Medical Device Reimbursement in Japan Presented to MassMEDIC April 10, 2008

1. Medical Device Reimbursement in JapanPresented to MassMEDICApril 10, 2008 Paul Barry Director, International Trade & Health Policy Boston Scientific Corp.

2. Presentation Outline • Funding and Healthcare Environment in Japan • Responsible Agencies • Reimbursement Classifications • STMs, Functional Categories • Reimbursement Pathway • Price Adjustment by Market Method: R-zone • Price Adjustment by Cost Control Method: FAP • Policy Challenges, A Look Ahead…

3. Funding & Healthcare Environment • Compulsory social health insurance system, financed by employer contribution, payroll deductions, taxes, patient co-payments (30% for core population) • Achieved universal health coverage/access in 1961 • Demographics: rapidly aging (82 yr life expectancy), but shrinking population (127 mil, -0.088% growth) • 8.2% of GDP spending on healthcare (‘05) • 2nd largest market for med tech at >$26 bil; growth has flattened in recent years.

4. Funding & Healthcare Environment • Social insurance system is financially unsustainable • Social security payments and spending are now more than 2X annual income and consumption taxes collected • Lengthy average hospital stays (30+ days) • Serious over-capacity in hospitals and clinics, diffuse services and distribution, lack of medical specialization • Cost and complexity of business is increasing: new user fees, Market Authorization Holder requirements, audits, post-market surveillance, etc. • Pressure to increase medical fees (physicians) • Government is resorting to cost-containment and price-cutting initiatives targeting drugs and devices

5. Responsible Government Agencies • Ministry of Health, Labor & Welfare (MHLW) is the sole agency responsible for regulation and payment of medical devices: • Pharmaceutical and Medical Devices Agency (PMDA) is a third-party regulatory review agency under MHLW • Health Insurance Bureau (HIB) sets rates and approves reimbursement coverage • Central Social Insurance Medical Council (Chuikyo) is an outside advisory body to HIB on reimbursement/coverage decisions • Ministry of Finance (MOF) approves the healthcare budget proposed by MHLW, may adjust line-item expenditures for devices, etc. • Ministry of Economy, Trade and Industry (METI) supports development and competitiveness of Japanese Med Tech industry

6. Two Payment Systems • “Special Treatment Materials” (STMs): also called “designated insured medical materials” - product reimbursement price fixed according to a fee schedule and is separate from other medical service fees • STMs represent about 1/3 of overall device budget, or about 3% of national healthcare expenditures • The remaining 2/3, including capital equipment, IVDs, commodities, etc, are either purchased “by-brand” or paid for out of the “technical fee” associated with a medical procedure • Non-STM product prices are determined through direct negotiation between buyer and seller, not according to a fee schedule

7. “Functional Category” System for STMs • Applies only to Special Treatment Materials (STMs) • Announced by MHLW in 1992, adopted in 1994 • Products previously reimbursed “by-brand” • “Functional Categories” established with the aim of increasing price competition among products with identical or similar function • Today there are roughly 150 major groupings containing about 600 functional categories

8. Sample Functional Category

9. Reimbursement Application Pathway

10. Shonin (Regulatory) Approval Applicant Dossier 1. Application for reimbursement 2. Hearing 5. Notification of Approval MHLW Eco Affairs Div Health Policy Bureau 3. Expert opinion 4. Listing decision Chuikyo Expert Committee Med Economics Div Health Insurance Bureau 6. Public Announcement: Listing in NHI Reimbursement

11. Product Pricing Classification System

12. Timing of Reimbursement

13. New Product Premiums Epochal Function Premium: 40-100% A) Novel function of clinical utility and B) Higher utility or safety than similar products and C) Improves the method of treatment Orphan Drug Premium (I): 10% A new listed product of a new function class designated orphan drug in accordance with Par. 2 of Article 77 of PAL Utility Premium (I): 15-30% Meets A or B+C from above + Orphan Drug Premium (II): 3% A newly listed product of a new function class that has less target patients than do listed products of a similar function class Utility Premium (II): 5-10% a) Higher utility or safety and b) Increased safety for healthcare professionals and c) Improves the method of treatment and d) Environmental (disposal) advantage

14. New Product Pricing If no similar technical fee: use Cost Calculation Method: Cost of production/import + Promotion expense + General administrative expenses + Distribution expenses + Operative profit + Consumption tax = Price of a material of a new function class

15. What’s Not Required? • Paradox regarding lack of evidence requirements for coverage and pricing: • Hindrance to securing new categories • Allows for price management by government without consideration of value • No economic or clinical benefit data needed for A1, A1, B product applications • Supporting economic and clinical data helpful for C1/C2 applications, but not defined • No rigorous tech assessment in place, yet….

