172/CAC/Feb19 in the Matter Between MEDICLINIC SOUTHERN AFRICA

THE COMPETITION APPEAL COURT OF SOUTH AFRICA JUDGMENT Case No: 172/CAC/Feb19 In the matter between MEDICLINIC SOUTHERN AFRICA (PTY) LTD FIRST APPELLANT MATLOSANA MEDICAL HEALTH SERVICES SECOND APPELLANT (PTY) LTD And THE COMPETITION COMMISSION RESPONDENT Coram: Rogers, Victor and Vally JJA Heard: 14 & 15 October 2019 Delivered: 6 February 2020 2 JUDGMENT [Non-confidential version] _____________________________________________________________________________ Rogers JA (Victor JA concurring) Introduction [1] The appellants appeal against the Tribunal’s prohibition of their large merger. The first appellant is Mediclinic Southern Africa (Pty) Ltd (‘Mediclinic’), the second appellant Matlosana Medical Health Services (Pty) Ltd (‘Matlosana’). In terms of the merger transaction Mediclinic will gain control of Matlosana. The respondent, the Competition Commission (‘Commission’), recommended that the merger be prohibited and now resists the appeal. [2] Mediclinic owns a multidisciplinary hospital in Potchefstroom (‘MC Potch’). MC Potch is one of 50 hospitals which Mediclinic owns in South Africa. Matlosana owns two multidisciplinary hospitals in Klerksdorp called Wilmed and Sunningdale and a psychiatric hospital called Parkmed. [3] Potchefstroom and Klerksdorp, both of which are in the North West Province (‘NWP’), are just under 50 km apart (the travelling time is 41 minutes), Potchefstroom lying to the east of Klerksdorp. [4] It was and is common cause that Parkmed’s services are not in the same product market as those provided by the three multidisciplinary hospitals mentioned above, and that the acquisition by Mediclinic of control over Parkmed does not raise any competition or public interest concerns. The contentious issues concern Mediclinic’s acquisition of control over Wilmed and Sunningdale, to 3 which I shall refer collectively as the targets. All references hereafter to hospitals are to multidisciplinary hospitals unless otherwise stated. Background [5] There are three large corporate hospital groups in South Africa: Netcare, Life Healthcare (‘Life’) and Mediclinic. Many independent hospitals are affiliated to the National Health Network (‘NHN’), a non-profit company. Historically NHN has been permitted, by way of an exemption granted in terms of s 10 of the Competition Act 89 of 1998, to negotiates tariffs and other benefits with medical schemes on behalf of its affiliated hospitals. In November 2018 this exemption was expanded to include procurement on behalf of affiliated hospitals. (I shall refer to this part of the exemption as the procurement exemption.) Matlosana’s Klerksdorp hospitals form part of NHN. Nationally, the numbers of hospitals and beds operated by these four groups, and by unaffiliated independents, are as follows (the national market share, by number of beds, is given in brackets): • Netcare: 54 hospitals/10 004 beds (24,9%); • NHN: 62 hospitals/6611 beds (24,7%); • Life: 57 hospitals/7987 beds (21,3%); • Mediclinic: 50 hospitals/7164 beds (20,3%). • Unaffiliated: 3065 beds (8,8%). • Total beds: 34 831. [6] The targets have 247 beds. If they are acquired by Mediclinic, the latter’s national market share by beds will increase by about 0,7%. [7] Apart from MC Potch, there is one other multidisciplinary hospital in Potchefstroom, MooiMed, which forms part of NHN. The drive-time between MC Potch and MooiMed is five minutes. Apart from the targets, there is one other 4 multidisciplinary hospital in Klerksdorp, Life Anncron (‘Anncron’), which belongs to Life. The drive-time between Wilmed and Anncron is five minutes. [8] A hospital bill (‘cost per event” – CPE) comprises three components: (a) Fees for ward and theatre time according to the hospital’s tariff. Hospitals’ tariffs differ. Although one hospital may have a higher tariff than a competitor, the tariff component of the former’s bill might in comparable cases be lower than the latter’s because of more efficient time management (ie less time spent in theatres and wards). (b) Ethicals (drugs) supplied. Ethicals are by legislation subject to a single exit pricing (‘SEP’) regime, the effect of which is that the same drug supplied by two competing hospitals will appear in their respective bills at an identical unit cost. In comparable cases one hospital’s bill might nevertheless have a lower ethicals component (and thus be more efficient) than another’s because the same drugs are used in lower but adequate quantities or because satisfactory cheaper substitutes (generic as against patented versions) are used. (c) Surgicals consumed or supplied. Surgicals (which includes prostheses) are not subject to the SEP regime. One hospital may be able to bill surgicals at a lower cost than a competitor because it has procured the same surgicals at lower prices (superior bargaining with suppliers), or because the same surgicals are used in lower quantities, or because satisfactory cheaper alternatives are used. [9] In the case of the targets, their CPE on an average weighted basis comprises a tariff component of 68%, an ethicals component of 11% and a surgicals component of 21%. CPE at other hospitals is broadly similar but there would naturally be differences. 