KUALA LUMPUR, Nov 17 — Various countries took five years to over a decade to implement the diagnosis-related groups (DRG) payment system in phases, said an analyst from Maybank Investment Bank.
Health care analyst Nur Natasha Ariza told a webinar organised by Maybank Investment Bank on health care stocks last Tuesday that share prices for hospital groups IHH Healthcare Berhad and KPJ Healthcare Berhad fell sharply in December 2024 after the government’s announcement introducing DRG.
But the past 11 months has seen numerous “ping pongs on when it will be announced”.
“What we’ve seen over the last 11 months is actually a reinforcement of what we had studied and believed – this will take time, this will not be easy to do, and this will be phased,” Natasha told investors at the webinar titled “Signs of Life: Malaysia Health Care”.
She noted that Medicare in the United States was the first to begin DRG in the 1970s, taking 12 years to transition to the payment system in 1983. Australia, the second to initiate DRG in 1981, took 12 years to implement it in the state of Victoria in 1993.
Thailand took a decade to implement DRG from 1993 to 2003, Beijing in China took five years (2006 to 2011), and Germany took three years (2000 to 2003), among various developing and developed countries that transitioned to the reimbursement system.
“These guys typically take more than five years to implement DRG in totality. That is one. But secondly is that even when it took them that long, their implementation was actually in phases,” said Natasha.
Last month, Bank Negara Malaysia (BNM) claimed that the DRG rollout would be postponed to 2027, after it was originally planned for mid-2025. The 15th Parliament will automatically dissolve in December 2027.
Rakan KKM, the cornerstone of BNM’s Reset strategy for private health care, has yet to be launched due to regulatory barriers under the Private Healthcare Facilities and Services Act 1998. The private wing programme by the Ministry of Health (MOH) – which wasn’t allocated in MOH’s 2026 budget – had originally been intended to pilot DRG as a benchmark for conventional private hospitals.
Under DRG, health care providers are paid a fixed rate based on diagnosis and episode of care; private hospitals in Malaysia currently operate a fee-for-service model. Private general practitioner (GP) clinics have essentially been practising DRG for decades, charging bundled payments for consultation and medications.
Natasha pointed out that Thailand had six different variations of DRG over the last 20 years.
“So what this means is that the impact to the sector will not be immediate and it will not be major because they have to start with smaller groups. What I mean by that is if you want to implement a price cap onto a specific disease group, you’ve got to first understand how to group the diseases,” said the Maybank analyst.
“Secondly, you have to understand how each disease is priced in all the different private hospitals. Currently, we do not have a centralised pricing that we are aware of. Every kind of hospital kind of charges differently.
“It’s a free market out there. This is what has been deterring DRG from being very easily implemented over the last few years.”
Natasha said she expected hospitals to begin DRG with non-complex cases like fever or dengue, before moving towards complex cases that will take a long time over phases.
“By the time it does, then we believe the hospitals should be able to match the cost to whatever price that is being imposed on them.”
Medical Insurance Trends Support Future Health Care Expansion
Natasha then pointed to medical insurance trends as a key indicator of confidence in the health care sector.
“Medical insurance in Malaysia makes up about 60 to 70 percent of total receipts for most of the private hospital operators, such as the likes of IHH and KPJ.”
During the Covid-19 pandemic, new medical insurance take-up surged in 2021 and 2022 to more than 1.8 million new policies taken up in each of those years, before dropping to about 1.2 million new policies each in 2023 and 2024.
“Insurance take-up was really boosted during the Covid years. It has since normalised. This doesn’t mean that the number of businesses has been reducing. It’s just a general normalisation post a specific macro event,” explained Natasha.
Medical insurance claims trends also showed upward movement, with claims payouts increasing from nearly RM5 billion in 2019 to almost RM9 billion last year.
“Claims payout is one of the factors of what drives insurance premium price revisions,” said Natasha.
Deputy Finance Minister Lim Hui Ying claimed in Parliament recently that under BNM’s interim measures capping health insurance premium hikes to 10 per cent until end 2026, more than 90 per cent of policyholders experienced premium adjustments of less than 10 per cent in the first year.
Lim also said extending the central bank’s interim measures beyond three years could threaten the sustainability of health insurance products.
Natasha said the government’s planned basic medical and health insurance/takaful (MHIT) product – which BNM has said will also launch in 2027 alongside DRG – was a positive for the health care sector.
“With more people taking up insurance, then for us, this gives a very strong case support for more patient volumes going into the private sector hospitals.”
Significant Growth Potential For Medical Tourism
Malaysia ranks among the top medical tourism destinations in Asia, alongside India, Thailand, Singapore, and South Korea.
As of last year, private hospitals in Malaysia recorded revenue contributions from medical tourism in the mid-single digits to low teens.
“For example, KPJ’s foreign patient contribution is at 6 per cent to revenue. IHH, post the acquisition of Island Hospital in Penang, has been recording around 12 per cent revenue from foreign patients,” said Natasha.
She pointed out that medical tourism is stronger in Thailand, with Bumrungrad International Hospital recording a much larger revenue contribution from foreign patients at over 50 per cent.
“So in Malaysia, you can see that our revenue is relatively small. There’s a lot more room for growth. One of the reasons is we haven’t really been pushing as much as our Thai counterparts have been pushing for medical tourism,” said Natasha.
However, 2026 will be the flagship Malaysia year of medical tourism. According to Natasha, the main areas for medical tourists are Penang and Johor, both of which are close to Indonesia, as well as Kuala Lumpur. Indonesia comprises about 90 per cent of Malaysia’s foreign patient base.
Foreign patients typically bring higher margins to hospitals.
“Foreign patients who come in actually bring in around 20 per cent higher margin than local patients,” said Natasha.
She explained that some hospitals charge higher for “certain items” for foreigners. Foreign patients also tend to have very complex cases. “By the time you seek international help, it means your case is incredibly difficult.”
High-quality medical facilities in Penang, such as Pantai Hospital’s stroke centre and Island Hospital’s cancer treatments, further attract these patients.
“That’s a normal psychological thing that people would actually do. You wouldn’t go across the border just for any particular surgery if you did not think you needed it. If your neighbourhood area does not have the facilities you need, then you will be looking out,” said Natasha.
Cost competitiveness strengthens Malaysia’s standing among its peers. Natasha noted that on average, for a coronary artery bypass graft (CABG) procedure, Malaysia charges US$20,000, compared to South Korea (US$29,000), Thailand (US$33,000), and Singapore (US$54,500).
“Across this entire list, you will be able to see that we are consistently either the second lowest or the lowest in general when it comes to cost comparisons between the different health care travel destination countries. So that stands as one of our strongest suits,” said Natasha. “Because not only are we cheap, we are good.”
