This Selected Issues paper examines implications for long-term bond yields in case of Japan. The analysis finds that so far, upward pressure on interest rates from high public debt has been offset by domestic factors, including a stable investor base with a preference for safe assets. As these effects could decline with population aging, yields could rise unless reforms are implemented to stimulate growth and reduce the public debt-to-GDP ratio. In such a scenario, long-term Japanese government bond rates would remain relatively low and stable. The paper also analyzes to what extent rising health care spending poses a fiscal risk to Japan’s economy.

Abstract

This Selected Issues paper examines implications for long-term bond yields in case of Japan. The analysis finds that so far, upward pressure on interest rates from high public debt has been offset by domestic factors, including a stable investor base with a preference for safe assets. As these effects could decline with population aging, yields could rise unless reforms are implemented to stimulate growth and reduce the public debt-to-GDP ratio. In such a scenario, long-term Japanese government bond rates would remain relatively low and stable. The paper also analyzes to what extent rising health care spending poses a fiscal risk to Japan’s economy.

Japan’s Health and Long-Term Care System: Fiscal Projections and Reform Options1

Japan’s health spending has increased significantly for the past two decades, but is low by international comparison and has succeeded in promoting health and longevity. Spending is projected to continue to increase from the current 9.4 percent to 14.4 percent of GDP in 2030, given demographic changes and past cost trends. Out of the 5-percentage-point increase in health spending over the next two decades, 3 points would have to be financed by the government, which would complicate an already difficult fiscal consolidation process. Japan’s health system is generally regarded as cost effective, yet it shows signs of inefficiency. Various reform options considered here could save 1.8 percent of GDP in 2030, and more drastic reforms are needed to fully offset the expected increase in spending. Although long-term health spending projections are uncertain, estimates could understate the rise in costs and pose a downside risk to the fiscal sustainability of Japan.

A. Introduction and Main Findings

1. Universal health coverage has contributed to a dramatic improvement of Japan’s health outcomes over the past 60 years (Figure 1). Life expectancy increased from 50 to 80 years over 1947–2011 for males. Likewise, female life expectancy increased from 54 to 86 years over the same period. Universal health coverage established in 1961 (Box 1) has played a critical role in this success, along with improvements in societal factors, such as income, education, nutrition, and sanitation. In addition, the health care (HC) system has achieved and maintained equal access to care for all people at an affordable cost. (Ikeda and others, 2011).

Figure 1.
Figure 1.

Health Performance and Spending

Citation: IMF Staff Country Reports 2013, 254; 10.5089/9781475563795.002.A002

2. With the country’s rapidly aging population, the government introduced mandatory public long-term care (LTC) insurance in 2000. The system is built on a social insurance principle (Box 1) in which the government provides care as an entitlement to eligible population. Its services are financed from mandatory contributions from those aged 40 or older. Coverage and benefits of the LTC insurance is generous. It provides care in an institutional setting, as well as home and community based services. The number of public service users has significantly increased since 2000.

3. Financing of the HC and LTC system, however, is coming under pressure (Figure 1). The funding for the system is sensitive to changes in demographic and economic factors, which raise utilization of services, while lowering private contributions. Subsidies from general revenues and cross-subsidization among different insurance plans, along with tightly regulated prices, have maintained its functioning, but the long-term financial sustainability of the system will increasingly come under pressure if demand for services and growth in private contribution continue on past trends.

Japan’s Health System

Japan’s health system consists of universal health care (HC) and long-term care (LTC). The HC system virtually covers the entire population. The LTC system covers people at age 65 and older, as well as those in 40–64 years of age who meet eligibility criteria. Japan’s HC system is highly fragmented. There are over 3,000 plans according to where they reside and where they are employed. The insured can choose any service providers. Other key features are as follows:

  • Insurers. Age and employment largely determine one’s insurers for HC (text figure). For people aged 75 and above, the prefecture of their residence serves as their insurer. For people aged 74 and below, four kinds of insurance programs exist. Employees of SMEs are all covered by one insurer (Kyokai Kempo), while employees of large firms are covered by their employers (Kumiai Kempo). For the latter, there are around 1,500 insurers. Public sector employees and teachers at private schools have their own insurers (Mutual Aid Association). All others (that is, self-employed, unemployed, and pensioners) belong to National Health Insurance Program (NHIP), which is administered by each municipality, and there are around 1,800 insurers. Likewise, LTC is administered by municipal governments.

