COMPETITION COMMISSION REPORT
Efficiency behind Discovery’s health, says CEO
Discovery Health CEO Jonathan Broomberg launched a robust defence of the company on Thursday, saying its sustained profit was due to its efficiency and not abnormally high fees.
He was responding to the Competition Commission’s report on the private health market. The commission said Discovery Health’s operating model had enabled it to make large profits over a sustained period, which were far in excess of its competitors.
The provisional report, released at a briefing by former chief justice Sandile Ngcobo on Thursday, said the absence of effective competition to Discovery Health’s dominance, which was growing ever stronger, was an indication of "market failure". The report did not suggest specific remedies to redress this dominance, but proposed a raft of measures to enhance competition in the medical-schemes market and to ensure better governance by administrators.
Broomberg rebutted accusations that Discovery Health charged higher than necessary service fees to its medical scheme clients and insisted that its profitability was due "to a number of business factors, including continuous innovation and greater operational effic-iency driven by management excellence and by large investments in advanced systems and customer service technologies".
In the year to end-June 2017 Discovery Health, which had 3.4-million members and a 40% share of the medical-schemes market, increased its normalised operating profit 11% to R2.5bn. Premium income from its core new business annualised rose 18% to R6bn.
Ngcobo said in his speech that the analysis conducted by the inquiry over the 10 years from 2006-2015 "shows that one player, Discovery Health, recorded sustained high profits over the entire period and much higher than its competitors Metropolitan and Medscheme".
The report said sustained levels of profitability had been found across the funder market and that "Discovery Health has, over a sustained period of time, earned profits that are a multiple of those of its main competitors, with no sign of [an] effective challenge".
"We acknowledge that much of Discovery Health’s success is partly due to a highly competent management team, but we do not think this alone explains the significant gap in profitability when compared to its direct competitors. Higher than necessary service fees given economies of scale; a "locked-in" Discovery Health Medical Scheme that does not source services from any other industry stakeholder; risk selection; and broker management contribute to its profitability," it said.
"Under normal competitive conditions, Discovery Health’s profitability would attract new competitors and stimulate competition from incumbents. There is no sign of this. On the contrary, we see Discovery Health growing and becoming more successful over time.
"This is an indication of market failure and there are no signals that the market will self-correct."
Broomberg said publicly available data demonstrated that "the weighted average administration expenses and managed care fees incurred by the open schemes administered by our major competitors were very similar to those incurred by Discovery Health Medical Scheme".
Public data also confirmed that the administration expenses and managed care fees incurred by Discovery Health Medical Scheme were almost exactly the same as the weighted average of all 22 open schemes when measured as a percentage of gross contribution income.
"The fees charged to Discovery Health Medical Scheme are in fact the 14th lowest out of 22 open medical schemes when measured on a rand per beneficiary per month basis, or 10th out of 22 open schemes when measured as a proportion of contribution income," he said.
"Similarly, the expenses incurred by Discovery Health’s 18 restricted scheme clients are very close to the average expenses incurred by schemes administered by our competitors, and the weighted average fees charged to Discovery Health’s restricted scheme clients are almost identical to the weighted average fees charged by our two major competitors."
An analysis showed that in 2017 for every R1 spent by Discovery Health Medical Scheme on administration and managed care fees, the members of the scheme received R2.10 in value from the activities of Discovery Health.
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