Pursuing Innovation in Medical Area as a Proving Ground - Significant benefits expected from reform

Consulting Fellow, RIETI / Professor, the University of Tokyo

Health care reform holds the key to turning innovation-driven economic growth into reality. Reform, if realized, would not only enable people to receive better medical services, but the accompanying growth of the health care industry would have positive spillover effects on the entire economy. Reform debate should not be left solely to the conventional circle of experts and other forums, such as the Council on Economic and Fiscal Policy (CEFP), should be utilized.

Japanese medical sector lags behind, lacking access to latest technologies

In Japan, where the population is rapidly aging and the fertility rate is declining, calls for better medical services are increasing as never before. At the same time, the medical industry is being counted on to become an engine of economic growth by tapping into the high potential of the country. Presently, however, it is hard to say that sufficiently high quality medical services are being ensured in Japan. Neither the medical industry nor the market is competitive. I will explore reasons why the Japanese medical industry and market are in their present state and consider what reforms are needed to change the situation.

The field of medical services embraces some of the industries in which Japan has strong technological capabilities - ranging from materials to semiconductors and electronics. Thus, in addition to the availability of high-quality human capital including physicians, there are quite a few aspects where Japan's strength - as seen in kairyo-kaizen (reengineering and improvement) quality control and the suriawase (integration) approach in manufacturing - can play a critical role in achieving success. Indeed, this is a field in which Japan may evolve into a cutting-edge market as companies compete, taking advantage of their potential and leveraging innovation.

However, in many areas the latest technologies, instruments, or medicines are not necessarily available. For instance, the non-availability of most-advanced anti-cancer drugs or insured treatment using such drugs has become a major political issue in Japan. Much attention was placed on cases where certain cancer patients had no choice but to seek treatment overseas due to delays in vital drug approvals and in the application of health insurance to their desired treatment. Cardiac pacemakers available in Japan are one generation behind the world's latest model, while the government has yet to approve drug-eluting stents, which are currently the most advanced coronary stent system available in the world.

Also, Japan has been failing to join the front-runners in the development of devices for medical treatment. Japan's market for medical devices is some 2 trillion yen, compared to 7 trillion yen in the United States, while only four Japanese companies - such as Toshiba Corp. and Terumo Corp. - are barely managing to be ranked around 20th worldwide among medical device manufacturers.

Imbalance between risks and rewards

Comparison with the U.S. concerning the development of medical devices sheds light on various problems with Japan's medical industry. First, there is little collaboration between engineers and medical doctors in the early stages of device development. Next, certain clinical trials of unapproved medical devices are strictly limited to those conducted under the initiative of medical doctors. This causes ambiguity as to who is legally responsible for the use of unapproved devices and, in many cases, hinders the improvement and commercialization of advanced devices; processes to which the initiative of medical device manufacturers is crucial.

Clinical trials are both costly and time-consuming, while the approval process for new medical devices is very slow due partly to the lack of transparency in the screening criteria. Furthermore, under the current public health insurance system, the number of medical points (fees) chargeable for each insurance-covered medical treatment is fixed in that the latest improved medical device models are treated equal to older models, thus eliminating incentive for improvement. In addition, in the face of unpredictability regarding the scope of recalls and uncertainty over potential liability, including civil and criminal as well as social liability, many companies, despite their technical capabilities, remain overly cautious about entering the medical device market.

Meanwhile, due to inefficient management and low profitability, Japanese hospitals have been unable to introduce advanced equipment and devices in a timely manner. Current insurance payment system also discourages hospitals to introduce devices and methods designed to enable accelerated discharge of patients; thus discouraging the development of new devices. There have been some attempts to shift to a new system, such as partially introducing the Diagnosis Procedure Combination (DPC) payment system similar to the U.S. Diagnosis-Related Groups (DRG), wherein medical fees are calculated based on a fixed amount for each type of illness per patient per day of hospitalization. However, the change is slow.

There is no disagreement that the existing approval system must be improved. The system was launched in such a way that the regulatory authorities, while being given considerable discretion, could be held criminally liable for the outcomes of their decisions. Also, as exemplified by the lack of progress in compiling review criteria and procedures into manuals, the knowledge and expertise accumulated to date have barely been codified or shared by external users. Furthermore, the concept of regulatory science, which seeks to use scientific and rational evidence to make decisions by weighing the benefits and risks of a medication subject to approval, has not sufficiently taken root in Japan.

Under these circumstances, the regulatory authorities became highly risk-aversive and slow to approve new medications. They have typically granted approval only after coming under mounting pressure from patient groups and foreign companies. Yet even then they are slow to take action. Certain steps are being taken toward the improvement of the system, but the effects are limited. The existing approval system remains ill-equipped, for instance, in terms of the number of examiners, recruitment and career path arrangements, and expertise evaluation. Its efficiency is also limited under the absence of a national consensus on handling criminal charges against administrators.

