The Japanese story of achieving low-cost healthcare through price controls
By Aneesh Mugulur (@mugulur)
Between 1980 and 1992, Japan’s price controls in the healthcare sector led to the decline of physician fees by 19%. In 1991, Japan’s infant mortality rate was just 0.45% of live births in comparison to the United States of America’s figure of 0.91%, placing it in the top rank amongst industrialised countries. The same year, the average life expectancy at birth was 76.13 years for males and 82.22 years for females, more than the world average.
What was the reason for such impressive status of Japan’s health?
The Japanese government provided universal healthcare to all its citizens and regulated the prices of all care (and continues to do so). The aim of this price control was to provide affordable healthcare and insulate them against the high cost of living due to inflation. In this period, more than 80% of hospitals and clinics were privately owned. However, for-profit hospitals were banned.
How did the price control mechanism work?
Health insurance was mandatory for every citizen. There were three important types of insurance based on sectors; for employees, the self-employed, pensioners and the elderly. The government also fixed the co-payment rate. Claims were supposed to be filed with providers and services were provided in kind. The Ministry of Health, Labour and Welfare provided medical care under a nationally uniform fee schedule. It is ‘uniform’ because the same fees are paid by all insurers to providers regardless of the experience of the doctor, or whether it is performed in a rural clinic or a multi-speciality hospital. The government strictly controlled the fees scheduled, and neither the insurers nor the providers had any say on it.
While there were marginal differences in rates amongst insurance plans, the physician fee was uniform. Charging more than the prescribed fees schedule had serious repercussions. Hence, there was no incentive for higher quality of service. As a result, doctors and medical practitioners focused more on quantity rather than quality.
Was the objective of low-cost met?
Nationally, uniform fee schedule played a vital role in maintaining equity. It also established both the scope and standard of services. There are further three structural factors that ensured low costs.
- The economic incentive embedded in the fee schedule was for testing pharmaceutical products and laboratories test which meant it was mainly for physicians in primary care who could conduct those tests.
- Clinics-based physicians did not have patient admitting privileges. Only hospitals could accept patients and their fees were regulated.
- Low administrative costs and secure claiming process
According to the Organization for Economic Cooperation and Development (OECD), among the major industrialised nations, Japan’s personal health expenditures were the lowest.
However, there were several unintended consequences which remain unresolved even to this day. Due to the universal fees schedule, a doctor who sees more patients makes more money than a physician who performs long hours of surgery. As the price for each consultation is fixed, doctors make sure they consult more patients to increase their income. In Japan, doctors worked an average of 70.6 hours per week, compared with 51 hours per week in the U.S. Patients have to wait for three hours but their consultation time is just three minutes.
Even though Japan’s healthcare was cheaper compared to most industrialised countries, its quality was dismal. The rigid control did meet the objective of providing affordable healthcare to citizens irrespective of their income. But its unintended consequences were more.
Since Japan’s system provides more incentives to primary care physicians and pays equally to specialists, it has led to an acute shortage of specialists in tertiary care such as surgery, paediatrics, and obstetrics. According to Japan times, the number of maternity wards declined from 4200 in the year 1993 to 3000 in 2005, resulting in longer commutes for pregnant women. Another significant consequence of this government control is the increasing corruption in the system. In 2004, the chairman of Japan Dental Association was arrested for bribing the members of the government in charge of setting medical care fees.
Will the new ‘Abenomics,’ which is making news globally, revamp the healthcare system of Japan? The question remains unanswered.
Aneesh Mugulur is an alumnus of the Takshashila GCPP15 and tweets at (@mugulur)
[This blogpost is part of an assignment of the Economic Reasoning coursework. For the assignments, students were asked to submit essays on identifying instances of price controls across the world; who the intended beneficiaries were; and what were the unintended consequences of the price control.]