Discussion Paper No. 502

APPROACH TOWARD
A UNIFIED HEALTH INSURANCE SYSTEM:
WHAT CAN JAPAN LEARNFROM THE KOREAN EXPERIENCE?
Soonwon Kwon
and
Wataru Suzuki

February 2000

The Institute of Social and Economic Research
Osaka University
6-1 Mihogaoka, Ibaraki, Osaka 567-0047, Japan

Approach toward A Unified Health Insurance System:
What can Japan Learn from the Korean Experience?

Soonwon Kwon
Economics Department, Duksung University and Institute ofSocial and Economic Research, Osaka University

andSuzuki*
Wataru Suzuki*
Economics Department and ISER, Osaka University

Abstract
We discuss that Japan should make a comprehensive reform of the existing
institutions of health insurance in view of the apparent structural problems
centering on the financial instability of health care finance, anddiscrepancies in premiums and benefits among the insured. With the rapid
population aging in a sluggish economy, Japan cannot afford to financeadditional medial bills in a cost-ineffective manner. It seems that Japan candraw valuable lessons from the Korean experience on this regard. We argue
that Japan needs to move toward a unified health insurance system, alongwith introducing a la Singaporean MSA as a supplementary financial
mechanism.
Keywords: Reform of health insurance, privatizing health care financing.
JEL codes: I18, O57.

*The authors would like to thank the generous support of the ISER. They are thankful
to participants of the seminars at ISER, Kyoto University, Keio University, andAssociation for the Social Security Studies for comments. In particular, they appreciate
Professors Ohkusa, Nishimura, Iwamoto, Yoshino, Ihori, Tada ， Tsuchida, andSuganuma for their helpful comments and discussions. They also are grateful to Doctors
K. Lee and I. Noh of the Korea Institute for Health and Social Affairs for their data
support. The authors, however, are solely responsible for any remaining errors andomissions.

11. Introduction
The number of elderly (those 65 years and older) in Japan has grown overthe past several decades both in size and in proportion to the general
population, and will continue to grow at an even faster rate during the 21st
century. It is certain that the growth of the elderly population will have a
profound effect on the health care system. As the elderly live longer, thenature and complexity of their health status change, and they should requiredifferent care than the current system is designed to provide. The issue of
rapidly increasing share of the elderly population carries a vitally important
implication in discussing the overhaul of the Japanese health insurance
system.
This is particularly the case when Japan becomes one of the fastest
countries in population aging in the world, while it is clear that the Japanese
economy would show a much slower economic growth rate now and in the
future than before. The reality is that senior citizens are preferentiallytreated in terms of costs and benefits in Japan. This implies that as far as
the health insurance system is concerned, income is redistributed in favor of
the elderly, thus accelerating an increasing trend of medical costs andcontributing to the financial vulnerability of health care finance. As a matterof fact, elderly patients are crowding out young patients in utilizing medical
resources.
In retrospect, there have been prolonged structural problems such as
financial instability in health care financing, complicated government
subsidies, and gaps in premiums and benefits between different programs,
and among different insurance societies, among others. It is evident that
because of rapid population aging all these structural weaknesses have been
aggravated. It can be said that there is a consensus in Japan that the current
health insurance system has insurmountable problems in making due
adjustments to changing socio-economic and demographic conditions, thus
calling for a fundamental reform.
Recently, some of the Japanese scholars proposed a unified healthinsurance system as a policy alternative to solve the system-inherent

2structural problems, as well as to mitigate the impact of the population aging
on ever-soaring medical expenditures. It is interesting in this context to seethat Korea adopted a la Japanese health insurance system some 20 years
ago, yet she is moving ahead of Japan toward integration in managing
health insurance. The very basic theme of the unified approach in Korea liesin improving the equity aspect of the health insurance system by integrating
the multiple insurance carriers into one.
In this paper we will closely examine and analyze the economic rationaleof the Korean transition in managing health insurance from the multiple
insurers to a single insurer, along with the process of such a transition. Our
next goal is to draw in an inter-country policy-comparison framework
relevant policy implications for Japan based on the Korean experience. We
would like to ask a series of questions in this regard:• How was the Korean transition toward unified approach possible?
• What are the important economic motivations of such a movement?
• Will it be economically justified to transplant in the future a similar
version of unified approach to the Japanese soil with due modifications
for the benefit of all Japanese people, rather than the vested interest
groups?
• Will such integration efforts be sufficient in tackling major structuralproblems of the Japanese health insurance system in view of the prospectthat medical expenditures in Japan should increase steadily while theeconomic growth rates would slow down in the future?
• If the integration approach is not sufficient, given the rising trend of
medical bills, what kind of policy packages will be required to finance theadditional medical expenditures for the future?
This paper consists of six sections. After the introductory section, Section
2 will briefly explain similarities and differences between the Japanese
health insurance system and the Korean system. In this section, the major
issues and problems of the health insurance system in the two countries will
be highlighted as well. In Section 3, we will mainly examine the economic
rationale and motivations of the Korean movement toward integration
approach in managing health insurance. Also, we will discuss a set of3

adequate policy measures to improve both equity and efficiency for Korea.
The following Section will focus on the lessons, either positive or negative,that Japan can draw in moving toward a unified health insurance system.
Section 5 will first pinpoint the major structural problems of the Japanese
health insurance system. Then we will discuss policy options available forJapan and suggest a package of suitable policies for a fundamental reform
for the future. Our discussion will be based on the results of simulation
analysis. For this, a particular emphasis will be placed on the issues ofintegrating existing insurance programs, and developing alternative
financing mechanisms for the expanded basis of health care finance. The
final section will summarize and conclude discussions so far.

2. Similarities and Differences in the Health Insurance System
between Japan and Korea
Japan introduced a social insurance type of health insurance in 1926,
making reference to the schemes of the continental European countries, inparticular, the German health insurance system, and achieved a universal
coverage with due adaptations conducive to the country setting in 1961.
Korea adopted the same type of health insurance system in 1977 based onJapanese experience1. Accordingly, the health insurance systems in the twocountries show many aspects in common as shown in the Table 1. On theother hand, there are some minor differences, which reflect country-specificadaptations (see Table 2)2.

