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Value-based healthcare in JapanAn evolving concept

A report from The Economist Intelligence Unit

1© The Economist Intelligence Unit Limited 2016

Value-based healthcare in Japan An evolving concept

Contents

About this report 2

Introduction 3

Chapter 1: Good value for money? 4

Chapter 2: Shaping a nascent HTA process 8

Conclusion 12

2 © The Economist Intelligence Unit Limited 2016

Value-based healthcare in Japan An evolving concept

Value-based healthcare in Japan is an Economist Intelligence Unit (EIU) report, commissioned by Gilead Sciences. Value-based healthcare looks at health outcomes of treatment relative to cost. In this particular report The EIU examines whether Japan’s healthcare system delivers good value for money, its approach to pricing and reimbursement, and the evolution of a nascent system for health technology assessment (HTA).

In June and July 2016 The EIU conducted three interviews with experts on value-based healthcare in Japan. The insights from these in-depth interviews appear throughout the report. The EIU would like to thank the following individuals (listed alphabetically) for sharing their insight and experience:

l Isao Kamae, project professor, HTA and Public Policy Project, Graduate School of Public Policy, University of Tokyo

l Hiroaki Miyata, professor, Department of Health Policy and Management, School of Medicine, Keio University

l Kenji Shibuya, professor, Department of Global Health Policy, Graduate School of Medicine, University of Tokyo

The EIU bears sole responsibility for the content of this report. The findings and views expressed in the report do not necessarily reflect the views of the sponsor. Andrea Chipman was the author of the report, and Martin Koehring was the editor.

July 2016

About this report

3© The Economist Intelligence Unit Limited 2016

Value-based healthcare in Japan An evolving concept

Introduction

Value-based healthcare (VBH)—achieving the best value for patients at the lowest possible cost—is increasingly gaining traction as cash-strapped governments attempt to ensure better healthcare outcomes. As a concept, VBH has been making inroads in many European health systems,1 and Japan’s health system is also starting to integrate elements of VBH.

Although the adoption of broader concepts of value is in its infancy in Japan, there are a number of signs that policymakers and other leaders are recognising its importance. In 2015 a Ministry of Health, Labour and Welfare (MHLW) advisory panel published “Japan Vision: Healthcare 2035”, in which it identified VBH as one of the three central components of its vision.2 The paper committed to a “paradigm shift” in the country’s

healthcare principles, emphasising quality over quantity, autonomy over government regulation, care over cure, and a shift from fragmentation to integration. In particular, the MHLW’s panel underlined that its view for the future of the Japanese healthcare system envisioned “a healthcare system that evaluated health care on the value it provides to patients and society, not on the inputs it demands”.3

This paper will examine to what extent Japan’s universal healthcare system provides good value for money, including the level of autonomy given to healthcare providers, the system’s approach to pricing and reimbursement, and the evolution of a nascent system for health technology assessment (HTA).

1 The Economist Intelligence Unit, Value-based healthcare in Europe: Laying the foundation, 2016. Available at: https://www.eiuperspectives.economist.com/healthcare/value-based-healthcare-europe-laying-foundation

2 Ministry of Health, Labour and Welfare, Health Care 2035 Advisory Panel, Japan 2035: Leading the World through Health, Executive Summary, June 2015. Available at: http://www.mhlw.go.jp/seisakunitsuite/bunya/hokabunya/shakaihoshou/hokeniryou2035/future/en/

3 Ibid., p. 3.

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Value-based healthcare in Japan An evolving concept

Chapter 1: Good value for money?1Japan’s approach to value-based healthcare (VBH) needs to be looked at in the context of its existing healthcare system, which emphasises access to health for all and close co-operation between health providers and regulators.

