133

Case study

Japan

Professor Naoki Ikegami

St. Luke’s International University, School of Public Health

Professor Emeritus, Keio University

Japan

134 Price setting and price regulation in health care

Price setting and price regulation in health care: Japan

Abstract 135

1 Historical development 137

BeforeandafterWesterninfluence 137

DevelopmentoftheFeeSchedule 137

2 General structure of the payment system 140

Present health service delivery context 140

KeyroleoftheFeeSchedule 140

Restricting extra billing and balance billing 142

Nationallyuniformfees 143

Definingitemsandtheconditionsofbilling 144

Classificationoftheserviceitems 145

Reflectingadvancesintechnology 146

3 Pharmaceuticals and medical devices 147

Settingthepriceofanewpharmaceutical 147

Revisingpharmaceuticalprices 147

Medical devices 148

4 Revising the Fee Schedule 149

Setting the global revision rate 149

Setting item-by-item revisions 151

Lobbying by provider organizations 153

Monitoringcompliancetoregulations 154

5 Focused analysis 155

Primary care and specialist services 155

Acuteinpatientcare 155

Chronicinpatientcare 157

Post-acutecareandsub-acutecare 158

Long-termcareinsuranceservices 158

6 Possible lessons for other countries 160

References 162

Contents

135Price setting and price regulation in health care

Thefollowingaspectsshouldbenotedwhenreformingthepayment system. First, services are determined not only by the patient’sneeds,butalsoonhowtheneedsareinterpretedbythephysician.AsFig.1shows,thedefinitionof“appropriate”differsaccordingtothephysician’seducationandtraining,theresourcesavailable(bigurbanhospitalorruralclinic),andthemethodofpayment(fee-for-serviceorfixedsalaries).Thus,itwouldbedifficulttodefinean“appropriate”packageofservices that meets the needs of every patient.

Figure 1 Defining appropriate treatment

“Appropriate” depends not only on the patient, but also on:

1 Each physician’s experience, including education, training, and encounters with patients. This tends to be idiosyncratic.

2 Where the physician practices, whether in a rural clinic or a big urban hospital.

3 How the physician is paid, whether FFS (leading to expansion of need) or more inclusive payment leading to a contraction of need.

Always appropriate

Sometimes appropriate

Inappropriate

Source:author.

Second, even if there is agreement on the services and the amountoftimerequired,thereisnoconsensusonhowmuchphysiciansshouldbepaidrelativetotheaverageworkerfordeliveringtheservices.Shouldtheirincomebetwiceortentimesthatoftheaverageworker?Therearebigdifferencesinthisratioevenamonghigh-incomecountries(Conover,2013).Thelabourcostsofnursesandotheralliedhealthcareworkers,andtheextentoftask-shifting,alsovaryacrossandwithineachcountry.Thenationalaverageisoftenused,butwhetherthecurrentlevelsshouldbemaintainedisdisputedfromthosewithinandoutsidethehealthcaresector.

Theaboveimpliesthatpaymentreformshouldfocuslessoneconomictheoryanddatafromcoststudies,andmoreonnegotiations with physicians and hospital organizations. Japan oncetriedtoradicallyredesignitspaymentsystem.Ahugecost

Abstract

136 Price setting and price regulation in health care

studywasmadein1950,inwhichtruck-loadsofdatawerecollected. However, it was not possible to set fees according to thestandardcostofeachserviceitem,becausecostsvariedgreatlyacrosshospitals(MatsuuraandOomura,1983).Moreover, the government and the Japan Medical Association (JMA)hadverydifferentideasonhowmuchphysiciansshouldbepaidonanhourlybasiswhencomparedwithaverageworkers.Sincethen,thegovernmenthasreliedmainlyonstructurednegotiationswiththeJMAandotherproviderorganizations in setting and revising fees.

Thetwomajorgoalspursuedbythegovernmenthavebeencontainingcostsandnudgingproviderstowardspolicygoals,suchasdecreasingthelengthsofhospitalstaysandpromotinghomeandcommunitycare.Whethercostshavebeencontainedisdebatable.TotalhealthexpenditurestotheGDPare10.7%,thesixthhighestratiointheworld(OECD,2018).However,thefactthatJapanhasthehighestpercentageofelders65andoverintheworld(27.7%)andthatexpendituresforlong-termcare(LTC)arerelativelyhigh(Campbelletal.,2016)shouldbetakenintoconsideration.1 The lengths of hospital stays are still long,butmany“hospitals”inJapanaredefactonursinghomes.Regardingquality,themacroindicesofhealthareexcellent,andtheoutcomesforspecificclinicalconditionsarethesameorbetterthanthosereportedforothercountries(Hashimotoetal.,2011).Thisreportwillexplainhowthepaymentsystemfunctionstoprovidepossiblelessonstoothercountries.

1 The percentage of total health expenditures (THE) to GDP jumped from 9.2% in 2010 to 10.6% in 2011. This occurred only in Japan and is probably due to the fact that virtually all LTC insurance expenditures were first included in THE from 2011 (IHEP, 2016).

137Price setting and price regulation in health care

1 Historical development

Before and after Western influence

Paymentreformshouldtakeahistoricalperspectivebecausethephysician’sbehaviourandvalueshavebeenrootedinthepast. In Japan, private practitioners were well established by themiddleofthe18thcentury.Atthattime,physicianswerepaid for the medication they dispensed and not for the services they provided. It was professionally and legally not appropriate forphysicianstodemandpaymentforservices,becausetreatingpatientswasahumanitarianact.However,paymentformedicationwasappropriate,becausephysiciansmustearntheirlivingandtheingredientshadtobepurchased(Fuse,1979).Atthattime,prescribinganddispensingwereintricatelylinked;physicianswerealsoreferredtoas“kusushi”(apothecaries).Dispensingcontinuedtobeamajorsourceofthephysicians’incomeuntilwellaftertheendoftheSecondWorldWar.Atitspeakin1980,paymentforpharmaceuticals,whichwouldincludetheprofitsprovidersmadefromdispensing,composed38.7%ofnationalmedicalexpenditures(KenkouHokenKumiaiRengoukai,2017).

Thedevelopmentofhospitalswasalsodifferent.InWesterncountries,hospitalsbeganascharityinstitutionsforthepoor.InJapan,hospitalswerebuiltbythegovernmentfromthelatterhalfofthe19thcenturyaspartofthegeneralpolicytoWesternizethecountry.Theobjectiveslayinthefollowing:treatingsoldiers,educatingmedicalstudents,andisolatingpatientswhohadcommunicablediseases.However,thesegovernmenthospitalsremainedfew.Mosthospitalswerebuiltby physicians adjacent to their clinics for patients who were abletopay.Asaresult,therewasnocleardistinctionbetweenclinics and hospitals. In general, hospitals did not provide nursingcare.Patientswerecaredbytheirfamilies,andnurseswere trained to assist physicians. It was only after the reforms madebytheoccupyingforcesafterJapanwasdefeatedinWorldWarIIthatpatientcarewaslegallydefinedasanurse’sresponsibility(Ikegami,2014).

Development of the Fee Schedule

WhenSocialHealthInsurance(SHI)wasimplementedin1927,thegovernmentbecametheinsurerfortheGovernment-managedHealthInsurance(GMHI),whichcoveredmanualworkersemployedinsmallcompanieswithlessthan300employees. At that time, the services were overwhelmingly delivered by private practitioners who were paid on a fee-for-service basis for the services and the medications they dispensed.Thus,intheGMHI’sFeeSchedule,thebasicunit(“point”)wasforaconsultationthatincludedoneday’sdosageofabasicpharmaceutical(suchasbicarbonateofsoda)dispensedbythephysician(Aoyagi,1996).Otherfeeswereset

138 Price setting and price regulation in health care

relativetothisbasicunitandexpressedinpoints.TheFeeSchedulewasverysimpleandissaidtohavebeendesignedovernightbytheJMAPresident(Fuse,1979).

