Abstract
This study presents a theoretical framework for examining the effect of the Japanese government-regulated medical price schedule, ‘Shinryo-Houshu-Seido,’ on the behavior of medical providers. In particular, we discuss the optimal rule of this price schedule for the regulator, taking into account information asymmetry between the regulator and providers. Our simple model predicts that heterogeneous providers either under-provide or over-provide medical inputs in comparison with the socially optimal outcome. Moreover, our results show that when the allocated budget is reduced to a certain level, even the second-best outcome becomes unachievable, no matter how the price schedule is regulated. While the limited budget size is shown to have a clear negative effect on social welfare, we suggest that the prospect of obtaining the second-best outcome is left to negotiation between the regulator and the budget allocator.
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Notes
The SHS is based on a point system in which the government allocates points to all items covered by the public health insurance.
In practice, the fee schedule is revised biennially at the Central Social Insurance Medical Council, which is a committee within the MHLW.
Many theoretical studies examine various issues related to payment systems such as prospective and cost-based payment systems (Newhouse 1983, 1996; Ellis and McGuire 1986, 1988, 1990, 1993; Dranove 1987; Pope 1989; Selden 1990; Allen and Gertler 1991; Glazer and McGuire 1994; Rogerson 1994; Ma 1994; Ma and McGuire 1997; Chalkley and Malcomson 1998; Ellis 1998; Lewis and Sappington 1999; Bos and Fraja 2002; Beitia 2003; Boadway et al. 2004; Mougeot and Naegelen 2005; Siciliani 2006, and Wright 2007). Several studies apply mechanism-design approaches to investigate the health care system with information asymmetry (Lewis and Sappington 1999 and Beitia 2003). See also McGuire (2000), and Dranove and Satterthwaite (2000) for the literature review.
Our model contains several similar elements as that of Liu and Ma (2012), such as altruistic physicians and consumers’ illness severity. Their model considers the role of the delegation regime of health insurance, where an insurance company establishes a payment contract with the physician, and an insurance contract with the consumer. However, this system is totally different from the Japanese heath care system. In Japan, central government regulates the prices and the financing system. All citizens are covered by a mandatory employment-based health insurance operating on non-profit basis (see Anabacken (1994)).
We categorize hospitals and physicians as the medical provider in this paper. We do explicitly not consider the relationship between physicians and hospitals, since we believe that such a relationship is less relevant in the Japanese health care system. We do not discuss the behavior of insurers either, since the role of insurers is very limited in the current Japanese system, as pointed out by Tokita (2002). Regarding the relationship between physicians and hospitals, see Tirole (1988) within the context of the vertical control, and also see Pauly and Redisch (1973); Shortell et al. (1985); Custer et al. (1990); Dor and Watson (1995); Boadway et al. (2004), and Crainich et al. (2008).
Our model assumes two medical inputs: one input is cheaper than the other, and it is less effective. An example may be the case of generic and brand-name drugs. Other examples may include the case of an old type and a new type of treatments in terms of various aspects, such as the installment of new medical facilities. The old type is generally cheaper than the new type, and it is less expensive.
The Japanese health care system has mainly been based on the fee-for-service scheme. Many medical services are reimbursed based on the fee-for-service scheme, while there are several hospitals which adopt the prospective reimbursement scheme with the DPC (Diagnosis Procedure Combination) as a framework of Japan’s specific DRG.
This model assumes that a new medical input recovers a patient completely, while an old medical input recovers a patient partially. The ineffectiveness of an old medical input is captured by \(\theta -\alpha \uplambda \), so that more severe patients face a larger payoff loss. There may be some alternative ways. For example, \(h(0,\uplambda )=\theta -\alpha \uplambda \) for an old medical input, and \(h(1,\uplambda )=\theta +\alpha \uplambda \) for a new medical input. This setting implies that the effectiveness of an old medical input is decreasing in the severity of the health status, while that of a new medical input is increasing in the severity of the health status. However, the qualitative implication would be the same as our assumed model. Thus, we simply assume that \(\uplambda \) affects the health-related payoff only when an old medical input is chosen.
In our setting, providers care about the effectiveness of medical inputs they provide as well as the cost (co-payments) of medical inputs which their patients have to pay. The inclusion of patients’ co-payments in the payoff of providers is consistent with the argument of Lundin (2000) that physicians take into account patients’ costs significantly when they prescribe. Iizuka (2007) empirically finds that physicians consider patient’s out-of-pocket costs in the prescription drug market in Japan.
The fee schedule, or points allocated to all items covered by the public health insurance, are revised biennially at the Central Social Insurance Medical Council. Points set to a newly developed, or a brand-name drug, are usually higher than those to an existing one, although the medical effect of a newly developed drug is similar to that of an existing one, in order to cover the research and development cost of the newly developed drug. Furthermore, points set to an existing one is usually decreased at the biennial revision of the fee schedule when a newly developed drug appears. See Ikegami and Campbell (2004) and Iizuka (2007, 2009).
Ihori et al. (2011) evaluate the reforms of the Japanese public health insurance started in year 2006 in the dynamic general equilibrium framework with overlapping generations, where the effect of government deficits is explicitly considered.
To reduce the total amount of reimbursements, the regulator controls prices of medical inputs. This would also affect the pharmaceutical industry. Kurata (2009) points out the relationship between the existing SHS and firms’ profitability and argues that high prices of brand-name drugs have induced strong incentives in the pharmaceutical industry to invest in the development of new and competitive drugs. However, our analysis has not incorporated the role of pharmaceutical firms and the relationship between medical providers and the pharmaceutical industry in Japan, which should be addressed in the future research.
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Acknowledgments
We thank all participants in the Health Economics Workshop regularly held at Saku General Hospital, Nagano, Japan, and the Fifth Irvine-Japan Public Policy Conference at University of California, Irvine (March 2009) for their helpful comments and suggestions. The research fund by Promotion and Mutual Aid Corporation for Private Schools is acknowledged. Remaining errors are ours.
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Kakinaka, M., Kato, R.R. Regulated medical fee schedule of the Japanese health care system. Int J Health Care Finance Econ 13, 301–317 (2013). https://doi.org/10.1007/s10754-013-9133-6
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DOI: https://doi.org/10.1007/s10754-013-9133-6