It should be appropriate in the beginning to examine the fundamental differences inoperating the health insurance system between West European countries and East
Asian countries such as Japan and Korea, although they have adopted a seemingly
similar type of the social insurance system. Essentially, there is a big difference between
the west and the east in that the western system is flexible so that the insured are given
the right to choose the insurer, while the Asian system is so rigid that there is no suchright provided to the insured. Besides, European countries from the beginning covered
the most needy groups as well among different segments of the population while Asian
countries adopted ‘the rich first, and the poor later’ approach. Lastly, the Asian insurers
have not played their proper role as agents for the insured due to strong government
regulations. As a result, European countries could have taken advantage of the plural
carriers system by gradually making up the gaps and problems while the Asian
countries have not fully utilized such advantages as we will see later on.
2Here, we just make a list for a comparison purpose.
1

4

Table 1. Similarities in Health Insurance between Japan and Korea______________________________________________________________________
1. Started with a similar social insurance type of the health insurance
system run by the multiple carriers based on occupation and residence;
2. Curative medicine is emphasized, while virtually neglecting preventive
medicine and health education;
3. Low-quality medical care, in most cases, is provided at low price tofacilitate an easy access to medical services for every citizen, based on thefee regulation;
4. A high share of drug expenses out of total medical costs, compared to thoseof other OECD countries due to over-utilization of drugs3;
5. A free choice of physicians and hospitals is allowed to patients;
6. Fee-for-service reimbursement to the medical providers;
7. No complete division of functions between medical doctors andpharmacists;
8. No orderly referral arrangements are in practice4;
9. Co-Financing scheme has been in effect to assist those health insurance
societies which show financial weaknesses due to either a high percentageof the poor or (and) a high percentage of the elderly among the insured5;
10.Private sector is dominant in the supply of medical services;11.Private health insurance plays a minor role, and
12.A high share of time costs is involved in utilizing medical services, due toa long queue.
For instance, drugs account for more than one-third of total medical care costs inJapan. See Powell and Anesaki (1990).
4
They are often called as a referral system as well. The establishment of such a system,
first starting with primary health care facilities manned by a general practitioner
and/or paramedical personnel, tends to help reduce the concentration of demand on
general hospitals, for instance.
5
The Korean government established the Co-Financing Program, at the National
Federation of Medical Insurance, and expanded it until the time when a partial
integration has done. One of the main functions of the Program is to take care ofadditional financial burdens such as care of the elderly and expensive services using
high-tech medical equipment. Contributions for the Program are made by each
insurance carrier according to ability to pay while benefits are paid in proportion toactual costs, thus providing a financial transfer mechanism from the relatively richinsurance societies to the poor insurance societies. As such, Japan has a very similar
program. On the other hand, the Dutch system has built up an equalization fund in thecourse of a comprehensive reform of health insurance. It collects income-dependent
contributions from the insured and distributes the proceeds to insurers according to the35Table 2.

Differences in Health Insurance between Japan and Korea________________________________________________________________________________

1. Japan’s health insurance societies for regional residents are administeredby local and/or municipal governments. And those insurance societies forthe self-employed based on occupation are organized separately. On theother hand, the Korean counterpart is run by a single carrier, the National
Health Insurance Corporation, after the program for government officials
and private school teachers, and Regional Insurance have been merged;
2. Korea’s integration efforts of health insurance are in the process and will
be completed by the beginning of 2002, while Japan has a series of
proposals on integration approach;
3. Coinsurance rates in Korea are much higher than those in Japan6;
4. A partial division of functions between medical doctors and pharmacists isin practice in Japan, while Korea has a plan to execute a complete divisionof functions between them by the second half of 2000;
5. Korea has a plan to carry out the Korea-DRG (Diagnosis-Related Group)
on a nation-wide scale in the latter half of 2000, based on a three-year pilot
project, while Japan proceeds the Japan-DRG project for demonstration
covering several hospitals7.
______________________________________________________________________The Japanese and Korean health insurance systems broadly comprise
two major programs: Employee Insurance and Regional Insurance. All the
insurance programs are similar in terms of the range of medical services
covered, the procedures for obtaining medical care and the system ofreimbursing medical providers. But there are significant differences incomposition of their enrolled population. See Zweifel and Breyer (1997).
6
On average, Koreans tend to pay approximately 44 percent of total medical expenses
directly out of their own pockets in recent years. For details, see Han et al. (1999). Thisrate, what we call ‘effective coinsurance rate’ is certainly higher than those of any othercountries with health insurance coverage. The high coinsurance rates have resulted indifferential treatment among consumers with different income level. They certainly
tend to give less financial burdens to the rich than the poor, ceteris paribus.
7
DRG is regarded as a prospective payment system. On the contrary to theretrospective reimbursements, it provides a clear incentive to the hospitals to be more
efficient in the treatment of each care. See Rosen (1988).
6eligibility, administration, cost-sharing, cash benefits, financing and thelevel of government subsidy provided to bear administrative costs and makeup deficits. This is mainly attributable to the design of the health insurance
system at the onset8.
In recent years, however, the differences have been becoming larger anddiversified. This is particularly the case with respect to the policy
environment, reflecting different political situation and people’s preferencesin the two countries9. Korea and Japan show a sharp contrast in terms ofenvironment for making policy reform, among others. Two years ago, Korea
experienced a drastic government change from a conservative one to a liberal
one, while a conservative government remains in power in Japan. In
addition, the majority of Japanese people prefer to have gradual changes10,
while Koreans are willing to accept fundamental and structural changes.
Around the end of 1997, the Korean National Assembly (parliament)
enacted a law, which allows the Korean government to move toward a unified
health insurance system. Based on the law, the health insurance program forgovernment officials and private school teachers, and Regional Insurance(the insurance program for the self-employed and residents in the region)
have been merged on October 1, 199811. In this paper, we will choose thepoint of comparison of the health insurance system in the two countries as of
October 1999. This means that the Korea has already put several steps
toward integration.
As shown in Table 3 below, there are some gaps in terms of changes in
population structure between two countries, which can be highlighted by an
For the reasons of economic viability and administrative easiness, the governments inJapan and Korea made the decision to begin with large firms. Then, medium and small
sized firms followed. Lastly, farmers, self-employed, and residents in the region were
insured. As a result, there emerge a contrast between financially stable insurance
societies on one hand, and financially unstable insurance societies on the other, thus
causing an equity issue between different health insurance programs, and among
different insurance societies.
9
The ways in which a country organizes and finances her heath care system reflects thevalues and ideals of that society and its political recognition.
10
Proposals suggested so far in Japan confirm that there will not be any radical
departure from the current mode of health care provision for the future.
11
See Planning Commission for Unifying Health Insurance (1998).
8

7

Table 3.

Share of the Elderly Population (those aged 65 or more) Out
Of the Total Population for Japan and Korea (%)

Korea

Japan

Korea

Japan

_____________________________________________________________
1970
3.1
7.1
1980
3.8
9.1
1990
5.1
12.1
1995
5.9
14.5
2000
7.1
17.2
2010
10.0
22.0
2020
13.2
26.9
__________________________________________________________________
Source: Korea Institute for Health and Social Affairs (1999), and Ministry of Health andWelfare (1997), respectively.

increasing share of the elderly population out of the total population. It isobserved that Korea is lagging behind Japan by at least 25 years or more inthis particular indicator. Japan’s share of the elderly is already high andrapidly rising. Although Korea’s share at present is not that high, she isregarded as one of the fastest countries in the world in terms of population
aging in the future.
It is also worthy to discuss similarities and differences of the structuralproblems which Japan and Korea face at present and for the future. Before
dealing with the major problems and issues in both countries, it isworthwhile examining what is the proper role of government in health sector,
in particular, regarding the financing of health care12. Essentially, the main
issue is narrowed down to ‘how we design a desirable financing mechanism
for health care in terms of equity and efficiency’. To be more specific, itmeans what kind of the financing mechanism should encourage adequate
12

