Chart of the Week: Healthcare Costs

The Edge has an article on medical inflation, citing a source claiming it will rise at a double digit pace this year. I hate to break it to people, but this has been the norm, both for Malaysia as well as globally.

Here’s the data, up to 2014 (in RM):

The compound annual growth rate from 1997 to 2014 is 8.9% in nominal terms, and 5.8% in real terms. This is on a per capita basis; on an aggregate basis, the numbers are 11.0% and 7.8% respectively.

That’s the bad news. Here’s the worse news – there’s no such thing as good news with healthcare expenses (in RM millions):

The government (all levels) covered about 53.7% of all expenditure on average for the period, with the rest from the private sector. But out of that private sector portion, insurance payouts only cover about an eighth of the expenditure (1/16 compared to the total). Almost everything else comes directly from consumers.

Here’s another view of the same data (click on the graph for a larger version):

Why is healthcare inflation so high?

1. Malaysians are unhealthy, and that adds to demand pressure. We’re the most obese country in the region;
2. The availability of new medical treatments and techniques increases demand (and expenditure);
3. Rising incomes increases accessibility to a broader range of treatments;
4. The population is ageing, which increases the proportion suffering end-of-life morbidity;
5. High labour intensity means that healthcare suffers from Baumol’s cost disease;
6. Inflation in terms of other inputs (such as pharmaceuticals);
7. Medical tourism adds to domestic demand (before anybody gets over-excited over foreigners coming here, this is still fairly small);

One other thing that jumps out is that Malaysians are under-insured. Pooling of risk via insurance would reduce costs, relative to the current pace of OOP expenditure, especially under a national single-payer insurance plan (which would cover those with pre-existing conditions). We’re not that close to a solution there yet (this article outlines some of the options), but the existing pace of increase in expenditure is unsustainable.

Technical Notes:

Data from the Malaysian National Health Accounts: Health Expenditure Report 1997-2014, from the Ministry of Health Malaysia