Selected Issues

Abstract

Selected Issues

Japan—Options for Healthcare Reform1

The rapid aging of Japan’s population has raised concerns about the fiscal sustainability of the current healthcare system. Japan’s universal approach to health coverage has produced relatively strong outcomes. However, several indicators point to inefficiencies, over-supply, and excess demand. These weaknesses pose fiscal risks as Japan’s baby-boom generation crosses over the 75-year of age benchmark, private contributions to health insurance and out-of-pocket costs decline, and the burden of supporting the healthcare system shifts to the government. Under status quo policies, public expenditure on healthcare could rise beyond 16 percent of GDP over the long-term—well beyond what the current tax framework could likely finance. Managing healthcare costs in the context of ongoing demographic challenges will require a combination of measures to contain supply and demand, as well as additional tax revenue over the medium and long-term.

A. Introduction

1. The convergence of adverse demographics and a generous universal healthcare system pose challenges for Japan’s future fiscal sustainability. Japan’s healthcare system—broadly in place since the 1920s—has generated strong outcomes in terms of life expectancy. However, the projected fiscal costs in the context of a rapidly aging population are a clear concern—particularly given lower premiums paid by those over 75 years, a declining contribution base, and Japan’s already unsustainable level of public debt. Taken together, public spending on medical and long-term care has risen from about 5 percent of GDP in 1995, to 11 percent currently, and is projected to increase to near 20 percent of GDP by 2050—well beyond what could be sustained without radical and potentially disruptive increases in tax rates. Japan must act quickly to ensure that its health care system can be financially sustainable within a broader macro-fiscal framework that is geared to gradual consolidation.

2. A credible medium- to long-term framework for fiscal sustainability must encompass reforms to Japan’s social security system. With growth and inflation prospects relatively constrained in the face of adverse demographics and backward-looking inflation expectations, a meaningful policy framework to bring public finances and public debt to a sustainable path will require a combined revenue and expenditure effort. Social security spending (which in Japan encompasses the public pension system together with public expenditure on health and long-term care), is already the single largest item under current expenditure at close to 19 percent of GDP—up nearly 6 percentage points of GDP since the beginning of the century. Pension reform is already underway, but healthcare system reform has lagged. Addressing the structure of Japan’s healthcare system to achieve durable fiscal savings (while preserving health outcomes) is a key priority within the larger task of fiscal consolidation.

3. This chapter seeks to lay out a range of potential healthcare system reforms and quantify their potential fiscal savings. In doing so, the chapter seeks only to estimate fiscal savings, without taking a position on their relative priority. The chapter’s emphasis is on measures to increase efficiency and eliminate wasteful spending, and to bring Japan more in line with practices and spending levels prevalent in the rest of the OECD. Three broad areas are considered here: (i) measures to control costs; (ii) measures to rationalize demand; and (iii) measures to raise the level of private contributions.

4. The estimates presented in this chapter suggest that a combination of reforms to Japan’s healthcare framework could generate fiscal savings in the range of up to 2 percent of GDP by 2030. This relatively large range stems from the multiplicity of options on individual cost saving measures (such as differences in application to age cohorts, adjustment of premiums or copayment rates, and other scalable parameters), and potential differences in the timing of reforms (front or back-loaded).

B. Japan’s Healthcare System in Perspective

5. Japan is not alone among advanced economies in facing demographic headwinds, but it is certainly at the front of the pack. After peaking in 2010 at 128 million, the country’s population has fallen to 127 million and will continue to decline. Population is set to shrink by 0.6 percent annually for the next two decades, and the decrease will accelerate to 0.9 percent annually into the 2050s. By 2060, Japan will have nearly 27 percent fewer citizens if current trends continue.2 Aging of the population (and the shrinking of the working age cohort) is also most prominent in Japan. The closest comparator among the G7 in terms of population decline is Italy, followed by Germany and France.

uA07fig01

G7 Share of Population Age 15–64 Years

(In percent)

Citation: IMF Staff Country Reports 2018, 334; 10.5089/9781484386804.002.A007

Source: United Nations, World Population Prospects: 2017 Revision.