As usual, health economists have two yardsticks, namely equity and efficiency in8amount in health care utilization while maintaining quality of care. It is
important to keep in mind in this context the message the OECD Researchintends to deliver. It shows that socio-economic and demographic factors areplaying a significant role in the health status of the population, as well as
environmental, behavioral and life-style factors13.
Health insurance as a branch system of the social insurance system plays
two important functions: insurance function, and income redistributionfunction. The former implies that each individual would receive
approximately the same return on his or her contribution, and is related tothe horizontal equity issues as well as the efficiency issues. The latter
implies that for individuals of the same age, generally lower the earnings orincome level, the larger the gain (or the smaller the loss), and is related to
the vertical equity issues14. As Professor Karen Davis correctly points out, it
is desirable for a NHI plan to be equitably financed, easy to understand andadminister and acceptable to providers of medical services and to the public15.
Based on these criteria, we can evaluate the health insurance system in acountry whether it is on the right track or not.
Some in Japan and Korea believe that each country faces serious
problems in health care financing16. In particular, it is argued that theJapanese system is facing an ever-worsening situation, thus requiring an
immediate reform17. Korea has been in a similar situation in recent years.
Currently both countries are undergoing the reform process. However, thereform packages of Japan and Korea may not be sufficient in genuinely
improving both equity and efficiency with respect to managing healthinsurance. The two countries seem to have the following problems incommon. 1) instability in the insurance finance, 2) escalation of national
health expenditures (NHE, for short) due to a steady increase in the elderly
population, development of medical technology, and increases in life-styleevaluating policy frameworks.
13OECD (1999).
14
See Rosen (1988).
15
See Davis (1975).
16
From the Japanese side, we can name Professors Nishimura (1999a, and 1999c), Hiroi(1997), and Tokita (1999) among others, while choosing Professors Yang (1999), andKwon (1999) among the Korean experts.

9related degenerative and chronic diseases, 3) inequity in benefits andpremiums under the health insurance system of multiple insurance carriers,
4) a limited role of the insurer for the benefits of the insured, due to excessive
regulations of the government, and 5) low cost-effectiveness due to fee-forservice reimbursement18, curative medicine-oriented approach, and moral
hazard induced by the third-party payment.
A high degree of uncertainty about the financial status of the healthinsurance system has become a priority issue in policy debate in recent years
in Japan. And it becomes one of the serious issues in Korea at present. Thereis convincing evidence that health insurance becomes an unwieldy, highly
fragmented and complicated edifice which is expensive to administer andoperate. The plurality of insurance societies has moreover led todiscrepancies in contributions and benefits. Rationalization of this system
has been the focus of policy reform during the past decade in Japan. Being
challenged by the rapid population aging and slow economic growth rates inrecent years, the Japanese health insurance system has come to the point of
the crisis.
There are not many differences in the nature of the structural problemsof health insurance between two countries. Korea has a far less burden
attributable to the increased number of elderly people, thus bringing about
less serious social repercussions due to the intergenerational income
redistribution in favor of the elderly. Also the amount of the government
subsidies allocated to the health insurance system is much less in Korea
compared to the Japanese counterpart in terms of its ratio to GDP. There are
additional differences in that Japan prefers to take a gradual improvement
approach while Korea has taken a rapid path of the institutional reforms.

3. The Korean Approach to A Unified Health Insurance System
The commencement of health insurance in Korea was the result of abrupt
See Tokita (1999) for instance.
Most academicians are critical of current reimbursement policies. When
reimbursement is based on a fee-for-service approach, itemized services tend to beprovided more than it should be necessary. See Abe (1975) for more detail. As a result.,
medical costs escalate while overall quality of medical services does not improve.

17
18

10

decision making by the political leader around the middle of the 1970s. Thishistorical background probably explains why Korea adopted a healthinsurance system similar to the Japanese system with a lack of long-term
perspective. In developing its health insurance plan, Korea had the benefit ofwatching the evolution of the Japanese health insurance system, inparticular, during the period of 1930 to 1960. Korea borrowed the basic
concepts, but tried to apply them to the specific Korean circumstances with
due modifications19.
Since the mid-1980s, however, there has been a prolonged debate
centering on whether one integrated insurer or multiple insurers should be
relevant in Korea’s health insurance management. For each one of these two
has merits and demerits20. What is important in this regard is ‘how a nationin question can shape its health insurance system, that should be mostappropriate to its country setting in terms of equity and efficiency’. It is quite
natural that the conservative groups stand with the current scheme withmany insurance carriers, while the liberal groups with unified approach.
Judging from the degree of contribution burdens for health insurance, there
is high possibility that people in the middle income or upper income classes
feel more comfortable with the former. Nevertheless, people in the lowmiddle or low-income brackets support the latter.
(1) Problems of the multiple carriers system
As time goes on, the health insurance system based on multiple insurance

See Kwon (1993).
It is interesting to see the trend that Asian countries either have already decided toadopt integration approach (Taiwan and Korea) or are interested in moving toward
integration (Japan), while European countries have maintained the tradition of plural
carriers. It appears that Asian countries have not been in the position to fully activate
merits of the multiple carriers system, due to system-inherent structural problems suchas ‘the rich first, and the poor later’ approach by system design, and strong government
regulations and interventions. Thus, insurers cannot afford to represent the interests of
the insured vis-à-vis medical institutions and government. On the other hand,
European countries have made up demerits of plural carriers on a continuing basis
while maintaining and strengthening merits of autonomous administration. Thus theinsurers could have the bargaining power vis-à-vis medical institutions. Also theyguarantee the insured the right to choose insurers and medical institutions for theirbenefits.

19
20

11

societies has raised numerous problems. For instance, leaving theadministration of health insurance in the hands of multiple health insurance
societies yields discrimination. It produces different premiums and benefits
between the different types of health insurance programs, thus resulting inan equity issue among the insured. For they apply a different criteria inlevying premiums of health insurance. This is also the case among different
health insurance programs, which offer different benefits based on different
contributions. Recall that these features are intimately related to the way
the Korean health insurance system is designed21. Also, they are only loosely
coordinated by their federation.
At present, every Korean is insured under the National Health Insurance(NHI, for short) System22, except those under the Medicaid23 funded solely by
the government. By law, one’s health insurance society is automaticallydetermined either based on one’s occupation or residence. This rigid system
not only restricts the risk pooling function of health insurance, but also
contributes to widening discrepancies, in particular, between Employee
Insurance and Regional Insurance. In addition, the presence of manyfinancially weak insurance societies has tended to give enormous amount ofpressures to lower the overall benefit level of the Korea’s health insurance
system.
The multiplicity of carriers is also uneconomical. Some of smaller carriersmust spread their risk over a small number of people. Each one of them
maintains an administrative staff that increases costs. As a result, some ofthe smaller sickness funds among Regional Insurance experience financial
difficulties. The previous government, therefore, had tried to force many of
the smaller health insurance societies to merge into larger units.
As is clear in the previous discussion, Korea’s health insurance based on
For instance, those insurance societies which cover poor people such as farmers andregional residents are destined to show financial vulnerability sometime soon, simply
because the insured have high risks but low-income level on the average.
22
NHI means a nationally organized financial mechanism based on social risk-sharing,that is, a public system for the collective financing of privately provided services.
23
This program helps to provide free (or with some nominal amount of copayments)
inpatient and outpatient care for the poorest citizens as a part of the public assistance21

