Private health insurance in Malaysia : market demand, adverse selection and moral hazard

Abstract

Health contributes to the growth and wellbeing of human capital and thus to the development of nations. The demand for healthcare has led to continued increases in healthcare costs which are projected to increase further. Various factors contribute to healthcare spending including, among others, changes in disease patterns, wealth or GDP growth, lifestyle, technology, and an ageing population. Despite the numerous efforts and commitments made by the Malaysian government, the healthcare costs continue to increase over the years. The continuous increase of out-of-pocket expenditures on healthcare remains a challenge for Malaysians in the presence of a dual nature healthcare system. Besides its main objective of promoting health, private health insurance (PHI) helps in mitigating the financial loss caused if healthcare is needed. Despite its advantage, the penetration of private health insurance is low in Malaysia. This study aims to examine the impact of selected socioeconomic, demographic, health, health-related characteristics on the demand for private health insurance in Malaysia. In addition, the study aims to investigate how private health insurance affects the demand for healthcare utilization in Malaysia. Healthcare utilization is measured using the number of hospital admission and the number of days stayed at the hospital. To fulfill the objectives, the study aims to identify the existence of two situations of inefficiencies in the insurance market, namely; adverse selection and moral hazard. Adverse selection occurs when consumers opt to purchase health insurance based on their expected future healthcare needs. On the other hand, moral hazard is a situation when consumers over utilize healthcare services when they are insured. A national representative cross-sectional data, NHMS 2011 is used for the cross sectional analysis of the demand for private health insurance and healthcare utilization. In the first part of the econometric analysis, a Probit model is adopted to study the demand for private health insurance. Variables reflecting an individual’s risk behaviour towards their health such as smoking, Body Mass Index, the number of days of vigorous activities performed in a week and self-assessed health are used to test for adverse selection. In the second part, two scenarios are considered; exogeneity and endogeneity of private health insurance. First, a negative binomial is used to study the effect of private health insurance on the demand for hospital admissions and the number of nights stayed at the hospital when exogeneity is assumed. Second, the endogeneity of private health insurance is addressed using GMM estimation technique. Moral hazard is examined by looking at the association between private health insurance and the healthcare services in the study. Nine interaction terms between health insurance and illnesses are generated to assist in studying the moral hazard effect. Findings reveal that the demand for private health insurance is well determined by age, household size and location. Evidence of adverse selection is found in the demand for private health insurance. Age, gender and education are found to have strong influence on the demand for hospital admission and hospital stay. Chinese are found to stay fewer days in the hospital when admitted compared to Malays. Evidence of moral hazard is found for privately insured individuals. The study could provide insights for policy makers to accommodate the challenges facing the system in terms of accessibility, efficiency and quality of healthcare delivery especially with the impending aspirations of the National Health Insurance Scheme (NHIS) to introduce in the country.