Naoki Ikegami, MD, MA, PhD Dept. of Health Policy & Management Keio University School of Medicine

1. The Emerging Markets SymposiumHealth Delivery Systems Session－Containing Costs by Controlling Prices－ Naoki Ikegami, MD, MA, PhD Dept. of Health Policy & Management Keio University School of Medicine nikegami@a5.keio.jp *Please do not distribute without authorization

2. General principles in health policyNature of demand in health care • Demand for health care • Unpredictable: Both when illness occurs and the amount needed • Concentrated: 80% of expenditures is concentrated in 20% of the high cost patients (80:20 rule) • Little elasticity: Price does not affect demand • In a life or death situation (own or of family) → prepared to give up everything, sell all assets, incur heavy loans→ Risk of impoverishment • Need to pool risk and transfer wealth from the rich, healthy and young to the poor, ill and old

3. 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 • Payment to physicians and hospitals are always negotiable • [Healthcare costs for government, patients] = [Providers’ income] • Physician’s income: Twice or twenty times the average worker? Productivity?

4. What is appropriate treatment? “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 Always appropriate Sometimes appropriate Always inappropriate

5. How to control costs and change provider behavior • Healthcare reform should focus on the supply side, by controlling the flow of money = fee schedule = prices, not the demand side • In Egypt, a significant amount of the government’s health budget goes to government owned hospitals • Budget for hospitals historically determined, not based on performance • Payment system to hospitals not developed • In China, public hospitals earn 90% of their revenue from providing services, less than 10% from subsidies • Payment system exists but locally determined • Dispensing drugs are the primary source of profit: hospitals receive extra payment if expensive drugs are prescribed in order to compensate for the low price set for services • 50% of the hospital budget goes to pay for drugs • Payment to hospitals must be reformed

6. How Japan does it • Fee schedule: Single payment system set by government • Applied to all health plans and virtually all providers: Plans and providers do not have to negotiate on an individual basis→ All made by the government • How can costs be contained by controlling fees and drug prices? • Expenditures = Fee (Price) X Volume • Volume of each will remain essentially the same on a year to year basis • Macro control: Government first sets the overall revision rate • Micro control: Government then revises service fees and drug prices on an individual basis • Why have fees and prices been so tightly controlled? • One quarter (fixed rate) of total expenditures financed from taxes • In order to contain the general revenue budget, total health expenditures must be contained

7. 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)

8. 1st Step: Global revision rate • Global (volume weighted rate for all fees and drugs) revision rate • Because the volume of each service will remain essentially the same, total expenditures can be controlled by the global revision rate • Reflecting fiscal austerity policy, since 2002, the revision rate has been negative. 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

9. 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

10. 2nd Step: Drug and device prices • Providers can buy drugs and devices from wholesalers at prices lower than set by the fee schedule because of competition ⇒How to reduce excess profit of the providers? • 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 • Net effect has been to reduce total health expenditures by 1% • 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 for increasing medical service fees • Share of Japan in the global drug market: 15% (2000)→ 9% (06)

11. 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 that shows the volume of each itemized service provided→ The impact of each revision can be estimated • Fees individually reduced if: 1) Sector that provides the service shows profit → Example: clinics 2) Volume has expanded sharply → Indication of inappropriate use 3) Costs have decreased → Example: Material for renal dialysis • Fees may be increased if in line with policy objectives • Example: Promote home visits by physicians • 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

12. Example of revisions in fees for diagnostic imaging：MRI (Yen) Year Head BodyLimbs 2000 16,600 17,80016,900 2002 11,400 12,200 11,600 2006 10,800 if <1.5 Tesla, 12,300 if >1.5 Tesla* 2008 10,800 if <1.5 Tesla, 13,000 if >1.5 Tesla** 30%↓, despite only 2.2% macro↓ * Differential fees according to equipment type introduced for the first time **Successful lobbying by radiologists?

13. (%) 12.0 10.0 8.0 6.0 4.0 2.0 0.0 -2.0 -4.0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Year Annual Changes in Gross Domestic Product, National Medical Expenditures and Average Fees, Japan, 1980-2007 Gross domestic product National medical expenditure Fee schedule macro revision rate

14. Why did the government intensify its efforts to contain costs? • Economic depression from 1991 led to a huge deficit, totaling 1.7 times the GDP by 2002 • Decrease of revenue: Corporate taxes↓, personal income tax cuts • Increase of expenditure: Public works • Government must show the public that they have done everything to contain expenditures before increasing taxes: Every government that has increased consumer taxes has since lost the following election • Health sector became targeted for cost containment • Subsidies to healthcare compose 10% of total budget • President of Japan Medical Association did not support Prime-minister Koizumi in 2005 election→ One reason why the global revision rate was minus 3.16% in 2006 • However, the ruling parties have lost the August election partly because of popular dissatisfaction about emergency care in hospitals • New government Minister has promised a positive global revision

15. 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 provider groups • Negotiators have power and skill • MHLW has a division devoted to the fee schedule staffed with ten full time physicians bureaucrats • 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 market competition