12

multiple carriers has revealed two thorny problems, that is, a low level ofbenefits provided to insured, and serious financial instability in running
health insurance. Until recently, the Korean health insurance system has
provided benefits to those medical services, which are frequently utilized,
but relatively cheap. However, only limited benefits have been provided tothose services, that are rarely utilized, but relatively expensive. This kind of
sub-optimal benefit scheme has blocked a full-fledged function of risk poolingof health insurance. Together with high copayment rates, low level ofbenefits has made people in the low income classes have less access to
medical services, thus raising the equity issue24.
Thanks to sustained increase in income and enhanced educational
standards, an increasing number of Korean people are demanding higher
quality of health care, and are seeking for diversified health services. On thecontrary to the needs of the people, the Korea’s health insurance has kept
the tradition of ‘a low premium rate, and accordingly a low benefit level’,mainly due to the presence of a group of financially vulnerable insurance
societies. Some of the Korean health economists argue that the Korean NHI
System has reached a crossroads in view of insurmountable problems both interms of equity and efficiency. Thus they call for a structural reform, which is
conducive to changing socio-economic, and demographic conditions25.
(2) President’s initiatives to move toward integrating health insurance
During the campaigning period, one of the strong presidential candidates
Kim, Dae Joong clearly promised that the health insurance system should be
integrated, once he would be elected. As is well known he is a reform-minded
politician, who has been close to the socially weak groups, including the poorand farmers. Naturally, a group of reform-oriented scholars have been called
upon to join his camp, while the conservative expert groups have joined theopponent’s camp. As promised, President Kim, after being elected, launched
the project of integrating the health insurance system right away, along withintegration efforts in administering four social insurance schemes, healthscheme.
24
See Han et al. (1999).
25
ibid., and Kwon (1999).
13

insurance, pension insurance, employment insurance, and industrial
accident insurance.
Without any hesitation, President Kim Dae Joong’s strategists
recommended that the government should take a quick action toward
establishment of a unified health insurance administration covering theentire nation, as soon as possible (see Table 4 for a detailed time schedule for
integration efforts). Based on the schedule, the majority party took an
initiative in passing the new National Health Insurance Law, whichprescribes the process of integrating the health insurance system until thecomplete integration will be done by the beginning of 2002. By merging 227
health insurance societies under Regional Insurance, and the insurance
program for government officials, and private school teachers, the National
Health Insurance Corporation was born as a single carrier.
(3) Economic rationale of integration and expected results
Economic rationale behind the policy changes regarding health insurance
administration can be summarized as follows: to enhance both efficiency andTable 4．
4． Time Table to Proceed Integration Efforts--

Promulgation of the ‘new’ National Health Insurance Law (December
1997)
By merging the insurance program for the government officials andprivate school teachers with Regional Insurance (October 1, 1998), theNational Health Insurance Corporation was created as its sole insurer.
Achieving a complete administrative integration by further merging
Employee Insurance by July 1, 2000.
Achieving a complete financial pooling by January 1, 2002.

Source: Planning Commission for Unifying Health Insurance (1998).

14

equity by improving risk-pooling function and income redistribution functionof the health insurance system, thus eventually contributing to social
integration in Korea26. First of all, it would significantly enhance equity by
applying the same criterion to the insured in assessing premiums and paying
benefits. In particular, a group of proponents for integration assert that it
would, as a countervailing power, assist government in resisting thedemands of the near-monopoly providers27. In addition, centralization ofadministration would reduce administrative costs and offer a way to lower
the contribution burden on the poor. Such a step would also eliminate an
obstacle to labor mobility throughout the nation.
According to the government plan, the basic policy directions for the
integration efforts are two-fold: one is for enhancing equity, and the other for
improving efficiency as shown in Table 5. The government aims at enhancing

Table 5. Basic Policy Directions for Integration________________________________________________________________________
EquityEfficiency_______________________________________________________________________
1.To guarantee adequate premiums

1. Institutional changes,

and benefits level to the insured

in lines with integration

2. To upgrade quality of medical

2. To check an excessive increase

services for all

in NHE, and maintainstability in NHI financing
3. Efficient administration of
NHI___________________________________________________________________
Source: Planning Commission for Unifying Health Insurance (1998).

See Planning Commission for Unifying Health Insurance (1998). The Korean
approach toward integration of health insurance programs had the benefit of learningfrom the Taiwanese experience whose integration efforts were started in 1995.
27
Kwon (1993).
26

15

equity by emphasizing two important policy changes. Primarily, thegovernment focuses on how to guarantee adequate level of premiums andbenefits. In order to achieve this goal, equitable assessment of income orearnings, and a fair levy of premiums are required. Recently, the Korean
government announced that a single criterion would be adopted, which issolely based on income in premium assessment. This basic rule will beapplied to employees as well as self-employed.
In addition, there will be expanded benefits by reducing the number of
excluded medical service items and including some of high-tech related
service items, in view of the fact that the poor suffer most among different
income classes due to financial barriers when they utilize medical services.
Moreover, government subsidies would be clearly targeted for providing
administrative costs, and making up premiums to a group of low-income
people including small farmers, and fishermen, and self-employed. Together
with improving the benefits level, the government plans to assure quality of
medical services. The Ministry of Health and Social Welfare also plans to
reduce copayment rates, which are extremely high in Korea, compared tothose of other OECD countries.
Regarding the efficiency aspect, the Korean government is looking
forward to developing complementary financing schemes, and related
institutional changes in lines with integration in order to maximize its effect.
Complementary measures, which may get along with integration approach,include alternative financing mechanisms, such as Medical Savings
Accounts (MSA, in short), and private insurance programs, and changes inpayment methods, such as DRG, capitated payment systems, HMO, andglobal budgeting system. In addition, a complete division of functions
between medical doctors and pharmacists is required to further improving
efficiency. A series of such institutional changes will make contributions toenhanced cost-effectiveness in administering NHI, and strengthened
financial basis of the health insurance system by checking excessive increasein NHE in the years to come.
It is particularly worthy to pay due attentions to MSA at this point intime. There are a couple of reasons why we have interest in MSA for Korea in16

