Japans Healthcare Systems Cost Crisis
Japan is a major presence in most larger pharmaceutical companies' contributions to their bottom lines. But as the world changes, and the healthcare environment becomes more difficult across the globe, Japan is changing, too.
By on Dec 16, 2008Japan is a major presence in most larger pharmaceutical companies' contributions to their bottom lines. But as the world changes, and the healthcare environment becomes more difficult across the globe, Japan is changing, too.
What worked in the past when it comes to healthcare doesnt automatically work anymore. Japans unique system is being stressed and strained by these changes, and the country is at a crossroads.
In this article, we take a look at Japans healthcare system, how its facing pressure from multiple sources, and the emerging crisis of cost. We also examine some tough choices Japans healthcare policy makers face in the coming years to provide a better future for its citizens.
The NHI Under Pressure
Japans healthcare system is one that seems to favor patients, and seems to be one of the healthiest in the world. But a closer look at some of the quirky processes and hard facts show a different story.
Japanese citizens enjoy universal coverage on a relatively generous scale, provided by the National Health Insurance (NHI) plan. Patients pay a mix of co-payments, premiums, and consumption taxes in their healthcare bills. By international standards, two of the three components are fairly low.
Today, according to McKinsey, typical premiums are around 8 percent, while consumption tax stands firm at 5 percent since 1997. On the other hand, copayments are among the highest in the world. For citizens betweens the ages of 3 and 69, copayments are 30 percent. For people aged 70 or older, copayments are 10 percent.
Another interesting and revealing aspect of the system concerns reimbursement. The NHI focuses on constraining treatment costs rather than limiting the scope of care. Unlike its colleagues in the Organisation of Economic Co-operation and Development (OECD), countries that limit healthcare costs by disallowing certain elective items or other system-wide mandates, Japan instead caps increases in medical treatment fees and drug prices. Reimbursements are refigured every two years to fit the budget. But the caps are still far lower than other OECD countries.
In addition, NHI does not have a regulatory body in place to determine patient need for specific treatments, and rules state that all patients must be accepted for whatever treatment they seek, wherever they seek it. And for those patients who are willing to pay more for premium care? Few options exist.
On the institution side, no system of checks and balances exists to ensure treatments offered are reasonable and cost effective. In addition, institutions can be opened anywhere, with few strictures on geography, ratio of public and private facilities, or medical resource allocation. This has resulted in a larger proportion of privately owned medical practices and hospitals than in the United States.
Japans system, full of complexities and curiosities, is primed for pressure in todays environment.
o An aging population. Just as with other countries around the globe, the Japanese population is aging quickly, growing in leaps and bounds over the next decade and driving up costs by trillions of yen.
o Changing lifestyles. Japanese habits and diet are becoming more westernized. While the culture has long been hailed as a paragon of health, less physical activity and unhealthy diets are gradually becoming the norm, causing grave repercussions for citizen health.
o Growing wealth. The Japanese economy is booming and Japanese citizens have increasing economic resources. With greater wealth, people invariably seek more healthcare services for an array of conditions. This will drive up both government and public spending on medical care.
o New treatments. Advanced medical technology, especially those based on targeted gene therapy, presents highly expensive options that work to make the entire system more expensive. Additionally, new treatment patterns caused by fluctuating disease rates will add to healthcare costs and government spending.
Future Funding and Reform
With a unique healthcare system that mixes centrality and a hands-off approach, combined with the tightening pressure of surging healthcare costs, trouble seems imminent. McKinsey research indicates total health care expenses paid by the NHI will rise from 33.1 trillion yen and 6.6 percent of the GDP in 2005 to as much as 62.3 trillion by 2020, and 93.6 trillion in 2035. With this estimate, expenses as a percent of GDP will reach 13.5 percent by 2035, doubling within 30 years from today.
The trouble comes when comparing these expenses with the revenues generated by the Japanese system, revenues derived from copayments, employment-based insurance premiums, consumption taxes, and income and real estate taxes. By 2020, revenue will reach 43.1 trillion yen, leaving a funding gap of 19.2 trillion. By 2035, the situation will be much worse, with generated revenue reaching 49.4 trillion yen and the funding gap widening to 44.2 trillion.