Theconversionrateofthe“point”toyenwasnegotiatedbetween the JMA President and the Director of the Social AffairsBureauintheMinistryofInterior,whowasresponsiblefortheGMHI.Theratewassetbelowthecustomarylevel.TheJMAagreedtothisrate,partlybecauseGMHI-enrolledpatientscomposedonlyafractionoftheirpatients(otherpatientswouldcontinuetopayinfull)andpartlybecausephysicianswouldnolongbeatriskofnotbeingpaid.Fundingcamefrompremiums,halfofwhichwereleviedonGMHIenrolleesandhalfontheiremployers,plusanother10%fromgeneralrevenues.ThissubsidywasjustifiedbecauseSHIwouldmakeworkersmoreproductive,andthusincreasethenation’swealth(Shimazaki,2011).Avertingtheriskofasocialistrevolutionwasalsoanobjective.Theconversionratevariedineachprefecture:ifthephysiciansintheprefecturebilledmore“points”perGMHIenrolleethanthenationalaverage,thentheconversionratewouldbelower.

TheGMHIFeeSchedulewasadoptedbySociety-managedHealthInsurance(SMHI)plans,whichenrolledemployeesoflargecompanies,andtheMutualAidAssociations(MAA)plansforpublic-sectoremployeesin1943,thusunifyingthefeeschedulesofallemployment-basedhealthinsurance(EHI)plans.Inthatyear,theconversionfactorofthe“point”toyenbecamefixedirrespectiveofthevolumeofservices.Thewar-timeinflationandgeneralshortageofsupplieshadmadeitdifficulttosettheconversionratebasedonthevolumeofservices delivered.

Forthosenotformallyemployed,Community-basedHealthInsurance(CHI)planswerelegislatedin1938.CHIwasfocusedonimprovingthehealthoftheruralpopulation,whichcomposedmorethanhalfofthetotalpopulationatthattime.ThearmyneededtodraftmoremenbecauseoftheescalatingwarwithChina.StrongpressurewasputonmunicipalitiestoestablishCHIplans.Topayproviders,eachplancouldsetitsownwayofpaymentandindividuallycontractwithproviders.Inruralareas,thefacilityestablishedandoperatedbytheCHIwas de facto the only provider of services. Few CHI plans contractedwithprovidersoutsideoftheirprefecture.

139Price setting and price regulation in health care

In1956,thegovernmentformallyannouncedtheimplementationofUniversalHealthCoverage(UHC)inordertoestablishawelfarestate.Bythatyear,thecountry’sGDPhadrecovered to the level before the Second World War had started.UHCwasachievednotbyrestructuringtheSHIsystem,butbyexpandingCHI.TheCHINewActlegislatedin1958hadthefollowingmandates:

1. AllmunicipalitiesmustestablishaCHIplanfortheirresidents

2. EveryoneresidinginthemunicipalitynotenrolledinanEHIplanmustenrollinthemunicipality’sCHIplan

3. AllCHIplansmustadopttheFeeScheduleoftheEHI

Thefirstmandateforcedbigcities,suchasmetropolitanTokyo,to establish CHI plans. The second mandate forced everyone to enroll in a SHI plan. The two mandates led to the whole populationbecomingcoveredin1961.Thethirdmandateledto both services covered and payment to providers becoming the same for all SHI enrollees.2Inordertofinancetheexpansionsofbenefits,thenationalgovernmentincreaseditssubsidiestoCHI.SubsidiestoGMHIhadtobealsoincreasedbecausetheincomeleveloftheirenrolleeswhowereemployed in small companies was lower than that of SMHI enrollees.ThesesubsidiesfromgeneralrevenuesnowcomposeaquarterofSHIexpenditures,amountingtoatenthofthenationalgovernment’sgeneralexpendituresbudgetandtwicethatfordefense(Ikegamietal,2011).Asaresult,therevisionoftheFeeSchedulehasbecomeanintegralpartofthebudgetingprocess, as will be explained later.

2 Those on public assistance are not enrolled in SHI. However, they are entitled to the same benefits, and the providers are paid according to the fees set in the Fee Schedule.

140 Price setting and price regulation in health care

2 General structure of the payment system

Present health service delivery context

Thenumberofphysiciansper1,000populationisrelativelylowat2.43(OECD,2018).Some32%practiceinclinics,and63%inhospitals.Amongclinics,thegreatermajorityareproprietary-ownedsolopractices(MHLW,2018a).Physiciansbased in clinics do not have access to hospital facilities, and the majorityfocusesonprimarycareservices.Amonghospitals,virtuallyallphysiciansareemployedbythehospital,andtheirwages are generally set based on their seniority and do not reflecttherevenuetheygenerateforthehospital.

Thenumberofhospitalbedsper1,000populationishighat13.1(OECD,2018).Ofthesebeds,57%aregeneralbedsforacuteandpost-acutecare.Amonghospitals,69%havelessthan200beds(MHLW,2018c),and81%areintheprivatesector, which in many cases are owned by the physicians’ family. In general, high-tech care tends to be provided by publicorquasi-publicsector(suchastheRedCross)hospitals,andpost-acutecareandchroniccarebytheprivatesector.Investor-ownedfor-profitorganizationsarenotallowedtoopenhospitals.Thehospitaldirectormustbeaphysicianwhousuallycontinuestopractice.

Key role of the Fee Schedule

Althoughthedeliverysystemisfragmented,itiseffectivelycontrolledbytheFeeSchedule.AsFig.2shows,theFeeSchedulesimultaneouslysetsthebenefitsforenrolleesofallSHI plans, and the service fees and the prices of pharmaceuticalsanddevicesforvirtuallyallprovidersinJapan.Both physician fees and hospital fees are listed in one Fee Schedule.Inprinciple,paymentismadetothefacilityandnottoindividualphysicians.Fromthisrevenue,providerspaywages,purchasepharmaceuticalsandothermaterial,andretainprofitssothatinvestmentcanbemadetomeetfutureneeds.This system may seem at odds with the fact that the Fee Schedulewasoriginallydesignedtopayfortheservicesofprivate practitioners. However, at that time, services were overwhelmingly delivered by solo-practice clinics, so that paying the clinic meant paying the physician.

141Price setting and price regulation in health care

Figure 2 Role of the Fee Schedule in Japan

Plans: Multiple

– Employment-based plans (1,500 plans)

– Community-based plans (1,800 plans)

Providers: Private sector dominated

– Hospitals (80%)

– Physician offices (95%)

Fee Schedule

Single payment

Defines benefits

Sets price and conditions for billing

90%+ of providers’ revenue from services delivered at prices set by Fee Schedule

Source:author.

ThefeesareofficiallysetbytheMinistryofHealth,LabourandWelfare(MHLW)andarerevisedeverytwoyearsbasedonthedecisionsmadebytheCentralSocialInsuranceMedicalCouncilof the MHLW.3ThisCounciliscomposedofsevenmembersfrompayers(SHIplans,businessandlabourgroups),sevenmembers from providers, and six members who represent publicinterests(academics),plustenspecialistmembers(representingnurses,pharmaceuticalanddeviceindustries,etc.).However,councilmembersdonotvote.Indeed,thesixmembersrepresentingpublicinterestarenotallowedtospeakunlessaskedbythechair(Morita,2016).TheCouncilexiststoauthorizenegotiationsthattheMHLWofficialsintheMedicalAffairsDivisionoftheHealthInsuranceBureauhavemadewithproviderorganizations,suchastheJMA,hospitalassociations,andspecialistgroups.

PeopleintheMedicalAffairsDivisionnumber84intotal,including20physicians,2dentists,2pharmacists2nurses,and12careerbureaucrats,withtherestbeingadministrativestaff.NonehavereceivedformaltrainingontheFeeSchedule,andexceptfortheadministrativestaff,theyarerotatedeverytwotothreeyearstodifferentpositionswithintheMHLW.However,theyareresponsibleforalltheworkneededtoreviseandmanagetheFeeSchedule.Theonlyexceptionsareadhocstudiescontractedouttoprivatecompaniesonatenderbasis.

3 Services not listed in the Fee Schedule include normal delivery (when SHI was first legislated, the enrollees were manual workers and male) and preventive services such as health screening. Services covered by accident insurance and other publicly funded programs use the fee schedule.

