BNM announced interim measures with insurance and takaful operators (ITOs) on medical and health insurance and takaful (MHIT) products to curb inflation of policy premiums. Chief among them is annual premium adjustments to MHIT products with repricing to be staggered over a minimum of three years at an annual cap of 10%. Overall, this is mildly negative for insurers as premium adjustments may not sufficiently keep up with the pace of medical cost inflation.
However, Kenanga Research noted the exposure of ITOs under its coverage is highly limited, with LPI and TAKAFUL having medical coverage as less than 10% of their respective total gross premiums.
On the flipside, private healthcare operators should be less constrained under these interim measures as it ensures a wide pool of patients can still seek private healthcare, and offer relief following previous negative investor reaction on the implementation of a Diagnosis Related Group (DRG) payment system which is pending clarity. Moreover, the RM60m cost for accelerating health reforms will not meaningfully affect earnings as it is collectively funded among the government, ITOs and healthcare operators.
Among the changes announced include:
(i) Changes in premiums from medical claims inflation effected between CY24 and CY26 will be staggered over a minimum of
three years (at a cap of 10% adjustment per year)
(ii) Temporary pause in premium adjustments due to medical claim inflation for policyholders aged 60 years old and above
(iii) Reinstatement of surrendered or lapsed MHIT policies in CY24 due to repricing, based on the adjusted premium under this
measure without additional underwriting requirements
(iv) Jointly contributed RM60m fund by the government, ITOs and private hospital operators to accelerate health reforms to
assist policyholders aged 60 years old and above.
These include the implementation of the DRG payment model and publication of costs of common medical procedures for greater transparency, facilitate the development of a base MHIT product that covers essential healthcare needs, and facilitate policyholders aged 60 years old and above to switch to the new base product, once available.
A notable concern for ITOs, but a moderate one for some. Following the three-year premium adjustment period, Kenanga opines that ITOs would face greater earnings pressure should claims be made greater than it could be adjusted for. In addition, the leeway for lapsed policyholders to reinstate older policies without additional underwriting requirements could also expose a higher claims probability. Overall, it could lead to a higher combined ratio for ITOs in the medical segment, notwithstanding medical inflation is expected to persist beyond the three-year premium adjustment cycle.
With regards to the ITOs under its coverage, Kenanga said medical insurance makes up less than 10% of total gross premium contributions in both LPI and TAKAFUL, and therefore are not expected to be significantly dented by the interim measures. Most of their claims paid are derived from motor (50%) and credit-related products (50%).
The house said it is mildly positive on this latest development to private healthcare operators which provides medium-term relief and not as bad as initially feared pending more clarity from the DRG system. Recall, on 11 Dec, share prices of IHH, KPJ and SUNWAY fell 4%, 9% and 6%, respectively, following news of the government proposal to introduce a DRG payment system to regulate private healthcare costs citing rising medical costs that have caused medical insurance premiums to surge.
The aggregate RM60m will have minimal earnings impact to private hospitals under Kenanga’s coverage including IHH and KPJ. Over the longerterm, it believes the DRG-related regulatory overhang could gradually subside after stakeholders engage in more in-depth discussion and cost-benefit analyses. The health minister has said that the pricing system for which private hospital bills will be regulated is more likely to be made available by the second quarter of 2025 given that the Private Healthcare Facilities & Services Act 1998 must first be amended.
In fact, hospitals under its coverage i.e. IHH and KPJ have been embarking on value-based healthcare, which is similar to the DRG system. Pending further development and clarity on the DRG, the house said it continues to remain positive on the long term growth prospects of the healthcare sector, which will continue to be underpinned by an ageing population, rising affluence and rising cases of chronic diseases globally.