5 [10] Although traditionally a hospital bill is made up of numerous line items for each service and item supplied (the fee-for-service (‘FFS’) model), medical schemes and hospitals sometimes negotiate alternative reimbursement models (‘ARMs’), a typical example of which would be a fixed fee for a certain type of procedure. An ARM allows the scheme to share some of the cost risk with the hospital, since if in a particular case the procedure turns out – perhaps because of complications – to be unusually expensive, the hospital still only gets the ARM fee. From the hospital group’s perspective, it will want to be reasonably confident that, averaged out over all the procedures covered by the ARM, the fees payable in terms thereof will be profitable, even if some of the procedures turn out to cost more than the ARM fee. [11] More than 95% of patients who receive services from private hospitals are insured by medical schemes. In respect of this group, price negotiation occurs not between hospital and patient but between hospital and scheme. The hospital (or hospital group) typically negotiates its tariffs annually with each scheme. Where a scheme option permits a patient a choice between two or more hospitals, quality of care and patient experience may play a role in the patient’s choice. [12] For the fewer than 5% of patients who are uninsured, each hospital has its own tariff, with hospital managers having more or less discretion to grant discounts. In relation to these patients, therefore, hospitals compete not only on quality of care and patient experience but on price. [13] Most schemes are national, ie have members throughout South Africa. Each scheme typically offers a variety of benefit options. For richer options, members are not restricted in their choice of hospital. So in an area served by two or more hospitals, the member can choose any one of them without financial prejudice. 6 [14] For low-cost options, however, a scheme constructs a network of designated or preferred service providers (although there is a distinction, for present purposes I can refer to them collectively as DSPs). In order to be covered or avoid co-payment, the member must go to a DSP. Since usually only one of the several hospitals serving the area where the patient resides is a DSP, the patient has no choice. [15] Typically a DSP network comprises one or two anchor groups out of the four large groups (Netcare, Life, Mediclinic, NHN) with filler hospitals, drawn from the other groups and from unaffiliated hospitals, to provide coverage in areas not served by the anchor(s). Hospital groups compete with each other to be included as anchors. The attraction to a hospital group of inclusion is the increased volumes arising from the fact that scheme members must use that group’s hospitals in order to enjoy cover. The trade-off is that the scheme will expect the group to offer a tariff discount. It is this discount which enables the scheme to offer a low-cost option to its members. Network negotiations, like tariff negotiations, occur annually. Even with discounted tariffs, however, low-cost options are generally not independently sustainable; there is some element of subsidisation from richer schemes. [16] Since schemes compete with each other for members, a scheme would usually want to offer its low-cost members reasonably accessible (ie not too distant) DSP hospitals. Accessibility from the scheme’s perspective is also important for those services falling within the legislatively defined range of ‘prescribed minimum benefits’ (PMBs), because where a member needs treatment constituting a PMB, the scheme must cover the cost in full unless the member fails to use a reasonably accessible DSP. For this purpose, the Council for Medical Schemes (‘CMS’) regards 50 km as the outer limit of reasonable accessibility. This means that if the scheme does not have a DSP within 50 km of 7 the member’s residence, the scheme will need to cover the full cost of a member’s use of a non-DSP hospital within the 50 km radius, even though the scheme has no negotiated discounted tariff with the non-DSP hospital. [17] Low-cost options are a small part of medical scheme business. In the case of Bonitas, one of the large national schemes which received some attention in the Tribunal’s hearing, 66 000 (9,4%) of its 700 000 members are on its three low- cost options. This is typical of other large schemes. [18] Because of the features summarised above, it has been recognised in previous cases concerning hospital mergers that the geographic market for hospital services has a national and a local dimension: (a) In the provision of services to insured patients, there is a national market in which hospitals compete with each other in their tariff and network negotiations with schemes.

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