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Impact-Assessment-Report-Final-Draft -Non-confidential-29032021
Competition law (CMP421)
University of Pretoria
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IMPACT ASSESSMENT REPORT
on
THE IMPACT OF THE COVID-
BLOCK EXEMPTIONS AND COMMISSION'S
ENFORCEMENT DURING THE PANDEMIC
DATE: March 2021
TEAM MEMBERS:
__________________________
Khalirendwe Ranenyeni
Qhawe Mahlalela
Queen Khetsi
Contents
- INTRODUCTION
- IMPACT OF COVID-19 BLOCK EXEMPTIONS
- 2 Introduction
- 2 Covid-19 Block Exemptions for the Healthcare Sector
- How were the exemptions used to respond to the crisis?
- Perceived benefits of the exemptions
- Perceived adverse consequences of the exemptions.....................................
- General issues raised
- Conclusion
- 2 Covid-19 Block Exemptions for the Retail Property Sector
- How were the exemptions used to respond to the crisis?
- Perceived benefits of the exemptions
- Perceived adverse consequences of the exemptions.....................................
- Whether the exemptions were adequate in responding to the crisis
- Conclusion
- 2 Covid-19 Block Exemptions for the Banking Sector
- How were the exemptions used to respond to the crisis?
- Perceived benefits of the exemptions
- Adequacy of the exemptions
- Conclusion
- DETERENT EFFECTS OF THE ANTI-PRICE GOUGING INTERVENTIONS
- 3 Introduction
- 3 Overview of anti-price gouging interventions
- The Commission’s initiatives
- Price gouging complaints and settlements
- 3 Methodology
- 3 Deterrent effects of the Commission’s interventions..............................................
1. INTRODUCTION
- This study assesses the impact of the Commission’s work during the Covid-19 national disaster. The impact of two pieces of the Commission’s work is assessed in this study.
- Firstly, we assess the impact of the Covid-19 Block Exemptions that were granted by the Minister of the Department of Trade, Industry and Competition (“DTIC”), after extensive consultation with the Commission, to assist three key sectors in their response to the pandemic, namely the (i) the Healthcare Sector, (ii) the Retail Property Sector, and (iii) the Banking Sector. Effectively, these block exemptions allowed market players in these sectors to collaborate and coordinate their response to the crisis with the ultimate goal of mitigating the negative economic and social impact of the crisis. Under normal circumstances, such coordination and/ or collaboration would have been in contravention of Section 4 and/ or Section 5 of the Act. The impact study therefore seeks to understand from market participants how they utilised these exemptions, the benefits achieved, any unintended consequences and input on how the design may have been improved.
- Secondly, we assess the deterrent effects of the Commission’s advocacy efforts, investigations and prosecutions of price gouging contraventions during the Covid- disaster period. After the announcement of the national lockdown in March 2020, South Africa saw unprecedented spikes in demand for hygiene and healthcare products, needed to prevent the spread of the virus. Consumers also started panic-buying and stockpiling essential food stuffs. This, along with other factors provided conditions for price gouging by suppliers and retailers of these products. The Commission was then called upon to respond to price gouging in the first wave to protect consumers and customers from unconscionable, unfair, unreasonable, unjust or improper commercial practices during the national state of disaster. The Commission responded through advocacy initiatives as well as investigation and prosecution of price gouging allegations. Whilst there is a public record of actual investigations and prosecutions, what the current study seeks to assess is whether these interventions deterred further acts of price gouging during the disaster period.
- The Commission notes that the recent amendments to the Competition Act made possible some of the Covid-19 responses. In particular, the block exemptions were enabled by the amendment to Section 78 of the Act which afford the Minister the power to exempt a category of agreements or practices from the application of the Act. The successful prosecution of price gouging cases was enabled by the amendments to Section 8 of the Act which replaced the rigid definition of ‘excessive price’ with a more discretionary
approach provided for in Section 8(3) of the Amendment Act and also provided for reverse onus in Section 8(2) if there is a prima facie case of an excessive price. This required firms to justify their pricing conduct where increases were excessive, which many simply failed to do.
