Health Care in Japan

Financing Health Care in Japan:
A Fast Aging Population and the Dilemma of Reforms

Minchung Hsu
National Graduate Institute for Policy Studies
Tomoaki Yamada
Meiji University

May 29th, 2012
CIGS ConferenceHealth Care in Japan
Introduction
Background

Background◮ Population aging:◮A global trend of aging◮◮◮

Observed: European countries, Japan, Asia tigers, etc.
Expected: Many developing countries, e.g., China, Malaysia,
Thailand, etc.

A fast aging population in Japan – old-age dependency ratio willreach near 80% in 2050 from current 35%.

◮ Impacts:1. Fewer workers/tax payers
2. Higher medical care demandHealth Care in Japan
Introduction
Background

Dependency Ratio
10090

Total dependency ratio
Elderly dependency ratio

Dependency ratio (%)

8070
60
50
4030
2010
1980

1990

2000

2010

2020
Year

2030

2040

2050

Health Care in Japan
Introduction
Background

Background (cont.)◮ Universal health insurance (UHI):◮◮UHI is provided in most developed countries
Many others are pursuing it, e.g., the US, Mexico, Turkey...

◮ Japan has a public UHI system◮ The health care provided by the UHI in Japan is financed by (in2002)
1. Premium (a payroll tax): 51.7%
2. Government general tax revenue: 33.0%
3. Co-payment: 15.3%

Health Care in Japan
Introduction
Questions

Questions◮ How does the fast population aging affect the cost of Japan’s healthcare system?
◮ How large is the corresponding impact on tax burden?

the old need much more medical care the young
shrinking working population◮ tax distortion◮◮◮ Any policy that can reduce the negative impact of aging andimprove welfare?
◮◮

UHI policy reform: an increase in co-payment
Financing policy reform: an increase in consumption tax

Health Care in Japan
Introduction
Questions

What We Do◮ Construct a dynamic stochastic general-equilibrium life-cycle model

to study impacts of aging◮ Policy experiments

1. UHI policy reform: changes in the UHI co-payment
2. Financing policy reform: using consumption tax to prevent high labortax burden◮ Welfare analysis

1. Steady state comparison – Welfare implications for future generations
2. Transition – Welfare implications for current households and thelikelihood of implementing the potential reforms.

Health Care in JapanIntroduction
Summary of Results

Main Results – Impact of Aging◮ Impacts of aging on PUHI cost◮

If medical price is constant:◮◮

An additional 8.9% labor tax will be needed with the 2050 agestructure compared with the tax rate in 2010

If annual medical price growth rate 0.6%:◮An additional 13.7% labor tax with the 2050 age structureHealth Care in Japan
Introduction
Summary of Results

Main Results – Policy Experiments◮ Both UHI policy reform (raising co-payment) and Financing policy

reform (raising consumption tax) improve welfare significantly in thefuture steady state (2050 age structure).
◮ Transition and Welfare for Current Generation
1. Only very young people have welfare gains
2. An increase in co-payment causes a huge loss for the oldhigher out-of-pocket expenditure
more risk◮ no time for preparation in advance◮◮3. Low agreement rates for both reforms – the tax reform gets moresupport

Health Care in Japan
Introduction
Literature

Previous Studies◮ Health insurance (Theoretical/Quantitative)◮Attanasio, Kitao, and Violante (2010), Jeske and Kitao (2009)◮ Health insurance and medical expenses (Empirical)◮French (2005), French and Jones (2007), De Nardi, French andJones (2009), Finkelstein (2007)◮ Health care in Japan (Empirical)◮Kan and Suzuki (2005), Iwamoto (2010), Kondo and Shigeoka(2011)

Health Care in Japan
Introduction
Road Map

Road Map

1. Introduction
2. Model3. Calibration
4. Results – Steady state comparison
5. Results – Transition
6. Conclusion

Health Care in JapanA Life Cycle ModelModel◮ A general equilibrium life cycle model with following features:

1. A continuum of finitely-lived individuals
2. Individuals face three uncertainties◮(i) labor productivity, (ii) medical expenditure, and (iii) mortality

3. Incomplete market (borrowing constraint)
4. Public health insurance provides universal coverageHealth Care in JapanA Life Cycle Model

