The roles of public and private insurance for the health-care
reform of Japan
†Eiji Tajika
‡Hitotsubashi University, Tokyo
Jun Kikuchi
National Institute of Population and Social Security Research, Tokyo
Abstract
The purpose of this paper is to identify the main features of Japanese health-care system and to present a direction for reform. It offers the following three as the distinct features of Japanese health-care system: the first is that pubic insurance dominates the health- care market; the second is that insurers fail to play the role as an agent of patients; and the third is that health-care costs has been contained by the price control in a centralized fashion. Based on the conceptualization and the practice of the roles of public and private health-care insurances, it looks into the construction of Japanese health-care system. One of its major findings is that many apparently different problems in Japan have stemmed from the government’s significant subsidies to insurers. As for the direction of reform, restoring the cost-reflecting premium is an important step toward a virtuous circle that would ultimately lead to a more sustainable health-care system in Japan.
I. Introduction
The purpose of this paper is to identify the issues of health-care reform of Japan and to present the ways to cope with them. The way we approach the issues is to shed light from the viewpoints of roles and functions that public and private insurances play in health care. To start with, it is relevant to state some of the salient features of Japanese health-care system. As such we would like to refer to the following three: the first is that pubic insurance dominates the
† Thanks are due to the valuable comments from Professors Hideki Hashimoto (University of Tokyo),
Masako Ii (Hitotsubashi University), Hiroyuki Kawaguchi (Seijo University), Peter Smith(Imperial College London) and Richard C. van Kleef (Erasmus University). The views expressed here are the authors’ and they are responsible for any remaining errors.
health care market and the private insurance has offered a very limited category of services; the second is the capacity of insurers has not well been developed and they fail to play the role as an agent of patients (individuals) against health-care providers like hospitals and doctors; and the third is that health-care costs has been contained by controlling the prices of treatments and drugs by the ministry in charge of health care in a centralized fashion.
In fact these three aspects of Japanese health-care system are closely interrelated. A common or connecting element of them is a sizable financial input contributed by the government, and that the government has become a big financier of health-care system. Japanese health-care system is considered to be managed by the social insurance: that is, health-care insurers collect premiums from the insured and they manage with their own sources of revenue. This, however, is not entirely true. There are many insurers in Japan, but except for those set up by large-scale companies others are in one way or another financially supported by the central and local governments.
The health-care insurer for the self-employed is the most typical receiver of the subsidy from the governments, and a half of its costs after deducting co-payments by the insured is paid by the government. The insurances for the people aged seventy five years and older, and for the employees of private (mostly small and medium sized) companies are no exception, and they receive respectively 50% and 16.4% of their total costs net of their co-payment parts from the governments. Adding these up, the health-care financing in Japan at large in the year of 2008 is such that about a half of total costs is procured by the premiums, 37% by the subsidy of governments and 14% by the out-of pockets fees of those who received medical treatment (Ministry of Health, Labour and Welfare, 2008).
With the presence of the massive input from the governments, the costs transmitted to the public has been suppressed. This means not only that the premiums have been set lower than otherwise would have been the case, but the government sets a ceiling of the out-of-pocket fees of individuals so that they do not have to incur the costs beyond the cap. Furthermore, the list of treatments and medications covered by the public insurance is very exhaustive: dental care and part of physical therapy, which are often candidates to be delisted from the coverage of the public insurance, are retaining insurance status in Japan; even when some treatments are not in the list, they are given a chance of clinical test to be added to the list.
One of the consequences of these “generosities” of the government is that the pubic insurance has been a dominant player in the market and the private ones have been dwarfed by it. Simply put, private insurance has a difficulty in being a complementing partner, much less a competitor, to the public insurance due to the heavy subsidization to the public insurers. Another effect by the public intervention to health care is that insurers look to the government for help: when health-care costs rises, it is a more efficient way for them to balance their budgets by asking the government to increase the support than tightening their budgets by paying more efforts to improve disease and hospital management. These, we think, are the
background of the aforementioned Japanese health-care characteristics. Another side of the coin is that the government has so far been able to control the health-care costs, for they are the ultimate owner of the pubic insurances, which pays to the hospitals, doctors and pharmaceutical companies.
Now the question is: can this system be sustained? In this regard there is already a signal of alarm from the OECD: “Japan’s strategy of repeatedly cutting the fees for physicians and hospitals and the price of drugs and equipment cannot continue forever. Prices can fall only so far before products become unavailable and the quality of care suffers; some would argue that this point has already reached (OECD, 2009a, p.112).” The progress of aging in Japan and increasing costs of health care with the advent of sophisticated treatment will make our answer to the question more in the negative than the caution made by the international organization.
This paper intends to find ways to sustain the financing of Japanese healthcare by carefully studying the roles of public and private health insurances in concept and practices, and by identifying the problems to fix. The rest of it consists in the following way: the second section classifies public and private insurances and discusses the role of private insurance with the cases mostly drawn from EU countries; the third section goes deeper into the Japanese health-care system to locate the problems to tackle, and discusses the roles that public and private insurances have so far played with as much as evidence as possible; the last section concludes our diagnosis of the difficulty of Japanese health-care system with an idea of the direction for reform.