142 Price setting and price regulation in health care

Restricting extra billing and balance billing

Thepercentageofproviders’revenuenotcontrolledbytheFeeScheduleisabout10%onaveragefromthedataavailable(MHLW,2017b).4 The services that hospitals can set prices and directlychargepatientsareverylimited.Extrabilling,thatisthebillingofservicesandpharmaceuticalsnotlistedintheFeeScheduletogetherwiththoselisted,ismainlylimitedtonewtechnology being developed by the hospital. Before being allowedtoextra-billthepatient,thehospitalmustsubmitarequesttotheMHLW.Ifapproved,thehospitalconductsclinicaltrialstocollectdataontheservice’sefficacyandsafety.Iftheresultsarepositive,thentheprocedurewouldbeapprovedandlistedintheFeeSchedule,withitsfeereducedfromtheamountthathadpreviouslybeenextra-billed.Thiswashowhearttransplantscametobelistedin2006(JapanOrganTransplantNetwork,2006).

Balance billing, that is billing the patient for the balance betweenthefeesetbytheFeeScheduleandthefeesetbythehospital, is mainly limited to beds with better amenities. Hospitals may only balance bill if the bed meets amenity standards set by the MHLW and the proportion of the extra chargeforbedsinthehospitalislessthan50%ofthetotalforprivatesectorhospitalsandlessthan30%forpublichospitals.Note that physicians are not allowed to balance bill no matter howrenownedtheymaybe.“Gifts”(moneypackets)usedtobegiven,butthisisnowmuchlessprevalent.

Otherthantheaboveexceptions,ifthepatientwantstoreceiveservicesorpharmaceuticalsnotcoveredbySHI,thenheorshemustpayforallcostsoutofpocketandnotjusttheextra-orbalance-billedamount.Ifahospitalwaslaterfoundtohaveextra-billed or balance-billed patients for services not permitted,itmustreturntheentireamountthattheyhadbilledtheinsuranceplanfortheservicescoveredbySHI.Becauseofthebenefit-in-kindprinciple,thebillcannotbedividedintocoveredanduncoveredservices(exceptforthoseexplicitlyallowed).Thisstrictinterpretationhasbeenattackedbypro-marketeconomistsasrestrictingthepatient’schoice(Ikegami,2006).However,onlyminorconcessionshavebeenintroduced,suchasincreasingthenumberofhealthcarefacilitiesthatcanextrabillnon-approvedpharmaceuticalsmainlyforcancer.

Becauseoftheserestrictions,complimentaryprivatehealthinsurancehasnotdeveloped.TheMHLWhasmaintainedthatallservicesandpharmaceuticalswhichhavebeenevaluatedfortheirefficacyandsafetywillbelistedintheFeeSchedule.SubstitutionprivatehealthinsuranceplansdonotexistinJapanbecauseallresidentsinJapanarelegallyrequiredtoenrollinSHIplans.Thus,although88.5%ofhouseholdsareenrolledinprivatehealthinsuranceplans(SeimeiHokenBunka

4 The revenue from extra-charge beds and from preventive screening services are 1% each. 8% comes from non-health care activities. This ratio is 16% in local government hospitals because of subsidies, but is only 2% in private hospitals (earnings from investments). Disease-specific hospitals (such as for psychiatry) and hospitals that derive 2% or more of their revenue from LTC Insurance services are excluded from these data (MHLW, 2017b).

143Price setting and price regulation in health care

Center,2018),theyhavenotplayedaroleinthesettingornegotiatingofpricesinJapan.Thegreatermajorityoffercashbenefits,irrespectiveoftheout-of-pocketamount,forthedayshospitalizedorthevisitsmade,orasalumpsum,whendiagnosedandtreatedforcancerorotherseriousdiseases.

ThebasisofthesestrictrulesonextrabillingandbalancebillingliesinthefactthatSHIbenefitsareinkind(services)andnotincash(aswouldbethecaseforanindemnityinsurancethatreimbursespartofthecostsincurredbytheenrollee).ThisprincipledatestodayswhenSHIwasfirstimplemented.Atthattime,therewerenocoinsurance,andtheSHIplanpaidproviders directly for the services delivered to their enrollees. Thisbenefit-in-kindprinciplehasbeenmaintainedevenaftercoinsurancewasleviedondependentswhentheywerecoveredin1938andlaterin1984,whencoinsurancecametobe levied on the employees themselves.

Nationally uniform fees

ThesamefeeissetforthesameservicethroughoutJapan.Aspreviouslyexplained,whentheFeeSchedulewasfirstintroduced,theconversionrateofthepointstoyendifferedaccordingtothevolumeofservicesthathadbeendeliveredineachprefecture.However,theconversionratebecamefixedin1943regardlessofthevolume.Atthattime,therewerethreeratesreflectingurban-ruraldifferencesinthecostofliving.Thiswasreducedtotworatesin1948andbecameoneratein1963.

Thefactthatfeesarenationallyuniformmayhavecontributedtoamoreequitabledistributionofphysiciansandnurses.Allfacilities receive the same fee for delivering the same service. Outofthisrevenue,bigcityhospitalscanrecruitphysiciansatrelativelylowwagesbecausetheyoffernon-monetaryrewards,suchasallowingthemtofocusontheirsub-specialtyandtousehigh-techequipment.However,theymustpaynurseshigherwagesbecausethecostoflivingishigher.Inruralhospitals,thereverseistrue:therearehigherwagesforphysiciansandlowerwagesfornurses.Supportingdataareavailablefrompublichospitals.Inhospitalsestablishedbybigcities(over700000inhabitants),theannualwageswere13.6millionyenforphysiciansand5.1millionyenfornurses.Inhospitalsthatareestablishedbytownsandvillages(lessthan30000inhabitants),thewageswere17.9millionyenforphysiciansand4.6millionyenfornurses(MIAC,2017).Althoughtherearenodataforprivatesectorhospitals,thedifferencesarelikelytobegreaterbecausetheirwagestendtobe less seniority based.

The extent to which paying the same fee for the same service itemhascontributedtoamoreequitablegeographicaldistributionofphysiciansandnursesisdifficulttoevaluate.However,asamethod,itissimplerthansettingfeestoreflectthecostoflivingandthenpayingabonustophysicianswhoworkinruralhospitals.Currently,theage-adjustedpercapita

144 Price setting and price regulation in health care

medicalexpendituresdifferbyaquarterbetweenthehighestandlowestofthe47prefectures(MHLW,2017a).

Defining items and the conditions of billing

Providers are basically paid on a fee-for-service basis for the serviceitemstheyhavedelivered.Eachitemispreciselydefined.Asanexample,thefeesforphysicianconsultationsaredividedintothefeeforan“initial”visitandafeefora“repeat”visit.Thefeefortheformerisfourtimesthatofthelatter,reflectingthefactthatthetimeandeffortrequiredforaninitialconsultationaremuchgreaterthanthatrequiredforarepeatconsultation.IntheFeeSchedule,an“initialvisit”isdefinedasavisitmade29daysormorefromthepreviousvisitandwithouthavingthephysicianaskthepatienttomakethenextvisit29daysormoreafterthepreviousvisit.

Conditionsofbillingeffectivelycontrolthevolumeofeachitem.Theyhavebeensettocontaincostsandassurequality.Forexample,tobillforrehabilitationtherapy,thehospitalmustemploymorethanthedefinedminimumnumberofexperienced physicians and therapists, have a therapy room withafloorspaceof150m2 or more, and so forth. To target resourcesandcontaincosts,patientsmusthavehadastrokewithin180days,aninjurywithin150days,andsoforth.5 For positronemissiontomography(PET)scans,thehospitalmustmeetfacilitystandardssuchashavinganexperiencedradiologistonsite,andpatientstandardssuchasthosewhohaveaconfirmeddiagnosisofcancer(sothatitcannotbebilledforscreeningpurposes).Tobillforthebonusofmanaging the dietary needs of inpatients, the physician and staffmusthaveattendeddesignatedseminars.

The most complex conditions have been set for basic hospitalizationfees.Thegeneralrulehasbeenhigherfeesforhighernursestaffinglevels.Thiswasintroducedin1951asanincentiveforhospitalstohiremorenursesandnotdependonthe family for the care of the patient. Since then, the Japan NursingAssociation(JNA)haslobbiedtoincreasethestaffingratiotoimprovelabourconditionsandenhancetheirprofessionalstatus.Inadditiontothestaffinglevel,nightdutymustbelessthan72hourspermonth,andtheproportionofregisterednurses(asopposedtolicensedpracticalnurses)inthehospitalmustbe70%ormore.Workintensitywasinitiallyonlymeasuredbythehospital’saveragelengthofstay:18daysorlessforthebillingofhigherstaffinglevels.However,from2006,morespecificconditions,suchastheproportionofpatientsintheunitwhohavehadamajorsurgeryorhavecognitive problems and so forth have been added and have since been made more detailed.

