c.
Medical scheme administrators do not have carte blanche to set prices, since the Registrar for Medical Schemes monitors fees and regulates
the relationships between the schemes and the administrators.
16.
However the relationship with Discovery does raise concerns and it is to this that we now turn our
attention. The merging parties focussed their argument on the contention that Momentum and Discovery are vigorous competitors. They
framed their competition analysis around this and presented strong arguments on this basis. In their Competitiveness Report they
state that:-
“Although Discovery Health and Momentum both fall within the FirstRand group of companies, they are managed and operate separately
and independently of each other. These businesses compete fiercely with each other in the market and operate at arms’ length. This also applies to the marketing and distribution of the various open medical aid schemes administered by each of them…We
therefore submit that even though Discovery Holdings and Momentum fall within FirstRand’s stable of companies the transaction
must be assessed on the basis that the market shares of the two firms should not be aggregated ” (Our emphasis)
17.
Their expert’s report also follows the same line of contention:-
“It is my opinion that Momentum Health and Discovery Health operate independently in the medical scheme market…. In my dealings
with both groups I have found there to be no co-operation between them on benefit design, pricing, tariff negotiation or any other
aspect of their business.”
18.
Similarly, Mr Dippenaar, FirstRand’s chief executive officer, also attests to this vigorously
competitive relationship as well as to the “owner/manager” ethos adopted within the FirstRand group which allows companies
within the group to pursue their own cultures and freedoms:-
“This difference in cultures is a major contributor to the two groups being fiercely competitive, also against one another. Concerns
have been expressed internally about the competition being internally destructive. At this stage this has not manifested although
he competitive relationship between the two groups is such that there is no prospect of them combining forces or colluding in any
way. The short history of the two long-term insurers competing head-on as set out above clearly demonstrates this.”
19.
Furthermore, in a follow up letter addressed to the Commission after the filing of the merger, the
parties’ legal representatives also went to great pains to stress the intensity of the competitive relationship between Momentum
and Discovery and why an aggregation of market shares was an incorrect approach:-
“Please note that the totalling of the market shares of Momentum, African Life Health and Discovery Health above does not constitute
a concession that those market shares should in fact be aggregated. In this regard we refer to the submission in the Competitive
Report to the effect that Momentum and Discovery Health are separate and independently run businesses. We once again repeat that
the merging parties are willing to negotiate conditions should it be necessary to ensure that this independence is demonstrated.”
20.
While we accept that there is evidence to suggest that there is, at present, vigorous competitive
rivalry between the Discovery and Momentum businesses, our concern is whether the overall governance structure and corporate governance
issues will allow this to continue into the future. We deal with this further later on.
21.
The Commission contended that since Discovery generates 95% of its revenue from its own medical
aid, this membership is thereby excluded from the contestable market for third party medical aid schemes. We don’t agree with
this latter view. Just as Discovery competes for customers to join its medical aid scheme, so other medical aid administrators compete
to get customers away from schemes administered by their rivals, to join their own. Administrators assist medical schemes to win
customers, and Discovery has in fact been able to win customer to its own schemes in this way. In fact, its own expert’s report
indicates this:-
“Discovery Health has more than doubled its market share over the period mainly through the increase in the number of members on the
Open Medical Scheme and also by acquiring some administration contracts.”
“Discovery Health and Momentum Health offer a comprehensive range of services to medical schemes including administration, managed
care and marketing services.”
22.
The more fundamental error is that the Commission fails to appreciate that medical administrators
compete for beneficiaries. They do so whether these beneficiaries are their clients via a closed medical scheme, an open scheme or
the administrator’s own scheme. Nothing in the documents that accompany the filings, or in the reports of the CMS which analyses market shares by number of beneficiaries,
would suggest that the Commission’s delineation is correct. Since individual beneficiaries, or the collective in a closed scheme,
are free to change administrators, and the quality of an administrator is what makes a scheme an attractive one in the case of an
open scheme, Discovery Medical Aid’s members are part of a contestable market. The Commission may be correct that the scheme
itself as a legal entity may not be about to defect to another administrator, but the same cannot be said of the individual members
and hence, they do form part of the contestable market.
23.
Though the parties argued that they are vigorous competitors, there might nevertheless be problems
if there is an aggregation of market shares, and if they begin to participate in the same markets in some sort of co-operative manner.
The parties have not dealt with these potential concerns, although there is evidence in the record that Discovery and Momentum’s
spheres of influence are set to overlap with the advent of new markets and the fact that they exert a potential or actual competitive
pressure on each other would be endangered, should this “competitive” relationship be rendered more tenuous by a future
strategic collaboration.
24.
In a due diligence report prepared for the Momentum Board on the acquisition, the authors of the
report allude to the fact that Discovery is the only other effective competitor in the market.
“An acquisition of ALH will immediately give Momentum access to all essential building blocks, not only to be a dominant (and unique)
health care player, but also to have access to health data in all market segments as described above. It will furthermore almost eliminate the ability of other insurers (except Discovery) to compete on an equal footing.” [Our underlining]
25.