II. Clarifying the role of private insurance in comparison with the public
II.1. Defining public and private insurances
This section defines public and private insurances in health care, and mostly discusses the role played by the private one. Comparative study of the two insurances has been done by OECD(2004) and Paris et.al (2010), and we would like to proceed on the facts accumulated by them. We start with the classification of the two insurances. Here, OECD(2004) defines the insurance according to its source of funds: when either tax revenues or income-related premium is the source of funds, the insurance is called public; and when otherwise, it is called private.
An awkward aspect of this definition of public and private insurances is that the collection of community-rated premium is not synonymous with the income-related premium, which is usually proportional up to a certain level of it. A case in point is the situation where the insurance is applicable to all people and a fixed-rate premium is charged with credits granted to the insured with income smaller than certain threshold. The OECD definition pushes this type of insurance away from public, and puts it into private insurance. Switzerland is the country of universal coverage with this type of insurance, and the OECD treats the country’s insurance as
private. Since Switzerland’s insurance may be better (and in fact has been) regarded as pubic rather than private, the OECD classification needs a reconsideration.
The way we instead employ for the classification of insurances is to first discriminate the health-care system according to whether it is universal or not. We then delve further into the universal insurance, and classify it according to whether the membership is mandatory (in some case, automatic as well) or not. Based on this configuration of types of insurances, we define insurance as a public one when it is universal and compulsory. Private insurance can either exist in a universal or non-universal system; but when it is in the universal, it is the one the membership of which is not mandatory. The insurance of Switzerland is now classified as the public, for it is universal and requires compulsory participation. An interesting fact is that it has indeed been classified as such in other OECD publications (e.g., System of Health Accounts, SHA).
Figure 1 Classification of Health-Care System
Universality Enrollment Sources of funds
NHS system UK, Canada, Australia SHI system
France, Netherlands, Germany, Japan SHI system
Switzerland
Primary-PHI
Germany (high-income earners)
Roles of PHI
Income-related tax or premium Universal Compuslory(Automatic) General tax
Fixed premium (including community rating)
Risk-rated premium Non-universal Non-compulsory (Non-automatic) Duplicate Supplementary Complementary
Public Health System
Private Health Inurance (PHI)
Note: NHI and SHI refer respectively to National Health Service and Social Health Insurance.
Figure 1 shows our classification. Based on it, we continue to classify public insurance: this time according to the sources of funds. As is depicted in the figure, public insurance can be financed by general revenue from tax, income-related tax or premium, and fixed premium. Of the three sources of funds, we consider the U.K., Canada and Australia belong to the first; France, Netherlands, Germany and Japan to the second; and Switzerland to the third.
Since the U.S., Mexico, Turkey and Chile are only countries among OECD members which do not have universal health insurance, we would concentrate on the countries with universal coverage and move on to private insurances. Here, we think that the private insurance can be classified into four types as in the OECD (2004): the first is so called primary insurance, and it takes care of those people who are willing to or mandated by the government to opt out of the public insurance (say due to a high-income status) ; the second is called a duplicate and it offers insurance on top of health services offered by the public health system; the third is supplementary and it offers additional health-care services that are not covered by the public insurance; and the fourth is complementary and it insures the costs not reimbursed by the public insurance, typically the co-payment part of the costs. These are the classifications of health insurance into public and private ones we will be using in this paper, and we would like to discuss further the characteristics of private insurances.
II.2. Functions and effects of private insurances
It is fair to say that the primary insurance is special, or different from other three types of private insurance since it deals with only those who are not taken care of by the public insurance. As such it can be either designed to be independent of or aligned with other public insurance schemes; however, the point is it is not applied to the general public. We will therefore do not discuss further the primary insurance, and stay on other three types: duplicate, supplementary and complementary insurances. Hereinafter, we proceed by enumerating important aspects in the functions and the effects of each of the three insurances. Discussion here is mostly conceptual, and the experiences and historical developments of various countries are relegated to Tapay and Colombo (2004) and other studies of OECD.
Duplicate private health insurance (PHI)
Functions:
As we have seen in Figure 1, duplicate PHI exists in OECD countries where public health system is financed by general revenue from tax (Australia and U.K.).
In these countries, there is a separation between publicly-funded and privately-funded providers and public health system covers basically treatments received in public providers.
Duplicate PHI covers treatments in private providers and offers increased choices over providers and timely care.
Effects:
1) Cost savings
Duplicate PHI is often seen as an instrument in reducing cost pressures on public systems by shifting demand and cost from public to private providers.
But cost-saving effect may not be as big as initially envisaged due to the following reasons: a) Private providers tend to pay more attention to elective cares; b) Privately insured people continue to use publicly financed health services; c) Cost-saving effect is also offset when there are public subsidies to the purchase of PHI services (e.g., Australian case).
2) Equity aspect
Duplicate PHI increases inequity in access to care and is suspected to divert physicians and other human resources from the public sector in those countries where the dual practice is permitted (OECD, 2004).
Some countries prohibit the duplicate PHI in order to avoid the creation of a two-tiered system (e.g., Canadian case).
