Assessing the fiscal adequacy and distributional equity of Malaysia's medical insurance tax relief

Abstract

Medical insurance tax relief constitutes a significant tax expenditure within Malaysia's dual-tier healthcare financing framework. It is designed to encourage private medical insurance ownership while reducing households' exposure to catastrophic out-of-pocket healthcare expenditure. However, post-pandemic medical inflation, extensive premium repricing by commercial insurers, and the prolonged stagnation of the statutory deduction ceiling have raised concerns regarding the policy's fiscal adequacy and distributional equity. This study evaluates Malaysia's medical insurance tax relief using a two-pronged quantitative approach. First, approximately 6.5 million individual medical insurance claims from 2022 to 2024 were analyzed using a Generalized Linear Model (GLM) to identify the key drivers of healthcare cost escalation. Second, a macro-level benefit-incidence analysis based on institutional data from 2014 to 2025 was conducted to evaluate changes in the purchasing power of the tax relief and the distribution of tax benefits across income groups. The findings reveal that healthcare utilization and treatment intensity drive 71.5% of the total escalation in medical claims, while pure price inflation accounts for the remaining 28.5%. This shift toward higher intensity and volume has placed significant pressure on financial sustainability, as evidenced by the Relief Coverage Ratio (RCR), which plummeted from 1.62 in 2014 to 0.71 in 2024. This represents a 56% reduction in the purchasing power of the tax relief before the policy revision introduced under Budget 2025. These results demonstrate that the current deduction-based framework has become increasingly inadequate in preserving the real value of the tax incentive and increasingly regressive in its distributional effects. The analysis further shows that the existing deduction mechanism disproportionately benefits higher-income taxpayers (T20), while lower-income households (B40) receive limited benefits because many are unable to maintain private medical insurance coverage following premium repricing. The study concludes that Malaysia's medical insurance tax relief requires structural reform through the introduction of an income-targeted refundable tax credit and automatic inflation indexation. These reforms would preserve fiscal adequacy, improve distributional equity, and strengthen the long-term sustainability of Malaysia's healthcare financing system.