Health Insurance Business Related

Issues

CHAPTER 8
INTRODUCTION
 With the number of private hospitals in Malaysia there is definitely a
demand for private healthcare and opportunity for the growth of PMI

 There are related issues and challenges that need to be managed as

addressed by providers in the provision of healthcare service

 Related bodies and associations have a role to play in the overall

viability or the private medical and health assurance industry

 Price control, the collaborative relationship among the industry bodies,

the need for reinsurance and taxation are main aspects of this topic
PRICE CONTROL
 Healthcare economics is a perfect example of an imperfect market
 In a perfect market supply chain, when the supply goes up, the price goes
down and vice-versa
 In the healthcare market scenario the price continues to increase
regardless of demand
 Healthcare financing is a challenge in many countries and the concern is
in the provision of a safety net for the poor
 Price regulation could rein in the cost of care and help secure a better
deal for employers, taxpayers and individuals purchasing health coverage
PRICE CONTROL
 Regulation could restrict or check the capacity of monopolists to inflate
prices, it would also restrict free competition in the market

 Any price regulation or control measures could have a positive or

negative impact

 There is no perfect solution but the best is a trade-off amongst all parties
concerned
HEALTHCARE PROVIDER PERSPECTIVE
 Private healthcare must be affordable, sustainable and provide a profit to
shareholders
 The regulations regulate the professional fees
 With this ceiling it has brought some behavioural change in the manner
that the professional may conduct their practice to maximize returns
 Example, physician may shorten the duration of consultation or visit
during the out-of-hour time frame for better fees
 It will also encourage the use of unnecessarily costly procedures and
overuse of diagnostic tests
 The quality of care may be compromised
HEALTHCARE PROVIDER PERSPECTIVE
 The majority of hospital charges for inpatient care compromise the
hospital supplies and services, which are not regulated
 There is major difference in charges between each hospital in the private
sector
 This creates some competition between providers to price their room and
board quite competitively to target certain markets
 If providers cannot earn a premium by improving quality, they have little
motivation to invest and innovate in their healthcare delivery
 Improvements in healthcare are substantial up fronts in healthcare
investment in research and development
HEALTHCARE PROVIDER PERSPECTIVE
 If the healthcare system is subject to price control it will stagnate
technology and reduce quality of care

 This will be a concern for the private healthcare and the consumer

 There must be a balance in terms of affordability otherwise the private

sector will price itself out beyond the affordability of the consumer and no
longer remain viable as a majority of the consumers will go to public care
INSURANCE COMPANY PERSPECTIVE
 From insurers perspective, price control measures may lower the
premium charge for the coverage
 The pricing is reflective of the pool utilization and charges
 If the utilization goes up the premium will be adjusted to reflect the higher
risk charge
 Insurer will continue to write this class of business so long as it is
profitable and there is a market for it.
 Insurers welcome price control as it affects their stability if the prices keep
going up and they have to readjust and renegotiate treaty arrangements
INSURANCE COMPANY PERSPECTIVE
 Insurers will take different cost containment measures to ensure they are
competitive in the market
 On upfront underwriting they will do cherry-picking the healthy applicants
 Measures like collaboration with the providers and developing benefit
plans with deductibles or co-insurance may be introduced
 Wellness programs and consumer educational programs will be initiated
to keep the insured pool healthy
 If the premium for insurance goes up in tandem with medical inflation and
cost of utilization, there will be a time when consumers can no longer find
it attractive to provide cover for this class of risk and will leave the market
CONSUMER PERSPECTIVE
 Customers usually seek the best price in any product and would approve of
price control that can benefit them without compromising on quality
 Their affordability will determine the customer choice of provider from with
private or public
 Some will have no issue even if the price is exorbitant so long as they receive
quality service and treatment
 This market segment is very small and insignificant
 When prices go up the burden is passed on to the consumers to be responsible
for their spending
 Consumers are demanding more transparency around healthcare costs
 There are limitations to how much that information can help them make
decisions and could end up costing than more in the end
CONSUMER PERSPECTIVE
 If there is real competition in the market, and patients have the ability to
take costs into account when making decisions
 In an emergency situation, patients cannot afford to begin price shopping
while waiting for an ambulance
 Sometimes something that seems simple can turn out to be more serious
and expensive, making it difficult to compare prices ahead of time
 Consumers will have to bear a higher cost in the form of out-of-pocket
expenses, when insurers impose higher deductible or co-insurance IN
PMI policies to combat rising medical costs
 If prices go up the only place the consumer can go to for treatment is the
public hospitals and burden the government
CONSUMER PERSPECTIVE
 In the end there will be no winners and only losers amongst all parties i.e
providers, insurers and consumers

