Health Economics and Health Policy - Lessons from Japan –

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Health Economics and Health Policy- Lessons from Japan –

Naoki Ikegami, MD, MA, PhDDept. of Health Policy & Management

Keio University School of [email protected]

*Please do not distribute without authorization

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Outline of Lecture

1. General principles in health policy 2. Financing system of Japan 3. Payment system of Japan 4. Physicians and hospitals in Japan 5. Group Work: Healthcare reform in China 6. Long-term care

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1. General principles in health policy:Why governments must take a proactive role

• Better health status leads to a more productive society– Healthier workers are more productive workers

• Health security leads to a more stable society– Patients and families unable to access the health services

they need become desperate and angry– Patients and families who are impoverished as a result of

paying medical bills become desperate and angry• Policy-makers must understand the nature of demand

and supply in health care– Policy-makers and politicians tend to make decisions based

on their own personal experience and convictions– How to enhance the capacity of policy-makers?

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Nature of demand in health care

• Demand for health care– Unpredictable: When will illness occur? How much it would cost?– Concentrated: 80% of total expenditures is used by only 20% of

the patients who have high costs (80:20 rule)– Inelastic: demand is generally not affected by price

• In a life or death situation (own or of family) → prepared to give up everything, sell all assets, incur heavy loans

• Left to consumer choice and the market, healthcare will become the leading cause of impoverishment and social instability→ Healthcare must be provided equitably→ Government must transfer wealth from the rich to the poor

• Taxes or social health insurance premiums (SHI)?– Both are difficult to levy in low and middle-income countries

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Percentage of total healthcare expenditures billed in descending order of the claim amount

Japan Social Health Insurance, 1993

Top <1% of claims

（ 22%）（ 26%）

（ 38%）

（ 14%）

1 ～ 10 ％ of claims

10 ～ 25% of claims

Bottom >75% of claims

National Claims Survey, 1993, Japan, Ministry of Health & Welfare

＊ Claims are billed every calendar month

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High out-of-pocket (OOP) payment related to greater risks of deprivation

Fig 3. Catastrophic headcount against OOP financing share (OOP>25% of non-food expenditures)Source: Van Doorslaer, et al, 2007, Health Economics 16(11), P1175

OOP financing as % of total health expenditure

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Strengths and weaknesses of taxes• Strengths of tax-based system:

– Progressive contribution: Rich pay more• Weaknesses of tax-based system

– Unstable: tax revenue depends on the state of the economy, demands from other sectors (defense, public works etc)

– Linked with government ownership of hospitals• More resources allocated to urban medical centers to which the rich have

better access (regressive reallocation)• Difficult to change the budgeted amount of each hospital: Last year’s

budget determines this year’s budget• Public sector tends to be inefficiently managed• Low wages of public-sector employees leads to corruption

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Principles of social health insurance (SHI)

• Solidarity, sense of togetherness (all in the same boat), among those enrolled– Employment-based, or community-based for self-employed

• Premiums based on ability to pay, not on the individual’s risk of becoming ill– Fixed percentage of income: If 5%, then those earning $10,000 contribute

$500; those earning $100,000 contribute $5,000– Benefits the same, regardless of the premium amount

• Compulsory enrollment– The healthy cannot opt out: if they can, only the sick will enroll

• In comparison: Private health insurance (PHI)– Premiums are based on the individual’s previous healthcare costs: the sick

pay high premiums or would not be able to enroll– The healthy pay comparatively low premiums and enjoy generous benefits– Once PHI has a significant share, difficult to expand SHI– Reason why the United States has not achieved universal coverage

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Strengths and weaknesses of SHI

• Strengths of SHI– Premium levels reflect benefit service levels– Possible to gradually expand the population covered– Provision of services is usually contracted out, and not directly

provided by the SHI organization• Weaknesses of SHI

– Solidarity only within each SHI plan → Need to subsidize (by government taxes) and/or cross-subsidize (=among SHI plans) in order to achieve equity

– Benefits restricted to providers contracted by SHI• Reciprocal arrangements must be made among SHI plans so that their

enrollees have access to services in other regions (portability of benefits)

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Nature of supply in health care• Physician’s definition of “medical need” is relative

– In comparison to the resources available– Differs according to each physician– Gray area of what constitutes “need” in health care

• Depends on how physicians and hospitals are paid– Fee-for-service: Expansion in the number of patients having

“need”• Tests given just to make sure: CAT scan for headaches• Medication given just in case of complications: Antibiotics for common colds• Surgical operation to reduce minor discomfort: lower back pain

– Inclusive payment: Retraction in the number of patients having “need”

• No CAT scan taken despite headache and sudden vomiting (high risk of tumor)

• No antibiotics given for a cold despite diagnosis of bronchiectasis• No surgical operation despite major discomfort: lower back pain

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What is appropriate treatment?

Always inappropriate

Sometimes appropriate

Always appropriate

“Appropriate" depends on:

1) Each physician’s experience: training encounters with patients etc.

2) Where the physician practices

3) How the physician is paid: fee for service or inclusive

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Regional differences in proportion of the population who have had an organ resected in Ontario, Canada

Reference ： Vayda, E., et al, Canadian Med Assoc J, 1984

Uterus

Tonsil

Gall bladder

Prostate

Appendix

Breast

Colon0 200 400 600 800 per 100,000

Maximum

Mean

Minimum

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Why governments must control supply• Nature of demand: Inelastic (price is not the issue)• Nature of healthcare: Egalitarian standards• Nature of supply: Flexible• Governments must make tough decisions to provide appropriate

health care at affordable costs– Flow: Controlling payment to physicians and hospitals→ Fee schedule– Stock: Regulating the number of physicians, hospitals→ Planning

• Why are decisions so tough?– Costs on the demand side = Revenue for the provider side– No right answer to which all parties can agree– Flow: Average income of physicians: Should it be twice or twenty times

the average worker? Hospital’s profit margin: 0% or 20%?– Stock: How many medical students to be enrolled in medical schools?

