To regulate private hospital charges, the Ministry of Health (MoH) intends to standardise them against the Rakan KKM programme. It will pilot the DRG for Rakan KKM by mid-2025 before mandating the system for private hospitals.
Rakan KKM is a government partnership that offers “premium economy” services at select public hospitals for elective outpatient, daycare and inpatient services, including personalised care, specialist choice and enhanced privacy.
To that note, Bank Negara unveiled measures yesterday to curb rising insurance premiums, including instructing insurance and takaful operators (ITOs) tooffer alternative products at the same or lower premiums for policyholders who do not wish to continue with their repriced plans.
More importantly, the central bank announced that the government, ITOs and private hospitals have jointly pledged RM60mil to accelerate health reforms. This included implementing the DRG payment model and developing a basic hospitalisation coverage product to address essential healthcare needs.
What is DRG?
The DRG model categorises hospital cases into groups based on diagnoses and procedures, establishing standard payment rates by providing a fixed amount for each group, rather than itemising individual charges. Hospitals must operate within this predetermined budget that is negotiated in advance between payers and themselves, although it means that hospitals will no longer be required to itemise every charge in a bill – such as for drugs, medical and surgical supplies, and medical reports – but to simply state the total charge.
Private hospitals are at present operating on a fee-for-service model, in which private healthcare providers are paid based on the services delivered.
Expert observers within and outside the medical industry have varied opinions on whether this would be effective in battling Malaysia’s exorbitant medical inflation of over 12% per annum, which is more than double the global average of 5.6%.
The pros
International Medical University’s professor of health economics Dr Syed Aljunid, who is reputedly well-versed in DRG, says the model has been implemented in more than 100 countries. He says the DRG is much easier to implement as the system has been used in some hospitals in Malaysia since 2002.
“Casemix Solutions Sdn Bhd’s experts at Universiti Kebangsaan Malaysia (UKM) have developed its own DRG based on international standards, and helped neighbouring countries such as Indonesia, the Philippines and Vietnam to implement the system.
“The hospitals will need to make some minor adjustments in the way they send their claims to the payers. Patients will know the total cost for each diagnosis and procedure even before they are admitted. This transparency will benefit everyone,” he says.
Casemix Solutions is a startup private limited company incorporated under UKM in 2011 that designs, sells, train and distributes the Casemix patient classification system globally.
Syed Aljunid says the DRG has a track record of not only controlling escalating healthcare costs, but also enhancing the quality of service. Studies have shown that operation costs of hospitals can be reduced by as much as 20% per year.
“This is accomplished by reducing unnecessary admissions, reducing length of stay, reducing variations of care, incentives to use generic drugs, and monitoring of outcome of care.”
He observes that many countries have migrated to more advanced forms of DRG called case-based groups or CBGs.
CBGs cover all types of patients including acute, sub-acute and chronic long-stay cases, as well as non-admitted or ambulatory care patients, he says, noting that there are also top-up payment options for groups of patients that require costly drugs, investigations, special procedures and prosthesis.
“Assessment of outcome of care is also more comprehensive with the use of components of International Classifications of Functioning. Once DRGs are properly implemented, we can move on to CBG,” Syed Aljunid says.
RHB Research healthcare sector analyst Oong Chun Sung comments in a report this week that the insurance industry has been pushing for private hospitals to switch to the DRG model or value-based healthcare since 2023.
While hospitals under his coverage – IHH Healthcare Bhd
and KPJ Healthcare Bhd – are already advocating value-based healthcare, he believes the DRG’s implementation still requires extensive study and engagement with stakeholders, given the complexity of medical procedures and the underlying costs.
He says: “Ultimately, DRG is not a price-capping mechanism, but could be viewed as a cost-discipline approach.
“DRG benefits both hospitals –by optimising resources and efficiency – and patients who can get better medical outcomes.”
Potential pitfalls
Association of Private Hospitals of Malaysia president Datuk Dr Kuljit Singh tells StarBiz 7 that the association is actively engaging with relevant ministries and agencies to identify a sustainable solution. He says the proposed DRG framework presents a promising avenue, although he recognises its complexity may extend the implementation timeline by several years.
“Nonetheless, we are dedicated to collaborating closely to develop a mutually agreed-upon approach. Our commitment reflects our desire to address the challenges effectively and ensure a viable path forward,” he says.
Veteran insurance practitioner and chief executive at Numero Uno Asia Wealth Planners Sdn Bhd, Gary Low, says insurance companies calculate the sustainability or profitability of a hospitalisation plan individually, not collectively.
He explains why medical premiums are skyrocketing: “A local insurer may have 10 medical plans comprising standalone plans and medical riders. Over the years, more plans with better features and benefits, but with higher premiums, are continuously added and introduced to policyholders.
“The richer, healthier and younger group of policyholders will migrate from one plan to another, but sadly the older ones, and some with impaired health conditions, are forced to stay put.
“The problem is exacerbated by the shrinking number of members under the old plans, making the insurer realise the lack of sustainability of these plans. This scenario was created by the insurer but the costs are borne by policyholders, through extortionate increases in premiums.”
Low says the DRG should have been adopted years earlier as it would have stabilised insurance premiums in the short run.
