Yes, that’s right. Everyone in the ecosystem, from patients to medical suppliers to doctors, contributes to the medical inflation problem in Malaysia.

Everyone is talking about medical premiums significantly rising and much of the blame is on insurance companies. Unfortunately, they’re an easy target. They’re only part of the problem. Let’s look at the facts issued by Bank Negara Malaysia (BNM) and the Ministry of Health (MOH), presented to the Malaysian Parliament¹.

The table below shows the premium increases across insurance policies in 2024:

The average premium increase in 2024 is about ~20%.

BNM and MOH also released some interesting data on inflation for 2021 – 2023:

So insurers are increasing premiums (on average) less than the claims/costs which they are incurring (20% vs 56%). Are they absorbing the losses? Maybe. Markets have been good, which might have also offset some inflation for ILP products.

It’s easy to vilify insurance companies as greedy, profiteering scammers. But it’s not a worthwhile endeavour to solve the actual root problems.

The root problems with medical inflation are a lot more complex than insurers maximising profits by increasing premiums and denying claims. Claims incurred ratios are regulated by BNM, and any premium increases must have BNM approval. Insurance companies can’t go crazy raising premiums.

So what’s wrong with the medical ecosystem in Malaysia?

The problem with medical insurance and inflation has many root causes, enabled by the principal-agent problem.

What is the principal-agent problem?

According to Investopedia:

The principal-agent problem is a conflict in priorities between a person or group and the representative authorized to act on their behalf. An agent may act in a way that is contrary to the best interests of the principal.

What is an example of a principal-agent problem?

A client who hires a lawyer may be charged more billable hours than are actually necessary, due to fraud, inefficiency, or non-value-adding activities

So when it comes to our medical insurance and bills, there are principal-agent problems everywhere.

• Profits incentivise private healthcare, so you might receive treatments that are more expensive and yet not necessary
• An insurance agent may consciously omit talking about key terms of the policy or even lie to get a sale as the agent is paid via commissions by the insurer

All parties contribute to the high medical inflation in Malaysia

Yes, every party is (unfortunately) incentivised to maximise benefits/profits for themselves. Even patients.

But why don’t we have this problem in other industries?

In other industries, you shop around. You see the product/service, read reviews, and you actually see the price before using the service and paying.

You can’t do that with medical services. An operation may cost more due to complications, or you may need to stay an extra day in the hospital because the doctor said you need an extra day of recovery.

The result is many parties are price takers who are forced to accept prices issued to them, and the party issuing those prices are incentivised to increase profits (hospitals, pharmacies, medical suppliers).

The vicious cycle just gets repeated over and over again.

This vicious cycle causes both costs per claim to increase, and the number of claims to increase (among other factors). BNM and MOH have the breakdown by average cost per medical visit and claims frequencies, resulting in the ~56% increase in claims costs/inflation:

So the 22% increase in costs per visit multiplied with the 26% increase in the number of claims has resulted in about a 54% increase in claims costs (close enough to the 56% claims cost increase stated earlier)

Going deeper into the root causes of premium inflation

In the diagram below I’ve broken down the reason for increases in medical premiums. As you read through them, you’ll start to understand why it is enabled by the principal-agent problem and how most parties are just price takers. You’ll also see how everyone is contributing to the inflation.

1. Reduction in ILP sustainability

For those with Investment-Linked Policies (ILPs), sustainability is how long the investments in the policy can pay for the insurance charges/costs. When the sustainability of the ILP is reduced, normally it is because of:

1.1 Inaccurate/faulty assumptions

BNM mandated that all ILPs disclose sustainability projections and underlying assumptions used. This is your chance to analyse how likely your premiums will increase in the future. For example, if the assumptions for your ILP is investing in a money-market fund with 7% p.a. returns against insurance charges that increase 3% p.a., the projections are overly optimistic. Insurers may make optimistic assumptions so (initial) premiums are more affordable to sell the policy.

1.2 Underperforming funds

It’s statistically proven that active fund managers underperform the market. ILPs do not invest in passive, low-cost index funds because that doesn’t generate as much fees as active fund management. So more often than not, the funds which ILPs are invested in are not going to meet expectations.

2. Increase in total claims costs

We’ve established earlier in this post that in 2021 – 2023 total claims costs increased about 54 – 56%. Let’s break it down to cost per claim and volume of claims.