  • Contributions. Contributions for HC insurance are adjusted to income and differ across insurers. Kyokai Kempo has different contribution rates across prefectures although it is a single insurer. For employment based HC insurance, employers provide a matching contribution to each insured. Dependent spouses with annual income below 1.3 million yen are exempted from paying contributions. Contributions for the NHIP enrollees are based on a family unit. Contributions for LTC insurance are adjusted to income and differ across municipalities.

  • Out-of-pocket payments (copayments). The copayment rate for the HC program is uniform (30 percent), except for pre-school children (20 percent) and the elderly (10 percent). The rate for LTC is 10 percent. The average effective copayment rate is low at 13 percent for HC and 10 percent for LTC. Copayments are subject to a monthly cap, which is based on age and income. People on the welfare program receive free care.

  • Government controls. The central government sets unit prices of all medical procedures, drugs, and devices every other year, and they are applied uniformly to all physicians and hospitals (both private and public). Prices of public LTC services are also decided by the central government every three years.

uA02fig01

Fragmented Health Insurance System

(In million people, FY2011/2012)

Citation: IMF Staff Country Reports 2013, 254; 10.5089/9781475563795.002.A002

Source: Ministry of Health, Labor, and Wealth.

Total spending on HC and LTC2 more than doubled in percent of GDP during the last two decades. Although the share of public health spending to GDP is currently around the OECD average, with a rapidly aging population and increasing cost to provide HC and LTC, the share is expected to rise even further.

4. Our estimates show that the financing gap would rise by 3 percentage points of GDP in 2030. Given the assumptions of demographic change and the growth differential between health spending and GDP per capita (a.k.a. excess cost growth (ECG)) of 1 percent, total HC and LTC spending would increase by 5 percentage points over 2010–30. Assuming a modest and gradual increase in premiums equivalent to 1¾ percent of GDP over the next two decades, the government would need to substantially raise its funding for the HC and LTC system. The increase in transfers (financing gap) as a share of GDP would amount to 3 percentage points of GDP in 2030. Various reform measures examined below could save up to 1.8 percentage points of GDP. These measures include raising copayment rates, more efficient use of health resources, and higher reliance on generics. However, these options cannot fully close the financing gap.

5. The rise in total HC and LTC spending raises fiscal risks, although there is large uncertainty around the expenditure and revenue projections. Japan has already a large fiscal consolidation need to bring public debt on a downward path requiring a structural fiscal adjustment of 11 percent of GDP over the next decade according to IMF estimates. This assessment does not include the potentially sizeable increase in HC and LTC financing needs that this study finds. Although long-term projections—including ECG and an increase in premium revenue—entail large uncertainty, estimates could understate the rise in costs and pose a downside risk to the fiscal sustainability of Japan.

B. Spending Projections

6. Total HC and LTC spending in Japan has risen rapidly. After hovering around 4–5 percent of GDP during the 1980s, spending more than doubled during the last two decades, from 4½ percent in 1990 to 9½ percent of GDP in 2010. The introduction of public LTC insurance in 2000 also contributed to this increase.

7. The spending increase stems both from population aging and ECG (Figure 2, top chart).3 During 2000–10, the ratio of total spending to GDP increased at a rate of 3.6 percent per year. About half of this (1.7 percentage points) is attributable to population aging, and the rest to ECG.

Figure 2.
Figure 2.

Health Spending Decomposition and Projections

Citation: IMF Staff Country Reports 2013, 254; 10.5089/9781475563795.002.A002

Source: IMF staff calculations.1/ Comprises health care and long-term care spending.2/ Includes contributions from healthy aging and residual (see Appendix).3/ Staff calculations based on the authorties’ projections through 2025. That is, an annual ECG implied by the authortiies’ projections is computed from the same aging factor component used in staff projections. Then, the implied ECG (as well as the aging factor used in staff projections) is used to extend the authorities’ projections to 2030.

8. Moreover, ECG has been on an upward trend since the late 1980s. ECG was −1.5 percent per year during the 1980s, but picked up to 1.1 percent per year in the 1990s and 1.9 percent per year in the 2000s (Figure 2, top chart). The latter may reflect cyclical downturn or lower labor participation;4 after controlling for these effects, however, ECG for 2000–10 was still as high as 1.3 percent per year. In addition, high ECG was observed across the board for different age groups.

