My previous write-up, published on December 17, 2024 in CodeBlue, highlighted that in 2023, private hospitals in Malaysia earned a revenue of about RM27.73 billion in 2023 (RM24.56 billion in 2022).
The two largest hospital networks in Malaysia are KPJ Healthcare Bhd (KPJ) and IHH Healthcare Bhd (IHH). Their combined revenue is RM7.1 billion, representing 25.6 per cent of the market share in 2023 (23 per cent in 2022).
KPJ’s net profit for FYE2023 is RM263.41 million (RM166.98 million in FYE2022), representing a 58 per cent increase. Their revenue in 2023 is RM3.42 billion (RM2.87 billion in 2022). IHH’s net profit for FYE2023 was RM2.95 billion (RM1.55 billion in FYE2022), representing a 90 per cent increase. Their revenue in 2023 is RM3.68 billion (RM3.0 billion in 2022).
For KPJ, a 19 per cent increase in revenue generated a 58 per cent increase in profit; for IHH, a 22 per cent increase in revenue generated a 90 per cent increase in profits.
Hospital Revenue Drivers
Comparing to Nestle Malaysia’s 2023 revenue of RM7.05 billion (RM6.64 billion in 2022), with a profit margin of RM659.8 million (RM 620.3 million in 2022). The profit increased by 0.06 per cent on the back of a revenue increase of 5.8 per cent. The combined hospitals’ profits in 2023 represent 4.9 times Nestle’s profits.
A comparison with Nestle is made because both are in the consumption business. Despite having a smaller consumer base and limited products and services, the two hospitals generated more significant profit growth in 2023 than Nestle.
What does this tell us?
Private hospitals offer limited products and services, unlike Nestle Malaysia, which sells a wide range of consumable products. Private hospitals are dependent on doctors and their reputations. They decide on the admission, investigations, and the type of treatment given to patients. In other words, private hospitals’ revenue and profits directly depend on doctors’ activities while dealing with patients.
Compared to 30 years ago, when diagnoses were driven by clinical assessment, today, doctors make their diagnoses based on lab results, radiology, and other invasive and non-invasive tests. The advancement in medico-technological sciences encourages doctors to use this expensive test to avoid any medico-legal risk of misdiagnosing. This led to increased consumption of laboratories, procedures, and admission.
There is a symbiotic relationship between doctors in private hospitals and the company that owns the hospital. For both, their survival depends on new and recurrent patients. Patients visit private specialists and hospitals based on their reputation, spread by word of mouth.
Though the prevalence is not documented, a sizeable number of patients demand admission and specific expensive tests to be done, and very few doctors maintain the ethical principle of denying such patient’s requests. Information on Google and social media probably contributed to patients making such demands.
Many small, non-listed private hospitals provide additional remuneration to doctors for admitting patients and prescribing tests and medications. The authorities must audit these hospitals to ensure such a conflict of interest does not exist.
Another factor leading to higher admission is that health insurers warrant that some tests can only be done in-patient to control the utilization rate and prevent abuses.
It is apparent that hospital shareholders direct management in delivering specific targeted revenue and profit.
Diagnosis-Related Groups (DRG) Pricing
As a result of the spiraling increase in insurance prices, Health Minister Dzulkefly Ahmad was reported as saying that the government plans to roll out the diagnosis-related groups (DRG) pricing system. He says the aim is to regulate private hospital bills by the second quarter of 2025 after amending the Private Healthcare Facilities & Services Act 1998.
DRG is a case-mix pricing matrix system. Patients are charged based on a particular diagnosis and treatment to streamline pricing across the health care industry. The ultimate goal is to maintain some standardized market pricing and to ensure unethical profiteering by healthcare providers.
The pricing is not static and is typically reviewed periodically based on continuous data gathered over time. DRG is not perfect. It is open for doctors and hospitals to be creative in artificially manipulating DRG assignments to maximise reimbursement.
Its success depends on the regulator’s ability to supervise closely and proactively investigate any deviations in pricing.
Proponents of DRG claim that it benefits the industry by providing consistent and standardized diagnosis, care, and pricing. It promotes transparency across the industry. However, opponents of the system are concerned about underpaying the doctors and hospital shareholders.
Doctors’ concerns include the pressure to discharge patients early and the inability to place a case in the matrix, which results in inaccurate charges being imposed and optimal care not being given to patients.
Applying DRG outside the National Health Care Financing Scheme (NHFS) framework has significant consequences. It will burden the public health care system.
Private hospitals and doctors will turn away chronically ill patients who require costly treatment, and these patients will have no place to turn to other than the public hospitals. Private doctors might ask patients to top up the cost of treatment above the allowable DRG cost if they wish to be treated by them.
DRG would work better when the public hospitals are corporatised, i.e., the country has a single health care system. With corporatisation, the separation of public and private care services disappears.
Bank Negara’s Moratorium On Insurance Companies
On December 20, 2024, Bank Negara Malaysia (BNM) announced interim measures as “agreed with the insurance and takaful industry” to assist policyholders. BNM’s decision is understandable since the root cause of the problem is outside their governance sphere.
They have little insight and almost no control over the medical business ecosystem and can only “appeal to and persuade” insurers to reduce the price revision. BNM can be very persuasive when needed. It is unclear whether BNM offered any capital reserves concessions to insurers.
BNM concurred with the Association of Private Hospitals Malaysia’s (APHM) view that “medical inflation” leads to price increases based on a superficial analysis. They failed to acknowledge that private hospitals’ excessive and greedy profiteering caused Malaysia’s rising treatment costs, despite the presence of publicly available financial data on most KLSE-listed private hospitals.
It contradicts the evidence presented in the first paragraph, which supports the theory that excessive profiteering is the cause of excessive price increases rather than actual inflationary pressures.
BNM claims that price escalation is driven by advancements in medical technology and the increasing prevalence of non-communicable diseases (NCDs). However, it does not provide evidence to support its statement.
Did BNM or the government check on the amount of new technology investment made by the hospitals or produce statistics to support the rise of NCDs in Malaysia? Such information can be found in their annual reports.
Logic dictates that an increase in NCDs means more business for hospitals, and they can offer cheaper pricing due to an increase in case volume. We can conclude that the basis private hospitals use to increase their prices is not solely due to the rise in NCD cases and inflation.
Interestingly, BNM echoed my previous point that the issue is complex and requires the concerted action of all stakeholders across the health care ecosystem. The message BNM is sending is clear, i.e., they are not the sole solution provider to this malady, but it’s a problem that the government (through a multi-ministry task force) needs to solve.
Conclusion
The solution lies in the development of NHFS. Introducing DRG without NHFS will have grave consequences on the public health care system. DRG cannot be introduced as a knee-jerk reaction to address the rising health assurance premium.
The country needs a systematic medium and long-term solution. BNM’s interim solution appears to be due to public and political pressure. It is not a sustainable solution, even in the short term.
The government should immediately introduce the National Healthcare Fund (as I had proposed) and impose a special tax (similar to the prosperity tax imposed previously) on private hospitals that make an insane profit and use it as seed funding to set up the National Health Fund.
Dr Mohamed Rafick Khan is a reassurer and assurance industry consultant. He is a trained physician with 12 years of experience in military medical services and over 22 years of experience in the assurance industry. He retired as the CEO of a multinational reinsurance company in 2019. Currently, he remains active as an independent international assurance industry consultant.
- This is the personal opinion of the writer or publication and does not necessarily represent the views of CodeBlue.
