Optimising medical cost containment: What Malaysia’s DRG System Means for Employers and Insurers

Optimising medical cost containment: What Malaysia’s DRG System Means for Employers and Insurers

Malaysia’s healthcare landscape is undergoing significant changes as rising medical inflation [1] continues to strain both employers and individuals. According to The Star, medical inflation is projected to reach 15% in 2024 [2], well above the global and Asia-Pacific average of 10% [3], placing significant pressure on employee benefit programmes and personal finances.

To address this challenge, Health Minister Datuk Seri Dzulkefly Ahmad announced plans to implement the Diagnosis-Related Group (DRG) pricing system by the end of 2025. Aimed at ensuring more equitable and affordable healthcare services, it seeks to regulate private hospital billing and curb medical inflation, starting with a pilot in selected public hospitals.

Malaysia’s Healthcare Landscape: Public and Private Sectors            

Malaysia operates a dual healthcare system: the public healthcare system, heavily subsidised by the government, offers affordable care but faces overcrowding and long wait times, while the private sector provides faster access and more advanced treatments at a higher cost.

Understanding the DRG system

The DRG system is a healthcare payment model that provides hospitals with a fixed payment based on case complexity instead of fee-for-service. Hospitals must then manage resources within this budget by focusing on cost-effective treatments, eliminating unnecessary procedures, and avoiding over-prescription of medication.

By implementing fixed payments based on diagnostic categories, the DRG system encourages hospitals to optimise resources and focus on quality patient outcomes rather than service volume, helping to control costs while maintaining high standards of care.

Challenges in medical cost containment

Several factors have contributed to Malaysia's rising healthcare costs, including:

• Medical inflation – Driven by ageing population, rising chronic diseases, medical advances, and drug prices which have outpaced inflation. The Life Insurance Association of Malaysia warns that these considerations raise premiums and reduce coverage, burdening businesses and their workforce. Without action, rising costs risk limiting care access and threatening funding sustainability.

• Healthcare fraud and abuse – Potential fraud, waste, and abuse in healthcare may inflate costs through deceptive practices such as billing for unnecessary tests and prolonged stays. The DRG system aims to address these by eliminating financial incentives for unnecessary services, promoting a more cost-effective and transparent healthcare system.

• Hospital overhead and administrative costs - High hospital overheads including facility maintenance, staffing, and administration, drive rising healthcare costs. These costs are often passed to patients, insurers, and employers, increasing financial strain. Streamlining hospital operations is crucial for cost containment while maintaining quality care.

Cost Containment Strategies

As healthcare costs continue to rise, employers seek cost-effective strategies to ensure employees have access to quality care while managing expenses, such as:

• Preventive care programmes - Prevention is key to reducing long-term healthcare costs. Investing in health screenings, vaccinations, wellness programmes, and chronic disease management can reduce healthcare utilisation, boosts productivity, and reduces absenteeism, benefiting both financial and workforce benefits.

• Managed care models - Structured healthcare delivery and financing models, such as Health Maintenance Organisations (HMOs) and Preferred Provider Organisations (PPOs), help control costs while ensuring employees’ access to high quality care.

• Alternative care options - Expanding beyond traditional hospital-based care through telemedicine, ambulatory surgery centres, long-term medication prescription purchase from pharmacy [JY1] and retail clinics offers cost savings and convenience, allowing employers to offer comprehensive care solutions while keeping costs in check.

Benefits of Implementing DRG in Malaysia

The DRG system brings several advantages, including improved cost efficiency with fixed payments and predictable reimbursements while shifting focus from service volume to appropriate care. It promotes cost stability, controls premium increases, reduces unnecessary stays and testing, and ensures pricing transparency, helping employers to maximise the value of their healthcare spending.

Additionally, the DRG model supports quality benchmarking by standardising hospital assessments on cost-efficiency and quality-metrics, with outlier analysis identifying best practices to help employers in choosing high-value healthcare providers.

Challenges in implementation

Despite its benefits, implementing DRG in Malaysia faces several obstacles:

• Data standardisation – Successful DRG implementation demands robust data infrastructure with accurate medical coding, standardised documentation, advanced IT systems for processing classifications, and regular updates to reflect medical advancement—a significant undertaking for Malaysia’s healthcare system.

• Healthcare provider concerns – The transition to DRG may face resistance as hospitals move away from fee-for-service. Concerns include discharge pressures, resource constraints in smaller facilities, and specialists may fear financial penalties for complex cases. Overcoming these challenges is vital for provider buy-in.

• Financial sustainability – Maintaining the DRG effectiveness requires regular payment calibrations, alignment of public subsidies, vigilance against system manipulation, and strategies to manage financial instability during the transition. Continuous monitoring and adjustments will be essential for successful implementation.

• Patient selection bias – Without proper safeguards, the DRG model could lead to hospitals avoiding high-risk patients, prioritising financial efficiency over care quality, or focus on lucrative DRG categories, potentially limiting access to essential treatments. Robust regulatoryoversight is crucial to ensure fair and equitable patient care.

Preparing for DRG Implementation in Malaysia: Key considerations for employers

As Malaysia adopts the DRG system to control costs via standardised payments, employers must navigate its impact on benefits structure, provider networks, and employee education. With greater cost predictability and transparency, aligning benefits strategies is key to staying competitive.

According to the government announcements, the DRG will initially apply only to new individual basic health and Takaful insurance policies. Its impact on group insurance remains uncertain at this stage. Additionally, all private clinics and pharmacies are now required to display the prices of all medicines, further enhancing transparency in healthcare costs.

"The upcoming DRG implementation presents both challenges and opportunities for employers. Those who proactively adapt their benefit strategies early will be better positioned to control costs while maintaining quality healthcare coverage for their employees" said Lim Sook Kim, Director of Employee Benefits at Howden.