Introduction
Commercial health insurance providers constantly balance two competing goals, between payment obligations and sustainability. On one side, assurance exists to provide timely financial access to treatment when illness strikes.
On the other hand, overly generous coverage—particularly “first-dollar, cashless” benefit, which fuels excessive utilisation, inflated billing, and rapidly escalating claims that threaten the long-term viability of the pool.
Across many markets, including Malaysia, this tension has led insurers and takaful operators to introduce cost-sharing tools such as copayments and deductibles. These mechanisms require policyholders to pay a portion of medical costs themselves before or alongside reimbursement.
Regulators have also encouraged such measures. Bank Negara Malaysia’s (BNM) White Paper on the Base Medical and Health Insurance/Takaful (MHIT) Plan incorporates both deductibles and copayments as structural features intended to manage rising health care costs.
In theory, cost-sharing promotes prudent consumption, discourages unnecessary care utilisation, and stabilizes premiums. In practice, however, health care decisions are rarely discretionary, and patients have no power to influence hospital charges.
The question, therefore, arises: do copayments and deductibles genuinely control costs, or do they simply transfer financial burden to policyholders? The basic mutuality arrangement is now combined with another layer of cost sharing.
This article examines the practical advantages and inherent drawbacks of these tools, arguing that their effectiveness in containing medical inflation is often overstated.
Understanding Copayments And Deductibles (CPD)
A copayment is a fixed amount or percentage that the policyholder pays whenever health care services are used. For example, a plan may require the patient to pay 20 per cent of the bill. Under BNM’s proposed base MHIT structure, the copayment is set at 20 per cent, capped at RM3,000 per disability or episode of treatment.
A deductible, by contrast, is the initial amount the policyholder must pay before coverage begins. If the deductible is RM1,000, the first RM1,000 of eligible expenses comes directly from the patient’s pocket.
Under the BNM-proposed base MHIT structure, the deductible is tiered by policyholder age into two categories. The proposed deductible is RM500 per admission for those below age 61, increasing to RM1,000 at age 61, in tandem with a higher annual limit. Shouldn’t it be reversed, as one would expect fewer claims in younger ages?
Both mechanisms are forms of cost-sharing. They reduce the insurer’s immediate claims outlay and expose policyholders to some financial responsibility. The underlying assumption is that it will make behavioural changes when people pay part of the cost, as they will use services more carefully to avoid paying for CPD.
This logic may hold for discretionary consumption, such as retail purchases. Healthcare, however, is fundamentally different. Most hospital admissions are medically necessary rather than optional. Patients rarely shop for hospitalisation the way they shop for consumer goods. The policyholder’s ability to influence treatment intensity or hospital pricing is limited.
The Economic Logic Behind Cost-Sharing
From an assurer’s perspective, copayments and deductibles serve three main purposes.
First, they reduce small and frequent claims that are expensive to administer relative to their value. Second, they mitigate “moral hazard,” where fully insured individuals may consume more services simply because someone else pays. Third, they lower total claims paid by shifting part of the expense to policyholders, theoretically enabling lower or more stable premiums.
These arguments are sound in principle. Yet their relevance depends heavily on the type of health care covered. In Malaysia’s private hospital environment, inpatient treatment is rarely inexpensive. A single admission can easily exceed RM10,000. A deductible of RM500 to RM1,000 has minimal impact on such claims. It neither changes hospital pricing behaviour nor materially alters total costs.
For example, if 100 patients each incur RM10,000 in hospital charges, total costs equal RM1 million. Even with an RM1,000 deductible, the pool only covers RM100,000 (10 per cent), while the overall hospital pricing structure remains unchanged. Patients still face the same medical necessity and limited bargaining power.
Thus, cost-sharing may reduce insurer payouts, but it does not address the root drivers of medical inflation and fails to account for policyholders’ limited ability to mitigate hospital claims costs.
Theoretical Benefits In The Malaysian Context
Proponents argue that cost-sharing reduces unnecessary utilisation and improves premium stability. In outpatient settings, this may be partially true. A small copayment can deter casual or repetitive visits with limited clinical value.
However, medical and health insurance/takaful products in Malaysia mainly cover inpatient hospitalisation. Pre-admission consultations and minor outpatient visits are often excluded from such cover, except if they lead to admission. As a result, opportunities for “frivolous” use are naturally limited.
Most people do not unnecessarily admit themselves to the hospital. However, a small number of people do so. In such cases, doctors failed in their fiduciary and professional duties by admitting them. In fact, the opposite risk is more common: patients delay treatment due to CPD cost concerns.
When early intervention is postponed, conditions worsen and total expenses increase. What begins as a minor illness can escalate into a major admission. Consequently, deductibles and copayments may not meaningfully reduce utilisation but may instead shift treatment to later, more expensive stages. It becomes counterproductive to both patient welfare and insurer sustainability.
Premium Stability: Reality Or Illusion?
