Regional hospital wards off misuse of market power claim

Ramsay Health Care Australia Pty Limited (Ramsay) successfully defended Federal Court proceedings brought by the Australian Competition and Consumer Commission (ACCC) for misuse of market power (under the old “taking advantage” test) and exclusive dealing.

The case is a timely reminder that competition law and compliance is an ever present and important consideration for all levels of business to be aware of. Even in highly regulated sectors where a wide range of legal issues commonly arise, every day business conduct always needs to be considered through the lens of competition law.

The allegations related to Ramsay’s response to a proposal by some of its surgeons to set up a competing day surgery in the regional city of Coffs Harbour. Judgment was handed down in March earlier this year, with Johnson Winter and Slattery advising Ramsay in these proceedings.

It was the competition awareness of Ramsay’s regional hospital CEO recorded in contemporaneous file notes and emails which contributed to a finding that there was no misuse of market power. 

What do you need to know?

Some critical lessons to be drawn from this case are:

• businesses should ensure personnel are cognisant of competition laws when engaging in conduct and take care to record their understanding in contemporaneous file notes and emails; and
• witness accounts and supporting evidence should be rigorously tested. 

What were the facts of the case?

Ramsay operates Baringa Private Hospital (Baringa) in the NSW regional city of Coffs Harbour. Baringa provides both in-patient and day surgeries and is the only private hospital in Coffs Harbour. At the relevant time Ramsay also operated Coffs Harbour Day Surgery (CHDS), the only private day surgery in Coffs Harbour.

Surgeons admit private patients to Baringa (and CHDS at the time) to perform elective surgeries. In order to do this, they are required to be accredited under Ramsay’s Facility Rules and allocated theatre time (referred to as “lists”) by Baringa’s CEO. As part of her role, Baringa’s CEO is responsible for monitoring and managing operating theatre utilisation by the surgeons.

In late 2014, a group of surgeons operating at Baringa started planning to set up a day surgery which they would run and operate in Coffs Harbour. 

What did the ACCC allege?

The ACCC alleged that in 2015, Ramsay conveyed to three surgeons that their access to theatre lists for in-patient surgeries at Baringa would be substantially reduced or entirely withdrawn if they carried out day surgeries at the new day surgery. The conduct comprised of separate conversations between Baringa’s CEO and three surgeons and a further conversation between Ramsay’s CEO of Australian operations (Ramsay’s CEO) and one of those surgeons. Despite differences in the particular words used, the same message was alleged to be conveyed to each surgeon.  

This conduct was alleged to be a taking advantage of Ramsay’s substantial market power in the in-patient services market for the purpose of preventing the new day surgery from entering or competing in the day surgery services market (in contravention of the misuse of market power prohibition under s46 of the Competition and Consumer Act (Cth) (CCA) pre-“effects” test). It was also alleged to be an offer by Ramsay to supply in-patient surgery services to the surgeons on the condition that they not use the new day surgery, which had the purpose or effect (or likely effect) of substantially lessening competition (in contravention of the exclusive dealing prohibition under s47 of the CCA). 

Why was the case dismissed?

The Court found that the ACCC did not establish to the requisite standard the pleaded conversations which it contended constituted the contravening conduct for the following reasons. 

Baringa’s CEO was well aware of competition issues

The Court put favourable weight on contemporaneous file notes and emails which indicated that Baringa’s CEO:

• had a clear appreciation of the need to obtain legal advice on any competition issues;
• was well aware of the need for caution and to avoid anti-competitive conduct; and
• discussed her concern with her direct report who sought legal advice on the issue.

In these circumstances, the Court considered it was most unlikely that Baringa’s CEO would have made the threats as alleged even though at the time of her conversation with the first surgeon she did not know of the legal advice provided to her direct report. 

Oral testimony was inconsistent with a sound recording

A sound recording of one of the conversations stated that if a surgeon chose to take the in-patient part of their business away, his major (in-patient) lists at Baringa “would no longer be guaranteed” because Ramsay needed a balance of day and in-patient surgeries. This evidence differed materially from accounts of the other conversations given by witnesses which was a significant issue because the allegation was that the message conveyed to each surgeon was the same. 

Witnesses were not credible

The Court noted the witnesses were prone to exaggerate or overstate matters in order to ensure the ACCC took action. 

In addition: 

• two surgeons redacted relevant material from documents produced in response to subpoena;
• important parts of one surgeon’s evidence were less reflective of the words actually used than his perception of what was said; and
• a further surgeon’s evidence was not accepted because the message had no relevance to his practice, which was primarily for in-patient procedures. 

Misuse of market power:  Did Ramsay take advantage?

It was not strictly necessary for the Court to consider the other aspects of the case given the pleaded conversations were not established but it did so for completeness and determined that there was no misuse of market power in any event. Although the Court found that Ramsay held substantial market power in the relevant market (due to barriers to entry and a lack of constraint) it did not “take advantage” of that power because it had a legitimate business rationale for the conduct. 

The Court considered it was not demonstrated to be economically rational for a firm in Ramsay’s position to act in any other way, particularly in light of the following: 

• Surgeons are inclined to think they “own” their lists with a preference for lists which were earlier in the week (to avoid attending to patients on the weekend) or in line with commitments at nearby public hospitals and the surgeons wanted to preserve their existing lists for in-patient surgery without having them reduced or changed to a less convenient day;
• There was no evidence that it was economically rational to run an in-patient only private hospital and a private hospital would not wish to signal to its surgeons that they could take away profitable day work but remain comfortable in the knowledge that their major lists for in-patient work (which required higher capital investment and running costs) would remain unchanged;
• Full utilisation of operating theatres and having a balance in the mix of day and in-patient surgeries was important to the financial performance of Baringa and the most valuable contributors to Baringa’s profitability were given their preference in the timing of theatre lists;  
• In any competitive environment a hospital losing the day surgeries of three or four surgeons would seek to maximise profits by obtaining the required balance of day and in-patient work and, in order to do so, allocating lists of the departing surgeons to existing accredited surgeons who needed more lists or newly recruited surgeons.

Would the new “effects” test result in a different outcome?

This case was brought under the old “taking advantage” test for misuse of market power which required proof that Ramsay took advantage of its substantial market power for a proscribed anti-competitive purpose. The current test prohibits a firm with substantial market power engaging in conduct for the purpose or effect (or likely effect) of substantially lessening competition (referred to as the “effects” test). 

The “effects” test is also a necessary limb of exclusive dealing and was applied to the facts of this case in that context. The Court determined that the relevant conduct did not substantially lessen competition because: 

• The conduct did not have the purpose of substantially lessening competition - Ramsay had a legitimate business rationale for the conduct (that is, Ramsay was seeking to maximise profits by obtaining the required balance of day and in-patient work in its lists); and
• The conduct did not have the likely effect of substantially lessening competition - The surgeons continued to explore their new day surgery plans many months after the conduct occurred and they ultimately didn’t proceed, not because of Ramsay’s conduct, but because the proposal was not viable.

In light of the above, even if the case was brought under the “effects” test, it is likely that the Court would have maintained its view that there was no misuse of market power. 

What did the case tell us about exclusive dealing?

In relation to the exclusive dealing claim, even without application of the “effects” test, the Court noted that it would have been dismissed because there could be no condition that the surgeons would not acquire services from a competitor when at the time there were no services to acquire and no competitor in existence.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).