What will Japan do? The burden could be shifted to citizens. Today Japanese households spend 6.6 percent of total income on medical care. That includes copayments, premiums and consumption taxes. To address the funding gap, that percentage could rise to 22.5 by 2035. Combined with other payments for social security and taxes, the level of citizen contribution to the government would exceed that of workers the world over. Besides causing stress and strain for individuals, this could hurt Japans economic prospects and performance over time.
Many analysts agree that Japan will need to raise revenue through some increased premiums, copays, taxes, income taxes, or a combination of these. This will invariably cause some pushback from organizations and individuals, and be successful only in certain political climates. But other approaches may also be necessary that focus on altering some of the aspects of the NHI system:
o Stricter reimbursement limits. NHI funds pretty much everything that patients could want, with no regulations on whether that treatment is necessary, effective, or cost efficient. Other countries could provide an example of better options, like those that prohibit physicians and institutions from providing medical services deemed unnecessary, or those that highly encourage cost-effective alternatives through different reimbursement structures.
o Allow voluntary payments. Why prohibit those consumers with the resources to pay for additional, higher-cost healthcare the ability to do so? Other countries allow individuals to contribute through organized policies or discretionary payments, and benefit through reduced expenditures. A system that allows people to pay more for elective procedures frees up standardized care for public patients, and can actually enhance the quality of care provided through the universal system.
o Reduce institutions. Since Japan allows public and private centers to open up on their own accord, the system is glutted with institutions. This increases NHI spending, but also spreads care across a wider spectrum, resulting in less expertise and increased room for error. Other countries have consolidated facilities and instituted limits on additional ones, and have seen both reduced costs and improved outcomes as a result.
With some combination of reforms like these, Japans policymakers could help fix the leaks and provide an even better system of care for its citizens.
What does this mean for pharma?
Well, the picture for pharma in Japan (the second largest contributor to international pharma bottom line) is getting tougher:
Low growth rate due to MHLW bi-annual price cuts;
Threat of this price cut being stepped up to annually with proposed changes to the Pharmaceutical Affairs Law (PAL);
Long drug approval times, although changes in the approval system should speed this up;
Healthcare reform proposals, including increasing co-payment levels;
Japanese government encouraging increased generic substitution by introducing scheme in which physicians are permitted to stamp substitution allowed on the prescriptions they write;
Japanese government also promoting use of generics in hospitals throughout Japan;
MHLW study into safety and efficacy of generics to prove they are as good as branded;
Non-availability of many leading products.
But what should pharma do?
The revenues generated by a drug are based on the simple formula below:
Number of units sold x Drug price = Total Revenues
It is only through manipulation of both aspects of the formula that drug companies are able to make more revenue. Therefore, to increase revenues, a drug company either has to increase its sales or increase its prices. Price increases are not possible as these are government determined. An increase in sales is through sales and marketing; however, this may not be hugely possible due to stable disease rates, fixed competition, etc. Alternatively, there are some things that can be done to grow profit:
Enhance R&D productivity
Get maximum effectiveness out of all sales and marketing spend to increase profit
Steal market share from your competitors by clever marketing
How can these be done? The first is not a discussion for marketers whom this article is directed) but the second two are. Both of these areas can be addressed by using analytics to grow sales and market share and profit. Information on how many companies in this sector have done this can be found at
http://www.eularis.com/results/case-studies.asp (in English)
http://www.eularis.com/japanese/results/case-studies.asp (in Japanese)
Conclusion
Japan faces a crisis of cost today and in the coming future, as spending rises, demand increases, and government revenues stay stagnant. The situation is grim, but by looking to other countries and their models of public healthcare, Japan has options for NHI reform that could ease the pain.
Author:
Dr. Andree K Bates
Eularis
www.eularis.com
For further information on this topic and for what Japanese marketers can do, please contact the author, Dr. Andree K Bates, at Eularis.com