mitigating the negative economic and social impact of the crisis. This was far easier where market participants were already organised and where there was a common agenda. It proved more difficult where competing needs exist or where groups of firms, such as SMEs, were not organised. 8. The Commission specifically sought to design the exemptions in a manner which would permit required coordinated responses to the pandemic that was welfare enhancing, but ensure that the exemption was not so wide ranging so as to permit collaborations that may extend beyond what is required to deal with the pandemic. This was important because many applicants pushed for a broad exemption for any actions that might be required, creating substantial risk that welfare reducing collaborations would occur. This risk was real insofar as some market participants have sought to collaborate in order to reduce the negative effect the pandemic on their business rather than pursuing a broader social welfare benefit. For instance, the design elements included the following: 8. Many of the provisions in the exemption had to be triggered by the Minister. The agreements, coordination or collaboration in these sectors would be exempted if undertaken at the request of, and in coordination with, the relevant Ministers 1. 8. Further, the agreements would be granted for the sole purpose of responding to the Covid-19 pandemic disaster and specifically exclude communication and agreements in respect of prices unless specifically authorised by the relevant Ministers. This would permit ex-post enforcement if the industry strayed from this purpose. 8. The requirement to record minutes for all industry meetings which could be provided to the Commission on demand. 8. No collaboration over prices in most circumstances. 8. The provision to expand the scope of the exemption upon motivation to the Minister rather than to leave the scope open-ended. 1 For the Healthcare Sector Exemptions, the relevant Ministers were the Minister of Trade and Industry and the The Minister of Health. For the Banking Sector, the relevant Ministers were the Minister of Trade and Industry, and the Minister of Finance; For the Retail Property Sector the relevant Minister was The Minister of Trade and Industry; and for the Hotel Sector the relevant Ministers were The Minister of Trade and Industry and the Minister of Tourism.
The refusal to grant exemptions to industries where it was determined that cooperation was not required in order to respond to the pandemic or where the application to the Minister was overly broad and could not be narrowed by applicants. For instance, the Commission recommended that exemptions not be granted to the Communications industry, the petroleum industry and the steel industry.
As far as the Commission is aware, no material collaborative efforts took place in the Hotel Sector, hence this sector is not discussed any further in this report. The rest of this chapter discusses the block exemptions that were granted to the three sectors in which collaborative efforts occurred (and the impact of such collaborative efforts in responding to the crisis) namely, the Healthcare Sector, the Banking Sector, and the Retail Property Sector. The specific focus is on the following questions:
How the exemptions were used in responding to the crisis,
What are the perceived benefits of the exemptions?
Whether there are any unintended adverse consequences of the exemptions, and
Whether the exemptions were adequate competition measures in responding to the crisis.
These questions do not only assist in determining the impact in general but also whether there are some design issues which could have improved the impact of the exemptions. This may include issues around operationalising the exemptions but also reducing any unintended consequences. These additional insights will assist in improving exemption design as we move forward with the pandemic, including exemptions that may be required to promote economic recovery and not just a response to the pandemic.
Importantly, the impact of these exemptions are examined for the period up to October 2020 and do not incorporate the impact of the exemptions in the second wave of infections that took place in December 2020 to February 2021. It is likely that exemptions in healthcare in particular would have been far used more extensively in the second wave given the sheer number of hospitalised patients. 2 Covid-19 Block Exemptions for the Healthcare Sector
The Healthcare Sector block exemption was requested by the Hospital Association of South Africa (“HASA”) on 17 March 2020. HASA is an association of hospitals and its
Medical suppliers are able to communicate on the availability of supplies and coordinate on procurement and distribution;
Medical specialists and radiologists are able to share data on the scale of the outbreak, disease and patient profiles, capacity and utilization, and agreeing to standardise care protocol or transfer supplies;
Pathologists are able to communicate on capacities and utilization; co-ordinate on procurement of inputs required for testing, and transferring medical supplies and equipment;
Pharmacies are able to communicate on availability of pharmaceuticals and medical consumables, and co-ordinating on transfers and procurement; and
Healthcare funders are able to agree to reduce the cost of diagnosis, tests, treatment and preventative measures, and to reach agreement with healthcare facilities to reduce these costs.
On 08 April 2020, the scope of the exemptions was further expanded to include competing manufacturers and suppliers of medical hygiene goods and services (such as hand hygiene and water sanitation, ethicals and consumables, disinfectants, and anti-bacterial products). The manufacturers and suppliers of these categories of goods and services were allowed to communicate with one another in relation to stock availability and to also coordinate on the procurement and distribution of these categories of goods and services.
The foregoing laid an enabling framework for the Healthcare Sector to collaborate its response to the pandemic without being constrained by the Competition Act, in particular the anti-cartel provisions. The rest of this section assesses whether the block exemption was effective in enabling the sector to respond to the pandemic. The section seeks to answer the questions as set out in Section 2 above. How were the exemptions used to respond to the crisis?
The table below provides a summary of how stakeholders in the healthcare sector used the exemptions to respond to the crisis under each exempted practice or area of collaboration.
