Thinking about Healthcare Innovation: Speeding up institutional reforms to facilitate industrialization

Since the late 20th century, the so-called "medical industrial revolution" has been transforming healthcare services. While new technologies have contributed to the dramatically improved quality of life (QOL) of cured patients, they have also increased healthcare expenditure to the national economy.

Combined with advancing globalization that allows companies, doctors, and patients to choose medical institutions across national borders, as well as the rapidly aging population, the wave of technological innovation is urging all developed countries to review fundamentally their medical care systems. Every country is working to develop new ideas and carrying out bold steps on medical care systems and policy reform toward fostering new medical industries and providing efficient medical care. Meanwhile, in recent years in Japan, the medical industry's competitiveness has been weakening particularly in the therapeutic equipment sector, while hospital malfunction and other problems have become increasingly serious in such sectors as emergency medical care and obstetrics, among others.

There are various institutional arrangements in the medical sector centering on the four areas discussed below. The objectives of these systems are common to all countries, but their designs and ways of operation differ from country to country due to various factors such as history and traditional values. Reactions from doctors, nurses, hospital managers, pharmaceutical producers, medical equipment companies, and patients subsequently contribute to the determination of the quality of medical care as a whole.

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From the viewpoint of industry, the review and approval system comes first. This is to deliver safe and effective new technologies in a more rapid manner and with fewer side effects. There is no big difference among countries in this system. Various steps are being taken to establish international standards for approval and relevant data. However, in terms of actual operation, there are significant differences among Japan, the United States, and Europe, including to which priority is given--pursuing the prevention of side effects to the limit or avoiding the risk of delayed provision, the number of reviewers and their proficiency, and progress in the systematization of the review process.

The Japanese review and approval system, which had been criticized for its slow review speed, has been making some progress. But there is yet much room to improve in such aspects as the simplification of various procedures essential for the commercialization of new technologies and the enhancement of review transparency and predictability. Especially, it is a fatal problem for the development of medical equipment that the sector is regulated by the Pharmaceutical Affairs Act, despite the fact that the development process and nature of medical equipment products are different from those of pharmaceutical products. For instance, medical equipment is improved through use in clinical practice. Thus, if a clinical testing system is designed to limit test targets to finished products like pharmaceutical products, investigatory use of semi-finished devices in the product development process is legally restricted. The production process regulation of equipment that consists of a large number of parts cannot be effectively and efficiently implemented under the concept similar to chemical goods.

Second, there are price-related arrangements. In countries other than the United States, governments practically participate in price formation under their public insurance systems. Specifically, the Japanese government has been directly involved in price formation through its medical treatment fee system. Since prices directly affect various parties' interests, nobody is willing to lower an expected income. And, in a fiscally constrained environment, it is not easy to find sources to set proper prices on new technologies and products that would bring about considerable effects.

Furthermore, in Japan, where the government is directly involved in price formation and the price setting process is not transparent, there are many ways that are different from international standards and cases with unclear grounds. Examples in the pharmaceutical sector include the method of new drug pricing, price reductions during patented periods, and relatively little use of generic products. In the medical equipment sector, very broad item classification, which is internationally uncommon, makes it difficult to reflect product improvements on prices through differentiation of product categories. These practices undermine development incentives.

In order to solve these problems, it is essential to adopt a transparent pricing system that properly rewards the important providers of innovation. The UK and Germany in recent years have taken various measures in this regard, including choosing claims to be paid by public systems and setting prices, both based on outcome data, and adopting systems that permit price formation in the form close to market-based price formation by such ways as combining a comprehensive payment system and private insurance. Thus, many countries have made various efforts and bold decisions to promote the commercialization and development of new technologies through the recovery of their pricing function.

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Third, there are many rules and incentives that affect the establishment and functional differentiation of hospitals, the supply and specialization of doctors, and the division of roles between doctors and other medical professionals. Every country, under its national system, is seeking ways to provide optimal medical services for each region. These systems can take various forms, from British systems with strong overtones of government control to U.S. systems making maximum use of market forces.