2.1 Increase in costs per claim

In general, there are 4 main reasons for the increases in the cost per claim:

2.1.1 Overcharging by hospitals, clinics and doctors

Have you noticed that if you go to a private hospital (and some clinics), they always ask you, “Are you paying out of your pocket, or do you have insurance“? Even if you’re only looking for a consultation? The charts below show the difference in costs between self-pay and insured, reported by BNM and MOH:

There is no excuse for the significant discrepancy between “pay by cash” and insurer-approved upfront (guarantee letters). It’s definitely overcharging, and it happens because:

• Hospitals / clinics / doctors know that if the insurer is paying, you are unlikely to scrutinize the bill. Also, once the medical service is provided and the bill is issued, there isn’t much that can be done except pay the bill. As a result:
  • Doctors may prescribe treatments that may not be necessary. For example, the doctor may propose treatments that are not necessary or a more expensive treatment. You as the patient also trust them to be the expert, so how much can you challenge them?
  • Hospitals / clinics will overcharge for medical supplies. According to BNM and MOH, 59% of surgical and 70% of non-surgical treatment bills are hospital services and supplies. Have you seen your hospital bills? Have a deeper look, you might find that a bandage wrap was billed at RM 30, when you can get it at the pharmacy for RM5.
• Hospitals and clinics know that it costs time and money for the insurer to scrutinize every medical bill under claim
  • Ever wondered why sometimes it takes so long for an insurer to process your claim? Have a look at your hospital bill. Are there hundreds of line items, all with vague wording such as “generic medical supplies”, or “consultation”? There’s a lack of transparency in hospital bills and lots of room for overcharging to occur.

2.1.2 Increase in costs of medical supplies

Manufacturers of medical equipment and supplies have no issue raising prices. Also with middlemen in the picture, everyone wants needs a slice of the profits. The requirements for high standards of safety and sanitisation are the typical reasons for burgeoning costs. With other businesses, buyers would negotiate cheaper prices. Medical providers have less incentive to negotiate cheaper prices from suppliers. That’s because they can accept ongoing price increases which they will just pass on to the payers, which are typically insurers. Every year, each bandage, each chemo drug, increases by 5-10%, over thousands of items, it all adds up. It’s a slippery slope.

2.1.3 New advances in medical equipment

This is the excuse that is always given. Yes, it costs a lot of money to buy the latest machinery and equipment. However I have yet to see the numbers for how much this contributes to medical inflation. Based on the data BNM and MOH have released, I tend to think this doesn’t actually contribute much. Plus for big capital expenditures, you spread the costs out over many years.

2.1.4 Increased efforts to investigate fraud

Insurers are well aware that there’s tons of leakage in claims that they pay. Each query back to the hospital about a bill, and each claims investigation costs time and money.

Don’t think that it’s a big issue? Anecdotally, about 35% of claims have an element of fraud involved (source: past work experience).

Claims fraud is not easy to prevent or detect. Many involve collusion with doctors (covered in #2.2.1) doctors are involved, and they’ve signed off that the procedure is medically required.

2.2 Increase in the number of claims

The 26% increase from 6.8 to 8.6 claims per 100 policyholders means that the volume of claims has been increasing as a proportion of people. I would attribute these increases to two root causes:

2.2.1 Claims fraud by patients and doctors

There are many ways in which fraud can occur, sometimes it’s only by patients, sometimes it’s by patients and doctors, and sometimes it might even be by doctors themselves.

Don’t forget that there is an element of fraud in roughly 35% of claims.

Let me give you some examples of fraud that I’ve either seen or is widely known:

• Patients not disclosing known conditions when buying insurance
• Patients double claiming insurance from multiple insurers
• Consumers trying to get massage centres to sign off that the massage is therapeutic for medical reasons (I’ve seen this)
• Doctors collude with patients to be admitted overnight as inpatients just for an MRI scan, so it can be covered by insurance
• An insurer terminated a doctor from their approved panel. The insurer analysed claims relating to one doctor and found this one doctor would have had to work 24/7 for more than a year to perform all the surgeries for which they were paying claims

Can we stop this? I don’t think so. Why?

• In Malaysia private healthcare, doctors hold all the power. Did you know that in private hospitals, doctors are not employees? They’re “partners” who run their practice in a hospital setting. So they’re free agents. And patients prioritise doctors of their choice (based on their perceived quality) for which hospital to go to (for important treatments). Can hospitals afford to terminate the partnership and risk losing money? Also, it’s really hard to prove fraud when both patient and doctor are in collusion.
• Our defeatist attitude. If we can’t beat them, join them. In many of my discussions with people, they don’t care that they’re committing fraud. The excuse is that insurance is expensive and they should get their money’s worth. But that’s just worsening the problem.

