Introducing Principles of Competition into University Hospitals

Fellow, RIETI


University hospitals are currently under the microscope all over the world. This is because they provide not only education, but also have clinical, therapeutic, and R&D functions. And without changes in these hospitals, medical system reforms are also unlikely. In other words, innovation in teaching hospitals is one of the keys to success in health care reform. In Japan too, universities and hospitals are often mentioned as areas where deregulation has made the least progress. If so, then university hospitals must be prime examples of pre-modern organizations. Ironically enough, while medical and dental universities, as well as their attached and affiliated hospitals, are supposed to attract the most intellectual members of society, they have been protected by years of custom and "closed-room" practices, resulting in a highly distorted structure.

University hospitals

University hospitals were originally built as necessary facilities for medical and dental school education and research. More specifically, they function as vehicles for students' clinical education and research activities, as well as for post-graduate doctor training. They also provide medical examinations and treatment for patients as hospitals under the Medical Service Law and as medical institutions covered under the Health Insurance Law. Their main mission therefore is to support students' clinical education and research activities through medical examination and treatment of patients.

Further, they play a major role in the formation of modern medicine and medical care, as well as offering the highest level of local medical care, leading the local medical community. In the post-war period, university guidelines initiated medical and dental schools and forestalled the establishment of new medical and dental universities. Since 1965, however, the demand for medical treatment and the emerging nationwide shortage of doctors and dentists led to greater capacity in existing medical and dental schools, while the government also adopted a policy of establishing new medical and dental universities. As a result, there are currently 79 medical universities and 29 dental universities. (The National Defense Medical College has also accepted medical students since 1974.)

University hospitals lack business perspective

Against this backdrop, the primary concern of those involved with university hospitals is the conversion of national universities into independent administrative institutions, expected to begin in FY2004. A key issue will be the changes brought about in university hospitals, which until now have totally ignored the business side of hospital operation. In other words, Japan's university hospitals are about to be tossed about in a storm of medical system reform.

Currently, the management and administration costs of university hospitals are covered under the national school special account. In terms of the revenue and expenditure scale for these hospitals, the FY1997 settlement recorded revenue of 740.5 billion yen. A breakdown reveals that 507.7 billion comprised hospital revenue, with 155.4 billion drawn from the general account budget, government borrowing and financing 77.2 billion, and revenue from commissioned surveys, experiments, etc., 200 million, resulting in a transfer rate from the general account budget of 21.0 percent (FY1999 Administrative Inspection Almanac). Outstanding loans are also increasing yearly, rising 394.4 billion (80.3 points) from 490.9 billion in FY1989 to 885.3 billion in FY1997.

In response to tight fiscal conditions, the former Ministry of Education convened the Conference of Parties Cooperating in Surveys and Research on Improving the Operation of National University Hospitals (an advisory institution under the Administrative Vice-Minister for Education) in September 1994, which produced a report entitled "Toward Improving the Management of National University Hospitals." Based on these recommendations, the Ministry has since been working to improve hospital management while ensuring that education, research, and medical care are not impaired.

University hospitals should compete with other hospitals using DRG payment system

The problem is how to approach the improvement of hospital management. I propose that university hospitals shift to a different system in terms of medical examination and treatment charges, moving away from the current "piecework" payment system to a system that rewards effort. More specifically, I suggest introducing a system of payment based on the Diagnosis-Related Groups (DRG) system.

The DRG system refers to the selection from around 14,000 disease codes from international disease classifications, and organizing these into around 500 to 1,000 statistically meaningful disease groups according to the need for medical care resources such as manpower, pharmaceuticals, and medical care materials. The United States has used Medicare since 1983 for insurance for persons 65 years and older, the original purpose being to develop a management method that would streamline hospital operation and boost productivity. More specifically, data concerning the (1) manpower, (2) pharmaceuticals, (3) medical care materials, (4) days in hospital, and (5) costs pertaining to patients were gathered from as many hospitals as possible and analyzed by disease, seeking primarily to clarify where each hospital needed to improve its performance. The DRG method is therefore the product of a research program launched for the same purpose as the quality control activities conducted by general industry.

By using the DRG method, the state of utilization and cost of medical care resources can be observed from a "product line" perspective. As a result, quality control, account management, and other management tools widely employed by manufacturing can be used in hospital management. Adopting DRG as a payment method would also adjust payment according to the degree of severity of the patient's illness, putting national university hospitals on an equal footing with hospitals attached to private universities.

Moreover, DRG is becoming commonly recognized in the medical profession worldwide, which would allow Japanese university hospitals to compete with their foreign counterparts in terms of cost performance. In this sense, DRG is truly a useful tool in terms of enabling competition on a level playing field among all university hospitals. Fortunately, both medical practitioners and insurance providers approve the construction of a new medical service fee system for university hospitals. The remaining issue is how to reallocate the 1.6 trillion yen currently paid to university hospitals in medical care costs and subsidies.

Table 1 lists case mix indexes (CMI, a weighted average cost value by DRG) for university hospitals in the United States. It reveals that in 1998, the Stanford University hospital was treating patients requiring the most care. In the United States, this information is also available to the general public. If Japan too was to disclose this information to the public, it would provide a guide in determining whether medical costs and transfer from the general account budget were being appropriately distributed.

Table 1.
University of Chicago Hospitals1.66
University of California- San Francisco1.84
University of Michigan1.83
Stanford University1.91
The Johns Hopkins University 1.71
University of Minnesota1.78
June 12, 2001

June 12, 2001