Supplementary private health insurance
Functions:
Almost all OECD countries where PHI markets exist have some types of supplementary insurance.
Supplementary PHI covers services not offered by public health system and the typical services covered by it are optical, dental, physical therapy, cosmetic surgery, luxury services and improved hotel and accommodation amenities in hospitals (OECD, 2004). Effects:
1) Cost-saving effect
Delisting services from public insurance helps to restrict health-care costs of the public sector. But those services that can be delisted from the public insurance, such as optical and dental care, do not generally account for a large share of total health-care costs. Moreover, it is often politically difficult to delist services from the coverage of the
public insurance. 2) Risk selection
Under the managed competition framework, supplementary PHI could be used as an instrument to attract lower-risk people, thus it may enhance the possibility of risk selection.
Complementary private health insurance
Functions:
Most OECD countries charge the insured the co-payments or require them to share costs for services provided by the public health-care system. The complementary private insurance mitigates the portion of costs passed to the insured. It helps to limit the exposure to high medical costs coming from serious/catastrophic illness.
The complementary private insurance is most prevalent in France among the OECD countries where 90% of the population is said to have this kind of insurance. This is partly due to the widely developed mutual insurances before the universal insurance. Effects:
1) Increased accessibility
A high share of co-payment reduces the access to health care by poor people and results in an inequitable use of the health care services. Spreading the complementary PHI and enabling the poor to buy it will reduce inequity.
2) Enhanced use of health-care services
However, the complementary PHI works against the purpose of health-care cost sharing: sharing treatment and drug costs should make individuals (patients) more conscious about the costs than without. But if insurance is applied to this portion of the costs, they would perceive that the marginal costs of health care is reduced, and hence consume more. These moral-hazard effects will end up with increased health care costs.
In fact, many studies show that complementary PHI increases the utilization of health-care services (OECD, 2004). This is one of the reasons why governments prohibit the extensive use of the complementary PHI for some cases.
II.3 . How public and private insurances stand side-by-side: country cases
Given the classification of public and private insurances in health-care systems and the nature of the private insurance in health care, we would like to consider next how the two insurances co-exist and work together. We do this by studying the health-care institutions of some of OECD countries: the U.K., Canada, Australia, France, Netherlands and Germany. Here, we will refer to three aspects of health-care insurances (systems) for each of the six countries above: the first is how the public insurance (system) extends to the people; the second how and in which form the private insurance has been made available; and the third resulting policy issues the countries have been facing. Discussion here is not complete, either, like the one above on the nature of private insurances. But it aims at detecting noteworthy features of each
of the three aspects of each country’s insurances for better characterizing the Japanese health-care system.
The U.K. public health-care system, the National Health Service (NHS), is financed by taxes and offers a wide variety of services including in-hospital and outpatient cares, primary doctors’ fees, drugs and dental care. However, as for the care at hospitals and from specialists, the reimbursement from the NHS is allowed to be made to those institutions that have contracts with the NHS. Health-care providers are permitted dual practice, that is, to practice both publicly and privately reimbursed cares, but they have to manage the two practices on separate accounts.
Tables 1 and 2 show respectively the proportions of people and expenditure of public and private insurances. As of the year 2006, 11.1% of the population of the U.K. bought private insurance in one way or another, and 1.1% of total health-care expenditure is covered by it. The private insurance is of a duplicate type, and it provides the insured primarily with a better and rapid access to elective cares. Thus, the public and private insurances offer the same services in the U.K., but individuals are not permitted to receive both services at a time.
Table 1. The proportion of the population covered by the PHI
Total Primary Duplicate Complementary Supplementary
United Kingdom 20062 11.1 11.1 Canada 20091 68.0 68.0 Australia 20091 51.2 44.5 51.2 France 20081 93.7 93.7 Netherlands 20091 90.0 90.0 Germany 20091 30.4 10.8 19.7 Sources:
1. OECD Health at a Glance 2011 2. OECD Health at a Glance 2009
Share of population purchasing PHI
Table 2. Financing health-care expenditure by public and private agents
Public Private Total
United Kingdom 2009 84.1 15.9 1.1 14.8 100.0 Canada 2009 70.5 29.5 12.7 16.8 100.0 Australia 2008 68.0 32.0 8.1 23.9 100.0 France 2009 77.9 22.1 13.3 8.8 100.0 Japan 2008 80.8 19.2 2.4 16.8 100.0 Netherlands 1,2 2009 79.0 14.3 5.1 9.2 93.3 Germany 2009 76.9 23.1 9.3 13.8 100.0 Source:
OECD Health Data (Data extracted on 09 Feb 2012 11:18 UTC (GMT) from OECD iLibrary) Notes:
2. Estimate
1. In the Netherlands, it is not possible to clearly distinguish the public and private share related to investments.
Private insurance
Co-payment and others
Canada has also tax-financed public health systems, and each one is governed by the provinces. Tax-source revenues are both from provinces and the central government: Canada Health Act stipulates the conditions for eligible health-care system and the grants from the central government are made on the premise that provinces satisfy the conditions (Flood and Haugan, 2010). Public health system covers hospital, primary doctors’ and specialists’ cares, and the drugs prescribed at hospitals, but it does not pay the drugs for the outpatients. Dental care is also off the list of public coverage.