9. The effects of population aging and a continuation of ECG trend imply that total HC and LTC spending could increase by 5 percentage points of GDP between 2010 and 2030 (Figure II.2, middle chart). This rise comes equally from the effects population aging (based on official population projections) and an acceleration of HC/LTC cost (ECG is assumed at 1 percent per year). This projection is in line with the authorities’ forecast, which shows a spending increase of 4½ percentage points under a no-reform scenario and a rise by 5¾ percentage points under a reform scenario (Figure 2, bottom chart). If ECG is 2 percent per year, the increase would be 8¼ percentage points of GDP. As changes in ECG are difficult to project—especially as a larger share of the population enters the group of the very old (85 years and above)—there is large uncertainty around these estimates.

C. Financing Gap Projections

10. Total HC and LTC spending is financed by premiums, government transfers, and copayments (Figure 3). In 2010, premiums accounted for nearly half of HC financing and 45 percent of LTC financing. Government transfers (by the central and local governments) accounted for 38 percent of HC financing and 45 percent of LTC financing, with the rest accounted for by copayments, that is, out-of-pocket expenditure by patients.

Figure 3.
Figure 3.

Financing Health Spending

Citation: IMF Staff Country Reports 2013, 254; 10.5089/9781475563795.002.A002

Sources: Authorities data; and IMF staff calculations.

11. Premium contributions are assumed to rise in line with the authorities’ projections, while copayment rates remain unchanged. In the baseline scenario, the average contribution rate for HC (effectively a payroll tax rate) would increase by 3 percentage points to reach 10 percent in 2030.5 The equivalent contribution rate for LTC would reach 2½ percent in 2030, an increase of 1¼ percentage points.6 Effective copayment rates are assumed to remain at the 2010 level. The difference between the spending increase and increases in premiums and copayments widens the financing gap, which would need to be financed by an increase in government transfers.

12. The financing gap would rise by 3 percentage points of GDP over 2010–30. Government transfers would need to increase by 2½ percentage points of GDP for HC and ½ percentage points of GDP for LTC. To finance the gap with consumption tax increases, Japan would need to raise its rate by 6 percentage points by 2030. On a cumulative basis, the gap amounts to 33 percent of GDP over 2010–30 on a present value basis.7

13. Almost the whole rise of the financing gap is explained by an expected increase in HC and LTC spending on people aged 65 and above. In 2010, the spending share by people in these age cohorts accounted for 62½ percent in total. This share is expected to grow to 72½ percent in 2030 and nearly 80 percent in 2060. Yet, their contributions, including copayments and premiums, are merely 23 percent of their HC and LTC spending during 2010–60. The remaining 77 percent, which is expected to grow substantially in percent of GDP, would require funding.

D. Reform Options

14. Despite the very good health outcomes, Japan’s system has some potential inefficiencies, which could be addressed to generate cost savings (Figure 4). In particular:

Figure 4.
Figure 4.

Reform Options

Citation: IMF Staff Country Reports 2013, 254; 10.5089/9781475563795.002.A002

  • Japan has by far the largest number of beds per capita and longest average hospitalization days among the OECD countries. According to the OECD, the number of beds per 1,000 population is 13.6 and average length of stay is 18.2 days in Japan while the OECD average (the highest 5 other OECD countries’ average) is 4.9 (7.8) and 7.1 (10.6), respectively. This may be partly a result of very low copayment rate beyond the monthly cap on out-of-pocket payments and relatively limited usage of DRG (diagnosis-related group) -based reimbursements.

  • Japan also has by far the largest number of CT scanners and MRI units per capita, while it is among the least advanced in using generics. Japan has 130 and 40 percent more CT and MRI per population than the second highest country in OECD, and 4.3 and 3.5 times more than the OECD average, respectively. Possible reasons behind this include the low usage of DRG-based reimbursements and conflicting responsibilities over patient care among neighboring hospitals.8 In addition, according to the IMS Health (Sheppard, 2010), Japan’s utilization of generic medicines in the off-patent market is 24 percent in 2009, while it is 89, 75, and 71 percent in the U.S., Germany, and the U.K., respectively. Further incentivizing and advertizing the usage of generics should be pursued.