However, he says there are challenges, the main one being the risk of under-treatment as fixed payments may lead some hospitals to “cut corners” or discharge patients prematurely, just to save costs.
“Additionally, the DRG system is primarily suited for inpatient care. Therefore, this system may not be effective to manage the rising outpatient care.
“Besides, there is the possibility of hospitals transferring some costs to other areas, just to balance the book.
“The main concern is whether the quality of patient care will be affected,” he says.
The solutions to these challenges include Bank Negara directing all insurers to calculate policy sustainability by taking into account the “whole medical plan’s portfolio”, instead of the “individual plan portfolio”, as well as introducing no-claims bonuses, Low adds.
In addition, he suggests insurance companies contribute to the National Medical Trust Fund with corporate social responsibility funds; mandate Employees Provident Fund savings be split between healthcare and nursing care needs; and allow older policyholders to reduce their coverage to fixed standard plans, making it available to all existing members.
“For example, those aged 60 and above, can be entitled to a RM200 room and board coverage offering an annual limit RM200,000, with 10% co-payment subject to a maximum of RM5,000.
“For practical purposes, perhaps such plans may be designed to cover a number of major and old-age related illnesses, with level premiums until age 100,” he says.
Low also advocates for the government to encourage Malaysians to lead healthier lives, by imposing higher sin taxes on tobacco, vape and liquor.
Low’s mixed sentiments are mirrored by paediatrician Datuk Dr Musa Mohd Nordin and Pharmaceutical Association of Malaysia executive director Chan Li Jin, who highlighted this week in a writeup that personalised medicine may no longer be a priority if patients are defined by their category of DRG.
“Private hospitals may begin to select cases that are easier and cheaper to treat under fixed payment models, transferring high-risk and complex cases to public hospitals.
“Patients whose diagnoses do not fall into any of the categories within DRG will also see themselves being pushed to public hospitals, further prolonging waiting times and compromising the quality of care in MoH facilities,” they say.
Musa and Chan report that countries where DRG have seen success pair the concept with the VBC model, where health outcomes are at the centre of the diagnosis and ensuing treatment.
They observe that the VBC, emphasises patient-reported experience, prioritising efficacy and empathy of care in the long term, while reducing complications that will ultimately result in more healthcare costs.
While economists generally subscribe to the belief that market forces should be allowed to dictate the prices of goods and services, they are making an exception for medical insurance.
Economists’ view
IDEAS Malaysia economist and assistant research manager Doris Liew feels that market regulation is crucial in addressing the rampant profiteering in the private healthcare sector.
She says a common issue is the practice of charging higher fees to patients with insurance, a profit-driven approach that has led to over-treatment, with patients prescribed unnecessary treatments and medications so as to increase healthcare costs.
She says given that healthcare directly impacts public welfare, regulations are essential to ensure that high-quality private healthcare services remain accessible without exorbitant costs.
“While insurance companies typically work with panel hospitals and clinics to control prices, hospitals that charge unreasonable fees are often blacklisted or dropped.
“However, insurance companies alone cannot detect over-treatment, as they are not healthcare professionals.
“Government regulations are necessary to fill this gap and ensure greater oversight,” she tells StarBiz 7.
Her advice for policyholders is they request treatment cost estimates upfront and, when possible, compare prices with other hospitals.
“This can help both patients and insurance companies manage healthcare costs more effectively,” says Liew.
Seasoned economist Geoffrey Williams, meanwhile, suggests that the government get more patient involvement in its discussions about lowering insurance premiums, on top of independent economists who could provide useful perspectives on alternative strategies.
He agrees with Liew that private healthcare is one key area where even market-focused economists think that a market solution will fail.
“This is due to limited information to patients about the need for treatment and its costs, as well as the imbalance of power which gives doctors an upper hand, especially when people are ill and vulnerable.
“The DRG model is one strategy that can help but there is really no single strategy and a multifaceted approach must be developed,” he opines.
Williams believes that at the core of it, private hospitals and insurers have no incentive to contain rising costs as it helps maintain profitability.
While private healthcare must be regulated and there are regulations in place, they are clearly not working because the regulatory system is run by the medical entities such as the Malaysian Medical Council.
“There is a very close relationship between private hospitals and private insurers who depend on each other for their business model.
“Most patients cannot afford private healthcare without insurance and if there were no private hospitals, there would be no private insurance market.
“Hence, from an economics perspective, there is no solution that does not involve an independent regulatory system.
Independent economists must be included to help understand the well-known economic issues in healthcare funding and to help evaluate the many alternatives that are used around the world,” he points out.
Furthermore, he argues that private hospitals often claim that investment in new technologies is costly and that they need to push the costs to patients.
However, Williams says the fact is that technology makes diagnosis and treatment more effective and reduces costs and time in hospital, and as such, prices should be raised to pay for the use of technology but also lowered when technology can reduce treatment costs per patient.
Going by the current speed of things, the government and all relevant stakeholders at the party, in particular premium paying patients, would need time to iron things out, to bring about an effective solution.
Suggestions by Low and Williams should perhaps be taken into account not just for the short term, but in ensuring a sustainable and win-win ending for everyone.
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