The private insurance in Canada is of a supplemental type: it has developed to offer the cares that are not covered by the public health-care system. The proportion of the population buying the private insurance is 68% and about 13% of the total heath expenditure is paid by it. Unlike the U.K., Canada does not permit the dual (public and private) practice of medical providers, implying the publicly provided cares cannot be mixed with those paid by private insurances (Flood and Archibald, 2001). The reason for this regulation seems to have stemmed from keeping the public health-care system from becoming two-tiered: one for the affordable with two kinds of services and another for the less well-to-do with only public services. Therefore, the private insurance of duplicate nature is not in place in Canada.
Australia is another country with a health-care system financed basically by taxes. The Medicare is the name of it, and as compared with its counterparts of the U.K., and Canada, it looks like the Medicare is much closer to private insurances. Firstly, the Medicare reimburses the treatments offered at private medical institutions; and secondly the expenditure of patients covered by private insurance is partly reimbursed by the Medicare. Moreover, the government gives the people incentives to buy private insurances by providing subsidies and by even penalizing the high-income people for not buying it. The reason of this public support for the private insurance is the awareness of the government that the erosion of the private insurance with the development of the Medicare would shift the costs to it (Colombo and Tapay, 2003). Probably as a consequence of these polices, about a half of the population have bought private insurance and the share of total health expenditure paid by it amounts to about 8%. However, the expansion of private insurance has not contributed to containing health-care costs; it would rather be the case that the health-care costs have increased due to the public subsidies.
We move on to the case of France, where health care is not managed by a single national agent, but mostly by occupational insurers. However, an interesting aspect about the country’s financing the health-care costs is that taxes constitute important revenue sources: the share of the total health expenditure born by income-proportional premium is about 50%, whereas taxes finances about 40%, the most notable among them is General Social Tax (Chevreul et.al., 2010). General Social Tax is an income-based tax earmarked for social benefits. Hence, from the viewpoint of health-care cost financing, the French system is a hybrid one mixing taxes and premiums.
cares on top of others usually on the list. However, the cost coverage of the public insurance is rather small: 80% of the hospital care, 70% of the ambulatory and dental cares and 60% of medical checks. This has resulted in another interesting aspect of the French health-care insurance: that is, the cost-sharing (co-payment) part of individuals has turned out to be very widely insured. We have called this type of private insurance complementary, and it attracts more than 90% of the population and pays 13.3% of the total health-care expenditure. The effect of this complementary insurance is said to have increased the overall health care costs by making its marginal cost lower for the purchasers of the insurance (Buchmueller and Couffinhal, 2004).
The netherlands has long-term and basic health insurances. They are separate insurances and what we have been discussing as health-care system in this paper refers to the basic one in Netherlands. Managed competition is a rule of the game in this insurance: the insurers (sickness funds) have been made private organizations, and people can choose the one they like. In order to avoid risk selection on the part of insurers, risk-adjustment mechanism and open enrollment have been put in place. Premiums consist of two parts: the first one is income-proportional and paid into national Health Insurance Fund, and the rate is the same for all insurers; the second is called nominal premium and charged at a fixed amount per insured by the insurer, and it fills the gap between the actual costs and the risk-adjusted payment from the Health Insurance Fund. Of the two kinds of premiums, the income-proportional one charged at the same rate across insurers purports to finance mainly the systematic risk of insurers arising from differences in the structure of age, sex and other elements. On the other hand, the fixed premiums make up the costs which are not fully adjusted by the risk factors and therefore they are paid by each insurer (Schäfer, et al., 2010).
The coverage of public insurance is wide, but excludes dental care for the people who are older than twenty two years. There is a deductible amounting to 155 Euro per year, but basically no co-payment. The private insurance offers supplementary services which are not provided by the public insurance, and it covers 90% of the population, and pays about 5% of the total health-care expenditure.
Germany has also long-term care and health-care insurances, and they are different insurances as that of Netherlands. The health-care insurance in the country is also based on managed competition with risk adjustment and free choice of insurers. A characteristic of the German system is that opting out of the public insurance is permitted for certain group of people, mostly high-income people and the civil servants (Blandt, 2008). The private insurance for those out of the public is therefore primary one, which is a different type of insurance observed in the countries we examined so far. Other than this German health-care insurances have more or less the same features of others: the coverage of cares of the public insurance is far reaching and includes dental care. There is small co-payment, but capped at the two percent of the total income of a household (Busse, 2004). As the result, about 30% of the population
purchases the private insurance, of which one third the primary, and the rest are either complementary or supplementary. The share of the expenditure paid by the private insurance is about 9%, which is rather high among the countries we overviewed reflecting the portion of the people who have opted out of the public insurance.
III.
Health-care system of Japan
III.1. Some distinct aspects of public insurance of Japan
At the outset of the paper, we introduced major issues of Japanese health-care system, and remarked that the costs could not forever be contained by the price control by the government and that its sustainability would become a serious problem. Population aging and the advancements of technology in health care among others will increase the costs, and this will make the continuation of the government’s price control difficult without sacrificing the quality of care: rationing certain types of care or eliminating them from insurance coverage can be an outcome of this policy. This section explores further Japanese health-care system by using the framework of the preceding section: we study public and private insurance aspects of Japanese health-care system and seek to present the ways of reform toward a more sustainable system.