Table 1: Summary of how the granted exemptions were used Exempted Practice/Area of Collaboration How the exemptions were used Coordination on the allocation of patients between hospitals Very few public sector patients were treated in private sector hospitals. Through the exemption, both private and public hospitals could collaborate on the allocation of patients and through the exemption, patients that needed care in either of the sectors could be easily transferred. That ability provided important comfort to the industry. Communication in relation to capacities and utilization Hospitals shared data on the capacity (measured by beds) and the utilization thereof. This enabled hospitals to know where they could move patients if and when the need arose Coordination on the allocation of specific services, medical professionals and nurses between hospitals Hospitals could share resources if needed. This included programmes that aimed at temporally appointing student nurses and doctors. No submissions were received on the area of resource sharing. Although the DoH did appoint temporary healthcare professionals, this does not seem to have occurred under the remit of the exemptions. Procurement of various consumables, pharmaceuticals and other inputs required for the optimal treatment of patients to ensure they are procured in an efficient manner Stakeholders coordinated on the procurement of PPE. This resulted in the reduction of PPE prices and also ensured adequate supplies of PPE, although there were challenges with issues around quality and delays in the procurement of the consumables Medical suppliers can communicate and coordinate on procurement and distribution Coordination took place on the procurement of medical supplies Data sharing by radiologists and specialist on scale of the outbreak, disease and patient profile Stakeholders coordinated and shared data on the number of tests and other information that helped keep record of the results or statistics of the COVOD-19 virus Communication between radiologists on capacities and utilization, coordinate on procurement of inputs required for testing, transferring medical supplies and equipment Stakeholders collaborated to formulate the most efficient tools for testing and utilised same across the country. Further to this, communication took place in instances where regions or areas had access to medical supplies and to coordinate the transfer to areas that did not. Communication between pharmacies on the availability of pharmaceuticals and medical consumables, coordination and on transfers and procurement Communication took place in instances where regions or areas had excess medical supplies and coordinated on the transfer thereof to areas with a shortage Healthcare funders are able to agree to reduce the cost of diagnosis, tests, treatments and preventative measures and to reach an agreement to reduce these costs Stakeholders managed to coordinate and push down the price of testing from between R1000 and R1500, down to R across the board
response capabilities. According to one of the largest medical aid scheme administrators, fortunately, South Africa managed the pandemic effectively such that the health system was not overwhelmed in the first wave of the pandemic. As such, very few public sector patients were treated at private facilities. 6 24. The smaller two schemes 7 however submit that they did not have direct involvement in these discussions and agreements, although their members would have benefited from the agreements in place. Nevertheless, these schemes voiced their support for the greater collaboration between the private and public sector. 8 Cost reduction for the Covid-19 Tests 25. As regards the price of Covid-19 tests, the study found that the exemptions were used to create a forum for discussions to reduce the cost to patients of Covid-19 test kits. Since public sector tests were conducted through the national Health Laboratory Services, this also led to a reduction of costs of tests for the state as well. 26. One of the largest three pathology laboratories 9 submits that the exemptions assisted immensely in terms of setting a price for the COVID-19 PCR 10 tests. This laboratory engaged in collaborated efforts with other stakeholders in the sector in setting a price for the COVID-19 PCR test after receiving permission to do so. Prior to the collaboration, laboratories were charging between R1000 and R1500 per test but this was reduced to R850, representing a 15-43% price reduction. These sentiments were echoed by one of the largest three private hospital groups. 11 27. Similarly, a small black-owned medical scheme 12 submits that it collaborated with its administrator 13 in that the administrator informed them that there was a directive for the different pathology companies to charge a maximum of R850 14 for the COVID-19 test, and thereafter the scheme was further provided with information on how the test would be charged. 6 See submission from 7 8 See submission from 9 10 PRC stands for Polymerase Chain Testing. This is the test that looks for the genetic material of the virus itself in the nose, throat, or other areas in the respiratory tract to determine if there is an active infection with Covid-19. 11 12 13 14 See submission from
