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Controlling Healthcare Costs in Japan

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

superambulance-fuso

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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Price Control on Milk Products in Vietnam

By Hiren Doshi

A price cap on milk products in Vietnam led to shortages, illegal production and distribution, distortions in the market and a dramatic drop in profitability of manufacturers. 

In 2014, The Ministry of Finance in Vietnam set ceiling prices on 25 milk products (which was later increased to cover almost 600 products) for children below the age of six in a move to contain constant price hikes on the dairy market. This move was in response to hyperinflation in price of milk powder in few years preceding 2014 and was aimed to help make the milk for children affordable for the citizens. Vietnam has around 10 million children below the age of 6 and was considered price sensitive to milk prices.

The price of powdered milk had approximately increased 30 times since 2008 until 2014, at between 3-20 percent at a time. The retail price of powdered milk in Vietnam was about 1.4 per litre USD and almost 1.5X as compared with Thailand and Malaysia making it among the highest in the world. Powder milk market in Vietnam was very competitive, with almost 800+ milk products catering for children under 6 years old, forcing the manufacturer to routinely spend far in excess of permitted advertising and marketing cost which then translated into higher cost for the consumers.

The regulation which was to be in effect for 12 months brought down the recommended wholesale price ceiling 15-20% below the prevailing wholesale prices. The price ceilings were based on three grounds: the results of inspection at five dairy firms, price developments of the dairy market and prices of similar products on regional markets. Retailers were also mandated to reduce their costs, be reasonable with their profit margins and charge retail prices which did not exceed 15% over the wholesale ceiling.

Milk Price Hiren

Some of the consequences in response of price ceiling were as below:

1.    Some milk suppliers in Vietnam pulled products whose prices was to be capped under the regulation from shelves and replaced them with new ones a week before the ceiling prices become effective. They worked around the regulation by launching new products with new labels but similar ingredients at much higher prices, and reducing weights of products.

2.    Even though the ceiling on advertising spend for milk products was abolished, spends on advertising and marketing by milk producers came down due to limited margin after the price ceiling.

3.    According to the research carried out by Nielsen in 2015 in Hanoi and HCM City, it indicated that milk products for children less than six years old were reduced 10 percent and 9 percent in terms of quantity and price, respectively against the previous year, after enacting the price ceiling. This means the consumption actually went down after the price ceiling was in force. This was counter intuitive to the very reason of putting the price ceiling in place.

4.    After price ceiling was extended for one more year after being in effect from June 2014, Nielsen noted that milk prices in Vietnam have been no higher than prices found in the middle group in Asia. Its statistics in July 2015 revealed that average milk prices in the high end segment in Vietnam were similar to those in other countries in the region, such as Malaysia, Thailand and Philippines.

5.    In April 2015, the European Union removed milk production quotas which existed for more than 30 years, leading to the worldwide drop in milk prices. In 1984, quotas were applied to limit the over-abundant supply in Europe, and milk farms that produced over their quotas were fined. This made the cost of importing powder milk cheaper than sourcing milk from local cow farmers.

6.    In early 2016, prices of milk sourced from cow farmers in Vietnam were about VND12,000-14,000 (US$0.54-0.63) per kilo, nearly double that of milk shipped from the U.S., Australia, New Zealand, and European countries, which sold for about VND7,000-9,000 ($0.3-0.4) per kilo.

7.    One interesting outcome of locally sourced milk becoming non-competitive was that local cow farmers sold record number of cattle in the last 12 months. For instance, in Cu Chi District, Ho Chi Minh City, nearly 10,000 cattle of 40,000 being reared were sold in the last 1 year.

Price ceiling on milk products for children under six was introduced in response to large and frequent price increase of milk, making milk prices in Vietnam one of the highest in the world. It was meant to increase the consumption of milk and help reorganize the milk industry ecosystem which keeps the low prices sustainable. In the end this move did not make any of the stakeholder happy – consumers continued to complain about high prices, manufacturer’s sale & profit dropped while the poor cattle suffered change of ownership during the worst crisis for local cow farmers.

Hiren Doshi is a GCPP-13 alumnus. 

[This and the other two essays on Price Controls was submitted as part of the Economic Reasoning coursework. The question asked students to identify instances of price controls in the world; who the intended beneficiaries were; and what were the unintended consequences of the price control. The 3 best answers were picked. The other two were on Price Control on Prescription Drugs in Europe and Price Control on Gasoline in the US in the 1970s].

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Price controls on prescription drugs in Europe

By Anjana Kaul

The unintended consequences of price controls on prescription drugs far outweighs the benefits.

Europe has had price controls on prescription drugs for decades. While this has helped the state save a lot in terms of healthcare costs, it has also had a number of unintended consequences that, in many cases, outweigh the savings on drug costs.

