6.
The parties, in response to the Tribunal’s request, submitted the following draft condition on 14 February 2005:
For so long as a firm in the Medscheme Group (i.e. Medscheme Ltd or any firm that is controlled by Medscheme Ltd) and a firm in the
FirstRand Group (i.e. FirstRand Group Ltd or any firm that is controlled by FirstRand Group Ltd) own shares in Sovereign Health (Pty)
Ltd (“Sovereign Health”), no person that is a director or an employee of any firm in the Medscheme group or the FirstRand
group shall be appointed to the Board of Directors of Sovereign Health.
7.
The Competition Commission, in commenting on the above proposal, indicated that it remained concerned that the proposed condition
would delay rather than eliminate the possible sharing of information between the independent directors on the one hand and the parties’
shareholders on the other hand. It therefore proposed, as an alternative, the formation of a “blind trust” whereby Momentum
opens an account with an independent investment firm, which then holds and manages Momentum’s interests in Sovereign on behalf
of Momentum. Structurally, Momentum would then operate separately from Sovereign and/or Medscheme, which in the Commission’s
view would address the post-merger concern.
8.
The Tribunal requested the parties to comment on the Commission’s proposal. On 22 March 2005 the merging parties informed the
Tribunal that they had agreed to restructure the transaction. In terms of the new proposal Momentum will acquire all the issued shares
in Bonheur and not only 50% as was originally intended. Momentum, through its subsidiary Southern Life, will thus acquire 100% control
over the business of Sovereign Health. Thus Medscheme will post merger have no further interest in Sovereign Health.
9.
The concern that the joint venture could serve as an information sharing vehicle between competitors is thus eliminated. The Commission
was satisfied that the change to the transaction would eliminate its concerns. It was also satisfied that the transaction, although
altered, did not need to be re-notified.
Effect of the transaction on competition
10.
Sovereign Health is an administrator of medical aid schemes. Its services entail the managing of financial aspects of medical aid schemes, including contribution collection and adjudication
and payments of claims. It also attends to queries by members and medical service providers and handles other aspects related to
fund management.
11.
Momentum, the acquiring firm, and its sister company Discovery Health both provide healthcare funding products. Momentum also markets
and distributes a medical aid scheme called Pulz, for which Sovereign acts as the administrator. Discovery Health is the administrator
of its own Discovery medical aid scheme, which accounts for 95% of its business, external medical schemes account for the remaining
5%.
12.
Services overlap in only one product market, the market for medical aid administration, in which both Discovery Health and Sovereign
compete nationaly.
13.
Discovery’s medical aid scheme is by far its administrative arm’s largest customer. Based on the historical relationship
between the administrator and the medical aid scheme, the Commission is of the view that chances are slight that Discovery’s
trustees would switch administrators. The Commission argues that 95% of Discovery’s 22% market share is uncontested, with customers highly unlikely to switch when
the SSNIP test is applied, leaving Discovery with only 1% market share in the contestable part of the market. Whether this approach is correct is not something we need to decide.
14.
Sovereign Health’s market share is 5%. Post–merger the combined entity’s market share in the Momentum stable would
thus be 6%.
15.
However, should one include Discovery’s market share of 22%, the First Rand Group’s market share would be 28%. Its closest
rivals are Medscheme with a market share of 17% and Metropolitan Health with 9%.
16.
The merging parties have argued that Momentum and Discovery are managed separately and would have a competitive relationship albeit
both are ultimately controlled by First Rand. Although access to their internal strategy documentation bears this out this arrangement
represents FirstRand’s present business choice. It must not be forgotten that Discovery was once owned by First Rand via Momentum.
If First Rand has a change of mind, it could prefer co-operation between its health care interests in the future. We must therefore
assess the merger on the assumption that Momentum and Discovery belong to a single economic entity.
17.
In assessing the strength of competition in the market we found that there are more than 17 medical scheme administrators that compete
in this market, with market shares ranging from 1% to 9%.
18.
Secondly, strong countervailing power exists. The trustees of a medical scheme choose the preferred administrator. In terms of the
Medical Schemes Act, a medical scheme may, on giving 6 months notice, replace its administrator with another. Since trustees of medical
schemes are aware of the Registrar of Medical Schemes’ drive to reduce the non-healthcare expenditure of medical schemes they
use this as leverage in negotiating fees with medical scheme administrators. However, in the event of excessive prices, medical schemes could always self-administer.
19.
Finally, barriers to entry are relatively low. Due to the minimal regulation that applies to administrators such as accreditation
in terms of the Medical Schemes Act and relatively low sunk costs entry is relatively easy. During the past 3 years eight new competitors
entered the market.
20.
In light of the above we conclude that the merger is unlikely to substantially prevent or lessen competition.
Public interest issues
21.
According to the parties the merger would not result in any retrenchments, since the business of Sovereign will continue to operate
as a separate discreet business.
____________________
2 June 2005
N Manoim
Date
Concurring: D Lewis and Y Carrim
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