6. Japanese health care performs well in cross-country comparisons. Life expectancy in Japan is long, at 83.2 years compared to an OECD average of 80.2 years. As well as long life expectancy, some indicators of the quality of health care are amongst the best in the OECD. Five-year relative survival estimates after a diagnosis of breast, cervical or colorectal cancer are all high, and the 30-day case fatality after stroke is the lowest in the OECD, at 3 percent.3 Comparatively low costs are enabled by a nationally-binding price list based on a fee schedule that is revised every other year. In cross-country comparisons on health expenditure per capita, Japan ranks below the rest of the G-7 and under the OECD average. However, as a share of GDP, current expenditure on healthcare is among the top six in the OECD, which reflects a number of factors including demographics (rapid aging and depopulation).

uA07fig02

Current Expenditure on Health – 2016

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 334; 10.5089/9781484386804.002.A007

Source: OECD.

7. Japan’s healthcare financing is based on a highly-fragmented social insurance system and is subsidized with government spending. The healthcare system in Japan features 3,422 health insurers as of March 2017. Insurance payments accounted for 48.8 percent of Japan’s total health expenditure, followed by government subsidies to various health insurance schemes at 38.8 percent and co-payments by the insured 11.7 percent. Enrollment in the health insurance system is compulsory and applies to all residents including foreigners (short-period visitors are excluded) on condition that they are legally residing in the country. Participants are covered under one of the following categories of insurance:

  • Employee Health Insurance provided by their employers;

  • Community-based Citizen’s Health Insurance for the self-employed, part-time employees, retirees, and the unemployed, provided by prefectures where they live; and

  • Elderly’s Health Insurance for people aged 75 years and above provided by the prefectures where they reside.

uA07fig03

Healthcare Spending as a Share of GDP – Latest Available

(In percent)

Citation: IMF Staff Country Reports 2018, 334; 10.5089/9781484386804.002.A007

Source: OECD.

8. Employee Health Insurance can be broadly separated into self-financed Health Insurance Societies (HIS) and the subsidized Japan Health Insurance Association (JHIA). HIS is a corporate-managed program for employees of large corporations (with more than 700 workers) and their dependents. Mutual Aid Associations (MAA) for government staff and their dependents fall under this category. Under the Health Insurance Act, large employers can establish an insurance society to establish and manage its own health insurance program. These insurance societies operate within government regulations to determine their own benefits and contributions. In Japan, there are approximately 1,409 HIS and 85 MAAs managed and funded by employers and employees. Premium rates range from 5.4–12.2 percent of the salary of workers (with a ceiling), reflecting different income levels of those insured, averaging 9.2 percent for FY2018 (Kenporen, 2018). Monthly contributions are shared by employers and employees. Premium rates for HIS and MAA are on the rise, mainly driven by the cross-subsidization required to support the elderly. Some societies whose premium exceeded 10 percent of salary have decided to dissolve and moved into JHIA, as JHIA can receive more fiscal support.

9. JHIA is a quasi-government-managed program covering employees of small and medium-sized firms (between 500 and 700 workers) and their dependents. JHIA is managed by a public corporation established in October 2008 – the Japan Health Insurance. The premium rates, ranging from 9.26 percent to 9.42 percent of the monthly salary of workers, are determined based on the health expenditure, demographic structure and income level of each prefecture. Since employees of small and medium-sized firms tend to have lower salaries than those in large corporations, premium revenue alone is not enough to sustain the operation of JHIA. To supplement the deficit incurred, the Japanese government provides subsidy support to JHIA (currently set at 13 percent of its healthcare benefits). Monthly contributions to JHIA are shared equally by employers and employees.

uA07fig05

Average Length of Hospital Stay (days) – Latest Available

Citation: IMF Staff Country Reports 2018, 334; 10.5089/9781484386804.002.A007

Source: OECD.