15. Cost savings from addressing these issues could amount to 0.6 percent of GDP in 2030. Based on the research by the OECD (Paris, Devaux, and Wei, 2010) and the IMF (Clements, Coady, and Gupta, 2012), improving Japan’s scores in “supply constraint” and “gatekeeping” to the OECD average level could save the government 0.35 percent of GDP in 2030. Also, the authorities’ estimate suggests that increasing the generic share in the unprotected market to 100 percent could save 0.27 percent of GDP.

16. Raising copayment rates would produce a double dividend of increasing revenue and reducing excess demand. Raising effective copayment rates by 5 percentage points for people aged 70 and older in the HC system9 and for all users in the LTC system could add revenue of 0.8 percent of GDP in 2030. In addition, increasing copayment rates on expenses above the monthly cap and that for medical services provided under the welfare program may be worth examining. Higher out-of-pocket payments would also contribute to reducing excessive demand, but may need to be accompanied by means-testing.

17. Collecting contributions from dependent spouses could increase revenue and reduce disincentives for second earners to work. Under the current system, dependent spouses of employees are exempted from paying premiums if their annual earnings are below 1.3 million yen. This creates disincentives to work beyond this threshold. Moreover, this special treatment of dependent spouses may be unfair vis-à-vis couples with both earnings beyond the threshold and those insured by the NHIP. Collecting contributions from dependent spouses equivalent to the amount of benefits received (for age 64 and below) could add revenue of 0.31 percent of GDP in 2030.

18. These options would add up to total savings of 1.8 percent of GDP in 2030 (text table), only partly offsetting the projected increase in government transfer of 3 percent of GDP. Given the already high fiscal adjustment need, Japan may need more drastic reforms to contain the impact of aging and cost growth (ECG>0). These could include further increases in copayment rates and a review of government-controlled prices of HC and LTC services.

Reform Options to Rationalize and Limit Public Expenditure on Health and Long-Term Care

article image

Amounts in FY2025. Although the government plans to increase spending on net, these figures refer to gross savings.

Total savings is staff’s estimate based on OECD (2012)’s projections in 2017.

Authors’ calculation based on the paper’s results.

Category of measures is based on IMF (2012).

Authorities plan to shorten hospitalization days and optimize the number of doctor visits. Based on their estimate, reducing hospitalization days to OECD average would produce saving of 1 percent of GDP (0.5 percent in the case of reducing days to the average of five OECD countries with longest days except Japan).

Only includes an increase of 5 percentage points in effective copayment rates for 70 and over. Copayment rates for expenses above the monthly cap and for the welfare program could be increased.

Appendix

Decomposition of Health Spending Increases

The ratio of health care and long-term care spending (Gt) to GDP (Yt) is equal to

gtGtYt=ΣGitYt=(G1t/NitYt/Nt)Σi(Git/NitG1t/N1t)(NitNt)=etΣihitnit

where

  • et: ratio of per capita health spending of a benchmark age cohort (age 36–40) to GDP per capita

  • hit: per capita health spending of age cohort i relative to that of the benchmark age cohort (age 36–40)

  • nit: population share of age cohort i, i.e., the ratio of population of age cohort i (Nit) to total population (Nt).

Let a “hat” represent the percent change of a variable (i.e., x^t+k=xt+kxtxt. Then, the percent change in the ratio of health spending to GDP (g^t+k) is decomposed into four components: excess cost growth, healthy aging, pure aging, and residual (which should be much smaller than the rest):

g^t+k=(1+e^t+k)Σhi,t+kηi,t+kΣhitηit1=(1+e^t+k)Σiwi(1+h^i,t+k)(1+n^i,t+k)1=e^t+kECG+Σiwih^i,t+kHealthy aging+Σiwin^i,t+kPure aging+residual

where weight, Wit=hitnitΣhitnit.

In other words:

  • The health spending ratio increases as a result of excess cost growth (ECG), that is, per capita health spending (of the benchmark age cohort) rises relative to GDP per capita.

  • The spending ratio is affected by a change in the profile of per capita health spending over age cohorts. For example, the spending ratio declines if healthy aging occurs, that is, per capita spending of the elderly declines relative to the young as the elderly become healthier over time.

