Medical Inflation Is The Root Cause Of Increasing Insurance Premiums

Malaysia's medical inflation rate soared to 15% in 2024, far exceeding the global and Asia-Pacific rates of 10%. Insurance premium hikes seem inevitable, but they will undoubtedly increase the burden on policyholders. This situation has also placed unprecedented pressure on Medical Health and Islamic Takaful (MHIT) products and insurers.

Medical Inflation: The Root Cause

The rapid increase in Malaysia's medical costs, commonly referred to as medical inflation, is primarily driven by non-transparent medical expenses. Hospital Supplies and Services (HSS) costs, which include various scans, laboratory fees, medications, and even ventilators and gloves, could constitute up to 70% of a patient's total medical costs.

When insured patients are admitted to private hospitals or clinics, they often do not check their bills, as insurers would cover the costs. Even if they did, the detailed breakdown of the bills might be full of medical jargon that the patients would not understand. Many cases also revealed that insured patients would be charged significantly more than self-paying patients. These practices that are not transparent give private hospitals or clinics more opportunities to charge more by recommending unnecessary tests or treatments.

Furthermore, private hospitals and clinics' fees, particularly for medical supplies and services, are not regulated by any government agencies. Both lack of regulation and transparency contribute significantly to medical inflation.

Challenges Faced by Medical Insurance

In addition, the post-pandemic era has seen a rise in patients opting for private healthcare, leading to an annual increase in insurance claims. Statistics reveal that while only approximately seven out of 100 insured individuals made claims in 2020, this figure increased to around nine in 2023.

Data from 2023 shows that the compensation-to-premium ratio for insurance companies reached 111%. This indicates that many insurers are operating at a loss in their medical insurance products, as premium income is insufficient to cover claims.

Although the insurance industry remains profitable overall, it is primarily due to profits from other business areas. In the short term, these profits might offset losses in medical insurance, but prolonged deficits could compel insurers to raise premiums for other products. This scenario could create a sense of unfairness among customers relying on other insurance products. Ultimately, if the overall situation does not improve, it could affect the long-term operations of insurance companies, potentially leading to the discontinuation of medical insurance policies.

Bank Negara Malaysia (BNM) has previously emphasized that insurers can only reprice their premiums due to continued increases in claims and not for higher profits or other expenses. In short, the premium increases we see today reflect medical claims increases.

Short-Term Solutions: Measures by BNM and Insurance Companies

To assist affected policyholders, BNM and insurers have recently announced several interim measures:

1. Gradual Premium Increases: Insurance companies will spread out the changes in premiums over a minimum of three years for all policyholders affected by the repricing, until the end of 2026. With this measure, BNM stated that at least 80% of policyholders are expected to experience yearly premium adjustments due to medical claims inflation of less than 10%. However, this measure does not apply to premium increases due to age group transitions.
2. Exemptions for Seniors: Policyholders aged 60 and above with basic medical coverage will be exempted from premium hikes for one year from their policy anniversary. However, this does not apply to premium increases due to age group transitions.
3. Policy Reinstatements: Policyholders who lapse or cancel policies due to premium hikes can seek reinstatement and enjoy the above measures.
4. Alternative Plans: Insurance companies must offer policyholders medical policy options with the same or lower premiums by the end of 2025 if they choose not to continue with their existing plans.

Long-Term Solutions: Transparency and Structural Healthcare Reforms

As long-term solutions, we need the healthcare industry to take proactive steps in promoting transparency and operate on a value-based system:

• KPIs that track specialists' use of hospital services should be eliminated, as these metrics can create unnecessary pressure on specialists to meet certain targets.
• Guidelines and interventions should be implemented to properly manage and reduce unnecessary diagnostics, such as using digitalisation to enable the sharing of electronic medical records, which would reduce the need for repeated tests for patients.
• The industry should publish cost comparisons to enable patients to make informed decisions. The industry should also move towards the Diagnosis-Related Group (DRG) payment models, standardising payments to promote cost efficiency.
• Greater transparency on drug prices.
• Strategic purchasing by both public and private sectors to reduce costs.
• Plain language should be used in itemised bills.

Tackling medical inflation is a complex challenge. Until these structural healthcare reforms are undertaken to rein in medical cost inflation, we will not be out of the woods. A ‘whole-of-nation’ approach is needed – including MOH and private hospitals to also play their part.

Collective Efforts Needed to Overcome Challenges

In summary, tackling medical inflation requires collaborative efforts from all stakeholders, including the Ministry of Health, private hospitals, Bank Negara, and insurance companies. Without such cooperation, resolving the crisis will remain a daunting challenge.