10. Citizen’s Health Insurance (CHI) and Elderly’s Health Insurance (EHI) are prefecture- based insurers, both exposed to demographic pressures. CHI covers the self-employed, part- timer workers, the unemployed, and retired persons aged under 75 years. In April 2018, the administration of CHI was consolidated from municipalities to prefectures. More than half of CHI’s benefit payment is supported by tax subsidies, reflecting the increasing number of enrollees with low or no income. CHI also receives cross- subsidization from employment-based insurance schemes for their retirees. EHI was created in 2008 to cover all persons aged 75 years or older, including the employed and dependent, to increase the transparency of elderly healthcare financing. Half of EHI’s benefit is covered by tax subsidies, and 40 percent is funded by cross-subsidization from employment-based insurers and CHI, as out-of-pocket payment of EHI insured is limited to 10 percent.

uA07fig06

Number of Hospital Beds per 1,000 People – Latest Available

Citation: IMF Staff Country Reports 2018, 334; 10.5089/9781484386804.002.A007

Source: OECD.
uA07fig07

Medical Consultations Per Capita – Latest Available

Citation: IMF Staff Country Reports 2018, 334; 10.5089/9781484386804.002.A007

Source: OECD.

11. While Japan’s universal healthcare system has provided strong health outcomes, it is important to take a closer look at overall costs. Healthcare provision and access are not strongly regulated, contributing to over-supply and physician maldistribution. From a crosscountry perspective, some elements of supply and demand in the Japanese healthcare market highlight inefficiencies. Japan leads the OECD in terms of both length of hospital stay, and number of hospital beds (per 1,000 people) by substantial margins and is second only to Korea in number of medical consultations per year. This likely reflects supplier-induced demand (Sekimoto and Ii, 2016), partly resulting from the fee-for-service reimbursement system combined with nationally fixed fee schedule for medical services and pharmaceuticals4. Physicians may practice wherever they choose, in any area of medicine, resulting in uneven (and potentially inefficient) physician distribution both by specialty and geography. Similarly, Japan places few controls over demand and allows free access for patients; there is no gatekeeper (such as a primary physician) – patients can consult any provider at any time, without proof of medical necessity and with full insurance coverage. Additional out-of-pocket payment has been imposed on visits to tertiary care hospitals without referral since 2016, however, it has had little impact on limiting access (non-referral outpatient ratio decreased by only 1–3 percent). Also, patients often do not recognize the total healthcare cost occurred, due to low copayment ratios and capping of out-of-pocket payments depending on age and income.

C. Fiscal Dimensions of an Aging Population and Healthcare Spending

12. Population aging and use of advanced and expensive health-technology have been, and will continue to be, the key drivers of health spending in the decades to come. Aging raises health and long-term care spending because the elderly spend more on health than the young. Excess cost growth is defined as the excess of growth in per capita health spending over the growth in per capita GDP, after controlling for the effects of demographic change. Excess cost growth has been positive in many advanced economies, pointing to the importance of non-demographic effects such as technological advances (Clements et al, 2012). Such factors as medical service fees, increased pharmaceutical costs, and outpatient care have also elevated total healthcare expenditure in recent years.

uA07fig08

Japan: Drivers of Health Spending Growth

(In percent)

Citation: IMF Staff Country Reports 2018, 334; 10.5089/9781484386804.002.A007

Source: IMF staff estimates.
uA07fig09

Japan: Decomposition of “Other”

(In percent)

