A STUDY OF INVESTMENT LOSS ON PUBLIC SERVICE PROVIDING

Takashi GOSO1, Kotomi UEMOTO2 and Seigo NASU３PPPPPPABSTRACT: Recently, many local governments in Japan are facing financial crisis. Local
governments have role of many kinds of service providing, such as construction, social welfare andeducation etc. Loss of public service delivery should be minimized. But Local governments in Japan
don’t have assessment tool for their service providing. Therefore, oversupply and loss of investment
may occur in public service providing. Local governments in Japan are required to become
independent under the decentralization policy of central government. But it is difficult for present local
governments to provide efficient and effective public service by themselves.
In this research, nursing care service taking as an example of public service providing was studied.
Excessive investment for nursing care service by oversupply and dead weight loss were investigated indemand and supply curve. Investment loss was simulated in the model developed in this study andsome recommendations for reducing investment loss are proposed.
KEYWORDS: Loss on Public Service Providing, Demand and supply curve, Nursing Care Insurance
1. INTDRUCTION
Central government and local governments in Japan are facing financial crisis. Many Japanese people
criticize prevailing extensive public works as a cause of financial crisis. Figure 1 shows changes ofpublic investment and social security cost in Japan. Social security cost has been increased constantly,
and is as three times as public investment in 2005. So, cause of financial crisis is a chain reaction ofincreased social security cost incurred due to aging society, increased public investment for keeping
amount of employment, and reduced tax revenues from low economic growth. In this situation, loss of
public service delivery should be minimized.
Purposes of this study are following.
i ) Is to investigate loss on public service providing, using easy economical model.
ii) Is to assess effect of some recommendations for reducing investment loss.
In this study, nursing care service was taken as an example of public service providing. The reasonsare as following.
i ) Figure 2 shows changes of nursing care cost in Japan. Burden for nursing care was estimated toincrease rapidly. Nursing care cost has been estimated about 20 trillion JPY in 2025. This amount1

Postdocrtal Researcher, Social Management System Center, Kochi University of Technology, Kochi, Japan
Ph.D Candidate, Department of Infrastructure Systems Engineering, Kochi University of Technology, Kochi, Japan
3
Professor, Infrastructure Systems Engineering, Kochi University of Technology, Kochi, JapanPP2PPPP

is same as the present public investment.
ii) In Japan, insurer of nursing care service is local government. So, the model developed in this study
is useful for another kind of public service providing in order to improve public management
system.
Trillion（兆円）JPY
9080
7060
Pension
年金

50

Public公共建設投資
Investment

4030

老人医療

20Medicine
医療10Welfare, Nursing

福祉その他

0

1965

1970

1975

1980
1985
Year
（西暦）

1990

1995

2000

Figure1. Changes of public investment and social security cost in Japan

Trillion
JPY（兆円）
Insured
45% of cost

2005

2010 2015
年度
Year

2020

2025

Figure 2. Changes of nursing care cost in Japan

40 to 65
years oldTax

Insurer(Local Govs.)

Source: Ministry of Health, Labor and Welfare
http://www.mhlw.go.jp/shingi/2004/03/s0324-7d.html

2.

Over 65
years oldCent.Gov:20%of cost

Pref:12.5% of cost
12.5% of cost
90 %of cost
10% of cost

National Healthinsurance
Organizations

Service providing

25201510502000

Nursing care service provider

90% of cost
Figure 3. Nursing care insurance system in JapanNURSING CARE SERVICE PROVIDING SYSTEM IN JAPANNursing care insurance is compulsory insurance for every Japanese people of over 40 years old. Figure
3 shows burden and benefit of nursing care insurance system in Japan. Every people of over 40 years
old are insured. Insurers are municipality level local government, and they levy premium. Price ofpremium is decided by each insurer, extent of price of premium is from 2,000 JPY to 5,000 JPY permonth. Central government and prefectural governments pay part of service providing cost for insurer
according to the rules. By above system, insurers keep source of fund to provide nursing care service.
Designated insured people who need nursing care can get nursing care service from service provider
by 10% of total cost. Remaining 90% of total cost is paid from insurers to service provider throughNational Health Insurance Organizations. Service contents and price are fixed by the central
government uniformly.