 Therefore there should be some balance of price control for the viability of
the business as well as protection for the consumers
INDUSTRY BODIES AND CROSS INDUSTRY INITIATIVES
 There are a number of initiatives adopted by the industry to promote the
understanding of the medical and health products

 There is also standardization of policy wording and some basic guidelines

in respect of underwriting

 There are also industry related associations that have an impact on the
development of the medical and health industry
COLLABORATION
 MHI products can be sold by the following insurance companies:
a) General Insurers
b) Life Insurers
c) Takaful operators
 There needs to be a common stand amongst them in order to avoid any
conflicting views or opinion in joint activities to be undertaken for the
development of PMI
 Thus the Joint Technical Committee (JTC) of Medical and Health was
formed with 4 voting members per association, from :
a) PIAM
b) LIAM
c) MTA
COLLABORATION
 The position of chairman will be rotated among the associations every two years and the
secretariat would be the association from whom the Chairman is elected
 Objective of the committee is to review the current practices of MHI and where possible
to harmonize the practices between life and general insurance companies
 Role of JTC is to work on common issues faced by the industry and to report to the
respective associations for decision making
 The ITC was required to look into industry wide issues on MHI particularly the following:
 The implementation of the Medical and Health Insurance Guide; and

 Measures to control the escalating cost of Hospital & Surgical Claims

 The MHI Guide has been introduced to the industry and been reviewed
and revised in alignment with the market changes and changes in
insurance legislation (FSA 2013 & IFSA 2013)
STANDARDIZATION
 There is also collaboration with other industry bodies such as the
Association of Private Hospitals of Malaysia (APHM)
 APHM was registered in 1972 and has 120 members form all over
Malaysia
 APHM was set-up to coordinate activities of private hospitals in Malaysia
with the aim to facilitate healthcare of the highest standards for the public
 It is also focused in promoting cooperation amongst member hospitals
and other healthcare providers
 One of the core objectives of APHM is to develop and maintain a
uniformly high standard of patient care, skills, services and
professionalism in private in Malaysia
STANDARDIZATION
 Resulting from the collaboration between the JTC and APHM, the
standardized claim form was developed and implemented for Medical and
Health insurers in the industry
 All private hospitals adopted the same claim form format for medical insurance
claims purposes
 The same claim form is issued by TPA as well
 The doctors will not be confused by differing formats from different insurers
and differing questionnaires required
 They also have simple tick boxes for their confirmation of the admitting
diagnosis and related conditions
 The collaboration is ongoing to smoothen processes and enhance operational
flow to their common customers for their mutual benefit
LARGE CLAIM DATABASE
 ISM maintain a large claims database containing medical and health
claims data
 ISM’s membership includes all insurers dealing with general insurance
business and takaful operators
 ISM is responsible for providing the necessary statistical data and
quantitative benchmarks to the insurance industry
 They also offer service in the area of anti-fraud and IT, as well as
research and development
 ISM maintains databases of major lines of business for the insurance
industry including medical and health
LARGE CLAIM DATABASE
 The main strategic objectives of ISM are to:
 Provide infrastructure for database and analytics for members to make informed
decisions and support the liberalized pricing environment
 Build competence in quantitative underwriting and technical pricing
 Increase efficiencies in operations by:
 providing online access to shared information

