In our update on 10 April 2015, we highlighted the key recommendations of relevance to the private health insurance industry contained in the final report of the Competition Policy Review Panel chaired by Professor Ian Harper (Harper Review). In this update, we provide further comment on some of those key recommendations and further discussion of the implications for private health insurers.
SPECIFIC INDUSTRY REFORM
Lighter touch regulation recommended but implementation not an immediate or priority area for reform
In good news for private health insurers, the Harper Panel recommends "lighter touch" regulation of private health insurance premiums and services, subject to an assessment by a recommended new body, the Australian Council for Competition Policy (ACCP), that competition in the industry is effective. The imposition of this assessment as a condition on the lighter regulation was added by Panel after its draft report and is based on the Panel's view that consumers would not be adequately protected by "lighter touch" regulation unless competition is effective.
The real downside for private health insurers, however, is that they are going to have to wait some time for this "lighter touch" regulation. In its Report, the Panel proposed a timetable for implementing its reforms. The Panel did not identify the review of private health insurance regulation as an immediate or priority area for reform. Instead, the Panel recommends immediate reviews of regulations governing retail trading hours, parallel imports and pharmacy ownership and then prioritising planning and zoning, taxis and ride-sharing, and mandatory product standards.
Deregulation of prices of inputs for private health insurers recommended, but again this may take time
The Panel also recommends consideration be given to deregulating prices of some inputs purchased by private health insurers, once competition in the industry is deemed by the ACCP to be effective.
For example, the Panel suggests that the ACCP examine the regulation of pricing of prostheses under the Private Health Insurance Act 2007, and consider if pricing and supply can be made more competitive while still maintaining the policy aims of the current prostheses arrangements.
However, again, this recommendation is not identified by the Panel as an immediate or priority area for reform.
The Harper Panel also considered the availability of information for consumers, noting that markets work best when consumers are empowered to make informed decisions. In this context, the Panel recognised that comparator websites, including in relation to private health insurance, can assist consumers to analyse their options for products and make it easier for new firms to enter markets.
However, the Panel noted the importance of ensuring that comparator websites serve as accurate decision-making tools and that consumers trust their operation. The Panel pointed to the risks identified in the ACCC's December report on comparator websites and noted the ACCC's plans to release best-practice guidelines to assist comparator website operators and businesses to comply with Australia’s competition and consumer protection laws.
PROPOSED AMENDMENTS TO THE MISUSE OF MARKET POWER PROHIBITION
One of the most significant competition law reforms recommended by the Harper Review concerns the prohibition against misuse of market power, contained in section 46 of the CCA.
The Harper Review recommends subjecting unilateral conduct by firms with market power to a "substantial lessening of competition" (SLC) test (Proposed s46). If implemented, these amendments would extend section 46 beyond the "misuse of market power" and would make it easier to prove a contravention.
If implemented, the key implications would be:
- Expanded reach: Removing the nexus between the conduct and the market power would increase the scope of conduct caught by the provision beyond the "misuse of market power" to conduct by certain companies that has the purpose or effect of substantially lessening competition.
- Contraventions easier to prove: History suggests that an effects test is easier to prove than a purpose test.
- Transitional Uncertainty. The SLC test would not apply to misuse of market power cases in the same way as it applies in other contexts.
We expand on each of these issues below:
The Proposed s46 removes key mechanisms that have been used to distinguish between competitive and anti-competitive conduct by firms with substantial market power and would thereby capture more conduct than the existing provision.
- Conduct in other markets: The Proposed s46 would apply to all operations of firms that have substantial market power in any single market, including their operations in markets where they do not have market power. This would be a significant change from the existing provision in which the "take advantage" limb requires a link between the market power and the proscribed conduct.