  • The spending ratio increases as the population ages because the elderly spends much more than the young. The third term is the effect of “pure aging,” in the sense that the effect of healthy aging is stripped off.

To decompose the past increase in the spending ratio, we use data on spending and population by age cohort (Git and Nit, respectively), for health care and long-term care separately.18

Health Spending Projections

Health care and long-term care spending is projected from the base of 2010 through 2060, with the following assumptions:

  • The ECG component eit increases at a fixed annual rate for the projection period (0 percent, 1 percent, or 2 percent).

  • The profile of per capita health spending over age cohorts hit is fixed at 2010 levels and unchanged for the projection period.

  • The population share by age cohort (nit is calculated from population projections by the National Institute of Population and Social Security Research (January 2012), under the medium-mortality and medium-fertility scenario.19

References

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  • Ikeda, N., E. Saito, N. Kondo, M. Inoue, S. Ikeda, T. Satoh, K. Wada, A. Stickley, K. Katanoda, T. Mizoue, M. Noda, H. Iso, Y. Fujino, T. Sobue, S. Tsugane, M. Naghavi, M. Ezzati, K. Shibuya, 2011, “What has Made the Population of Japan Healthy?The Lancet, Vol. 378 (9796), pp. 10941105.

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  • Sheppard, A., 2010, Generic Medicines: Essential Contributors to the Long-Term Health of Society (London: IMS Health).

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  • OECD, 2012, OECD Health Data 2012 (Paris).

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  • Shibuya, K. I. H. Hashimoto, N. Ikegami, A. Nishi, T. Tanimoto, H. Miyata, K. Takemi, M. R Reich, 2011, “Future of Japan’s System of Good Health at Low Cost with Equity Beyond Universal Coverage,” The Lancet, Vol. 378 (9798), pp. 126573.

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1

Prepared by Kenichiro Kashiwase (APD), Masahiro Nozaki (FAD), and Ikuo Saito (APD).

2

Total spending in this paper covers public and out-of-pocket spending on the HC and LTC system, while excluding private insurance. Data on HC spending comes from the national health expenditure (NHE) compiled by the authorities, and differs from total health expenditure calculated by the OECD based on the System of Health Accounts. The latter includes expenses that are not covered by Japan’s public insurance system and thus not included in NHE, such as expenses related to prevention (for example, medical checks) and health promotion, and R&D.

3

See Appendix for the methodology applied to the decomposition.

4

If health expenditure per capita is less cyclical than GDP per capita, ECG rises as the output gap becomes negative. Also, if health expenditure per capita is more closely linked to GDP per labor force, a decline in labor participation raises ECG.

5

The contribution rate for HC insurance is calculated partly in line with assumed ECG. For those aged 16–64, the average contribution rate (based on their labor income) would reach 12 percent in 2030, an increase of 3¾ percentage points. For those aged 65 or older, the contribution rate (based on their pension benefits) would reach 5.7 percent, an increase of 1½ percentage points. Beyond 2030, the contribution rates are assumed to increase by additional 7½ percentage points on average by 2060.

6

The contribution rate for LTC insurance is calculated partly in line with assumed ECG. For those aged 40–64, the average contribution rate (based on their labor income) would reach 2 percent in 2030, an increase of ¾ percentage points. For those aged 65 or older, the contribution rate (based on their pension benefits) would reach 4.6 percent, an increase of 2 percentage points. Beyond 2030, the contribution rates are assumed to increase by additional 2¾ percentage points on average by 2060.

7

Based on the discount rate of 1 percent.

8

The government is aware of necessity of achieving division of labor among hospitals. For example, the government introduced the system by which higher unit prices are disbursed to hospitals with high doctor to inpatient ratio in 2006. Given the rapid increase in the number of hospitals with higher ratio (almost 8-fold), this financial incentive may not be working.

9

Copayment rate for ages 70–74 is temporarily reduced from 20 percent to 10 percent, which costs 0.1 percent of GDP according to the government.

18

Health care spending by age cohort (Git) is available for 5-year age cohorts for 1998–2010. Long-term care spending by age cohort is available only for age 40–64 as well as age 65 and older (no spending for age 0–39 for which long-term health care insurance is not applicable).

Japan: Selected Issues
Author: International Monetary Fund. Asia and Pacific Dept