this context. First, Korea should solve the major problems—how to stabilize
the soaring trend of the NHE, and how to finance the medical expenses forthe elderly whose number is steadily increasing, and whose medical
expenditures per capita are rapidly increasing over time. Second, it is related
to the fact that savings rates are quite high in Korea. Third, the Korean
economy is bound to show a slower growth rate from now on. Fourth, it isrequired that social insurance should be an efficient financing mechanism.
In order to help NHI to be efficiently administered, and to strengthen
stability of the health insurance system in the long run, it is advised thatsocial insurance should be in harmony with the market principles. Therefore,
some assert that MSA should be better fitted in the Korea’s socio-economic,
and demographic conditions28.
By nature, the MSA scheme is regarded as a means of risk pooling basedon personal savings. While health insurance is designed to makecontribution to the cross-sectional risk pooling, MSA to the inter-temporalrisk pooling29. As said previously, health insurance has two importantfunctions to play, namely, functions of risk pooling, and income redistribution.
Generally speaking, health insurance as a social insurance system is subject
to moral hazard problems induced by the insured and medical providers. It
also brings about intergenerational redistribution in favor of the elderly, forinstance. For health insurance is based on the pay-as-you-go financing
approach. On the other hand, MSA discourages at the maximum thepossibility of inducing moral hazard, while it is independent from the current
institutional features which tend to do a favor to the elderly by emphasizing
the importance of individual responsibility in utilizing medical resources.
However, it does not have any direct role for income redistribution.
Some economists argue that the best way to bring health care costs undercontrol would be to enhance the role of market forces in the health caresector30. MSA is essentially based on the market principle, and is regarded as
See Prescott (1998) and Kwon (1999). The same story can be applied to Japan. The
Japanese are conscientious savers, have a strong sense of responsibility, and on thewhole would not be disturbed or financially troubled by having to pay a contribution for
MSA from their own saving accounts.
29
See Prescott (1998) and Han, et al. (1999).
30
See Rosen (1988).
28

17

an efficient financing mechanism. As the Singaporean experience indicates,
the MSA scheme can be considered as one of the most effective means insolving the contemporary problems of instability in health care finance. It
has been allegedly reported that MSA has contributed to solving such thorny
issues as financing medical services for elderly people, and stabilization of
NHE to some extent in Singapore31. However, the assertion on the last point
is subject to further verifications.
Also, the MSA concept is perfectly in lines with the spirit of the recent
OECD Report. It succinctly summarizes the future direction of healthinsurance policy as follows: it is desirable for the governments to pursue abalance between market forces on one hand and government regulation on
the other32. In other words, policy reform of the health insurance systemshould be designed and proceeded to promote optimal division of works
between individual responsibility and social responsibility. Though the
Korean government has not officially endorsed MSA, a group of healtheconomists strongly support its introduction to Korea as a complementaryfinancing scheme with a long-term perspective33.
It is critically important in this context to keep in mind that integration
approach alone cannot solve all of the structural problems, such as thefundamental issues of financial instability of the health insurance system,
and a rapid increase in NHE. For integration approach may provide only anecessary condition, not a sufficient condition for raising financial stability
in health care finance on a long-term basis. This is the main reason why
alternative financing mechanisms, and other related changes are required topermanently expand the financial basis of the health insurance system.
Once the integration would be successfully carried out as planned, it isexpected that there will be a couple of important positive changes in Korea’s

See Masaro and Wong (1995).
See OECD (1999).
33
Some argue among the Korean health economists that health care policies from now
on should be implemented via an interaction of two factors: the market and the state.
For example, they assert that greater individual flexibility in choice of health caredelivery should be considered through the medium of individual saving accounts. See
Han et al. (1999) and Kwon (1999), for instance.
31
32

18

health sector. First of all, there should be clear incentives given to the
medical providers as well as consumers in utilizing medical services in a
cost-effective manner. Such changes would be attributable to a shift toward
prevention-oriented health services, including preventive medicine, healtheducation34, and rehabilitation, deviating from the dominating status of
curative services at present. As the Taiwanese experience indicates, there
will be additional effects such as decrease in administrative costs of healthinsurance, enhanced equity in premiums assessment and benefits payment,
and improved quality of medical services, and so on (see Table 6)35. Amongthe expected results, the most important outcome of the policy reform shouldbe the elimination of such discrepancies so that by reform every insured will
confer the same level of benefits.
However, there remain a couple of thorny issues to be tackled. The
primary issue should be related to how to develop a fair method ofadequately assessing earnings or incomes of self-employed groups in order tolevy adequate premiums for them. The next issue is how to persuade active

Table 6.

Expected Results and Remaining Issues_________________________________________________________________________
1. Expected results of integration- Improved cost effectiveness- Enhanced equity- Improved quality of medical services- Expanded role of the insurer
2. Major issues to be solved- To develop an adequate method of income assessment for the selfemployed- To persuade workers’ groups standing against integration.
Prevention, and health education include effective health screening andimmunization programs.
35
See Planning Commission for Unifying Health Insurance (1998).
34

19

leaders of labor unions and salary workers’ groups in view of their strong
resistance so far. These social pressure groups have engaged in a steady war
against the government in order for them not to bear a heavier burden than
before in terms of premium contributions as a result of integration.

4. Major Lessons Japan Can Draw from the Korean Experience
It appears that Japan can draw a couple of positive and negative lessons,respectively from the Korean experience. First, we will examine positive
lessons. The first lesson could be ‘a sense of timing for making policy changes
and quickness in making adjustments to a changing nature of policy
environments’. Once recognizing that the policy direction to move toward
integration was right, and its merits were known to be quite significant,compared to its costs, the Korean government was in the right place at theright time in making such a movement. As the OECD Report clearly
indicates, advanced countries are gradually reorienting their policy-making
to take into account a more integrated approach to health care36.
Second, Korea’s movement toward a unified health insurance system may
not be possible, if there was not a firm determination from the politicalleadership. Suppose there was no government change in the 1997
presidential election. Then, it is quite certain that Korea keeps the previous
health insurance system with some minor modifications. It can thus be said
that Korea could successfully shift its direction from multiple carriers to asingle carrier in administering the health insurance system, mainly thanks
to political leader’s decision-making. A reform-minded Chief Executive takes
initiatives in overhauling the existing health insurance system to improve
both equity and efficiency, for the benefit of general public, in particular,
economically less fortunate groups.
Third, the government correctly recognizes the fact that integration
approach alone is not enough as a fundamental solution vis-a-vis the issue offinancial instability of the insurance system as a whole. The Korean
government in this context makes it clear that it is necessary to experiment36

