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Mediclinic News : Yes, It's complicated


Yes, It's complicated




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FINANCIAL MAIL 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. Shared ownership 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, saying that 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 anti-competitive effects in certain circumstances. However, she says, 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 percent 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 percent stake in Discovery and a 25 percent stake in administrator MMI. It gets worse. Remgro, with 42 percent, 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 which 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, saying that 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. Not convinced 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. She says that 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. Irvine says the commission loves to focus on cross-ownership, but the small number of institutional shareholders in SA means many companies share owners. She says 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. 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. No evidence of collusion In a statement, Discovery Health CEO Jonathan Broomberg noted that the Health 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 Barn 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 anti-competitive behaviour due to the cross-ownerships and cross-directorship between Remgro [with shares in Discovery and MMI and Mediclinic. Barn says 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. It says that though MMI and Discovery Health have provided some examples of competition between them, the HMI panel believes 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. 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. In perpetuity The report says 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 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 percent 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. “Scam” 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: those medical aids are run by for-profit administrators. One of the report’s major recommendations is that medical aid members get involved in voting for trustees, who are supposed to run the scheme, rather than let the administrator do this. It suggests trustee elections take place after hours, or on weekends when ordinary members can attend. It also wants a change in trustee pay so that the millions they earn are linked to their independence and the work they do in holding the administrator to account - and serving members’ interests. GTC healthcare consultant Jill Larkin added her support to the demand that trustees do more to keep administrators on their toes. Long-term investments Discovery Health says the long-term relationship with the scheme allows it to make long-term investments in technology, infrastructure and human resources. The report says the dominance and stability of the administrators hasn’t benefited the consumer through “economies of scale”. Discovery Health says its fees have been reduced in real terms each year. In the end, many of the report’s recommendations are largely focused on government. It states that the Medical Schemes Bill, 2008, which sought to strengthen scheme governance, has not yet been implemented. Much of what government can do is already allowed for in the National Health Act and Medical Schemes Act. Former chief justice and panel director, Sandile Ngcobo, said that what remains to be done is to implement these provisions. But at the launch of the report, Health Minister Aaron Motsoaledi blamed medical aids, hospitals and doctors, saying that stakeholders “don’t like to be regulated”. Back to top MEDICLINIC DISAGREES WITH INQUIRY OVER COMPETITION 25 July 2108 Business Day Page 4 Tamar Kahn Mediclinic disagrees with inquiry over competition Tamar Kahn Private hospital group Mediclinic has taken issue with the health market inquiry's concerns about market concentration in the sector and its call for submissions on possible divestiture and a moratorium on issuing new licences. Mediclinic does not agree with these findings ... and does not believe the proposed remedies are appropriate: it said in a statement issued on Monday. The inquiry was launched by the Competition Commission four and a half years ago to investigate the barriers to effective competition in the private healthcare market It released its preliminary report on July 5. Mediclinic said it believed there was robust competition between the four big players: the National Hospital Network and the three JSE listed hospital groups Netcare, Life Healthcare and Mediclinic. "Hospital groups are able to leverage on economies of scale, enabling the provision of high quality, cost efficient care to the benefit of the patient," it said. Mediclinic agreed with the inquiry's finding that healthcare expenditure was rising faster than consumer price inflation due to an increase in utilisation, but disputed its view that supplier induced demand played a significant role in driving this trend. "Mediclinic's economic and actuarial experts do not support the accuracy of the calculations and data under pinning these findings: it said. Increased utilisation was due to other factors, such as the increasing burden of disease, an ageing population and new technology, it said. Supplier induced demand refers to a phenomenon in which increased access prompts additional use of a service that would not have otherwise occurred. In the case of hospitals, this could mean increased bed numbers trigger a surge in hospital admissions. Mediclinic said it supported the inquiry's recommendation that bilateral tariff negotiations be maintained between medical schemes and hospital groups. In a separate development, the health market inquiry said on Tuesday that it had received numerous requests for access to the underlying data considered in preparing its report and it would open its data access room to stakeholders during August.
Created at 2018/08/01 10:40 AM by Mediclinic
Last modified at 2018/08/01 10:40 AM by Mediclinic