PETALING JAYA: The increase in medical costs, health insurance and takaful claims have spurred the government to address these issues by rolling out the diagnosis-related groups (DRG) pricing system by the second quarter of 2025 (2Q25).
However, Affin Hwang Investment Bank Bhd Research (Affin Hwang Research) said it does not believe the deadline is doable, considering the complexity and time required as a comprehensive model will need to be formulated.
Additionally, it said information regarding the system’s implementation is scarce, with no data requested from private hospitals and no town hall meetings scheduled.
“In our view, one of the key hurdles would involve data collection and analysis of all private hospitals across the country with differing cost structures, prospects and customer mix,” the research house said.
It added that a premature implementation of the plan could result in hospitals excessively cutting costs and being discouraged from investing in newer technology and drugs.
This could also cause a talent drain of reputable specialists pursuing their careers in other countries.
Affin Hwang Research pointed out that under the proposed system, hospitals would retain a surplus if they treat a patient for less than the DRG rate, and vice versa.
Instead, the research house suggested a more gradual approach, starting with selective cases and expanding as more data becomes available, along with a price adjustment mechanism that accounts for cost and service-level differences.
“The DRG system should lower the burden of the payer and benefit the insurance sector, though we caution against the negative risks towards the healthcare sector’s outlook,” it said.
“Assuming the DRG model aims to target those generating relatively superior profits, like IHH Healthcare Bhd
who caters to a more premium market as opposed to KPJ Healthcare Bhd, we note IHH’s Malaysian operation only makes up circa 20% of earnings, versus KPJ at nearly 100%,” the research house said.
Meanwhile, Affin Hwang Research said among its top picks for the sector include IHH due to its earnings growth potential as its domestic operations only contribute about 20% of its earnings.
Despite maintaining an “overweight” call on the healthcare sector, the research house said downside risks will include DRG payment model implemented in Malaysia with unfavourable prices and steep cost escalations.
To regulate private hospital charges, the Health Ministry (MOH) plans to standardise them under the Rakan KKM programme.
A pilot of the DRG system for Rakan KKM will begin by mid-2025 before mandating its implementation in private hospitals.
The DRG system, already in use in all 149 MOH hospitals, categorises hospital cases based on diagnoses and procedures, setting fixed payment rates for each group instead of itemising individual charges.
Hospitals will operate within a predetermined budget negotiated in advance with payers, meaning they no longer need to list each charge (eg, for drugs, medical supplies and reports) but will provide a total charge.
Currently, private hospitals operate on a fee-for-service model, where healthcare providers are paid for each service delivered.
Expert observers have varied opinions on whether this would be effective in battling Malaysia’s exorbitant medical inflation of over 12% per annum.
