BUSINESS OVERVIEW SECTION 2 17 Al-`Aqar Healthcare REIT | Annual Report 2024 MARKET SUMMARY REPORT While the sector’s outlook remains strong, rising medical costs have been an area of focus. Malaysia’s Health Consumer Price Index (CPI) has increased steadily, reflecting higher costs for medical services, pharmaceuticals, and hospital care. Key contributing factors include technological advancements, increasing demand for quality healthcare, and an ageing population requiring more extensive medical care. The medical inflation rate is projected to reach 12.6% in 2025, surpassing the global average of 7.2%. The evolving regulatory landscape in the insurance industry is also set to have significant implications for the healthcare industry. In response to rising medical costs, BNM has tightened insurance regulations to enhance consumer protection and improve transparency in healthcare-related claims. The new policies include stricter co-payment requirements for medical insurance and takaful packages, aimed at discouraging excessive medical claims and promoting cost-sharing between insurers and policyholders. Additionally, the Malaysian government is set to address emerging challenges in the healthcare sector by reviewing regulations to ensure better cost management, improved access to medical services, and sustainable industry growth. This includes evaluating new pricing models such as the Diagnosis-Related Group (DRG) pricing system that was introduced in early 2025, which aims to provide greater cost transparency and efficiency within private healthcare facilities. The transition from a fee-for-service model to DRG pricing will require substantial upgrades to Malaysia’s healthcare data infrastructure, including medical coding systems and electronic health records. The implementation process will necessitate clear pricing structures, defined cost benchmarks, and comprehensive training for healthcare professionals. The transition will take time, and a phased approach may be necessary to ensure seamless integration. While the DRG system is expected to help contain healthcare costs in the long run, concerns remain regarding potential short-term impacts, including pressure on hospital margins and the risk of quicker discharges or reduced care for patients with complex medical needs. However, healthcare providers with well-established operational efficiencies and diverse revenue streams, are likely to adapt effectively. Medical tourism remains a key growth driver for Malaysia’s healthcare sector, offering strong revenue-generating potential for private hospitals. The post-pandemic recovery in medical tourism has been swift, with revenues reaching RM1.3 billion in 2022 and RM1.9 billion in 2023. This upward trend is expected to continue into 2025, supported by Malaysia’s reputation for high-quality, cost-effective medical services and the government’s ongoing efforts to position the country as a leading medical tourism hub. Private healthcare providers with a strong domestic presence are poised to benefit the most from this trend, particularly as medical tourists generally contribute higher margins due to the complexity of their cases and the additional services they require. Budget 2025’s increased tax reliefs for medical charges and insurance premiums are also expected to support further growth in medical tourism, reinforcing Malaysia’s appeal as a destination for international patients seeking affordable yet high-quality healthcare services. The healthcare sector continues to benefit from strong policy support, investment incentives, and increasing demand, ensuring sustained growth and resilience. While industry stakeholders are navigating regulatory changes and cost pressures, the sector is well-equipped to adapt through innovation, enhanced operational efficiencies, and strategic partnerships. Private healthcare providers, pharmaceutical firms, and healthcare REITs remain well-positioned to capture future growth opportunities, supported by a rapidly evolving and increasingly sophisticated healthcare landscape. Sources: 1. Monetary Policy Statement - Bank Negara Malaysia 2. Maybank Investment Bank Berhad. (2024). Malaysia 2025 Outlook & Lookouts: Brace Up for a Volatile Year 3. MIDF Research. (2024). 2025 Market Outlook 4. BIMB Securities Sdn Bhd. (2025). 2025 Annual Strategy: Certainty over Uncertainties 5. Kenanga Research. (2025). Market Strategy: 1QCY25 Outlook 6. Deloitte: 2025 Global Health Care Outlook Source: Malaysia Healthcare Travel Council (MHTC), Maybank IBG Research MALAYSIA INBOUND MEDICAL TOURISM-VOLUME AND REVENUE Health Tourism Revenue (MYR’m) Health Tourism Volume (# ‘000) (RHS) 2023 1,900 1,076 2015 914 859 2019 1,700 1,220 2018 1,500 1,200 2017 1,300 1,050 2016 1,123 921 2020 800 689 2021 600 561 2022 1,300 850
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