In her letter “Shocked by hike in insurance premium” (The Star, Sept 14), Jean of Ipoh protested the 15% increase in her medical insurance and questioned the justification provided by the insurers.
Since November 2016, many insurers had notified their clients of the increase of 15% to 25% in premiums effective in 2017. A typical 60-year-old man will now have to pay about 20% to 25% more in premium to renew his coverage.
As it affects nearly two million people, the movement of private healthcare insurance premium price is of considerable public importance and has far-reaching effects in healthcare financing for our country.
Private healthcare insurance plays an important role in most high-income countries as providers of supplementary coverage to predominantly publicly funded systems, such as in France (85% of population) and the Netherlands (over 90%). In that way, public funding shouldered the major portion of basic needs but still allowed individuals freedom of choice in their healthcare demand. There is thus an expanding market for private insurers in the evolution towards a shared responsibility healthcare system.
Barely a month ago, Bank Negara governor Tan Sri Muhammad Ibrahim announced that the central bank would release as soon as possible a reference framework to reduce the inflation of medical claims. Bank Negara’s press release on Aug 18 featured an increase of medical claims from RM2.6bil in 2011 to RM4.9bil in 2016, an apparent increase of 14% per year.
In its Annual Report 2016, Bank Negara had also expressed its concern over the increasing repricing activity of medical and health insurance/takaful (MHIT) products by insurers and takaful operators, and reiterated its stand on protection of public interest.
From the consumer’s point of view, the purpose of an insurance policy is to provide financial aid to protect against the catastrophic cost of a major medical illness.
This benefit is measured by the amount paid out by the insurer. The claims ratio, also known as medical loss ratio (or MLR in American and European literature), is a measurement of the amount of claims paid out as a percentage of total earned premium collected before taxes and expenses. The lower the percentage, the lower the payout. Assuming that costs of suppliers are well controlled, a high claims ratio works to the advantage of the consumer and reduces the funds earned by the insurer.
Claims ratio as recorded by Bank Negara was at a high of 50.9% in 2009. From 2009 to 2015, it dropped between 2% and 3% per year until its lowest level of 36.2% in the first half of 2015. There was a marginal rise of 7% from the second half of 2015 to the second half of 2016 (from 39.7% to 46.7%) but this was still far below its 2009 levels.
If the paid claims ratio was used, the PIAM data would show an increase from 34.7% in 2015 to 40.3% in 2016, which is only 5.6% and even lower than Bank Negara’s data.
In comparison, in the United States’ private insurance market, ObamaCare or the Affordable Care Act (ACA) stipulated that large group plans maintain an MLR of at least 85% while small group plans have at least 80%.
In EU countries, the MLR ranges from 65% to 90%, with majority of the countries consistently above 80%.
In non-profit public healthcare financing systems such as Medicare or in some states in India, the MLR is consistently above 90% to 95%. A claims ratio of less than 50% is far below industrial standards in advanced countries, and below 40% would have been considered exceptional from the insurer’s point of view.
There is, therefore, very little ground for our insurers to increase the premium by 15% to 25% based on high claims ratio alone. The public is in fact paying much higher premiums to gain no additional benefit.
Similar data on Bank Negara reports were 6%, 0% and 3% for 2014 to 2016 respectively. It then became clear that the major cause of the increase in claims ratio was the dwindling growth rate in the premium collected, coupled with a modest increase in cost.
In real terms, it was the dwindling premium revenue that had a larger effect on the premium price increase. As the price of premiums increased, the growth of the total earned premiums paradoxically shrank, triggering an early warning sign for the insurance industry that the pricing is almost touching the limits of public tolerance.
In most countries, premium price increase of 4.5% to 6%, about 1% to 2% above per capita GDP, is the norm on healthcare systems. Annual premium price increase of 15% or more is not only excessive, it also brings no additional benefit to the clients and may lead to adverse effects upon the insurers themselves.
As premium prices escalate, it will only encourage the sicker people who are likely to claim more to purchase the plan while healthy individuals will tend to withdraw. This negates the risk-pooling function of insurance, and encourages what insurers call “adverse selection”. Eventually, there is a real danger of the “spiral death” of the industry by its own creation.
Yet, the cost of claims continue to escalate. Excessive use of monopsony (where a few with monopoly controls the pricing of the providers) will cause the suppliers to “game the system” and contribute to excessive price increase. Perhaps closer communication between stakeholders and performance-based incentives would be a much better way of reducing the cost of medical claims.
I applaud the Bank Negara governor’s interest in stewardship of health insurance markets and consumer protection which are both vital in meeting the long-term sustainable healthcare objective of the nation. There is a dire need for Bank Negara to review the health insurance sector comprehensively against the country’s health system in defence of public good and individual consumer benefits.
Article by - Datuk Dr SH Lee
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