How many hospitals to build? What kind of equipment to purchase?

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2. Financing system of Japan Low expenditures, best health indices

1. Low health care costs: 8.0% of GDP (2005, OECD)– Low compared with other major OECD countries (20th) – Macro and micro management by government have led to

decreases in expenditures in 2002, and nearly zero since2. Basically egalitarian system with universal coverage3. Excellent health indices

– Infant mortality rate: 4 per thousand4. No waiting lists: unrestricted access to virtually all

hospitals: may have to wait but seen on same day

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0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

0.02.04.06.08.010.012.014.016.0

Source: OECD Health Data 2008, OECD (2008)

Healthcare expenditures, per capita PPP US$, ratio to GDP(2005)

Capita, US$ PPP %GDP

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Flow of money in the Japanese healthcare system

Government

Public-sector facilities

People

National taxes: 25%

Local taxes: 11%

Directly by patient: 14 ％

SHI

Premiums: 49%

Private-sector facilities

Subsidies: 4 ％

Fee schedule: 96 ％

MHLW: 2005 data

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Low percentage paid by patients• Universal coverage by SHI• High co-insurance rate of 30%, but:

– For 90% of elderly: 10% (applicable to the elderly with incomes less than that of average worker)

– For child 3 or less: 20%– Cap on co-insurance amount: If the monthly co-insurance exceeds the cap,

then the co-insurance rate above the cap becomes 1%• 80:20 rule of health care costs: 80% of the total costs come from 20% of the

patients → One reason why the share of patient payment is only 15% of total

• Prohibition of balance billing (demand more than the fees set by SHI), and extra billing (demand payment for services not covered by SHI)– Should providers do so, then the patient must pay the entire costs, and not

just the balance-billed or extra-billed amount• Patients are not at risk of impoverishment from healthcare costs

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Achieving universal coverage (1)• First period: 1922-45

– Initially, pre-empt socialist movement and increase the nation’s wealth by making workers more healthy

– Resistance from all sides• Employers: Resent having to pay their share of premiums• Employees: Resent having to make their contributions• Physicians: Resent lower fees set by the SHI

– What carried the day: Political will of leaders– Impetus for the expansion of coverage: From the army

who were concerned about the poor health of draftees, mothers as the invasion in China expanded → Need to build a warfare state

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Achieving universal coverage (2)• Second period: 1945-61

– After defeat, Building a welfare state became the national goal– In 1955, political parties were unified on the right to the Liberal Democratic

Party and on the left to the Socialist Party• Each party tried to outdo the other in their manifestos to build a welfare state• Achieving universal coverage was a common goal• Subsidies increased to community-based SHI

– Universal coverage achieved in 1961 when the last municipalities started SHI– Note: Japan was a relatively poor country when the goal was

• In 1952, per capita GDP was the same as in Sri Lanka at that time• Third period: 1961-1973

– Narrowing differences among enrollees, free care for elders by increasing government subsidies led by progressive prefectural governors

• Fourth period: 1973-– Narrowing differences by decreasing benefits for those who had been

favored

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Growth in the percentage of the population covered by health insurance in Japan

[Source: National Institute of Population & Social Security Research, Social Security (1997)]

0%

20%

40%

60%

80%

100%

'27 '31 '39 '40 '43 '49 '53 '58 '61 '70 '80 '90

Year

Perc

ent o

f pop

ulat

ion

GMHI

SMHI

CHINone

MAA

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Achieving equity among SHI plans:Subsidies and cross-subsidization

• SHI principle: solidarity among enrollees within each plan– Those enrolled pay a fixed percentage of their income (=premium rate)– Pay according to their means, benefits according to their needs

• But, income levels and ratios of elders differ among SHI plans– Average income high, % of 65+ low → Low premium rate– Average income low, % of 65+ high → High premium rate

• Three mechanisms for achieving equity(1) National government subsidizes SHI plans which have enrollees

with low average income(2) All SHI plans contribute to financing health care costs of elders(3) Uniform payment by the fee schedule to virtually all providers• Funding: Premiums 49%, National gov 25%, Local gov 11%, Pt 14%

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Grouping of SHI plans in Japan• 1st tier: Plans having relatively high ratios of healthy and

wealthy enrollees– MAA (Mutual Aid Associations) for civil servants: 78 plans– SMHI (Society-managed health insurance) for employees of

large corporations: 1500 plans• 2nd tier: One plan for those in between

– GMHI (Government-managed health insurance) for employees of small to medium corporations: 1 plan

• 3rd tier: Plans having relatively high ratios of ill and poor enrollees– CHI (Citizens Health Insurance) for self-employed and

pensioners managed by municipalities: 1820 plans– CHI for occupation-based self-employed: physicians, dentists,

carpenters, barbers etc; 166 plans

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(1) Adjusting to disparities in income• Provide subsidies from general tax revenue to plans that have high

ratios of those with low incomes– 1st tier: No subsidies→ Expenditures financed from premiums only– 2nd tier: Subsidies amounting to 13% of benefit expenditures– 3rd tier: Subsidies on average amount to 50%, 40% for rich

municipalities, up to 80% for the poor municipalities• Ratios of subsidies has been gradually increased to these levels with

commensurate improvement in coverage, benefits– Subsidies instrumental in achieving universal coverage in 1961– Co-insurance rate: CHI and dependents of other plans 50%→30%

in 1973– Cap on the co-insurance amount exceeding $300 in 1973 (cap now

differs according to income: from $354 to $1,500)– Co-insurance waived for those 70+ in 1973

