EVERYONE is talking about rising medical inflation and health insurance premiums, which have added to households’ financial burden.
The lawmakers, regulators – including the Finance Ministry (MoF) and Bank Negara – as well as the insurance providers, healthcare providers and the general public have hotly debated this issue as medical insurance premiums are reportedly set to increase by 40% to 70%.
Medical inflation, healthcare costs and the associated insurance premiums are complex issues, influenced by a myriad of factors such as socio-economic, industry-specific, regulatory and environmental elements. However, some of these factors have had a more pronounced impact than others.
What are the patterns of medical inflation, medical insurance and overall inflation, as measured by the consumer price index (CPI)?
For the sake of comparison, we use the CPI as the basis for measuring medical inflation and insurance premiums paid by the insurers and households. Our closer review of the data for the period 2011-2019 prior to the Covid-19 pandemic and 2021-2024 (January-October) indicated the following:
> Annual medical inflation generally tends to be higher than overall headline inflation. In 2011-2019, medical inflation increased by an average of 2.5% per annum (pa) compared to 2.2% pa for headline inflation.
> Annual healthcare-related insurance inflation increased by an average of 0.6% pa in 2011-2019, lower than medical inflation (2.5% pa) and overall inflation (2.2% pa).
> Post-pandemic, Malaysia suffered deflation as the headline inflation declined by 1.2% in 2020 before reversing to an average increase of 2.8% pa in 2021-2023 and 1.9% in January-October 2024.
Medical inflation increased by 0.4% pa in 2021-2023 and 1.4% in January-October 2024, while that of healthcare-related insurance inflation increased 0.9% pa in 2021-2023 and zero growth in January-October 2024.
Our calculation of medical inflation is a weighted average of price changes for each component mentioned above. Due to limited historical data on the precise weight of each component before 2016, the analysis assumes consistent relative importance of these components over time.
It is observed that there is a nuanced relationship between overall inflation trends and medical inflation that consumers pay and medical insurance trends that insurers experience.
There is a time lag when medical inflation is correlated to general inflation. The government heavily subsidises the cost of treatment through public facilities with small fees (RM1 for citizens and RM15 for non-citizens for outpatient treatment).
The contracts between private medical insurance providers and insurers are often in force for multiple years, resulting in a delay between the general inflation associated with the payers’ incomes and increases in medical inflation and insurance connected with health.
It must be noted that the measurement of CPI for medical and insurance connected with health is on a weighted basis of price changes in a single basket of goods and services, representing a consumption basket of all households.
Hence, it could understate the living expenses on healthcare of households.
Medical inflation is defined as the systemic increase in the median or unit cost of healthcare services over a defined historical period.
It is not surprising that medical inflation has risen rapidly over the years, outpacing that of general inflation.
The reported medical inflation differs according to different sources.
Bank Negara earlier reported a 12.6% medical cost inflation rate in 2023, and an insurance provider indicated that medical inflation had climbed at an average of 9% to 10% annually between 2013 and 2018.
According to Aon’s “2022 Global Medical Trend Rates Report”, Malaysia’s estimated medical inflation rate was 12%, increasing on an average of 10%-15% annually.
Bank Negara’s and MoF’s briefing to Members of Parliament indicated a cumulative medical cost inflation of 47% or a simple average of about 16% pa in 2021-2023.
The shocking number was medical and health insurance and takaful (MHIT) policies claims cost inflation had jumped 56% in 2021-2023, surpassing the MHIT premium inflation of 20%.
In 2024, higher insurance premium increases of less than 20% hit 61% of those affected policies, premium increases of between 21% and 40% applied to 30% of policies, premium hikes between 41% and 60% hit 5% of policies, and premium rises above 60% affected 4% of policies.
As the MHIT premiums do not commensurate with the high claims rate, insurance companies and Bank Negara have justified the need to increase premiums as the shrinking pool of funds will make the future claims unsustainable, if there are continued “extravagant claims” or too many people making claims.
Currently, over 90% of every premium dollar goes towards paying claims, with little control over these costs.
The ratio of claims hit 101% to 111% in 2018-2023, excluding pandemic years.
In terms of insurance claims, 6.8 out of every 100 policyholders filed their claims in 2020, rising to 8.6 policyholders in 2023.
There are a number of factors contributing to higher healthcare costs and the associated rising insurance premiums, as well as hefty insurance claim inflation.
It was reported that the cost per hospital visit to private hospitals increased about 22% from RM8,800 in 2020 to RM10,700 in 2023.
