THE proposed merger between Life Healthcare and Joint Medical Holdings (JMH) could lead to a 3% increase in national private hospital costs as the tie-up would boost concentration in the private hospital sector by 3,8%, says Prof Alex van den Heever, an expert witness of the Competition Commission.
However, Prof van den Heever's use of a statistical tool (regression analysis) to support his theory that increased concentration in SA's private hospital market would lead to higher costs, drew criticism from the merging parties on Friday during the Competition Tribunal's hearing into the proposed transaction.
The Competition Commission had recommended the prohibition of Life Healthcare's acquisition of another 21% in JMH, which would give it 70% control.
That would lead to dominance in the Durban area as all five of JMH's hospitals are there.
David Unterhalter SC, appearing for the merging parties, argued that the regression analysis done by Prof van den Heever was unreliable, saying at least 21 observation points had to be recorded for the data to be reliable. In Prof van den Heever's analysis it was in one instance "hopelessly less than 21".
Regression analysis is a commonly used statistical technique. Its main objective is to explore the relationship between a dependent variable and one or more independent variables, a Unesco report has shown.
Mr Unterhalter also took issue with the fact that cost factors such as inflation and currency fluctuations were not taken into account when Prof van den Heever investigated the relationships between variables to establish a causal effect of a rise in concentration over an increase in the rise in costs.
Prof van den Heever said the historical trend in concentration and costs suggested that national market share would have an effect on prices negotiated nationally.
"Indications are that for every 1% change in market concentration there is a 0,8% real adjustment in hospital costs over and above gross domestic product growth," he said.
Mr Unterhalter referred to big fluctuations in the value of the rand to sterling over a period that would have influenced costs, one being that of consumables and drugs, which made up 30% of a hospital's cost.
Prof van den Heever acknowledged that 70% of consumables and drugs was imported.
He also argued that there was no price competition between hospital groups and that due to collective bargaining between hospitals and medical aid schemes having ceased at the end of 2003, the price differential in individual negotiations with medical aid schemes was at least 10%.
Private hospitals recouped these losses by driving up their volumes through admissions and specialist treatments.