When this extract was put to the merging parties for comment during the hearing Mr Kruger, the CEO
of Momentum’s Group Business – stated that the due diligence was expressed in this way to sell the deal to the board.
This post hoc explanation of a difficult piece of evidence is not credible given the fact that the board of Momentum is not new to
the industry and could not that easily be sold on some hype which was not true. Mr Kruger also argued that since the due diligence
report, the market has changed and that Metropolitan Health and Medscheme are far more formidable competitors due their winning of
tenders in respect of the administration of the GEMS (Government Employees Medical Scheme) This evidence has not been dealt with
in the filings of the merging parties nor even if it had, does it detract from the importance of the rivalry between Discovery and
Momentum, especially post merger.
26.
Moreover, the evidence shows that Momentum’s sales of Pulz, its new health offering have shown
marked growth, and is described in the FirstRand annual report as the “fastest growing open medical scheme within the first year of operation.” Further, the amalgamation provides Pulz with the “critical mass to enable it to compete with larger schemes”. Its expert confirms that the Pulz scheme enabled Momentum to compete with established players like Discovery.
27.
ALH has, through its own various schemes, attained approximately 50% of the local government market.
Momentum clearly intends, with the acquisition of ALH, to expand into the low income market:
“With the acquisition of African Life Health, Momentum Health will be moving towards supporting benefit options structured on a more
traditional basis and targeted at the lower income market where the greatest levels of membership growth are expected… This
will also put Momentum Health in a position to compete for GEMS business.”
28.
What is also significant is that Discovery seems also to have entered this low-income market, in
that LAMAF ( the “local authorities’ medical aid fund”), a local government scheme, has, since 2005, been moved
to the Discovery portfolio of in-house schemes and is known as the LA Health Medical Scheme. Discovery accesses local government and municipal
worker employees through its KeyCare Plan, or low-income, offering.
29.
Although ALH does not have a large market share in relation to that of Discovery, its strategic
importance to Momentum is emphasized in the due diligence report where great concern is shown about Sanlam’s possible entry
into the market, should they have acquired this business when they bought the rest of the African Life business.
“The one component of AfLife that will cause concern if sold to a competitor like Sanlam is its Health operations”
and later on:
“Its is clear that an acquisition of AfLife will greatly assist Momentum’s strategic initiative to enter the Growth Market segment.”
30.
The consolidation of Discovery and other larger players in the market is also a point worth noting.
Momentum’s expert states the largest four administrators covered some 53% of the beneficiaries in the market at the end of
2003. She points to the increasing consolidation of medical schemes, attributable to regulatory requirements around minimum membership
and reserve levels to stabilise risk pools, as entailing an associate consolidation at the level of medical scheme administrators,
which are ‘for-profit’ entities. Part of this consolidation has involved Momentum. It acquired Sovereign Health from
Medscheme earlier this year, and as a result of the present merger, will benefit from ALH’s acquisition of Amanzi Health Administrators
in 2004.
31.
This reinforces the fact that the administration market is one in which large, well-resourced firms
and institutions compete, but in an ever-consolidating environment. The fact that both Discovery and Momentum are seeking to enter
this lucrative lower income market, coupled with the increasing consolidation at the administration level, does not bode well for
future competition in light of the fact that they share a common parent. Their size and market power under one umbrella could remove
the competitive pressure from the market and thereby enable them to behave strategically and submit bids and tenders for large government
projects. It is therefore imperative to maintain the rivalry between these entities and the concern raised by this merger would be
that post merger there would be an enhanced incentive to co-ordination, rather than rivalry.
32.
At the present moment Discovery Holdings and the Momentum Group have two common non-executive directors
Mr Laurie Dippenaar and Mr Burger, respectively the chief executive and financial director of FirstRand. We find cause for concern
with respect to the level of cross-holdings and common directorships between Discovery and Momentum, even at non-executive director
level. The possibility of exchange of sensitive information at board level becomes even more of a concern where conceivably a market
division strategy could easily be entertained between Discovery and Momentum.
33.
For this reason our condition requires the elimination of cross-directorships between the Momentum
and Discovery Groups. This was not an issue of concern for the Commission as given the approach it had taken to the size of Discovery’s
share, it obviously felt no need to address this issue. It was however of concern to the industry regulator the Council for Medical
Schemes, who in a submission to the Commission on the merger remarked:
“. The issues pertaining to the First Rand Limited’s joint shareholding in both Momentum Group and Discovery Holdings Limited
are dealt with in sufficient detail in the parties’ filings.
To the extent that the proposed merger could increase the likelihood of collusive relationships between these entities, we are of
the opinion that these concerns could be adequately dealt with by conditions attached to the approval of the transaction, perhaps
formalizing some of the governance issues outlined in pages 9 to 12 of the parties’ competitiveness report.”
34.
Moreover, the parties themselves, in their competitiveness report, offered a condition to this merger:
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