7. Financing
Second edition

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Financing｜Trends in Medical Expenditures

Medical expenditures in Japan for FY2016 totaled 41.3 trillion yen (according to preliminary reports),
approximately 0.2 trillion yen less than the total from the previous fiscal year. This preliminary figure is also
referred to as approximate medical expenditure because it excludes expenditures stemming from work-related
injuries or those paid entirely out of pocket by individuals. The growth rate of the approximate medical
expenditure compared to the previous fiscal year was -0.4%. Rather than being frequently observed, this negative
annual growth rate was an isolated occurrence, likely due to significant increases in expenses, particularly in 2015,
related to antiviral drugs for treating viruses such as Hepatitis C, followed by a year in FY2016 that saw suchchanges as the revision of medical service fees as well as significant decreases in expenses for antiviral drugs.1
In this section, "medical expenditure" refers to the actual cost incurred at medical facilities for examinations,medications, and treatment for sickness or injury. Note that while "medical expenditure" refers to approximate
medical expenditure, "national medical care expenditure" refers to the estimated costs of treating injuries anddiseases covered by insurance. Specifically, "national medical care expenditure" includes costs for medical anddental treatment, pharmaceutical dispensing, hospital room and board, in-home nursing care, and treatments
such as those from chiropractors/acupuncturists.
Factors Behind Rising National Medical Care Expenditures
As shown in Figure 7-1-1, national medical care expenditure increases every year. These national medical careexpenditure figures represent estimates of the cost of treating injuries and illnesses at medical facilities withineach fiscal year. Factors contributing to rising expenditures include those common among developed economies
such as population aging, advances in medical technology, and increased demand for healthcare. In 2015,
approximately 60% of national medical care expenditure was incurred by people aged 65 and over.2 This groupcomposed approximately 27.3% of the total population as of October 1, 2016. It is predicted that amidst ashrinking population, the rate of population aging will continue to rise, bringing the percent of people aged 65 orover to 33.3% or 1 in 3 by 2036 and resulting in even higher national medical expenditure.3

1 Ministry of Health, Labour and Welfare "FY2016 Medical Expenditure Trends-MEDIAS-"

http://www.mhlw.go.jp/topics/medias/year/16/dl/iryouhi_data.pdf (Accessed 2018, Jan.25)

2 Ministry of Health, Labour and Welfare "Basic Document on Health Insurance" http://www.mhlw.go.jp/file/06-Seisakujouhou-12400000-

Hokenkyoku/kiso_h27.pdf (Accessed 2017, Jan.25)
3
Cabinet Office "FY2017 White Paper on the Aging Society" http://www8.cao.go.jp/kourei/whitepaper/w-2017/zenbun/pdf/1s1s_01.pdf (Accessed 2017,
Jan.25)© 2019 Health and Global Policy InstituteNational Medical Care Expenditure by Funding Source
The topic of national medical care expenditure is crucial for considering the sustainability of Japan's universal
health insurance system. This is especially clear when viewing national medical care expenditure by funding
source—a total of 87% of all expenditures are funded via public sources (government funds and insurance
premiums). The complete breakdown of funding sources is shown in Figure 7-1-2.
Compared to other developed nations, Japan spends relatively little on healthcare in absolute terms; however,total spending on healthcare as a proportion of GDP is higher than the OECD average. By this measure, Japan ranks
sixth, just behind the United States, Switzerland, Germany, Sweden, and France.4 That said, it should be notedthat the OECD calculates healthcare spending as the sum total of not only national medical care expenditures fortreatments reimbursed by health insurance, but also spending on over-the-counter medications (OTCs), long-term
nursing care, preventative measures (vaccinations, checkups, etc.), natural childbirth, and optional hospital bed
upgrades.
In recent years, total healthcare spending as a proportion of GDP has been increasing. Starting in 2006 and heading
into 2016, healthcare spending as a proportion of GDP increased from 7.8% to 10.9%, a number that far surpasses
the 2016 OECD average of 9.0%.5 Japan is one of only a small number of OECD member economies that hasreported rising healthcare spending as a proportion of GDP since 2009. However, the OECD does predict that
healthcare spending in Japan will gradually level off in the future.

4 OECD “Health at a Glance2017: OECD Indicators” http://www.oecd.org/japan/Health-at-a-Glance-2017-Key-Findings-JAPAN-in%20Japanese.pdf (Accessed

2017, Jan.25)
5OECD “Health Statistics 2017” http://stats.oecd.org/index.aspx?DataSetCode=HEALTH_STAT（Accessed 2017, Jan.25)© 2019 Health and Global Policy InstituteJapan faces regional disparities in national medical care expenditure. As shown in Figure 7-1-3, FY2014 medicalcare expenditure in Kochi Prefecture, the prefecture with the highest spending, was approximately 1.5 times
higher than the expenditure of Saitama Prefecture, the prefecture which spent the least. The national governmentis currently aiming to reduce the age-adjusted per-capita national medical care expenditure gap by half in
response to this issue. Regional Medical Care Visions, Medical Cost Optimization Plans, and the strengthening of
incentive measures for health-promotion as discussed in Sections 4 and 5 are all parts of the effort being made toresolve this problem.

