KUALA LUMPUR (May 21): Malaysia’s plan to introduce a diagnosis-based fixed payment scheme in the healthcare industry nationwide will exclude private hospitals for now, sources told The Edge, marking another speed bump in the government’s effort to improve healthcare affordability as part of sweeping reforms on cost of living.

The enforcement of the Diagnosis-Related Group (DRG) system, meant to control rising healthcare costs and insurance premiums, has already been delayed to end 2025, instead of the middle of this year, and has narrowed down to focus only on simpler medical cases.

According to sources, private sector hospitals, where medical inflation is happening and medical insurance premiums rose as much as 70% last year, will not be included in the first phase.

Instead, the system will be piloted in selected public hospitals, where medical fees are subsidised. The exclusion of private hospitals means the initial DRG system roll-out will not immediately translate to cheaper, or a slower rise in medical fees.

In a nutshell, the DRG system categorises patients based on classifications of diagnoses and procedures. The patients are charged fixed rates based on those classifications, regardless of final cost of treatment.

The DRG roll-out is meant to be a follow-up to Bank Negara Malaysia’s (BNM) temporary measures, such as a three-year cap in medical insurance premium hikes.

The first phase of DRG will nonetheless help the government better track cost efficiency of each hospital based on each product (treatment type), and allow better budget allocation across hospitals.

“There was a closed-door briefing for industry players... The verbal decision was not to implement DRG for private hospitals for now — only to pilot it in selected public hospitals,” a healthcare industry source told The Edge.

To be sure, the Ministry of Health (MOH) has implemented parts of DRG in public hospitals, covering inpatient acute cases, according to analyst reports. The latest proposed iteration is to cover outpatient, sub-acute, and chronic conditions.

The government originally planned to launch DRG by mid-2025, conditional upon amending the Private Healthcare Facilities and Services Act 1998 to mandate the payment model. 

Updates to the Act are yet to be made. It is unclear if the amendment will be tabled in the coming Dewan Rakyat session, scheduled from June 23 to July 31.

An April 16 note from Hong Leong Investment Bank said that when implemented, DRG would only apply to new basic health insurance and takaful plans, not the full private healthcare sector.

On April 18, Health Minister Datuk Seri Dr Dzulkefly Ahmad clarified during a press meet that the first phase of DRG would begin by end-2025, starting with simpler medical cases.

He said the MOH is still working closely with other agencies, including BNM, the Ministry of Finance, insurers, and private healthcare providers, to create a DRG model suited to Malaysia — but gave no further details. Details on the planned basic insurance plan were also scarce.

His remarks add to what he said in his column, titled “MySay: A system-wide health transformation agenda — public and private”, in the March 24–30, 2025 issue of The Edge Malaysia weekly, that the government is working with private insurers to create a modern, voluntary insurance plan mainly for private sector workers, government-linked companies’ staff, small and medium enterprises, and their families.

Besides government hospitals, DRG may also be used in public-private partnerships — where the government pays private hospitals for treatment — to “contain costs within a fixed package and to ensure transparency in what the government is paying for”, another source said.

It remains unclear how Malaysia’s DRG mechanism would work to tackle key cost drivers like expensive imported drugs (affected by currency changes), rising demand for outpatient and specialised care, or the growth of mobile healthcare services. The Edge asked the MOH for details, but has yet to receive a response.

One concern raised is the absence of a single-payer healthcare framework in the country, which improves the viability of DRG, according to the Association of Private Hospitals of Malaysia (APHM), which represents over 150 private hospitals nationwide.

In brief, the framework sees one public agency acting as the sole insurer to pay for all healthcare costs. Having a single payer allows the application of one national DRG standard, rather than having different rules or guidelines between different insurers. The single payer also has higher leverage to reward and penalise healthcare providers based on performance, using standardised DRG data.

“There is much work to do, to ensure this system is viable in the Malaysian context and [that it] ensures the best outcome for patients,” said APHM president Datuk Dr Kuljit Singh.  

“Nonetheless, APHM remains committed to working collaboratively with the Ministry of Health to provide industry insights and help develop best practices — our goal is to ensure that any implemented mechanism, be it DRG or others, is evidence-based and truly benefits all patients,” he told The Edge.  

The Life Insurance Association of Malaysia (LIAM), meanwhile, said: “Initially, the DRG will be adopted for the basic insurance plan, but it is expected to be implemented for all insurance plans — both public and private — eventually”.

“We understand that the government is planning a phased roll-out towards a national DRG system,” LIAM said in an emailed response to The Edge.  

“LIAM supports the direction, as it promotes cost transparency and sustainability in healthcare financing,” it added. 

Professor of Health Economics, Policy and Management at the Department of Public Health and Community Medicine, IMU University, Prof Datuk Dr Syed Mohamed Aljunid Syed Junid explained that resource homogeneity and clinical homogeneity are the two key features of DRG payment systems. 

Resource homogeneity means patients in the same DRG group have similar medical conditions and treatment needs. Clinical homogeneity means the costs and resources required to treat them, like hospital beds, medication, and staff time, are similar. 

These features make DRGs ideal for prospective provider payment models, which replace the traditional fee-for-service (retrospective) method.

“Data from DRGs are also used for quality benchmarking, since the outcome of care can be objectively compared when cases are grouped into similar categories. The main advantage of using DRGs is that it will help to improve efficiency, as well as quality of care,” Dr Syed said. 

The professor added that in DRGs, the total cost for each group is set before treatment, making healthcare costs more predictable and easier to control compared to fee-for-service. Fee-for-service can lead to unnecessary treatments and longer hospital stays, which is less likely with DRGs. This helps address rising healthcare costs in Malaysia.

Globally, over 120 countries have implemented DRGs for provider payments and quality assurance. In Southeast Asia, countries such as Indonesia, Thailand, the Philippines, Singapore, and Vietnam have long adopted DRGs, according to Dr Syed.

Notably, Indonesia is the largest user of DRGs in the world, with around 2,500 public and private hospitals reimbursed under the National Health Insurance (Jaminan Kesehatan Nasional), which covers more than 95% of its 280 million population.

The DRG system in Indonesia, known as INA-CBG (Indonesia Case-Based Group), was developed and is maintained by Malaysian casemix experts under Casemix Solutions Sdn Bhd — a company established by Universiti Kebangsaan Malaysia (UKM) in 2013.