Merger in the Healthcare Sector: NMa Accepts Efficiency Defense
Almost four years after Stichting Ziekenhuis Walcheren (SZW) and
Stichting Oosterschelde Ziekenhuizen (SOZ) informed the Dutch
Competition Authority (Nederlandse Mededingingsautoriteit
(NMa)) for the first time about their wish to merge, on 25 March
2009 the NMa granted a license for the concentration, albeit under
strict conditions. Thus, the NMa has accepted that the merger,
which leads to a restriction of competition, may still take place
because of quality reasons. It is the first time that a so-called
"efficiency defense" is accepted by the
NMa.
Background
At the end of 2005 the NMa indicated on the basis of a notice of
a proposed concentration of both hospitals that a license was
required for this concentration. The NMa never had to take a formal
decision on the first official license application of December
2005. As a result of an opinion of the Dutch Care Authority
(Nederlandse Zorgautoriteit (NZa)) (at that time still
CTG/ZAio), in which the NZa deemed it plausible that the merger
would have negative consequences for healthcare affordability and
accessibility and in which the NZa could not clearly estimate the
effects thereof on the quality, both parties withdrew the
request.
Three years later the parties tried again. Also this time the
NMa decided that this concentration required a license. Pursuant to
the collaboration protocol between the NMa and the NZa, the NZa
issued an opinion in the notification stage, in which it advised
the NMa to further investigate the intended concentration in the
application stage. The NMa surely took heed of this advice. For
instance, the NMa asked the parties additional questions on three
occassions, as a result of which the decision period of 13 weeks
had to be suspended by a total of 166 days, and asked advice from,
amongst others, the NZa, the Healthcare Inspectorate (Inspectie
voor de Gezondheidszorg (IGZ)), clients' participation
councils and patients' platforms, general practitioners,
specialists and municipalities.
Competition Restrictive
Concentration
The essence of this matter is whether the possible positive
effects of the merger for the parties, patients and the quality of
the healthcare sufficiently outweigh the adverse effects of the
intended concentration for the competition. In order to be able to
answer this question the NMa has first established in which
relevant product market the parties are active. In accordance with
earlier decisions, the NMa has considered that in this case there
are product markets for general clinical hospital care and
non-clinical general hospital care. The NMa has established that
the activities of the parties on these markets in the Central
Zeeland region, the relevant geographical market, overlap.
The most important reason why the parties wish to merge is
according to the parties - in brief - that the merger is necessary
in order to guarantee the quality of general hospital care in
Central Zeeland in the long term. The parties talk about a downward
spiral which, in the event of the failure to merge, will ensure
that the small, fragmented departments cannot provide sufficient
quality and cannot specialize sufficiently. The increase in scale
of the merger is necessary to reduce the risk that one of the two
hospitals will have to close its doors in the future.
The NZa, which has examined the anticipated consequences of the
concentration, follows this line of reasoning only partly. When
assessing the quality of the actions of healthcare providers the
NZa is legally required to follow the opinion of the IGZ, which
indicated in this matter that, in view of the vulnerability of both
hospitals, without a merger no guarantees could be given that basic
hospital functions could be maintained in Central Zeeland and that
there is a large risk that the quality of the healthcare would be
endangered. With regard to the competition-law aspects of the
merger the NZa has observed that the merger will lead to a
monopolistic position for the merged hospitals. Although, following
the IGZ, the NZa is aware of the quality advantages, it has
emphasized that there are disadvantages for healthcare
accessibility. In NZa's opinion, these disadvantages must be
compensated by means of strict conditions. The NZa has warned that
if the parties appear to be insufficiently prepared to comply with
these conditions, it will advise that the merger is to be rejected.
These conditions vary from the disposal of specialisms to the
creation of conditions under which medical specialists may offer
competitive services.
In its assessment the NMa has included the advice obtained and
has concluded that the merger will indeed lead to a monopolistic
position and a related restriction of competition. The NMa does not
follow the healthcare insurers in their argument that they can put
the strong market position of the hospitals after the merger into
perspective by means of referral of their patients. In short: the
merger has adverse consequences for competition, which would be a
reason, in principle, for refraining from issuing the required
license.
Efficiency Defense
The parties, however, have put up a so-called "efficiency
defense". An efficiency defense means that a concentration,
despite its restriction of competition, will lead to a verifiable
quality improvement arising from the merger for the purchasers on
the relevant market, as a result of which the concentration still
has to be allowed. The NMa has investigated whether in this
concrete case the cumulative conditions for an efficiency defense
are met and has concluded that they are not. The Nma has argued
that, in view of the advice of the NZa, it is insufficiently clear
that there will be efficiency improvements for the purchasers. It
is also insufficiently clear that the quality improvements alleged
by the IGZ are sufficiently verifiable and will be timely and
actually realized. The NMa is convinced, however, that the merger
is the best method for realizing the proposed efficiency
improvements. Because not all requirements have been met, the NMa
has concluded that the efficiency defense cannot succeed without
additional measures.
However, in the course of the handling of the matter the parties
have proposed a number of measures to meet the objections of the
NMa. One of these is that the parties will be subject to a price
cap for the provision of certain services. This cap is based on the
market average for similar handling and simulates a
market-compliant situation in the absence of actual competition. A
number of other conditions are also set on the provision of
service, including maintaining the necessary facilities, such as
Intensive Care and First Aid in each hospital location, and the
creation of a situation in which new specialists can join the
market by making operating rooms available to
them.
Collaboration
It is remarkable that the NMa, although it almost fully follows
the assessment and view of the NZa, does not follow the
recommendations of the NZa about the conditions. For instance, the
NZa has advised to dispose of specialisms and treatment centers,
whereas the NMa actually sets the condition that specialisms will
be added. The NMa has stated in no uncertain terms that the advice
of the NZa is at odds with the solution provided, and is possibly
counterproductive for achieving the necessary quality. The NMa,
however, will closely collaborate with the Nza in the
implementation of the price cap, because the NZa possesses
important data and calculation models. This collaboration will be
based on the protocol between the NMa and the NZa of 2006 and
established working arrangements of 2008.
The collaboration connects well with the intention of the
supervisory authorities to collaborate more, which was recently
expressed in a letter of intent. On 3 April 2009 the NMa, the NZa
and four other supervisory authorities (DNB, AFM, OPTA and the
Consumer Authority) have pronounced in a statement that they will
set up a "Market Supervisory Authority Council" to share
their knowledge of the various market sectors and their
experiences. This council will meet twice per year and will
constitute an addition to the collaboration existing between the
supervisory authorities on the basis of the various protocols. It
is the intention of the council to discuss particularly topics that
concern more than one case and are eligible for a common
approach.