© 2019 Health and Global Policy InstituteIn terms of the ranking of national medical care expenditures by type of care, as shown in Figure 7-1-4, in
FY2014 inpatient expenditures ranked highest, accounting for 37% of the total, followed by outpatient
expenditures at 34%, and pharmacy dispensing expenditures at 18%. As touched upon in Section 4, one factor
that has been identified behind the high inpatient expenditures is the longer than average length of
hospitalization in Japan compared to other countries.

© 2019 Health and Global Policy Institute7.2

Financing｜The Medical Service Fee System“Medical service fees” refers to the fees that healthcare providers
charge for medical services and pharmaceuticals covered by healthinsurance plans. These fees are set through a medical service fee
point system in which 1 point equals 10 yen. All healthcare providers
throughout Japan are required to comply with the medical service fee
points and calculation requirements for health services, medical
devices, and pharmaceuticals that are set by the MHLW, andproviders are prohibited from charging medical fees in excess of these
set amounts. In general, providers may not provide patients withcombinations of insurance-covered and non-covered treatments(mixed medical treatments); however, mixed medical treatments areallowed for situations covered by the Special or Specified Medical
Care Coverage System. The Special or Specified Medical Care
Coverage System applies to situations involving advanced treatments
and Patient-Proposed Health Services (PPHS) that are underevaluation for insurance coverage as well as elective treatments notintended for coverage.6＜Column＞Has episode-based payment
resulted in lower costs?

Another goal of the Japanese system of
episode-based payment was to drive
down costs, but is that goal being
achieved? Actually, there is a possibility
that health care costs have increased as aresult of DPC. While DPC was successful in
reducing the average length of hospitalstay, an increase in the per-diem rate of
inpatient care created an incentive forhospitals to increase the number of
inpatients. The introduction of DPC also
saw the start of “DPC consulting” services
that, in some cases, help facilities
manipulate coding, or up-code, in order toyield greater returns per patient.

Structure of the Medical Service Fee System (FFS and DPC)
The medical service fee system includes a Fee-For-Service (FFS) system and a Diagnosis Procedure Combination(DPC) payment system.
Since the foundations of the current health insurance system were established in 1961, medical service fees havecome to be based on a Fee-For-Service (FFS) system. The medical service fee system reimburses providers frominsurance funds based on medical service fee points, calculated by each medical facility according to the insuranceapplicable medical services, pharmaceuticals, and medical devices actually provided.
Introduction of the DPC System
The Diagnosis Procedure Combination (DPC) payment system is a medical service fee framework unique toJapan that emerged in the early 2000's amidst growing concerns over healthcare costs, lengths of
hospitalization, and the healthcare demands associated with the rapid aging of the population.
From 1998 to 2004, an episode-based payment system for acute inpatient care was introduced on a trial basis
at 10 major hospitals. During this trial period, the current DPC framework using a per-diem payment system(PDPS) was introduced. Among other things, the trial revealed that, regardless of large variations in length of
hospitalization among patients with the same disease, compared to fee evaluation based on a retrospective,
per-hospitalization method, fee evaluation based on a prospective, per-diem method resulted in smaller gaps
between the total service fee points and the actual resource costs and provided an incentive to lower per-diem
costs.

