SA ‘needs divestiture’ to free up the private healthcare market

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The preliminary findings of the inquiry into South Africa’s private health care sector shows worrying trends, writes Phumudzo S Munyai, associate professor at the University of Pretoria in The Conversation. And key among the inquiry’s revelations are high concentration levels in the market.

Munyai writes: “For example, the report shows that 70% of the open medical schemes market is controlled by two players – Discovery Health Medical Scheme and Bonitas. The market for restricted medical aid schemes is dominated by the Government Employees Medical Scheme, with a 47% market share. The medical scheme administrators market is controlled by three players, Discovery Health, MMI Holdings Ltd and Medscheme. These three have a 70% combined market share.

“The situation is no better in the market for private hospitals. Three hospital groups – Netcare, Mediclinic and Life Healthcare – hold 83% of the national market.

“The concentration problem in the private health care sector is further compounded by integration. Two of the largest medical scheme administrators, Discovery Health and MMI Holdings, and one of the largest hospital groups, Mediclinic, have common ownership.

“A market dominated by few players creates an environment in which collusion, abuse of dominance and other anti-competitive conduct can thrive. To remedy the problems identified by the inquiry, addressing the problem of concentration is key. This is because it’s the root cause of other problems affecting the sector.

“But sadly there isn’t much that competition authorities can do. The Competition Act empowers competition authorities to take effective remedial actions in cases involving mergers, collusion and abuse of dominance. But not when it comes to concentration. This means under the current law the health care market inquiry won’t result in any effective remedial steps being taken.”

But, Munyai writes, there’s hope. “If amendments to the country’s competition law are passed by parliament the law relating to market inquiries will be strengthened. The Bill will empower competition authorities to impose more radical remedies, such as divestiture, to address the problem of concentration. Divestiture would involve, for example, a dominant firm being ordered to sell or dispose of its shares or assets to free up the market.

“Divestiture can be a drastic and sometimes controversial remedy. Because of this there’s an acceptance that it be used sparingly and as a last resort. It works best when other remedies have failed.

“That’s not to deny divestiture its place in competition law enforcement. Divestiture orders have been part of competition law enforcement for almost 130 years dating back to 1890 when the world’s first competition statute, the Sherman Act, was passed in the US. Ever since, the US has used divestiture to prevent monopolies from happening as well as to loosen the unhealthy grip of one or few firms on the market.

“In the 1911 world famous case of Standard Oil Co of New Jersey v United States, the US Supreme Court ordered that Standard Oil be broken up into 34 independent corporations. Standard Oil had monopolised the entire US oil sector.

“Another prominent case in which the Supreme Court ordered divestiture is United States v Aluminium Company of America. Here the Supreme Court’s remarks about monopoly were more telling: Possession of unchallenged economic power invariably killed initiative and discouraged thrift.

“In United States v Columbia Steel Co, another case of historic significance, the Supreme Court also ordered divestiture. The court found that monopoly was an ‘industrial menace’, because of the firm’s ability to create inequalities in relation to its competitors. Monopoly was also found to be a ‘social menace’, because of the firm’s ability to control prices.

“Recently, in 2000, information technology giant, Microsoft, also received a divestiture order. In that case, United States v Microsoft Corp, a judge ruled that Microsoft established an unlawful monopoly and abused its dominance. The judge ordered that Microsoft must be broken down into two separate units, one to produce computer operating systems and the other software components.”

Munyai writes that this decision was later overturned on appeal. But some observers still believe that divestiture was an appropriate remedy because where anti-competitive conduct is made possible by market power, divestiture may be a suitable remedy.

He writes: “South Africa should follow the US example by using divestiture to free up concentrated markets when circumstances require.”

The Conversation report

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