Imagine reducing 35% of claims just by eradicating fraud and how much in premiums we could save. It’s a constant battle and fighting fraud incurs more and more costs.

2.2.2 Increasingly unhealthy population

Malaysia has the highest obesity rates in Asia. That’s just one statistic out of many showing how unhealthy we are. And with an ageing population which lives longer, we’re going to need more and more medical care.

So we choose to live unhealthy lifestyles and pay the price for it later in medical bills.

So what is being done to prevent further premium inflation?

There are a lot of upset consumers, and insurers are the first to blame. This article is not evangelising them, what I’m trying to show is that it’s a complex problem, and in actual fact, there are bigger reasons for medical premiums increasing than just insurers maximising profits.

BNM recently announced that they have agreed with insurers to interim measures to stagger hikes to no more than 10% a year. That’s not solving root causes, it just makes premium increases a bit more palatable.

The Health Ministry is planning to implement the diagnosis-related group (DRG) pricing system, but that will incentivise private healthcare providers to skimp, risking patient health and safety.

Some insurers (AIA and Prudential I know of) are planning to operate their own hospitals and clinics. Then policyholders will be incentivised to visit insurer-owned centres. This will drastically reduce fraud and overcharging. Other private healthcare providers should be scared. Yes, I hope this happens.

I could wait for others to solve the problems, but I’m a man of action. I prefer to control the situation. How about you?

What you can do to manage your premium and medical costs

You play a different metagame

• Don’t buy ILP: You avoid risking bad assumptions and underperforming funds to weather increasing insurance charges. Plus you pay more fees for funds management and ILP admin expenses, as well as agent commissions. Term medical is cheaper. Even at old age. (Don’t get me wrong, ILP is useful for those who are bad at saving. If you need forced savings, you might need ILPs, but you pay more for the service)
• Go for medical insurance with a deductible. The higher the deductible, the cheaper the premiums. With a deductible, people are unlikely to participate in fraud. So that means up to 35% fewer claims in that specific policy with a deductible, leading to less inflation.
• Pay cash/claim later. Your medical costs will be significantly cheaper. You say it doesn’t matter because insurance will cover it? That’ll hit you later with higher premiums since everyone thinks this way. I recommend going with insurers that incentivise or only allow pay and claim later for their policies. Examples of this are fi.life (discounts for pay and claim) and Lonpac (certain products only allow pay and claim). Rest assured all claims paid out are significantly cheaper as everyone is paying first, so there’s less chance of fraud or overcharging
• Challenge the status quo: Refuse to answer if the private hospital or clinic asks if it will be covered by insurance. It’s none of their business. Also, always negotiate bills. It can be good practice for life in other areas requiring negotiation skills. Lastly, question whether you can get the same medication at a pharmacy for much cheaper before agreeing to the medication. Just ask for the prescription note but don’t take the meds from the hospital/clinic.
• Go to public hospitals: If the cost of insurance is unaffordable in your financial situation, public healthcare in Malaysia is considered above average. Fact: Many rich people still go to public hospitals. It’s not because they’re cheap, or because the public hospitals have the latest medical equipment. It’s because doctors at public hospitals are generally more experienced. They deal with many, many more patients through sheer volume. If you’re complaining that you have to wait in public healthcare, then medical premiums are the price you pay for not waiting and convenience.
• Self-insure: This is the ideal endgame. You build enough wealth and cash reserves that you have freedom and options. Of course, not all of us can afford this option. But a lofty goal, no?
• Stay healthy. Need I say more?

Some of these options may depend on your financial situation, but I give you the knowledge of all the options so you can choose how you stay ahead of the game.

Final thoughts: Collective transparency

I’ve been thinking that we can do more as Malaysians. We definitely can’t rely on our government. When they gather all stakeholders into a room, it’s 100 different ministries, bodies, associations and companies all talking over each other with no forward progression. Everyone is protecting their own interests and no one can agree.

Perhaps we should take transparency into their own hands. Like how we provide data on our wages to Glassdoor and MalaysianPayGap. Perhaps we should crowdsource our own database of our hospital and clinic bills, so we know how much we’re being overcharged, and by who, and we can make decisions on where to bring our medical business. That will put pressure back on the medical providers, suppliers and doctors.

Any volunteers willing to make this a reality?

1. https://codeblue.galencentre.org/2024/12/majority-health-insurance-premiums-rose-up-to-20-pc-this-year-bank-negara/ ↩︎