Budget 2020: Three areas to target for healthcare cost control

  • Vital Signs
  • Wednesday, 09 Oct 2019

There are many ways to achieve affordable healthcare access for all Malaysians, and cost control is only one of them.

We’ve previously discussed reducing unnecessary healthcare demand and the limits behind cost controls. As we approach the tabling of Budget 2020 on Friday (Oct 11, 2019), let’s look at some specific allocations and tax incentives to control healthcare costs most impactfully.

The three target areas are bills for private hospitals, insurance premiums, and medicines and technology.

The rakyat complains about all three bills in the private sector, and the third bill in the public sector. (It’s a myth that everything is free in the public sector; it’s not).

In economics terms, government-regulated controls are one method to reduce prices, while the second method is to use market forces. Both have their pros and cons; I’ll leave others to dissect them.

We’ve seen previously that despite the rhetoric surrounding cost controls and the multiple cost categories, Malaysia only controls physician fees and is only now beginning to discuss price controls for medicines.

My proposals to control costs largely rely on market forces and are intended to correct market failures by providing more information for consumers to make better choices and to incentivise better governance surrounding the principal-agent problem.

Generally, I do not support government price controls because they are notoriously difficult to calculate, are ineffective, have many unintended consequences, cause the government to forever play catch-up with rising costs, create unnecessary opposition and waste political energy, and represent a band-aid solution that avoids the more fundamental causes of rising healthcare costs.

The following proposals are based on publicly available information, but we do need better data. What’s not easily available in the public domain is the rate of growth of cost categories.

For example, although we know that hospital spending is the biggest cost category at 53% of total healthcare spending (PDF), we don’t know its component parts and fastest growing components, especially in the private sector.

Reducing private hospital bills

Let’s start with some fun facts.

Of the 6,210 hospitals in the United States – the motherland of capitalism – only 21% are for-profit entities.

Of the 344 hospitals in Malaysia, a whopping 58% are for-profit entities (PDF). Even among Singapore’s 28 hospitals, only 29% are for-profit.

We can draw our own conclusions from those fun facts. There’s nothing wrong with private hospitals of course, but they serve a public duty as equally important as their profit-making duty.

Consider also the common belief that the Malaysian private sector is more efficient than the public sector.

It’s actually a myth. With only 51% of total health expenditure (PDF), the public system treats approximately 70% of all inpatients and 95% of all outpatients (PDF).

Yes, you read that right.

With only 51% of total health expenditure, the public system treats two times more inpatients and twenty times more outpatients than the private system, and usually sicker and more complicated patients too. That’s Efficiency with a capital E!

I will readily admit that my calculations could be slightly inaccurate. But, even with mistakes, the private sector is either grossly inefficient or their bills are problematic.

Therefore, in either situation, a reduction in private hospitals bills are perfectly reasonable.

Those bills comprise many components. Doctors’ fees are already controlled, and we’ll discuss drug and technology prices shortly.

The remaining components include overnight admissions, food and drink, laundry and cleaning, utilities, administrative overheads, salaries, cost of capital expenditure to build the hospital and buy the machines, and so on.

The individual components don’t matter, except in the final bill presented to the insurers or patients who pay out-of-pocket.

Here’s where Budget 2020 can come in.

Firstly, it should not contain any additional allocations or tax incentives to private hospitals, beyond what is given to the private sector at large.

Secondly, Budget 2020 can provide a ring-fenced allocation to the Private Medical Practice Control Branch (CKAPS) in the Health Ministry, to strengthen their oversight capabilities and resources.

Thirdly, if the Government makes a political decision to continue with private sector healthcare in Malaysia, then a public debate about price transparency of private hospital bills must begin.

Even in the US, this became a federal requirement beginning Jan 1, 2019.

Budget 2020 could provide an allocation for research and public consultation to take place over a one-year period, ending with a set of recommendations on whether we should introduce price transparency and its methodologies.

If private hospitals are here to stay, then price transparency is the least imperfect instrument to control costs.

Other solutions to private hospital bills lie outside the purview of Budget 2020. For example, the health system could be restructured (which will be the subject of future columns), and medical insurers and patients can have their own parts to play respectively.

Reducing insurance premiums

In a previous column, I proposed a series of ideas for Budget 2020 to increase the number of policy-holders.

These ideas would help increase the risk-pooling, which will contribute to lower premiums. I will propose additional ideas below.

Often in the insurance industry, there’s a chicken-or-egg situation in their business model. Lower premiums will attract new clients, but you can’t lower premiums unless you have enough clients.

Budget 2020 can step in to break this vicious circle, in a few ways that fall short of a direct allocation or tax incentive to insurers.

The details may differ, but the intention is to break the vicious circle. That needs a bit of trust, and I mean the verb “I will trust you”, rather than the noun “we have trust”.

The insurance industry has a number of very cohesive industry groups (e.g. PIAM, LIAM and Takaful), which could form the basis of a new social contract with the Government, leading to a progressive and visible reduction in premiums.

Firstly, the Government can request that the insurers enter an informal risk-sharing agreement.

Tax deductions to purchase insurance can be given to those with pre-existing conditions, if the insurers will change their actuarial calculations to “meet the Government halfway”.

Secondly, there can be another tax deduction for individual taxpayers to purchase insurance while they are young and healthy.

It can be like a RM1,000 deduction for those aged between 30-40, and progressively lower deductions the older you are.

This will attract younger and healthier policy-holders into the insurance pool.

There are other steps for the insurance industry outside of Budget 2020.

Chief among these are for insurers to improve the efficiency of their third-party administrators (TPAs), to enhance the medical expertise within insurers and TPAs, and to occasionally audit the bills of private hospitals.

Reducing medicine and technology prices

Malaysia spends 13% of our total health expenditure on medicines, while the OECD average is 19%.

We’ve previously discussed that a blunt price cap may not be the most effective instrument, although international reference pricing is a helpful tool.

In a previous column, I’ve proposed specific ideas for Budget 2020 to strengthen a centralised purchasing mechanism for strategic purchasing of medicines and technologies for the government.

For the private sector though, the fiscal tools available to us in Budget 2020 are limited.

There are options to provide allocations or incentives to encourage general practitioners and private hospitals to form centralised purchasing functions, of course.

While desirable because it can drive down prices, it requires an interventionist role for the state that could be problematic; why should the Government encourage the private sector to be efficient when it’s already their role and in their own interests to be so?

There remains one policy-cum-fiscal tool to reduce medicine and technology costs, and that is to invest in a price transparency option for all medicines.

This must be implemented simultaneously with a repeal of the doctors’ fee schedules and a move to dispensing separation.

Three bold moves all at once, but it may be what’s needed by the system.

Fiscal tools are limited in their effectiveness, but if coupled with system and policy changes, we can see meaningful progress.

Editor's note: Vital Signs will be published once every two weeks, instead of once a week, starting from this column. The next Vital Signs column will be on Oct 23, 2019.

Dr Khor Swee Kheng has postgraduate degrees in internal medicine and public health, and has worked in five health sectors across three continents. He is currently reading Public Policy at the University of Oxford. The views expressed here are entirely the writer’s own.

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