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Controlling Healthcare Costs in Japan

The Japanese story of achieving low-cost healthcare through price controls


Japanese Superambulance/Ypy31

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.

  1. 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.
  2. Clinics-based physicians did not have patient admitting privileges. Only hospitals could accept patients and their fees were regulated.
  3. 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.]

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A simple step to bring back unaccounted Indian money

Indian government only needs to muster enough political courage to get the unaccounted money back into country

For a layperson, when one thinks of tax havens, the names that immediately spring to mind are Cayman Islands, St. Kitts, Bermuda and other offshore financial centres(OFCs) in Caribbean that are used for money laundering. The Bhartiya Janata Party(BJP) on its campaign trail in 2014 had made bringing back the unaccounted money as one of the key promises. Even the previous governments have tried only superficially to address this problem. Financial journalist Nicholas Shaxson, in his book Treasure Islands: Tax havens and the Men who Stole the World has given a brilliant account of how business elites across the world avoid tax, including the much respected western countries. He also suggests measures to tighten the system.

The Organization for Economic Cooperation and Development(OECD) leads a project called as Base Erosion and Profit Shifting(BEPS)—which refers to to the erosion of a nation’s tax base due to accounting jugglery adopted by multi national enterprises (MNEs). In its 2015 report, BEPS gave a laundry list of 15 action points that can curb abusive tax avoidance by the MNEs.  In the case of India, one of the most favoured foreign destinations happens to be Mauritius. In an article in The Hindua dated 21st January, 2016, G.Sampath quotes Shaxson who has explained the process of tax avoidance as “round tripping.” Mauritius is one of the most popular hubs in the financial world for round tripping. India has a Double Taxation Avoidance Agreement(DTAA) with Mauritius, which is at the core of tax avoidance by companies. The BEPs report says that Mauritius accounted for 34 per cent of India’s equity inflows from 2000 to 2015. In round-tripping, an Indian businessman sends his money to Mauritius, where it is dressed up in a structure (in the form of registered companies). It is then disguised as foreign direct investment, before returning to India. The sender of the money thus avoids Indian tax on local earnings. Therefore, this becomes a government sponsored loophole for MNEs for tax avoidance by channelling profits and investments through offshore destinations.

The DTAA was signed with Mauritius in 1983. Even China had a similar treaty with Mauritius which it renegotiated and now forces its investors to pay 10 per cent capital gains tax in China. This is the simplest method to arrest the illegal outflow of money. But this is easier said than done in India. The government’s Special Investigation Team(SIT) on had given a list of eight recommendations in September 2015. One of them was Know Your Customer(KYC) norms disclosure of Participatory notes (P-notes) to Securities and Exchange Board of India(SEBI). P-notes are instruments issued by foreign institutional investors(FIIs) to overseas investors for investing in the Indian stock market without registering themselves with SEBI. The top five countries of P-notes investment in India are the Cayman Islands, UK, US, Mauritius, and Bermuda.

The simple step will be to bring offshore money onshore. The example of US which set up its International Banking Facilities(IBFs), Japan (Japan Offshore Market), Singapore (Asian Currency Market) etc. These were mechanisms to become an OFC and get the money back. For now, it looks like wishful thinking to put the money launderers in jail like Iceland(which was forced to take this step after its entire banking system collapsed in 2008). India certainly will not like to walk down that road. It is time that Modi government acted on the tall election promise that the party made on unaccounted money.


Guru Aiyar is a research scholar with Takshashila Institution and tweets @guruaiyar

Featured image: Money by Nick Ares, licensed from creative commons.org

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