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Flow of money in the Japanese healthcare system

Taxes

CHISMHI GMHI

Non-employees

Government

Premiums

Employers Employees

Society Managed Health Insurance• 1,500 Societies• Large corporations MAAMutual Aid Associations• 78 associations• Government employees

Government Managed Health Insurance• Central government• Small corporations

Citizens’ Health Insurance

• 1820 Municipalities• 166 Self-employed associations Self-employed and pensioners

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(2) Adjusting to differences in the percentage of elders

• 65-74: Cross-subsidization among plans– Upon retirement, employees leave SMHI, MAA and GMHI to

join CHI– Subsidies from SMHI, MAA and GMHI to the CHI

• 75+: New insurance plan implemented April, 2008– 4th tier of SHI– 50% paid by tax, 40% by contribution from all other plans,

and 10% by premium contributions from 75+– Organized at the prefectural level– Co-insurance rate: 10% for 90% of elders, 30% for the 10%

rich; threshold of cap lower (on average $354 per month)

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(3) Challenges facing the SHI• Changing employment pattern: One-third of all employees are not

regularly employed and are not covered by the employer-based plans– Some are covered by their spouse’s plan as a dependent if earnings are low– Those not covered should enroll in the municipal CHI, but some do not– Can reenroll in CHI by paying back one year’s amount of premiums– Public assistance will pay if individual has no income or assets– But those not enrolled tend to forgo visiting physicians

• Burden of contributions to elders’ healthcare: Premium rate of some SMHI too high to be sustainable → Dissolving of SMHI→ Employees join GMHI→ Government must increase subsidies from general revenues because it finances 13% of GMHI expenditures

• Rural villages: Some have 50%+ of their population 65 and over– Subsidies amounting to 80% of the CHI’s revenue still not enough– Premium rates also contained by lowering the amount subject to reinsurance

• Municipalities must join the reinsurance program at the prefectural level• Amount covered by reinsurance lowered from $7,000 to $3,000per month

– Government has encouraged mergers of municipalities (3,200→ 1,800)

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3. Payment system of Japan• Single form of payment to all SHI plans and virtually all providers

– Fully implemented in 1943, prior to achieving universal coverage in 1961• Payment, in principle, covers for both recurrent and capital costs• Fee-for-service with some inclusive per diem payment in hospitals• Regulates not only the price of services and drugs, but also the

conditions which can be reimbursed– Example of condition: Extra-office hour surcharge for physician consultation can

be billed after 6 pm, irrespective of the hours set by the provider– Conditions can be set on an ad hoc basis by Ministry directorates

• Single form of payment has prevented ratcheting up by providers– Ratcheting up: Price and extent of benefits negotiated by rich insurance plans

or patients gradually becomes the de facto industry standard• Example: Criteria of need for CAT scans, grade of equipment, private rooms

• Extra billing (billing for services not covered by SHI), and balance billing (charging more) prohibited– Providers can only bill for the amount and conditions set by fee schedule– Main exceptions: private room charges, new technology still under development

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Ensuring compliance to regulations• Providers must give patients an itemized list of the services delivered at the end of

each visit when they pay their co-insurance– Difficult to extra-bill or balance-bill

• Peer review of claims– Claims submitted to clearing agency in each prefecture every calendar month– Review committee of peers (clinicians) established in the clearing house– If an item is judged inappropriate, then payment denied for that item– Amount denied is 1% of the total but has greater signal effects

• Inspections made by a team of physicians from the government inspectorate and the local medical association– Nationally 44 full-time inspectors plus hospital physicians hired for the day– Inspections made based on information from local providers, patients,

dissatisfied hospital employees etc.– Services listed in the claims matched with medical records– If not written in the medical record, then assumed that services had been billed

inappropriately→ Provider must retrospectively pay back the amount billed for that service delivered in the past 6 to 12 months

– If found to be fraud, physician and/or hospital’s license suspended or removed

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Flow of money in the Japanese healthcare system

Taxes

CHISMHIMAA

GMHI

Non-employees

Government

All providers

Premiums

Fee schedule

Employers Employees

Co-insurance

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Revisions of the fee schedule• Made every two years

– Implemented in April 1, when the new fiscal year starts• Revision consists of three steps

– 1st Step: Global revision rate– 2nd Step: Drug and device price revision

• Mostly based on survey of market price

– 3rd Step: Revision of individual procedures • Each procedure fee is individually revised

• 1st Step: Political decision made by prime-minister• 2nd and 3rd Step: Made by Council within the Ministry

(Ministry of Health, Labor & Welfare)

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1st Step: Global revision rate• Global (volume weighted for all fees and drug prices) revision rate

– Because the volume of services will remain essentially the same, total expenditures can be controlled by the setting the price = the global revision rate

– Government must come to a decision on the global revision rate by December because the budget for the next fiscal year starting April must be set by then

– One quarter of total health expenditures financed by the national government’s general tax revenues

– Reflecting fiscal austerity policy, revision rates made since 2002 have been negative. The 2002 revision rate of -2.7% led to a decrease in expenditures

• Actual process of negotiations– Ministry of Finance demands a reduction– Provider organizations (Japan Medical Association etc.) demand an increase– Ministry of Health (MHLW) acts as secretariat and provides data– Politicians (Diet men) act as go-betweens– Final decision made by the prime-minister (cabinet decision), based on his

evaluation of the political-economic situation

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Central Social Health Insurance Council• 30 members appointed by Minister, subject to approval by

Diet– 7 from providers (5 physicians, 1 dentist, 1 pharmacist)– 7 from payers (SHI plan, corporate and labor representatives)– 6 from academia– 10 specialist members (drug & device companies, nurses etc;

not allowed to vote and only provide information)– Integrity rules: Two members from payers arrested for taking

bribes from dentist association• Sub-committees to discuss technical aspects• Recommendations on revisions made to the MHLW

Minister (early March) • MHLW publishes the revised fee schedule (late March)

which is enforced from April 1, the start of fiscal year

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2nd Step: Drug and device prices • Providers can buy drugs and devices in the market from wholesalers

at prices lower than set by the fee schedule because of competition⇒How to reduce excess profit of the providers?

