Healthy demand in the healthcare sector

Malaysia’s healthcare sector, recognised internationally for providing affordable and high quality services, has been experiencing healthy demand locally due to the country’s ageing population and rising incomes.

According to analyst Saw Xiao Jun of the research arm of CIMB Investment Bank Bhd (CIMB Research) in a healthcare sector report from June 27, 2014, an ageing population, higher prevalence of lifestyle diseases and rising incomes drove the 215 per cent growth in private healthcare spending during 2002-12.

That said, Saw noted then that the growth could slow down in the next few years as income growth has lagged behind medical inflation.

Currently, the medical inflation rate in Malaysia is estimated to be around 15 per cent, according to Intelligent Money Sdn Bhd (iMoney).

“The biggest consumer of healthcare services – the elderly – will feel most of the pinch,” Saw said.

This is due to their retirement income which may be diminishing or there may even be none at all, as pointed out by iMoney editor Iris Lee.

“The increase in retirement savings has not led to more affordable private healthcare as the growth in savings has lagged behind the rate of medical inflation.

“Those without adequate savings and insurance coverage will need to continue working or seek financial assistance from others to fund their private healthcare expenses,” she said.

According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), it is estimated at end-2014 that during the 2010-2040 period, Malaysia’s population aged 65 and over is projected to increase more than three-fold of the 2010 population.

Kenanga Research noted that the increase will lead Malaysia to become an aging population in 2021 when the population aged 65 years and above reach 7.1 per cent.

It further noted that this was based on the United Nations (UN)’s definition that an aging society is when the population aged 65 and over constitutes seven per cent of the total population.

“Population for the age group 0 to 14 years is projected to decline from 27.4 per cent to 19.6 per cent for the same period.

“However, the population for the age group 15 to 64 years and 65 years and over is expected to increase by 1.4 and 6.4 percentage points respectively for the same period.

“Longer life spans also result in a larger number of people aged 65 and above,” the research arm said, adding that this improvement has been attributed mainly to advances in medical technology, higher personal wealth and growing awareness of the importance of healthcare and disease prevention.

As such, Lee noted that the demand for healthcare services in Malaysia will increase at a more rapid rate than the population growth due to the larger number of old people.

AmResearch Sdn Bhd (AmResearch) also believed that healthcare demand remains healthy on the back of an ageing nation (10 per cent of population over 60 years old by 2020), increasing health awareness and improving economic wellbeing.

For the 2008-2012 period, the research house noted that healthcare expenditure had increased at a compound annual growth rate (CAGR) of 10 per cent to RM42.2 billion.

AmResearch added that as a percentage of the gross domestic product (GDP), healthcare expenditure has risen from 3.8 per cent to 4.5 per cent.

It further noted that the growing healthcare demand can be reflected in the two healthcare stocks under its coverage, KPJ Healthcare Bhd (KPJ) and IHH Healthcare Bhd’s (IHH) revenue CAGR of 11 per cent each over the past three years.

“Last year, KPJ’s sales rose 13 per cent while IHH’s Malaysian operating revenue increased by 12 per cent.

“We project sales for KPJ and IHH to grow at CAGR of eight per cent and 13 per cent, respectively, over the next three years,” the research house said.

As for total healthcare expenditure in Malaysia, Frost & Sullivan had noted earlier this year that by 2025, it could very well exceed US$20 billion.

The growth partnership company noted that in the next five years (2015 to 2020), it is expected to grow at a compound annual growth rate (CAGR) of 11 per cent.

“While Government spending will focus on development of public healthcare infrastructure and chronic and infectious diseases control and treatment, private healthcare spending will drive much of this growth.

“Private healthcare (out of pocket, private health insurance) will grow from 46 per cent of total healthcare expenditure to close to 50 per cent by 2020,” Frost & Sullivan said.

It further noted that healthcare services and medical devices provide the largest near term opportunities in Malaysia, while new sectors of growth are in home healthcare, aged care and medical technology.

It added that other areas of growth for Malaysia are medical tourism as well as in primary healthcare services.