Almost 1,800 municipalities operate parts of Japan’s public health insurance, with universal health coverage available since 1961. The whole Japanese population is covered by either public or association-managed health insurance, with

membership in one of the public health insurance plans—National Health Insurance (NHI) and Employees’ Health Insurance (EHI)—compulsory for all citizens, with the exception of those on public assistance, who receive medical care for free. Although Japanese citizens are able to purchase private insurance to cover non-medical expenses such as extra hospital room charges, the NHI system prohibits private insurance in principle.4

Under the EHI, individuals and dependents are enrolled automatically with an insurer according to their occupation and age, with premiums graded in proportion to their income. There is considerable inequity in the share of income levied as premiums: contributions range from 3.12% to 9.62% of monthly wages, with employers paying half the premium. Subsidies from general revenue mitigate insurance plans covering people on low incomes or whose monthly payments exceed predetermined amounts based on individual annual income ranges, and there is cross-subsidisation among plans to pay for the healthcare costs of elderly people aged over 75 years.5

Positive health outcomes—but how sustainable is the system?On the face of it, Japan’s healthcare system appears to provide good value for money. Healthcare spending is moderate by international

4 Goddard Health, Japan Market Information, 2012. Available at: http://goddardhealth.com/general.html

5 Ikegami, N, Yoo, B et al, “Japanese universal health coverage: evolution, achievements, and challenges”, Lancet 2011; 378: 1106–15.

Percentage of population aged over 65(%)

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Value-based healthcare in Japan An evolving concept

standards. According to World Bank data, Japan spent 10.2% of its GDP on healthcare in 2014, slightly below the OECD average of 12.4%. However, Japan’s ratio has increased much more rapidly in recent years (from just 6.6% of GDP in 1995) than the OECD average (9.2% of GDP in 1995) because the share of elderly people in the total population has risen—and will continue to rise—much more rapidly in Japan than in many other countries (see chart 1). OECD data show that pharmaceutical spending made up 21% of total health spending in 2011 (latest available data)—the tenth-highest share out of the 32 OECD countries surveyed in that year.

Japan’s healthcare spending translates into positive health outcomes. A 2014 study by The Economist Intelligence Unit (EIU) compared health spending and outcomes in 166 countries.6 The study divided the countries into six tiers (with Tier 1 the best and Tier 6 the worst) according to their overall population-health outcomes. Japan was placed in Tier 1. The country topped the outcomes index and also scored comparatively well on value for money, keeping healthcare spending relatively low for a wealthy OECD country. Among Tier 1 countries Japan was ranked more highly for healthcare outcomes than for spending (see chart 2).

The EIU report found that this positive result was partly attributable to the relatively healthy diets and lifestyles of its people. Japan’s healthcare system can also take a large portion of the credit for its high ranking for outcomes and relatively low costs, including strong central pressures on pricing for health services and pharmaceuticals and very flexible access to high-quality healthcare solutions, with virtually limitless access to medical services. Additionally, a long-term care insurance system, to which people have to contribute from the age of 40 onwards, has ensured that many elderly Japanese have received long-term care at relatively reasonable costs to date.7

However, the success of the system has also created challenges. Life expectancy at birth, at 83.6 years in 2014 (World Bank data), is the second-highest in the world (after Hong Kong’s 84.1 years) and well above the OECD average of 80.2 years. But population ageing, rising rates of chronic diseases (such as hypertension and diabetes) and advances in health technology are putting upward pressure on health spending. And the lack of a fixed healthcare budget in Japan, while creating flexibility for providers, helps to fuel rising expenditure, according to Isao Kamae, project professor for the HTA and Public Policy

6 The Economist Intelligence Unit, Health outcomes and cost: A 166-country comparison, 2014. Available at: http://www.eiu.com/public/thankyou_download.aspx?activity=download&campaignid=Healthoutcome2014

7 Ibid., p. 12.

EIU Health Outcomes Index, Tier 1 countries, 2014Ranking differences: Outcomes versus spending

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Sources: The Economist Intelligence Unit, World Health Organisation.

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Value-based healthcare in Japan An evolving concept

Project at the University of Tokyo’s Graduate School of Public Policy.