> Malaysians have seen a significant improvement in life expectancy due to better healthcare facilities and maintaining a healthy lifestyle. Better healthy outcome will inevitably contribute to rising healthcare demand.
> Medical treatment costs/price differentiation. Healthcare providers have engaged in price differentiation, charging higher if a patient is insured compared to out-of-pocket payment.
For dengue treatment, patients with a GL (guarantee letter) are charged RM4,978, about 286% higher than pay-and-claim patients who are billed RM1,288. For pneumonia treatment, GL patients are billed RM6,859, about 158% more than pay-and-claim patients who are charged RM2,654.
> Stickiness of healthcare costs. Rising healthcare cost trends associated with the adoption of technology diagnostic equipment, medical apparatus, costly drugs and medicines, salaries for the healthcare workforce, the treatment of high comorbidities, emergence of new and old infectious diseases, ageing demographics and non-surgical costs.
Hospital supplies and services (HSS), which among others include lab and imaging, drugs, nursing and medical equipment comprise 59%-70% of private hospital bills.
> Payers “buffet syndrome”. Policy-holders having extensive insurance coverage seek to maximise the value of premiums paid, using medical services without considering the associated costs. This can lead to higher medical costs, which can then translate back into higher premiums.
> Third-party payers. Consumers pay premiums to insurance service providers, which then reimburse medical expenses. Having this interim payment model tends to lead to increased spending and higher medical inflation.
> Non-transparent pricing. Lack of price transparency has made cost of services comparison in healthcare much more challenging. More importantly, price transparency allows consumers to compare prices with reasonable alternatives.
> Inelasticity in demand for medical services. It is found that the demand for medical services is generally inelastic to price, time cost, and income.
Rising healthcare costs and medical insurance premiums are indeed a legitimate concern. The rising costs are putting a strain on the government’s budget, households and healthcare providers.
As healthcare costs and insurance premiums rise faster than income, payers face greater cost-sharing, making health insurance plan unaffordable, forcing some to terminate their policies while others are underinsured.
The lawmakers should consider solutions to rein in costs to reduce the financial burden on consumers and relieve the fiscal cost.
The sustainability of the insurance sector needs adequate reserves for claims, maintaining profitability, and providing affordable coverage to consumers.
As we navigate through these challenges, all stakeholders need compassionate and collective efforts to reach an amicable solution to balance the interests of all parties.
This delicate balance is essential to providing efficient and quality healthcare, as well as affordable coverage to consumers, and ensuring the sustainability of the insurance sector.
Bank Negara has required insurers and takaful operators (ITO) to introduce cost-sharing features in their MHIT products starting September 2024, in efforts to encourage more responsible use of health services and further lower the costs that need to be jointly borne by the “pool” (based on the concept of risk pooling).
Additionally, an integrated claims database will be established to ensure that MHIT products remain sustainable and affordable.
We propose the following policies to rein in escalating healthcare costs and private healthcare sector offering healthcare services, and hence the health insurance premiums.
> The government shall conduct a comprehensive review of all healthcare charges every three years to make sure they are fair and affordable. Any adjustment in medical insurance premiums must be reasonable and staggered;
> Consider the establishment of a Universal Healthcare Insurance Fund, to be funded by the government, employers and employees to ensure affordable and quality healthcare services;
> Price transparency movement. The Health Ministry will introduce hospital fee benchmarks for 21 common surgical procedures and eight common medical conditions, making transparent the components of the bill.
Patients can refer to these benchmarks when seeking medical consultation and treatment. Hospitals and doctors charging above these benchmarks should be prepared to justify the higher fees, if queried;
> Reduce the price that commercial insurers pay for hospitals and physicians’ services by regulating those prices in various ways: Capping the price levels by setting maximum amounts that hospitals and physicians can receive from commercial insurers; capping the annual growth rate of those prices; and taxing services which prices exceed certain maximum amounts;
> Ending middlemen and using direct contracting to help lower healthcare costs. One proven way to combat rising medical supply chain prices and other cost increases is to partner with a group purchasing organisation (GPO).
The government shall not engage in direct negotiations for government procurement; and
> Anti-competitive behaviour conduct. Private hospital pricing system and the health insurance industry should be subjected to prompt and close scrutiny for impeding conduct and contracting practices that adversely impact both consumers and providers.
Investigate potentially anti-competitive contracting practices due to confidential contract negotiations and the lack of public disclosure of contract terms.
Lee Heng Guie is the executive director of the Socio-Economic Research Centre. The views expressed here are the writer’s own.
