This article first appeared in Forum, The Edge Malaysia Weekly on January 26, 2026 - February 1, 2026

Predictions are fraught with uncertainties and imperfect but can help us understand how the Malaysian health system will be financed in 2026 and 2027. We will try to “predict what will happen” instead of “describing what should happen” (which tends to be more idealistic or prescriptive in nature). For the record, we welcome all three predictions. [Editor’s note: This article was written before the announcement of the Ministry of Health’s (MOH) White Paper on its medical and health insurance or takaful (MHIT) plan last week.]

We predict a visible and signposted pilot or move towards SHI in 2026. The essence of SHI is to raise additional sources of financing for healthcare from the payroll. For example, SHI contributions may start at something like 0.5% of salaries (50/50 contributed by employer and employee), similar to the Employees Provident Fund (KWSP), Social Security Organisation (Perkeso) and Human Resources Development Fund (HRD Corp) contributions in spirit and implementation.

SHI contributions can gradually increase to 2% to 3% of salaries over one to five years into a “personal health account”. That personal health account is used to either purchase a base package of health insurance from the private markets or from an “insurer in the public interest” owned and operated by the government. The eventual hope is to cover the entire formal economy with subsidies for the informal economy, the care economy (like housewives and caregivers), students and seniors. The name “SHI” may not be used and variations may include voluntary insurance, payroll health insurance, national health insurance or another name. The name “pilot” may not be used and variations may include “sandbox”, “proof-of-concept”, “limited trial” or another name. The agency in charge of the pilot may be the Health Ministry, Bank Negara Malaysia, KWSP, Perkeso or ProtectHealth with the “steady state agency” a matter for the cabinet and parliament to decide later (we recommend the KWSP as the steady state agency). The initial population scope may start small, for example, with several ministries only (for example, those receiving new permanent posts for certain grades in the Sistem Saraan Perkhidmatan Awam (SSPA) remuneration scheme) or with a specific demographic or industry only (for example, gig economy workers), to prove that the SHI model can work.

Moving towards SHI is good for Malaysia, assuming several conditions are met. One, SHI is used to complement but not replace the existing tax-based financing. Two, SHI starts with a small contribution by a small discrete group of contributors and gradually expands to the population over 5 to 8 years. Three, the pilot agency for SHI should be an existing agency (for example, KWSP) and not a new agency (lest we have another 1MDB). And four, Malaysia must learn lessons from SHI implementation from Thailand and the Philippines (since 1999) and Indonesia (since 2014).

SHI is probably necessary for Malaysia’s health system in the future but is insufficient. SHI must be paired with: predictable increases in tax-funded financing in five-year Rancangan Malaysia plans (not just annual Belanjawan budgets); measures to reduce healthcare costs (especially identifying waste, which is around 30% of total healthcare spending in most countries); and a review of the RM1 and RM5 user fees in public facilities (for example, ask the M40 and T20 to pay more), as these fees have not been changed since 1982 and are completely decoupled from the financial realities of the 2020s.

In June 2025, the Joint Ministerial Committee (JMC) was formed with three co-leading agencies: the Health Ministry, the Finance Ministry and Bank Negara. In the same month during the Bank Negara Sasana Symposium, the JMC announced five strategic plans with 11 initiatives. Under the Revamp MHIT thrust, JMC will “develop the base MHIT product” and “improve tools for consumers to determine health insurance needs and options” for insurance and takaful operators (ITOs) to implement.

(Getting a base MHIT product is critical and helpful for Malaysians but getting an agreement to that base MHIT product will be challenging because “the deeper and broader the base, the more expensive the base MHIT will be”. Just like any industry, healthcare is not immune to the “trilemma of choose two: good, fast or cheap”.

We predict a more active and interventionist JMC and Bank Negara in 2026 to stimulate more innovation in and access to insurance products. While sympathetic to the valid concerns of a high loss ratio for ITOs, adverse selection, moral hazard and increasing medical inflation, more can be done by the insurance industry. Three reasonable and commercially attractive products come to mind as a prediction.

One, ITOs may resist the base MHIT in the beginning but will soon realise that the base MHIT will enlarge their risk pool, reduce adverse selection, improve bargaining positions with private hospitals and increase written premiums (while keeping their regulator happy). The agency and distribution officers will adapt to an additional way of working and compete on education, price and “mass 1:many distribution” from the current more personalised 1:1 agency model.

Two, ITOs will move towards tackling waste more than fraud. Fraud is much easier to identify and address but fraud is likely only less than 1% to 2% of total healthcare spending. Waste is a much bigger problem, contributing up to 30% to 40% of total healthcare spending (according to US and European health systems and claims data). But waste is much more difficult to identify because it is challenging to create an objective binary “Yes” or “No” threshold to determine waste. AI tools can help but human judgement is inevitable because medico-legal systems can only assign responsibility (that is, judgement) to humans and not to AI tools.

