Kenanga Research said there could be some near-term impact on the margins of private hospitals as the initial adoption may target lower-value or minor illnesses.
PETALING JAYA: The government’s commitment to healthcare reform and the requirement for the implementation of the diagnosis related group (DRG) payment model is a positive, despite the possible near-term impact on the margins of private hospitals, analysts say.
Kenanga Research, which has an “overweight” call on healthcare stocks, said recent news reports, including about the establishment of a joint ministerial committee to set the timeline for the implementation of the DRG payment model for private-healthcare providers, “is a step in the right direction”.
The initial rollout of the DRG system, which takes a value-based approach focusing on outcomes and cost-effectiveness rather than volume of services for reimbursements, would be limited to selected public hospitals.
The research house said there could be some near-term impact on the margins of private hospitals as the initial adoption may target lower-value or minor illnesses.
“In terms of earnings impact, we expect KPJ Healthcare Bhd
to be more impacted given that more than 95% of its topline is derived from its Malaysian services,” it said.
“IHH Healthcare Bhd will be less impacted because its Malaysian services accounted for 17% of its topline both last year and first quarter ended March 31, 2025,” the research house said, adding that investors would continue to gravitate to these stocks due to their defensive nature.
Other factors supporting healthcare stocks include the current risk-off sentiment among investors and the longer-term growth prospects underpinned by an ageing population, rising affluence and rising cases of chronic diseases globally.
It noted that both IHH and KPJ have embarked on value-based healthcare model like the DRG system with the average length of stays in their hospitals being three days.
Kenanga Research said the use of technology such as robot-assisted surgery and other advanced procedures can lead to shorter stays based on early data.
Kenanga Research believes that the 6% sales tax on non-citizens seeking healthcare from private operators would be manageable for KPJ and IHH as medical tourists make up around 5% to 7% of revenue.
It added that the listing of Sunway Healthcare Group at the end of this year or early next year could pave the way for a re-rating of healthcare stocks.
It also pointed out the urgent need to address national healthcare financing and highlighted the Australian system with a single-payer, multiple provider arrangement, where public and private hospitals provide equal facilities and functions to patients compared with the current multi-payer multi-provider system currently in use in Malaysia.