“Malaysia provides affordable, high quality healthcare. Enhancement of our capabilities in medical devices manufacturing with stronger emphasis on use of Made in Malaysia medical products could help to control this unavoidable increase in healthcare costs.

“With our growing middle aged and elderly population, as well as increased awareness on the importance of healthcare management, we see a trend also in earlier diagnosis, leading to the ability to manage diseases better,” says Rhenu Bhuller, senior vice president, Healthcare, Frost & Sullivan Asia Pacific.

 

The GST effect

It has been just over a month since the goods and services tax (GST) was put into effect and there has been much queries as to what extent this implementation will affect the healthcare sector.

According to the Royal Malaysian Customs Department (Royal Malaysian Customs), for the government sector, healthcare services provided by the government are out of scope supplies.

“No GST will be imposed on any healthcare services supplied by the Government,” it affirmed in the updated ‘Guide on Healthcare Services’.

The department added that these include traditional and complementary medicine services (TCM) provided by the Government.

iMoney noted that at present, all registered medication is exempted from any sales and services tax. It has however, also noted that the price of selected medication was set to rise when the GST was implemented.

“It will go up further when the cost of administrating the GST is passed down the line.

“Even patients in Government healthcare facilities who require these medications, will end up paying more,” it said.

Recently, Customs Department GST Division director Datuk T. Subromaniam affirmed that the number of medicines and medical equipment in health services that are exempted from GST will be expanded.

To date, there were 4,214 medicines listed and 126 types of medical equipments purchased by hospitals or clinics which were exempted from GST.

So, for the private sector in particular, what health services are exempted from GST? The department said that healthcare services are treated as exempt supply under the GST if they are supplied by the private healthcare facility registered or licensed premise under the Private Healthcare Facilities and Services Act 1998 (PHFA).

As such, iMoney noted that if the healthcare premises are not registered under PHFA, the services provided will be charged six per cent GST.

“Generally, healthcare services provided by private healthcare facilities will be exempted from GST,” it said, adding that all consultation and procedural fees under PHFA will be exempted from GST as long as the doctor is the owner or an employee of the facility.

As for what are being charged GST, iMoney compiled a list of all affected procedures outside the PHFA, starting with locum fees.

iMoney explained that doctors in private facilities that are not an employee or owner of the facility, but operate as independent consultants are categorised as ‘outsourced services’. “Therefore, their consultation and procedural fees would be taxed six per cent GST,” it said.

Supplements and nutritional products are also being charged GST, with iMoney noting that sales tax of five per cent on supplements will be replaced with six per cent GST and nutritional products will be charged GST, on top of import tax.

Plastic surgeries and aesthetic treatments, if provided by other than the licensed private healthcare facilities, will be subject to GST at standard rate, according to Royal Malaysian Customs.

“Cosmetic surgery treatment which is solely for beauty purposes and does not have any connection to improve health will be subject to six per cent GST.

“However if these services are provided by the healthcare facility for a health purpose, it is exempted from GST,” iMoney said.

On medicines and medical equipment that are not exempted, iMoney noted that these machines, equipment and medicines or drugs will thus be subject to GST.

As for pharmaceutical services as well as traditional and complementary medicine services not provided by the Government or private healthcare facilities, again these will be charged GST accordingly.

Finally, all outsourced services that are related to healthcare services will also be subject to GST. iMoney noted that the six per cent GST charged by the outsource companies to the healthcare facilities can be claimed by the supplier if they are a registered under GST, such as laundry, food catering, laboratory and imaging.

On a side note, iMoney added that non healthcare related services is subject to GST but input tax cannot be claimed by the healthcare facilities, such as hygienic cleaning, security, canteen and parking services.

This includes rental or leasing of operational theatre, medical equipment, floor space for office, clinics, retail shop or florist.

It also includes seminar and training for the use of medicals professionals giving talks on their field of expertise in seminars or training courses.

Fitness and well-being programmes, such as gymnasium, spa, sauna and slimming centre or massage parlour) also fall under the category.