The Japanese approach to pricing and reimbursementThe reimbursement of medical services to healthcare providers in Japan is primarily made on a fee-for-service basis, with few attempts made so far to introduce outcome-based payments or pay-for-performance models (which are core elements of systems driven by value-based healthcare) that are gaining traction in the US and Europe.8 This could undermine the healthcare system’s continued ability to offer good value for money, particularly against a backdrop of population ageing and rising healthcare spending that will continue to outstrip GDP growth in the coming years, according to EIU forecasts.9 Unless the healthcare system’s financing mechanisms adapt to these new realities, the system faces a funding gap of around ¥19.2trn (US$189bn) by 2020 and ¥44.2trn by 2035, according to a McKinsey report.10

The Japanese system includes a number of elements designed to help to contain costs, among them supply-side price regulation, which allows for a review of prices of medical products every two years;11 guidelines for physicians regarding medical treatment, which are among the strictest in any region; and co-payments, whereby service users pay around 30% of the government-set price of medical costs (10% for long-term care), with the remaining 70% reimbursed by insurance.12 The 30% co-payment applies to all medical fees, regardless of whether they are inpatient, outpatient or prescription drugs. However, in cases where the total cost of care exceeds a given threshold amount, the co-payment is decreased to 1%, with insurance covering the rest.13

Japan often uses cuts in fees to physicians and hospitals and reductions in the prices it pays for drugs and equipment to manage expenditure. However, this approach does

little to cut healthcare demand and threatens to create shortages in treatments and worse quality of care. As the McKinsey report notes: “The country typically applies fee cuts across the board—a politically expedient approach that fails to account for the relative value of services delivered, so there is no way to reward best practices or to discourage inefficient or poor-quality care.”14

Efforts to increase the consumption tax to 10% from 8% in order to expand financing capabilities for social and healthcare spending have been postponed twice within the past two years. However, if the government is unable to improve its financing capability, it will become increasingly difficult to finance a healthcare system for a rapidly ageing population.

The government has also encouraged the use of generics. Generic penetration has risen significantly in Japan, from 17% of the whole pharmaceutical market in 2005 (in volume terms) to almost 28% in 2013 (latest available data).15 However, this is still well below the OECD average of 48%.16 Although policymakers have been pressing for greater use of generic drugs to cut costs, doctors retain the right to prescribe medicines as they see fit. Moreover, such policy measures on their own are unlikely to be sufficient to provide the savings necessary to maintain or even improve Japan’s healthcare system, especially given the rising demand from its ageing population.

The fact that healthcare providers lack any accountability regarding costs is a clear part of the problem, according to Professor Kamae. “Governments like to respect the professional responsibility of physicians but are trying to make them use more generics. Still, [the physicians] have their own autonomy to select brands and also play a limited role in the procurement of medical technology and drugs in Japan. It seems that most physicians don’t have their own opinions on cost-effectiveness. Every decision is taken by government.”

12 Ikegami et al, “Japanese universal health coverage”.

13 Ibid.

14 Henke et al, “Improving Japan’s health care system”.

15 Japan Generic Medicines Association, Generic Share (%) by MHLW Drug Price Survey, http://www.jga.gr.jp/english/country-overview/genric-share-by-mhlw/

16 OECD, OECD Health Statistics 2015.

8 Henke, N, Kadonaga, S and L Kanzler, “Improving Japan’s health care system”, McKinsey Quarterly, March 2009. Available at: http://www.mckinsey.com/industries/healthcare-systems-and-services/our-insights/improving-japans-health-care-system

9 EIU, Health outcomes and cost, p. 13.

10 Henke et al, “Improving Japan’s health care system”.

11 Goddard Health, Japan Market Information.

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Value-based healthcare in Japan An evolving concept

These systemic weaknesses lead to inefficiencies in the delivery of care, which are most glaring in the inpatient sector, according to Hiroaki Miyata, a professor in the Department of Health Policy and Management at Keio University’s School of Medicine. He says that the average length of stay for coronary-bypass procedures is 28 days in Japan, compared with just seven days in the US. Both extremes can be harmful for patients, he observes. “We think we could save US$10bn a year by evaluating the length of stay by value, looking at costs and outcomes. There is too much

overtreatment, overstay and overdiagnosis.” On average, the Japanese make nearly 14 visits to physicians a year, three times the number of visits in other developed countries, thus adding to the financial pressures on the system.17

In the next chapter we will look at the prospects for reform of the system’s funding mechanisms, notably the introduction of HTA elements in an effort to consider cost-effectiveness in the decision-making process for pricing and reimbursing healthcare solutions.

