Medishield's Reserves To Meet Future Obligations

02 Oct 2004, The Straits Times

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Name of the Person: Salma Khlik

Medishield's Reserves To Meet Future Obligations

Medishield has reserves of $524m

Until 2001, claims paid out each year were less than premiums collected; so far, it has given out $516m in benefits

THE Government-run MediShield insurance has reserves that exceed the total claims it has paid out since its inception 14 years ago.

The Central Provident Fund Board, which runs the three MediShield schemes, told The Straits Times that it has $524 million comprising both premiums collected and the investment income generated from that.

Till the end of last year, it had paid out a total of $516 million to settle 715,000 claims.

MediShield was set up in July 1990 to encourage people to buy medical insurance by allowing them to pay for it with Medisave money.

The claims paid out each year have never exceeded the premiums collected, although the difference between the two has narrowed in recent years.

In the first eight years, claims amounted to less than half of the premiums collected. Figures from the CPF Board showed that, last year, it collected $98.7 million in premiums and paid out $80.2 million to settle over 94,000 claims.

Dr Lily Neo, chairman of the Government Parliamentary Committee on Health, described the $500 million in reserves as 'mind boggling'.

'But it is good to know about the large amount as it will give people confidence in the MediShield scheme.'

Given the huge sum, she said, MediShield should quickly enhance the claim limits to help people facing huge medical bills.

The cheapest MediShield scheme gives policy holders a maximum of $30,000 a year and $120,000 in a lifetime. There are also varying limits on the claims for each treatment.

But the huge reserves have led to questions on whether the Health Ministry should go ahead with its plan to raise premiums. The ministry has argued that the premiums - which range from $12 to $1,950 a year - have to go up as payouts from MediShield are not enough for the big medical bills faced by five to 10 per cent of policy holders.

Financial planner Leong Sze Hian thinks it will be difficult to explain to the people why MediShield premiums have to go up when it has so much money in reserve.

He described MediShield as one of the healthiest insurance schemes in the world.

Commercial insurance companies, he said, usually work on 'a loss ratio of over 100 per cent', which means they pay out more in claims than they collect in premiums.

Their profit comes from investment income generated during the time between premiums paid and claims made.

Agreeing, National University of Singapore health economist Phua Kai Hong said: 'It's inefficient when you collect more than you pay out.'

While agreeing that the reserves seemed high, Mr Nishit Majmudar, chief financial officer at Prudential Assurance Singapore, said the gap between premiums and claims had been closing, possibly because of better benefits.

When contacted, a Health Ministry spokesman said that, since 2002, the benefits paid out under the basic MediShield scheme had been higher than the premiums collected.

To enhance the scheme further, premiums would have to go up, she reiterated, adding that the ministry would ensure that they remained affordable.

Reply

Reply from MOH 

Medishield's Reserves To Meet Future Obligations

Your article "MediShield has reserves of $524 million" (ST, Oct 1 2004) described the reserves as "mind-boggling" and suggested that they were excessive or even unnecessary.

But MediShield is a long term medical insurance policy. When it takes on a policyholder, it commits to pay part of the hospital bills of the policyholder when a catastrophic illness strikes. It protects the policyholders against hospitalisation expenses, much of which are likely to crop up only in the future. That is why all regulators require insurance plans to set aside adequate reserves to cover future obligations and contingencies. In Singapore, the Monetary Authority of Singapore imposes such a prudential requirement on private insurers.

While $524 million may seem "mind-boggling", it should be seen against a large base of 1.7 million policyholders, for whom MediShield must provide such long term medical coverage.

The correct way to judge if premiums are excessive is to study the loss ratio of an insurance plan. This is the ratio of annual payouts to premium collections. For long term viability, it cannot exceed 100%. In other words, payouts must not exceed premium collections. The surplus is to build up the reserves for future obligations and contingencies, besides covering the cost of running the insurance plan.

Table below shows the payouts and premium collections of MediShield Basic in recent years:

Year Payouts ($ million) (A) Premiums ($ million) (B) Loss Ratio (%) (A/B*100) 1999 40.1 52.6 76 2000 46.9 52.3 90 2001 51.2 52.3 98 2002 63.6 53.9 118 2003 65.3 54.2 120

MediShield Basic is already in deficit operationally. The deficit will increase as more healthy lives get cherry-picked by private insurers, leaving MediShield with rising claims and payouts.

Meanwhile, there is a pressing need to raise the benefits of MediShield as patients with catastrophic illnesses are finding its coverage inadequate. This will worsen the deficit.

The problems facing MediShield are real and major steps have to be taken to return it to its original intent of protecting Singaporeans against large hospital bills. Some of these steps include removing cherry-picking by private insurers, adjusting the deductibles to reflect the current cost of hospitalisation and raising the claim limits to provide substantially higher payouts for patients with large hospital bills.

To fund these higher payouts and prevent MediShield from becoming insolvent, premiums will need to be raised. But we will want to keep the revised premiums affordable for all Singaporeans.

We welcome all feedback on the MediShield reform at our consultation website.