5 The period is extended to patients who have designated diseases. Maintenance rehabilitation is provided by the long-term care insurance.

145Price setting and price regulation in health care

ThesedefinitionsandconditionsofbillinghavemadetheFeeScheduleverycomplex.In1960,themanualhadonlyabout100pages.The2018versionhasmorethan1700pagesinfineprint,withabout4000itemsandconditionsofbillinglisted.Inaddition,thereareseparatemanualsfortheDPC(DiagnosisandProcedureCombination;theJapaneseversionoftheDiagnosis-relatedgroups[DRGs])groupingbook,forpharmaceuticalsanddevices.

Classification of the service items

Physicianandhospitalserviceitemsareclassifiedasbelow.Ineachsection,itemsareidentifiedbyathree-orfour-digitcode.For many items, the patient’s and facility’s conditions for billing are set. Note that Section F, Prescribing and dispensing, and SectionG,Injections,areindependentsectionsdespitethefacttheycomposeonlytwopageseach,reflectingtheirhistoricalimportance. Section C, Home care services, became a separate section in 1988 in recognition of its expanding role.

_ A.Basicoutpatientconsultationandinpatientfees

_ B.Specificoutpatientconsultationandinpatientfees

_ C. Home care services

_ D.Tests(laboratoryandphysiological)

_ E.Imaging

_ F. Prescribing and dispensing

_ G.Injections

_ H. Rehabilitation

_ I. Psychiatric treatment

_ J.Procedures(ofeyes,ears,etc.)

_ K.Surgicaloperations

_ M. Anesthesia

_ L. Radiation therapy

_ M. Pathological diagnosis

_ MedicalproceduresperformedinLTCIhealthfacilitiesforelders

146 Price setting and price regulation in health care

Reflecting advances in technology

NewitemswillbelistedintheFeeScheduleiftheyareclinicallydistinctfromexistingonesandhavesignificantlyhighercosts.Forexample,laparoscopicsurgerywaslistedwhenitcametobewidelyused.Theirfeesareset10%to70%higherthanthatofanopensurgerytocompensateforthecostofthelaparoscopeandtheskillsneededtoperformtheprocedure.Thephysicians’specialistassociationssubmitarequest,whichisreviewedbytheMHLW.Ifjustified,theitemwillbelistedintheFeeScheduleatthetimeofthebiennialrevision.

Forequipment,feesarebasedmoreontheirefficacyandlessoncosts.Whenmagneticresonanceimaging(MRI)wasfirstlistedin1982,itsfeewassetattwicethatofcomputedtomography(CT)scans.Atthattime,thepriceofpurchasingaMRIequipmentwasmorethantentimesthatofpurchasingaCTscanner(Hisashige,1994).However,despitethelowfee,providerspurchasedMRIequipmentbecauseitattractedmorephysicians and patients to the hospital. Meanwhile, the manufacturersgraduallyloweredthepriceofMRIequipment,whichledtomorehospitalspurchasingtheequipment.Thus,marketforceshaveworkedevenwhenfeeswereregulated,andprobablyworkedbetterbecausetheywereregulated.

Notethatthereisnogovernmentorquasi-governmentagencythatisofficiallyresponsibleforsystematicallyconductingtechnology assessments. However, there is an expert committee withintheMHLWthatevaluatesrequestsfornewtechnologytobedeliveredasanextra-billeditem,assessesefficacybasedonthedatacollected,andrecommendslistingintheFeeSchedule.ThedivisioninchargeoftheFeeScheduleservesasthesecretariat.Pharmaceuticalsanddevicesareevaluatedforefficacyandsafety,buttheircostsareindependentlycalculated.Thiswillbedescribedinthenextsection.

147Price setting and price regulation in health care

3 Pharmaceuticals and medical devices

Setting the price of a new pharmaceutical

PharmaceuticalcompaniesmustconductclinicaltrialsaccordingtotheguidelinessetbythePharmaceuticalsandMedicalDevicesAgency(PMDA),anindependentgovernmentagency.ThePMDAevaluatestheproduct’sreliabilitybasedonethicalandscientificstandards,anditsefficacyandsafetybasedoneffectivenessstandards.TheAgencythengivesarecommendationtothePharmaceuticalsAffairsandFoodSafetyCounciloftheMHLWtolisttheproductintheNationalFormulary.Whendoingso,thedosageandtheclinicalconditionsforon-labelusewillbespecifiedindetail.

Afterapproval,thePharmaceuticalPriceOrganizationoftheCentralSocialInsuranceMedicalCouncilevaluatestheproduct’sinnovativeness,efficacyandsafety,basedonwhichitrecommendstheprice.Ifthenewproducthasacomparator,thepricewillbebasedonthecomparator,withmark-upsforinnovativeness,efficacyandsafety.Ifthereisnocomparator,itissetbycalculatingthecostsofresearchanddevelopment(R&D)andproductionbasedonthemethodsetbytheMHLW.Theproduct’ssalesvolumeasestimatedbythemanufacturerwillalsobeakeyfactor.Ifthevolumeispredictedtobesmall,then a high price will be set to allow the company to recover its R&Dcosts.ThelistpricesintheUSA,UK,GermanyandFrancearealsousedtosettheFeeScheduleprice;thepricemustbesetlessthan1.25timesandmorethan0.75timestheaveragepriceofthesecountries.

Thegovernmentofficiallystartedtousepharmaco-economicanalysis from 2019. The analysis is performed by the manufacturer,andtheresultsareevaluatedbytheMHLW.TheresultswillnotbeusedtodecidewhethertheproductshouldbelistedintheFeeSchedulebutareusedtoprovideadditionaldata for setting the price. However, since the price of the new productisdeterminedbymanyfactors,theimpactofthepharmaco-economicanalysisresultsonthepricearenotclear.Parenthetically,theuseofwillingness-to-paystudieshasbeentabledbecauseofthedifficultiesinconductingandinterpretingtheresults(MHLW,2018b).

Revising pharmaceutical prices

Pharmacies,hospitalsandclinicspurchasepharmaceuticalsfromwholesalersatpriceswhichareusuallylowerthanthatsetbytheFeeSchedule.6 They may retain the balance. To contain

6 For this reason, dispensing used to be done by hospitals and clinics. However, the profit margin has decreased, while the fee that physicians can bill if they dispense to a free-standing pharmacy has increased. The ratio of prescriptions dispensed within hospitals and clinics has declined to 30% of the outpatients’ prescriptions (Federation of Social Insurance Associations). However, many of the pharmacies have strong ties with the hospitals and clinics that write the prescriptions. To discourage this trend, dispensing fees are reduced if the proportion of prescriptions from one hospital or clinic is more than 70% of the total number.

148 Price setting and price regulation in health care

costsandtheprofitsprovidersderivefromdispensingpharmaceuticals,theMHLWconductsasurveyofthewholesalers’andproviders’bookstocalculatethevolumeweightedmarketpriceofeverypharmaceuticalproductlistedintheFeeSchedule.Basedonthesedata,theMHLWrevisestheFeeSchedulepricesothatitwillbejust2%higherthanitsvolumeweightedmarketprice.7Thisruleappliesforbothbrandsandgenerics(genericproductsare“brandedgeneric”inwhicheachhasitsspecificFeeScheduleprice).

Inadditiontotheabovemechanism,priceswillbereducedfornewproductsthathavesalesgreaterthanhadbeenpredictedbythemanufacturer.Thegovernmentjustifiesthisreduction onthegroundsthatthemanufacturerwouldbeabletorecoupthe investments made for research and development from increasedsales.Forexample,thepriceofOPDIVOwashalvedin2017followingtheexpansionintheclinicalconditionsof itsuse.

Medical devices

Expendituresfordevicesareaboutonetenththatofpharmaceuticals.Theyhavemanycharacteristicsincommon,suchasbeingproducedbyfor-profitcompanies.However,thepriceofdevicesissetbythefunctionalgroupintowhichthedeviceiscategorized.Anewfunctionalgroupwillbesetonlywhenthenewdevicedifferssignificantlyfromanestablishedgroup.Forexample,coronarystentsarecategorizedonlyintoadrug-eludingfunctionalgroupandanon-drug-eludingfunctionalgroup.Therearenow212functionalgroupsfordevices.Thehospitalswillonlybereimbursedatthefunctionalgroupprice.Thehospitalmighthavetopaymorethanthispriceforastentmadebyamanufacturer,butitisnotallowedto balance bill the patient.