In Japan, there are regional medical plans drawn up by prefectures. However, these are only paper plans because such plans are not based on reliable data and also because there is no coordination between systems that would ensure appropriate distribution of hospitals and doctors. In reality, the number of doctors per capita is about two-thirds of the average of European countries. In addition, doctors can freely choose regions where they work and clinical departments in which they specialize. This has caused doctor shortages in regions and areas where risk is high without fitting rewards. Further, with a strict demarcation between doctors and non-physician medical professionals, who complement doctors, full use of doctors' skills is unable to be done.

Meanwhile, there are too many hospitals in Japan without differentiating their functions. The number of hospitals per capita in the country is nearly three times that of the average of advanced countries. There are cases where public general hospitals are newly built, hoping to be financed by the central government subsidy. As a consequence, both doctors and patients have been dispersed. Doctors fail to get enough expertise to become specialists, and patients lose access to professional treatment. Furthermore, the medical industries are disadvantaged by the shortage of adequate-sized specialized hospitals for efficient new technology development and clinical testing and for efficient education and distribution of medical equipment.

A number of efforts have begun to be made, including more realistic regional plans based upon medical fee receipt data, research on advanced measures for medical care service provision in different countries, and the review of the actual status of cooperation in new technology development and organic cooperation between doctors and other medical professionals in various parts of the country. However, they have not yet made significant changes.

Finally, there are criminal and civil liability systems for medical malpractice. In Japan, few civil cases involve huge amounts of compensation, like those in the United States. However, in criminal cases, doctors or other medical professionals might be arrested and punished on charges not of gross negligence but ordinary professional negligence, unlike in other major countries. The past arrest of a doctor of Fukushima Prefectural Ono Hospital's obstetrics and gynecology department on a medical malpractice charge gave an enormous shock to all obstetricians in the country, contributing to doctor shortages in emergency medical care and other high risk areas. Similarly, with regard to the review and approval processes, it is suspected from previous cases that reviewers may face criminal prosecution in connection with drug-induced disease cases. This has caused reviewers to make conservative judgments on review and approval. It is felt that reviewing the way of thinking of system operations is considerably significant.

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As discussed above, there are a number of fatal shortages in Japan, including few large-scale medical institutions with enough doctors and patients that can serve as centers of development and clinical testing, a large gap from international standards for the review and approval of medical equipment and other products, and lack of transparency in and predictability of government price setting. As a result, Japan failed to establish a competitive healthcare industry and services, in spite of the existence of valuable resources, including the rich elderly patients, competent doctors, technological development capability, quality control technique, and ample funds.

What is necessary for the development and commercialization of innovative technologies is an environment where those who have produced better products in an efficient manner will be rewarded. A properly designed, transparent system will help boost the competitiveness of the Japanese industry, which is competent and capable of taking advantage of such environment. To this end, it is important to get rid of arbitrariness and conduct policymaking based on verifiable data. Before the hollowing out of the medical industry and services further proceeds to an irreversible extent, these systems should be changed fundamentally.

Specifically, it is urgent to develop ideas and make decisions on the following three measures. First, in order to improve the quality of medical services and to provide an indispensable environment for technological development and clinical testing, all available policies should be mobilized toward promoting the specialization and intensification of medical institutions under the regional medical plans formulated based on the realities. Second, the review and approval processes should be simplified to a level comparable to international standards by rearranging objectives, and the current systems for medical equipment and other products should be re-examined fundamentally with a view to establishing regulations, different from pharmaceutical products, suited to the nature of the products. And third, arbitrariness should be eliminated, and a rational price system and the decision-making processes based on transparent grounds should be established. On top of these, in order to draw the grand design of the reform and to ensure execution, a function like the former Council on Economic and Fiscal Policy for the government would be necessary.

>> Original text in Japanese

* Translated by RIETI.

December 13, 2011 Nihon Keizai Shimbun

January 31, 2012