Behind the dominance of the big 4 in private healthcare

The long-awaited provisional findings of the Competition Commission’s Health Market Inquiry (HMI) has blown the lid on why Discovery Health Medical Scheme and hospital groups Netcare, Mediclinic Southern Africa and Life Healthcare continue to gain dominance in SA’s private healthcare industry.

Failures in regulation and governance have contributed to a lack of competition and high levels of concentration in the medical schemes and private hospital market, according to the 484-page and serially-delayed HMI report, which was released on Thursday.

Proving this point is the astounding success and profitability of players like Discovery at the expense of its few rivals, says former chief justice Sandile Ngcobo, who chaired the HMI.

“Discovery has, over a sustained period of time, earned profits that are a multiple of those of its main competitors, with no sign of effective challenge from incumbent or new firms … This is an indication of market failure and there are no signals that the market will self-correct,” says Ngcobo.

He has the numbers to back this bold assertion.

Of the 22 medical schemes open to the public, just two hold 70% of the market in terms of the number of members they have. One of these is Discovery Health Medical Scheme, which holds 55% of the medical schemes market.

While Ngcobo acknowledges how skilled and agile Discovery’s management is in running the business, its roaring dominance and success relative to its peers is no accident. Higher than necessary service fees given its scale, not sourcing medical services from any other industry professionals, risk selection, and broker management contribute to its dizzying profitability.

“Under normal competitive conditions, Discovery’s profitability would attract new competitors and stimulate competition from incumbents,” says Ngcobo. ” There is no sign of this. On the contrary, we see Discovery growing and becoming more successful over time.”

Discovery did not respond to requests for comment about the inquiry’s provisional findings at the time of publishing.

Medical scheme administrators

Administrators of medical schemes play a big role in maintaining the dominance of schemes. In the case of Discovery Health Medical Scheme, its administrator is Discovery Health (it has the same name as the medical scheme), which manages more than three million lives on an open and closed medical scheme (employer-offered schemes) and collected R5.5 billion in fees in 2017 for this role.

There are 16 medical scheme administrators, but Discovery Health and Medscheme accounted for 76% of the market based on gross contribution income. The HMI questioned the independence of medical schemes, which are not-for-profit and owned by members, from medical scheme administrators, which operate on a for-profit basis.

The interests of administrators are dominant and scheme members are too weak or disempowered to force administrators to align to member interests, it found.

“The lack of incentives … to scheme employees, trustees and principal officers … weakens schemes’ resolve to hold administrators to account for delivering value to members. Healthcare costs and administration fees are increasing and benefit packages cover less care.”

Ngcobo continued: “The separation between schemes and administrators often seems artificial, particularly in the case of large open schemes.”

The HMI has recommended that governance be strengthened to ensure that schemes place greater pressure on administrators to deliver value to members and improve value-for-money.

Hospital groups

Three private hospital groups have been fingered for promoting a highly concentrated market with limited competition. These are Netcare, Mediclinic and Life Healthcare, which have a combined market share of 83% in terms of number of beds and 90% in terms of the total number of admissions.

A profitability analysis by the HMI has shown that between 2010 and 2014, the profits of Netcare, Mediclinic and Life Healthcare have been consistent and sustained. “One of the most important consequences of the dominance of the three large hospital groups is that no funder [medical aid scheme] can afford not to contract with any one of the three big facility groups or to totally exclude one of these groups from any provider networks.”

If the market was less concentrated, for example with six large providers instead of the current three large groups, the HMI says, a funder would likely have the option not to contract with one of the groups. This would create a completely different bargaining dynamic, to the benefit of patients.

The HMI has recommended a moratorium in terms of which Life Healthcare, Mediclinic and Netcare would not be granted licences for new facilities, or permission to increase the number of beds within existing facilities, until their individual market share is not more than 20%.

Dr Shrey Viranna, Life Healthcare Group CEO, says the HMI’s recommendations “have been considered and have the potential to address the broader challenges that the private healthcare industry is facing.”

Melanie Da Costa, director of strategy and health policy at Netcare, says the hospital group is still studying the report.

“However, there are certain aspects of the provisional findings which appear flawed and unsupported by the evidence which has been made available to Netcare or its experts,” Da Costa tells Moneyweb. “Netcare intends making further submissions in response to the provisional findings to address a number of these issues in the interests of the panel reaching evidence-based conclusions.”

Mediclinic Southern Africa says it also plans to respond to the findings.