Citation: IMF Staff Country Reports 2018, 334; 10.5089/9781484386804.002.A007

13. Under status quo policies, healthcare spending (including long-term care) will rise in coming years—presenting a sizeable challenge to Japan’s fiscal sustainability. The speed and magnitude of this increase—abstracting from potential policy changes—is sensitive to assumptions regarding excess cost growth, population dynamics, and healthy versus non-healthy aging (Nozaki et al, 2014). Even with excess cost growth at zero, public expenditure on healthcare in Japan could rise beyond 16 percent of GDP by 2060. By comparison, assuming only 1 percent excess cost growth per year could bring healthcare spending to near 27 percent of GDP in the same period. This would likely be well beyond the capacity of tax revenue to finance—the VAT rate would need to be more than double the anticipated 2019 VAT rate of 10 percent (McGrattan, Miyachi, Peralta-Alva, 2018).

uA07fig10

Japan: Projected Health Spending, 2010–601/

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 334; 10.5089/9781484386804.002.A007

Sources: Ministry of Health, Labor, and Welfare; the National Institute of Population and Social Security Research; and IMF staff estimates.1/ Includes long-term care spending.

14. Rising public expenditure requirements for healthcare have substantial implications for Japan’s fiscal sustainability over the medium and long-term. Gross public debt—at an estimated 235 percent of GDP, is already assessed as unsustainable under the IMF’s Debt Sustainability Analysis (DSA) framework. Under current policies, it will further increase to more than 245 percent of GDP by 2030, mainly due to increases in health and long-term care. Conversely, to keep pace with public healthcare spending, the consumption tax rate would need to more than double from its anticipated 2019 level of 10 percent.

D. Potential Reform Options and Future Health Spending

Analytical Framework

15. While healthcare system reform can encompass a range of different possibilities,5 this chapter examines two main ways to reduce the level of public health expenditure: (i) measures to rationalize the overall level of spending (public and private); and (ii) measures to reduce public spending.

  • Measures to rationalize the overall level of spending (both private and public) on healthcare. Some potential reform measures would affect and rationalize the supply of medical services and products. Other measures would reduce excess demand for these services and products. A third group could raise the efficiency of supply and administration. To the extent that measures rationalize total spending with minimum welfare impact, they can be attributed to efficiency gains.

  • Measures to reduce the share of public spending on healthcare. For a given level of total health spending, raising the share of private out-of-pocket spending reduces public health spending (i.e., the part of health spending financed by premium contributions and subsidies from the central government). These measures would also reduce healthcare demand, thereby reducing total spending (e.g., higher copayment rates would likely induce citizens to reduce unnecessary or low-priority doctor visits). The degree to which overall demand would be affected is unclear, given differing demand elasticities across products and services and the long history of universal healthcare in Japan. However, some evidence suggests that Japanese healthcare demand elasticity would be similar to that in other advanced countries without price controls or universal care (Iwamoto and Kishida, 2001).

16. To illustrate the potential savings in public health spending from healthcare reforms, two quantitative scenarios are presented:

  • Scenario A: Reduce total healthcare spending by 5 percent and increase the share of out-of-pocket spending from the current 12 percent to 20 percent by 2030. Japan’s health expenditure per capita varies considerably between prefectures, even accounting for age differentials. Under this scenario, total health spending is reduced by 5 percent by 2030, assuming cost saving measures to bring all prefectural health spending in line with the most efficient prefectures. In addition, it is assumed that Japan’s out-of-pocket share (estimated at an average of 12 percent of total costs) is brought to 20 percent—roughly the OECD average and in line with most other advanced economies—by 2030. The net effect would be to reduce overall and public healthcare spending from 11.8 percent and 10.4 percent of GDP (under the baseline) to 11.2 and 9.1 percent of GDP by 2030, respectively. By 2050, the differential would increase— from total and public health spending of 13.9 and 12.2 percent, respectively (under the baseline) to 13.2 and 10.6 percent of GDP under the combined reform scenario.