We start with the pubic insurance with focus on its critical elements that have very much to do with the future of the insurance. Discussion does not intend to be extensive, or a very articulate recapitulation of health-care institutions of Japan: instead we would deal specifically with the construction of insurers (namely who are in the insurance business), how the health-care costs is financed and how the government has guided the insurers to pay (reimburse) the costs of health-care providers.
Broadly speaking, there are two types public of insurers in Japan: the first is employment-based one for the people working at companies (private and public alike) , educational facilities and various levels of governments; the other is called National Health Insurance (NHI) and consists of people left out from the first type of insurers. Historical background of the two insurances is different: the employment-based insurance came into being earlier than the NHI, and was promulgated in the 1920s as a law to improve the living conditions of the workers in organized economic sectors and to enhance their productivity; and civil servants were not integrated into this insurance, but their own insurance was set up in 1940. Thus, there are two institutions of the employment- based insurance in Japan, and this situation has been unaltered till now.
With some amendments after its establishment, the employment-based insurance was extened to the entities employing five or more people. In comparison with the employer-based insurance, the NHI went through a much more complicated and winding path to be established as the insurance for the rest of population: it was put into law in 1938 as the insurance for the people in informal sectors, that is, either peasants or the self-employed people at that time.
Municipal governments (city, town and village level governments in Japan) were assigned the role of insurers, but the government’s financial support was restricted to fiscally weak ones. The world economic depression and the second-world war were another reason that disrupted the movement toward the NHI; and it was only in the year of 1961 that all municipal governments joined the NHI. At this time the government also strengthened its financial and institutional commitments to the insurance.
The NHI has played a very important role in the health-care system in Japan by incorporating the self-employed, especially peasants in rural areas, into the mandatory system and by making a universal health-care system reality. However, along with the economic development, the number of people working in agriculture and fishery has declined, and the NHI is nowadays functioning as a residual insurer, taking care of either those not in the corporate (and other formal) establishments, or the retired people.
We turn to the specific features of the two insurances. The employment-based insurers consist of two types with respect to the construction of the insured: the first is of the self-contained type and each insurer is an independent closed unit covering the employees of a (usually very large) company; the second is regional, and publicly-managed insurers take care of the employees of certain categories of companies (usually small and medium sized ones) at the regional level. The NHI has basically developed as a regional insurance: the government at the municipal level is an insurer, and there are as many insurers in the NHI as the number of municipalities, which is now about 1700.
A rather special aspect of Japanese public insurance is that the employment-based insurance restricts the admission to it by age: while a person is working at a company, he/she may be enrolled in the insurance, but when retired, the employee has to leave it and go to the NHI (some companies accept their retired employees, but this is rather a special case). Thus, there is a discontinuation of the insurance affiliation and a consequence of it is that NHI receives the retired people and its age structure tends to concentrate on old people than other insurances. Furthermore, when people become seventy-five years or older, they leave their insurances and get into another one, which is independent of other insurances and managed at the regional level.
Figure 2 Construction of insurers in Japan
Source:
Ministry of Health, Labour and Welfare, Annual Health, Labour, and Welfare Report 2009-2010 (URL: http://www.mhlw.go.jp/english/wp/wp-hw4/02.html )
Medical system for the elderly aged 75 and older
( 14 million enrolles )
National Health Insurance (NHI)
Employment-based Health Insurance for the employees of
small and medium company
Employment-based Health Insurance
for the employees of large company and civil servants
Age 75
Age 65
( 39 million enrolles ) ( 35 million enrolles ) ( 39 million enrolles ) Cross-subsidization scheme for the people aged 65 - 74
Figure 2 gives an overview of the structure of insurers in Japan. The age of the insured is on the far left vertical line. When one is younger than seventy five, he/she belongs to either the NHI or one of other employment-based insurances. As we explained above, with retirement people leave their employment-based insurance, they are mostly absorbed by the NHI. Since this makes the financial management of the NHI difficult, there is a special cross-subsidization scheme for those aged between sixty five and seventy four; the long box of this range of people in the Figure depicts this aspect. The health-care costs of this portion of population is shared by all insurers according to the number of the insured and dependent family members. On the top of the Figure there is a “medical system for the elderly aged 75 and over.” When one becomes 75 years or older, he/she belong to this group of insurance..
There are other institutional ramifications which are not explained in the above explanation, but it should give us an idea of insurers in Japanese health-care system. An important feature which may relate to the sustainability of the insurance as a whole is that the people have no right to choose their insurers. It is correct to say that Japan offers a universal health insurance, but that is almost a half-told story. Where one works and how old he/she is determines the insurer to which he/she belongs, and an important fact is that people usually move from one to another insurer.