 utilization of information technology solutions

 providing effective fraud detection systems and capabilities

 Insurers are required to submit the required claims data to ISM

 ISM collates all the data and provides an ISM Claim Verification System
(ICVS) for claims queries
 Insurers are able to check if the claimant has made a similar claim with
other insurers by submitting a query to ISM
LARGE CLAIM DATABASE
 This system provides a means of checking to identify if a similar claim has
been paid and to avoid paying fraudulent claims
 (refer to page 203 for IVCS flow)
 In order to deter the rampant fraudulent activities of the accident and health
portfolio, ISM has further developed a system known as Claims and
Underwriting Exchange – Accident and Health (CUE- A&H)
 This will include data from these products:
 Personal Accident
 Hospitalization and Surgical
 Life Insurance
 Family Takaful
 Travel Insurance
 Critical Illness
 Hospital Cash/Income
REINSURANCE
 Reinsurance is insurance that is purchased by an insurance company (the
`ceding company’ or `cedant’) from one or more insurance companies (the
reinsurer) directly or through s broker as a means of risk management
 Reinsurer may be a specialist reinsurance company which only
undertakes reinsurance business
 Both parties enter into a reinsurance agreement, which details the
conditions upon which the reinsurer would pay a share of the claim
incurred by ceding company
 The reinsurer is paid a reinsurance premium by the ceding company
 Reinsurance contracts are structured in many ways
 Insurance companies use reinsurance to limit the risk for individual/group
exposures or for a whole portfolio of business
REINSURANCE
 The different types of reinsurance are:
a) Facultative Reinsurance
 Is negotiated separately for each insurance policy that is
reinsured
 It is used for individual risks not covered or insufficiently covered
by their reinsurance treaties, for amounts in excess of the
monetary limits of their reinsurance treaties and for unusual risks
 The expenses are generally higher for such businesses because
the risk is individually underwritten and administered
 A facultative certificate is issued by the reinsurance company to
the ceding company reinsuring that one policy
REINSURANCE
 The different types of reinsurance are:
b) Treaty Reinsurance
 means that the ceding company and the reinsurer negotiate and
execute a reinsurance contract under which the reinsurer covers
the specified share of all the insurance policies issued by ceding
company under the scope of the contract

c) Obligatory Reinsurance
 Is when the reinsurance contract may oblige the reinsurer to accept
reinsurance of all contracts within the scope of the contract
 It may also allow the insurer to choose which risk to cede to the
reinsurer and which it is obliged to accept
 Such risks are known as `facultative-obligatory’ or facultative
reinsurance
REINSURANCE
 There are two types of treaty reinsurance, namely:
a) Proportional
b) Non-proportional