See OECD (1999).
20

various financing arrangements. Some of the Korean health economists
argue that complementary financial mechanisms and utilization of themarket forces are required to improve the financial stability of the healthinsurance system on a permanent basis37. Since we gave detail on this issue
in the previous section, a few more policy measures are suggested here. For
instance, the shortcomings of the fee-for service payment can be to someextent mitigated by developing a system of resource-based relative value
studies (RBRVS, for short). It is also required to pursue a new approach tointegrate preventive and curative services, along with reconsideration on therole of primary health care. It is particularly important to emphasize theimportance of empowerment of the public in this regard38. The Korean
government also tries to reduce administrative costs of the health insurance
system by developing a slim, yet democratic management system, andpromoting competition among six regional offices when the complete
integration will be done.
On the other hand, we can also point out a number of negative lessons.
First, during the period of presidential election campaign, a strong politicalcommitment has been made, all of sudden, without due preparations forpolicy changes of such an importance. Of course, similar proposals have beenraised by a group of scholars in favor of integration since the mid-1980s. Dueto the reversed order in proceeding policy changes, however, it is inevitable
for the Korean government to repeat ‘trial and error’ in pushing forward
integration efforts. This sort of ‘top-down approach’ initiated by the politicalleader’s decision turned out inefficient, because the government shouldchange the policy directions quite often whenever facing new stumbling
blocks, including political one, due to lack of preparations. Accordingly, it isconsidered as highly costly.
Second, it should be desirable for the government to have a sufficient

Some of the Japanese health economists also believe that the current system could be
improved by the introduction of more market forces. See Hiroi (1997) and Tokita (1999),
among others.
38
The OECD Report shows “fully-informed and involved patients are more likely toadopt necessary behavioral changes than if faced with a purely paternalistic approach”.
Thus, empowerment of patients is a necessary component of a prevention-oriented
reform strategy. See OECD (1999).
37

21

amount of feedback processes with the insured, the entire Korean citizens, inview of a significant change in policy direction. Also, it is important to takecare of people’s needs, whenever the government tries to change policy
directions that affect people’s daily living. OECD in this regard clearly
depicts that it is important to focus on the needs of individuals in healthpolicy making39. Mere making a quick movement toward a unified systemdoes not carry a significant meaning when people do not understand or
cannot follow such policy changes.
As a matter of fact, there has been an organized resistance in Korea since
the government officially announced the policy reform toward integration. In
particular, active leaders of labor unions and salary workers’ organizations
took initiatives in opposing the government, simply because they have anegative expectation that as a result of policy changes they must bearheavier burden in terms of premiums than before. Recognizing that the
opposition forces are not weak, the government and ruling party agreed topostpone the completion of the administrative integration by six months. For
they are particularly conscious about potential negative impact on the
coming election for the National Assembly. It should thus be strongly warned
that political decisions, not economic decisions might ruin the steady
movement toward desired goal of a unified health insurance system.
Third, there are groups of people in the Korean government, who tend to
exaggerate the positive effects of integration40. It is important in this context
to point out that the movement toward integration does not necessarily bringabout panacea for fundamentally reforming the health insurance system in
Korea. This means that integration could provide a necessary condition, nota sufficient condition for overall improvements in health care financing. As
previously discussed, if and only if there would be complementary
institutional arrangements, which support integration approach, such policychanges make more sense.
ibid.
Theoretically speaking, integration approach should have an edge over alternative
management scheme run by multiple carriers both in terms of equity and efficiency.
Here, we implicitly assume that health insurance is being optimally administered. In
other words, economies of scale and scope economies are realized either on a national
basis or regional competition basis.

39
40

22

5.

Policy Options for Japan: Simulation Analysis

As seen previously, the Japanese health insurance system has numerous
problems at present. They are boiled down to two major issues, among others.
The first issue is focused on financial vulnerability of the health insurance
system. This is due to a sky-rocketed increase in NHE, that is mainly
attributable to a rapidly aging population. The second issue is related to thediscrepancies in benefits and premiums level among the insured. The second
problem can be approached in two different ways: one is to unify healthinsurance, and the other is to improve co-financing scheme so that there
would not be any more gaps and discrepancies in benefits and premiums
among different carriers. Korea and Taiwan employed an integration
approach, while Germany and Netherlands pursued the latter approach.
The first problem is more difficult to solve, in the sense that it involves ademographic shift, which the government cannot control at all. In order tosolve this problem, fundamental reform packages are required in such areas
as financing schemes as well as payment methods. Facing a low economic
growth, it will be extremely difficult for the Japanese government to provide
adequate amounts of subsidies to make up the deficit of health insurance.
Also it is not easy under a sluggish economy for health insurance societies toraise premium rates on a continuing basis in order to be able to meet everrising benefits payments.
It is evident that the Japanese health insurance system is facing thecrisis. Which way should it go in order to get out of current doldrums? The
Japanese government recently has made it clear that there should be
fundamental structural reform in health insurance. As far as making reform
is concerned, it is advised that the Japanese government must not seek forpolitical solutions in view of the Korean mistakes. Also, it should takeparticular Japanese situations into consideration, when choosing
appropriate policy directions. Such country-specific conditions may include
preferences of Japanese people, political atmosphere and economic reality atpresent and in the future, and so on.
The fundamental structure of health care financing in Japan should

23undergo a significant change in the foreseeable future. We want to propose aseries of measures, which point the way to future reform in health insurance.
Two objectives of reform are ‘to maintain medical care expenditures at an
adequate level now and for the future’, and ‘to ensure a fair distribution of
benefits and contributions among the various insurance schemes’. These
differences should be leveled so that the health insurance system as a whole
can continue to be treated as a fair social insurance institution.
Based on the survey of the recently published Japanese literature on thehealth insurance reform, it can be said that Japan has several options forpolicy changes in reforming health care financing41. When dividing the policy
reform issues into adequate provision of care for the elderly, and equity, eachpolicy area has a couple of policy alternatives, respectively. However, we had
better combine them to discuss policy alternatives on a practical basis. Table
7 shows four different plans. That is (1) a complete integration plan, (2) apartial integration plan--having two different insurance programs, one for
employees and the other one for the self-employed, (3) maintenance of thepresent system with expanded co-financing schemes (Risk Structure
Adjustment plan, RSA42, for short), and (4) establishment of a separate
insurance program for the elderly, which is financed by consumption tax.
For the sake of simplicity, we want to use abbreviation form to facilitate
our discussion on the policy reform. In short, we assume 'elderly care, andequity’ represent the issues of provision of adequate care for the elderly, anddiscrepancies in benefits and premiums among the insured, while assumingthat ‘efficiency’ delineates the issues of financial instability and a rapid
increase in NHE. At present, there are four different proposals suggested inJapan to primarily tackle the former issues (Table 7). Regarding theefficiency issues, there are no clear policy options suggested so far, except a

Website of the Ministry of Health and Welfare in this regard provides a condensed
form of summary on the policy alternatives. See Ministry of Health and Welfare (1998).
42This plan is similar to the German RSA, which is footed on the principles of autonomyof the insurers, and social integration. The German reform measures aim at improving
overall efficiency of NHE by equalizing the burden of the insurers, and enhancing
competition among the insurers based on the market forces.
41

24

Table 7. Policy Options Suggested for Japan______________________________________________________________________(1) Equity Enhancing(2) Adequate Care for the Elderly(3) (1) + (2)• Complete integration• Separate insurance for the elderly• Complete integration• Partial integration• RSA plan

