Just like the deteriorating quality of public education, the unchecked upward spiral in healthcare costs is a major concern for all Malaysians. The crisis came to a head recently, after the insurance industry passed on escalating costs — due to the sharp increase in the number of claims as well as increasing cost per claim — to customers via a hefty 40% to 70% hike in insurance premiums.
As we wrote last week, over the years the government has (intentionally or otherwise) outsourced education and healthcare for the middle class and above to the private sector, due in part to funding constraints. (Malaysia is a low-productivity, low-income nation with a comparatively small number of taxpayers but huge government spending on social transfers and benefits.)
The public healthcare system is suffering from severe staffing shortage and waiting time is long, including for critical life-saving surgeries. Staff, including specialists and surgeons, are overworked and not well paid, and the good ones are leaving for private hospitals and/or overseas. Some public hospitals have resorted to establishing a separate private wing and charge patients “premium economy” services (higher than public hospital charges but lower than private hospital fees) to generate additional revenue to fund their operations and increase incomes for doctors to retain them. Therefore, many Malaysians who can afford it have increasingly turned to the private sector, paid for primarily with medical insurance (see Chart 1). This is why the recent sharp hike in insurance premiums is such a great concern.
The middle class is already struggling with rising cost of living, not only for food and the basic necessities, but also the increasing cost of obtaining quality education for self and children. As the recent Khazanah Research Institute study concluded, up to three-quarters of households we classify as middle class (the socalled M40) face cost of living pressures with limited discretionary spending power. They often must make trade-offs in their consumption between essential needs and aspirational spending. In short, just because the M40 occupy the middle segment of the income distribution curve does not mean they have the purchasing power of true “middle class”. And this is reflected in their dwindling savings — disposable incomes less expenses — and limited buffers for emergencies and retirement savings. A fact that is also frequently highlighted by the government. To top it all off, they must now worry over spiralling insurance premiums and healthcare costs.
The point of this article is to make an honest assessment of who is responsible for the high and rising cost of healthcare for Malaysians. And we will offer some suggestions on how to manage future cost increases. The recent 40% to 70% hike in medical insurance premiums seems unlikely to be a one-off event. Hence, all parties including the private hospitals, insurance companies, the government and, especially Bank Negara Malaysia (as the regulator), must take steps to resolve the issue
See also: Time to cut government spending to reduce tax and boost investments, productivity and wages
Information and bargaining power asymmetry between patients, hospitals and insurers
While private hospital doctor fees are regulated, some 59% and 70% of total medical bills for non-surgical and surgical treatments respectively (for “non-transparent” charges for medical supplies and services) are unregulated. Yes, part of the cost increases is probably inevitable, given that most supplies, equipment and medications are imported and therefore affected by the ringgit’s secular depreciation. What we are most interested in is Bank Negara’s analysis of the huge difference between what private hospitals charge an insured versus a self-paying patient for similar treatments — as much as four times higher (see Table). Why?
See also: Who speaks for the ‘squeezed and bruised’ middle class in Malaysia?
There is a significant gap in terms of medical knowledge and bargaining power among the three parties — the patients, the private hospitals and the insurance companies.
More often than not, private hospitals are profit-maximising entities — with disproportionate informational power and, therefore, pricing power vis-à-vis the patient. The average patient lacks the medical expertise to fully understand his diagnosis or treatment plans, including unnecessary tests and treatments, and little motivation to shop around (if even possible) in desperate times of need. There are very few publicly available — and more importantly, easily accessible — cost comparisons among healthcare service providers. And quite frankly, patients are generally uncaring of costs since insurers are footing the bill. They only want the best services and treatment. There is a misalignment of interests — the patient benefits from the treatments but the costs are shared by everyone else in the same insurance pool.
The public listing of hospitals on Bursa Malaysia likely compounds the problem. Listed companies are pressured to deliver revenue and earnings growth and returns on equity (ROE) to justify higher valuations and stock prices. This is one example of excessiveness of capitalism and raises the question of economic justice. Should private hospitals, offering critical healthcare services, be listed entities?
So, yes, the facts point to the private healthcare providers being the biggest culprits in the current crisis. Their primary goal is to maximise profits, especially for the listed entities. And they can because of the asymmetry in informational and bargaining power vis-à-vis the patients. That said, patients must also share some of the blame, by being uncaring of the costs since the bill is borne by their insurers (and now, all other insurees).
Unless there is intervention, the exorbitant rise in healthcare costs will get worse. Why? Healthcare companies have high stock market valuations, high price-to-earnings (PE) and book ratios. This enables them to acquire other hospitals at very high costs — since the stock market will pay for it. Case in point: The recent acquisition of the Island Hospital in Penang for RM4.2 billion, or about US$966 million (based on the exchange rate in September 2024, when the deal was made). For a 600-bed hospital with 80 specialists, that made RM29 million in FY2022 and RM73.5 million in FY2023. The price was bid up because of competition. This “free market” competition is fine, except that to justify the RM4.2 billion price tag, the winning bidder must make more profits out of Island Hospital — which surely implies higher costs and more treatments to patients in future. Think of it this way: Island Hospital was valued at 57 times PE (RM4.2 billion price tag divided by RM73.5 million profits) while IHH shares were trading at about 24 times. No company will acquire another if it does not believe the purchase will be value-accretive, certainly not a listed company (whose share price will surely be punished by investors). And the only way to bring down Island Hospital’s PE is to triple its profits. That’s just maths. To put into context, this hospital was founded in 1996. Affinity Equity Partners acquired a 78% stake in 2015 for US$200 million, giving Island Hospital a US$256 million valuation. That means the sellers (at US$966 million) made almost three times profits in US dollar terms for their nine-year investment.