While private healthcare doctors would be unable to claim the tax as private healthcare falls under the exempt supplies list, they would likely still have to pay GST for some of the goods and services from their suppliers which led iMoney to believe that this would result in them raising their consultation fees to cover these GST payments.

On the plus side, the cost of inpatient care in private hospitals will be lower following the implementation of GST.

“The current service tax of six per cent imposed on lodging and meals provided to patients in the ward will not be subject to GST,” iMoney said.

That said, iMoney noted that the concept of independent consultant doctors in private hospitals, the existence of multiple layers of middle-men agencies like Managed Care Organisations (MCOs) and insurers collecting and processing fees will affect the cost of private healthcare.

“With the many levels invovled in healthcare services, imposing GST on them would not only be costly and complicated in terms of administration but will cause the cost of healthcare to escalate across the board.

“Patients will end up paying much more after GST for the same treatment. This will have a major adverse impact on the national expenditure on healthcare.”

On top of this, iMoney noted that health insurance is equally charged six per cent GST, resulting in an inevitable rise in the overall cost of healthcare, especially for those visiting private facilities.

It further noted that the ones that will feel the real pinch out of all these will be parents with young kids and aged individuals who will require more medical attention.

While the cost of healthcare is expected to increase, in particular for those preferring private healthcare facilities, this does not mean there will be any sudden preference change to public facilities.

Lee commented that there may not be too many Malaysians turning to public healthcare because the difference in cost was not really a concern for most.

She cited the reasons people turn to private healthcare which included the fact that people do not like the long queues at public healthcare.

“There is a long delay before treatment is available. In private healthcare facilities, people have faster access to treatment,” Lee said.

She added that people can choose which doctor or specialist that they prefer to see and that the private healthcare facilities offer more comfortable and private environments.

Other reasons given included that most employers offer private healthcare health insurance as part of the workplace benefit and there is a wide availability of private health insurance in the market.

“Public healthcare is a safety net for those who cannot afford the cost of private healthcare.

“The group of people that will be most affected who may turn to government facilities are those in the lower and lower middle income groups.

“This is especially true if they do not have medical insurance coverage,” Lee said.

Meanwhile, Kenanga Research has projected that the implementation of GST and further subsidy rationalisation programme could dampen private hospitals’ margins and volume growth.

“From our channels check, we understand that several private hospital players are expected to raise prices in order to mitigate the higher operating cost due to the implementation of GST, which could ultimately exert a negative impact on their margins.

“Generally, healthcare services operating expenses are expected to go up since they have to pay for GST on business purchases or raw material costs before selling but are unable to claim credit for the GST paid on the inputs,” the research arm said.

It added that similarly, higher prices charged by hospitals as well as further subsidy rationalisation programme could potentially dampen purchasing power of consumers leading to lower volume in patients.

However, given the fact that healthcare is essential, Lee believed that an increase in healthcare costs due to GST should not significantly impact private healthcare’s margins or lower their patient’s volume.

Case in point, the aforementioned elderly which are currently the sector’s biggest consumers and Malaysia’s aging population. Lee noted that “the older we grow, the more important healthcare becomes.”

She added that older people are likely to be less healthy and they tend to develop more complex diseases.

Lee further noted that Malaysians in general are also getting less healthy with diseases such as diabetes, high blood pressure and obesity increasing the risk of Malaysians suffering from more chronic illnesses.

“This will create more demand for healthcare services,” she opined.

That said, there is a possibility that patients may opt to buy medications at pharmacies (without doctor’s consultation or prescription) for milder health issues such as fever or flu, as pointed out by Lee.

She added that they would likely want to consult a doctor only when it is a bigger or persistent health issue.

Based on CIMB Research’s channel checks, hospitals had been raising charges to pass through the higher costs due to GST to patients. As such, Saw also opined that their profit margin should remain stable.

“The key concern is that the growth in private healthcare spending may slow due to weaker purchasing power and this may affect the new hospitals because most new hospitals are not profitable,” Saw added.

