What is attracting CADE’s attention to the healthcare insurance industry?

Recent news reports indicate that the Brazilian antitrust authority, the Administrative Council for Economic Defense (“CADE”), is being pressured by relevant companies in the healthcare insurance industry to carefully analyze the merger between Sul América – a major healthcare insurance service provider in Brazil – and Rede D’Or – a group of hospitals, specialized clinics and diagnosis labs in the country. CADE’s concern with this sector, however, is not recent.

Vertical integration in health services is not a novel subject in foreign jurisdictions, such as the United States. In Brazil, vertical integration between health insurers and hospitals is not a new trend either, but the discussion of possible anticompetitive effects resulting from such a trend has been under CADE’s spotlight since 2018. The main discussions usually involve market foreclosure for hospitals/clinics that do not belong to the insurers’ economic group – could they render healthcare services to patients that have contracts with other insurers? A new theory that we believe may be raised in the near future concerns the impacts of verticalization for manufacturers of medical devices and the pharmaceutical industry, since those players are relevant suppliers of hospitals and diagnosis labs.

In 2015, a first white paper was issued by CADE to address the main anticompetitive conducts analyzed by the authority involving the sector: price fixing, exclusivity clauses and conducts involving medical cooperatives. In mid-2018, a new white paper was focused exclusively to the analysis of transactions under review by CADE. These papers were updated in December 2021 and January 2022, respectively, but none of them refer to the impacts for pharmaceutical and medical devices industries.

According to CADE, the attention given to the healthcare insurance industry is due to its social importance: the number of beneficiaries of healthcare insurances exceeded 47 million people in 2020 and 49.4 million in 2022, respectively. In addition, these are sectors which peculiarities may require a specific methodology of antitrust analysis. Between May and August 2022, CADE reviewed 20 mergers involving this industry, of which 6 involved players with market shares exceeding 20% in the respective segments of transaction of the parties, with emphasis on the following matters:

• Merger between South America and Rede D’Or: this is a transaction that has generated heated debate at the media even before it was presented to CADE in June 2022. The transaction is under scrutiny by the General Superintendence of CADE, which has so far issued at least 140 RFIs to health insurance administration companies, insurers, clinics and hospitals. Among the approximately 100 responses presented by August, the majority pointed out concerns regarding the transaction, especially by the 7 hospitals qualified as interested third parties. Among the main concerns are:
  1. Risk of market foreclosure, hindering the entry of new players, and encouraging the verticalization by existing players;
  2. Possible exclusion by SulAmérica of Rede D’Or’s competing health service providers;
  3. Diversion of demand by SulAmérica to Rede D’Or of the procedures with higher added value;
  4. Increased bargaining power of SulAmérica in order to enable the adoption of abusive practices before competitors of Rede D’Or; and
  5. Information asymmetry: Rede D’Or, Qualicorp and SulAmérica will have access to the data of their respective competitors.

• Acquisition by Hapvida of Plamed’s portfolio of beneficiaries.  The transaction had already been notified to CADE in 2020. In February 2021, the antitrust authority approved the transaction, subject to the divestiture of a substantial part of Plamed’s portfolio of beneficiaries of insurance services in the Brazilian Northeast Region. However, in November 2021, CADE attested that the parties had not complied with the remedies previously negotiated. According to CADE, the parties failed to submit the divestiture plan in a timely manner, and the player chosen to acquire part of Plamed’s assets was not considered as an effective rival. Thus, the transaction was notified to CADE once again in May 2022, with the indication of a potential new buyer. The transaction is under review by CADE’s Tribunal.

• Acquisition, by Pague Menos, of Extrafarma: the transaction was approved in June/2022 on the condition that stores in 08 municipalities were sold in up to 180 days to the Bruno Farma chain.

Investigations into anticompetitive practices underway at CADE have not raised new topics or practices resulting from verticalization since the first edition of the 2015 white book or its updated edition of Dec./2021. The 4 ongoing procedures affect regional or federal councils of health professionals (dentistry, pharmacy and physiotherapy) and cover conducts already analyzed in depth by CADE on previous occasions.

Verticalization between hospitals and healthcare insurers has not been one of those conducts and may result in the adoption of practices still unknown to CADE. For instance, CADE has not yet analyzed the impacts of verticalization on suppliers of medical devices and pharmaceuticals for hospitals, specialized clinics and entities providing diagnostic services.

In any case, these concerns are beginning to be pointed out to the antitrust authority by industry players in the context of the ongoing mergers and acquisitions analyses mentioned above. Also, Federal Bill of Law No. 3590/2021 proposes to amend the provision of the Antitrust Law (Law No. 12,529/2011) to contemplate as an example of an infringement of the economic order “obtaining a dominant position through vertical integration in supplementary health, in situations where there is interference”.

The mere concentration of the industry or the verticalization of healthcare insurers are not factors to justify government intervention per se, neither to justify penalties or prevent new mergers and acquisitions in this sector. Nevertheless, CADE is expected to pay close attention to the importance of ensuring competition not only among the agents of the sector, but also in the industries supplying medical devices and pharmaceuticals.