Healthcare sector needs a dose of reforms
IN recent times, we have seen some major transactions involving the acquisition of hospitals by larger market players, which are clearly either expanding their network of hospitals or getting ready for the next stage – an initial public offering (IPO).
Two key assets changed hands the past year and they include the acquisition of Island Hospital, which was completed earlier this week, by IHH Healthcare (IHH) for RM3.92bil.
The Penang-based hospital was valued at RM3.92mil per bed based on its planned expansion to a 1,000-bed hospital.
Measured by enterprise value to earnings before interest, tax, depreciation and amortisation (EV/Ebitda), the deal was done at a staggering 24.6 times multiple.
About a year ago, Sime Darby and AH Holdings Health Care Pty Ltd sold Ramsay Sime Darby Hospital (RSDH) to Columbia Asia for RM5.68bil, valuing the Subang Jaya-based hospital at 20.1 times EV/Ebitda and at RM3.71mil per bed based on RSDH’s 1,530 total beds capacity across seven hospitals in Malaysia and Indonesia.
Private hospitals trade at a premium valuation to other industries due to the cash-generating ability of the business model as well as the strong growth of the industry itself due to multiple factors such as higher life expectancy, rise in non-communal diseases (NCD) as well as demand for personalised and timely care for those who can afford them.
The Malaysian medical industry
According to the Health Ministry, as disclosed in the Health White Paper (HWP), Malaysia has a hybrid healthcare system, comprising a public and a private healthcare system.
The public sector seeks to provide widespread coverage of universal healthcare for the population, delivering virtually near-free primary healthcare services and heavily subsidised secondary and tertiary care services which are largely funded by federal government revenues.
The private sector seeks to provide healthcare services to the public on a fee-for-service basis which is predominantly funded by individual out-of-pocket payments and private health insurance products.
In terms of numbers, based on the ministry’s 2023 Health Facts report, Malaysia had some 148 government hospitals, inclusive of 11 special medical institutions, with some 45,167 beds at the end of 2022. Over at the private sector, the number of private hospitals stood at 207 with some 17,781 beds. Hence, while the public sector has a 41.7% share in terms of the number of hospitals, they represent 71.8% of the total number of beds.
The ministry has one of the highest allocations of RM45.3bil in Budget 2025.
The amount comprises RM38.5bil for operating expenses and RM6.7bil development expenditure.
Emoluments supply and services are the bulk of the government’s expenditure for the ministry, accounting for 53.3% and 37.3% of total expenditure next year respectively.
Rising cost of medical coverage
According to the Global Medical Trend Rates Reports by Aon, medical costs in Malaysia rose by 10% in 2022 and 12.6% in 2023, which is higher than the global average of 5% in 2022, and 5.6% in 2023.
Among the key factors contributing to the rise in medical cost inflation is the increase in costs of hospital supplies and services, including drug prices, advancements in medical technologies, and the increase in the utilisation of health services following the resumption of elective medical procedures following the Covid-19 pandemic.
Realising this, the central bank announced that with effect from Sept 1, 2024, insurers and takaful operators must offer consumers an option to purchase medical, health insurance and takaful (MHIT) products with a co-payment feature. The aim here is to lower the cost of MHIT products based on the consumer’s financial position and needs, which will help to contain medical cost inflation in Malaysia by controlling the over-consumption of health services.
Why is medical cost rising?
The simple answer – a confluence of factors. This includes the nature and structure of how private hospitals are owned today.
Of course, in the public sector, it is heavily subsidised by the government for both outpatient and those under hospitalisation but when it comes to the private sector, it is driven by shareholders’ return expectations based on specific key performance indicators (KPI).
For smaller hospitals that are up and coming, most are owned by private equity (PE) funds and their main KPIs are about having a decent return on equity and a mid-teen to above 20% in terms of internal rate of return.
As these PE funds have a limited time span to nurture their investee companies, which is typically between five and seven years, they are under pressure to deliver the expected returns by flipping their investments in these hospitals either via a trade sale or a potential IPO.
With high expectations in terms of returns, these PE funds also add pressure on the hospitals to deliver results.