  • Scenario B: Reduce total healthcare spending by 10 percent by 2030 and increase the share of out of pocket spending to 20 percent by 2025. This would require deeper reforms with across-the-board cuts equivalent to 5 percent of total healthcare spending in addition to eliminating inefficiency across prefectures, and a faster timetable to increase copayment rates. The net effect would be to reduce overall and public healthcare spending to 10.8 and 8.6 percent of GDP by 2030, respectively. By 2050, the differential would increase—from total and public health spending of 13.9 and 12.2 percent, respectively (under the baseline) to 12.7 and 10.1 percent of GDP under the combined reform scenario.

uA07fig11

Japan: Health Spending under Reform Scenarios, 2017–50

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 334; 10.5089/9781484386804.002.A007

Source: IMF staff estimates.Total health spending = public health spending + out of pocket spendingScenario A: rationalize total health spending by 10 percent by 2030 through cost-saving measures.Scenario B: scenario A plus raise the share of out of pocket spending from 13.1 percent to 20 percent by 2025.

17. Scenario B would avoid a large increase in taxation to meet fiscal consolidation objectives. Using the model-based approach outlined in McGrattan, Miyachi, and Peralta-Alva (2018), the consumption tax rate would need to be increased to about 20 percent by 2050 to keep public debt at the current level. In contrast, under a scenario comparable to scenario B (the combination of improving healthcare efficiency and increasing the share of out-of-pocket spending), the required increase in the consumption tax rate would be smaller by about 5 percentage points (halving the required increase).

Reform Options

18. The potential range of measures to reform Japan’s healthcare system is broad. Table 1 identifies possible measures to rationalize total healthcare spending and increasing the share of out- of-pocket spending. It is not possible here to compile a comprehensive list of reforms or, in many cases, estimate potential savings, as some parameters (such as relative elasticity of demand across different products and services) is not known, but likely highly variable.6 Further, estimates of savings are subject to uncertainties surrounding the final impact on supply and demand. However, based on available data and estimates, the measures shown here and elaborated below, could reduce total spending by as much as 35 percent—potentially enough to realize Scenario B above.

Table 1.

Potential Healthcare System Reform Measures and Their Estimated Impact

article image
Source: IMF staff calculations.

19. Reforms to reduce total healthcare spending focus primarily on efficiency. As noted in Section C, Japan is an outlier with respect to several indicators of healthcare system use. The high number of hospital beds, long length of hospital stays, and high number of medical consultations (relative to the OECD average or figures for other advanced economies with aging populations) suggest potential inefficiencies that could be addressed without affecting health outcomes. Similarly, the per capita consumption of pharmaceuticals in Japan is high relative to the OECD average, while use of lower-cost generic drugs is low. Steps to reduce hospital supply and length of stay, use of “gatekeeper” function of primary physicians, making more use of generic drugs and otherwise reducing administrative costs could reduce total healthcare spending by 8–9 percent.

20. Increasing the share of out-of-pocket spending can be achieved by a combination of higher copayment rates, raising the monthly cap, and introducing a flat fee per medical consultation. Increasing out-of-pocket spending to 20 percent can be achieved by raising copayment rates for those aged over 75 from the current 10 percent to 20–30 percent, and by raising the monthly payment cap for each age group and income level. These measures can be complemented by a small flat fee per medical consultation.

uA07fig12

Out of Pocket Medical Costs – Latest Available

(In percent of total)

Citation: IMF Staff Country Reports 2018, 334; 10.5089/9781484386804.002.A007

Source: OECD.

