Is the medical insurance system broken?

The past couple of months has not been good to the medical insurance landscape. It almost seems that at every news cycle, there is yet another story on medical insurance popping up on everyone’s newsfeed.

First, there was the issue of premiums being raised at the end of last year, by 40-70%. Amidst an outcry, the government intervened. Medical insurers were made to spread out premium increases over a three-year period rather than over a single year, and premium increases were paused for policyholders above the age of 60.

There was also a lot of political stir over this; with many amongst the general public furious with these announcements. This led to a lot of political advocacy calling for sectoral reform, involving multiple Parliamentary Select Committees and hearings.

Next, the health and finance ministries, together with Bank Negara, announced their “Reset” (revamp, enhance, strengthen, expand and transform) strategy, with key initiatives, such as:

the introduction of a basic, affordable medical and health insurance/takaful product, and
cost-control initiatives, such as switching to a new payment model (diagnosis-related groups) to replace the current fee-for-service system would be implemented.

This was followed by another episode early this month where a third-party administrator (TPA) who processes medical claims reportedly asked hospitals and clinics to prioritise certain procedures above others which were of higher costs.

The entire medical fraternity voiced serious objections over this issue. Their contention? Clinical care should be driven by what is best for the patient, as determined by the physician; not the third-party claims administrator (TPA) interfering in the physician’s decision-making.

The issue was deemed serious enough that the health director-general himself issued an official warning to TPAs to caution them against getting involved in clinical decision-making.

Over last week, another storm has broken out, this time from the results of a survey of specialists in private hospitals where more than 90% of them reported perceived interference from insurance and takaful operators or TPAs in their clinical decision-making.

The survey findings also revealed that specialists reported patients being affected by delays or “stalling tactics” by insurers to postpone admissions or even clinical procedures; revocations of guarantee letters where the insurer decides it will not pay for a certain admission or treatment; or outright refusals of care, where insurers deny the patient coverage due to issues such as pre-existing conditions which have not been declared in their initial application.

In response, the insurance industry associations namely the Life Insurance Association of Malaysia, the General Insurance Association of Malaysia and the Malaysian Takaful Association just issued a statement jointly that they have continued to maintain a claims approval rate of more than 90%.

The industry associations reported that the main reasons for claim rejections were policy exclusions, failure to meet policy eligibility criteria, non-disclosure of pre-existing conditions, and treatments unrelated to the admission.

With this ongoing controversy, it is the following issue that is at the top of our minds: is the medical insurance system in Malaysia broken?

There is no easy or quick answer to this, especially as there is so much confusion and misconceptions around medical insurance, but allow me to elaborate on this issue in a little more detail.

One of the key things to understand is what medical insurance is. Insurance itself is a contractual arrangement about transferring financial risk of unforeseen circumstances from an individual or an organisation to the insurer in exchange for regular payments named premiums.

For example, car insurance provides you with financial protection against costs from car accidents, among other things. So you pay a regular yearly premium, and in return, if your car gets hit, the insurer pays for specific damages and liabilities.

This may include the cost of repairing your car, covering the damage done to other vehicles if the accident was your fault; and even the cost of treatment if you or others were injured in an accident.

An important point to note is that the amount of coverage and the type of policy you choose will determine what kind of coverage you have, and of course, with more coverage you end up paying a higher premium.

Additionally, it is also important to understand that insurance works on the principle of shared risk, where the probabilities of someone making a financial claim (i.e. getting into an accident) is much, much lower than the large amount of people subscribing to the insurance — a term called risk-pooling.

Above all, insurance is a business, which needs to make profits as all businesses do.

Hence, insurance always needs to have a large low-risk pool with low claims payout. The amount of money collected at the end of the year, minus operating expenses and payouts are what constitutes profit for the insurer.

Funnily enough, even with car insurance, you see some cost-saving options which may not prove to be a “saving” in the immediate future.

Take the optional windshield cover, which you can opt for to add to your car insurance if you want. I myself have had friends, who after diligently paying for windshield insurance additional cover for years choose to not renew it on a particular year just to save that amount of money.

Of course, Uncle Murphy (he of Murphy’s Law fame) then pays a visit with unforeseen circumstances resulting in a shattered windshield, leaving my unlucky friend having to fork out cash to repair it since he did not pay for the additional windshield cover for that year.

Theoretically, medical insurance works the same way — providing financial protection against medical expenses incurred by individuals in exchange for the regular premium being paid to the insurer.

The type of medical expenses reimbursed depends on the type of medical insurance policy that is being subscribed to and may include a wide range of things including medicines, surgeries, doctor’s consultations and hospital stays.

To reduce the risk of high medical expenses being paid out, insurers inevitably try to offer insurance to individuals who are “low-risk”, i.e. younger, and have no diseases or pre-existing conditions.

This way, the insurance has a large low risk-pool with fewer claims being paid out.

However, there are some key factors which are impacting the medical insurance landscape today.

Cardinal among these is:

the issue of rising risk within the risk-pool,
the issue of rising healthcare costs, and
the issue of rising medical claims being made on the insurer.

Reflexively, the insurers (and by association their contracted vendors, i.e. TPAs) are acting to control costs; by trying to reduce risk in the risk-pool, bring down healthcare costs, and reduce the number of medical claims being made.

This is the crux of the matter.

Unfortunately, such actions are impacting the public in a big way, and serious multi-stakeholder engagements are required to prevent the medical insurance system from being permanently broken.

Tomorrow: Reducing risk in medical insurance

 

The views expressed are those of the writer and do not necessarily reflect those of FMT.