Insurance companies are also complicit in the soaring healthcare costs in the country — by doing nothing. The insurers are willing to pay whatever the private hospitals charge since they can simply pass on all the costs to their customers, as they are doing now, by hiking premiums. Surely this cannot be justified.
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While patients generally have limited informational and/or bargaining power vis-àvis private hospitals, the same cannot be said of the large insurance companies. They have substantial resources at their disposal, including medical professionals in employ. There are many ways and tools to control costs. For instance, they can leverage artificial intelligence (AI) and data analytics to collate and compare treatment costs — and provide a check and balance on runaway healthcare charges. Unlike patients, who have limited options, these large insurers hold significant coercive bargaining power over the private hospitals. In the extreme, they can even “blacklist” hospitals with consistently exorbitant charges. We have summarised the asymmetry in bargaining powers in the Diagram below.
We are by no means medical or insurance experts. But we have common sense. When no party is held responsible and accountable for rising costs and claims, where is the motivation to control costs? In 2023, Malaysia saw medical cost inflation rise by 12.6%, more than double the global average of 5.6%.
Some so-called experts (we would think from the private hospitals and insurance companies) are advocating universal health insurance as a solution. Really? Making every Malaysian contribute more to create an even larger pool of money — so that private hospitals and insurance companies can make even more money is a solution? Our proposal here in this article is the opposite of universal health insurance.
Regulate insurance premiums to control future healthcare cost increases
Herein lies our most important contribution to this debate. It is incumbent on the insurance companies to do more. To check the rise in healthcare costs. Why? Because they have bargaining power asymmetry over the hospitals. It is the insurance companies — and they alone — that can force hospitals to behave. To do the treatments that are necessary — but not excessively priced for profit. After all, private hospitals can improve their profits by pursuing medical tourism, where prices are not controlled by the government. Much like our international schools and local universities in enrolling foreign students.
We are not saying insurance companies are the culprit in the rise of healthcare costs. But given the power dynamics, they have power over the hospitals. And like banks, they are oligopolistic. Therefore, they have social responsibilities in building public trust and ensuring systemic stability, consumer protection and affordable insurance. Simply allowing insurers to pass on escalating costs to consumers is akin to allowing them monopolistic power. This is why we hold the insurance companies as the key towards sustainable and responsible healthcare for all.
The proposed diagnosis-related group (DRG) pricing system, slated for rollout in 2Q2025, is a good starting point. It should provide greater pricing transparency and reduce unnecessary procedures and hospital charges. At the same time, some form of co-payment mechanism could foster greater self-governance and discipline among patients when choosing medical services and prevent the “buffet syndrome”. But it is incumbent upon insurance companies to take responsibility and accountability for the rising healthcare costs, because of their unique asymmetrical bargaining power. Bank Negara must regulate insurance premiums based on science and data. Set a maximum insurance premium goal over the next 10 years and, trust us, healthcare costs will quickly fall.
There will be consequences to regulating the free market. Hence, we should be careful of excessive regulations, which tend to create worse outcomes such as insolvency. Having a single cap on premiums or a fixed increase will distort a competitive marketplace. So, how do we ensure continued affordability while also allowing the market to be competitive? One suggestion would be an industry framework that is similar to the airline model — where there is a basic package (economy class) for the masses and premium packages (business and first class) for those who can afford to pay more (see Chart 3).
The DRG will standardise reimbursements for treatments, which will be covered by the “economy” package. The private hospitals will tailor treatments accordingly, limiting unnecessary tests and procedures. However, for those who prefer to have the choice of additional tests, different treatment options, better non-medical services and so on, they can opt for the higher premium “business” and “first class” packages. This structure will enable the insurers to tailor their own business model and be innovative in product differentiation (what to include in the different packages) targeting different market segments. And consumers have a choice: to pay for the basic insurance coverage or pay extra for more “frills”. Of course, the government should ultimately be responsible for providing quality healthcare to the people. Unfortunately, over time, it has outsourced this responsibility to the private sector.
Addressing longer-term demand-supply mismatch
Preventing private healthcare costs from spiralling higher today is necessary and urgent. But we cannot lose sight of the longer-term issues. The problem of rising healthcare costs is not going to go away, and, we think, will only get worse — much like the state of our public education system today — if not comprehensively addressed. And especially if the ringgit continues to depreciate.