In addition, the National Pathology Group (“NPG”) negotiated with suppliers for lowest possible reagent prices and performed activity-based costing to arrive at the lowest possible price for the test. 15 The NPG further negotiated with suppliers to conclude agreements on a set of essential and supplementary tests and prices for state patients referred to private facilities for COVID-19 related treatment. In this regard, the NPG negotiated service level agreements with the Western Cape Department of Health for its members to supply a list of essential tests, at a capitated rate, and a list of supplementary tests, at a discounted fee-for-service rate for these patients. 16 It is not clear whether the NPG had agreements with other provinces. The Commission understands that Lancet attempted to have negotiations with each province but was unsuccessful, suggesting that negotiations at a national level might have achieved better outcomes. Communication to ensure adequate supplies of PPE, Covid-19 tests, and Medical Equipment
The exemptions were also applied in negotiations around ensuring adequate supplies of healthcare equipment. A large pathology laboratory and one of the largest three hospital groups 17 both submit that stakeholders communicated with each other to ensure adequate supplies of PPE and COVID-19 tests equipment and reagents for all parties. These engagements involved the NPG, Business 4 South Africa (“B4SA”), the National Health Laboratory Services (“NHLS”) and other parties and pertained to ensuring that there is improved supply from manufacturers and sharing materials between each other to ensure that there are no shortages. 18
Under the exemptions, hospitals (both public and private) were required to conduct a continuous assessment of the amount of equipment (especially ventilators), but also anaesthetic machines and CiPAPs as per request by the DTIC to be used to determine the country’s response capabilities. 19
A certain medical scheme administrator which administers more than ten medical aid schemes 20 collaborated with a wholesaler of healthcare products 21 to bring cost-effective pricing of PPE to healthcare providers to ensure that they are protected from the risk of 15 Further see submission from where a comparison is made for the price of the test across a few countries 16 See submission from 17 18 See submission from 19 See submission from 20 21 . The company specializes in the wholesale and distribution of pharmaceutical, surgical and medical products and devices with a national distribution footprint
The study found that the exemptions provided for agreements and practices between health funders and or healthcare facilities aimed at reducing the cost of diagnosis, tests and diagnostics, treatment, and other preventative measure in addition to the cost of tests as discussed above. A small black-owned medical scheme submits that before the guidelines were issued in March 2020, there was a lot of uncertainty in the health industry on how to respond to the pandemic. 26 The scheme notes that the government, together with the Council for Medical Schemes (“CMS”), sought to minimize the uncertainty and provided leadership in the development of clinical guidelines by the National Institute of Communicable Diseases (“NICD”) and the declaring of Covid-19 as a Prescribed Minimum Benefit (“PMB”). 27 Many stakeholders, 28 including large medical schemes submit that this area of collaboration applied to them.
It appears that at the time the submissions were received the industry still had not agreed on the billing codes for the treatment of Covid-19 and the PMB thereof according to submissions from some stakeholders. 29 However, as we discuss in detail below, through the exemptions, discussions took place through the Health Funders Association (HFA) and strides were made in establishing certain principles for the pricing of Covid-19 care, prescription of PMBs as well as which billing code would be used for the COVID-19 tests and diagnosis code for payment. Details of these developments are spelt out under the section on benefits of the exemptions below.
Another area where collaboration took place relates to payments of pre-admission COVID-19 tests. In this regard, the private hospital groups tried to engage funder associations to implore them to pay for Covid-19 tests prior to a patient being admitted to a hospital for illnesses other than COVID-19. Pre-admission tests are necessary in order to protect the patients who are being admitted, other patients, as well as healthcare workers from contacting COVID-19 tests. One of the largest three hospital groups notes that even though private labs had already reduced the costs of COVID-19 tests and pre- admission testing was considered a cost-effective intervention, funder associations were still willing to have engagements with hospital groups to determine the hospital admissions that would qualify for payment of pre-admission tests and which would not.