6

Ministry of Health, Labour and Welfare "Regarding the Uninsured Medical Expense System" http://www.mhlw.go.jp/file/06-Seisakujouhou-12400000Hokenkyoku/20170925.pdf (Accessed 2018, Jan.25)© 2019 Health and Global Policy InstituteOverview of the DPC System
The main purpose of the DPC system is to promote the standardization and transparency of healthcare. Thissystem aims to improve the overall quality of healthcare while also addressing disparities among hospitals
through the construction of an objective medical treatment information database that can be used to clarify
medical outcomes and improvements. At the same time, the objective data of the DPC system gives patientsthe benefit of being able to reference standard treatments and pricing information. In addition, the DPC system
is expected to contribute to shortening the average length of hospitalizations. As of April 1, 2016, approximately
55% of Japan's general hospital beds (490,000 beds in 1,667 hospitals) were covered by the DPC system.7 Similar
to the diagnosis-related groups/prospective payment system (DRG/PPS) introduced in the United States, theDPC system uses codes based primarily on combinations of diagnoses and procedures. There were a total of
4,244 such DPC codes as of April 2016.8 The Japanese system is unique in that it includes per-diem, bundled/
episode-based codes that are partially integrated with a fee-for-service (FFS) system. Medical fees for inpatient
treatments that correspond to DPC diagnostic groups are calculated using a flat-rate, prospective payment
system, while fees for non-corresponding services are calculated using an FFS system.
Fee Calculation Methods in the DPC System
Basic hospitalizations, screenings (including diagnostic imaging), injections, medications, and procedures
valued at less than 1,000 points are subject to bundled/episode-based evaluations. Fees for these treatments
and services are calculated based on a combination of DPC code-specific per-diem points, lengths of
hospitalization, and medical facility coefficients.
Surgeries, radiation therapy, anesthesia, and treatments valued at 1,000 points or more are not subject tobundled/episode-based evaluations. Fees for these treatments and services are calculated using a Fee-ForService (FFS) system.
In order to eliminate variations in the set coefficients assigned to medical facilities offering similar levels ofcare, the government reconsidered facility type-specific coefficients. Facility coefficients now include the Basic
Coefficient, Function Evaluation Coefficient I, Function Evaluation Coefficient II, and the Provisional Adjustment
Coefficient. In the past, there were just three types of facility-specific coefficients—the Adjustment Coefficientand the Function Evaluation Coefficients (I and II), but after the FY2012 revision to the medical fee calculation
system introduced the Basic Coefficient, the Adjustment Coefficient began to be gradually replaced by the Basic
Coefficient and Function Evaluation Coefficient II. In the FY2018 revision, the Adjustment Coefficient will beeliminated.9
Basic Coefficient: Used for basic facility services that cannot be evaluated using Function Evaluation Coefficients.
Function Evaluation Coefficient I: Used when considering the entirety of the medical facility as a service
provider, including its personnel organization, facilities, and structure (structural factors).
Function Evaluation Coefficient II: Used when considering incentives (for roles/ functions that medical facilities
should take on) to improve medical delivery system efficiency through the use of DPC/PDPS.
Fee calculation methods also vary according to the stage of hospitalization of which there are three. The flat,
per-diem fee during Stage I, the earliest stage of hospitalization, is set higher than for Stages II and III. Stage II
includes days spent in the hospital past Stage I through the day representing the national average length of stayaccording to DPC data. Although flat fees within this stage vary according to each diagnostic category, after
taking into account the average per-diem medical resources used, fees in this stage are effectively lower thanfees in Stage I. In Stage III, the final stage specified within the DPC system, per-diem rates are set even lower

7

Ministry of Health, Labour and Welfare “Outline of FY2016 Revision of Medical Service Fees (DPC System-Related Section)"
http://www.mhlw.go.jp/file/06-Seisakujouhou-12400000-Hokenkyoku/0000115023.pdf (Accessed 2017, Oct.27)
8 Ministry of Health, Labour and Welfare “Outline of FY2016 Revision of Medical Service Fees (DPC System-Related Section)"
http://www.mhlw.go.jp/file/06-Seisakujouhou-12400000-Hokenkyoku/0000115023.pdf (Accessed 2017, Oct.27)
9
Ministry of Health, Labour and Welfare "Future Consideration of DPC System-Related Coefficients by Type of Medical Facility (Draft)"
http://www.mhlw.go.jp/file/05-Shingikai-12404000-Hokenkyoku-Iryouka/0000151103.pdf (2018, Feb.2)© 2019 Health and Global Policy Institutethan in Stage II.10 In exceptional cases, when hospitalizations extend beyond the end of Stage III, all additional
medical service fees are then calculated using the fee-for-service (FFS) system.
There is much debate within Japan on whether the DPC system is producing results in line with its original
purpose. The DPC was created through a unique combination of the United States' PPS and FFS systems. There
have been many analyses published concluding that the use of this system cannot be linked to cost reductions
as well as many publications arguing that the PPS system needs to be applied to an even greater range ofservices.
The Revision Process for Medical Service Fees
(Road to revision approval via the Central Social Insurance Medical Council and Social Security Council)
Japan's medical service fee system is currently revised once every two years. When under revision, discussions
are held in a variety of domains. As shown in Figure 7-2-1, over the course of the revision process, the Social
Security Council, the Cabinet, the Minister of Health, Labour and Welfare, and the Central Social Insurance
Medical Council (Chu-i-kyo) hold discussions and set goals. For instance, the Chu-i-kyo not only makes proposals
over the course of this process, it also holds discussions and responds to inquiries from the Minister of Health,Labour and Welfare regarding medical service fees, regulations for medical facilities, and health professionals
authorized to accept insurance. The Chu-i-kyo is composed of both members representing insurers, the insured,and employers (on the payer side), as well as members representing doctors, dentists, and pharmacists (on the
medical side), and others representing the public interest.