Healthcare services in most EU countries are provided primarily by the state. Hence the state stands to gain the most from such price controls. Each country has a regulator which negotiates the price of each prescription drug with the pharmaceutical company that is marketing the drug in that country. While an approval for efficacy and safety of a drug can be given by any EU country regulator and is applicable across the EU, the price of the drug has to be negotiated with each country’s regulator independently.

European countries have certainly benefited from these price controls. A 2004 study by Bain & Co states that in 2002 EU countries spent 60% less per capita on prescription drugs than the US. It also states that the EU countries have saved $840 Billion in the decade from 1992-2002 on drug costs.

However, these price controls have had many other consequences – some that can be easily quantified and others somewhat intangible.

Long price negotiations delay entry of new drugs into European countries. Pharma companies need to recover their R&D costs as early as possible to maximize returns hence they delay marketing drugs in countries with price controls. It was observed that in EU countries it takes anywhere between 7-19 months from drug launch to market availability while in the US it takes about 4 months. Moreover, when a regulator and the pharmaceutical company are unable reach a consensus on price on a drug, that drug remains unavailable in the country for even longer. These delays can sometimes result in higher healthcare costs for patients who otherwise would have been treated more effectively by the new drugs. It can also result in longer absence from work due to illness and in extreme cases can even lead to avoidable loss of life.

Drug approvals for efficacy and safety are not global so pharma companies first seek approvals for new drugs in countries or regions where they can maximize the price and quickly recover their R&D costs. It is easier to seek approval from a regulator if drugs have been developed and tested with a local country population in mind. This has led to a significant migration of pharma R&D activity from the EU countries to the US where drug approvals are faster and drugs can be released at higher prices.

This migration of R&D activity has reduced investment in pharma R&D in the EU, which is not just a direct economic loss to the EU countries but also compounded by the loss of network effects of R&D such as training, clinical trials, equipment manufacture, etc.

The number of drug patents from EU countries is declining causing loss of patent revenue. The controlled drug prices and the reducing patent revenues have resulted in declining profits for the European pharma companies.

When R&D divisions are shifted to the US, there is a flight of high value talent along with them. These R&D experts and their families would in turn have created their own network effects from high end services & retail activity that is an additional economic loss when they migrate.

Added to this economic loss is the reduced tax revenue for the state due to the declining profits of the pharma companies and the flight of high value talent.

Price arbitration across different EU countries creates opportunities for middlemen to profit by purchasing drugs in countries with lower prices and selling them in countries with higher prices. The lack of trade barriers amongst EU countries makes this very hard to control. This price arbitration gets extended to a global scale when drugs are sourced in Europe and illegally sold at much higher prices in the US.

The study done by Bain & Co illustrates with a case study of Germany that the benefit of imposing price controls on prescription drugs in fact leads to a net loss. In 2002, Germany saved $19 Billion on prescription drug expenses. However, if some of the costs of the above consequences were quantified (as shown in the study) they would add up to a loss of $22 Billion, a net loss of $3 Billion.

Anjana Kaul is a GCPP-13 alumnus 

[This and the other two essays on Price Controls was submitted as part of the Economic Reasoning coursework. The question asked students to identify instances of price controls in the world; who the intended beneficiaries were; and what were the unintended consequences of the price control. The 3 best answers were picked. The other two were on Price control on milk products in Vietnam and Price Control on Gasoline in the US in the 1970s].

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Aftermath of Venezuelan Socialism

Venezuela is on the brink of a complete economic and political collapse, which has been building up since the early days of Bolivarian Socialism.

How does one know that things are going bad in Venezuela? – By the fact that there are no reliable ways of knowing it. Good economic data about Venezuela is conspicuous by its absence. It seems that President Maduro has made it State policy to not publish data. The last time that the Venezuelan central bank published inflation data was in January 2015 and it was 63% at that time, already the highest in the world. By the end of 2015, it was estimated by the IMF that inflation rates would have reached 275%

The Venezuelan economy and the government is in complete shambles and the only question is, as a Washington Post article points out, is which one will collapse first. A combination of bad policies and global situation has put Venezuela on the edge of the precipice.

The Venezuelan economy is driven by oil. In fact, it has the world’s largest oil reserves and like many oil-exporting countries today, is suffering due to low global crude oil prices. However, this is just the proximate cause. The seeds of destruction were sown with the extreme socialist measures taken by the late populist President Hugo Chavez. When oil prices soared in 2000s, it offered Chavez the funds to pursue a hyper-populist and socialist reforms in the economy. The Chávez government pursued a series of “Bolivarian Missions” aimed at providing public services (such as food, healthcare, and education) to improve economic, cultural, and social conditions. Very soon, fiscal spending ballooned in a view to retain loyal political support. Two cent gasoline, free housing, highly subsidized food from government controlled supermarkets and a whole range of such populist policies were practiced.

The first part of his inequality reduction was to conduct land reforms. Many productive agricultural lands were seized with the belief that land belongs to the state and not private individuals. With this move, a sizeable area of productive land previously owned by individuals were now sitting idle under government control, which led to reduction in food supply.