17 Henke et al, “Improving Japan’s health care system”.

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Value-based healthcare in Japan An evolving concept

Japan currently has no official body for health technology assessment, although there are several institutions within the country’s healthcare system that use a process similar to HTA. The system used for reimbursement and pricing decisions includes the assessment of efficacy, safety and social benefits.

Japan’s Ministry of Health, Labour and Welfare (MHLW) is the primary body that creates and implements standards for medical devices and drugs, with approved products ending up on the NHI list. The MHLW is also in charge of determining coverage policy and the final pricing of products used for treatment.

The Pharmaceutical and Medical Devices Agency (PMDA), which is similar to the European Medicines Agency (EMA) and the US Food and Drug Administration (FDA), is an independent regulatory agency within the MHLW that reviews applications for new drug licenses for their safety and efficacy.

Lack of transparency and scientific basisThe Central Social Insurance Medical Council, known as Chuikyo, is a separate body within the MHLW that provides recommendations for the pricing of medical products and includes representatives of health insurers,

medical professionals (physicians, dentists and pharmacists), academics and some other representatives from local governments, nurses, laboratory technicians and industry. However, it is questionable how objective these recommendations can be. “They have their own equations and a formula to assess the value of medical technology, but those kinds of equations and formulas were not developed based on a scientific method in an objective way,” says Professor Kamae. “So eventually the committee members make their decisions based on their own judgments.”

An external body, the Drug Pricing Organisation (DPO) is responsible for the pricing and repricing of products on the NHI list. Companies cannot decide prices for drugs and medical devices on their own. If the MHLW and Chuikyo agree with the price, it is listed on the NHI price list within 60 to 90 days.

The NHI uses a so-called “similar product efficacy comparison method” to match the proposed price for a new product with that of the existing standard of care. If the new product is seen to be an improvement on existing treatments, the agreed price will be higher, with an adjustment for the average foreign price.18

For products with no comparators, the final NHI price consists of a combination of the

Chapter 2: Shaping a nascent HTA process2

18 Pacific Bridge Medical, Japan Drug Regulatory Overview, 2014, p. 58. Available at: http://www.pacificbridgemedical.com/wp-content/uploads/2015/04/Japan-Drug-Regulatory-Overview-2014.pdf

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Value-based healthcare in Japan An evolving concept

manufacturing (or import) cost, the selling cost or research expenses, the business profit, the distribution cost and a consumption tax, known as the “cost-calculation method”.19 The NHI drug price is the reimbursement price paid to medical institutions and is fixed for each prescription drug approved by the MHLW. This means that unlike in some European countries, there is no difference between the NHI price and the reimbursement level in individual medical institutions. Prices are also consistent across the country, with no regional pricing or reimbursement disparities, as is the case in other health systems, for example in Europe.20

Drugs that are notable for their innovativeness, usefulness, marketability and paediatric use are given additional premiums, with the first two categories receiving the largest premiums of up to 120% and 70%, respectively, over the basic price.21 However, a lack of a scientific basis for evaluating pricing or repricing decisions makes the process less transparent to the public, while inner-circle players understand the process and pricing rules, according to Professor Kamae.

Redefining valueThe process of integrating outcomes-based evidence and cost considerations in the decision-making process is still in its infancy in Japan. “Until 2015 the country defined value questions as clinical outcomes and efficacy,” says Professor Kamae. “Pharmacoeconomic requirements were introduced on a trial basis in April 2016, and that is a basic change regarding the definition of value in Japan.”

Data on outcomes are readily available. The health system has more than 15 years of data on 90-day outcomes for a range of medical conditions, according to Professor Miyata. He says that this should provide evidence that physicians can use as guidance for treatment. “Evidence-based medicine is updating itself globally. When a physician enters data, the cloud can quickly answer what is the appropriate best practice.”

The MHLW is currently in the early stages of looking at the adoption of HTA focused on cost-effectiveness in order to reprice a number of existing pharmaceutical treatments. In 2014 the government launched trial HTA evaluations of the cost-effectiveness of five listed treatments, according to Kenji Shibuya, a professor in the department of Global Health Policy at the Graduate School of Medicine at the University of Tokyo.

Professor Shibuya adds that a full HTA system is due to be rolled out in 2018. Its framework has been discussed in a working group, but there are some technical and logistical issues to work out, including how to find the human resources to carry out such assessments, as well as a need for strong political commitment.

