Completed acquisition by Denplan Limited of BUPA DentalCover Limited

No. ME/1070/01

Report under Section 125(4) of the Fair Trading Act 1973 of the Director General's advice, dated 30 April 2001, to the Secretary of State for Trade and Industry under Section 76 of the Act

The parties

Denplan Limited is part of PPP Healthcare, which is itself part of the AXA insurance group. Its principal activity is to provide and administer a dental capitation plan to the dental profession and related services including an accreditation service. (Capitation services are described below). In the year to 31 December 1999 it had a turnover of £145.4 million, made a profit before tax of £3.8 million, and had gross assets of £13.8 million. It should be noted that of the above turnover £115.2 million was collected from patients for onward payment to dentists. The remaining £30.2 million was retained by Denplan.

BUPA DentalCover Limited was a wholly owned subsidiary of BUPA, a leading provider of private healthcare services and insurance. Its main activity was the administration of a capitation scheme for dentists. In the year to 31 December 1999 it had a turnover of £18.6 million, and made a loss before tax of £0.4 million. Its gross assets were £0.3 million. It also traded at a loss in the previous financial year.

Jurisdiction

I have established that the merger qualifies for investigation by satisfying the share of supply test in section 64(1)(a) and (3) of the FTA in respect of the supply of dental capitation services in the UK.

Assessment

Relevant markets

The parties overlap in the provision of dental capitation schemes to dental practices. Capitation schemes involve a patient paying for dentistry by monthly direct debit after their dental health has been checked and brought up to minimum standard before joining the scheme. The patient is then placed in one of five risk bands and pays a fixed monthly payment regardless of the amount of treatment provided. Contact from the capitation scheme provider is with the dentist who acts as intermediary in recommending to their patients whether to participate and pay for dental treatment under a capitation scheme.

The role of the scheme administrator is to collect the monthly payment from patients and pass this on to the dentist after deduction of a monthly administration fee. The essential elements of this service are financial administration - collecting and distributing payments on behalf of dentists.

Dentists may choose either to administer their own payment scheme or to hire a third party to administer the scheme. The majority of dentists who utilise capitation schemes use a third party given the benefits which accrue from outsourcing this function and difficulties in self-provision. Overall, two-thirds of dentists offer no capitation scheme to patients.

At its widest the market may be regarded as comprising the various different payment methods available to patients to fund dental treatment. This involves not only capitation schemes but dedicated dental insurance cover, cash plans, employee benefit schemes, and other payment or credit arrangements provided by dentists for private treatment, referred to as private fee per item (PFPI). It has also been argued, but I am not convinced, that it may be appropriate to include NHS treatment since this forms one of the range of choices available to both dentists and patients when deciding on the type of treatment and how to fund this.

NHS treatment accounts for approximately 70% of the dental market (half is paid fully by the government, and non-exempt patients pay 80% of NHS costs) with private treatment accounting for the remaining 30%. The private dental market is valued at approximately £1.2 billion with capitation schemes accounting for an estimated £200 million or 16.7% of PFPI. The majority of PFPI continues to be paid directly by patients as and when treatment is received.

The relevant geographic market is national in scope.

Horizontal issues

Denplan was the first company to offer capitation services to dentists in 1986 and is the clear market leader. If the market is viewed narrowly to comprise capitation services then Denplan has following the merger a market share of 86% by volume, and gained an increment of approximately 10% from the acquisition of BUPA DentalCover, the second largest provider in this sector. The sector is characterised by a number of smaller providers who have entered since 1993 with DPAS the next largest player with a market share below 10%, followed by CIGNA.

The market narrowly defined was already highly concentrated and the effect of the merger through the transfer of BUPA to Denplan has further advanced but not radically altered its position or market conditions. I also recognise that BUPA DentalCover had made a strategic decision to withdraw from the capitation market.

As indicated above, there are, however, reasons to think that the relevant market is broader. Moreover, entry barriers do not appear to be substantial given the financial/administrative nature of the services provided. Eight companies have entered since 1996, including DPAS and more recently NatWest Professional Services. Some of these offer schemes that differ in detail but provide the same core service of administering direct debits for dentists. Dentists also have the option to self-provide and there are proposals by the British Dental Association, expected later this year, to issue guidelines to dentists to make self-administration easier. Dentists that want to offer capitation plans therefore have a range of choices available to them. These factors should act as a form of supply-side constraint in this sector.

In terms of final demand, patients have a range of other payment methods for private dental treatment, and the parties' combined position does not raise significant competition concerns in this wider market. Patients continue to have a wide choice in how they wish to pay for dental treatment. (In this regard I note that market research data provided by Denplan indicate that the majority of patients who leave its scheme revert to either NHS or PFPI treatment rather than another capitation provider.)

Vertical issues

No substantive vertical issues arise as a result of this merger.

Third party views

I have received representations from a number of third parties. Views were mixed. Most competitors were concerned, although there was some feeling that the merger would do little to add to Denplan's already strong position. Dentists also had mixed views, some being unconcerned. A number of concerns related to how they were informed about the acquisition, but that is not a competition issue. These third party views have been taken into account in the analysis above.

Conclusion

This merger further advances Denplan's position in offering capitation services to dentists, where it is already the leading provider. However, barriers to entry into capitation services appear low, dentists have alternatives available, including self-provision, and private patients have a range of payment alternatives open to them.

In the light of the above I conclude and recommend that you should not refer this completed transaction to the Competition Commission for investigation.

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