Thepriceofafunctionalgroupisrevisedusingbasicallythesamemethodusedforpharmaceuticals,butwiththevolumeweightedmarketpricesofthedevicebyeachmanufactureraggregatedatthefunctionalgrouplevel.Forexample,ifthemarketpriceofadrug-eludingstentmadebyManufacturerXhavinga20%marketshareinvolumeisfoundtobe10%lowerthanitsFeeSchedulefunctionalgroupprice,thenthepriceofthefunctionalgroupisreducedby2%.

7 The method for revising pharmaceutical Fee Schedule prices has changed. When the survey-based method was first introduced in 1967, it was set at the 90th percentile from the lowest price; it became the 81st percentile in 1983 and, from 1987, was based on the volume-weighted average. The allowable margin (the “reasonable” zone concept) was introduced in 1994 in response to demands from the United States to make the transaction process more transparent as part of the Market Oriented Sector Selective negotiations. The “reasonable” zone was initially set at 15% but has since been gradually decreased to the present 2% from 2000.

149Price setting and price regulation in health care

4 Revising the Fee Schedule

RevisionsoftheFeeSchedulearemadeeverytwoyearsforservicefeesandeveryyearforthepriceofpharmaceuticalsanddevices(CAO,2017).8 The process is composed of the followingthreesteps:first,settingtheglobalrevisionrate;second,revisingpharmaceuticalanddeviceprices,andthird,revising service fees on an item-by-item basis. The global revisionratesetsadefactoglobalbudgetforhealthexpenditureswithinwhichthepricesofpharmaceuticalsanddevicesandthefeesofserviceitemsarerevised.Althoughtherevisionsmaynotbepublicizedinthisorder,andtheglobalratemighthavetobefinelyadjustedtoreflectthetermsnegotiated in the second and third steps, the process is easier tounderstandifexplainedintheorderbelow.

Setting the global revision rate

Thefirststepisdecidingtheglobalrevisionrate,whichsetsadefactoglobalbudgetforallSHIandpublicexpendituresinthenextfiscalyear.Nextyear’sexpendituresaredeterminedbytheequationbelow:

Next year’s expenditures =

This year’s expenditures Ú[1 + (the increase rate from population ageing + the increase rate from “other” factors) ± (global revision rate)]

Theimpactofpopulationagingiscalculatedfromchangesinthepopulationforeachfive-yearagegroup.AsFig.3shows,expendituresvarygreatlybyagegroup.Forexample,thepercapitaexpendituresofthe75-79agegrouparetentimesmorethanthatofthe35-39agegroupsothattheincreaseinthe75-79populationwillhavemuchgreaterimpactonexpendituresthanthedecreaseinthe35-39population.Itisassumedthatpercapitadifferencesinhealthexpendituresacrossagegroupswillremainthesame.

8 Pharmaceutical and device prices will be revised annually from 2018 so that any decreases in market price are reflected more quickly in the Fee Schedule. The first revision in which they are revised independently from service fees will be made in 2019.

150 Price setting and price regulation in health care

Figure 3. Per capita health care expenditures by five-year age group in Japan (2013)

0 20 40 60 80 100 120

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100~

(in 10,000 Yen)

Source:MHLW,2018b.

Increasesnotduetoaging(i.e.,residuals)arereferredtoas“otherfactors.”Thisiscalculatedbysubtractingtheannualrateof increase for aging from the increase rate of health expenditures,andthenaveragingtheratesofthepastthreeyears.Populationagingand“otherfactors”combinedhaveincreasedhealthexpendituresbyabout2to3%everyyear.Thus,iftheglobalrevisionweresetat-4to-6%,thenhealthcareexpenditureswillremainthesamebecausethiswouldcancelouttheincreasesduetopopulationagingand“otherfactors”inthenexttwoyears.ThisiswhytheMinistryofFinance(MOF)wouldliketosettheglobalrevisionrateat-6%.9 As has been noted, the national government’s allocation to healthcareisoneofthelargestitemsinthebudget,composingaboutonetenthofthetotal.Thisproportionhasbeenrelativelystablebecausethenationalgovernment’scontributionstoSHIplansarestatutorydefinedandthenationalbudgethasincreasedataboutthesamepaceasthatofSHIexpenditures.

However,a-6%globalrevisionratewouldbevigorouslyopposedbyproviders.Theywouldprotestthatadecreaseofthismagnitudewouldbankruptthem,thusdenyingaccesstopatients.Toarriveatamiddleground,therevisionprocessbeginswiththetwoministersoftheMOFandMHLW,together

9 The greatest decrease so far was in 2006. The -3.16% revision rate was blamed for the closing of hospitals, resulting in newspaper headlines such as the “collapse of the healthcare system.” Decreases of this magnitude would be politically difficult to make in the future.

151Price setting and price regulation in health care

withtheirtopcivilservants,discussingpossibleoptions.Thefinaldecisionismadebytheprimeministerbasedonhisevaluationofthepoliticalandeconomicsituation.Thisdecisionwillbemadeinmid-Decemberannually,sothatthenationalbudgetcanbesetbeforethecountryshutsdownattheendofthecalendaryear(whichwillallowthenewfiscalyeartostartsmoothlyfromApril).

Inmakingthisdecision,thefollowingtwofactorsplaykeyroles.Oneisthemarketsurveyofpharmaceuticalprices.Ifthesurveyshowsthatthecumulativevolumeweightedmarketpriceofpharmaceuticalsis8%belowtheFeeScheduleprice,thenafterallowingforthe2%margin,cumulativepriceswillbereducedby6%.This6%reductionwillincreasetheglobalbudgetformedicalservicesby1.5%,becausepharmaceuticalscomposeaboutonequarterofmedicalexpenditures.Inaddition,therewillbefurthersavingsbyreducingthepricesofnewproductsthathavesoldmorethantheamountestimatedbythemanufacturer.Thesesavingshavebeenusedtonegateor soften the impact of decreases in the global revision rate. However,inthe2020FeeSchedulerevision,theywouldhavelessimpactbecausepharmaceuticalpriceswouldalreadyhavebeenrevisedin2019toreflecttheresultsofthe2019marketpricesurvey.10

ThesecondfactorisdataonthefinancialconditionsofhealthcarefacilitiesfromtheHealthEconomicSurvey(MHLW,2017b).ThissurveyisconductedintheyearprecedingtheFeeSchedulerevision,andtheresultsshouldshowthatthefacilityexpendituresarebalancedbythefacilityrevenues.11 If the resultsshowthatthedeficithasincreased,itwouldbedifficultfortheMOFtoargueforanegativerevisionrate.Ontheotherhand,ifconditionshaveimproved,itwillbedifficultfortheMHLWtoargueforapositiverevisionrate.However,theresultstendtodifferbythetypeofprovider.Thus,theHealthEconomicSurveytendstohavemoreimpactonhowresourceswillbeallocatedamongthevarioustypesofprovidersintheitem-by-item revisions.

Setting item-by-item revisions

Theglobalhealthcarebudgetisappropriatedtothemedical,dental and dispensing services based on the relative share of each.About80%ofthetotalservicebudgetisappropriatedformedicalservices.Next,withintheglobalbudget,item-by-itemrevisionsaremadebasedontheequationbelow:

Global budget for medical services =

∑ (Fee of each item revised ) Ú (Volume of each item increased or decreased by loosening or tightening the conditions of billing)

10 Service fees will be revised together with pharmaceutical prices in October 2019, because of the introduction of the consumer tax. This tax is not levied on health care services so that fees and prices listed in the fee schedule must be increased to pay for the additional costs incurred by the providers.

11 With the exception of local government hospitals (as noted in reference 4), the proportion of subsidies is small. National hospitals have not received subsidies after they were reorganized into the National Hospital Organization in 2004 (Ikegami, 2014).

