Understanding The Impact: How Insured Consumer Choices and Medical Inflation Drive Medical Repricing and Premiums

Medical inflation rate in Malaysia 2024

As of 2024, according to Bank Negara Malaysia, Malaysia's medical inflation rate has reached 15%, surpassing the global average of 10%. Premiums have risen, with some facing hikes up to 20%, prompting BNM to cap increases at 10% and support policyholders aged 60+. 

Medical inflation has become an undeniable problem in today's global healthcare system because it drives up costs and affects both consumers and insurance companies. According to Aon's 2022 Global Medical Trend Rates Report, global medical inflation is expected to reach a whooping 10.1% in 2024.

This systemic challenge is more pronounced in Malaysia, where medical costs rise faster than general inflation rates. Unfortunately, medical inflation places a substantial strain on health insurance premiums. As such, insurers are being compelled to explore innovative strategies to contain escalating medical costs effectively.

What is medical inflation?

By definition, medical inflation is the systemic increase in the median or unit cost of healthcare services over a defined historical period. It encompasses both the utilisation and the unit costs of health services.

In simpler terms, medical inflation denotes the changes in the median healthcare expenditure per person in a country from year to year— assuming the risk profile of the subject and benefit entitlements remain the same.

Key factors influencing medical inflation

Several key factors contribute to the rising medical inflation rate in Malaysia and globally:

1. Advances in medical technology and treatment: Continuous advancements in medical technology, treatments, and medications have significantly improved the quality of healthcare. However, this progress has come with a higher cost of healthcare access.

2. High cost of imported equipment and medicines: Many countries, including Malaysia, rely on imported medical equipment and pharmaceuticals. These elements are considerably expensive due to factors like exchange rates, transportation costs, and intellectual property rights.

3. Rising drug costs: Pharmaceutical research and development are expensive, and these costs are often passed on to consumers through higher drug prices.

4. Rising healthcare worker salaries: As demand for qualified medical professionals increases, so do their wages. These costs inevitably get factored into healthcare service prices.

5. Administrative costs: The complexities of managing healthcare systems contribute to administrative overhead, further inflating healthcare costs.

6. Ageing population: As the population ages, the demand for healthcare services increases, particularly for the treatment of chronic and age-related conditions. This increased demand, in turn, drives up medical costs.

7. Increasing prevalence of non-communicable diseases (NCDs): The rising incidence of lifestyle-related diseases, such as cardiovascular diseases, diabetes, and cancer, has contributed to higher healthcare costs. These conditions often dictate long-term treatment and management, exacerbating medical expenses.

8. Misuse and medical fraud: Instances of misuse, overutilisation, or fraudulent practices within the healthcare system can also contribute to increased costs —and, consequently, higher medical inflation rates.

How can medical inflation increase overall healthcare expenses?

Medical inflation has a domino effect on the entire healthcare system, ultimately impacting patients like ourselves. Here's how:

• Increased costs for providers: When the cost of medical technology, pharmaceuticals, and staff salaries rises due to inflation, healthcare providers face higher operating expenses.

• Shifting of costs: To maintain profitability, providers are likely to transfer these increased costs to patients by raising the prices of their services. This means everything— from doctor visits and hospital stays to diagnostic tests and medications— becomes more expensive.

• Higher claims for insurance companies: As the cost of medical services rises, insurance companies see an increase in the amount they have to pay out for claims. This is because claims reflect the actual cost of the healthcare services received by policyholders.

In essence, medical inflation creates a ripple effect. Rising costs for providers lead to higher prices for patients— and ultimately translate to increased claim payouts for insurance companies.

To maintain financial stability, insurance companies then adjust premiums through medical repricing, which directly impacts the amount you pay for your health insurance coverage.

How does consumer behaviour amplify the effects of medical inflation?

While medical inflation is a significant driving force behind rising healthcare costs, insured consumer choices can also play a surprising role in amplifying its effects.

Increased healthcare utilisation by policyholders due to poor lifestyle choices like excessive smoking and alcohol consumption, as well as physical inactivity, may amplify the effects of medical inflation.

Furthermore, skipping preventive health screenings and check-ups to detect potential health issues early, as well as unnecessary emergency room overuse, can exacerbate the effects of medical inflation.  

For more context, as insurance companies pay more for these preventable claims, it may contribute to rising premiums for everyone.

Impact of lifestyle and health choices

Poor dietary habits, lack of physical activity, excessive alcohol consumption, inadequate sleep, high levels of psychological stress, and tobacco use have been directly linked to the development of chronic and non-communicable diseases (NCDs).

These NCDs— like cardiovascular diseases, diabetes, and certain types of cancer—

often require long-term treatment and management. Thus, resulting in higher healthcare costs for individuals and the healthcare system as a whole.

How can active pricing of insurance premiums (claims-based pricing) help?

Active pricing, also known as claims-based pricing, is a method where insurance premiums are set based on claims behaviour.

This approach can benefit policyholders who prioritise healthy living and preventive care. In practice, individuals may qualify for lower premiums by demonstrating a lower risk profile through healthy habits and responsible healthcare utilisation.

By rewarding policyholders for staying healthy and making judicious use of healthcare services, active pricing seeks to keep healthcare and insurance premiums affordable. Thereby fostering sustainability within the healthcare system and safeguarding access to affordable healthcare for individuals and communities alike.

For example, with PRUMillion Med Active, policyholders receive an instant discount of up to 15% from the very first year. This discount continues when no claims are made. Hence, the lower premiums are maintained without affecting their policy coverage.

However, if a claim of RM5,000 is made, the cost of insurance may increase 10%, and claims more than RM5,000 may cause cost of insurance to rise by 25%. Nonetheless, it will return to original level if the policyholder is able to recover and stay healthy the subsequent years without making any claims.

PRUPanel Plus: Key Benefits for Prudential policyholders amidst rising medical inflation

To help manage the rising costs of healthcare, Prudential’s PRUPanel Plus offers policyholders access to over 100 top hospitals and specialist centres nationwide, with the full list available on PAMB and PruBSN’s Corporate Websites.

One of the key benefits is the waiver of administrative fees and deposits upon approval of the Pre-Authorisation Letter, reducing upfront medical expenses.

Additionally, policyholders enjoy exclusive rates on medical services and the opportunity to redeem up to RM1,000 annually through the No Claims Benefit at the Prudential Marketplace, making preventive care more easily accessible.

For more information, visit the PRUPanel Plus page.

Conclusion

Medical inflation can significantly impact individuals, families, employers, and the healthcare system as a whole. Medical costs are rising at an alarming rate due to factors like technological advancements and an ageing population that's characterised by the prevalence of non-communicable diseases.

Insurers play a vital role in mitigating the effects of medical inflation through strategies like active pricing. This approach not only promotes responsible utilisation of medical services—but also aligns the interests of insurers and policyholders in maintaining good health and containing healthcare costs.

Furthermore, this dynamic pricing model encourages transparency, equitable coverage and fair cost distribution, thus ensuring the financial viability of the Malaysian healthcare system—even in the face of escalating medical expenses.

For more reading, check out our other articles on medical inflation and medical inflation rates in Malaysia.