Clients won't pay more, health insurance giant tells High Court

Friday 26th January 2001

MARKET POWER: Even with nearly 80% of the health insurance market, the other 15 health insurers would make it difficult to increase premiums, Southern Cross argued. Premiums for those aged 46-54 will rise 10-30% next month

Health giant Southern Cross appears to have changed its mind on the Aetna deal, reports JOCK ANDERSON

Health insurance heavyweight Southern Cross Healthcare sought to convince the High Court at Auckland this week that getting its hands on the policy holders of its takeover target Aetna Health (NZ) did not mean premiums would increase.

But observers are tantalised by what appear to be curious directional changes by the holder of the lion's share of health insurance.

A prevailing view in some quarters is that Southern Cross may have exposed itself badly by being possibly stuck with paying over the odds in the Aetna deal.

There is even talk of an unconditional purchase agreement, irrespective of Commerce Commission approval.

Which may explain why Southern Cross has reverted to its "we want all of you" appeal stance.

Southern Cross took over Aetna earlier last year but the Commerce Commission, while approving the third-time-lucky acquisition bid, made the deal subject to Southern Cross divesting all of the medical insurance policies of insured members of Aetna.

In its first application to the commission last July Southern Cross wanted all of Aetna, including its policy holders.

The commission knocked Southern Cross back because of concerns over market dominance.

In a second unsuccessful application Southern Cross said it would divest some of Aetna's health insurance policies.

In a third application Southern Cross gave an undertaking to divest all of Aetna's medical insurance policies.

Southern Cross - a not-for-profit friendly society with tax benefits - also undertook not to have access to confidential and commercially sensitive information about Aetna policy holders.

Those undertakings satisfied the commission that Southern Cross' acquisition of Aetna would not give Southern Cross an even greater dominance in the medical insurance market than it already had.

But industry observers were wondering why Southern Cross had changed its tune. Why agree to flog off 40,000 policy holders in exchange for a computer system and public sector contracting businesses?

The appeal effectively takes Southern Cross back to its original position of wanting all of Aetna.

Southern Cross has about 820,000 members - giving it an estimated 60% of the annual $500 million health insurance revenues. But its membership is said to be declining.

Aetna was number two in the market with 40,000 health insurance customers, giving it about 18% of the market.

Arguing this week before Justice Hugh Williams and lay associate Professor Ralph Lattimore, Southern Cross lawyer Jim Farmer QC sought a reversal of the condition that Aetna's customer portfolio could not be acquired. Even with about 80% of the health insurance market, market dominance would not necessarily lead to increased premiums, the court heard.

Mr Farmer put the proposal that the presence in the market of 15 other health insurers would effectively constrain Southern Cross from increasing premiums, a view not shared by the commission.

Arguing that large market share did not necessarily mean market power, Mr Farmer said if Southern Cross increased premiums its competitors would act.

Decision was reserved but whatever the outcome it will be little comfort to about 300,000 aging Southern Cross policy holders in the 46-64 age bracket about to be hit with premium hikes of 10-30% in February.

Meanwhile, Wellington-based Tower Group - which in November paid $16 million for Axa Health - is still keen to buy Aetna's health insurance customers at the right price, according to managing director Jim Minto.

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