– Group purchasing has not developed as each hospital thinks it is getting the best price (as told so by the wholesalers)

• Prices reduced by two methods, strengthened in 1981:– Survey of market price: wholesalers’ books etc.

• Prices reduced so that new price will be only 2% greater than the volume weighted average market price of each drug

– Old list price $10→Market price $9→New list price $9.02• Downward spiral of drug prices: Cuts made every revision• Confidentiality of survey data assured to all parties

– Unilateral decreases in price for new drugs selling better than projected, or for drugs that have had generics introduced

• Cumulative effect: average price of pre-existing drugs one third that of 20 years ago; ratio of drug costs to total expenditures has decreased from 39% to 20%– Decreases in drug prices provides funds to increase medical service fees

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Revision of existing drug prices

Year Drugs listed(100%)

Decrease Increase No change Revision net rate

2002 11,191 81.3% 0.9% 17.8% -6.3%

2004 11,993 80.4% 0.3% 19.3% -4.2%

2006 10,113 76.0% 0.6% 23.5% -6.7%

2008 12,740 88.7% 0.5% 10.7% -5.2%

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Examples of drug price reductions• Pravastatin (cholesterol lowering drug) 10 mg dose

– ￥ 163.0 (02) → (patent expires, generic introduced 03) → ￥ 145.5 (04)→ ￥ 131.4 (06) → ￥ 124.4 (08)

– The first generic introduced in 2003 priced at 80% of brand ( ￥ 163.0)→ Later, more reductions than brand

– Price range of generics: ￥ 20-80• Paclitaxel (cancer drug) 100 mg injection

– ￥ 47,370 (02)→ ￥ 46,052 (04)→ ￥ 43,768 (06) →(patent expires, generic introduced 06)→ ￥ 39,089 (08)

– Generic introduced in 2006 priced at 70% of brands (new rule)– Price of the two generics: ￥ 28,402

• Drug companies have blamed this downward spiral of price for the failure to develop a globally competitive industry– Short-term profits→ Incentive to develop me-too new drugs– But in the USA, the number of new drugs approved by FDA has also decreased

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Setting the price of new drugs• Approval and setting price are de facto the same process

– No essential drug list→ Once approved and listed on formulary, universally available– Cost-effectiveness not used as criteria for granting approval

• In general, prices set relative to that of nearest existing drug– Level of innovativeness determines the range of increase– Five levels: 50-100%, 25-40%, 5-20%, 3-10%, 3% more than comparator– Ex: Price of closest existing drug is 100 Yen, 3-10% level→ Price of new is 105 Yen– Process of evaluating innovativeness has become stricter and more open– Blatant me-too new drugs no longer approved

• When sales volume is projected to be small, such as for cancer drugs, then company may opt for prices to be set by using cost-based pricing method because the R&D cost per drug would not get diluted by volume

• International prices also used as benchmarks– If prices are 50% higher than the average list prices in US, UK, Germany and

France, then reduced– But the US drives up the price of drugs for Japan– One reason new drugs are launched first in US, and then in Japan

• Unclear whether prices are higher in Japan or not– Different drugs prescribed, lower dosage but more variety– Launch prices are higher in Japan, but the decrease after patent expires is less

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3rd Step: Individual fees • Negotiated in the Council based on data from two surveys conducted

in the year prior to revision 1. Survey of the balance sheet of hospitals and clinics that shows which

sectors are more profitable than others– Clinics, hospitals, type of hospital (acute/chronic, public/private)

2. Survey of the claims that estimates the volume for each service item• Fees individually reduced if:

1) Sector that provides the service shows profit → Example: clinics2) Volume has expanded sharply → Indication of inappropriate use3) Costs have decreased → Example: Material for renal dialysis

• Fees may be increased if in line with policy objectives– Example: Promote separation of prescribing and dispensing

• At the end of the day, all revisions must equal the revision rate and budget level set by the 1st and 2nd Steps– If increased for one procedure, then another procedure must be decreased– Survey of claims used to calculate impact of individual revisions on the total

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Example of targeted cuts in fees for diagnostic imaging ： MRI (Yen)

Year Head Body 　　　　 Limbs2000 16,600 17,800 　　　 16,9002002 11,400 12,200 11,6002006 10,800 if <1.5 Tesla, 12,300 if >1.5 Tesla2008 10,800 if <1.5 Tesla, 13,000 if >1.5 Tesla

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Example: Decreasing drug costs• Encourage separation of prescribing and dispensing

– 40 years ago, very little separation– 1974: Fee for writing a prescription to outside pharmacy increased from 60 to 500 Yen– Gradually increased: Fee is now 680 Yen in general, and 860 Yen if prescribed for

common diseases in clinics & small hospitals– Percentage of prescriptions dispensed in outside pharmacy is now 55%

• Profits from dispensing reduced: Allowed mark-up following market price survey reduced from 15% (1992) to 2% (2000)– 1992: Old price: 100 Yen→ Survey 80 Yen→ Revised 95 Yen– 2000: Old price: 100 Yen→ Survey 80 Yen→ Revised 82 Yen