It is frequently claimed that cost-sharing stabilises premiums by reducing claims. Yet premium increases in Malaysia have largely been driven by medical inflation, hospital pricing practices, technology costs, and provider behaviour rather than small, frequent claims.
When hospital charges rise 10 per cent annually, a modest deductible does little to offset this growth. Insurers ultimately still adjust premiums upward to match claims trends.
Furthermore, eliminating minor reimbursements does not significantly change the cost structure of hospitalisation assurance, where most expenses stem from large, complex cases. The savings are marginal relative to total claims.
Thus, while cost-sharing may slow claims growth slightly, it rarely delivers the dramatic premium relief often promised.
Impact On Mutuality And Social Protection
Insurance and takaful are built on mutuality—the collective sharing of risk so that no individual bears catastrophic costs alone. Excessive cost-sharing can weaken this principle.
When copayments become large, coverage begins to resemble self-funding. Policyholders shoulder substantial expenses themselves while still paying premiums. The sense of shared protection (mutuality) diminishes.
This shift can have broader social consequences. Financially strained individuals may opt out of coverage altogether, increasing reliance on public hospitals and undermining risk pooling. Over time, the pool becomes smaller, older, and sicker, further driving up premiums—a classic adverse selection spiral.
What was designed to improve sustainability may inadvertently reduce participation and destabilise the scheme.
Operational And Administrative Challenges
The introduction of CPD introduces operational complications. Hospitals and insurers must accurately track deductibles, percentages, caps, and accumulated limits. Claims systems must compute these amounts precisely, while policyholders must understand their responsibilities.
Confusion is common. Disputes arise over balances, and patients often experience stress at the point of care when asked to pay unexpected amounts. Administrative costs may increase rather than decrease, offsetting some intended savings.
In summary, cost-sharing complicates what was once a straightforward cashless promise – “The bill will be paid.”
The Downside
The most significant drawback is behavioural. Faced with out-of-pocket costs, lower- and middle-income individuals may postpone care. They may not differentiate between minor symptoms and serious illness, seeking treatment only when conditions become severe. This leads to longer hospital stays, higher complications, and ultimately larger claims.
Ironically, the very mechanism intended to reduce costs may end up increasing them.
Moreover, patients have almost no influence over hospital pricing. Whether they pay zero or 20 per cent, they cannot negotiate surgeon fees or the various hospital charges. Cost-sharing, therefore, penalises patients without addressing provider-side inefficiencies.
The number of people not renewing their policies is expected to rise.
A More Balanced Perspective
Copayments and deductibles are not inherently harmful. When modest and carefully structured, they can encourage awareness and reduce trivial claims. However, they should not be viewed as primary solutions to medical inflation. The solution lies in controlling hospital charges.
Sustainable reform requires addressing supply-side drivers: transparent pricing, negotiated tariffs, utilisation management, clinical governance, and better data analytics. Without these measures, cost-sharing merely reallocates costs rather than reducing them.
Effective health assurance depends not only on financial discipline but also on fairness and accessibility. Policies that undermine participation or delay treatment ultimately weaken the entire system.
Conclusion
CPD has become a standard feature of modern health assurance design, promoted as pragmatic tools to curb excessive utilisation and stabilise premiums. Their logic is intuitively appealing: when individuals share costs, they will consume health care more carefully, thereby making the pool more sustainable.
Yet health care is not a discretionary purchase, and patients have no control over the price or intensity of hospital treatment. In Malaysia’s inpatient-focused environment, small deductibles and capped copayments do little to restrain medical inflation or hospital billing practices. Instead, they primarily shift expenses to policyholders while leaving systemic hospital-related claim drivers untouched.
More importantly, excessive cost-sharing risks undermining the social purpose of assurance. Financial barriers (CPD) discourage early treatment, push vulnerable individuals out of coverage, and erode the principle of mutual risk sharing. What begins as a cost-containment measure can inadvertently increase complications, claims severity, and long-term expenditure.
The underlying principle of assurance is mutuality and cost sharing. The company’s role is to manage hospital costs for the benefit of contributors, keeping contribution costs low. With CPD, the contribution is reduced because fund-level mutuality is now lower, but the cost remains high and is not controllable.
The company’s failure to manage costs is shifted to burdening contributors. If a lower contribution is desired, the sum cover should be reduced instead of introducing CPD.
Is this in line with the assurance basic principle of mutuality? Takaful shariah scholars need to examine this issue, whether there is any breach of (mutuality) ta’awuni. We can conclude that CPD’s main objective is to make contributions more affordable and not cost containment.
Cost-sharing, therefore, should be applied cautiously and proportionately—not as a cure-all. Real sustainability lies in addressing provider pricing, strengthening governance, improving transparency, and aligning incentives across hospitals, doctors, insurers, and patients.
Only by tackling these structural issues can health assurance remain both affordable and faithful to its promise of genuine protection, and will encourage greater participation.
Dr Mohamed Rafick Khan 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 and 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.