• Partial integration• RSA plan

• Complete integration• RSA plan

• Public assistance for the elderly• Separate insurance program• Improving present health carefor the elderly financed bysystem for the elderly

consumption tax

few proposals43 including one by the government, which is characterized bymarshalling all sorts of flowery words without providing any substantive
policy alternatives.
Therefore, Japan’s health care planners should be paying greaterattention to the issue of financial vulnerability in health care finance.
Finding it impossible to increase available funds for health care bills, apriority should be given to the improvements in financing mechanism. Thereare certainly some grounds for concern that more radical and comprehensive
kinds of reform might be necessary if the present system is to be in a position
to respond fully and to cope compassionately with the changes taking placein Japanese society. The changes are so deep as they might suggest and yet
one can sense that Japan’s policy-makers may be misinterpreting theevidence and indicators all around them.
In this section, we will employ simulation analysis in order to focus on thefinancial status of the Japanese health insurance system as a whole. Among
those four proposals, three plans, except the complete integration plan, areregarded realistic in the sense that they are in lines with a gradual change,
which is most likely to happen in Japan. This means that Japan would go
43

For instance, see Nishimura (1999c), and Hiroi (1997).
25

slowly in making policy reform. However, the complete integration plan (thisis what Korea chooses) can give a benchmark for our simulation exercises.
Then, we will introduce MSA primarily to deal with the efficiency issues,that is, to expand the financial basis of health care finance with a long-term
perspective. The MSA scheme utilized for the simulation analysis for Japanis assumed to be one, which is very similar to the Singaporean MSA schemein terms of risk pooling function44. It is also assumed that every Japanesecitizen should take part in the MSA scheme on a compulsory basis45.
Basically, MSA is an individual savings account from which one’s medical
bill for the routine services is paid. MSA is supposed to cover those services
that the insured frequently utilize at relatively small costs. Also MSA has aninsurance component from which premiums are paid for catastrophic
illnesses, that require a large amount of medical expenses. When people areyoung, they rarely utilize this insurance. On the other hand, the older, themore frequently one utilizes it. Normally this type of insurance requires
relatively higher copayment rates. At the practical level, however, a special
consideration should be given to the possible exemption from cost-sharing
allowed to the poor and elderly population, either in full or in part,
depending on one’s ability to pay46.

The Singaporean MSA consists of three branch programs, that is, Medisave,
Medishield, and Medifund. Medisave is savings accounts from which premiums forMedishield are regularly withdrawn automatically. Medifund is a la public assistanceprogram, and is financed by the government for the medically poor. Medisave also
covers routine medical services, while Medishield provides insurance against
catastrophic diseases. Some of the health economists in this context assert that patientsshould be asked to pay most of the costs for all routine procedures, but the state should
provide virtually complete insurance against catastrophes. For, very expensive
treatments, albeit for a relatively small proportion of patients, could increase overall
medical costs. See Rosen (1988).
45
The MSA scheme for Japan can start with a moderate amount of savings. As theoverall size of the medical bills increases, then the amount of savings for this purpose
would be increased accordingly on a gradual basis. This sort of a piecemeal approach ispractically desirable in reducing the degree of resistance at the initial stage ofintroducing a new system like MSA. Since MSA is regarded as one of the most costeffective financing mechanisms so far, Japan can smoothly transfer a part of the highpersonal saving rates into MSA, provided that a slow, but steady process to persuade
the insured should follow.
46
Recall that equity in the finance of health care means that payments of health careshould be positively related to a person’s ability to pay. Germany, for instance, set a capon the amount of copayments as a proportion of income. See OECD (1999).
44

26

The basic formula for our exercises can be summarized as follows: for thesake of simplification, we assume that there would be no change in premium
rates, benefits level and copayments with the introduction of MSA47. Then,
we divide outpatient services into several categories in terms of utilization
frequency and expenses. Up until 3,000 yen per visit, the entire medical
expenses should be born by patients in order to encourage them to be costconscious in utilizing routine procedures, and health-conscious by inducing
them to practice healthy life-style. From 3,000 to 10,000 yen per visit, those
medical expenses are paid from MSA. And for those services, which exceed
10,000 yen, health insurance would reimburse.
In the case of inpatient services, there are two different categories—
catastrophic illnesses and non-catastrophic illnesses. Up until 500 thousandyen (considered as non-catastrophic illness), medical expenses are paid fromhealth insurance, except the copayments. And those services, which exceed
500 thousand yen (considered as catastrophic illnesses) would be reimbursed
from MSA-attached catastrophic insurance, subtracting copayments. It
should be noted that there are some variations in the pattern of the medical
utilization by expenditure category between the elderly and the non-elderly.
Accordingly, it is desirable to carry out the simulation exercises (bothinpatient and outpatient) by differentiating the elderly group (those who are
aged 70 or more) and the non-elderly group (those who are aged below 70).
Based on this formula, we will conduct simulation analysis48 for four
policy options: a complete integration plan, a partial integration plan, and a
RSA plan, and a separate program for the elderly. We will first calculate thefinancial status of the Japanese health care finance for the future for each of
the four plans without consideration of MSA. Then, we will add MSA for each
Also we assume that the wage level, NHE, and interest rates do not change over time
for the purpose of simplification. Calculations on the financial status will be done in
1995 constant market prices.
48
This is based on the Suzuki model. The model is primarily designed for making
projections of NHE, and is based on the 1990 model set up by Professors M. Ogura, andT. Irifune. The main feature lies in that it is able to reflect the characteristics of age
groups so that one can analyze the effects of population aging on the increase in NHE.
Population projections are based on the medium variant version of Population
Projections for Japan (1997), published by the National Institute of Population andSocial Security Research. See Suzuki (1999) for more detail.
47

27

plan, and similar calculations will be done. Thus, we will have eight different
policy options in total.
Indeed, the health insurance finance in Japan is bound to face enormous
difficulties. All major health insurance programs are expected to suffer froma long-ranged deficit problem. As the Ministry of Health and Welfare
correctly points out, Japan could scarcely avoid the worst situation of afinancial crisis, thanks to the revision of the Health Insurance Law in 1997.
However, the government still worries that the rapid increase in NHE willcontribute to pushing the financial status back to the old situation of
instability in the years to come, if nothing will be done to check the rising
trend of the medical bills49.
As Table 8 shows, it is clear that there would be a huge amount offinancial deficit accumulated in the near future unless fundamental reform
measures regarding health care financing would not immediately be
implemented. All four policy options, in terms of the cumulative amount offinancial deficit for the health insurance system as a whole, will record -73.2(Plan A), -101.2 (Plan B), -122.3 (Plan C), and –45.5 (Plan D) trillion yen in
2025, respectively50. The main reason why Plan D will show the smallest
amount of deficit is that elderly people will also pay consumption tax, thus
making contributions to expanded financial basis of the health insurance
system as a whole. Please note that the elderly at present do not pay any
premiums for the health insurance programs.
This strongly suggests that an alternative financing mechanism like MSA
should be necessary for Japan. Only after introducing a partial privatization
scheme based on MSA, the Japanese health insurance system will be in afinancially manageable shape, as Table 8 clearly reveals. Each plan will saveabout 20 percent of expenditures to be paid from the health insurance
system with introducing the MSA scheme. Accordingly, every plan will record
a significant amount of financial surplus in the long run, except the Plan C.
Please remind that we assume that Japan will introduce a simple MSA
scheme. And we also assume, for the sake of simplicity, the proportion of the49
50

See Ministry of Health and Welfare (1999).
Plan D is identical to Plan D2 in the Table 8.
28

Table 8.