For example, they needed to determine whether surgery would be covered or not and if covered, funders would still need to know if it was necessary for the patient to undergo 26 See submission from 27 See submission from 28 Such as . 29 See submissions from and
the specified surgery or not before they can pay for the pre-admission test. 30 However, the hospital group submits that private hospitals are not in a position to have discussions on such matters as in their view, admissions are to the discretion of the doctor and the patient. The hospital group submits that when this message was conveyed to funder associations, it was incorrectly interpreted as the hospital groups walking away from the discussion. Nevertheless, as the hospital group submits, doctors and hospital groups continued to require pre-admission tests and funders paid for these tests. 38. It is clear from the above that the healthcare industry extensively used the block exemptions. The submissions received also suggest that the exemptions could have been used even more extensively had it not been for some challenges that were encountered in operationalising the exemptions. Below we turn to the discussion of these challenges. Challenges in operationalising the exemptions 39. The submissions we received show that there are several aspects of the exemption that created restraint or barriers in the effective use of the exemptions. This includes challenges with the timeliness of coordinating with and getting approvals from the relevant departments, the misaligned incentives from the various stakeholders, and the inability of stakeholders to coordinate on a standard blanket approach to the cost reduction measure. These challenges resulted in some lack of synergy in the use of the exemptions and also meant that some stakeholders, particularly those with the least bargaining power, did not have a choice but to take the prices that were agreed on by larger players. 40. One of the largest medical aid schemes explains that there were constraints that stood in the way of some of the opportunities created by the exemption. 31 In this regard, the scheme submits that they did not directly use the exemption for medical aid schemes directly, which exempted agreements between medical aid schemes. The scheme averred that this was hindered by the necessity for the Minister of Health to authorise all discussions and this authorisation was at the time of the submission not issued. Furthermore, stakeholders felt that this provision led to considerable delays for reaching agreements. 32 41. A joint appeal was submitted to the Council for Medical Schemes (CMS) by two associations that together represented the majority of medical schemes, requesting that the Registrar of the CMS (“the Registrar”) leads a process of consultation and 30 See submission from 31 See submission from 32 See submission from and
so 37 A small black-owned medical aid scheme supplements this submission and notes that there is a need to have more inputs through public engagements with the different healthcare players, particularly on the supply side of the industry. In their view, certain players did not feel compelled to negotiate although the regulation allowed them to. 38 As we note later, some parties suggest that future exemptions should be made compulsory as opposed to voluntary. 45. Despite the challenges faced, industry players perceive the exemptions to have yielded substantial benefits in the sector’s response to the pandemic. Below is the detailed assessment of the benefits that perceived to have been derived from the exemptions. Perceived benefits of the exemptions 46. The exemptions were provided to the Healthcare sector to achieve two main objectives, namely: 46. promoting concerted conduct to prevent an escalation of the national disaster and to alleviate, contain and minimize the effects of the national disaster; and 46. promoting access to healthcare, preventing exploitation of patients, enabling the sharing of healthcare facilities, management of capacity and reduction of prices 47. The success of the exemptions in responding to the crisis will therefore be measured based on the extent to which the exemptions were used to achieve the objectives highlighted in section 2. above. Section 2. above provides a list of the exempted practices that the sector was allowed to embark on and the reasons for which these exemptions were granted to the sector. The Block Exemptions for the Healthcare sector was largely a success in that stakeholders in the sector collaborated in a number of the exempted practices and did achieve the objectives that were sought to be achieved through the granting of the exemptions. 48. The study revealed that the block exemptions resulted in a number of benefits that can be classified into two categories, namely (i) direct benefits - these were the intended outcomes of the exemptions, and (ii) indirect benefits - these are the outcomes of the block exemptions that were not intended as a result of the exemptions but were nevertheless positive outcomes of the block exemptions. We note that these responses were surveyed prior to the second wave which has seen much higher levels of 37 See submission from 38 See submission form
hospitalisation. As such, the impact of the exemption is likely to have been greater than reflected in the discussion below. Direct benefits of the block exemptions 49. The direct benefits flowing from the exemptions include (i) cost reductions and consumer savings, (ii) capacity sharing, and (iii) assurance of stakeholders that resources can/could be shared. Cost reductions and consumer savings are estimated for the period from the promulgation of the exemptions to November 2020 which is the last month in which we received submissions, or an eight-month period. Some of these savings, such as testing, are ongoing. Cost reduction and consumer savings 50. As regards cost reduction and consumer savings, it is estimated that the reduction of the price of the COVID-19 test to R850, estimated savings amounting to between R500 million and R1 billion accrued to patients/funders in the first eight months of the existence of the exemptions. 39 It is also estimated that the exemptions made it possible for a certain group of medical schemes to source PPE at a price that was 50% lower than the price that prevailed before the exemptions, which resulted in further substantial savings (in addition to the cost of tests savings) to these medical schemes of between R100m and R150m for the 8 months to November 2020. 40 51. In addition, the exemption along with the regulations which established the principle for prohibiting price gouging as a response to increased demand due to COVID-19, aided in scheme-mandated and administrator led negotiations with suppliers, e., for PPE, 41 thereby creating an environment conducive to price negotiation, something that would not be allowed under normal circumstances. Further, the exemptions allowed medical scheme administrators to enter into negotiations with providers in respect of the cost of PPE for both in-hospital and out-of-hospital care on behalf of their member schemes. 42 52. Although the industry could not accurately estimate the value of savings, based on the above, it is safe to say that the direct savings resulting from the exemptions, including reduction of the cost of Covid-19 tests and PPE prices, were substantially in excess of R 39 See submission from 40 These are the medical schemes 41 See submission form 42 See submissions fromdated and
Impact-Assessment-Report-Final-Draft -Non-confidential-29032021
Course: Competition law (CMP421)
University: University of Pretoria
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