proposed transaction raises no public
interest concerns.
Conclusion
[56] In light of the above, we concluded that the proposed transaction is unlikely to
substantially prevent or lessen competition in any relevant market. In addition,
no public interest issues arise from the proposed transaction. Accordingly, we
approved the proposed transaction unconditionally.
Mr Enver Daniels
28 January 2021
DATE
Ms Andiswa Ndoni and Mr Andreas Wessels concurring
Tribunal Case Manager
For the Merging Parties
For the Commission
Intervenor
: Ms Busisiwe Masina
: Adv J Wilson SC instructed by
Ndzabandzaba Attorneys and Webber
Wentzel Attorneys
: Mr Themba Mahlangu and Mr Billy Mabatamela
: Adv Puseletso Swele instructed Kunene Ramapala Inc
17