KUALA LUMPUR: Malaysia is not yet ready to implement a diagnosis-related group (DRG) payment system for hospital care, requiring more than three years of focused funding and resource investment before it can be introduced, experts said.
Under DRG, hospital care is reimbursed based on specific procedures or diagnoses rather than the length of stay in the hospital.
Galen Centre for Health and Social Policy founder and chief executive officer Azrul Mohd Khalib told Business Times that significant groundwork needs to be done in setting up and improving data systems, building coding and costing capabilities.
This also includes training the workforce, conducting pilot tests and carefully designing policy frameworks before DRGs can function as intended.
Azrul said there are five challenges that need to be addressed, with significant reforms in healthcare financing structures needed.
"To implement DRG payments effectively, there needs to be a shift in the mindset of public healthcare delivery: from a supply-driven model to one that rewards efficiency and value."
"Malaysia's public healthcare system which is tax-funded and highly subsidized, providing free or low-cost care, depends on budget line items and is supply driven."It is not dependent on performance with emphasis on activity-based or case-based payments. It is currently not suited for DRG," he told Business Times, adding that it could take up to five years to implement DRG payment system.
Azrul said that DRGs are fundamentally dependent on accurate, detailed clinical coding and reliable cost data.
"Each patient's diagnosis, comorbidities, procedures, and resource use must be meticulously documented and coded. The public healthcare system does not currently capture enough of the necessary data, particularly resource use," he added.
Azrul said the system needs significant investment in standardised digital health systems which are able to talk to each other, maintain electronic medical records, and be fully utilised by healthcare staff.
"A large part of the IT infrastructure is irregular and decades behind," he stated.
Furthermore, Azrul explained that hospitals must be able to break down their expenditures—staff time, pharmaceuticals, consumables, equipment usage—per episode of care, noting that Malaysia suffers major challenges in capturing granular cost data.
He added that transitioning to DRGs involves significant capacity building among healthcare professionals.
"Policymakers, hospital management and even clinicians need to understand how DRGs work, why they matter, and how to use them to improve performance."This includes training to interpret DRG-based performance indicators and adjust internal processes accordingly," he said.
Azrul emphasised that clear regulations and even legislative amendments might be needed, as well as guidelines, incentives and enforcement mechanisms.
"Consultations and stakeholder engagement with hospital administrators, clinicians, and professional bodies is crucial. It might take at least a couple of years for consultations alone. "Stakeholder trust and acceptance must be gained in order for this to succeed. There must be transparency and fairness in how DRG tariffs are determined and adjusted over time," he added.
Azrul said consultation and stakeholder engagement with consumers are critical to the support and success of the DRG model, noting that it must be done and the government should not take shortcuts or avoid doing these consultations.
Sharing a similar perspective, Hong Leong Investment Bank Bhd (HLIB Research) stated that if the benefits of the DRG system—such as standardised pricing to curb medical inflation—cannot be effectively implemented within the current private healthcare framework, the shift could lead to unnecessary costs being passed on to taxpayers.
The investment bank said implementing the DRG system within the existing private healthcare framework would be a deviation from global practices.
HLIB Research highlighted that studies by the World Bank and the World Health Organisation (WHO) show that the DRG payment system is commonly implemented in national health insurance (NHI) programs, where citizens or residents contribute a portion of their salaries and receive standardized healthcare services.
Furthermore, hospitals participating in such NHI programs are usually public or non-profit private hospitals, which may receive government or external subsidies to cover cost overruns, especially during periods of misalignment between DRG payment adjustments and medical inflation.
HLIB Research observed that Malaysia operates a private health insurance (PHI) system, where benefits and coverage levels differ greatly based on the premiums paid.
"This discrepancy creates an imbalance, as it would be unfair for individuals paying higher premiums to receive the same level of care as those with lower premiums."Moreover, in the event of cost overruns due to timing mismatches, private hospitals would bear the financial burden, which could diminish the sector's overall business attractiveness," it added.
Another factor is the varying cost structures of private hospitals, which stem from differences in the services they offer.
These include aspects such as room designs, doctor and nurse-to-patient ratios, and the use of innovative medical technologies, among others.
"As a result, a standardised payment per episode of care – whether at the state or federal level – could create an incentive for hospitals with higher cost structures to skimp on services provided per admission, discharge patients prematurely, or cherry-pick low-cost patients," it said in a note.
HLIB Research said the two largest hospital chains in Malaysia, KPJ Healthcare Bhd and IHH Healthcare Bhd are currently operating at bed occupancy rates (BoR) of 68 per cent and 70 per cent respectively in the nine months of 2024 (9M24).
"Given this regulatory overhang, they could postpone their brownfield expansions or shift focus towards medical tourism until the regulatory landscape stabilises."This could place additional strain on the already crowded public healthcare system, which is approaching the "end" of its capacity," it added.
The investment bank believes the government will proceed with the planning and development of the DRG payment system for a different goal—implementing it alongside the future NHI scheme, as per global practices, as outlined in the Health White Paper.
However, Angsana Health chief executive officer Dr. Khor Swee Kheng emphasised the importance of Malaysia starting the DRG solution today.
"By starting with consolidating the currently-fragmented DRG expertise "under one roof" and in one implementing body. DRGs must be implemented in parallel to other solutions to reduce healthcare costs," he added.
Dr. Khor stated that international experience indicates the implementation of DRGs takes between 3 to 10 years, depending on factors such as the public-private healthcare service ratio, state capacity, political will, data completeness, and resistance.
"International experience also shows that DRGs are an important part of the solution to reduce healthcare costs, but DRGs are not a magic solution," he said.
Association of Private Hospitals Malaysia (APHM) president Datuk Dr Kuljit Singh shared that they are actively engaging with relevant ministries and agencies to identify a sustainable solution.
He shared that the proposed Directly Responsible Governance framework presents a promising avenue, though we recognise its complexity may extend the implementation timeline by several years.
"Nonetheless, we are dedicated to collaborating closely to develop a mutually agreed-upon approach. Our commitment to this process reflects our desire to address the challenges effectively and ensure a viable path forward," Dr Kuljit said.