There is already evidence of a demand-supply mismatch, reflected in the long waiting time in public hospitals and disproportionate pricing power of private hospitals. We have an ageing population and increase in non-communicable diseases, due in part to lifestyle choices. On the other hand, the number of public-private hospitals has been fairly stagnant over the past five years. We can — and should — build more hospitals, which can be accelerated with more streamlined regulations and procedures.
According to the Association of Private Hospitals Malaysia, hospitals must now navigate approvals from at least 10 regulatory bodies, including the Ministry of Health (MoH), the Department of Environment, the Department of Occupational Safety and Health, the Fire and Rescue Department, and the state government. While we must never compromise on safety and quality, surely the process can be made more efficient; for instance, via a single consolidated online platform. Transparency in the requirements and approval decisions (within the specified time frames).
More importantly, the government must address the human resources factor, and especially the severe shortage of specialists in public hospitals (notably in cardiothoracic, paediatric, oncology and neurology). The Academy of Medicine of Malaysia — a body that represents specialists — had previously warned that the population-to-specialist ratio in the country is 10,000 to four, lower than the Organisation for Economic Co-operation and Development’s (OECD) “ideal ratio” of 10,000 to 14.3. According to MoH, there are currently 8,397 specialists (in an interview published in July 2024) serving at public healthcare facilities in 29 specialty areas. It also stated that Malaysia needed around 18,912 and 23,979 specialists in the years 2025 and 2030, respectively. That’s a huge gap to bridge and time is running out.
Yet, the route to gaining specialist qualification — which requires registration with the National Specialist Register (NSR) established by the Malaysian Medical Council (MMC) — is convoluted. Currently, there are two ways: via a master’s programme run by a local university or through the parallel pathway programme initiative that has been conducted by the health ministry since 2014. The thing is local specialist training programmes may not be accessible to all Malaysians. For instance, the sole cardiothoracic programme in the country is only open to bumiputeras. For all others, the only option is the expensive private parallel pathway, which typically costs hundreds of thousands of ringgit. Sometimes, the rules change suddenly, throwing students/graduates for a loop. For instance, the MMC decision in October 2023 to refuse registration of graduates with FRCS Edinburgh in Cardiothoracic Surgery qualification as cardiothoracic surgery specialists on the NSR.
Let’s not kid ourselves, we wish for our doctors and specialists to work with passion and dedication to healing and patient care. But education is also an investment in self — it too requires a return on investment (ROI). There is intense global competition for talent, even more so for medical specialists, given that ageing population is a global issue. And lest we forget, the global comparison for salaries and incomes is made in US dollar terms.
Are our current policies at least partly to blame for the current problems, be it rising healthcare costs or the severe specialist shortage we are facing? We believe so. As we said, over the years, the government has outsourced healthcare for a large segment of the population to the private sector. In more advanced countries, the public hospitals cater to most healthcare needs of their people. And in some cases, like Canada, there is only public healthcare — no private hospitals or clinics. The government could do a lot more for inclusive quality healthcare access. We can all agree that systemic inequality of opportunity — including lack of access to quality education and healthcare — will perpetuate inequality of outcome, that cannot possibly be offset with progressive wages and more cash handouts.
Conclusion
The evidence points to private hospitals as the party most responsible for the sharp rise in private healthcare costs, and therefore the astronomical rise in insurance premiums. But the insurance companies and the government are also enablers, to different degrees.
The truth is, there does not appear to be a will to solve the problems. It is easier to simply kick the can down the road. Sadly, the “go-to” solution is to just “tax” the middle class — be it allowing insurance premiums to increase, raising taxes to fund more government spending and so on. And why? Because no one speaks for the middle class, who are made to pay for the inefficiencies, the lack of care and interest (of insurers), the government’s lack of action and unwillingness to resolve critical issues and/or profiteering of all others. The very top 3% to 5% don’t mind and don’t care. They pay their own healthcare bills without the need for insurance. Many seek treatment overseas — in Singapore, the US, UK, Germany and so on. The same goes for education. But the middle class is stuck. And they are made to pay!
The Malaysian Portfolio gained 0.2% for the week ended Feb 26. The top performing stocks were Harbour-Link Group (+6.6%), United Plantations (+6.4%) and UOA Development (+2.9%). Prices for Insas Bhd – Warrants C continued to slide, down by another 17.6% for the week and bringing cumulative losses to 83.2% from our initial cost of investment. IOI Properties Group (-4.3%) and KSL Holdings (-2.5%) were the other notable losers. Total portfolio returns now stand at 195% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 13.2% over the same period, by a long, long way.
The Absolute Returns Portfolio lost 5.4% for the week, paring total returns since inception to 27.9%. US stocks came under some selling pressure after the S&P 500 Index hit a fresh all-time record high on Feb 19. The two gaining stocks were Berkshire Hathaway (+2.1%) and DBS Group Holdings (+1.8%). CrowdStrike (-12.3%), Talen Energy (-12.3%) and Grab Holdings (-8.8%) were the biggest losers. We disposed of all our shares in Palantir Technologies, netting a handsome gain of 75.7% for our three-month holding period.
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