Launching a market inquiry into a certain, seemingly problematic sector of the South African economy is not a new modus operandi for the South African Competition Commission (the "SA Commission"). In the past the SA Commission has relied upon general powers found in the Competition Act, No. 89 of 1998 (as amended) (the "Competition Act") to conduct a market inquiry into the retail banking sector (the "Banking Inquiry") and the supermarket sector (the "Supermarket Inquiry").
As there were no express provisions authorising and regulating market inquiries at that time, participation in the Banking Inquiry was effectively voluntary in nature. Consequently, the outcome of the Banking Inquiry was dependant on the assistance of those members of the industry wishing or willing to submit relevant information to the SA Commission. Surprisingly, despite these voluntary submissions, the Banking Inquiry did not yield any staggering anti-competitive findings or result in any significant restructuring in the industry.
Similarly, in the Supermarket Inquiry, the SA Commission decided not to take any action after concluding an investigation that lasted for over three and a half years and considered the exclusive long-term lease agreements in place between six major supermarkets and property developers, owners and managers.
There's no guarantee that the healthcare market inquiry (the "SA healthcare inquiry") initiated by the SA Commission will result in the same conclusions as the Banking and Supermarket Inquiries given that the SA Commission now has a wide range of statutory powers conferred upon it in terms of the Competition Amendment Act, No. 1 of 2009 that it did not previously have. Chapter 4A of the Competition Act, which became effective on 1 April 2013, now makes explicit provision for market inquiries and enables the SA Commission to force parties to participate in the inquiry through various means, including the issue of summons to appear and/or provide relevant documents to the SA Commission. It empowers the SA Commission to initiate complaints or to enter into consent agreements with the relevant respondents. These provisions give some indication that the current and future market inquiries will not all reach the same outcomes as the Banking and Supermarket Inquiries as the SA Commission now has the necessary statutory weapons to effect change in markets where an inquiry has produced anti-competitive findings.
Chapter 4A of the Competition Act mirrors the market investigation provisions contained in the United Kingdom's (the "UK") Enterprise Act of 2002. Moreover, on 4 April 2012 the UK Competition Commission (the "UK Commission") received a referral from the Office of Fair Trading (the "OFT") to investigate the private healthcare market in the UK. This investigation, which has a statutory deadline of 3 April 2014, is in its final stages and the final report thereon is scheduled to be published during March 2014. As such, it would be prudent to take note of the provisional findings and the proposed remedies published to date by the UK Commission as these provide useful insight into the possible outcomes for the Healthcare Inquiry.
After a two year long inquiry and investigation into the UK's private healthcare system, the UK Commission has published its provisional findings and proposed remedies after it provisionally found adverse effects on competition and resulting customer detriment. More particularly, such remedies are being proposed after it identified high barriers to entry and expansion for full service hospitals and weak competitive constraints in certain local markets as two structural features of the private healthcare industry that have an adverse effect on competition. These features, in turn, lead to higher prices for self-paying patients and to higher prices for insured patients where a private hospital operator has market power over private medical insurers in negotiations.
In addition to the structural features of the sector, the UK Commission identified various problematic conduct features as well. In particular, the UK Commission found that the existence of incentive schemes by private hospital operators to encourage patient referrals to their hospitals has an adverse effect on competition. This conduct feature distorts the referral decisions by doctors or specialists to a certain hospital and distorts a patient's choice of diagnosis and treatment options in certain circumstances. Furthermore, the UK Commission identified the lack of publically available information on the performance of private hospitals and the performance and fee information of consultants as a feature that has an adverse effect on competition. As a result of this, private hospital patients are prevented from exercising effective choice in selecting the private hospitals at which to be treated and patients are prevented from exercising effective choice in selecting which consultants by whom to be diagnosed and treated. This, in turn, reduces competition between private hospitals, and consultants, on the basis of quality and price.
To address these findings, the UK Commission has proposed the following package of remedies:
- the divesture of nine hospitals, two hospitals owned by the Hospital Corporation of America and seven hospital owned by BMI Healthcare, a subsidiary Netcare;
- a review by the OFT or the newly formed Competition and Markets Authority (which will be taking over many of the functions and responsibilities of the UK Commission and the OFT in April 2014) of arrangements under which private hospital operators enter into agreements to operate private patient units in the UK's National Health Service hospitals and prohibition of such arrangements if they fail a competition test;
- a prohibition of, or restrictions on, certain clinician incentive schemes that encourage patient referrals to particular facilities or for particular treatments or tests;
- requiring the collection and publication of information on the performance of private hospitals and individual consultants; and
- requiring that private hospital operators include as a condition in the granting of practising privileges an obligation on consultants to provide fee information to patients using standard letter templates and that private hospital operators ensure that consultants comply with this obligation.
The process followed by the UK Commission throughout its two year investigation placed certain burdens and obligations upon the parties involved in the inquiry. Parties to the inquiry were subject to, inter alia, the answering of questionnaires, site visits by the UK Commission, hearings conducted by the UK Commission and the submission of various responses to the UK Commission including to its provisional findings and proposed remedies.
The proposed remedies, particularly the potential divestiture of hospitals, are quite serious in nature and should serve as an indication of potential things to come for South African firms which find themselves involved in the SA healthcare inquiry. The SA healthcare inquiry commenced on 6 January 2014 and is scheduled for completion on 30 November 2015. The SA Commission's preliminary findings (which will be further tested during the inquiry) have identified, in its recently published terms of reference, that the South African healthcare sector is characterised by many challenges related to the uneven distribution of coverage and access to funding, poor infrastructure and human resources constraints. In respect of private healthcare, the SA Commission has stated that various concerns have been raised regarding the functioning of the market as a result of the fact that healthcare expenditure and prices across key segments are rising above headline inflation. These increases, states the SA Commission, are framing the inquiry into the sector.
In respect of concentration levels, the SA Commission has identified that there has been consolidation in respect of hospital groups (3 groups share 87.8% of the total number of beds in the national private hospital market), administrators (3 entities represent 78.2% of the total number of beneficiaries of medical schemes on a national basis) and medical schemes (3 schemes cover 55.5% of all beneficiaries of medical schemes).
If the UK healthcare inquiry is anything to go by, and taking into account the new powers available the SA Commission, the South African inquiry (which will be led by former Chief Justice Sandile Ngcobo (Chairperson), Professor Sharon Fonn, Dr Ntuthuko Bhengu, Dr Lungiswa Nkonki and Mr Cornelis van Gent) could result in extensive recommendations being made to the Minister of Economic Development and, if any potential contraventions of the Competition Act are uncovered, further prosecutions being pursued. Although the SA Commission's administrative process is yet to be published, firms can expect that the inquiry will be extensive and thorough and will require internal attention on a daily basis.
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