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SHOULD INDIAN HEALTHCARE M&A BE REGULATED DIFFERENTLY?

[Bhaskar Vishwajeet is a final year law student at Jindal Global Law School]


Introduction


The California legislature recently passed legislation to scrutinize healthcare mergers, acquisitions, and transactions more strictly. This move is motivated by rising healthcare costs and predatory pricing by private entities. They established the Office of Health Care Affordability (OHCA) to monitor transactions and identify anti-competitive behaviour in the healthcare market. OHCA conducts periodic reviews of transactions that could significantly impact healthcare entities and California's broader healthcare market.


In India, healthcare entities are attractive acquisition targets for domestic and foreign private equity firms. For instance, Temasek's recent acquisition of Manipal Health Enterprises is significant in the Indian healthcare M&A sector. However, such acquisitions and resource consolidation concentrate control and assets, potentially leading to anti-competitive arrangements. This raises the question of implementing a similar regulation model in India.


This article analyzes India's merger control regime and investor interest in Indian healthcare institutions to determine if the Competition Commission of India (CCI) and related agencies can adopt a similar regulatory framework for the healthcare industry.


Merger Control in India


The Competition Act of India (Act) and the ‘Combination Regulations’ primarily govern merger control in India. The Act does not explicitly define mergers. Acquisitions, however, are described as the direct or indirect acquisition of shares, voting rights or the assets of any enterprise or the control of the management/assets of an enterprise. Control herein means controlling the operations of an entity. Such control may be practiced by an enterprise or a group of enterprises.


Merger control is formally labelled ‘Regulation of Combinations’ in the Act. Section 6 prescribes regulations for combinations. It underlines an essential requirement for combinations, i.e., all combinations that have an appreciable adverse effect on competition within the relevant sector in India will be void.


The phrase ‘appreciable adverse effect’ (AAEC) originates from Section 3 of the Act, which prescribes the law on anti-competitive agreements. Anti-competitive agreements are broadly classified as agreements that involve price influencing, resource limitation, geographical control over production chains and collusion in the market. Agreements for combinations resulting in AAECs are deemed void under the Act.


In addition to the AAEC test, merger control regulations require that the acquirer intimate the Competition Commission of India through a notice if the transaction exceeds certain thresholds provided in the Act. These thresholds are based on the valuation of assets and revenue of two entities, i.e., parties or groups. Acquisitions below the prescribed threshold, i.e., ₹350 crores, do not have to be notified to the regulator.


The Indian Healthcare Market


The Indian healthcare market has experienced significant growth driven by increasing health awareness and the demand for regular check-ups. The COVID-19 pandemic further emphasized the importance of health, resulting in a surge in entry rates to Indian hospitals and an expansion of health insurance policies. Insurance companies responded by offering broader coverage, leading to a 20.7% increase in policies from 2019 to 2021, with premiums rising by 31%.


Established institutions and their offshoots are preferred in the Indian healthcare market due to existing hospital networks and economies of scale. This trend is exemplified by Manipal’s recent acquisition of Emami’s Advanced Medical Research Institute in Kolkata. Resourceful Indian hospital groups continue to consolidate by acquiring established chains, boosting infrastructural capacity and specialization. Fortis' acquisition of Medeor Hospital is another example that expanded its presence in the National Capital Region and increased its overall capacity and specialty.


The Indian healthcare market is witnessing a surge in acquisitions, with deal valuations eight times higher than five years ago. Additionally, to promote medical tourism, the government has increased healthcare spending by 3% in 2022, capitalizing on India's low costs, advanced technologies, and skilled healthcare workforce. While this indicates a thriving market, it raises concerns about the affordability of healthcare and equitable access. High valuations often result in rising costs transferred to patients, potentially limiting access for certain individuals or communities. These implications require careful legal and regulatory attention to ensure that healthcare remains affordable and accessible to all segments of society.


The Incomplete Jurisprudence on Healthcare Transactions in India


Price-fixing of drugs is a common method of exploitation in healthcare transactions. The OHCA aims to conduct cost and market impact reviews for proposed healthcare mergers and acquisitions in California, ensuring that significant changes to healthcare entities do not impede consumer costs or market competition. These significant or material changes involve substantial alterations in ownership, operations, or governance and a significant portion of healthcare assets, subjecting them to California sector-specific merger controls.


