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Tough Choices Ahead for Japanese Health Care Policymakers

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Brandon Danz

Danz augustIn health care, public policy drives infrastructure. Some governments hold ownership of various sectors of the health care industry, while others restrain costs through varying levels of regulation and eligibility standards. But regardless of how a health system is organized and regulated, rising health care costs are consuming growing portions of public budgets in most industrialized nations. Japan proves an interesting comparison to the United States. Despite the very different systems in place, each nation is experiencing crises in health care spending. Yet both could benefit from adopting some policies of the other.

Population Health: Japan outshines the United States in almost every population health measure. The World Health Organization reports that 33 percent of Americans are obese, compared to just 5 percent in Japan. The widespread incidence of chronic disease in the U.S. would be considered epidemic and trigger a national crisis in Japan. While the average American can expect to live to be 79 years old, his average Japanese counterpart enjoys four additional years. America’s 6.1-per-thousand infant mortality rate is almost three times as high as the 2.2-per-thousand rate experienced in Japan. More than 30 million Americans remain uninsured, while in Japan that number is zero. All this despite the fact that Japan spends only 10 percent of its gross domestic product and around $3,649 per capita on health care, compared to 18 percent gross domestic product and $8,745 per capita in the U.S.

Japan’s Universal Coverage: Like in America, Japan’s insurance industry is largely private, but is strictly nonprofit and access is universal through the existence of an individual mandate. Employers must offer health care and employees must sign up – and they can choose from over 3,000 plans. Like in the U.S., the kind of insurance a Japanese citizen gets depends on where they work. Employees of large corporations typically split their premium with their employer but max out at $6,000 per year out-of-pocket expenses. Smaller businesses also provide coverage with government kicking in a subsidy. All other citizens, regardless of age or health status are members of the National Health Insurance plan (NHI) and their care is paid for primarily through government funding. When a Japanese worker loses her job, the switch over to the NHI is immediate and seamless.

Paying for Care: In the United States, costs for individual services and treatments are determined through very complex negotiations between providers and insurers. The prices can vary depending on the market power held by the provider and the insurer. A large hospital operating in an area without competition can negotiate much higher rates because the insurer needs that hospital in its network. A small physician practice in an area with a dozen other practices does not hold this same market power and must negotiate rates that are more competitive if it wants the insurer’s business. Rates are contracted between each individual provider and payer. For this reason, in the U.S., the same identical procedure being performed by the same physician in the same hospital on two patients with different insurance carriers can vary in price by a considerable amount.

Not so in Japan. Here, biennial negotiations take place between the central government’s Ministry of Health and Welfare and medical stakeholders to produce a single reimbursement rate for every procedure and treatment offered throughout the nation. A single, transparent price is set for each service regardless of where the procedure is taking place and who is paying for it and with no adjustments for costs of living. This strict, fee-for-service system negates the need for negotiations between insurers and providers, which lowers the costs of administration significantly.

Achieving Cost Containment: The Japanese central government’s tight grip on health care pricing has enabled it to limit spending growth to just 2 percent per year, compared to U.S. growth rates that range from 6 to 8 percent or more. In order for spending growth to reach those enviable levels, Japan continually squeezes its health care providers with reductions in federally set reimbursement rates. A general practitioner in Japan earns the same level of cultural respect as her American counterpart, but earns a lot less in salary. A typical doctor’s office visit is set for a reimbursement of as little as $25, with the patient responsible for 30 percent of that cost. This fee-for-service system with meager reimbursement rates leads to major provider-induced demand. In order to maximize revenue, it is common for a physician to see well over 100 patients per day with three- to five-minute encounters per patient. Japanese citizens see their doctor an average of 14 times per year – more than three times as often as Americans. A quality health care system cannot be built upon superficial five-minute encounters and a payment methodology that rewards volume over improved patient health.

This degree of government price-setting and transparency is a leading reason why Japan is able to restrain growth in spending. However, these statistics do not tell the whole story. The public sector in the U.S. pays for around 46 percent of the nation’s total health care spending, while in Japan, government foots the bill for almost double that – 83 percent of total spending. This makes Japan a leader in public expenditures on health care among industrialized nations. Added to this, Japan’s population is aging. Over 40 percent of its citizens will be 65 years or older by 2050, which will further drive increases in health care spending. The consulting firm McKinsey & Company estimates that by 2020, a funding gap will exist of $200 billion.

Long-term solutions Needed: Despite its ability to limit reimbursements, Japan’s health care spending is reaching crisis levels. In August 2013, the nation’s debt hit a staggering one quadrillion yen. That is ¥1,000,000,000,000,000, or a billion, a million times over. Japanese debt equals more than 250 percent of the nation’s gross domestic product, meaning that the annualized value of all products and services within Japan is less than half of the money it owes investors. In reaction to debt hitting this milestone, Prime Minister Shinzo Abe announced a hike in Japan’s sales tax from 5 to 8 percent in September 2013. However, that rate would need to jump to 13 percent in order to meet growing demand, according to McKinsey. Tax increases, alone, will not fix this problem. The Japan Times reported in October 2013 that a proposal from Abe would double out-of-pocket copayments of elderly consumers and exclude certain elderly populations from special nursing care programs.

Across-the-board reimbursement cuts are unsustainable and do not address the long-term problem. Eventually, price gouges will affect the quality of care provided to Japanese citizens. Japanese policymakers should look beyond fee-for-service payment arrangements and instead, adopt U.S. capitated payment methodologies that spread risk and reward providers for achieving quality measures. This would incentivize better health, would likely reduce utilization and would reduce spending in the end. The Japanese have recently started to pilot per diem payment systems and this is a step in the right direction. In turn, the U.S. could learn from Japan by increasing its level of price transparency. Greater price transparency in America’s market-based health care system would allow consumers to shop for high quality services at more competitive prices.


Author: Brandon Danz, M.P.A., is special adviser to the Secretary of the Pennsylvania Department of Public Welfare and an ASPA member. He is a graduate of the Master of Public Administration program at Shippensburg University of Pennsylvania and is seeking a Master of Health Administration degree from The Pennsylvania State University, Harrisburg, with a focus on health care policy development and cost containment. Danz can be reached at [email protected]

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