3.

MODEL OF DEMAND-SUPPLY ANALYSIS OF NURSING CARE INSURANCE SYSTEM

In this study, investment loss on nursing care insurance system is classified in following kind of loss.
3.1 LOSS CAUSED BY FIXED UNIFORM PRICE
Figure 4 shows model of demand and supply curve and fixed nursing care service price. Before
introducing nursing care insurance system, point F was equilibrium. Amount of service supply was q0.
However, q1‘ is estimated amount of nursing care service providing for aging society.
To increase supply, selling price for service provider is fixed in p1’. To increase demand, purchaseprice for customer is fixed in p1. To realize above measure, public fund is necessary. Necessary publicfund is same as area of square p1’BCp1. Increased social surplus is the area p1’BFCp1. Dead-weightloss is Figure FBC.
B

B

B

B

B

B

B

B

B

B

B

B

B

B

B

B

pr i ce: ｐSupl l y cur ve: S0Ap1 'BFp0

Demand cur ve: D0p1CDEq 1q 1 ' ' q 0
q1 'ser vi ce quant i t y: ｑ
Figure 4. Demand and supply curve and fixed service price

3.2 LOSS CAUSED BY FIXED INAPPROPRIATE FIXED PRICE
Figure 5 shows model of demand and supply curve and loss caused by inappropriate fixed price.
Generally, demand and supply curve is not clear. So, actual selling price and customer price are notpriced as appropriate selling price p1’ and customer price p1 to maintain q1’ supply. In that condition,
pricing procedure of selling and customer price were as following.
1. Actual selling price p2’ was priced rather high than p1’ by opinion of providers.
2. p2 is calculated from ratio (α) of customer’s share to the whole expenses required for theservice. α is usually fixed low level by politician from the opinion of residents . So, actualcustomer price p2 is priced rather low than p1.
B

B

B

B

B

B

B

B

B

B

B

B

B

B

ｐB

G

B

H

p2 'I
p1 'Ap2'L( 1-α) p2 'F

p0p1p2B

S0CDEKq 1q1 ' ' q0p2＝αp2 'Jq 1 ' q2D0ｑ

unnecess ar y ser vi ce

Figure 5. Demand and supply curve and inappropriate fixed priceBy this pricing method, demand and supply are increased from q1’ to q2. Necessary public fund for thispricing is area of square p2’HJp2. Dead weight loss is area of figure FBC and BIJC.
Area of figure p2’HIBp1’ and figure p1CJp2 have increased social surplus. However, these surpluses are
made from overproduction (q2-q1) and inappropriate fixed price (p2’-p1’ and p2-p1). Loss of public
service delivery should be minimized in circumstance of financial crisis. Local governments don’t
have enough funds to provide too much service. So, these surpluses increasing are unnecessary.
B

B

B

B

B

B

B

B

B

B

B

B

B

B

B

B

B

B

B

B

B

B

B

B

B

B

B

B

3.3 INDIRECT FACTOR OF MAKING LOSS OR OVERPRODUCTION
Figure 6 shows supplier-induced demand. Customer’s demand for service amount is q2. If service
providers provide q2’ service, they can get more benefit (figure IHL). So, they have incentive toprovide more service. There is difference of knowledge level about nursing care service between
customer and service provider. If q2’ service was provided, customer might not aware of their loss(figure JMN). Furthermore, dead weight loss (figure ILMJ) would be occurred.
B

B

B

B

ｐG
p2 '
p1 'I
A

S0
L

B
F

p0
p1
p2

H

DECKM
JND

0q 1q1' ' q 0

q1 ' q 2 q 2 ' ｑｑSuppl i er -i nduced demand

Figure 6. Supplier-induced demand

4.