Demographic Structure◮ An agent lives for at most J periods. Age j ∈ {20, . . . , 65, . . . , 100}

facing survival probability ρj from age j to j + 1
ρJ = 0◮ choosing labor supply until j ss = 65◮◮

◮ Size of cohort, measured by µj for age j, grows at a rate gµj + 1 =ρjµ1+g jJ∑ µj = 1j =1

Health Care in JapanA Life Cycle ModelShocks

1. Labor productivity: z◮◮

labor income: w ηj zn
ηj : age specific efficiency; n: labor hours

2. Medical expenditure: q · xj (h), h ∈ {hg , hf , hb }◮q: relative price of medical care

3. Survival probability: ρjHealth Care in JapanA Life Cycle Model

Health insurance◮ Public UHI◮

ωj : coverage rate of health insurance (age-dependent)◮ Out-of-pocket medical care payment(1 − ωj )qxj (h)Health Care in JapanA Life Cycle Model

Preferences◮ Period utility function of a household:u (c, n) =[c σ ( 1 − n ) 1− σ ]1− γ1−γc: consumption, n: hours worked
γ: parameter for ies/risk aversion, σ: utility parameter of leisure◮ β: discount factor◮◮

Health Care in JapanA Life Cycle ModelHousehold’s Problem◮ State vector: s = (j, a, z, h )◮ A household’s problem can be expressed by:
V (s ) = max u (c, n) + ρj βE V s ′c,n,a ′◮ s.t. constraints

Health Care in JapanA Life Cycle ModelConstraints◮ Constraints(1 + τc )c + a′ = W + T ,W ≡ y (n, j, z ) + (1 + (1 − τk ) r ) (a + b ) − 1 − ωj qx,y (n, j, z ) = (1 − τl − τss − p med )w ηj zn + ss (j )T = max{0, (1 + τc )c − W }ss if j ≥ j ss ,ssj =0 otherwise.
◮ Accidental bequest b:′b =R(1 − ρj )a ′ d Φ(s )1+gHealth Care in JapanA Life Cycle ModelProduction◮ A representative firm’s production function:

Y = F (K , L) = AK θ L1−θ◮◮

A: TFP
θ: capital share◮ Aggregate capital and labor

L=Zηj zn(s )d Φ(s ), K =Zad Φ(s )where Φ(s ) is the population distribution over the sate variables.

Health Care in JapanA Life Cycle Model

Government Budget Constrains◮ Government spendings consist of:

1. Public UHI
2. G : government consumption (exogenous)
3. Social security system: PAYG

Health Care in JapanA Life Cycle Model

Government Budget Constrains◮ Government’s budget constraint:Z[τl w ηj zn + τk r (a + b ) + τc c ]d Φ(s ) = ψ|{z}|Tax Revenue+◮Z(ωj qx )d Φ(s ){z}PUHI subsidy

ZTd Φ(s ) + G

ψ: a fraction of UHI cost is financed by government revenue◮ National health care system:

Z(p med w ηj zn)d Φ(s ) = (1 − ψ)|{z}PremiumZ(ωj qx )d Φ(s )Health Care in JapanA Life Cycle Model

Government Budget Constrains (cont.)◮ Social security system (self-financed):

Z(τss w ηj zn)d Φ(s ) =Z

ssj d Φ(s ).Health Care in JapanA Life Cycle Model

Recursive Competitive Equilibrium

1. Households’ optimization problem is solved
2. Firm’s optimization problem is solved
3. Government’s budget constraints are satisfied
4. All markets (goods, capital and labor) clear
5. Distribution of population over sate space Φ(s ) is stationary (in asteady state)Health Care in Japan
Calibration
Wage Risk

Idiosyncratic Wage Risk

◮ Approximate wage shock z by AR(1) processln zj +1 = λ ln zj + ε j , ε ∼ N (0, σε2 )◮λ: persistence of shock◮ Adopted form Abe and Yamada (2009)

Health Care in Japan
Calibration
Demography

Demographic Structure◮ Survival rate {ρj,t }The National Institute of Population and Social Security Research(IPSR)◮ Projection from 2005–2055◮Health Care in Japan
Calibration
Demography

Demographic Structure in 2010
2.5

Fraction of Population (%)

Simulated
Projected
21.5

10.5

0204060
Age80100Health Care in Japan
Calibration
Demography

Demographic Structure in 2050
2.5

Fraction of Population (%)