Meanwhile, it remains unclear which performance indicators the system will use, and how it will quantify the value of incentives to encourage further efficiency. For example, quality of life is one criterion of value used by the government for the reassessment of medical products and treatments, and it allows pharmaceutical companies to submit evidence of improvement based on this criterion. However, Professor Kamae notes that there are no public guidelines in place for defining what constitutes improved quality of life. “The government also increasingly defines broader social benefits for [Chuikyo’s] discussion of central pricing decisions; their discussions are not very transparent with respect to objective standards, so we don’t know what kind of evidence is already considered in terms of broader social benefits.” And when it comes to evaluating economic evidence for new drugs or medical technology, it is also unclear which method will be applied.

“The guidelines say companies have to submit cost-effectiveness analysis primarily using QALYs [quality-adjusted life years], but an incremental cost-effectiveness ratio also has to be proposed to the committee,” Professor Kamae says. He also notes that although Japanese policymakers have said they would not impose a threshold

19 Ibid., p. 62.

20 EIU, Value-based healthcare in Europe.

21 Kamae, I and M Kobayashi, “Value-based Pricing and the Principle of the Incremental Cost-Effectiveness Ratio: The Case and Potential in Japan”, ISPOR Connections, October 2010.

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Value-based healthcare in Japan An evolving concept

for evaluating health outcome, such as the UK’s official refusal to pay for drugs that exceed £20,000-30,000 per QALY, this exclusion cannot necessarily be taken at face value. “It means they aren’t going to use [a threshold] exclusively or officially. They don’t forbid the Chuikyo committee members from using an implicit threshold in their minds.”

The pricing system will need to be overhauled, according to Professor Shibuya. Instead of “political negotiations under a macro cap”, there is a need for a transparent, rational and evidence-based process for determining pricing. In addition, he says, the methods used to contain costs—including item-by-item revisions and auditing of claims forms—are no longer suitable to most inpatient care settings, where acute care beds are generally paid for by a combination of a fee-for-service system and a per-diem inclusive rate set by the so-called Diagnosis Procedure Combination (DPC) approach. DPC is similar to the Diagnosis-Related Group (DRG) system used in a number of developed countries and was introduced by Japan’s government for inpatient care more than a decade ago. The government is looking to extend it to outpatient care.

Professor Shibuya says that distortions to the system must be addressed, such as the fact that outpatient services and pharmaceutical prescriptions attract a higher profit margin than inpatient acute services. The focus should be shifted from cure to care and prevention, from quantity to quality and from fragmentation to integration, he adds.

“Now the Japanese healthcare system is in a transitional process from a fee-for-service system to a flat-rate payment system for inpatient and outpatient care,” Professor Kamae says. “In a flat-rate payment system doctors have to be sensitive to cost. Physicians have to accept it, even though they don’t like it because it’s centrally [imposed].”

In the case of cutting-edge but costly drugs, policymakers will have to make greater use of

data to help decide which patient populations are most likely to benefit, Professor Miyata says, noting that one cancer drug currently costs Japan’s health system US$20bn a year. “It could change the world, but it could also change the financial situation [in Japan].” He adds that a database is collecting information on which physicians use the drug and for which patients they prescribe it, giving policymakers the possibility in the future to set guidelines on appropriate prescriptions and usage. “We put so much money into each patient that we have to balance the quality of care and Japan’s finances.”

Under the proposed new HTA system pharmaceutical companies will be required to submit an HTA dossier for treatments selected according to predetermined criteria that have yet to be announced. The MHLW, a dedicated body within an existing organisation or a new, yet-to-be-identified entity are among the prospective bodies that have been identified to analyse company data to make sure they are robust. The HTA agency will include healthcare professionals, insurers, patient representatives and health economists, with Chuikyo representatives potentially also included with a specific focus on drug costs.

Although the planned HTA system is currently focused on the repricing of listed medicines and devices, it could also be used to evaluate the pricing of procedures and care pathways in the future. Given the government’s new emphasis on pharmacoeconomic requirements, Professor Kamae believes it is only a matter of time before cost-effectiveness is applied to this element of healthcare provision, although he estimates that it is likely to be at least four to six years before this happens.