MEASURES FOR REDUCING NURSING CARE COST

4.1 DIFFERENCE BETWEEN GERMAN AND JAPANESE NURSING CARE SYSTEM
Nursing care system in Germany was referred to establish Japanese nursing care insurance system.
However, some differences are pointed out as following.
i ) In Germany, price of nursing care service is decided by each insures. The other hand, in Japan, priceof nursing care service is decided uniformly by the central government.
ii) In Germany, Insured people can select either getting cash or actual nursing care service. Insured
people who select to get cash, payment is as half as upper limit cost of actual service. However, inJapan, insured people cannot select to get cash.
Table 1 shows percentage of different nursing care services provided in Germany. 56% insured people
selected to get cash. The other hand, only 7% insured selected for actual service. This system has afunction to reduce nursing care cost by providing incentive for insured people.

Table 1.

Percentage of provided nursing care service in Germany 5)
PService
Actual servicce
HomeCash
Care
Combination
Care facilities
Others(%)
756
10252

4.2 INTRODUCTION OF CASH PAYMENT SYSTEMIn Germany, amount of payment alternative to the actual nursing service is decided as half as upper
limit cost of actual nursing service. In reference to the table.1, about home care service, approximately
1/4 insured people select to get actual nursing service, remained 3/4 select to get cash. Ratio of service
cost is as following.
Cash : Actual service = 3 : 1
Supposed that cost of nursing care service by family is as half as by service provider, ratio of nursing
care service amount will be,
Cash : Actual service = 6 : 1Figure 7 shows enlarged supply curve and public investment by introducing cash payment system. So,
supply curve S1 that is case of service providing by family is enlarged as 6 times as S0. Point F’ isequilibrium of D0 and S1. Service amount q3 is provided by family. Amount of provider’s service is q3’.
q3’ is 1/6 of q3. Public investment to provide actual service is area ①, to pay cash is area ②,.
B

B

B

B

B

B

B

B

B

B

B

B

B

B

B

B

L1=6×L0ｐL0p2 'MINp1 'S0L

S1p0p3F'OP

p1
p2

KJ

q3 ' q0 q 3 q1 ' q 2Figure 7.

D0 ｑS0Lp2 'Fp0p3

L1=6×L0
L0p1 'B

Area ①ｐS1

BFF'p1
p2

A r e a ② q3 ' q0 q 3 q1 ' q 2

D0 ｑ

Enlarged supply curve and public investment by introducing cash payment system

4.3 INTRODUCTION TO MARKET MECHANISM
By introducing market mechanism, service provider can decide their service charge by themselves. Ifservice price of each provider is different, insurer has to pay the cost as per their claim based on ruleshown in Figure 3. If a provider decides high price to get high profit, but this provider loses
consumer’s support. In this way, competition is accelerated. Figure 8 shows shift of supply curve andpublic investment under market mechanism. To keep service amount q1’, Supply curve should be
moved from S0 to S1. Necessary public investment is area ① and ②. Area ② is investment loss.
BB

B

B

ｐS0
p1 'p0BAArea ②Area ① F
S1

p1CDED0q 1 q 1' ' q 0Figure 8.

5.

q1 'ｑ

Shift of supply curve and public investment

CASE STUDY

5.1 DEMAND-SUPPLY CURVE OF NURSING CARE SERVICE CASE STUDY
Demand curve is made from data of actual service provided. Number of nursing care service user, eachuser’s level of care needed and amount provided for each nursing care service ware found out fromlocal government’s data. Supply curve is made from a report on final accounts of nursing care service
provider. Fixed cost and variable cost were found out from service provider’s data. Figure 9 showsdemand-supply curve of nursing care service (home care service) in a local government in Japan.
15,000Demand curve

Unit price(JPY/use)

12,500○ Number of use(each user)● Number of use(total)

Needing support

P = 18,785q-1
Selling priceP2' ＝ 7,490

10,0007,500
Supply curve
5,000

P = 263.96q

2,500

Actuaal number(25)005

10Customer price
P2 = 749

15

Planded number20(17)2530

q : Number of use(total)

20,000Demand curve

P = 75,549q-1

Nursing care level1○ Number of use(each user)● Number of use(total)

Unit price(JPY/use)

15,000
Supply curve

P = 263.96q
ServiceSelling pricepriceP2' ＝ 8,860

10,0005,000
Actuaal number(85)00Customer price
P2 ＝ 886

20Planded number(28)

