Reiterate OVERWEIGHT. We believe a long-awaited reform in the nation’s healthcare system, in the form of the introduction of a national healthcare insurance scheme, is likely to be back on the table, assuming a market-friendly outcome of the state elections. We believe time is running out for an overhaul of the healthcare system with public hospitals overflowing with patients and long waiting lines at emergency wards as well as ensuring a universal coverage for healthcare needs for all Malaysians. We believe private healthcare providers, namely, IHH (OP; TP: RM7.00) and KPJ (OP; TP: RM1.50) will be clear winners of the potential introduction of a national healthcare insurance scheme.

Time is ripe for a national healthcare insurance scheme. We believe the long-awaited reform of the nation’s healthcare system, in the form of the introduction of a national healthcare insurance scheme, is likely to be back on the table. This is assuming a market-friendly outcome of the state elections that will solidify the mandate given to the unity government led by the progressive Pakatan Harapan coalition. We believe time is running out for an overhaul of the healthcare system with public hospitals overflowing with patients and long waiting lines at emergency wards as well as ensuring a universal coverage for healthcare needs for all Malaysians. Specifically, the reform in the nationwide healthcare systems should prioritize healthcare insurance system that would ensure a universal coverage for healthcare needs for all Malaysians. Ultimately, the scheme allows all Malaysians to visit any hospital, private or public, and eventually providing a safety net for the poor. Generally, the scheme should help to lighten the burden at government hospitals overflowing with patients and hospital beds occupied to the point of overcapacity. Consequently, this would enable unused capacities to be utilised at private hospitals including KPJ (OP; TP: RM1.50) and IHH (OP; TP: RM7.00) with bed occupancy rate averaging 60%-70% under our coverage.

Presently, Malaysia has a dual healthcare funding system i.e. private and public. The private healthcare system is paid for by consumers via “out of pocket” or by private healthcare insurance (personal, corporate or employers). On the other hand, the public healthcare system is borne by the Government (i.e. tax payers) via mainly the Ministry of Health and to some extent the Ministry of Education (university hospitals). Briefly, the system is currently multiple-payer, multiple-provider, in which the public sector comprises payers like MoH, the Higher Education Ministry, the Social Security Organisation (Socso), other federal agencies, local authorities, other state agencies, state governments, the Ministry of Defence, and the Employees Provident Fund (EPF).

In our view, a revamped healthcare insurance system could lead to better overall healthcare services for Malaysians, lower outof-pocket spending, reduced waiting times and access to more modern medicines and technology. Moreover, it would also allow for new treatments, drugs, and therapies to be made available for patients not available at government hospitals. The system could entail a single-payer, multiple-provider arrangement, where public and private hospitals would provide equal facilities and functions to a patient (vs. current: multi-payer multi-provider system). Basically, it would mean everyone has to contribute. Theoretically, all working citizens are obligated to set aside a portion of their income into a fund which they can draw upon to pay their own medical bills when the need arises.

Single-payer system explained. In short, a single-payer system of healthcare is where a single entity is responsible for collecting the funds that pay for healthcare on behalf of an entire population. A multi-payer system, by contrast, allows multiple entities (e.g., insurance companies) to collect and pay for those services. For illustration purposes, in a single-payer system, private healthcare insurance can play the role as co-insurers for services not included in the national healthcare insurance fund, but it is the insurance fund that decides on the co-payments and not the service provider. The set-up could mean lower overall healthcare costs for the country, as a single-payer system would have greater leverage in dictating prices to providers than multiple buyers in the current system comprising various government agencies, individual patients, and insurance companies. For illustration purposes, the cost of treatment, except for co-payments, is paid by the fund; however, the cost of services to be delivered would be negotiated by the insurance fund with the providers. The key advantage of a single dominant-payer system are lowered costs due to competition among healthcare providers and the ability to demand for better services from both the public and private sector.

Singapore and Australia operate single-payer funding model. The Singaporean public healthcare insurance system is based on programs run by the Central Provident Fund, primarily known as Medisave, a mandatory medical savings account scheme. Medisave is a national medical insurance scheme through which members build savings for which they can draw upon to pay their own medical bills should the need arises in the future. The Central Provident Fund also manages the MediShield and MediFund insurance schemes, which cover people with insufficient savings or those who have depleted their savings. In addition, the government provides subsidies for the medical expenses of citizens and permanent residents who receive treatment in public hospitals.

Similarly, Australia operates a shared public-private healthcare model underpinned by the Medicare system, the national singlepayer funding model. Generally, state and territory governments operate public healthcare facilities where eligible patients receive care, free of charge. Primary healthcare services, such as GP clinics, are privately owned in most situations, but attract Medicare rebates. Australian citizens, permanent residents, and some visitors and visa holders are eligible for healthcare services under the Medicare system. Individuals are encouraged through tax surcharges to purchase healthcare insurance to cover services offered in the private sector, and further fund healthcare services.

Hypothetically, with their operations in Malaysia close to hitting full utilisation upon the introduction of a national healthcare insurance scheme, our FY24F earnings forecasts for IHH and KPJ could be raised by as much as 12% and 25%, and TPs by as much as 7% and 25% to RM7.50 and RM1.90, respectively, based on the same valuation basis (without new expansion). We acknowledge that an overhaul of the healthcare system of this scale may take a long time to accomplish. However, given that the forward-looking nature of the market, we believe the share price re-rating could happen as soon as the government demonstrates a firm commitment towards achieving it.

Apart from being potential beneficiaries of an overhaul of the local healthcare system, we continue to like private healthcare providers such as IHH and KPJ for their pricing power, an aging population and rising affluence. We also like IHH and KPJ for their market positions: IHH with presence in Malaysia, Singapore, Turkey and Greater China, while KPJ has the largest network of 28 private hospitals in Malaysia (vs. 16 of IHH).

Source: Kenanga Research - 4 Jul 2023