152 Price setting and price regulation in health care

Theleftandrightsidesoftheequationmustbeequal.Thatis,thecumulativeeffectofrevisingeachitemfeeanditsconditionsofbillingmustbeequaltotheamountthathasbeensetbytheglobalrateandtheincreaseratefromthe“natural”increaseandthesavingsthathavebeenmadefromreducingpharmaceuticalprices.Theadjustmentsaremadeinahugespreadsheet,inwhichitemfeesareindividuallyrevisedsothatthecumulativeamountwouldbeequaltotheglobalbudget.ThevolumeofeveryitemisavailablefromtheNationalClaimsDatabase(NDB),whichiscompiledfromtheclaimssubmittedbyproviders.Althoughtheeffectoftighteningorlooseningtheconditionsofbillingonthevolumecannotbepredictedexactly,ifthevolumeweretoincreasesharply,thentheconditionsofbillingcouldbetightenedinthenextFeeSchedulerevisionorrevisedbyadhocdirectoratesfromtheMHLW if more immediate actions are needed.

Notethatevensmallchangeswouldhaveabigimpactoncostsifthevolumeislarge(suchasrepeatconsultations),whilebigchangeswouldhavelittleimpactifthevolumeissmall(suchascomplicatedsurgicalprocedures).Revisionscouldbetargetedonspecificitems.Forexample,MRIfeeshavegenerallybeendecreasedbecausetheirvolumehasincreasedrapidly,andbecausethepriceofpurchasingaMRIequipmenthadbeendrivendownasmanufacturerscompetedtoselltheirproducts.TheMHLWreportedthatincreasesinexpenditureswerebluntedwhenfeeswerereducedby30%in2006(MHLW,2018c).Reductionsofthismagnitudehadtobemadetocontainexpenditurestotheamountsetbytheglobalrevisionrateof-3.16%.Sincethen,feeshavebeenincreasedforMRIequipmentthathavehigherdensityintheirimaging.TheseincreaseshavebeenoffsetbyreducingthefeesofMRIequipmentthathavelowdensity.

In general, fees have been revised to achieve the following policyobjectives:

1. Tocontainexpenditureincreasesbyloweringthefeesofitemsthathavehadrapidincreasesinvolumeand/orcanbedelivered at lower costs by providers.

2. Tomaintainappropriateprofitlevelsacrossallhospitaltypessothattheycancontinuetodeliverservicesandmakeinvestmentsforfutureneeds.

3. To provide incentives to physicians to deliver services in line withpolicygoalssuchasprovidingend-of-lifecareatthepatient’s home.

If providers do not deliver services in line with policy goals, thentheconditionsofbillingcouldberewritteninthenextrevision.Thus,item-by-itemrevisionscouldberegardedasapay-for-performance(P4P)paymentimplementedatthenational level.

153Price setting and price regulation in health care

Lobbying by provider organizations

TheabovedoesbynomeanssuggestthatprovidershavebeenpassiveintheFeeSchedulerevisions.Onthecontrary,theyhavevigorouslylobbiedforanincreaseintheglobalrevisionrate. However, once the global revision rate is set, then the item-by-item revisions divide providers into those who gain and those who lose, which can facilitate negotiations for the government. Moreover, the JMA, which is the best organization amongproviders,hasfocusedonincreasingpaymentforprimarycareservices,becausetheirmostpowerfulconstituentsare private practitioners. For example, the JMA lobbied for a new fee that physicians can bill for giving directions on improving lifestyle to patients with diabetes, hypertension or hyperlipidemia.Thisfeewasintroducedinthe2002FeeSchedulerevision.Billingofthisitemhasbeenrestrictedtoclinics and hospitals having less than 200 beds.

TheAssociationofSurgicalSpecialtiesforSocialInsurancesucceededinincreasingsurgicaloperationfeesby30%inthe2010FeeSchedulerevision.Thisrevisionwasbasedontheresultsoftheir2007report(Gaihoren,2007).TheAssociationhadconducteditsfirstcoststudyin1982.However,theincreaseowesmuchmoretothechangeintherulingpartywhichbroughtinasurgeonastheviceminister.TheAssociation’ssuccesspromptedtheAssociationofInternalMedicineSpecialtiesforSocialInsurancetoconductsimilarstudies,butthesehavenothadasimilarimpact.

The JNA has been lobbying for increases in basic hospitalization fees. As noted, to bill for higher basic hospitalizationrates,thehospitalmustnotonlyhavetomeetnursestaffinglevels,butalsothepercentageofregisterednursesmustbe70%ormore,andthenightdutyhoursbelessthan72hourspermonth.Whenahigherlevelwasintroducedinthe2006FeeSchedulerevision,hospitalsrushedtomeettherequiredlevelbecausetheincreaseintheirrevenuewouldmorethanoffsetthecostofhiringmoreregisterednurses.However,inthe2018revision,theJNAsufferedaset-backwhen the higher fees were made more dependent on the patient’sacuitylevel.

Astheaboveexamplesillustrate,revisionsoftheFeeScheduletend to be determined by politics. Perhaps for this reason, hospitalshavenotconductedcoststudiesthatdrillcostsdowntothelevelofeachitem.Instead,theyhavefocusedontherevenueandexpenditureofclinicaldepartmentstodecidewhichdepartmentsshouldbeexpandedorreduced.Studieshave shown that the clinical departments that are more weightedtoinpatientcare,suchassurgery,orthopedicsandsoforthtendtohavebiggerprofitmarginsthanthoseweightedtooutpatientcaresuchasdermatology(IHEP,2008).ThisisbecausetheFeeScheduleisstructuredtodiscouragehospitals,especially big hospitals, from delivering primary care services.

Notethatthelobbyingcontinuestothelastminutesothattheprecisedetailsoftheconditionsofbillingmaynotbefinalized

154 Price setting and price regulation in health care

untilthemiddleofMarchannually,justbeforetherevisionisimplementedinApril1,whenthenewfiscalyearbegins.Thismeansthatsoftwarevendorsofclaimsdatamustworkdayandnight to reprogram their claims software. Hospital directors mustestimatetheirrevenueintherevisedFeeSchedule,whichmay change the method of billing or how services are delivered.

Monitoring compliance to regulations

CompliancewiththeFeeScheduleregulationsisfirstcheckedbythequasi-governmentorganizationsestablishedinJapan’s47prefectures.Themainroleoftheseorganizationsistosortclaims and bill the SHI plans for the services that have been delivered to their enrollees. However, they have a panel of renownedphysiciansinthecommunitywhoreviewtheclaimsand deny payment for items that are not appropriate. These physiciansperformtheirtaskaboutfiveafternoonspermonthforwhichtheyarepaidaboutUS$1500.“Appropriateness”isevaluatedbycross-checkingtheservicesandpharmaceuticalsbilled with the patient’s diagnosis written in the claims form. If evaluatedasbeinginappropriate,paymentwillbedeniedforthatitem.Theamountdeniedcomposesonly0.3%ofthetotalbilled,butithashadasignaleffectofalertingprovidersonwhatispermitted.Bothpayers(SHIplans)andproviderscancontest the decision. The panel will vote in favor of the contestedcasesinaboutone-thirdofthecases.

Thesecondlinecheckisbyon-site“guidance”,whichisconductedbytheregionalofficeoftheMHLW.“Guidance”isgiventothefacilityeverythreetoeightyears:facilitiesthathadmoreproblemscitedpreviouslywillbevisitedmorefrequently.The team, headed by a physician, comes with 20 to 30 claims formsthathadbeenfiledbythefacilityaboutsixmonthsbefore the visit. They will examine the medical records and closelyquestionthephysiciansandotherstaffabouttheitemsbilled.Shouldthedocumentationandresponsesbejudgedasbeinginadequate,thenthatitemwillbedeemedashavingbeeninappropriatelybilled.Thefacilitywillthenbeaskedtoretrospectivelygothroughtheclaimsfiledinthepastsixmonthsandreturntheamountthathadbeeninappropriatelybilled.Iftheamountreturnedisjudgedtobetoolittle,thentheauditteamwillreturnandgothroughtherecordsthemselves.

Thethirdlinecheckisby“audit”.Shouldthe“guidance”revealthatthehealthcarefacilityhadintentionallyand/orsystematicallysubmittedinappropriateclaims,the“guidance”becomesanaudit.Theauditmayleadtoatemporaryorpermanent cancelling of the health facility’s contract with SHI, whichwouldeffectivelymeanshuttingdownthefacility.From2005 to 2015, only 11 to 54 facilities each year have had their contractscancelled,butthethreathasservedasaneffectivedeterrent(KenkouHokenKumiaiRengoukai,2017).

