• Private hospitals have now accepted Covid-19 patients. We expect the pricing framework to be similar to other respiratory illness plus additional costs for Covid-19 medications and consumables. Overall, we expect the private hospitals to provide the service at above breakeven costs

• The insurance associations are still in discussions with the government to explore an avenue where insurers can ease some of the expenses of patients. Currently, different insurance policies may have different clauses for the treatment of Covid-19 at private hospitals
   
• Overall, we do not expect the private hospitals to be any worse off under the current arrangements. We maintain our price targets and earnings forecasts for all healthcare companies under our coverage but upgrade IHH to BUY (from HOLD) on price weakness. In tandem, we upgrade the healthcare sector to OVERWEIGHT (from NEUTRAL).

Private Hospitals Now Accept Covid-19 Patients

We understand that the private hospitals are now accepting Covid-19 patients. If a public patient is instructed to get treatment at the private hospitals, the Ministry of Healthcare will bear the costs for all referred patients. Nonetheless, government hospitals will only refer specific selected Covid-19 patients to private hospitals, according to a report by Free Malaysia Today. Those who qualified are ambassadors, expatriates, and those who can afford the cost of private hospital care and those who have requested to be moved, said health director-general Dr Noor Hisham Abdullah. Meanwhile, the private hospitals will also admit walk-in Covid-19 patients, and the patients should be covered as per their insurance policy coverage.

Profit margin for private hospitals is expected to stay above breakeven level

Broadly, we expect the pricing framework for the Covid-19 and the charging mechanism to be similar to other respiratory illness. However, there could be additional costs for Covid-19 medications which are not widely available and higher usage of consumables. Overall, we expect the private hospitals to price in a minimum margin to ensure these services are provided at above breakeven costs.

The Discussions Between Government and Insurers Are Ongoing

In general, pandemic-related risks such as Covid-19 are not covered under any insurance and takaful plans worldwide. However, there is growing pressure on insurers to cover Covid-19 treatment at private hospitals. On 17th January 2021, The Life Insurance Association of Malaysia, The General Insurance Association of Malaysia and the Malaysian Takaful Association put out a joint statement to say that the industry is working with the Ministry of Health and Bank Negara Malaysia to “explore avenues where insurers / takaful operators can ease some of the expenses of patients whose conditions are required to be treated in private hospitals”. The discussions are ongoing and the government / insurance associations have yet to issue an update on the matter.

Treatment for Covid-19 Are Covered Under Some Policies, But Not All

We gathered that the insurers’ policies for Covid-19 differ, and within a same insurer, there may be differences between their policies. The Edge reported that AIA, in a 21st January 2021 internal circular to its agency force said some of its “older block” of medical plans have the clause that excludes coverage for communicable diseases that require quarantine by law. However, it said the newer generation of AIA medical plans do not have this exclusion clause. We understand that the AIA’s newer generation medical plans cover treatment for Covid-19, subject to certain conditions such as: (i) the patients will need to pay for the expense upfront and submit their claims thereafter; and (ii) the patients will need to be referred from a government hospital to a private hospitals.

Maintain PT and earnings forecasts but upgrade IHH to BUY on price weakness

Based on our understanding, we do not expect the private hospitals to be worse off under the current arrangements - the medical bills for Covid-19 patients (walk-in or referrals by the government hospitals) should be above breakeven costs. On the other hand, we do not expect the private hospitals to benefit materially from the Covid-19 pandemic either – in the interest of the nation, we anticipate that the private hospitals will only secure a minimum profit margin. We maintain our price targets and earnings forecasts for all healthcare companies under our coverage.

However, we upgrade IHH to BUY (from HOLD) on price weakness (-8.1% mom). Also, IHH’s experience in treatment of Covid-19 patients in Singapore, Turkey and India should help to ensure a smooth operation in Malaysia. Notwithstanding a challenging 2021 business outlook due to the Covid-19 pandemic and lockdowns, we remain positive on IHH’s long-term business prospects and recommend that investors look beyond the uninspiring 2021 earnings. At 40x 2022E PER, IHH is trading at 7-year average forward PER of 44x and looks attractive to us. Key risks to our BUY call are negative development in private hospitals involvement in the treatment of Covid-19 patients (ie. pressured to treat at loss) and weaker-thanexpected earnings.

Upgrade the Sector to OVERWEIGHT (from NEUTRAL)

In tandem with IHH’s rating upgrade, we are upgrading the healthcare sector to OVERWEIGHT (from NEUTRAL) by the virtue of IHH’s significant market cap vis-à- vis its peers. Downside risk to our OVERWEIGHT sector call is unexpected, negative development in private hospitals involvement in the treatment of Covid-19 patients, prolonged lock-down in Malaysia, India, Turkey, and steep downturn in the regional economies.

Source: Affin Hwang Research - 25 Jan 2021