Results of the Simulation Exercises by Policy Option( 1) Before Introducing MSA ( the amount of annual deficit in billion yen)
1997
2010
2025
______________________________________________________________________
Plan A: Complete integration-126-2,689-4,423(-17,341)(-73,248)
Plan B: Partial integration-126-3,721-5,457(-29,795)(-101,201)
Plan C: RSA plan
-126
-4,527-5,952(-40,790)(-122,257)
Plan D1: Separate program
for the elderly

Plan D2: Separate program
for the elderly

-126

-126

3,783

3,428

(54,826)(108,560)-1,829(-8,739)-2,823(-45,463)(2) After Introducing MSA (the amount of annual deficit in billion yen)
1997
2010
2025
______________________________________________________________________
Plan A
-126
1,022
-707
(28,475)(28,673)
Plan B-126
225-1,517(18,889)(7,051)
Plan C-126-560-1,985(8,156)(-13,379)
Plan D1-126

Plan D2

-126

6,214

5,589

(86,454)(174,586)

1,512(33,005)422(45,832)(Note) 1.D1 covers insurance system only for the non-elderly. This concept is included
here to better explain D2. D2 covers insurance system for elderly people as well,which depends on the public financing through the earmarked consumption tax.
2. Figures in parentheses indicate cumulative amount of deficit in billion yen.
29

health expenditure through the MSA components out of the total medical
expenditures would be constant over time. By varying the MSA version andmaking more realistic assumptions based on the dynamic expenditure data,
Japan can choose an appropriate alternative financing mechanism.
It is also worthy to mention that when the MSA scheme will beestablished, one can expect that the health insurance fund could savefurthermore because people would be more cost-effective in utilizing healthresources and would be equipped with health conscious life-style. In thisconnection, it is worthwhile mentioning possible topics for further researchin the future. One could be ‘the effects of MSA on intergenerational income
redistribution, and cost-effectiveness’. Others might include ‘how toeffectively design MSA in order to save health resources at the maximum’,and ‘how will individual contributions for the whole health care system beaffected by introducing MSA’.
6. Summary and Conclusions
There is little question that Japan is facing a crisis in the financing
health care. Her population is rapidly aging. The development and use of
new health care technologies continues to grow. Many people are notreceiving care appropriate to their needs in the most cost-effective way
possible. Aging of the population alone will drive health care costs andutilization to ever-increasing levels. At present, the elderly is consuming
about one third of NHE. By the year 2025, they are projected to consume 70
percent of all health care resources. Regardless of who pays for these services,
this care must be managed in one way or another. Ineffective management
will either bankrupt the Japanese economy or deny millions of Japanesepeople the care they truly need. We want to suggest a system that issensitive to the needs of people in Japan, and conducive to the Japanesesocio-economic, and demographic conditions now and for the future. It is
recommended that Japan should pursue active aging approach. For this,Japanese policy-makers need to show a paradigm shift in designing thepolicy reform in a genuine sense.
It is interesting to see that Korea has adopted the same type of health30insurance as Japan did much earlier, yet she is moving ahead of Japan inreforming institutions. In view of apparent structural problems in terms ofequity and efficiency, the Korean government has decided to move toward
integration. Facing a slower economic growth rate than before, yet expecting
an increased NHE year in year out, the Korean government has made aquick action for making reform. It seems that Japan lies in a more serious
situation. What kind of path should Japan choose in reforming healthinsurance? It is worthy, as a good reference, to review what the Singaporean
government has done for its health sector in the past two decades. Singapore
has made it clear that the main objectives of health sector are two-fold: (1) tomake the citizens healthy and productive by emphasizing the importance ofpreventive medicine, and (2) to encourage them to practice sound life-style,and to induce them cost-conscious in utilizing medical resources byimproving the financing mechanism for health care. It is apparent that she
has achieved a fair amount of success so far51.
Although the ‘aging society’ is clearly an important issue, it is notdesirable to be obsessed with it. As a matter of fact, this issue has alreadystalked through all areas of public policy, including health sector, in Japan
since 1980s. The policy makers have struggled to devise socially appropriate
and financially tolerable programs to care for health needs of elderly people
for the future. The challenge posed by the massive demographic shift to an
aging population has already given considerable impact on health careprovision. The real problem is that the negative psyche has been further
reinforced by its coincidence with a downturn in Japan’s economic growthrate, which naturally restricts an increase in public spending52.
It is evident that the Japanese health insurance system currently faces
serious structural problems in terms of equity and efficiency. In a sense, it isfighting a war for survival, particularly in view of the rapid population aging,
and worsening financial status of health insurance. In a sluggish economy, it
is difficult to either increase premium rates or decrease benefits level on acontinuing basis. It is also not realistic to expect that the Japanese
See Prescott (1998), and Massaro and Wong (1995), among others.
OECD Study shows that the potential effects of aging could be compensated in part bya relative improvement in the health status of the elderly population. See OECD (1999).

51
52

31

government is able to increase the amount of subsidies earmarked for healthinsurance for many years to come. In short, the current doldrums is callingfor fundamental reform for the sustainable health insurance system in the
future. In essence, the Japanese problems are boiled down to the two issues.
The first one is related to the possibility of insolvency in health carefinancing, due to ever-increasing number of the elderly, who tend to utilize
medical resources heavily until the last moment of their lives. And thesecond one is discrepancies in premium rates and benefits payment between
different insurance programs and among different insurance societies.
Given the changing socio-economic and demographic conditions, it seems
that the basic policy direction for reforming the Japanese health insurance
system should lie in the optimum division of works among social insurance,
private insurance, and individual payment, along with movement toward
integration. This means that Japan needs to rebuild her health insurance
system in harmony with socio-economic, and demographic changes.
Rebuilding thus demands for making a balance between individual
responsibility and social responsibility in terms of overall cost-sharing. In
other words, there should be an adequate balance between the government
regulations and the market forces. In this line of policy frameworks, it isexpected that integration could contribute to improvements in both equity
and efficiency. What is fundamentally important in this context is tointroduce supplementary financing mechanisms centering on MSA, andprivate insurance. Changes in payment methods also can improve theworking of the health insurance system. These changes are primarily aiming
at the expanded basis for health care finance for the future.
The results of simulation analysis show that only if alternative financing
mechanisms were established, the Japanese health insurance system would
be financially sound in the long run. Therefore, we would like to recommend
a package of policy reform—integration of the health insurance system, andintroduction of a new financing mechanism a la MSA of Singapore.
Combining these two, Japan should, not only enhance efficiency, but also
improve equity, thus upgrading her health insurance with a long-term
perspective.

32

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