• Reduce poly-pharmacy (prescribing multiple drugs)– Reimbursement cut by 10% across-the-board if 7 or more drugs are prescribed

• Share of drugs in total medical expenditures: 39% (1981)→ 21% (2007)• Share of Japan in global drug market: 15% (2000)→ 9% (2006)• Strategy for increasing share of generics: 17.2% in 2007→ Goal is 30%

– 2006: Prescription fee increased by 20 Yen if it included a generic→ failure– 2008: Pharmacists can switch to generics unless the physician prohibits– Japanese version of DRG: DPC (Diagnosis Procedure Combination)

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DPC inclusive inpatient payment• Introduced initially for university hospitals in 2003, now expanded

and covers half of all acute beds• Inclusive per diem rate set for 1,500 groups

– Rate declines as length of stay increases: Highest rate for the shortest period– Length of stay divided into 4 periods that differs for each DPC

• Inclusive fee covers only basic hospitalization, drugs, lab tests, imaging (2/3 of revenue); does NOT cover surgery etc (1/3 of revenue)

• Hospital specific conversion factor: Difference between the hospital’s actual costs (if billed by fee-for-service) and the inclusive rate is compensated

• Hospital revenue: [DPC rate for the group X days hospitalized for each period] X Hospital conversion factor + Fee for service items

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Effects of introducing DPC• Positive aspects

– Removes incentive to provide more: drugs, lab tests– Standardized payment → Standardized medical care

• Deviant behavior by physicians would increase costs• Negative aspects

– Quality of data• Fraud: Group patients into highest paying DPC group• Up-coding: Group inpatients in gray areas to the highest paying DPC group

– Quality of care?• Economic incentives: Under-treat or refuse to admit patients who are likely to incur

heavy costs such as having major co-morbidity• Just admit, diagnose into groups, not treat and discharge → Profits↑

• Effect on healthcare costs– Bed occupancy rate ↓, but daily costs ↑– Inpatient costs ↓, but outpatient costs ↑ (Lab tests made before admission)– Whether total costs have declined or not remains in doubt

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Summary of fee schedule revisions• All three steps are essentially political decisions

– 1st Step: Prime-minister’s evaluation of the macro situation– 2nd Step: Arbitrary decreases made so as to provide funds for increases in

key procedure fees– 3rd Step: Negotiated between MHLW officials and JMA

• Negotiators have power and skill– MHLW has a division devoted to the fee schedule staffed with ten full time

physicians bureaucrats– JMA has power among providers compared with hospital and specialist

organizations• Has contained increases in expenditures due to advances in

technology– Highest per capita number of MRI and CT at low costs, no waiting lists

• Has lowered the price of drugs and the percentage of drug expenditures by regulating prices and through market competition

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4. Physicians and hospitals in Japan• Laissez-faire

– 80% of hospitals and 94% of clinics in private sector– Physicians are allowed to open clinics anywhere and proclaim any

specialty without authorization– Authorization needed to open hospitals or expand beds

(restrictions imposed after 1985, until then no limitations)– Even now, hospitals can purchase any equipment, open any

specialty dept without authorization• Strict regulations

– Almost all revenue controlled by the fee schedule– Physicians legally obligated to provide service to patients– Entry of investor-owned hospitals legally prohibited

• Profits cannot be distributed as dividends, must be reinvested in capital

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Hierarchical structure of physicians• Well-developed system of private practitioners, mainly in Chinese

medicine, existed before westernization began in 1868• System remained intact because they, and their sons, were

provided with licenses– Allowed relatively good access to continue

• But new entry restricted to those trained in western medicine– Parallel schools of traditional medicine that exist in China were prohibited

• Hierarchical structure of medical education– Limited funds invested in University of Tokyo: German professors invited– Graduates of Tokyo University sent as faculty to other medical schools – Private, non-university level education for private schools except Keio– Remained intact until the post-World War II reforms– Allowed for affordable expansion of healthcare– But, absolute lack of well-trained physicians

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Development of hospitals• Hospitals did not exist before westernization

– Reliance on extended family for social support• Hospitals created for four purposes

– University hospitals for medical education– Military hospitals for enlisted men– Public hospitals for infectious diseases– Private hospitals by physicians (largest ratio)

• Public hospitals built by taxes, private hospitals built by private capital from revenue regulated by fee schedule– Prestigious hospitals in public sector– Private sector hospitals do not have enough resources to invest

because of tight control on reimbursement– Waiting lists for some departments in some prestigious

hospitals→ Patients can be referred if they do not or can not wait

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Appointment of physicians in Japanese hospitals

University Hospital

1st Internal Med. Dept.

2nd 〃

3rd 〃

1st Surgical Dept. ：：：

National Hospital

City Hospital

Red CrossHospital

Private Hospital

Mutual interests: medical schools wanted high quality hospitals, hospitals wanted high quality young doctors Development of closed ⇒network between university clinical departments and affiliated hospitals

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Basic structure of physicians and hospitals

Among physicians: Vertical relationship stronger than horizontal relationshipDoctors identify more with their university clinical departments than with their professional societies

Among hospitals: Antagonism between high-prestige, subsidized public hospitals and generally low-prestige, unsubsidized private hospitals

⇒Concentration of power to the Japan Medical Association: Professional societies and hospital associations have less power⇒Private practitioners focusing on primary care have higher incomes than specialists in hospitals

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Lack of professional quality control• Training and accreditation of specialists under-developed → Lack of

standardization– Appointment to major hospital positions: Under control of university clinical

departments, credentials as specialists less important– Each university department sets its own standards– Has made it impossible to control the number of residency training positions in

each specialty• Lack of standardization in hospital quality

– Hospital accreditation started 12 years ago, but still less than 1/3 accredited– All hospitals inspected by local government but this is focused mainly on

staffing (number of physicians, nurses to patients) and floor space per bed– Expensive equipment has been purchased without considering the following:

• Has the hospital technically competent staff?• Would the hospital have sufficient volume of patients needing equipment?

