In my December 3 write-up on CodeBlue, it has been demonstrated that rising premiums benefit hospitals and assurance companies. It is a symbiotic, profit-driven relationship between the two entities, with private hospitals having an undue advantage over the assurance companies.
Lately, lawmakers, regulators, and the general public have unfairly targeted insurance companies. Takaful companies have been spared even though they, too, are increasing their prices in tandem. Insurers’ reputations have been battered in the media.
Bank Negara Malaysia (BNM), MPs, and the prime minister have been making statements that do not consider the overall medical business ecosystem, product design, or legal framework.
The premium imposed directly relates to its ability to generate new enrolees (policy owners). Depending on the company’s strategies, the rate of new enrolees, and policyholder retention, they strive for a 5 to 10 per cent increase in total premiums to achieve their target profitability.
The following segment will explain the basis of insurance pricing and factors that affect the premium price.
Direct Cost Contributors — Hospital Charges
As with other business entities, assurers must deliver incremental profits that meet their shareholder’s expectations. Profits are achieved when products are priced above the cost of doing business.
If the cost of doing business is high, the product’s premium price must be higher than the cost to meet shareholders’ expectations. Therefore, an increase in hospital charges directly impacts the premium imposed.
Direct Cost Contributors — Regulatory Impact On Cost
Besides hospital charges, BNM’s many regulations directly affect the premium imposed. The business requires companies to determine the premium by computing the expected and unexpected claim amount based on historical data.
BNM regulation requires companies to maintain a certain regulatory financial reserve (which is meant to protect policy owners’ interests).
The reserve requirement can be substantial. As a rule of thumb, it is about 40 per cent more than the average (Best Estimate) claims in a defined period. The amount varies with companies depending on the business portfolio, total assets, and other defined variables.
For example, in a quarter, on average, if a company is expected to pay RM200 million to hospitals/policy owner claims, it must demonstrate that they have enough assets to support about RM280 million worth of potential claims.
The additional RM80 milllion is a cost to the company that must be factored into the premium price. Takaful and insurance companies must maintain a reserve capital under the RBC framework to protect customer interest.
Takaful regulation permits companies to mix the life and health premiums in a common fund. Theoretically, it should allow them to offer significantly lower takaful premiums since life claims experience is much lower than health. However, these are not seen in practice. The mixture of life and health premiums is not permitted in Insurance.
From a business model perspective, takaful companies earn gross profit at policy owner enrolment. However, insurance companies earn their income from a surplus of their insurance fund after deducting claims and operational expenses.
They will earn anything if the total claims amount exceeds the insurance fund collections. In other words, compared to insurance companies that take business risks, takaful companies don’t.
Cost Contributors — Product Design
Like insurance, takaful companies’ targeted profit rate is the same as insurance companies. They are not charitable bodies but commercial entities that leverage on Islam to pursue profits. The product benefits and design are the same as insurance.
Takaful companies face higher costs than insurance companies, due to the need to comply with Shariah law and the business model forced upon them. However, they have the upper hand in business among Muslims due to their strong flavourings of Islam and the Arabic language.
Current takaful and insurance health products are designed based on the annual or lifetime total medical expenditure limit. This unhealthy practice gives hospitals a blank check that is open for abuse.
The past practice of having internal limits for boarding charges, medical tests, and procedures must be retained, especially for treating acute illnesses. Such high limits can be opened for patients suffering from chronic diseases.
Unhealthy competition in the market led to the removal of these internal limits. It would be better for BNM to regulate such internal limits, prohibit the cashless system, and revert to the reimbursement method for treating acute diseases.
Both takaful and insurance health products are annual products. Many policy owners start paying at a very young age without making any claims. They do not benefit from being insured or receive non-claim benefits.
However, when the insured are no longer employed, their early day payments do not help them. This is an unfair business practice.
Medical Inflation
Lawmakers and regulators must appreciate the different prescribed models used, and the imposed regulatory reserve has a lesser impact than the unregulated private hospital charges.
