Balancing healthcare costs: Is the 35% hike in MediShield Life premiums justified?

by Jason Tan Premiums for MediShield Life, Singapore’s mandatory national insurance scheme, are set to increase by up to 35%, with an average rise of 22%, starting from April 2025. This adjustment follows recommendations from the MediShield Life Council, an 11-member panel chaired by Mrs Fang Ai Lian, the former chairwoman of Ernst & Young. These increases are linked to an expansion of coverage, offering higher claim limits and broader protection for policyholders. According to the Ministry of Health (MOH), the premium hikes will be distributed over the next three years. Notably, the rise will disproportionately affect older Singaporeans. However, the MOH has committed to financial support measures aimed at alleviating these increases for most citizens. Over 90% of Singaporeans will benefit from S$3.4 billion in MediSave top-ups and S$700 million in premium subsidies, ensuring that most individuals will not pay out-of-pocket during this period.

Justifications for the Premium Hike

The upcoming changes are primarily driven by efforts to enhance the adequacy of MediShield Life coverage. As healthcare costs in Singapore rise, these adjustments are seen as essential to maintaining the scheme's sustainability. Additionally, the MOH emphasised the importance of ensuring MediShield Life remains robust enough to meet its future liabilities. A key factor being reviewed alongside premium adjustments is the Capital Adequacy Ratio (CAR). The CAR reflects the scheme’s ability to meet its obligations under adverse conditions, such as higher-than-expected claims or sharp declines in investment returns. The Monetary Authority of Singapore (MAS) mandates a minimum CAR of 120%, but most insurers, including MediShield Life, aim for a target closer to 200%. This target provides a buffer to ensure the scheme's financial resilience. In 2017, MediShield Life’s CAR was said to be similar to private insurers, between the range of 205% and 282%, ensuring that the scheme is well-positioned to meet its liabilities without the need for sudden premium adjustments. The high level of reserves held by the MediShield Life Fund ensures that policyholders can feel confident the scheme will continue to meet claims even in adverse conditions. This practice is especially relevant given the mandatory nature of MediShield Life, which contrasts with private insurers that face potential lapses in coverage when policyholders switch providers or fail to renew policies.

Potential for Premium Moderation

While the premium increases are designed to secure the long-term viability of MediShield Life, some observers have suggested that a review of the scheme's CAR could potentially reduce the scale of these hikes. MediShield Life is funded primarily through special issues of Singapore Government securities, which pay a steady interest rate of 4% per annum, so the scheme may not face the same volatility in investment returns as private insurers. In 2023, the MediShield Life Fund reported holding S$13.8 billion in these government securities. This stable investment yielded an estimated interest of S$0.55 billion annually, which could potentially be used to offset some of the planned premium increases. With total liabilities of around S$10.7 billion, the investment returns, combined with the high CAR, may provide an opportunity to lower the quantum of the planned premium adjustments. The MOH has not yet indicated whether these considerations will be incorporated into its review. However, the potential to leverage the fund’s significant reserves and steady investment income has raised questions about whether the current rate of premium hikes is necessary. Some analysts suggest that, by reducing the CAR from its current target of 200% to a slightly lower but still safe threshold, it may be possible to moderate the scale of the upcoming increases.

Financial Support and Future Implications

For most Singaporeans, financial support from the government will be key to managing the premium increases. The MOH has assured that the majority of policyholders will receive enough in subsidies and MediSave top-ups to offset the increased costs, especially over the next three years. As part of the support package, elderly policyholders, who are expected to be most affected by the premium hikes, will receive targeted subsidies to prevent excessive financial strain. The total cost of the premium increases, over the next three years, is estimated to be around S$6.5 billion. If spread equally across the three years, this would represent an increase of approximately S$2.17 billion per year. However, given the anticipated support from government subsidies, it remains unclear how much of this burden will ultimately fall on policyholders. In light of these considerations, reviewing the CAR could help reduce the quantum of the premium increases, balancing the need for financial security with more moderate premium adjustments.