- Business decisions that would be rational for a firm without market power: The "taking advantage" limb has traditionally provided comfort to firms engaging in conduct that would be a rational business strategy even for a firm without substantial market power. The Proposed s46 would expand the reach of the prohibition by removing reference to that factor. In a practical sense, this would remove a "rule of thumb" and make it more difficult for firms to obtain comfort that their actions do not contravene the provision. The Proposed s46 would apply to all operations of firms that have substantial market power in any single market, including their operations in markets where they do not have market power. This would be a significant change from the existing provision in which the "take advantage" limb requires a link between the market power and the proscribed conduct.
- Business decisions that would be rational for a firm without market power: The "taking advantage" limb has traditionally provided comfort to firms engaging in conduct that would be a rational business strategy even for a firm without substantial market power. The Proposed s46 would expand the reach of the prohibition by removing reference to that factor. In a practical sense, this would remove a "rule of thumb" and make it more difficult for firms to obtain comfort that their actions do not contravene the provision.
Contraventions easier to prove
As a practical matter, proving an anti-competitive effect is often easier (albeit more expensive) than proving an anti-competitive subjective purpose. Although Courts are entitled to draw inferences as to purpose in a number of circumstances, commercial decisions are typically driven by a large number of considerations. Furthermore, as a matter of practicality, it is the subjective purpose of employees or officers that is relevant, as they are the directing mind of a corporation. Demonstrating that such individuals had a substantial subjective anti-competitive purpose has proven difficult. The ACCC has long advocated for the addition of an effects test for this reason. As such, although it is costly to prove that conduct has the effect of substantially lessening competition, the introduction of an effects test will in our view make it easier to prove that a contravention has occurred.
The Proposed s46 relies almost exclusively on the SLC test to determine the legality of conduct. It would prohibit conduct by a corporation with "substantial market power" that has the purpose, or likely effect, of substantially lessening competition.
Although the SLC test is already used in the CCA, its application in the context of section 46 may differ from existing jurisprudence. For example:
- Different conduct: Unilateral conduct by a firm with substantial market power is likely to impact competition very differently from an arrangement between competitors. For example, a unilateral decision by a monopolist to increase its prices is unlikely to lessen competition while a joint decision by two competitors to increase their prices may well lessen competition.
- New element: The proposed section includes a "direction" requiring the Court to consider the extent to which the conduct has the purpose or likely effect or increasing, or decreasing, competition. Prima facie, such a direction should have no impact as Courts have always had the ability to balance the pro-competitive and anti-competitive impacts of conduct. However, the inclusion of this "direction" creates uncertainty because it has not previously been considered by Courts and because the factors listed do not always have the suggested effect on competition, particularly in the circumstances of a firm with substantial market power. For example, the proposed section requires the Court to consider the increase in competition arising from "enhanced price competitiveness". In past cases, discounting by a monopolist has been characterised as reducing competition. Further, although the indicative factors listed in the "direction" could be relevant to a net public benefits test, the "direction" is expressly concerned with effects on competition.
The Harper Review acknowledges that the proposed change would involve transitional costs while Courts develop jurisprudence on its application.
The Harper Review recommends making authorisation available to exempt conduct from section 46 if the conduct satisfies a public benefit test. Authorisation is not currently permitted for such conduct. However, the time, cost and public consultation associated with an authorisation application makes it commercially impractical in many instances. For example, a firm seeking to introduce an innovative new product would be unlikely to seek authorisation to ensure that initially selling the product below cost price did not breach the Proposed s46. Furthermore, the dynamic nature of many markets makes it difficult for firms to engage in the forward planning and investment necessary when relying on authorisation as a means to avoid breaching the Proposed s46.
Application to specific facts
Of course, the implications of the proposed amendments will be specific to the circumstances and the conduct involved. For example, the implications of the Proposed s46 are likely to differ as between predatory pricing and refusals to supply. Our generalised observations in this update may not be accurate for some particular circumstances.
The government is currently engaging in a consultation period with industry, consumers and other levels of government on the Harper Report's recommendations, including the specific reforms for the private health insurance industry and the Proposed s46. The government will accept written submissions until 26 May 2015. It will then decide which recommendations from the Harper Report it will implement.