• Main pressure to maintain quality→ Competitive environment– Compete for patients (by grape-vine), and for physicians, nurses etc.– If unsuccessful, then goes out of business

• Number of hospitals: 9,490 (96) → 8,943 (06)

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Emphasis on outpatient care• Of total medical expenditures, less than half (48.5%) is

inpatient care and the majority (51.5%) is outpatient• Unhindered access to virtually all hospitals

– Even in university hospitals, more than one third come without any referrals

• Patients are admitted from outpatient dept or ER– Most hospitals operate large outpatient dept

• 1,000 bed hospital may have 4,000 outpatients per day• Even tertiary hospitals have many primary care patients• Physicians are kept busy providing outpatient care

• Of the outpatient expenditures, clinics compose 60% and hospitals compose 40%

• Evaluating quality more difficult in outpatient settings

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Major concerns of hospital CEO• Hospital CEO must legally be a physician in Japan

– Historical reasons: hospitals were built mainly by physicians• Keep the hospital in business, expand if possible: How?

– Anticipate where government policy is heading by evaluating the general direction of fee schedule revisions

– Adjust quickly to the fee schedule revisions• Recruit and retain physicians and nurses

– Physicians: Income + high-tech facilities, equipment• Maintain good relations with university clinical departments

– Nurses: Daily inpatient hospitalization fees based on staffing• More nurses per patient, higher daily rate, more income for hospital

• Private sector hospitals (80%): Retain family control → Make sure child succeeds as CEO

• Public sector hospitals (20%): Protect and enhance status of those who are currently employed

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Public-sector hospitals• Public sector: 20% of hospitals (8,943), 40% of beds (1,626,589)

– Ostensive dual mission: high tech care(2/3) + serve isolated rural areas (1/3)– High-tech care: Together with university hospitals, provide 75% of surgical

operations requiring general anesthesia• Composition of public-sector hospitals

– 5 National centers: Cancer, Cardiovascular etc.– 1 National hospital corporation with 146 hospitals– 294 Prefectural government hospitals– 753 Municipal government hospitals– 349 Quasi public: Red Cross, Farmer’s Co-op etc.– In addition, of the university medical hospitals, 43 national gov, 8 local gov, 29

private owned• Government subsidies: 0-20% of hospital revenue

– In addition: Exemption from all taxes (corporate tax, property tax etc.)• CEO, physicians, nurses etc. are all civil servants

– Accepting gifts from patients is a criminal offense

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Management of public hospitals• In theory, revenue from SHI should equal expenditures as they do in

private hospitals• Why most public hospitals have deficits

– Can rely on government subsidies to cover deficits• Cf. If private hospitals continue to have deficits, they go out of business

– Lack of managements skills• CEO appointed from among the hospital’s senior physicians• Administration staffed by local gov officials, rotated from other sections

– Slow and rigid decision making• Hospital CEO has little power: Must be approved by central office, local assembly

– Strong unions and seniority-based wages• Income of a nurse about to retire is more than three times that of a new graduate

– Pressure from politicians• Admit certain patients, expand or retain certain services etc.

– Equity reasons: Ensuring access to those with low income• Percentage of extra-charge rooms must be 10% or less (national mean: 17%)• Minor role of indigent care because there is universal coverage• But quasi-public hospitals under similar constraints do not have deficits

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Mounting pressure to reform• National government’s policy

– Decrease subsidies to local governments– Decrease direct subsidies to public hospitals and shift towards global

allocation to local governments• Local government’s fiscal condition has worsened

– Local government must include hospital’s deficit in financial statement– If deficits goes over limits, local gov would be taken over by central gov

• Attempts being made to preserve public hospitals– Transfer to a public corporation: Not much difference– Merge with other public hospitals: But, different cultures– Sell to private sector: Need to pay off the staff

• Difficult to define the “public services” which can’t be delivered because fees have been set too low– If definable, then project-based subsidies could be given on tender basis– Example: Providing 24 hour comprehensive emergency services

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Minor role of regional health planning• Introduced in 1985 at the prefectural level

– 47 prefectures have population from 0.6 to 13 million– Prefectural governors mandated to draw health plans

• Has been restricted to limiting the number of hospital beds– If number of beds per population is more than the national mean in each

health planning area, then not allowed to increase beds– But many hospitals had increased beds before implementation of the plan

• Health planning strengthened in 2007– Mandating coordination among hospitals and between hospitals and clinics

for the 4 diseases of cancer, acute heart diseases, strokes and diabetes• Acute hospitals must publicize where patients are transferred for rehabilitation etc.

– Can coordination be mandated?• Still no regulations for purchasing high-tech equipment, or opening

new clinical departments etc.

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Summary of Japanese system• Serves as model in financing, but not in delivery• Universal and egalitarian coverage has been achieved

by the national government subsidizing SHI plans that cover those with low average incomes– Subsidies are given to plans, not individuals

• Government has contained costs through the fee schedule and drug formulary– Nationally uniform fee schedule and drug formulary are applied

to all plans, all providers• Quality of care is not standardized

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5. Reforming healthcare in China• Recommendations made to Chinese government as World Bank

Consultant in April, 2009• How to decrease the disparity between regions, among three

insurance systems, and within the three systems?– Urban Employee Basic Medical Insurance (UEBMI)

• Compulsory coverage for regularly employed; half paid by employers– Urban Resident Basic Medical Insurance (RBBMI)

• Voluntary plan for non-regularly employed: no contribution from employers– New Rural Cooperative Medical Insurance (NRCMI)

• Central, local governments each one third, household one third

• How to reform public hospitals, drug policy?– 70% of hospitals are public but they must raise 90%+ of their revenue from

services , drugs compose half of hospital expenditures• What advice can you give to the President?