 Proportional reinsurance is the reinsurer’s share of the risk and is defined

for each separate policy

 Non-proportional reinsurance refers to a reinsurance arrangement where

the reinsurers’ liability is not assessed in direct proportion for each claim
but rather is computed with reference to a given formula on aggregate
claims suffered by the ceding company
THE NEED FOR REINSURANCE
 The health underwriter will try to protect the common pool against
adverse selection to ensure that a reasonable profit is made
 Insurance companies are not immune to the possibility of larger than
expected losses or more losses than anticipated
 The reasons for reinsurance are:
 Security
This will give the insurer peace of mind from the uncertainty of
losses and security for business continuity
 Flexibility
 RI can make the insurer’s results more predictable by absorbing
large losses and avoiding fluctuations in claims costs from year to
year and within a year
 This will reduce the amount of capital needed to provide coverage
THE NEED FOR REINSURANCE
 Capacity
Insurers may have limited financial capacity to underwrite the size of
risk they can accept
This will almost certainly be the case for most insurers, no matter
how large the company is
This means some business have to be turned down or partially
accepted
With the purchase of reinsurance, insurers can increase capacity
and accept more business
 Catastrophes
 Catastrophic losses can cause great financial impact to an insurer
and the insurer is not spared from such exposures
 The insurer would want to avoid this by purchasing reinsurance
cover so that they can transfer the risk to the reinsurer
THE NEED FOR REINSURANCE
 Capital
 Reinsurance may provide capital in the form of commission and RI
premium will take on part of the risk, using their solvency to cover the
risk
 Both the features are attractive to the insurers but have to offset
against the costs of reinsurance
 Expertise
 Insurers can tap into the expertise of the reinsurer who can provide
considerable expertise in areas such as product design and pricing
 By providing technical assistance to the insurer, there will be more
reciprocal business from the insurer
 Reinsurers will generally have a larger medical team than insurers,
wider international exposure and experience to contribute towards
the development of risk management
 This will also help the reinsurer to protect their own interests
THE NEED FOR REINSURANCE
 Greater spread of risk
 Greater spread of risk around the market place and the world
 Many large reinsurers are in UK, France, Switzerland, Germany,
Japan and USA
 The impact of risks will not fall solely on one country
METHODS OF INSURING PRIVATE MEDICAL BUSINESS
 By choosing the correct method of reinsurance the insurer
may create a more balanced and homogeneous portfolio of
insured risks

 This will give greater predictability of the portfolio results on

the basis after reinsurance and would be reflected in the
stability of the company’s financial results

METHODS OF INSURING PRIVATE MEDICAL BUSINESS
 The main types of reinsurance for medical insurance are:
 Quota Share
 Reinsurer will take a stated percentage of share of each policy that
the insurer writes
 Reinsurer will receive the same stated percentage of premium and
will pay the same stated percentage of claim
 The reinsurer will allow a ceding commission to the insurer to cover
the costs incurred (acquisition and administration)
 The reason for a quota share arrangement is that the insurer may
not have sufficient capital to prudently retain all of the business
 Example, it may be able to offer RM100,000 million in coverage but
by reinsuring 75% of it, it can sell four tine as much
 (refer example on page 206)
METHODS OF INSURING PRIVATE MEDICAL BUSINESS
 The main types of reinsurance for medical insurance are:
 Specific stop loss
 This method is also known as `Excess of Loss’ and is used to limit
the liability on each individual claim over a defined period (normally
12 months, either calendar or policy year)
 This reduced the risk of large variability of medical costs to insurer
without having to reduce specific limits in the policy
 The reinsurer pays the benefits that exceed the excess amount on
each individual, provided that claims are incurred during the defined
period.
 The coverage is called `specific stop-loss’ as it restricts the loss an
insurer can incur on any specific policy to the agreed amount
 Large companies on self funded programs and self appointed TPA
would adopt stop loss reinsurance to protect their claim fund
METHODS OF INSURING PRIVATE MEDICAL BUSINESS
 The main types of reinsurance for medical insurance are:
 Aggregate stop loss
 This cover is taken up on the top of a specific stop-loss agreement
that is already in place and will protect against a large volume if
claims by number in a set period of time
 It is usually purchased on a yearly basis
 This treaty is used by insurers to limit their aggregate risk exposure
over a number of group of specific risks
 When an aggregate claims in a given period exceed the overall limit
amount, the reinsurer will pay the excess claims.
 The claims included in the aggregate stop-loss coverage are only
those up to a specific stop-loss limit, as amount in excess of this
specific are already paid by the reinsurer
METHODS OF INSURING PRIVATE MEDICAL BUSINESS
 The main types of reinsurance for medical insurance are:
 Aggregate stop loss
 If the claim experience amount exceeds 125% of the expected
claims in a calendar year and there was a specific stop-loss
agreement with an excess of RM100,000, only indiviaul claim
amounts up to RM100,000 would be included in this treat
 Once the claims exceed the aggregate level, the reinsurer would pay
the excess
 In the next year, aggregate stop-loss exess amount would be
recalculated based on the census data for the portfolio being
reinsured as well as inflation and utilization trends
 The revised amount would have to be exceeded before the reinsurer
becomes liable
TAXATION
 The Malaysian tax system ins progressive tax system in which tax
increases as the taxable income increases
 Tax rates are on chargeable income and not salary or total income
 Chargeable income is calculated after tax exemption and tax relief
 The following are the general sources of taxable income:
 Business or profession
 Employment
 Dividends
 Interests (except bank deposit interest)
 Discounts
 Rent collected
 Royalties
 Premiums/pensions/annuities
TAXATION
 There are taxable benefits that can be converted to cash and are given to
an employee by the employer
 These include bill claims, company credit card, company loans,
sponsored club membership, sponsored child tuition fees, personal driver,
guard or main and others
 The tax exemptions, tax relief, tax deduction and tax rebates
 Tax exemption come in many forms and by an individual to reduce
taxable income’
 Tax relief is defined ` an amount that can be deducted from a person’s
annual income to reduce the amount on which tax is paid’
 Unlike tax exemptions tax reliefs are items that reduce the total
chargeable income
TAXATION
 Tax deductions are similar to tax reliefs as they allow a reduction in the
chargeable income
 This is stated, for example `to allow a deduction of 7% of the taxable
income for gift to charities and institutions which are approved by the
government’.
 Tax rebates are further reductions in the amount of tax expenses after the
computation of the tax payable for the year
TAXATION OF BENEFITS AND BENEFITS IN KIND
 Benefits in kind are also taxable unless exempted under the Income Tax
Ruling (cars, lodging, electronics and home furnishing)