While this discontinuity of enrollment of insurance is not desirable from the viewpoint of lifetime care of the insured, another major problem is that there is no competition among
insurers, because their clients have no way to choose among them. This has made health-care insurer of Japan a conduit that merely collects premiums and other revenues, and merely transfers them to health-care providers. In a sense, health-care insurers in Japan have lost its important mission of serving as an intermediate agent between the insured people and doctors/hospitals, and make hard negotiations for the insured.
We move to the health-care finance. As we have alluded to in the introduction of this paper, a characteristic of Japanese health-care finance is that the government has been shouldering a sizable portion of the costs. The NHI receives 50% of the costs net of patients’ out-of-pocket payment from the government; the medical system for the elderly aged seventy five and older receives 50% and the insurer for employees of private (mostly small and medium sized) companies 16.4%. There are in fact more supports from the government in various other forms taking the shapes of intergovernmental transfer, special grants to fiscally-vulnerable municipalities and so forth. As a result of these fiscal injections to public insurance, the portion of total health-care costs in Japan that was borne by insurance premiums was just 48.8%, and 37.1% by the government and 14.1% from the pockets of patients in the year of 2008 (Ministry of Health, Labour and Welfare, 2008).
Table 3.1 Health expenditure by source of funds (FY2008, billion yen)
Occupational HI NHI HI for the elderly
Health expenditure 10,373 10,821 11,444 Co-payment 3,009 2,666 1,144 Transfer (75+) -2,687 -1,433 4,120 Transfer (65-74) -3,115 3,115 -Public subsidy 864 3,037 5,150 Premium 12,303 3,436 1,030
Source: Tajika et al. (2011)
Table 3.2 Health expenditure per capita by source of funds (FY2008, 1000 yen)
Occupational HI NHI HI for the elderly
Health expenditure 140 274 850 Co-payment 41 68 85 Transfer (75+) -36 -36 306 Transfer (65-74) -42 79 -Public subsidy 12 77 383 Premium 166 87 77
Source: Tajika et al. (2011)
Table 3 shows how insurers finance their health-care costs. Here insurers are separated into three: occupational health insurance (HI), the NHI and HI for the elderly. Employment-based insurers are aggregated into one, and the occupational HI stands for this combined insurer. The upper part of the table reports the total amounts of funds necessary for financing the expenditure of each insurer, and lower part per capita (per-enrollee) amounts, both for the fiscal year of 2008. The numbers here are the estimate by Tajika et al.(2011).
Occupational HI spent 10.3 trillion Yen in total for its own health-care expenditure, and it was financed by co-payments (3.0), transfers to the elderly 75 years and older (-2.6), transfers to the 65-74 years group (-3.1), public subsidy (0.8) and the premiums (12.3). The reason that the amount paid by the premiums is larger than the total health-care expenditure is that the occupational HI cross-subsidized the elderly HI and the group of people aged 65-74, and these amounts are made negative in the Table 3. The numbers above tell that the occupational HI received only a negligible sum of support from the government and made transfers to junior and senior old-age groups. The proportion of the source of funds paid by co-payment is about 30% of the total expenditure, which reflects the statutory level.
The NHI spent 10.8 trillion Yen for its health care, which is almost the same as that of the occupational HI. It also made a transfer to the elderly group of 75 and older (-1.4), but it received the transfer from the occupational HI for the group aged 65-74 (3.1). As we have already mentioned, since the people who are enrolled in the occupational HI move to the NHI after retirement, the occupational HI pays a part of health-care costs of their former employees. The share of the co-payment is less than 30%, which implies that the enrollees of the NHI are on average partly exempted from co-payment. Public subsidy is about 30% of the total costs, and the premium pays only 31.5% of the total.
The HI for the elderly shows striking facts about health-care financing in Japan. The total costs of the insurance is 11.4 trillion Yen, which is larger than either the occupational HI or the NHI. Note that the HI for the elderly is only for the people aged 75 and older, and yet it costs more than other insurances. Co-payment is only 10% of the total costs, and the transfers from other insurers occupy 36%. The public subsidy is the most important source of funds supporting the elderly HI, and it is about 50% of the total. All these financial supports worked their way to reducing the premium portion to mere 10% of the total costs net of co-payment. We think these numbers are eloquently telling the difficulty of paying the health-care costs of old people in Japan and that health-care financing schemes in Japan need a fundamental overhaul.
The lower part of the Table shows the results in per-capita terms. The overall implications here are basically the same as in the above. However, a noteworthy fact here would be the differential in per-capita health-care costs among insurers: on average they are 140,000, 274,000 and 850,000 Yen per year respectively for the enrollees of the occupational, the NHI and the elderly HI. The differences in costs are mostly due to the difference in age profile of the insurance, but it is startling to find that people 75 years and older spend six times as much as an average enrollee of the occupational insurance, and 3.1 times as much as of the NHI, which itself looks after the retired people below the age 75.