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Flow of money in the Chinese healthcare system

Government

Public-sector facilities

People

National taxes: 15%Local taxes: 3%

Directly by patient: 50 ％+

SHI

Premiums: 32%

Private-sector facilities

Subsidies: 7 ％

Fee schedule: 93 ％

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Reforming the payment system • Establish nationally uniform fee schedule and drug formulary

– Need to establish central agency having power over all three insurance systems– Set basic services and their relative price, and essential drugs which must be

included in the benefit of all plans– Each plan or region allowed to expand the above, but not change relative price– Each plan or region allowed to set its own conversion rate to RMB– Any benefits outside of basic package must be entirely financed by premiums

raised at the local level, and not subsidized by national government• Increase funding to the New Rural Cooperative Medical Insurance

(NRCMI) – National government’s subsidies should be linked to the estimated income level

of the community• Future goal: All plans cover all services and drugs listed

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Reforming reimbursement for drugs• Goal is nationally uniform formulary and the same price set for all drugs

– Variations to be allowed in the co-insurance rate– In rural NRCMI, only a minority of drugs would initially be covered, but these essential

drugs should have no co-insurance– Future goal is to have an uniform co-insurance rate for all China

• Conduct survey of the market price paid by the hospitals and reduce prices for each drug based on the results

• Improving GMP (Good Manufacturing Practice) is pre-condition for generics use– Unless quality is guaranteed, physicians have valid reason not to prescribe

• Give physicians incentives to prescribe generics– Increase prescription fees if all drugs are generic

• Give hospitals incentive to prescribe generics– Amount paid for generics exceeds X% of total drugs purchased, then hospital receives

an extra Y% of the total amount reimbursed for drugs• Give pharmacists incentives to dispense generics

– Increase dispensing fee if all drugs are switched to generics

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Reforming public hospitals: Basic policy

• Reform of current fee schedule and drug prices is a pre-condition for the reform of public hospitals– Currently, use of high-tech care and expensive drugs leads to

more revenue, profits for hospital; more income for specialists• Gradually revise fee schedule so that primary care

generates more profit than high-tech care– In Japan, rural hospital doctors earn twice the income of large

urban hospital doctors because rural hospitals are reimbursed at the same rate as urban hospitals

• Labor costs lower for non-physicians in rural area• Same payment allows rural hospitals to pay doctors more• Doctors prefer practicing in urban medical centers: Why pay more?

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Reforming public hospitals• Use subsidies as an incentive for hospitals to comply with

policy goals• Link government subsidies to the achievement of policy

goals, and not just reflect the previous year’s budget• Set policy goal targets for each hospital based on

previous year’s actual figures– The percentage of patients treated who were NOT enrolled in the

UEBMI in emergency dept, outpatient care, inpatient care– The percentage of revenue derived from services, NOT drugs

• Make accepting gifts from patients a criminal offense• Make purchasing of high-tech equipment subject to

approval of the regional government

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Investmenting in management• Recruiting and training managers the key to success

– Managers for the government, insurance plans and hospitals– Understand the nature of supply and demand in health care– Senior physicians: Short training courses in the art and science

of management• Those recruited would command esteem from their peers• But hospitals would lose clinical expertise

– Well-trained managers may be good revenue maximizers!• Developing data basis

– Data needed to fine-tune fee schedule revisions– Reliability and validity of data are prerequisites– Select representative hospitals as beacon points for data

• Restructuring existing organizations– Hire consultants who will take the blame and the responsibility– Public image of the consultants is a crucial factor when hiring

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5. Long-term care policy:What is long-term care?

• Variety of ongoing health and social services• For individuals needing assistance on a

continuing basis because of physical or mental disability

• Services provided in an institution, the home, or community

• Includes both informal and formal services

(Institute of Medicine, 1986)

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What are long-term care services?• Personal care: bathing, grooming

– ADL (Activities of Daily Living) assistance• Household chores: meal preparation, cleaning,

shopping, medication management– IADL (Instrumental ADL) assistance

• Home modifications (ramps, hand rails), emergency alert systems

• Includes effort to ensure access to health care• Services by doctors generally not included, except

when the physician is employed by the institution

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Relationship of the three sectors (Historical)

Curative medicine

Prevention Social services

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Relationship of the three sectors (Present)

Long-term care (LTC)

Prevention Social services

Curative medicine

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Key issues in LTC • Increasing demand for formal services:

– Ageing society, decline in family support• Developing countries face double burden of diseases

– Chronic diseases + traditional communicable diseases• Ratio of communicable diseases in the global burden of diseases in

developing and newly industrialized countries: 49% (1990)→22% (2020)– Disability due to AIDS, malaria, schistosomiasis

• Distortions and fiscal strains in health, social and housing programs

• Unfair allocation of limited LTC formal services• www.who.int/ncd/long_term_care/index.htm• www.who.int/chronic_conditions/en/

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Key policy decisions for LTC

• Whom to support?– 1. Only the poor– 2. Poor as primary goal but to include non-poor– 3. Universal standards: non-poor equal rights

• Should services be limited by budget, or should benefits be an entitlement– Tax-based: budget limited– Social insurance based: individual entitlement

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Rationale and design of Japan’s LTCI

• Before public LTC Insurance was implemented in April, 2000:– Health care: open-ended entitlement– Social services: budget limited, means-tested– Both had increased rapidly prior to the implementation

• Structural problems in former system– Healthcare: Increased use of hospitals for LTC: de facto nursing homes ⇒Growing problem since health care became free for elders in 1973– Social services: Ad hoc, unfair decisions made by local welfare offices　⇒ Growing problem as resources started increasing from 1989 (Gold Plan)

• Aging society perceived to be the biggest policy issue– Ratio 65+: 7% in 1970, 20% in 2006, 28% in 2020– Increase of 1% every two years

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Overall design (1)• Transferring healthcare and social services to the LTCI

– From healthcare: visiting nurses, PT services, day care, Health facilities for elders (HFE), some LTC hospitals

– From social services: home-helpers, day care, nursing homes, loan of wheelchairs, home improvement (putting in slopes, rails) etc.

