Fears over health insurance merger

By DANIEL RIORDAN

Consumers will suffer if Southern Cross Healthcare's proposed takeover of rival Aetna Health NZ goes ahead, says the Consumers' Institute.

Southern Cross, by far the biggest health insurer with an estimated 63 per cent of the $500 million market, has applied to regulatory watchdog the Commerce Commission for clearance to buy Aetna, the second-largest health insurer, with an estimated 18 per cent market share.

"Given their combined market shares, we'd be surprised if the commission approved the deal," said Consumers' Institute assistant chief executive Peter Sutton.

"It would leave the market with basically just one player."

He said there would be fewer constraints on premiums.

The commission is due to decide by August 1, although it can extend the deadline if necessary.

Tony Douglas, chairman of industry umbrella group the Health Funds Association (and managing director of Axa Health), said the association's best estimates of market share gave Southern Cross 60 to 63 per cent by revenue, Aetna 18 to 20 per cent, and a dozen or so other players 6 per cent or less.

Southern Cross chief executive Roger Bowie said those figures were not particularly relevant.

"There's a big blurring in the marketplace, between financial services, between health insurance, between the broader health market. Market shares are very difficult to pin down."

Southern Cross' website claims more than 60 per cent of the health insurance market and 830,000 customers.

In its 24-page application to the commission, Southern Cross says it does not believe any dominance issues arise, but had made its application "as a matter of prudence due to the impression that might be created by the merged entity's market share."

Many figures, including market shares, are deleted from the application's public version.

The application argues there are low barriers to entry, low switching costs for consumers, and says that Southern Cross, a not-for-profit organisation, has expanded the market past what would have been strictly commercially viable, by setting its premiums on a cost-plus basis.

Southern Cross employs about 400 people in its medical care division and about 1000 in its hospital arm.

Aetna employs about 100.

Mr Bowie said it was too soon to talk about changes in staffing levels. He did not foresee any culture clashes between not-for-profit Southern Cross and the for-profit Aetna.

The Southern Cross move comes as Aetna's US parent reorganises its international businesses, itself under the shadow of a takeover from Dutch insurer ING Groep.

Mr Bowie may not have the Consumers' Institute on his side, but he does have history.

In 1993, Southern Cross applied to the commission for approval to buy its then-closest rival, Medic Aid.

The combined entity would have had an 80 per cent market share.

The commission granted approval, citing the absence of significant entry barriers and healthy competition as impediments to market dominance.

Southern Cross did not proceed with the takeover and Medic Aid was ultimately bought by Aetna, which thus established its New Zealand presence.