17 June 2014

ACCC Halts Hospital Merger

On 12 June 2014, the Australian Competition and Consumer Commission announced that it would oppose Healthscope Limited's proposed acquisition of the Brunswick Private Hospital from Healthe Care Pty Ltd, following a review which took just under six months.

Healthscope is owned by private equity houses. It is Australia's largest private hospital owner, with 44 hospitals in Australia (and approximately 81 per cent of its earnings said to be derived from those hospitals) and Australia's third largest pathology provider, behind Sonic Healthcare and Primary Healthcare. Healthscope is currently preparing for a float which would see it listed on the Australian Securities Exchange.

Brunswick Private Hospital is ultimately owned by Archer Capital, a private equity house.

ACCC's views on market definition

The ACCC assessed the proposed acquisition in four markets – the market for private hospital services to suburbs in inner and northern Melbourne; the market for the provision of private hospital services to health funds (which the ACCC found had national, State and local competition elements); the market for the supply for private rehabilitation services to patients in northern Melbourne and the market for the supply of private rehabilitation services to health funds (which the ACCC also found had national, State and local competition elements).

It was the proposed acquisition's likely effect on competition in the market for the supply for private rehabilitation services to patients in northern Melbourne which resulted in opposition from the ACCC.

Test applied by ACCC

The ACCC must be satisfied that a proposed acquisition would have the effect or likely (future) effect of substantially lessening competition in a market before the ACCC opposes it.

ACCC's concerns

The ACCC found that Healthscope's proposed acquisition of the Brunswick Private Hospital would be likely to have the effect of substantially lessening competition in the market for the supply of private rehabilitation services to patients in northern Melbourne.

Brunswick Private Hospital is the largest private provider of rehabilitation services in northern Melbourne and is Healthscope's closest and most significant competitor in that market.

Healthscope owns the only two other private hospitals providing rehabilitation services to patients in northern Melbourne (Dorset Rehabilitation Centre and North Eastern Rehabilitation Centre).

Following the proposed acquisition, Healthscope would have been the only supplier of private rehabilitation services to patients in northern Melbourne and would have faced only limited competition from the Epworth hospital in Richmond and St Vincent's Private in East Melbourne, each in Melbourne's inner eastern suburbs.

ACCC's Statement of Issues

The ACCC has not yet published the Public Competition Assessment outlining the reasons for its final decision.

In the ACCC's Statement of Issues, which were published at the commencement of the ACCC's second round of market inquiries, the ACCC confined the geographic area of the market for the supply of private rehabilitation services to patients to the northern suburbs of Melbourne. This was because the ACCC's market inquiries indicated that a key factor in choosing a rehabilitation facility is the residential location of a patient or a patient's family. The data on the residential location of patients attending various rehabilitation hospitals was said to be consistent with this.

Based on the ACCC's Statement of Issues, the ACCC considered that the market for the supply of private hospital services to patients had a wider geographic area that encompassed both the inner and northern suburbs of Melbourne. This was because the ACCC's market inquiries indicated that a significant number of patients may be willing to cross the Melbourne CBD to seek consultation or treatment from a general medical or surgical practitioner on the basis of expertise and reputation or the private health facility.

The ACCC considered that the proposed acquisition would be unlikely to result in a substantial lessening of competition in this market due to the presence of the remaining private hospitals in the market (including Epworth and St Vincent's).

This decision follows previous decisions where the ACCC has blocked mergers in the health care sector due to concerns about the effect of the merger on localised markets, including its recent decision to oppose Sonic Healthcare's proposed acquisition of the assets of Delta Imaging Group in the radiology sector (reported on here).

Authorisation from the Tribunal based on public benefits

An alternative route for hospital mergers that would create a monopoly or near monopoly in a localised market could be to apply to the Competition Tribunal for authorisation on public benefit grounds.

In the Netherlands, the Netherlands Competition Authority has previously cleared a merger between the only two providers of general hospital and non-clinical general hospital care in a particular region, subject to behavioural undertakings, on the basis that it would lead to necessary improvements to the quality of health care.

Recently, there have been two applications to the Competition Tribunal for authorisation of mergers.

The first of these, being Murray Goulburn's application for authorisation of its proposed acquisition of Warrnambool Cheese and Butter Factory Company Holdings Limited, was withdrawn.

The Tribunal is currently reviewing the second of these applications, being AGL Energy Limited's proposed acquisition of Macquarie Generation. The ACCC released its issues list on the authorisation application in April 2014, where it expressed the preliminary view that the public benefits asserted by AGL could be achieved by other means, are not certain to materialise and are unlikely to be significant.

Unlike the ACCC's merger review process, the Tribunal's process is relatively transparent, is subject to a statutory time clock (with 6 months being the maximum period for the review) and, if granted, results in statutory immunity from prosecution for the merger.

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