Hence, these hospitals too are expected to hit their KPIs in the form of returns to their shareholders or at least on key matrixes, such as revenue, Ebitda, number of beds, inpatient admissions, average length stay, occupancy rate as well as average revenue per patient admitted.
This, in turn, drives hospitals to maximise and squeeze out as much as possible when a patient seeks treatment at the hospital, be it in the form of tests, or even length of stay and medications.
Showing growth in numbers and at the Ebitda level or potential expansion in the number of hospital beds are real kickers for valuation to go further north and allow PE investors to exit with a handsome gain.
Insured or not?
One of the most important questions patients get at a hospital is whether they are insured or not.
An insured patient will be covered by his/her insurance company but with the co-payment in place, the insurance company’s outlay is reduced by the agreed co-payment amount, either in percentage or the absolute amount.
Still, the medical bill can be rather substantial and this drives insurance costs higher over time.
Medical inflation via insurance coverage is also rather obvious as there are cases where a treatment done and paid out of one’s pocket is lower by 15% to 20% than if covered under insurance.
Why is this so? Shouldn’t the cost be the same irrespective of the method of payment? It is widely believed that the pure reason for this is that since it is covered by insurance, it is a blank cheque for the hospitals to charge what they can.
Due to the higher incidence of claims experienced by insurance companies, the premiums charged by the insurance companies will naturally go up to protect their business margins.
The private-public dilemma
While the ownership of government hospitals is clear, it is not the case when one looks at the private sector. Within the private sector, there are also listed hospital entities and non-listed ones.
Among the listed ones, IHH is owned by Khazanah Nasional with almost a 26% stake. KPJ Healthcare (KPJ) is 45% owned by Johor Corp and another 6.7% via Waqaf An-Nur Corp, which was appointed as a Special Nazir by the Johor State Islamic Council, to manage the assets or shares that were endowed by Johor Corp.
We also have a healthcare division among other listed companies and this includes those owned by TDM Bhd, which is 60% owned by Terengganu Incorporated. Other key healthcare institutions that are owned by the government are the Institute Jantung Negara and various university teaching hospitals.
There are also non-profit hospitals like Assunta Hospital, Utar Hospital and Tung Shin Hospital in the Klang Valley, as well as Lam Wah Ee Hospital, Penang Adventist, and Mount Miriam Cancer Hospital in Penang.
With large private hospital chains owned by the government and other non-profit hospitals within populated areas and government hospitals, the healthcare sector does seem crowded but healthcare costs remain expensive and in some cases, unaffordable.
Rising medical insurance and pressure from hospital chains owned by PE funds or even among listed companies due to topline growth expectations and profit targets have added to the dimension in terms of addressing high medical costs.
The high Ebitda margins of 23.7% and 25.0% for the first half of 2024 enjoyed by KPJ and IHH respectively, surely can be narrowed down to a more socially accepted level of below 20% to ensure healthcare costs in the private sector remain affordable.
Implementing reforms
The HWP introduced in June last year aims to reform the nation’s health system towards realising better health and well-being for the people.
It’s a step in the right direction that will help address some of the pressing issues within the sector, especially on rising healthcare costs.
The recent comment by the health minister on the proposal to set up a National Health Fund (NHF) is also positive for the healthcare industry to ensure we have adequate cover for all Malaysians.
The NHF should be funded not only via contributions from the government but also perhaps via a defined contribution mechanism from both employers and employees that could mitigate some of the rising healthcare costs.
This can be similar to the Employees Provident Fund but obviously with a lower contribution ratio. Even a 2% contribution each by both parties can easily add more than RM20bil into the NHF, which can then be used to subsidise healthcare costs for all Malaysians.
In essence, the Malaysian healthcare sector is at a crucial point whereby intervention by the government is necessary to reduce medical inflation in the private sector for the benefit of all.
The co-payment incentive by Bank Negara and the proposal to set up the NHF are steps in the right direction but at the same time, there must be some form of price control for treatment, care and charges imposed by private hospitals.
Otherwise, we will be going down a slippery slope whereby it will become simply too expensive for us to be taken care of, especially with rising NCDs and an ageing society.