Financing innovationThe main goal of the introduction of value- and outcome-oriented health measures in Japan is helping the system to direct more of its resources towards the most innovative and promising interventions and funding them in a sustainable manner.

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Value-based healthcare in Japan An evolving concept

The “Japan Vision: Healthcare 2035” report recommended three target actions towards this goal to be accomplished by 2020: the systematic implementation of HTA; improvement in the quality of healthcare services through professional initiatives; and the development of a general-practice system that co-ordinates a “community-based, integrated healthcare system accessible throughout Japan”. By 2035, the report suggests, Japan’s healthcare system should be assessing health technology for value-based measures and setting reimbursement rates according to these criteria, as well as benchmarking performance to compare outcomes.22

One important element of this process involves ensuring that Japanese health professionals are integrated into the process of emphasising value. As we have noted, Japanese health providers adhere closely to clinical guidelines, most of which are drawn up by professional societies with a “substantial variation in quality”, according to Professor Shibuya. While some employ criteria such as those proposed by the Grading of Recommendations Assessment, Development and Evaluation (GRADE) Working Group—an international body founded in 2000 with the aim of addressing the shortcomings of healthcare grading systems, including a lack of evidence-based measures—others do not. Meanwhile, very few Japanese professional societies consider comparative effectiveness when setting guidelines.

The system is complicated by what Professor Shibuya says are two conflicting features, a “laissez-faire approach” to the way in which services are organised and delivered on the

one hand, and a “tight, supply-side control” of payment under the single-fee schedule on the other. “Aligning the service provision and payment mechanisms around the patients’ value is critical.”

Given the existing demands on the system, the government will have to find new ways of financing healthcare spending or free up funds using other methods to ensure access to the most innovative new healthcare solutions. One approach, for which a functioning HTA system will be crucial, is to identify lower-value treatments that can be discontinued or products that can be delisted from the National Formulary, Professor Kamae says, although he notes that this is likely to attract vocal opposition from some patients and doctors. “In Japan, only the government cares about financial matters,” adds Professor Miyata. “Now the physicians have started to think about that, but on the patient side they haven’t thought about it.”

In addition to improving the assessment of innovative drugs and devices, Japan will need to improve healthcare delivery to make the system more cost-effective, the experts interviewed for this study say. Professor Miyata notes that following a pilot regional collaboration project in Hiroshima Prefecture, which included the development of a phased system for providing diagnosis and treatment and the streamlining of hospitals, the region’s cancer survival rate is now the highest in the country. “We can improve quality and cost, it’s not a trade-off. It should be accomplished through a bottom-up process—not by the government but by healthcare professionals.”

22 MHLW, Japan 2035, pp. 4/5.

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Value-based healthcare in Japan An evolving concept

living with chronic diseases, there is increasing scrutiny of how well the health system is directing resources towards the innovative interventions that provide the greatest value.

As part of this process, policymakers need to address the limited incentives for physicians to control costs. The country needs to continue to develop its nascent HTA system, create a more balanced and transparent pricing and reimbursement system for innovative health technologies and services, and look more closely at the bodies issuing clinical guidelines, as these have a strong influence on health providers and are likely to be the most effective way of implementing comparative effectiveness models. Finally, given the increasing demands on the healthcare system, policymakers are likely to need to revisit the way the system is financed in the future.

The adoption of broader concepts of value in healthcare is still in its infancy in Japan. In 2015 the MHLW advisory panel recognised value-based healthcare as a central component of its vision for healthcare in Japan to the year 2035.

But while policymakers are now embracing the notion of cost-effectiveness in principle, the methodology for evaluating treatments and healthcare delivery remains underdeveloped, and the system for setting prices and reimbursement must be more transparent to bring other stakeholders in the system on board. In particular, physicians, long protected from cost considerations, are only just beginning to be exposed to the concept of outcome-oriented decision-making and cost considerations. And much work remains to be done before patients and payers can be brought around to a new way of thinking. At the same time, given Japan’s ageing population and the growing number of patients

Conclusion

While every effort has been taken to verify the accuracy of this information, The Economist Intelligence Unit Ltd. cannot accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in this report.

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