21. A more top-down approach to set a hard budget limit could be considered over the medium- to long-term. Budget caps can potentially be effective in reducing spending growth and containing costs. Both econometric analysis and case studies indicate that with the implementation of budget caps, excess cost growth slowed (Tyson, et al, 2012). However, budget caps also come with some downsides. They can inequitably limit access to health care (through growing waiting times), and by themselves are unlikely to spur greater efficiency. Budget caps would be challenging to implement in Japan’s current setting, especially because public hospitals account for only about 30 percent of total hospital beds in Japan. Nevertheless, health budget targets also exist in countries where health services are mainly provided privately. There would be scope for Japan to draw from successful practices in other advanced countries—for example, they can also be combined with automatic adjustment mechanisms, as has been done in Italy.7

22. Addressing the costs of long-term care is another essential element in reining in overall expenditures. Although not directly addressed in this chapter, the co-mingling of healthcare with long-term care and daily assistance is one of the factors driving up utilization of health-related infrastructure and government spending. This relates directly to Japan’s exceptionally long hospital stays compared with other OECD and advanced countries—driven in part by the provision of long-term care in hospitals rather than centers dedicated to long-term and less acute care. Available data indicates that this is an expensive option for long-term care, as such care in standard hospitals (governed by staffing, equipment and other requirements attached to their status as acute care facilities) is roughly double the cost of beds in long-term care facilities. To reduce the number of such beds, the government decided in 2016 to tighten the definition of acute care. To further remedy this misallocation of resources, the reimbursement of long-term care beds by public health insurance also needs to be reduced.

E. Conclusions

23. Japan’s universal healthcare system has produced good health outcomes but appears financially unsustainable given projected population dynamics. The combination of an aging and shrinking population will pose significant challenges. Nonetheless, given Japan’s already unsustainable level of public debt and the need to put public finances on a stronger footing, measures to reduce public expenditure on healthcare are needed in the context of a credible, well specified plan for fiscal consolidation.

24. The design of the current healthcare system encourages supply as well as demand (which is also supported by cultural norms). Japan relies primarily on a system of private hospitals, where physicians are paid on a fee-for-service basis in a price-controlled environment— encouraging a high-volume business model. Patients have access to any physician, at any time, with limited or no central control, and no requirement for a referral from a primary care physician. The resulting oversupply (visible in the number of hospital beds per capita) and over-demand (number of medical consultation and length of hospital stays) explain at least part of the excess cost growth of recent years and signal a high level of risk for future additional spending as the population ages.

25. Quantitative scenarios suggest that potential savings from a discrete set of measures could range up to 2 percent of GDP by 2030. Analysis is hampered by insufficient data and uncertainty over the behavior of key supply and demand variables. Working through the analytical framework provided by McGrattan, Miyachi, and Peralta-Alva (2018), this suggests an increase in consumption tax rate by 5 to 10 percentage points over the medium and long-term to meet fiscal consolidation needs under a realistic macroeconomic scenario. Further rebalancing between expenditure and taxation could be achieved through a broader range of reforms, and by a more front-loaded approach—particularly for increasing out-of-pocket costs.

References

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1

Prepared by Naoko Miake (OAP), Masahiro Nozaki, and Todd Schneider (both APD).

2

Source: Bureau of the Ministry of Internal Affairs and Communications.

3

OECD Review of Healthcare Quality, Japan, 2015.

4

Diagnosis Procedure Combination (DPC, a case-based reimbursement) was introduced by the authorities to address these issues in 2003, and now covers nearly 60 percent of total general hospital beds. However, DPC was insufficient on its own to curb healthcare costs as hospitals increased inpatient turnover, outpatient care, and expensive surgeries that are not covered under DPC.

5

See, for example, Botman and Porter, The Macroeconomic Impact of Healthcare Financing Alternatives: Reform Options for Hong Kong SAR, IMF Working Paper 08/272, 2008; and Jones, Health Care Reform in Korea, OECD Economics Department Working Paper 797, 2010.

6

Demand for critical life-saving or life-maintaining procedures such as dialysis are likely to be inelastic, while more optional treatments, such as massage therapy, are likely to be more elastic.

7

Suzuki (2018) proposes to de-link public subsidy from the healthcare cost growth, as it is not sustainable to fund half of healthcare benefits for CHI and EHI which will grow with aging; he suggest limiting public subsidies to the nominal GDP growth rate without adjusting for demographic factors.

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