03 July 2014

Why Government Wants Pre-Funded MediShield Life

The MediShield Life Review Committee in its Report dated 23 June 2014 said:

"Distributing Premiums More Evenly Over Lifetime. Our Committee also heard concerns that the elderly could have a problem affording MediShield Life premiums, because the premiums would increase with age. We therefore recommend that premiums be distributed more evenly throughout one’s life, i.e. higher premiums during working age, so that premiums rise by less in old age. In addition, policyholders currently only start receiving premium rebates (which reduce the net premium) from 71 years old. We recommend starting the premium rebates earlier at age 66. This will enable Singaporeans who have just retired or are near retirement to start benefiting from having paid premiums ahead when they were younger."

The stated rationale for pre-funding doesn't make sense.

Medisave Balance Is Key, Not Current Income
A person pays his MediShield Life premium using the money in his Medisave account.

Although his Medisave account is funded primarily from his employment income (the other sources being the occasional Government voucher or the rare bequests), it is his Medisave balance rather than his current income that is crucial in ensuring that he is able to pay his and/or his family's MediShield Life premiums year after year, through any unemployment and retirement. Otherwise, he should be exempted from paying any premium when he is unemployed or retired.

For a person earning a given stream of employment income, his ability to pay the increasingly higher MediShield Life premiums as he ages is the same with or without pre-funding. Pre-funding is superficial and in reality changes nothing.

Pre-Funding Irrelevant
Pre-funding MediShield Life doesn't help the individual.

If he is required to pre-fund by, say, $200 in a particular year, this pre-funded premium is not used by MediShield Life in that year, but will be invested in special issues of Government securities and grow annually at 4 per cent (the current Medisave interest rate, excluding the additional 1 per cent). If this pre-funded premium is drawn down in, say, 40 years' time, it would have grown to $960.

If instead the person is allowed to keep the $200 in his Medisave account, it would also have grown to $960 (provided he hasn't used any of it, see next section).

There are no financial or tax advantages in pre-funding.

Medisave Money Can't Be Frittered Away
Unlike money in a person's Ordinary account, which may be used for housing, investment, education etc., the money in his Medisave account may be used for certain allowable medical expenses only.

When a person uses his Medisave money to meet his and/or his family's medical expenses, it is not something that he enjoys doing.

For him, pre-funding MediShield Life leaves him with less money in his Medisave account.

Without pre-funding, he has more Medisave money to meet his and/or his family's medical needs but perhaps less for his MediShield Life premiums when he is older.

Either way, his combined cumulative premiums and Medisave-funded medical expenses do not change, unless with less Medisave money (after pre-funding) he may have to forgo some medical treatments.

WHY THE GOVERNMENT WANTS PRE-FUNDING

I believe there are two reasons why the Government wants MediShield Life premiums to be pre-funded, neither of which has been enunciated by the Government or the Committee (to the best of my knowledge).

Longevity Insurance
There is a pre-determined age at which people will stop pre-funding MediShield Life and start drawing down on their pre-funded balances. The Committee recommends it to be set at age 66.

The cumulative pre-funded balances will grow year by year until the cohort reaches the age of 66. At that point, the pre-funded balances are at their maximum. Thereafter, they will decline as the pre-funded balances are used to partially pay the yearly premiums.

The nearer to age 66 when a person dies, the more pre-funded premium he leaves behind for others in his cohort.

With pre-funding, people who die early subsidise the MediShield Life premiums of other people in their age cohort who outlive them.

But that should not be the objective of MediShield Life, which should be confined to risk pooling to protect policyholders against large hospital bills and expensive treatment of chronic conditions.

Neither is it fair. The dead should not be required to subsidise the hospitalisation costs of the living.

Being Forced To Help
With participation in MediShield Life being mandatory, the Government is almost compelled to help any person who cannot afford to pay his premiums. Pre-funding reduces the likelihood that, or the extent to which, the Government would have to subsidise the premiums of the elderly poor.


This article was updated on 5 July 2014 0:45 am

1 comment:

  1. This is really another form of taxation. Compare Singapore's healthcare (or education) spending against other countries, you will see that the government spend far less percentage wise on healthcare. The premiums are collected to supplement healthcare spending.

    The question should be given the government budget surpluses (practically every year for many decades!) why is healthcare spending still so low. You are being taxed for healthcare, education, transport, utilities, etc to produce the surpluses. Seriously why the obsession on budget surplus?

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