WHILE private hospital doctor fees are regulated, some 59 per cent and 70 per cent of total medical bills for non-surgical and surgical treatments respectively (for non-transparent charges for medical supplies and services) are unregulated.
Yes, part of the cost increase is probably inevitable, given that most supplies, equipment and medications are imported and therefore affected by the ringgit’s secular depreciation.
What I presented at Bank Negara’s event in Sasana Kijang last week was an analysis of the huge difference between what private hospitals charge an insured versus a self-paying patient for similar treatments as much as four times higher.
There is a significant gap in terms of medical knowledge and bargaining power among the three parties- the patients, the private hospitals and the insurance companies.
More often than not, private hospitals are profit-maximising entities with disproportionate informational power and therefore, pricing power vis-a-vis the patient.
The average patient lacks the medical expertise to fully understand his diagnosis or treatment plans including unnecessary tests and treatments and little motivation to shop around (if even possible) in desperate times of need.
There are very few publicly available and more importantly easily accessible cost comparisons among healthcare service providers.
And quite frankly, patients are generally uncaring of costs since insurers are footing the bill.
They only want the best services and treatment.
There is misalignment of interests, the patient benefits from the treatments but the costs are shared by everyone else in the same insurance pool.
The public listing of hospitals on Bursa Malaysia likely compounds the problem.
Listed companies are pressured to deliver revenue and earnings growth and returns on equity (ROE) to justify higher valuations and stock prices.
This is one example of the ‘excessiveness’ of capitalism and raises the question of economic justice.
Should private hospitals, offering critical healthcare services, be listed entities?
So yes, the facts point to the private healthcare providers being the biggest culprits in the current crisis.
Their primary goal is to maximise profits, especially for the listed entities.
And they can because of the asymmetry in informational and bargaining power vis-a-vis the patients.
(Put simply, it’s like walking into a shop where you don’t know the prices, aren’t sure what you need, and have no idea if there’s a cheaper option while the shopkeeper knows everything and sets the price. That’s what happens when hospitals hold more information and power than patients. They can charge what they like, and most people can’t push back.
For those academically inclined, this mirrors Nobel laureate George Akerlof’s “lemon market” problem and Kenneth Arrow’s work on information asymmetry in healthcare.)
That said, patients must also share some of the blame, by being uncaring of the costs since the bill is borne by their insurers (and now, all other insurees).
Unless there is intervention, the exorbitant rise in healthcare costs will get worse.
Healthcare companies have high stock market valuations, high price-to-earnings (PE) and book ratios.
This enables them to acquire other hospitals at very high costs since the stock market will pay for it.
Case in point, the recent acquisition of the Island Hospital in Penang for RM4.2 billion or about US$966 million (based on the exchange rate in September 2024 when the deal was made).
For a 600-bed hospital with 80 specialists, that made RM29 million in FY2022 and RM73.5 million in FY2023.
The price was bid up because of competition.
This free market competition is fine, except that to justify the RM4.2 billion price tag, the winning bidder must make more profits out of Island Hospital which surely implies higher costs and more treatments to patients in future.
Think of it this way, Island Hospital was valued at 57 times PE (RM4.2 billion price tag divided by RM73.5 million profits) while IHH shares were trading at about 24 times.
No company will acquire another if it does not believe the purchase will be value-accretive, certainly not a listed company (whose share price will surely be punished by investors).
And the only way to bring down Island Hospital’s PE is to triple its profits.
That’s just maths.
To put into context, this hospital was founded in 1996.
Affinity Equity Partners acquired a 78 per cent stake in 2015 for US$200 million, giving Island Hospital a US$256 million valuation.
That means the sellers (at US$966 million) made almost three times profits in US dollar terms for their nine-year investment.
Insurance companies are also complicit in the soaring healthcare costs in the country by doing nothing.
The insurers are willing to pay whatever the private hospitals charge since they can simply pass on all the costs to their customers, as they are doing now, by hiking premiums.
Surely this cannot be justified.
While patients generally have limited informational and or bargaining power vis-a-vis private hospitals, the same cannot be said of the large insurance companies.
They have substantial resources at their disposal including medical professionals in employment.
There are many ways and tools to control costs.
For instance, they can leverage artificial intelligence (AI) and data analytics to collate and compare treatment costs and provide a check and balance on runaway healthcare charges.
Unlike patients, who have limited options, these large insurers hold significant coercive bargaining power over the private hospitals.
In the extreme, they can even blacklist hospitals with consistently exorbitant charges.
I do not profess to be a medical or insurance expert.
My perspective is influenced by direct involvement in multiple healthcare M&A transactions and IPO mandates, as well as personal proximity to the sector—my wife is a doctor.
Some politicians are advocating universal health insurance as a solution.
Really?
Making every Malaysian contribute more to create an even larger pool of money is a solution?
All I’m saying is this: it’s incumbent on insurers to do more, to check the rise in healthcare costs because they have asymmetry over the hospitals.
It is the insurance companies and they alone can force hospitals to behave.
To do the treatments that is necessary but not excessively priced for profit.
After all, private hospitals can improve their profits by pursuing medical tourism where prices are not controlled by the government.
Very much like our international schools and local universities in enrolling foreign students.
I am not saying insurance companies are the culprit in the rise of healthcare costs.
But given the power dynamics, they have power over the hospitals.
And like banks, they are oligopolistic.
Therefore, they have social responsibilities in building public trust and ensuring systemic stability, consumer protection and affordable insurance.
Simply allowing insurers to pass on escalating costs to consumers is akin to allowing the monopolistic power.
This is why I hold the insurance companies as the key towards sustainable and responsible healthcare for all.
The proposed diagnosis-related group (DRG) pricing system, slated for rollout in 2Q2025 is a good starting point.
It should provide greater pricing transparency and reduce unnecessary procedures and hospital charges.
At the same time, some form of co-payment mechanism could foster greater self-governance and discipline among patients when choosing medical services and prevent the ‘buffett syndrome’.
But it is incumbent upon insurance companies to take responsibility and accountability for the rising healthcare costs, because of their unique asymmetrical bargaining power.
Bank Negara must regulate insurance premiums based on science and data.
Set a maximum insurance premium goal over the next 10 years and trust me, healthcare costs will quickly fall.
There will be consequences to regulating the free market.
Hence we should be careful of excessive regulations which tend to create worse outcomes such as insolvency.
Having a single cap on premiums or a fixed increase will distort a competitive marketplace.
So how do we ensure continued affordability while also allowing the market to be competitive?
One suggestion would be an industry framework that is similar to the airline model where there is a basic package (economy class) for the masses and premium packages (business and first class) for those who can afford to pay more.
The DRG will standardise reimbursements for treatments, which will be covered by the economy package. The private hospitals will tailor treatments accordingly, limiting unnecessary tests and procedures. However, for those who prefer to have the choice of additional tests, different treatment options, better non-medical services and so on, they can opt for the higher premium “business and first class” packages.
This structure will enable the insurers to tailor their own business model and be innovative in product differentiation (what to include in the different packages) targeting different market segments. And consumers have a choice; to pay for the basic insurance coverage or pay extra for more ‘frills’.
This is just a start, I haven’t touched on the deeper issues plaguing public hospitals, the baffling causes behind our specialist shortages, or why insurance premiums may not need to be as high as we’ve been led to believe. Perhaps in a future piece.
Medecci Lineil leads a specialised quant team within Goldman Sachs’ investment banking division. He’s also a founding board member of consultancy firms in Kuala Lumpur and Singapore. Reach him at med.akilis@gmail.com.