10

Ministry of Health, Labour and Welfare "Overview and Basic Approach of the DPC System (DPC/PDPS※)) http://www.mhlw.go.jp/file/05-Shingikai12404000-Hokenkyoku-Iryouka/0000186975.pdf (Accessed 2018, Feb.2)© 2019 Health and Global Policy Institute7.3

Financing｜Medical Facility Management

Medical facility revenue is composed of the total remainder after subtracting patient copayments and claims paidby insurance examination and payment facilities. This revenue does not go only to physician salaries. It is also used
to cover hospital and clinic overhead, as well as the cost of purchasing pharmaceuticals, the cost of purchasing
medical supplies, and the cost of facility maintenance.

Data on Japanese Medical Facilities
MHLW conducts a regular Survey on the Current State of Health Economics that examines the state of healthcare
management at hospitals, medical clinics, dental clinics, and insurance-covered pharmacies. This survey isconducted every two years, and the results inform future medical service fee revisions.11
Figure 7-3-1 shows profits and losses in FY2015 and FY2016 by medical facility type. The profit margin in FY2016
for hospitals overall was -4.2%, although this figure jumps to +0.1% when excluding national public hospitals. Thisis thanks to the positive effect of the FY2014 medical service fee revision on most hospital profit margins (+0.4%→+0.6%). Many hospital types are losing money overall, with public hospital profit margins being particularly low.

11

Ministry of Health, Labour and Welfare "Survey on the Current State of Health Economics (Survey of medical facilities etc.)"
http://www.mhlw.go.jp/bunya/iryouhoken/database/zenpan/iryoukikan01.html (Accessed 2017, Dec.14)© 2019 Health and Global Policy InstituteAlthough most public hospitals are in debt, as these hospitals bear responsibility for pro bono care as well as mostcare in remote areas, a portion of their debts are subsidized by tax revenues. Reasons for the high amounts ofdebt among public hospitals include cost-related problems as well as shrinking patient numbers. Especially at
smaller public hospitals, although average service prices are increasing, profits are decreasing due to falling patientnumbers.12
In addition, salary rates, pharmaceutical costs, and depreciation expenses are higher at public hospitals comparedto hospitals in general. In response to this situation, actions are being taken based on the "New Public Hospital
Improvement Guidelines" including initiatives for the improvement of healthcare management, adjustments to
hospital bed functions in consideration of regional healthcare needs, and downsizing.
Meanwhile, as in previous years, medical clinics remain profitable. That said, profit margins are shrinking. At thetime of the last revision in FY2014, the clinic profit margin was 15.5%, but in FY2016, it was 9.1%.
It's important to keep in mind that the facilities sampled for the Survey on the Current State of Health Economics
vary between surveys, so it is not possible to directly compare recent survey results with past results. Furthermore,since the Survey is set to only a sampling of medical facilities, there is always the chance that results do notaccurately reflect the true distribution of profit margins across Japan.
Figure 7-3-2 shows medical expenditures by specialty. Expenditures vary among specialties, with otolaryngology
and otolaryngologic surgery expenditure trends differing most greatly from trends related to other specialties.
Pediatrics, pediatric surgery, and obstetrics/gynecology have consistently shown negative growth rates. Internal
medicine ranks highest in terms of total expenditures due to recent measures such as the promotion of primarycare, and because this specialty treats the largest number of patients. In comparison, expenditures were morethan four times lower for orthopedic surgery, the specialty with the second-highest expenditures.

12 Ministry of Finance "Supplementary Explanation Document (FY2018 Revision of Medical Service Fees, 21st Survey on the Current State of Health

Economics)" http://www.mof.go.jp/about_mof/councils/fiscal_system_council/sub-of_fiscal_system/proceedings/material/zaiseia291108/01.pdf(Accessed 2017, Dec.14)© 2019 Health and Global Policy InstituteLooking at average remuneration (salaries and bonuses) for full-time employees working at medical facilities, as
shown in Figure 7-3-3, totals are particularly high for hospital directors and physicians at both hospitals andmedical clinics, especially compared to other full-time employees. Other than full-time pharmacists and executives,
there are not large differences within professions depending on the facility type. This was true of hospitals andmedical clinics in general even when comparing data from one fiscal year to the next.

Looking at the annual trends in terms of estimated numbers of patients per facility type (as shown in Figure 7-34), outpatients exceed inpatients. This is to be expected since the incidence of serious diseases requiring
hospitalization is low compared to that of diseases for which outpatient care is sufficient. Both inpatient andoutpatient numbers increased slightly from 1984 to 1996, but thereafter the number of outpatients leveled off.
Since 2011, the number of hospitalized patients has reached a level nearly equivalent to the level in 1984.

© 2019 Health and Global Policy Institute© 2019 Health and Global Policy Institute