Uncovering the next great price-fixing scandal
The Competitions Commission has not rested since tackling the bread and milk industries. It has cast its nets wide and is now bringing the management of some of South Africa’s major drug distributors to account. It has named Adcock Ingram Critical Care (AICC), Dismed Criticare Ltd (Dismed), Thusanong Health Care and Fresenius Kabi South Africa (FKSA) as the subjects of a three-year long investigation into anti-competitive behaviour. All of these companies supply pharmaceutical products to the healthcare market.
The first three on the list have been referred to the Competition Tribunal for prosecution, while Fresenius has turned ‘state-witness’ to secure leniency in return for cooperation with the tribunal. 11 February 2008 was a gray day for Tiger Brands. The company only recently paid an R98.8m fine for contraventions of the same legislation for its part in a bread price-fixing scandal – and Adcock is one of its subsidiaries.
Collusion on government tenders
But what crimes have these company’s committed? The Competition Commission reveals in their media release that the main offence is one of collusive tendering. They have determined that “representatives of AICC, FKSA, Dismed and Thusanong held telephone discussions and meetings prior to the submission of their respective responses to [government] invitations to tender.” The companies stand accused of colluding on annual Department of Health tenders.
We have heard many allegations of tender rigging and other tender irregularities; but the allegations in this case take the cake. The commission believes these companies went so far as to pre-determine who would win the various tenders – and even had back-up plans to share business should the tender award not go as planned. What this means is each company entered the tender process knowing what the other company’s intentions were. And that meant price manipulation.
The commission also voiced concerns that various senior management and directors were aware of these practices and had not taken any steps to stamp them out.
Dividing the market
A second allegation has been levelled at AICC and FKSA for “dividing markets in the supply of pharmaceutical products and services to private hospitals…” These two groups apparently reached agreement on the product lines and hospitals each would service. The behaviour was anti-competitive because it prevented private hospitals from securing the best possible price for a particular product.
This case supports that the South African healthcare industry is in serious need of a shake-up. The consumer is paying through the teeth for medical services which are being artificially inflated at every price point in the industry. Hopefully actions by the Commission will start baring fruit – and result in more equitable pricing strategies going forward.
Competition Commissioner Shan Ramburuth believes this case will do just that. “This is an important case in the light of growing public concern about escalating healthcare costs. Collusive behaviour would undoubtedly be one of the contributing factors to higher prices in healthcare markets,” he said.
An interesting question for life assurers
There is no excuse for the practices highlighted in the latest investigation. However, the Competition Commission is making things difficult for companies in the financial services sector. And the private healthcare industry is suffering most, with medical schemes struggling to set industry-wide tariffs without falling foul of anti-competitive practices. Ironically, at the same time the Commission strives to stamp out price collusion, government’s Department of Health is demanding it. We still have to come to terms with the coexistence of competition regulation and government controlled exit prices...
The situation in the healthcare industry raises some questions about companies in the short-term and life insurance business. Even if these companies independently determine prices (premiums) for their products the nature of the pricing inputs will always result in similar exit prices. And similar prices, it seems, is enough to encourage the commission to spend time investigating matters.
Editor’s thoughts:
Whenever an industry comes together to tackle issues of mutual concern to all the players in that industry, the possibility of collusive behaviour is strengthened. Players in the short-term and life insurance industries have numerous representative bodies (SAIS and the LOA for example) which do just that. Do you think there is a problem with price collusion in the financial services industry? Send your examples to [email protected] – or add you comment below.