155Price setting and price regulation in health care

5 Focused analysis

Primary care and specialist services

PrimarycareandspecialistservicesarenotdifferentiatedinJapan. Most physicians have been trained as specialists. However,whentheygointoprivatepractice,mostfocusonprimarycarebecausetheywillnotbeabletousehospitalfacilitiestoperformsurgicaloperationsandothercomplicatedprocedures.Incontrast,hospitalphysicianscanfocusmoreontheirspecialties.However,manyoftheirpatientscomewithoutreferral,andthephysicianstendtocontinuetreatingtheirpatientsintheoutpatientdepartmentaftertheyhavebeendischarged.

Thegovernmenthaslongtriedtofunctionallydifferentiatehospitals from clinics by the payment system. Fees have been setforphysicianstowritereferrals(referredtoas“informationprovisionfees”)fromclinicstohospitalsandfromhospitalstoclinics.However,thefunctionsofhospitals,especiallysmallones,overlapwithclinics.Totakeintoaccountsubtledifferencesreflectingthehospital’ssize,someoutpatientservicefeesdifferbythenumberofbeds:99bedsorless,100to 199, 200 to 399, and 400 and above. Incentives have also beenintroducedonthepatients’side:ifpatientsvisithospitalsthathave400ormorebedswithoutareferral,theymustpayanadditionalamount.

Acute inpatient care

ADRGtypeofpayment,theDPC-PDPS(DiagnosisProcedureCombination–PerDiemPaymentSystem)forthemain80universityhospitalsand2nationalcentres,wasintroducedin2003.12However,surgicalprocedures,endoscopicexaminations, rehabilitation therapy, devices, and pharmaceuticalsgivenonthedayofsurgeryarepaidasfee-for-service.Theinclusivepartofthepaymenthasthefollowingcharacteristics.

Payment is on a per-diem basis and not on a per case basis. The perdiemratediffersaccordingtothefourhospitalizationperiodswhicharespecificallysetforeachDPCgroup.TheperiodsarerevisedtoreflectthelengthsofstayasreportedforeachDPCgroup(Fig.4).

12 Because service fees and pharmaceuticals are combined in DPC, the global revision rate is used for revising the DPC base rate.

156 Price setting and price regulation in health care

Figure 4 Diagnosis procedure combination per diem rate for four periods of hospitalization in Japan

Per diem rate

A

B

15%}

}

A=B

Hospitalization period I Hospitalization period II Hospitalization period III Hospitalization period IV

15% or the average input amount of medical resources per day for hospitalization period III, whichever is lower

25 p

erce

ntile

50 p

erce

ntile

Average length of stay (ALOS)

ALOS + two or more standard deviations from average rounded to 30 day periods

Fee-for-service

Note:DPC:DiagnosisProceduralCombination. ALOS:AverageLengthofStay. Source:author.

TheamountpaidbytheDPCisweightedbyHospitalSpecificCoefficients.Forexample,the“efficiencycoefficient”rewardshospitalsthathaveshorterlengthsofstayafteradjustingforthehospital’scase-mix,andthe“complexitycoefficient”rewardshospitalsthathavemorecomplexpatients(highervolumeweightedcase-mixindex).13

DPCfeesweresettobebudgetneutral.Ifthehospitalhadcontinuedtodeliverthesameservicesasithadunderfee-for-service and the patient’s length of stay had remained the same, thenthehospitalwouldreceivethesameamountofpayment.14 However,afteradoptingDPC,hospitalstransferredservicessuchasMRItotheoutpatientdepartment,wheretheycouldbebilledas fee-for-service, and discharged patients earlier so that they wouldreceivehigherper-diempayment.Thiswouldincreasehospitalrevenue,whichwaswhythenumberofhospitalspaidbyDPC-PDPShasincreasedfrom82to1,730,composing54%ofallhospitalgeneralbedsin2017(MHLW,2018c).

However,becausepatientshavecometobedischargedearlier,bedoccupancyratesdecreased,whichmayhaveledtoanetdecreaseinhospitalrevenue.Ontheotherhand,qualitymayhaveimproved,becauseserviceshavebecomemore

13 Higher fees for hospitals with higher nurse staffing ratios are determined by another set of hospital functional coefficients.

14 When DPC was first introduced, there was a hospital-specific conversion coefficient that compensated for the difference between the fee-for-service payment and the DPC payment. This coefficient was gradually decreased from the 2012 Fee Schedule revision and dropped in the 2018 revision.

157Price setting and price regulation in health care

standardized when payment was standardized. Clinical pathways have come to be extensively adopted. Physicians no longerorderthedripinfusionofantibioticseverydaywhilethepatient is hospitalized. DPC has also led to the development of an extensive database of the hospital’s case-mix, which can be usedforregionalhealthplanningandhospitalmarketingpurposes.

Chronic inpatient care

Hospitals began to provide chronic inpatient care when medicalcareforpersons70yearsandolderwasmadefree(nocopayment)in1973.Atthattime,therewasnootherformofpayment aside from fee-for-service, which led to over-medication and the excessive ordering of diagnostic tests in chroniccareunits.Therewerealsonotenoughnursesbecausepatients in chronic care hospitals faced long stays, that did not meettheconditionsofbillingthatwouldallowchroniccarehospitals to bill higher basic hospitalization fees. Care was delivered by private attendants who were hired by the patients toprovidecare24/7.Thepresenceoftheseattendantsexacerbatedcrowdingintheunits:atthattime,thefloorspaceper patient was only 4.3 m2(thisstandardwassetbythegovernmentin1948,reflectingthehousingconditionsat thattime).

In response, a new type of facility, the health facilities for elders(HFE),wasestablishedin1986.Paymentwasaflatinclusiveperdiemamount.TheHFEhadtomeetstaffinglevels,tohaveafloorspaceofmorethan8m2 per bed and were forbidden to hire private attendants. Hospitals providing chroniccarewereencouragedtoconverttoHFE.However,becauseitwasdifficulttomeettheminimumfloorspacestandards,veryfewhospitalsactuallydidso.Forthisreason,thegovernmentintroducedanewformofpaymentforLTChospitalsin1990,similartotheHFE,butwithnofloorspacerequirements.Inthe1992revision,abonuspaymentwasaddedifthehospitalunitmettheconditionof“convalescentbeds:”afloorspaceofmorethan6.4m2 per bed, a dining room, andsoforth.BecausethesestandardswereeasiertocomplythanthestandardsforHFE,nearlyallchroniccarehospitalsandunitsconvertedtoconvalescentbedssothatby2003,itbecame the de facto standard.

However,theflatperdiempaymentledtotheperverseincentive of not admitting patients with high medical needs. To rectifythissituation,case-mix-basedpaymentwasintroducedin2006thatwasbasedonthepatient’smedicalacuityandtheactivitiesindailyliving(ADL)level(Ikegami,2009).Thefeesforpatientswiththelowestmedicalacuitylevelweresetbelowcosts.TheMHLWthoughtthathospitalswoulddischargethesepatientsandclosesomeoftheirchroniccareunits.However,asurveymadeoneyearaftertheintroductionrevealedthathospitalshadnotdoneso.Theyappeartohavereclassifiedpatientstohighermedicalacuitylevels.Problemsinthequalityofcareanddatawerealsorevealed:inonehospital,over80%

158 Price setting and price regulation in health care

ofpatientshadbeencheckedforurinaryinfection,whichgroupedthepatientsintoahighmedicalacuitylevel.Someoftheseissuesmayhavebeenrectifiedbyon-site“guidance”,butqualityhasnotbeensystematicallypursuedbytheMHLW.