The CCI has taken steps to curb such practices, as seen in the Max Healthcare case from 2017, where a Max-group hospital was charging unfair prices for in-house products. In response to such concerns, the CCI released a policy note in 2018 titled ‘Making Markets Work for Affordable Healthcare’. They acknowledged the shortage of healthcare professionals and inadequacies in health insurance but are yet to provide a uniform mechanism or channel for reviewing transactions that could significantly impact the healthcare sector in India.


The CCI has previously also scrutinized ‘killer’ acquisitions, albeit in the pharmaceutical space (an allied market), where dominant corporations acquire smaller entities to consolidate resources and potentially undermine competition. Their examination of the Sun Pharmaceutical-Ranbaxy merger in 2015 addressed anti-competitiveness concerns, requiring the newly formed entity to divest smaller drug companies and drug patents to prevent abuse of dominance. However, the regulator’s approach to such transactions lacks consistency, leading to varying commitments from merging entities to gain approval. The acquisition of Elder Pharmaceuticals by Torrent Pharmaceuticals is another relevant example that included riders or conditions, such as removing therapeutic categories from non-compete agreements to foster competition to see through the acquisition.


More recently, Temasek’s acquisition of the Manipal Hospital group is important because the CCI, in its summary of the transaction, mentions that a detailed description of the relevant market may be left open. This further reinforces the fact that no structure governs competition assessments of this sort in India. The general framework of merger control does not suit the manner of scrutinising hospital mergers.


The Regulatory Gap


The CCI serves as the primary channel for competition scrutiny but lacks a sector-specific framework, limiting its effectiveness in healthcare. This is partly due to the CCI's struggle to define the "relevant market" in healthcare deals and its reluctance to recognize healthcare institutions or entities separately. In Bharti Airtel, the court emphasized that competition assessments measure "power over the market" to assess the competitive constraints faced by entities in a relevant market. This allegorical power is measured through generic factors like market power, service bundling, etc., as Section 19 of the Act prescribes.


We are yet to appropriately define or consider the various entities within the healthcare products market that influence competition and abuse of dominance. In the order for Manipal’s acquisition of Columbia Asia Hospitals, the regulator wandered from physical infrastructure to specialty to determine the appropriate market, demonstrating a lack of understanding of the functional overlap such institutions work with.


In contrast, California's sector-specific merger control framework provides rigorous scrutiny and regulatory oversight through the OHCA, alleviating the burden on traditional antitrust agencies like the FCC and the Justice Department. This is because American courts are increasingly becoming suspicious of horizontal and vertical mergers by hospital groups as it inevitably consolidates quality infrastructure and disadvantages consumers through pricing. The California legislation takes a more comprehensive approach by explicitly defining "healthcare entities" to include healthcare providers, insurers, and public-funded programs like Medicare. This definition ensures that all components of the ‘healthcare delivery system’ are considered when scrutinizing a transaction.


The CCI is yet to establish a similarly granular arrangement in India, leading to challenges in effectively regulating healthcare mergers and acquisitions. On a related note, the outcome of an investigation of exorbitant pricing by major hospital groups is still pending, wherein the CCI had found 12 super-speciality hospitals in violation of the abuse of dominant position provisions in Section 4 of the Act.


By adopting a sector-specific framework like California's, the CCI would be better equipped to address the intricacies of healthcare transactions and ensure more comprehensive competition scrutiny. Very few jurisdictions employ such methods. In Germany, when a Malteser-group hospital and the somatic division of another hospital were merging, the primary question concerned the efficiency of the merger. The parties claimed that the merger would help improve the quality of services. However, Germany’s Federal Cartel Office approved the merger, noting that said claims of efficiency and quality cannot be verified without a framework and granular data.


The time is ripe to formulate a framework that analyses healthcare transactions through more rigorous engagement with data and forecasting of post-merger consequences. This is important because studies from the European Union posit that ex-ante assessments of hospital mergers may miss real outcomes, thereby ignoring patient treatment and competition in the market.


Conclusion


Healthcare merger control in India should recognize the strategic shifts in service offerings resulting from combinations and acquisitions. It is crucial to establish healthcare merger control as a distinct aspect of antitrust legislation. The OHCA's regulatory model offers a promising approach to evaluating healthcare combinations in India, especially as the sector attracts significant investment. However, Indian regulators need to strike a balance between the process's costs and its intended purpose. Regulatory procedures should be reasonable to avoid discouraging foreign investment and specialization.

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