• Population covered: 65+ and 40-64 with age related disability (Alzheimer’s, stroke, diabetes etc)

• Management: municipalities or coalition of municipalities– Premium levels set locally according to estimated expenditures

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Overall design (2)• Financing: Half by taxes, half by premiums

– Premiums from 65+: Deducted from pensions, 1/6 of total• 7 levels of premiums according to income: Highest level three and half

times the premium amount of the lowest– Premiums from 40-64: Deducted from wages, 1/3 of total

• Fixed percentage of income, half paid by employers: 1% of income in total

• Pooled at national level and redistributed to municipalities adjusting for differences in their age and income levels

• Generous levels of entitlement – Home care: 7 levels from US $450 to $3,300 per month

• Clients can purchase services up till this amount– Institutional care: Full cost, partial for “hotel costs” (food, room, utilities)– 10% co-payment applied to both (decreased if of low income)

• Entitlement levels based on assessment of ADL etc.– Neither income nor amount of family support part of conditions

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Flow chart for receiving LTCI servicesApplication to municipal office

 Assessment for determining eligibility 

Primary classification made by computer from 73 items form  

Secondary and final classification made by expert committee 

7 levels of eligibility or non-eligible status determined

Assessment for care planning

Care conference by care manager, providers, doctors 

Care plans drawn and approved by client

Service provision

Attending physician's report, etc.

① Process of assessing eligibility levels by municipalities

② Process of drawing care plans by care manager agencies

③ Delivery of services by LTCI provider agencies

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New paradigm of LTCI: New and old notions of fairness

• Former social welfare’s notion of fairness:– Services should be prioritized to the most “needy”– No family support, no income, no assets– Gradual relaxation of above criteria as funding was increased

• Problems with this notion– When funding was increased, the definition of “needy” became ad

hoc, unfair: Based on whims of the welfare agency official• LTCI’s notion of fairness:

– LTC services are an entitlement, as in health care– Criteria: computer algorithm based on amount of functional

support needed; irrespective of income or family support

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New paradigm of LTCI: Difference between health care and LTC

• Health care: Goal is egalitarian provision of services– Difficult to provide extra or better services explicitly based on

ability and/or willingness to pay• LTC: Goal is provision of basic level of services

– LTC is part of daily life: Social consensus that the amount of care can vary according to income and personal inclinations

– Additional purchase of services socially acceptable – Amount to be purchased up: Individual’s decision will be based

on how much assets should be left to children and how much support children should provide for their parents

⇒Rationale for separating LTC from health care• New issue: How to integrate after separating and prevent

building silos in each sector?

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First years of LTCI • LTCI became popular and accepted

– Number of FTE workers in community care doubled from 377,000 (01) to 749,000 (05) (institutional care from 420,000 to 599,000)

• Greater than expected annual increases in expenditures– Estimated: 4.3 (00)→5.5 billion Yen (05) (4% per year)– Actual: 4.0 (00)→ 6.4 billion Yen (05) (8% per year)

• Percentage of 65+ eligible: Planned to be 12% became 16% (05)• Greater than expected increase in those eligible

– Especially for the lighter levels: 2.2 times increase (compared with 1.6 times for heaviest)

• Proportion of for-profit among community care providers: 27.2% (01) to 44.6% (05)

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How Japan revised LTCI• Difficult to make eligibility criteria stricter → Solution: Limit benefits to “preventive services” for the

two lightest levels (“need support”)– Most in “care level 1” reclassified to the new “support level 2”

• Making a virtue of a de facto reduction in benefits– Rationale: Providing IADL support by home-helper has made

elders more dependent → Benefits restricted to prevention– Emphasis on light exercise training, restrictions on helper service– Preventive services are more in line with LTCI’s goal: To allow

elders to maintain their independence• Fiscal advantages of “preventive services”:

– Less demand: Services less attractive than IADL support– Less supply: Fees for preventive services lower than regular

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Other measures to contain costs • Fees decreased for LTCI services:

– Weighted average decreased by 2.3% in 03 and 2.4% in 06– Based on survey of providers’ financial state

• Institutional care fees decreased more (4%) than community care (1%)• Co-payment for “hotel costs” increased in 2005

– Charged $300 ($800 if private room) more per month for institutional care: Total amount $550 ($1050 if private)

– Even so, this amount is still about half that of assisted living→ Nursing homes have waiting lists of several years Assisted living has also increased to meet excess demand

• Net effect: Although the number certified to be eligible increased slightly, the rate slackened, and total LTCI expenditures declined slightly for the first time in 2006

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Lessons from Japan’s LTCI

• Public LTCI introduced in Japan because of failures in existing medical and social service systems

• Generous entitled benefits to purchase health and social services based on explicit eligibility criteria

• Benefits had to be made generous so that services could be continued to those already receiving them

• New policy cannot be drawn on a white canvass• But new policy can be introduced when the window

of opportunity opens and adjustments made later