We think it is now clear that health-care costs in Japan is strongly affected by aging population and that it has so far been financed by various sources of funds. User payments in the form of premiums and co-payment are far from enough, and cross subsidization among insurers and the public subsidy have played important roles. An outcome of the massive
government support for financing the health-care costs is that the real costs incurred by a visit to a doctor or treatments in hospital is often not revealed to the individual. Moreover, since the portion of the costs that is collected by charging premiums is reduced for such a large extent, it does not represent the true costs spent for care. The premium of insurance for the employees of large-scale companies is 7.45% on average (a combined rate of the employer’ and employees’ portions), 9.34% for employees of other mostly small and medium companies; the premium of the NHI is the fixed amount (due basically to the difficulty of assessing the income of the self-employed) and is about 7,000 Yen per person (12,100 Yen per family) per month on average in the year of 2010. Simple as it may be, a mere comparison of these premiums with that of Germany, which is 14.9% in 2008, would show the extent Japanese premiums have been set lower by the grants from the government.
The third aspect of public health insurance is the payment schemes to insurers and providers. The first thing to note is that risk-adjustment mechanism has not been applied to insurers and that when needed, the government subsidizes their costs on ex-post basis. That is, the government pays certain fixed portion of actual costs incurred. In a sense, it shares a risk of (eventual) high costs and makes the financing of insures easier than when the grants are provided on ex-ante contract basis reflecting the risk of the insurers.
The second noteworthy point to mention is related to the first: the reimbursement of costs of the services to providers has been mostly on the fee-for-service basis1. Here, the government again bears the actual costs rather than the prospective one, taking the risk of paying higher costs than envisaged before the treatments. A very likely result of these payment schemes would be that providers are easier to charge the costs to patients than when they are reimbursed their costs by other methods that would facilitate their efforts to more efficient management and treatment.
These are the aspects of public insurance in Japan, which we think are related very much to its sustainability. Namely, the lack of competition among insurers, reduced rates of premiums made possible by the explicit and implicit subsidies from the government, and the government’s taking the risk of increased costs by paying on ex-post basis are the underlying problems that will be making it difficult for the public insurance to continue to survive.
1 An important characteristic of the fee-for-service payment in Japan is that it is closely related to
an overall mechanism of the health-care cost control. The total cost is firstly controlled by setting its growth rate, and secondly the pricing of individual treatments and drugs are determined so as to meet the overall target. A fee-for-service payment is one of the treatment prices set in this fashion. Therefore, although it is a retrospective payment, it is not totally free from the overall cost containment in Japan. This linkage between macro and micro cost-control mechanisms is discussed in Hashimoto et al. (2011, pp.39-41). Furthermore, we would like to stress that this has called for an endless artificial pricing of health-care treatments and services in Japan.
III.2.
Private insurance in Japan: why it has not developed?A striking fact that we observe in the study of private health insurance of the OECD (2004) is that its share of health expenditure in Japan is very small: it is only 0.3%, whereas the corresponding shares in Germany, France and Netherlands are respectively 12.6%, 12.7% and 15.2%. Another study reports the share of Japanese private insurance is 2.6% (Paris et al., 2009), still far smaller than that of its social-insurance based EU counterparts.
One reason for this exceedingly small share is probably due to the definition and measurement of the private insurance: a common way of private health insurance payment in Japan is not of loss-compensating and reimbursement (i.e., indemnity) type, but of fixed-amount coverage in the event of accident and/or illness, and this type of private insurance is not incorporated in the statistics (Hotta, 2007). However, even taking this into account, it is fair to say that the market of Japanese private insurance is small from international perspectives. Why is this so? Our answer is that this is another side of the coin of generous offerings of public insurance. We will show this by considering the applicability of primary, duplicate, supplementary and complementary private insurances to Japan in turn. First, in countries where universal health care prevails, primary private insurance attracts those in high-income brackets who are opting out of the public insurance for themselves or forced to leave by the government. In Japan, every person has to join the public insurance, no matter how rich or poor he/she may be. Therefore, by the definition, the possibility of private primary insurance is gone. Moreover, as we stated above, the premium itself should not be very high to high-income people. There is a maximum income above which no further premium is charged. So, there even is no reason for them to opt out of the public insurance.
The duplicate insurance emerges when there is a rationing in health-care services: when there is a long waiting time till one can meet doctors, the insurance enables the insurance-purchaser to shorten the time. On many occasions home or primary doctors keep the gate for patients to proceed to hospitals. In such cases, people may want to buy the insurance. In Japan, however, the public insurance permits the insured free access to doctors and hospitals, and there are no gate keepers who stand on their way. Therefore, there is little demand for buying the private insurance that may render the same services in more efficient way than the public. Another reason that this type of insurance has not developed in Japan so far is that buying a private insurance to shorten the time to meet doctors or to receive better attention from them has been considered to be violating the sense of equal access to treatment.
The supplementary insurance should be in place when the basket of cares provided by public insurance is not rich enough that the people want additional cares which are not in the basket. If some widely-used care like dental one is de-listed from the basket, probably some sort of private insurance will replace the one deleted from the basket. Drugs prescribed for ambulatory care is another candidate that may be eliminated from the insurance coverage,
which in fact is the case in Canada. Besides these treatments and drugs, some amenities in hospitals like excellent rooms and beds can be taken off from the insurance coverage.
