How can private healthcare be anticompetitive?

Competition among medical aid providers is neither as vigorous nor as effective as it could be, said former chief justice, Sandile Ngcobo, during the presentation of the Health Market Inquiry (HMI).

“One large player – Discovery Health – leads the market, especially in terms of growth, innovation, and profitability. Other players largely follow its lead,” Ngcobo explained.

The inquiry, which sought to investigate the state of competition in the private healthcare sector, was released by the Competition Commission of South Africa at the start of July.

Among other things, it also found that the public healthcare sector cannot compete with the private sector, that healthcare consumers are disempowered and uninformed, and that the Department of Health has been inadequate in its role as supervisor. 

In the light of these findings, Justmoney spoke to Michael Kransdorff, chief economist at MyTreasury.co.za, about the impact of anticompetitive behaviour in the healthcare sector.  

Dominant players not always bad

The HMI pointed out that there were concerns about the small number of dominant players in the market. In most cases, an increased number of suppliers leads to competition in a market. 

However, this is not always the case,” said Kransdorff, “Markets with a small number of firms, such as the airline industry, engage in price wars and can be quite competitive.”

This means that a small number of competing firms in the private healthcare sector does not automatically mean it’s anticompetitive.

Consumers not well informed

In its inquiry, the Competition Commission highlighted other classic examples of barriers to competition, like information asymmetry. 

Kransdorff pointed out that this means consumers don't have enough information, or the right information to make good financial decisions.

Medical aid products are complex, and consumers struggle to discern what each product covers, and how this compares to other products. This is considered a major concern. 

“Being able to compare products so that you can assess its value to determine how much you are willing to pay is important in a competitive market,” said Kransdorff.

Elasticity: The impact on medication

The lack of competition can have a negative impact on consumers in industries where demand for goods is very price inelastic.

Price inelasticity is where a price increase plays a limited role in the purchase decision. In contrast, price elasticity is when a product will easily be substituted if its price increases. 

“Price inelasticity is especially prevalent in healthcare, where people's welfare and lives are at risk,” said Kransdorff.

He explained that if you are a diabetic, you will not reduce the amount of insulin you need, even if the price doubles. And if the price falls, it won’t encourage you to buy more insulin.

This means suppliers can increase prices without the consequence of losing their customers, who, in turn, are forced to accept unreasonably high prices.

The bright side of a monopoly

However, Kransdorff believes that in spite of their bad reputation, monopolies can drive innovation and economic development under certain circumstances.

“This is typically the case in industries where start-up costs are very high, such as the pharmaceutical industry,” said Kransdorff.

He explained that this industry spends billions on research and the development of new medicines. For their effort, they are allocated legal monopolies (in the form of patents) for a set period.

This allows them to earn high profits, which compensates them for the high cost of their research.

“Without these monopoly profits, firms would have no incentive to invest in research and development because they would make a loss,” said Kransdorff.