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Mediclinic News : Medical aid: Yes, it's complicated


Medical aid: Yes, it's complicated




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BUSINESS DAY LIVE The Competition Commission does not prove collusion between Discovery Health, MMI and Mediclinic but implies that cross-ownership enhances their scope for price fixing Investors would do well to take note of the health market inquiry’s provisional report on why medical aid prices keep rising while benefits decrease. The Competition Commission report may not bode well for the consumer but it notes that profits of the large hospital groups — Netcare, Mediclinic and Life Healthcare — are "consistent" and "sustained", with no chance of slowing down. Even better were the profits of administrator Discovery Health, "multiple" times those of competitors "with no sign of effective challenge from incumbent or new firms". The numbers illustrating Discovery Health’s dominance were erased from the report and instead pictures of a pair of scissors were drawn in their place. This is no doubt due to Discovery Health’s concerns about confidentiality of its data, said by inquiry director Clint Oellermann to be a reason for the delay in the provisional report’s release. The report, released after nine months of delays, highlights that there could be a substantial conflict of interest between two of the three largest administrators, which are supposed to negotiate good value for medical aid members and drive down hospital costs. Administrators are companies that are paid by medical aid companies to manage claims, payment to doctors and hospitals, deal with fraud and recruit new members. The commission notes that both administrators in question, MMI and Discovery Health, which should be competing to provide cheaper benefits to medical schemes, have shared ownership. The commission implies that having competitors owned by the same company benefits investors and could lead to price fixing. But analysts have downplayed the conflict of interest, saying the commission did not prove any collusion. In a research note, the inquiry explains why cross-ownership of competing companies matters: "If a firm has participation in a competitor, even without controlling it, the scope for collusion will be enhanced." Falcon & Hume competition lawyer Heather Irvine says: "There is a reasonable amount of economic theory which indicates that cross-ownership (common shareholders) may have anticompetitive effects in certain circumstances. "However, this risk arises only when the companies in which the common shareholder holds [shares] are competitors (because then it may lead to information exchange between competitors, which in turn leads to price-fixing or other collusive conduct)." Both MMI and Discovery have large shareholders that are themselves owned by investment group Remgro. It gets complicated. Remgro has a 28% shareholding in RMB Holdings, which through FirstRand has an unknown stake in MMI. Remgro also has a stake in Rand Merchant Investment Holdings, which has a 25.8% stake in Discovery and a 25% stake in administrator MMI. It gets worse. Remgro, with 42%, is also the largest shareholder of hospital group Mediclinic. This raises the question: do Discovery Health or MMI have an interest in driving down hospital prices for medical aid members or keeping profits high for their shared owners of Mediclinic? Do the two administrators compete in adding shared value to medical aids for whom they pay claims; or choose not to compete as they share shareholders? The inquiry poses these questions but doesn’t answer them. It does, however, describe the links between owners of MMI, Discovery and hospital group Mediclinic as substantial. "A substantial commercial relationship therefore exists between the largest and most influential owners of Discovery Limited, the owners of MMI and one major hospital group, Mediclinic." But whether the ownership of Mediclinic makes Discovery Health less likely to bargain for good prices for hospital stays is never proven. Irvine is not convinced. "This concern about cross-shareholding would not arise in relation to, for example, a medical scheme and a hospital group, which are not competitors in the same level of the market." She says the commission loves to focus on cross-ownership, but the small number of institutional shareholders in SA means many companies share owners. "The Competition Commission is obsessed with cross-ownership and likes to draw diagrams showing that there are lots of common interests held by shareholders throughout the SA economy. That is of course true — large institutional shareholders like the banks and the PIC all hold some shares in almost every listed company. However, this doesn’t necessarily lead to a lack of competition," she says. The commission gives no evidence that administrators are allowing Mediclinic to charge more than other hospital groups. It finds that out of all the administrators, Discovery Health was the only one with enough clout to drive down hospital prices, including those of Mediclinic. In a statement, Discovery Health CEO Jonathan Broomberg noted that the health-care market inquiry made "the observation that Discovery Health is the only administrator that has been able to use countervailing negotiating power to achieve lower hospital tariffs for its client schemes". Investment analyst Warwick Bam says the commission failed to show that Mediclinic is paid more by Discovery (due to shared owners) than Life Healthcare and Netcare. He says cross-ownership "would only be a problem for consumers if there is evidence of collusion or anticompetitive behaviour due to the cross-ownerships and cross-directorship between Remgro [with shares in Discovery and MMI] and Mediclinic. "It should have been evident to the health market inquiry whether Mediclinic’s rates or utilisation data differed from those negotiated with Netcare and Life Hospitals, implying bias from the group structure." In other words, no evidence is revealed that proves Mediclinic gets more business or is paid more by Discovery Health than competitor hospital groups. The health market inquiry report merely suggests there could be a "chilling effect" on competition. "Though MMI and Discovery Health have provided some examples of competition between them, we believe that common ownership between two of the largest administrators and of the large hospital groups might influence strategic direction and can have a chilling effect on competition over the long term," it says. Despite failing to provide evidence of collusive conduct, the commission is adamant that consumers may be getting a raw deal at the expense of firms that look out for each other. It says administrators are not driving hard enough bargains on prices. "Stakeholder-led negotiations have not yielded outcomes with a positive impact on expenditure and there remains a possibility that sector participants may continue to settle for mutually beneficial pricing levels at the expense of the consumer." The examination of Discovery Health by the inquiry — it took four and a half years — does not end there. The report is concerned that no matter how it performs in driving bargains for its medical aid Discovery Health Medical Scheme (DHMS), it is guaranteed business from the scheme in perpetuity. This is contrary to what the law suggests. Discovery Health, unbeknown to most consumers, is an administrator that gets paid about 10% of medical aid premiums to pay the claims of DHMS. It negotiates prices with hospitals and doctors and exposes medical aid fraud. If it is too expensive it could be fired by DHMS and a new administrator hired in its place. But this is unlikely to happen, giving Discovery less incentive to compete for business or drop its fees. The report says it is unlikely DHMS will ever get a new administrator and in the same way Bonitas will keep Medscheme as its administrator. Trustees don’t have the skill to fire their medical aid administrators, it suggests. Speaking after the release of the report, panel member Ntuthuko Bhengu called the idea as described in the law — that medical aids are run as not-for-profit entities — a "scam". The inquiry found what everyone in the industry knows: that medical aids are run by for-profit administrators.
Created at 2018/08/01 10:35 AM by Mediclinic
Last modified at 2018/08/01 10:35 AM by Mediclinic