Inherent differences between medical drugs and devices are also causing further delay in the approval process for medical devices. Medical devices are composed of diverse materials, have a relatively short average lifespan of 18 months and undergo a series of refinements and improvements. Rationalization of the approval process with respect to these refinements and improvements has a significant impact on device development. However, the existing approval system has been designed to focus primarily on medicines. The number of examiners, a majority of which are drug specialists, capable of making judgments about medical devices is very small. In addition, under the current approval system, any refinement or improvement made to a previously-approved device must undergo a full range of clinical trials in order to obtain approval, as if it were a completely new innovation, which imposes unreasonable costs on innovator companies.

The health insurance system is not structured so that a newly approved medication can be included in health insurance coverage as quickly as possible. The government also tends to be slow to renew the list of drugs and devices permitted under insurance-covered treatment. Medical drugs and devices are not priced rationally based on their costs and benefits; through proper market discipline. Therefore, when products are overvalued, pharmaceutical/medical device companies try to expand their market shares and maximize profits by spending excessively for sales and marketing under what appear to be irrational business practices. On the other hand, when products are undervalued, pharmaceutical/medical device companies lose incentive to enter the market with competing products. In addition, sporadic changes, such as abrupt price reductions, have been making it difficult for pharmaceutical/medical device companies to create development strategies.

A more fundamental problem is the misallocation of human resources in medical area, including doctors, reflecting the huge imbalance between risks and rewards. As often noted, there is a shortage of obstetricians and pediatricians. There exists income disparities between private practice medical doctors and those working at hospitals, and doctors continuing to work at hospitals are decreasing in number, therefore they face greater burdens. There have also been cases of criminal prosecution of medical malpractice. The result is a further decrease in the number of doctors willing to work in an environment where they are inherently at risk of litigation, which leads to a further deterioration in their work environment. Essentially, the forefront of medical care is beginning to crumble.

The existence of "walls" dividing various medical professions - each involving different qualifications - and inflexible regulations and restraint of supply have added to the uneven distribution of doctors and other medical professionals. Such inflexibility sometimes results in making it more difficult to save people's lives, as happened with automatic external defibrillators (AEDs) until a few years ago. It is also creating a situation where Japanese hospitals, compared to those in the U.S. and some other countries, have an extremely small number of medical staff other than doctors, which deteriorates doctors' working environments and keeps them too busy to undertake clinical trials.

Expedite reform through greater information disclosure

Prime Minister Shinzo Abe is trying to tackle the massive fiscal deficit and various problems arising from low fertility and the aging population by seeking economic growth through innovation. This fast growing field of medical services is a critical test for the Abe administration as to whether they can create an environment that enables the development and commercialization of new technologies ahead of the rest of the world and attracts foreign investment.

In all countries, the medical service industry has traditionally been subject to strong governmental influence on market entry and pricing because of its inherent nature of dealing with people's lives, the presence of significant information asymmetry, and the involvement of public funds. Presently, however, such government intervention is nearing a major turning point. Against the backdrop of globalization and technological innovation, medical doctors, patients, and companies are now crossing national boundaries, seeking an environment where they can access the latest technologies.

In other words, medical system reform should not just be about mathematical reductions of total medical expenditures and controlling the numbers of doctors and hospital beds. Instead, it should be focused on changing the system into one containing an incentive mechanism for ensuring the optimal allocation of resources and efficient delivery of quality medical services. Appropriate incentive should be given to medical institutions by fully utilizing the pricing mechanism and patient choice, for instance, through the active use of "mixed treatment" which provides a combination of medical treatment both covered and not covered by public health insurance. Also, the reform should be carried out so as to bring the medical system closer to one in which medical devices and drugs are properly evaluated based on their effects.

National consensus of the compensation mechanism relating medical malpractice and defects involving medical drugs and devices should be developed. Certainly it is important to minimize such incidents. However, when the stringency of the system brings about excessive caution, the result may be a situation where savable people cannot be saved because of insufficient or inadequate medical services and devices. Obviously, society needs to have a mechanism for ensuring that unfortunate victims of medical malpractice or other medical incidents be duly compensated in some way. Yet, discretion must be exercised in pursuing criminal charges against practitioners.

Designing institutional arrangements for medical affairs has been deferred to scattered experts without proper instruction with total picture. It should be examined from a broader perspective, for instance by having the CEFP discuss general framework. Finally, information plays an important role in the reform. Compared to the U.S. and some other countries, Japan, in many aspects, lacks basic information indispensable to policymaking and necessary for enabling patients to make their own choices. There is an urgent need to accelerate medical system reform to facilitate the disclosure of more information.

>> Original text in Japanese

* Translated by RIETI.

March 9, 2007 Nihon Keizai Shimbun

May 7, 2007