Further, the Chavez government set price controls on about 400 food items in 2003, in an effort to “protect the poor”. In March 2009, the government set minimum production quotas for 12 basic foods that were subject to price controls, including white rice, cooking oil, coffee, sugar, powdered milk, cheese, and tomato sauce. As it has been throughout history, price controls lead to massive shortages and to the creation of underground economies. In January 2008, Chavez ordered the military to seize 750 tons of food that sellers were illegally trying to smuggle across the border to sell for higher prices than what was legal in Venezuela.

As many socialist countries in the past will bear witness, one set of distortions introduced by the government will lead to many more and an attempt to correct those leads to further distortions. Price controls led to supply shortages. A few of the supermarkets that could manage to get its hand on essential supplies charged a price higher than what was stipulated. The government seized all of these supermarkets and the shelves have been empty ever since. This was a pattern that was found across all industries. A few examples:

  • Price controls caused shortages in the cement industry and led to a downturn in construction activities. The government nationalized the cement industry, including hostile take over of multi-national companies, which completely eroded business confidence in Venezuela, and led to a marked decrease in cement production.
  • The largest electricity producer in Venezuela was a private US firm, which was later nationalized. In 2013, 70% of the country plunged into darkness with 14 of 23 states of Venezuela stating they did not have electricity for most of the day
  • Similar cause and consequences were seen throughout Venezuela. Cable and telephone companies were nationalized – led to government censorship; Steel companies were nationalized – led to drop in production and capacity underutilization; Food plants – shortage of processed food; bank nationalization – a banking crisis in 2009-10, etc.

The biggest development that has led to present crisis is the complete take over off their biggest oil company. Even though the Petroleos de Venezuela was State-owned previously, it was at least run professionally before Chavez took over. People who knew what they were doing were replaced with people who were loyal to the regime, and profits came out but new investment didn’t go in. Accusations of nepotism were ripe. The result was that the company did not receive any new investments, which made the much-required technical upgradation impossible. Consequently, oil production in Venezuela declined by as much as 25% between 1999-2013.

The current economic crisis is a direct result of economic mismanagement in the past decade. Price controls led to reduction in supply and export bans led to shortage of foreign exchange needed for imports. The result is empty shelves on most retail outlets and a severe shortage of food supplies and being on the route to galloping inflation rates. Two to three hour-long lines in front of government owned supermarkets are not an uncommon sight. The government even deployed security personnel to kick out shoppers from the lines and introduced a two day per week limit for buying groceries.

People line up to buy food at a supermarket in San Cristobal, Venezuela. Source: Gateway Pundit

People line up to buy food at a supermarket in San Cristobal, Venezuela. Source: Gateway Pundit

 

Excessive government spending has led to deep fiscal imbalance and huge external debts. Many analysts are betting on a Venezuelan default by the end of the year, which will cripple the economy’s ability to rebound from the current crisis.

When faced with huge debt with no ability to raise revenues and limited borrowing opportunities, countries inevitably resort to one thing: printing notes and Venezuela has been doing it relentlessly. This has caused the Bolivar to drop 95% in the last two years, from 64/$ to 959/$ in the beginning of 2016. Given this, the IMF estimates inflation rate to touch 720% in 2016, which will no doubt intensify civilian protests in the country.

The Bolivar has dropped 93% in the past two years. Source: Washington Post

The Bolivar has dropped 93% in the past two years. Source: Washington Post

The need of the hour is economic reforms in order to dull the pain of an intensifying crisis. However, even if Maduro is prepared to bring in some much-needed reforms (which he probably is not), the opposition will not allow him. The opposition has just won the Congressional elections, which has given it a veto-proof majority, and they are determined to stall any plans that the ruling government may have.

The possibility of the opposition blocking Maduro’s reforms is a moot point. Maduro has far too much conviction in his socialist ideals and doesn’t look like he is too eager to change his policies. In fact, he passed a law, which has made it impossible to remove the Central Bank Governor that he has chosen and surely, he has chosen a remarkable candidate. He has chosen a central bank governor who doesn’t believe in the concept of inflation. As the Washington Post quotes the governor:

“When a person goes to a shop and finds that prices have gone up, they are not in the presence of ‘inflation,’ but rather parasitic businesses that are trying to push up profits as much as possible. Let me be clear, printing too much money never causes inflation. And so Venezuela will continue to do so”.

Please Mr Maduro, ask any Zimbabwean how this went down. Many economies have been on a similar path in the past and it is not pleasant. Venezuela will keep printing money until it runs out of money to buy printing paper. Hyperinflation (with inflation rates in millions) will ensue, before a complete economic and societal collapse, which will include asset stripping, rent seeking, and resource capture and hoarding by those who have power. In the end, generations in the future will suffer.

Anupam Manur is a Policy Analyst at the Takshashila Institution and tweets @anupammanur

Read about Brazilian economic crisis here and the Chinese debt burden here.

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