Simulated
Projected
21.5

10.5

0204060
Age80100Health Care in Japan
Calibration
Medical Expenditure Shock

Medical Expenditure◮ Transition of medical expenditure: Kan and Suzuki (2005)◮◮individual health insurance claim data
studying transition of medical expenditure in 5 age groups◮ Aggregate medical expenditure: Estimates of National Medical Care

Expenditures (Ministry of Health, Labour, and Welfare)◮ Medical expenditure: xj (h ), h ∈ {hg , hf , hb } (bottom 50%, middle

40%, top 10% in each j)◮ Adjust the level such that X/Y ratio matches the data

Health Care in Japan
Calibration
Medical Expenditure Shock

Medical Expenditure: Transition Probabilities
0.95
0.9g−gf−fb−bTransition Prob.

0.85
0.80.75
0.70.65
0.60.55
204060Age80100Health Care in Japan
Calibration
Medical Expenditure Shock

Medical Expenditure: Health Status
6

Medical Expenditure (2007, yen)

6x 105

goodfairbad4
3210204060
Age80100Health Care in Japan
Calibration
Social Insurance

Public Universal Health Insurance/Tax System◮ Co-payment rate depends on age (benchmark)1. ωj = 30%: j ∈ {20, . . . , 69}
2. ωj = 20%: j ∈ {70, . . . , 74}
3. ωj = 10%: j ∈ {75, . . . , 100}
◮ Tax systemτ c = 5%: consumption tax (benchmark)τ k = 39.8%: capital income tax (İmrohoroğlu and Sudo)◮ τ ss ∈ {16.058%, . . . , 18.3%} – social security has to be self-financedtbased on the tax.
◮◮

Health Care in Japan
Calibration
Parameters

Parameters
Parameters
Discount factor
Intertemporal elasticity of substitution
Share of labor supply
Capital share
Depreciation rate
Persistence of labor productivity shock
Std. dev. of labor productivity shock
Government share of PUHI cost
G/Y
Price of medical expenditure

βγσθ
δ
λσε
ψ
qValue
0.98
2.0
0.33
0.377
0.08
0.98
0.09
0.25
12.5%
{1, 1.27}

Health Care in Japan
Numerical Results
Steady State Comparison

Welfare Measure◮ How to evaluate welfare change?
◮

Certainty equivalent consumption variation (CEV)◮ Social welfare measure:◮

Measure 1: ex-ante value
SW 1 =◮Z

V (j, h, a, z )d Φ (j, h, a, z |j = 20, a = 0)

Measure 2: social average
SW 2 =ZV (j, h, a, z )d Φ (j, h, a, z )Health Care in JapanNumerical Results
Steady State Comparison

Result: Steady State Comparison

Age structure
Medical price
Change in K
Change in L
K /YX /YTax burden1) Labor tax: τl2) Premium: p med
1)+2): τl + p med
Increased burden

Benchmark
2010
q=1
0.00%
0.00%
2.52
7.1%

Only Price2010
q = 1.27-1.47%-0.18%
2.50
9.1%

Only Aging2050
q=1-0.52%-16.63%
2.81
12.1%

Aging & Price2050
q = 1.27-4.67%-17.23%
2.75
15.7%

7.6%
5.5%
13.1%
-8.7%
7.1%
15.7%
2.6%

12.2%
9.8%
22.0%
8.9%

14.1%
12.7%
26.8%
13.7%

Health Care in Japan
Numerical Results
Steady State Comparison

Result: UHI Policy Reform
Currentsystem
Change in K
Change in L
K /Y
Tax burden1) Labor tax: τl2) Premium: p med
1)+2): τl + p med
Welfare comparison
CEV(new-born, h =good)
CEV(new-born, h =fair)
CEV(new-born, h =bad)
CEV(all population)

0.00%
0.00%
2.75

UHI policy
ωj30%
35%
14.00% 19.10%
2.01%
2.79%
2.95
3.02

14.1%
12.7%
26.8%

13.3%
10.0%
23.2%

13.0%
9.1%
22.1%0.00%
0.00%
0.00%
0.00%

9.65%
9.67%
9.73%
1.29%

12.63%
12.63%
12.64%
2.02%

Health Care in Japan
Numerical Results
Steady State Comparison

Result: Financing Policy
Currentsystem
Change in K
Change in L
K /Y
Tax burden
Labor tax: τlPremium: p med
Total: τl + p med
Welfare comparison
CEV(new-born, h =good)
CEV(new-born, h =fair)
CEV(new-born, h =bad)
CEV(all population)