40

60

80

q: Number of use(total)

Figure 9. Demand-supply curve of nursing care service

1005.2 EFFECT OF MEASURES FOR REDUCING NURSING CARE COST
By using demand-supply curve on figure 9, loss of investment on present case and other 3 cases listed
below were assessed.
i)
ii)
iii)
iv)

Present case
Liberalize to decide service price by each insurer
Introducing cash payment system
Introducing market mechanism(1) Assessed issue①②③

Total public investment
Following areas of Figures were estimated.
z Present caseSquare p2’HJp2 on Figure.5
z Liberalize to decide service price by each insurer
Square p1’HJp1 on Figure.5
z Introducing cash payment system
Area① and area② on Figure.7
z Introducing market mechanism
Area① and area② on Figure.8
B

B

B

B

B

B

B

B

Increased social surplus caused by oversupply
Following areas of Figures were estimated.
z Present caseSquare p2’HIBp1’ and p2JCp1 on Figure.5
z Liberalize to decide service price by each insurer
If pricing is done appropriately, oversupply is not occurred.
z Introducing cash payment system
Square p2’MNp1’ and p1OPp2 on Figure.7
z Introducing market mechanism
If pricing is done appropriately, oversupply is not occurred.
B

B

B

B

B

B

B

B

B

B

B

B

B

B

B

B

Loss of investment
Following areas of Figures were estimated.
z Present case
Figure BCJI and figure FCB on Figure.5
z Liberalize to decide service price by each insurer
Figure FCB on Figure.5
z Introducing cash payment system
Loss is not occurred on Figure.7
z Introducing market mechanism
Area② on Figure.8

Each assessed issue is shown in Table.2.

Table 2.

Loss of investment on each case

Needing Support

Total public
investment

MeasuresP2 'H

169,065

Presaent case
JP2

Liberalize to decide service
price by each insures

P1'

B

P1C

P2 '

Introducing cash
payment system
Introducing market
mechanism

0P2 '
P1'
P1P2C（図-１６上）

M

P3F'

P 0q3
BC

42,000

B

HI

P2 '

M

P1 'NIB

71,930FJC0P1P2

Loss of investment

J60,828+
P2

Increased social surplus
caused by oversupply
GBFCTotal public investment
P2 '

P2 '

53,157

16,850P2 '10,6020FC679,941

P2J

P1 '

B

P1CM
P

P2O
PU+0B

30,414(Unit:JPY)
Nursing care level1

P3F'0q3

Increased social surplus
caused by oversupply
P2P' 2'
P1'
P1
P2

G HL
B I
125,301
CJ

137,360

0C

68,680FU

446,823

CJB
C29,542

M

P1'NP1P2OP

021,669

B16,850

L IB
F0P2'130,621

Loss of investment

0FBC

29,542

6. CONCLUSION
In this study, total public investment, increased social surplus caused by oversupply and loss ofinvestment on 4 different cases regarding actual nursing care services were assessed. Introducing
proposed measures for nursing care cost would be effective. By these measures, nursing care cost
would be reduced. In this research, nursing care service was studied by taking as an example of publicservice providing. This research can be equally applicable to other kinds of public services.

7.

REFERENCES

1. Takashi OMORI, Osamu TASAKA, Yutaka UNO, Tomohiro ICHINOSE, Economics for nursing
care service, TOYO KEIZAI, 1998
2. Joseph E. Stiglitz, Microeconomics, TOYO KEIZAI, 1995
3. Yoshiteru OHNO, Economics for social service ’, KEISO SHOBO, 1991
4. Miyoko MOTOZAWA, “Nursing care service and protection for consumer as care insurance
benefit”, Report for Aging Society, Vol.6, pp. 1-10, Mitsui Insurance Company, 1998
http://www.mitsui-seimei.co.jp/long_life/report/
5. Ryoichi KOBAYASHI, “Analysis for statistics of German nursing care insurance system”, Reportfor Aging Society, Vol.10, pp.21-24, Mitsui Insurance Company, 1998
http://www.mitsui-seimei.co.jp/long_life/report/