Three, Malaysia needs a policy intervention sitting between the ITOs and private hospitals and their policyholders/patients to resolve disputes and delayed or non-decisions. Today, in theory, an insurance dispute of “claimable or not claimable” can be referred to the financial ombudsman. As the financial ombudsman is trained more for financial disputes rather than insurance disputes, Malaysia may need an insurance ombudsman. Alternatively, Malaysia may need a “private insurance arbitration system” similar in spirit and implementation to the Arbitration Act and Asian International Arbitration Centre, although a trusted private company can deliver an independent review as a trusted intermediary without needing any acts of law. Delayed or non-decisions are more invisible than a dispute but deserve a solution via guidance or regulation of perhaps “If no claims decision is made within X calendar days, the claim is automatically approved unless referred to the insurance ombudsman or a private independent review”.

DRGs are a financing innovation first implemented in the US Medicare system in 1983. After four decades, (only) about 40% of total hospital bills in the US are paid via DRG; the remainder is paid through a combination of fees-for-service (FFS), per diem, global budgets and some capitation. In Malaysia, more than 99% of private hospital bills are FSS. There is an unhelpful misconception that DRGs will replace FFS when DRGs should complement FFS as one more way to pay doctors and hospitals. The right balance is “some procedures are FFS, some are DRGs and some are capitated”.

VBHC is a separate financing innovation that began in the US in the 1990s, from work in the Harvard Business School. In theory, VBHC says, “Pay doctors and hospitals based on good outcomes, not just the mere act of delivering a service.” In practice, there are two main ways to implement VBHC. One, doctors or hospitals are paid a bonus if the patient gets better after treatment or doesn’t suffer side effects from surgery (that is, “pay for performance”). Two, doctors or hospitals get a share of the savings if they help the payer save costs (that is, “shared savings”).

DRGs and VBHC require two main ingredients: vast amounts of data clean enough to be analysed and sliced-and-diced, and agreement between the payer (for example, the Ministry of Finance, MOH or ITOs) and providers. Both ingredients are political and politically weaponisable.

For data, the technology exists today with cheap cloud-based electronic health records (EHR), analytics tools, AI, blockchain and the like. But the political will to mandate all citizens to contribute data to an interoperable EHR system or health information exchange (HIE), either public or private, is missing. To date, very few single-payer systems have more than 95% of relevant population health data in one “national HIE”, perhaps only Japan, Taiwan and South Korea (and even then, after 40 to 60 years of work backed by health and social laws that are updated every two to five years).

Payer-provider agreement is perhaps even tougher. As one simplistic example for DRG, Caesarean sections are quite common and “predictably routine”, so it would be quite natural to pay for C-sections using one standardised DRG price nationwide (instead of FFS where prices can vary wildly). Payers will insist on “one standardised price for C-sections with variations for XYZ complexity only” but private hospitals will (quite reasonably) state that Kuala Lumpur is more expensive than Taiping, the presence of ICU backup should increase prices and higher care intensity (that is, more nurses or a two-patient room) should also increase prices. Therefore, it is very challenging to get payer-provider agreement for DRG, short of a strong government mandate or intermediation.

Let us use diabetes as one simplistic example for VBHC pay-for-performance. Assume a doctor manages 100 patients with diabetes and is given RM5,000 per patient per year to manage that cohort of 100 patients. If the doctor helps 80% of patients achieve HbA1c targets, then the doctor takes a bonus of RM200 per patient per year (for the sake of argument). But the doctor will claim to deserve a RM500 bonus, the payer will try to pay a RM100 bonus and the patient may also (quite reasonably) demand a RM200 bonus for “good behaviour”. Again, it is very challenging to get payer-provider agreement for VBHC, short of a strong government mandate or intermediation.

Worse, if C-sections and diabetes are common but it is already difficult to achieve a payer-provider consensus, consider that the International Classification of Diseases (11th edition) has around 17,000 diagnostic categories (or diseases, disorders or injuries). Payer-provider consensus needs to be achieved for a significant percentage of the around 17,000 diagnostic categories to cover a meaningful group of patients.

All that being said, we predict that 2026 will see a small-scale implementation of DRG and VBHC, to prove a point and to check off a list. This small-scale implementation may be limited in time, number of hospitals, number of conditions and/or number of patients. It may be called a pilot, a sandbox, a trial or another name.

There will be predictable and reasonable pushback from private hospitals and therefore the narrative of “DRG and VBHC complementing fees-for-service” is crucial. ITOs are likely to share the claims data with government agencies but ITO data is second-hand and incomplete. Only private hospitals have first-hand and more complete data, so we may eventually see a mandate from the director-general of health for more comprehensive, granular and regular data reporting from private hospitals to the MOH.

The first prediction above is to mobilise new funds. The second prediction is to increase access and coverage. The third prediction is to spend funds wisely. Here are other one-sentence predictions for 2026 to 2027. One, the government may impose more blunt-instrument and semi-arbitrary price controls, price caps or price regulatory mechanisms (we support transparency and competition to reduce prices, not command economy-style mechanisms). Two, the JMC may gradually realise that Perkeso and KWSP are crucial stakeholders and systematically include Perkeso and KWSP in the JMC (we support this and Perkeso is already operating rehab hospitals under an energetic leadership team). And three, more attention is provided to health, safety, welfare and protection for the gig economy.

Fortunately, five of six predictions tend positive (the exception is blunt-instrument price caps, which are populist in nature). Wishing everyone a happy and healthy 2026.

Dr Khor Swee Kheng is CEO of Angsana Health and specialises in health systems

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