0.00%
0.00%
2.75

Financing Policy
τc10%
15%
5.20% 10.26%
1.07% 1.99%
2.81
2.89

14.1%
12.7%
26.8%

9.9%
12.4%
22.3%

5.7%
12.1%
17.9%

0.00%
0.00%
0.00%
0.00%

3.68%
3.69%
3.74%
1.19%

7.02%
7.04%
7.12%
2.14%

Health Care in Japan
Numerical Results
Welfare Decomposition

Decomposition of Welfare◮ Decompose the welfare effect into

1. Distribution effect:
Keep average c and n the same as in the benchmark, only theallocations over life cycle change.
2. Level effect:
Average c and n change to new steady state level.

Health Care in Japan
Numerical Results
Welfare Decomposition

Decomposition of Welfare(cont.)
Table: Decomposition of welfare change

CEV (total)
Level
Only cOnly nDistribution
Only cOnly nUHI policy reform
Co-payment rate

Financingpolicy τc30%
9.66%
4.93%
5.90%
-0.92%
4.86%
3.41%
1.44%

10%
3.65%
1.64%
2.43%
-0.78%
2.03%
1.53%
0.50%

Health Care in Japan
Numerical Results
Transition

Transition Dynamics◮ Compute transition paths from 2010 to 2200:◮ New policy implemented in 2011
◮ Policy experiment plans:

1. Policy 1(Immediate UHI reform): Co-payment rate increases to 30%
suddenly in 2011
2. Policy 2(gradual UHI reform): Co-payment rate increases 1% peryear to 30%.
3. Policy 3(immediate financing policy reform): Consumption tax
increases to 10%
4. Policy 4(gradual financing policy reform): Consumption tax increases
1% per year to 10% .

Health Care in Japan
Numerical Results
Transition

Welfare Implications◮ Welfare implications

1. Redistribution between the young and the old
Co-payment increase: forcing the old to share more UHI cost andface more risk
◮ Consumption tax increase: milder impact on the old (c is smootherthan x over age)◮

2. Redistribution between the healthy and the unhealthy
Co-payment increase: forcing the unhealthy to share more UHI costand face more risk
◮ Consumption tax increase: the healthy share more (they have higherc than the unhealthy)◮Health Care in Japan
Numerical Results
Transition

Transition Dynamics: Health = good50

CEV (%)−5−10−15−20−25−3020

Policy 1
Policy 2
Policy 3
Policy 44060
Age80100Health Care in Japan
Numerical Results
Transition

Transition Dynamics: Health = fair50

CEV (%)−5−10−15−20−25−30
20

Policy 1
Policy 2
Policy 3
Policy 44060
Age80100Health Care in Japan
Numerical Results
Transition

Transition Dynamics: Health = bad50

CEV (%)−5−10−15−20−25−3020

Policy 1
Policy 2
Policy 3
Policy 44060
Age80100Health Care in Japan
Numerical Results
Transition

Agreement Rate
100
Policy 1
Policy 2
Policy 3
Policy 4

Agreement Rate (%)

8060

40200
204060Age80100Health Care in Japan
Numerical Results
Transition

Tax Burden: Labor Tax + Premium
45
Labor Tax Rate + Premium (%)

403530Benchmark
Policy 1
Policy 2
Policy 3
Policy 4252015105020102020

2030
Year20402050

Health Care in Japan
Concluding Remarks

Concluding Remarks◮ Impact of population aging◮

Additional 9 – 14% of labor tax will be needed to finance the Public
UHI if the population age structure is like in 2050.

◮ Policy implications

1. Welfare for future generation:◮

Both the UHI reform (co-payment increase) and financing policy
reform (τc increase) improve social welfare.

2. Implication for implementation of reforms:◮◮

The majority will face welfare losses.
Immediate reforms will hurt current old people a lot.

3. Suggestion and discussionReforms that reduce tax burden on the young are necessary, butcompensation is needed.
◮ How?
◮