Health Financing Reform: Why Malaysia Must Go Further on Progressive and Pro-Health Taxes

Prepared by Muhammad Daniel Kittu

27 February 2026

Public debate has centred on the government’s newly announced base medical and health insurance/takaful (MHIT) plan, which covers pre-existing conditions. More recently, the Health Minister, Datuk Seri Dr Dzulkefly Ahmad, announced at the Forum Ekonomi Malaysia 2026 that a National Health Fund (NHF) will be established, including targeted employer and employee payroll contributions, alongside pro-health taxes, to fund the public healthcare system by 2026 or 2027. 

Taken together, these developments mark a significant shift in Malaysia’s health financing discussions over the past few decades.

At their core, these reforms acknowledge a reality Malaysians increasingly feel: healthcare costs are rising rapidly. Insurance premiums have surged, private hospital bills continue to climb, and public facilities struggle with congestion, long waiting times, and staff shortages. As a result, many households increasingly rely on out-of-pocket (OOP) spending, exposing families to financial hardship when illness strikes.

This growing strain is reflected in Malaysia’s progress toward universal health coverage (UHC). According to the World Health Organisation (WHO), UHC is defined as people having access to the healthcare needed, without financial hardship. The WHO’s UHC Service Coverage Index shows that Malaysia once outperformed many upper-middle-income countries in UHC service coverage. Yet progress has since slowed, and the country now risks falling behind regional peers as healthcare demand rises.

(Data extracted from the WHO Global Health Observatory)

As Malaysia approaches high-income status, expectations for accessible and resilient healthcare will only rise. Yet stagnation in coverage translates into familiar frustrations: crowded clinics, delayed treatment, and rising financial burden on households.

Within this context, the government’s recent moves to establish a public health fund are welcome. They signal a recognition that healthcare financing must evolve if Malaysia is to sustain both access and quality. 

A Step Toward Stronger Public Financing

The base MHIT plan aims to provide a more standardised and affordable private insurance option, particularly for those priced out of existing plans. If successful, it could help restructure private insurance markets and provide better value for Malaysians, particularly those with pre-existing conditions who choose private coverage.

At the same time, the national health fund signals a commitment to strengthening the public healthcare system, which remains the backbone of equitable care in Malaysia. International evidence, including reports by the WHO and World Bank, shows that health systems funded mainly through pooled public funds provide stronger financial protection, expand access to essential services, and reduce inequalities in health outcomes compared with systems that depend heavily on OOP payments. 

A key development is the government’s openness to expanding financing sources beyond traditional allocations, including targeted payroll contributions alongside health taxes. Pooling contributions through payroll mechanisms can help stabilise funding and reduce reliance on OOP spending.

If financed and implemented well, this approach could gradually enable more Malaysians to rely on public healthcare instead of being pushed toward costly private insurance and direct payments. That shift would ease financial pressures on households while improving system-wide equity.

However, payroll contributions and existing health taxes alone may not be enough. Malaysia must carefully consider how to equitably and sustainably finance this expansion. 

Why Progressive Taxes Matter for Health

Financing health reform should not disproportionately burden middle- and lower-income households. Here, progressive taxation becomes crucial.

A briefing paper by the United Nations University International Institute for Global Health (UNU IIGH) highlights that countries with more progressive tax systems are better able to finance public services, reduce inequality, and improve population health outcomes. In other words, how governments raise revenue directly shapes society’s health. 

Expanding progressive revenue sources, such as strengthening progressive income and wealth taxation, would help ensure that health reforms do not shift costs onto those least able to pay. 

This is not simply a fiscal matter; it is about reinforcing the social contract. When citizens see their contributions translate into reliable, accessible healthcare, public trust strengthens. Illness should not mean financial ruin.

Pro-Health Taxes: A Buffer for Progressive Taxes 

While progressive taxation remains essential, it must be acknowledged that implementing such taxes can be challenging. For example, progressive taxes such as the luxury goods tax have been delayed since 2024. In the meantime, enhancing other forms of taxation, such as tobacco taxes, must be considered while progressive tax reforms are being implemented. Pro-health taxes like tobacco taxation can offset delays in broader progressive tax reform. 

In addition, tobacco taxes are largely seen as a low-hanging fruit for increasing revenue, and are favourable to a majority of Malaysians. For instance, SERI’s own national survey found 76% of Malaysians support higher cigarette taxes, and support was strong across key demographics.

Not only do tobacco taxes raise revenue, it improves public health. For example, when cigarette prices rise, lower-income smokers are the most likely to reduce consumption or quit altogether because they have less disposable income. As a result, they gain the greatest health benefits.

WHO studies consistently show that the poorest 20% of households experience the largest declines in smoking following tax increases. Far from being regressive, tobacco taxation is both pro-health and pro-poor. 

Strengthening Health Taxes for Public Health and Revenue 

Budget 2026 introduced a modest increase in tobacco taxes, with cigarette excise duties rising by 2 sen per stick, resulting in higher cigarette prices since November of last year. This is a welcome step, but one-off and sporadic increases are not enough. More can and should be done. Raising and regularly adjusting tobacco taxes would not only save lives but also generate revenue that can strengthen healthcare financing.

The same principle applies to alcohol and SSB taxes. Research synthesised by the Economics for Health research project at Johns Hopkins Bloomberg School of Public Health has shown that higher alcohol taxes reduce harmful drinking, particularly among heavy and young consumers, leading to fewer injuries, chronic diseases, and social harms.

Similarly, sugar taxes have been shown internationally, including countries like Mexico, to reduce purchases of sugary drinks, with larger reductions observed among lower-income households, who also bear the highest burden of diet-related diseases. These taxes encourage healthier consumption while providing revenue that can be reinvested in public health. 

Therefore, health taxes serve two goals at once: they reduce disease while financing healthcare systems. 

Aligning with Malaysia’s National Development Goals

These reforms are also significant in the broader policy context. The 13th Malaysia Plan (13MP) places strong emphasis on improving people’s well-being. Health, among other fields, was emphasised as a key priority under the implementation of the 13MP during the Royal Address of His Majesty Sultan Ibrahim, King of Malaysia, for the opening of the 5th session of the 15th Parliament. 

The government’s moves on MHIT and the NHF suggest that healthcare reform is being treated as a national priority rather than a sectoral issue. This alignment matters. Rising healthcare costs threaten economic security just as much as inflation or unemployment. When families must choose between medical treatment and daily necessities, social stability and productivity suffer.

A healthier population, by contrast, contributes to economic resilience and shared prosperity.

The Road Ahead

Still, caution is necessary. Fragmented schemes and voluntary insurance plans alone cannot deliver universal coverage. International experience, as highlighted by the WHO’s Health Systems Financing report, shows that progress toward UHC depends on pooling funds broadly and reducing reliance on individual payments. 

The base MHIT plan should therefore be viewed as one component of a broader reform journey rather than a complete solution. Likewise, allocating payroll contributions and health taxes to the NHF are important steps, but should be complemented by progressive taxation reforms and regular pro-health tax increases on tobacco, sugar and alcohol. This can then help Malaysia build a healthcare financing system that is both equitable and resilient.

Health is not merely a sectoral concern; it is foundational to national well-being. The success of these reforms will determine whether Malaysians can access healthcare without fear that illness will push them into debt.