 These are benefits that are not convertible into money

 This means the benefit cannot be sold, assigned or exchanged for cash,
either due to employment contract or due to the nature of the benefit itself

 The method of calculation using either of the following methods:

a) The formula method, or
b) The prescribed value method
TAXATION OF BENEFITS AND BENEFITS IN KIND
The formula method
 Under this method each benefit provided to the employee is ascertained as follows:
Value of asset = Annual Value of benefits
Life span of asset

The prescribed value method

 This method assigns a predetermined value from a list, sorted by classification of assets
as provided in the formula in the Income Tax Ruling on benefit in kind
 SERVICE TAX
 GST is charged on all taxable supplies of goods and services except those specifically
exempted
 GST is also charged on importation of goods and services into Malaysia
 The purpose is to replace the sales and service tax
 This GST of 6% will replace the sales and services tax
 PMI policies both individual and group are subject to the GST with effect from 1st April
2015
 A person who is registered under the GST Act 2014 is known as a `registered person’
 A registered person is required to charge GST (output tax) on his taxable supply of
goods and services made to his customers
 He is allowed to claim back any GST incurred on his purchases (input tax), which are
inputs to the business
 Tax is not a cost to intermediaries and does not appear as an expenses item in their
financial statements
 SERVICE TAX
 There is also disallowance of input as stipulated by the Royal Malaysian Customs on the
GST and classified as `blocked’ input tax under the GST Regulations 2014

 Any input tax incurred by any taxable person cannot be claimed even though the taxable
goods and services are acquired for business purposes

 Refer to page 209, 210 for Sections of `Blocked Input Tax’

 In this Regulation medical and personal accident insuring premiums are classified as
blocked input tax

 Policyholders and corporates are not allowed to claim tax for the purchase f private
medical and health insurance under GST Regulations 2014
 RULES GOVERNING TAXATION OF PMI
 Under personal income tax relief, an amount of RM3,000 for the purchase of private
medical and health insurance and educational policies is allowed

 This tax relief serves as am incentive to encourage individuals to purchase individual

private medical and health insurance policy

 For group corporate medical and health insurance policies, there is no tax relief and they
are treated as an expenses before the chargeable income for taxation