16. Distribution Flow Overseas Company Company’s Japan Affiliate Primary Dealer Secondary Dealer Customers Sell $200 Sales activities, OR (Operation Room) Support Payment Follow-Up, OR Support, Inventory Management, Delivery, Billing, A/R, etc

17. Price Adjustment Method: R-zone • “Actual Market Price Weighted Average Fixed Zone Method” or R-zone • R-zone is the allowable discounting margin between official reimbursement price from government and actual price paid by hospital to supplier • Allows for small margin to be kept by hospitals as a means to help cover other operating costs • The current allowable R-zone value is 4% for STMs

18. Price Adjustment Method: “R-zone” • Has been the primary, competition/market-based mechanism MHLW uses to manage prices in Japan • Bi-annual price adjustments based on government surveys of the discounts being provided by distributors to hospitals • Sample R-zone revision: • official reimbursement price product A = 1000 yen • if average selling price per survey = 900 yen • add 5% consumption tax to ave = 945 yen • add 4% R-zone value (of official price) = 40 yen • new official reimbursement price = 985 yen

19. Average R-zone % Price Adjustment, 1990-2008

20. Price/Cost Controls: FAP Foreign Average Price (FAP) Rules: • Compares Japanese price to arithmetic average of prices in US, UK, Germany and France • For “new products,” in case the calculated price is higher than 2X of FRP, the price is adjusted down to 2X of FRP • When the current domestic market price average is 2X or greater than the average overseas price, adjustment occurs • If the domestic market price is more than 1.5X of average overseas price AND the rate of decrease from the standard material price since the last revision is less than 15%, then the price is reduced by formula (up to a max of 25%)

21. Price/Cost Controls: FAP FAP adjustment formula: A: weighted average of current market prices in a particular functional class B: overseas average price of the subject product Standard Material Price XB x 1.5 Before the Revision A

22. FAP Survey Process • Revisions to fee schedules occur April 1 of even-numbered years: 2002, ’04, ’06, ’08, etc • MHLW identifies select group of Functional Categories for survey, ~ 6 months before price revision is effective • Industry provides overseas price data (company List Prices) to MHLW via a third-party, collated and submitted by Functional Category • Price data is protected – not shared with any third parties • Preliminary R-zone and FAP cuts announced to industry in Dec/Jan, begins a 2-3 month comment period • Final price adjustments published and distributed to hospitals in March, new prices effective April 1

23. Impact of Price Controls on STMs • More than $3 Billion in forsaken medical technology industry revenues since 2002 (as of 2006) • Nearly half of all categories surveyed in 2006: more than 80 categories suffered FAP cuts (totaling ~$161m) • 2008: only 14 categories cut, ~$31m impact • The combined effect of R-zone and FAP has been a downward price spiral, with political and economic pressure for expanded application • Creating disincentives for introduction of new products and therapies; product generation gaps are growing • Uncertainty regarding return-on-investment, Japan is being viewed very differently than in the past

24. Impact of Price Controls on STMs • Foreign Direct Investment (FDI), what incentives remain for medical technology industry? • Will undermine goals of METI “Medical Device Vision” to expand access to cutting-edge technology, and to grow Japan’s own med tech industry • Short-term budget “fix”, not a long-term healthcare financing solution • Souring relationships among Industry, MHLW, doctors, policy-makers, key opinion leaders, and the public

25. Future Developments • “An age when greater weight is placed on value and price” – MHLW, Sept. 2004 • “Correction of domestic-foreign price disparity” remains priority – Council on Regulatory Reform 2006 • Intensified price scrutiny; annual price surveys and revisions being considered • FAP & R-zone revisions to continue; rules changes to expand scope and depth of cuts seem almost certain

26. Future Developments Two potentially major systemic changes looming: • DPCs: Diagnosis Procedure Combinations – Japanese-style DRGs, per-diem rate which decreases over time. DPC pilot has expanded to ~534 hospitals, and shown modest results • Will STMs be folded in to DPCs? • Usual problems associated with DRG systems expected • HTA: healthcare technology assessment requirements – METI studying development of HTA guidelines; ISPOR chapter established in Japan to develop same • First-ever economic/outcome data requirements for med tech coverage and reimbursement in Japan? • Potential market barrier?