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Mediclinic and Competition Appeal Court in bad health after scathing Constitutional Court judgment

posted 2 years ago

Mediclinic and Competition Appeal Court in bad health after scathing Constitutional Court judgment

 

On 15 October 2021, the Constitutional Court of South Africa handed down judgment in the Competition Commission of South Africa v Mediclinic Southern Africa (Pty) Ltd and Another [2021] ZACC 35 (Mediclinic). This case was an appeal matter from the Competition Appeal Court and tasked the Constitution Court with determining whether the Competition Appeal Court had erred in its approval of the proposed transaction between Mediclinic and Matlosana Medical Health Services (“MMHS”) (the “Proposed Transaction”) which envisaged Mediclinic acquiring a controlling share (50.0.1%) in MMHS.  Mediclinic would thereafter become the owner of MMHS’s.

The Competition Tribunal’s decision and rationale

In determining whether to approve the Proposed Transaction, the Competition Tribunal (“Tribunal”) decided the proposed merger would result in a substantial reduction of competition in the relevant market. In essence, if the Proposed Transaction was approved, the target hospitals’ tariffs would increase substantially for both insured and uninsured patients. Specifically, the Tribunal found that the Proposed Transaction would negatively impact uninsured patients by diminishing their leeway for negotiation and opportunity to change to more affordable hospitals (as offered by the target hospitals). The expected increase in tariffs resulted in the Tribunal concluding that the proposed transaction would have an unfavourable public interest outcome which, when weighed against a countervailing public interest consideration, could not be justified.

In addition, it was determined that after the transaction, the merging parties would be dominant in the relevant market in three municipalities, with a combined market share comprising 63%, making it increasingly difficult for competing medical schemes to exclude the merged body when building networks and would also have the result that medical schemes’ external options would be less attractive.

As a result, the Tribunal refused to approve the Proposed Transaction based on the likely outcome of it causing a significant reduction or complete prevention of competition, together with the likelihood of consumer harm due to heightened tariffs.

The Competition Appeal Court decision

In an about turn, the Competition Appeals Court stated in Mediclinic Southern Africa (Pty) Ltd and Another v Competition Commission [2020] ZACAC 3 (6 February 2020) that the Tribunal had erred “in drawing a parallel between the price increases and heightened market power or a substantial lessening of competition”. Nevertheless, according to the Competition Appeal Court, the Tribunal had delineated the correct evidence for the enquiry which was required, namely whether price effects existed which could justify prohibiting this merger as a matter of public interest.

It further stated that the fact that price effects in this matter must be assessed in the context of public interest rather than a substantial lessening of competition has a crucial impact on the evidence which deals with the corresponding efficiency of Mediclinic and the respective targets.

Additionally, it highlighted a discerning element in this case to be that the merging parties did not bear the onus of showing a certain technological, efficiency or other pro-competitive gain which would be greater than or offset the effects of preventing or lessening competition in terms of section 12A(1)(a)(i), because it was not shown that the merger would likely cause a substantial prevention or lessening of competition. This rationale was used to justify the use of a public interest lens to analyse the evidence relating to price effects, instead of the standard substantial lessening of competition.

In essence, the Competition Appeal Court submitted that the Tribunal was incorrect in its finding that substantial public interest grounds existed on which to prohibit the Proposed Transaction, on the strength of price effects. It made the same conclusion on the Tribunal’s refusal based on the potential for a material decline of standards, and ultimately set aside the decision of the Tribunal, allowing the merger to continue subject to conditions.

Decision and rationale of the Constitutional Court

Following leave to appeal from the Competition Appeal Court, the Constitutional Court was requested to pronounce on, inter alia, the following legal issues:

(i) Whether the Competition Appeal Court afforded due consideration to the Constitution?

The Constitutional Court noted that both the Tribunal and the Competition Appeal Court are “institutions of the State”, which places an obligation on them to aid in the realisation of the right of access to health services. Despite this obligation, the Competition Appeal Court merely indicated the constitutional rights which had been encroached on, but did not refer to them in the reasons for setting aside the ruling of the Tribunal.

(ii) Whether the Competition Appeal Court afforded due consideration to the Preamble, purpose and relevant provisions of the Act?

The Constitutional Court initially stated that the Competition Appeal Court wrongly instructed itself through the application of an incorrect test, by interpreting section 12A(1)(a) and (2) of the Act to denote that a post-merger increase in price must indicate a result of changes in market share (“enhancement of market power test”). Rather, section 12A just provides for the substantial decrease or prevention of competition, normally measured by evaluating the prospective increase in prices. As a result, upon applying the “enhancement of market power” test, the Constitutional Court found that the Competition Appeal Court had been distracted from the provisions of the Act and failed to provide for sections 7(2) and 39(2) of the Constitution.

(iii) Whether the merger is likely to significantly prevent or lessen competition?

The Constitutional Court concluded that the Proposed Transaction would have the likely outcome of removing the competition connected to the target hospitals, thereby substantially lessening competition.

In conclusion, the judgment is substantial in that the Constitutional Court placed a strong emphasis on the Constitution’s role within the realm of competition law. This emphasis is likely to hasten the already weighty public interest considerations by Competition Authorities’ in deciding merger control cases. Thus, quite unsurprisingly, the judgment may be followed by an increase in merger interventions and prohibitions. Therefore, parties who wish to conduct a merger must pay due attention to the provisions of the Act as well as the Bill of Rights.

 Primerio Director, John Oxenham in commenting on the Constitutional Court decision expressed surprise in that the Apex Court appeared to consider a post-merger price increase as a public interest concern. Traditionally, an essential objective of any merger assessment is to determine whether the parties, post-merger, are likely to raise prices without any legitimate justification. Post-merger price increases are assessed with reference to well-grounded economic principles and theories and it is surprising that the Constitutional Court in the Mediclinic decision thought to characterize the price increase as a distinct public interest issue.

 

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