Post-acute care and sub-acute care

Post-acuterehabilitationunitswereintroducedinthe2000FeeSchedulerevision.Thepolicyobjectivelayinshorteningthelengthofstayinacuteunitsbytransferringthepatientsneedingrehabilitationtherapytopost-acuterehabilitationunits,andindecreasingtheneedforchroniccarebedsbyimprovingtheirfunctionalstatus.Exceptforrehabilitationtherapy,paymentisbundled.Theconditionsofbillingincludethenumberoftherapistsperbed,thepercentageofpatientsintheunitwhohavehadastrokeorinjurywithintheprescribednumberofdays,andforthepatienttobeadmittedwithin150daysofstrokeor60daysofaccident.P4Pwasintroducedin2012.Inthe2016FeeSchedulerevision,theperformanceindicatorwasrevised.Theunit’sdailyaverageimprovementrateasmeasuredbythepatients’FIM(FunctionalIndependenceMeasure)scorebecametheindicator.

Sub-acuteunitswereintroducedinthe2004FeeSchedulerevision.Thepolicygoallayincreatingaunittowhichpatientsintheacuteunitcouldbetransferredandtowhichpatientsinthecommunitynotrequiringthelevelofcaredeliveredintheacuteunitcouldbeadmitted.However,thelatterfunctionhasnotdeveloped,becausethebundledpaymentwouldputthehospitalatriskofadmittingpatientswhoneedmoreresourcesthanwouldbepaidbytheFeeSchedule.Sub-acuteunitswererenamed“comprehensivecommunitycarebeds”in2016,butwithbasicallythesamefunctions.Inthe2018FeeSchedulerevision, to incentivize hospitals to admit patients directly from thecommunity,higherfeeswereintroducedif10%ormoreofpatientsintheseunitshadbeenadmittedfromthecommunityandhadnotbeentransferredfromacuteunits.15

Long-term care insurance services

LTCinsurance(LTCI)wasimplementedin2000tomeettheneedsoftheageingsociety(Ikegami,2007).Itiscompulsorythatallpeople40yearsandoverareenrolled.LTCIunifiedLTCservicesthathadbeenprovidedbySHI,suchasHFE,somehospitalchroniccareunits,andvisitingnurseservices,suchasthoseprovidedbysocialservices,suchasnursinghomes,daycareandhome-helpers.Benefitsarerestrictedtoservices(nocashbenefits).Themaximumcashequivalentamountofservicesthatbeneficiariesareentitledtoisdeterminedbytheseveneligibilitylevels.ThelevelsarebasedonfunctionalcapacityandrangefromaboutUS$500toUS$3500permonth.Beneficiariesmustpayacoinsurance,rangingfrom10%to30%basedonthehouseholdincomelevel.

15 Only hospitals that have less than 200 beds may bill these higher fees. Small hospitals had insisted sub-acute and post-acute care should be reserved for them and not for units in big hospitals.

159Price setting and price regulation in health care

TheLTCIFeeSchedulehasbasicallythesamestructureasthatofthehealthinsurance.Thefeesandconditionsofbillinghavebeenrevisedtopursuepolicygoalsandtorespondtodemandsfromproviders.Forexample,abonuspaymentforthehomecareagencytoemploymoreexperiencedcareworkerswasintroducedin2009.ThepolicyobjectivelayinretainingtheseworkersintotheLTCworkforceandimprovingthequalityofcare.ToincentivizenursinghomesandHFEtodeliverend-of-life care within the facility and not transfer residents to hospitals,bonuspaymentswereintroducedin2006.ThesebonusesandtheconditionsofbillinghavemadetheLTCIFeeScheduleascomplexasthatofhealthinsurance.Whenfirstpublishedin2000,theschedulehadonly100pages,butthe2018 edition has 1000 pages.

However,theLTCIFeeSchedulediffersfromthehealthinsuranceFeeScheduleinthreeaspects.First,therulesrestricting extra billing and balance billing are more relaxed becauseequityislessofanissueinLTC.Second,itisrevisedeverythreeyears,nottwo.Third,theconversionratesdifferaccordingtotheeightlevelsinwhicheachmunicipalityisgrouped:therateformetropolitanTokyoishighestat11.4%abovethebaserate.Unlikehealthcare,thehigherwagesofnursesandaidesinurbansettingscannotbecompensatedbythe lower wages of physicians.

AsLTCIserviceshavedeveloped,theboundarybetweeninstitutionalcareandcommunitycarehasbecomeblurred.Forexample,specialhousingforeldersthathasadaycarefacilityandacommunitycareagencyinthesamebuildingaredefactoinstitutions.However,thefollowingdifferencesremain.First,in“housing”,rentandfoodmustbepaidbytheresident,butinan“institution”,itwouldbemostlycoveredbyLTCIiftheresidentisoflowincomeand/orhasfewassets.Second,inan“institution”,thefacilityisresponsibleforprovidingcare24/7,but,in“housing”,theresidentorthefamilyisresponsible.Thus,forthosewithbehaviouralproblemsrequiringsupervision,an“institution”maybetheonlyoption.Forthesereasons,therearelongwaitingliststobeadmittedtonursinghomesthatdonot balance-bill.

160 Price setting and price regulation in health care

6 Possible lessons for other countries

Asnotedintheintroduction,Japan’shealthcaresystemappearstobefunctioningrelativelyefficiently,giventhefactthattheolderpersonsasashareofthetotalpopulationisthehighest in the world, and the LTC system is well developed. Theseresultsmayseemtobeevenmoreremarkablebecausethey have been achieved within a basically fee-for-service form ofpayment.ThekeyliesinthegovernmentcontrollingpaymenttoallprovidersthroughtheFeeSchedule.Thefollowingaspectsshouldbenoted.

First,allservicesandpharmaceuticalsthathavebeenevaluatedasbeingeffectivearecoveredandlistedintheFeeSchedule.Direct payment by patients in the form of extra billing and balancebillingisstrictlyregulated.Withouttheseregulations,patients,asconsumers,wouldassumethattheywillgetbetterservices if they paid more. However, patients are not in a positiontobargainwithphysiciansonthepriceandqualityofservices.16Therefore,itcouldbesaidthatpolicy-makershavebeensuccessfulinmanagingtheexpectationsofboththephysician and the patient so that both parties are basically satisfiedwiththelevelofservicesthatiscoveredbythepubliclyfinancedsystem.17

Second,feeshavenotbeenfocusedonthe“costs”incurredbyproviders,butontheproviders’revenueandexpenditures.IfprovidersrespondtotheincentivessetbytheFeeScheduleandmanagethemselvesefficiently,physiciansshouldbeableearncomfortableincomesandhospitalscouldderiveenoughprofitsthatwouldmakeitpossibletoinvestinfutureneeds.Revisions of the fees and the conditions of billing have been negotiated with the associations of physicians and hospitals basedonthisimplicitunderstanding.Thenegotiationsarestructured,routinized,andindepth.Anyunresolvedissuescouldbepostponedtothenextrevisionafterseeinghowproviders react.

While there is no perfect payment method, fee-for-service shouldnotbedismissedasbeingintrinsicallyinflationaryandreflectingonlytheproviders’interests.Althoughfee-for-servicewouldbedifficulttointroduceincountriesthataredominatedbybigpublichospitals,itshouldbenotedthataDRGtypeofinclusivepaymentwouldalsobedifficult.Codingpatientsintoclinicallyandeconomicallyhomogenousgroupsrequiresthestandardizationofdiagnosis,procedures,andrecordings.Theremustbeanappropriatemonitoringsystemtominimizeup-coding.Therearealsocaveatsinintroducingcapitation,

16 The situation would be the same for the payment made in free-standing pharmacies. In low- and middle-income countries where hospitals are financed by line-item budgets, physicians may instruct their patients to purchase pharmaceuticals from outside pharmacies because the hospital’s supply is insufficient. This could develop into kickbacks from the pharmacies to the physicians. The same practice could expand to laboratory tests performed in free-standing facilities.

17 One area where balance billing could be allowed in the future is for services provided by renowned physicians, because their main value lies in their scarcity as positional goods. Differences in outcome would be very difficult to validate.

161Price setting and price regulation in health care

becausewithoutmeasuringandrewardingperformance,itwouldbeanotherformofpayingfixedwages.

Thus,paymentreformshouldstartbydevelopingaclassificationsystemoftheservicesthatarecurrentlybeingdelivered.Professionalassociationsmustbeorganizedandco-optedintothisprocess.Thisclassificationsystemwouldbethe basis for establishing a payment system regardless of the method chosen, for negotiating with providers, and for conductingsurveys.Itwouldalsofacilitatetheintegrationofthepaymentsystemsthatarebeingcurrentlyusedinthepublicandprivatesectorsinthefuture.

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