Private hospitals deceptively hide their annual increment behind the phrase “medical inflation”. The rise in hospital charges is a revised profit rate and has nothing to do with inflation.
Unlike actual inflation, private hospitals are in total control of price revisions. This term seems to have become a norm and has not been challenged by the assurance industry and the regulators. It is meant to negate the reputational impact of private hospitals’ business.
In 2023, private hospitals in Malaysia generated a revenue of around RM27.73 billion, an increase of more than RM3 billion from 2022.
KPJ Healthcare Bhd’s net profit for FYE2023 is RM263.41 million compared to RM166.98 million registered in FYE2022, representing a 58 per cent increase.
IHH Healthcare Bhd’s net profit for FYE2023 was RM2.95 billion compared to RM1.55 billion registered in FYE2022, representing a 90 per cent increase.
Private hospital profits are directly proportionate to the charges they impose on their patients. This hospital profit growth rate mainly contributes to increased assurance premiums.
IHH’s top 3 shareholders are Mitsui, Khazanah, and the Employees Provident Fund (EPF), representing 68.84 per cent of the total shareholding. KPJ Healthcare’s top three shareholders are Johore Corp, EPF, and Kumpulan Wang Persaraan, representing 60.01 per cent of the total shareholding. These shareholders are driving the price increase.
Conclusion And Proposed Solution
The public, lawmakers, and regulators have been barking up the wrong tree. They need to appreciate the root cause of rising premiums. They must acknowledge that most premium increases are directly due to private hospitals increasing their charges to meet shareholder expectations.
The government needs to find a way to regulate companies that are making such obscene profit growth.
The unfair tactics of charging insurers (as much as 100 per cent more) than cash-paying patients should be curbed and regulated. Private hospitals must understand that their behaviour will kill the goose that lays the golden egg.
Once a tolerance level is breached, the consumer-assurance-hospital economic cycle will crumble.
The Private Healthcare Facilities and Services Act 1998 must be strengthened, and medical care costs must be streamlined to a reasonable level using a standard approach without compromising market competition. Differential rate pricing based on payor status should be prohibited.
Private hospitals must prioritize the medical social element in business by taking a long-term view in addressing their returns on equity (ROEs).
Government hospitals should be corporatised as part of the National Health Care Financing Scheme (NHFS) agenda. They can be efficient and affordable medical service providers, and, at the same time, compete with private hospitals. This will provide the necessary pricing check and balance.
The corporatization of NHFS, along with the setting up of the National Health Fund, will trigger the desired competition in the health care industry and prevent hospitals from making excessive profits.
To ensure a level playing field, unfair assurance regulations in the industry must be harmonised. BNM should revisit the RBC reserve rate for health assurance and allow cross-subsidization between life and health funds at the company’s discretion to reduce the potential impact of price increases.
Regulators should consider imposing an annual pricing review and ensure that at least 80 per cent of collected premiums go towards paying medical claims. The other 20 per cent shall be used for administrative, overhead, and marketing costs.
Under the 80/20 rule, agent commission will be limited, forcing companies to operate optimally and promoting direct sales. Assurance companies must reward policy owners who do not file claims by offering stable premiums, especially during the golden years.
Regulators must curb the current annual and lifetime limits products by enforcing inner limit rules.
Takaful companies must bring added financial value to the marketplace besides riding on Islam to achieve their profit goals. They should be able to do it using the pure fee-based model (wakalah) and limit their wakalah fee to 20 per cent.
This will build up more reserves and cushion any future price revisions. They must demonstrate that they live by the spirit of S92 IFSA, where the focus should be on the customers and not solely on religious sentiments.
Assurance industries in Malaysia must cooperate and negotiate collectively with private hospitals on the cost of treatment since they contribute billions of ringgit to hospitals’ revenue. Collective negotiation should not trigger competition law (Competition Act 2010 (CA 2010)), provided no standard product structure, benefits, or pricing exists.
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.