The fact in Japan is that luxurious amenities and cosmetic surgeries are off the insurance, but dental and most other treatments including physical therapy are on the list. This has made the supplementary insurance difficult to enter the market: even if there is strong demand for extra quality rooms and beds, it may not be very much fitted with the indemnity (loss-compensating) insurance, and a disease-specific insurance with cash payment would suffice. “Cancer insurance” is in fact one of the most well received private insurances in Japan, and it pays certain amount of cash in the event of the disease. In a broad sense of the word, it supplements the services not offered by the public insurance.
The complementary insurance is the one which insures the portion of the costs that is not paid by the public insurance: most typical of such is out-of-pocket payment on the side of patients. Since thirty percent of medical costs is required by law to be paid out of the pockets of the insured themselves in Japan, the chance of this type of insurance should be good. However, it has not developed in Japan, either.
An important reason for this is that a maximum amount is set by the government beyond which no further individual burden is necessary and instead the additional costs beyond the ceiling are shouldered by the government: for people younger than seventy five years old, the maximum obligation is about 80,100Yen per month and 44,400 Yen per month for the rest of population. This implies that the government has offered by itself a complementary insurance to the public. Hence, an irony is that there is already a complementary insurance in Japan, but it is a publicly offered one.
So what is left in the private health insurance market in Japan? As was referred to in the preceding discussion, disease-specific insurances paid in cash is the best-selling one. It sells to the people who are conscious of the hardship when they catch the disease and think that the provision by the public insurance may not be enough to combat it. We, therefore, consider this is part of supplementary insurance for these risk-conscious (probably averse as well) people: the benefits received by the insurance are not in-kind, but the cash received may be considered a kind of composite goods that make access to various services possible.
Summarizing our discussion above, the chance of further development of private health insurance in Japan seems to be limited. At the same time, its expansion is not desirable by itself; letting people buy it on top of the public insurance, sometimes by inflating the risk that the insurance-purchasers may face, is not a desirable way of selling the insurance. There seems to be room for further examining the list of treatments covered by the public insurance: dental care, for example, is one among those that deserve scrutiny and it may be taken out of the list. However, the costs saving achieved on the side of public insurance and the welfare costs incurred on the side of beneficiaries by removing certain treatments from the list of public insurance have to be balanced to reach an appropriate basket of publicly provided services.
So far we have discusses the possibility and the pros and the cons of the coexistence of public and private insurances. However, there is a thorny issue that has divided the public opinion in Japan. It is about mixing services provided by the public insurance and those purchased entirely by patients for themselves: services are bought from two different sources, but they are combined to be applied to the patients in an integrated manner. An element that makes the issue somewhat complicated, though, is that across-the-board mixing is not permitted in Japan: purchases of better amenities than offered by the public insurance do not deprive the patients of their access to public insurance; but having certain out-of-pocket purchased treatments (say, special drugs) prohibits them from a simultaneous use of public insurance, which will make the total treatment cost expensive.
It is rather strange why this is a contentious issue in Japan, where the list of cares and services provided by the public insurance is wide; and moreover the government is willing to test new treatments and drugs to judge their inclusion into the list. We consider that the point of issue is not the narrow gate of the public insurance, but a naive and unguarded “deregulation” to permit the mixing would open the road to uncontrollable incorporation of treatments into the coverage of public insurance, thus the surge of the bulk of insured treatments and costs. We think the present law regulating the mixing has made the door sufficiently open and that it would be better to see how it works rather than opening the door further in haste.
IV. Concluding remarks
This paper approached the reform of Japanese health-care system by examining the roles played by public and private insurances. One of our major findings is that many apparently different problems have stemmed in fact from the government’s (ex-post and cost-sharing) subsidies to insurers: for some insurers, especially financially vulnerable ones, they amount to almost a half of their costs to be reimbursed.
An important result of this is that the incentives for the insurers to make ends meet by increasing the efficiency of their management have significantly been weakened. An insurer with the mind of efficiency would have done a better job for disease management of their insured people and would have asked the government to strengthen the payment schemes that incorporate prospective elements. Another side of generous payments by the public insurance is the underdevelopment of private insurance: it thus resulted that disease-specific insurance dominates the market and that very few indemnity-type one is available there.
However, there is no denial that some of the public insurers, say the NHI, are financially very weak. Our study suggests the way government support them should be changed. One of such ideas would be to stop subsidizing the budgets of insurers and instead to use the government’s subsidy to reduce the premium of those who cannot afford the one which reflects the full costs. The reform will increase an overall rate of premium and invite more efforts of
insurers to enhance their management since they have to explain to their insured people about increasing their premium. This will then help strengthen their capacity for making deals with medical providers and drug companies. In a sense, restoring the cost-reflecting premium could be a step toward a virtuous circle that would ultimately lead to a more sustainable health-care system in Japan.
The direction of health-care reform we have reached by studying public and private insurances in Japan is fundamental in nature, though it can be put into execution gradually, say by a step-by-step retreatment of the government from cost-sharing and carefully planned increase in insurance premiums over the years. The problem is how much time is made available by the current price control of the Ministry of Health Care and Labour before rationing of certain treatments and services becomes inevitable. We consider the emergence of autonomous and efficiency-propelling insurers is a necessary condition for a step toward to the sustainable health-care system of Japan.
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