For the impact of GST on pharmaceutical products, Saw noted that it depends on whether they are generic drugs or originator drugs. “GST should not have any material impact on the consumption of generic drugs,” he said.

However, in the long term, Lee believed that GST implementation will impact the healthcare sector, hitting the middle class the hardest. She explained that  private healthcare that target this income group may find it harder to attract patients away from the almost-free public hospitals.

On the other hand, Lee noted that local generic drug manufacturers could benefit as the generics are cheaper than originator drugs.

“All this could mean that the drug makers will see stronger earnings growth than the private healthcare operators,” she said.

In contrast, Saw did not see GST  having a large impact on the sector. “In fact, I don’t think GST will affect any sector significantly in the long run. It is just another form of tax,” he said.

Overall, the cost of private healthcare has risen sharply in the past few years and this is set to increase further in the upcoming years due to higher cap on doctors’ consultation fees and the implementation of GST, as observed by Lee.

“Complex life-saving procedures in private hospitals are beyond the financial reach of many Malaysians.

“Private healthcare may skew even more towards the richer group in years to come as private healthcare cost soars.

“One way to protect yourself is by having adequate medical insurance coverage,” she advised.

Malaysia well-positioned for growth in medical tourism industry

Malaysia was recently declared as ‘Medical Travel Destination of the Year’ at the International Medical Travel Journal (IMTJ) Medical Travel Awards 2015, no doubt an indication of the country as the ideal destination for healthcare needs.

According to the Malaysia Tourism Promotion Board, Malaysia won the award based on all-round excellence in promoting inbound medical tourism, verified statistics of yearly growth in medical tourists served, evidence of high levels of patient satisfaction and coordinated activities that delivered an increase in medical tourism.

It does not look like this growing international demand for Malaysia’s healthcare services is slowing down anytime soon with AmResearch noting that the weakening RM is expected to result in an influx of medical tourists in the country.

As of May 6, the RM has weakened to 3.61 against the US$ from 3.50 in the beginning of 2015.

Frost & Sullivan said that compared to other countries in Asean, Malaysia has a higher-than-average availability of medical personnel and high quality facilities providing treatments across different ranges of the cost spectrum, making it an attractive destination for medical tourists.

“While Thailand and Singapore will continue to be larger in terms of dollar size, they are forecasted to see slower growth over the next five years, compared to Malaysia’s forecasted CAGR of 18.5 per cent between 2014 and 2020,” it said.

Malaysia Healthcare Travel Council’s statistics had indicated that healthcare travellers recorded a CAGR of 12 per cent to 770,000 from 2007 to 2013.

Meanwhile, AmResearch noted that 2014 saw local medical tourism revenue grow 19 per cent year on year (y-o-y) to RM228 million.

On the market share of foreign patients at hospitals, the research house said that for IHH’s Malaysian operations, they made up about five per cent of its revenue, which is similar to KPJ’s five per cent.

“Note that foreign patients are mainly concentrated at IHH’s bigger hospitals, for example, Gleneagles Kuala Lumpur and Gleneagles Penang.

“The same applies for KPJ as well,” the research house added.

To ride on the growth of medical tourism, both KPJ and IHH are expanding and ramping up capacities at strategic locations, AmResearch underlined.

“KPJ is targeting medical tourism contribution to total revenue to increase to 25 per cent by 2020 from five per cent currently,” it said.

Apart from KPJ’s current marketing activities in the Middle East, Asia, and East Africa, the research house said that future growth will largely hinge on the completion of its flagship Bandar Dato’ Onn Specialist Hospital (BDO) in Johor (Phase 1: 2016, 150 beds).

It added that BDO, with a development cost of RM400 million, will spearhead KPJ’s strategy to increase foreign patients under the medical tourism programme.

“We expect medical tourism revenue will continue to grow for IHH’s three main markets – i.e. Malaysia, Singapore, Turkey – on the back of continuous marketing efforts and favourable operating environments,” AmResearch said.

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