I.  INTRODUCTION

    
Although it is often somewhat overlooked, the 1,520 billion yen ($11.6 billion)[1] Japanese medical equipment industry is an important part of the overall Japanese economy.  It is one of the few industries in Japan that grew steadily during the country’s rapid GDP decline from 1996 to 1998, and domestic production of medical equipment has steadily increased.  In 1998, GDP contracted 2.5 percent yet domestic production of medical equipment grew, albeit by less than one percent.

Japan’s market for medical equipment is second in size only to that of the United States.[2]  In 1998, medical equipment sales, including foreign company sales, were over 2,000 billion yen ($15 billion).[3]  By 2025, the market is expected to be around $73 billion.

MITI has recognized the significance of the senior services market, including the medical industry, by making it a target for enhanced competitiveness in preparation for the next century.  Toward this end, the ministry has promised senior services industries that it will finance programs to enhance relevant collaboration between the government, business and academia.

Nonetheless, companies will still have difficulty introducing new medical equipment into the market unless Japan’s regulatory and distribution systems are reformed. Because the estimate for market growth over the next 25 years ($73 billion) assumes current regulatory and distribution systems, the market is likely to grow even larger if reform occurs.

There are four major problems that need to be addressed:

• The Pharmaceutical Affairs Law. This law is redundant and cumbersome. It reasonably requires medical manufacturers to obtain safety approval for all products before they are marketed. However, Japan’s approval process is longer than that of any other major developed country. Another problem related to the approval process is that procedures for “me-too” products are redundant. Such products, which incorporate technologies that are already on the market, should only be examined to determine whether they are equivalent to existing products. Currently, “me-too” products are often reviewed as thoroughly as products that incorporate new technologies. 
• Japan’s Distribution System. This system is unnecessarily complicated and hinders the introduction of new medical equipment into the market.  If the current distribution system were reformed, sales of medical equipment could increase by 5.6 percent.[4]
• Ministry of Health and Welfare (MHW) Policy.  MHW’s approval policies for new products are too cautious and thereby impede market entry.  While a certain degree of vigilance from MHW is vital to ensuring public health and safety, this vigilance needs to be weighed against opportunity losses incurred by both the medical products industries and patients when MHW’s policies are too stringent. Indeed, MHW did not approve the Implantable Cardioverter Defibrillator (ICD) until this device has been in use in other countries for ten years. Yet ICD could save $46,500 per patient, and it offers a better treatment option for many patients.
• The National Medical Insurance Reimbursement System. This system creates a mechanism under which price competition for medical equipment does not work. Because reimbursement prices reflect the cost of a piece of equipment (regardless of its cost-efficiency), hospitals have no incentive to purchase new more cost-effective equipment and manufacturers have no incentive to produce it.

Eliminating these obstacles is an urgent task not only for the industry, but also for the Japanese government. Indeed, the Japanese government will need to adjust its policies to better accommodate the country’s aging population. In 1999, the government spent $264 billion on health care.[5]  Estimates indicate that this expenditure will reach about $600 billion in 2010, and about $1,240 billion in 2025.[6]  To provide adequate services to its aging population without yet further increasing its growing national debt, Japan will need to find a way to reduce the cost of health care.

Japan will also continue to face pressure from other countries (especially the United States) until it deregulates its medical sector.  Since 1986, Japan and the United States have discussed deregulation in the medical market under "The Market-Oriented Sector-Selective (MOSS) talks" led by the U.S. Department of Commerce.  The two countries have also held regular bilateral meetings under “The U.S.-Japan Enhanced Initiative on Deregulation and Competition Policy” led by the Office of the United States Trade Representative (USTR). USTR has specifically addressed the medical devices sector as part of this second initiative.[7]  USTR’s main request is that the Japanese government speed up the approval process for new products. According to USTR, Japan’s regulatory system, such as its procedures for approving new medical devices, is unnecessarily cumbersome and restrictive compared to other developed countries’ systems.[8]

It is time for Japan to start taking action to reduce obstacles to increased business in the medical equipment market.  JMEA can and should help jump-start this process by putting pressure on the government to act quickly. Indeed, prompt action will be crucial to containing health care expenditures and providing better medical treatment for all Japanese.

II.  BACKGROUND

1. Overview of the Japanese Market for Medical Equipment

The Japanese market for medical equipment has grown significantly over the last twenty years. It is one of the few sectors of Japan’s economy that has grown steadily despite the country’s protracted economic recession. Its growth reflects the public’s growing interest in health and its high expectations for medical care.[9] It also reflects the fact that Japan’s population is aging and that medical professionals are increasingly reliant on new, often expensive technologies and treatments—particularly for previously incurable diseases (such as certain cancers and AIDs).

The Ministry of Health and Welfare (MHW) is the governmental agency responsible for regulating the medical equipment sector by implementing the Pharmaceutical Affairs Law.  The main objective of the law regarding medical equipment is to protect and improve public health by enforcing regulations concerning quality, effectiveness, and safety. The law was first established in 1943 and was amended in June 1994.[10]

In 1996, Japan spent $290 billion on medical care, or 7.3 percent of GDP, a figure that is relatively low compared to the United States’ 14.2 percent expenditure, Germany’s 10.5 percent, France’s 9.6, or Canada’s 9.2 percent.[11] Nonetheless, Japan’s market for medical equipment is second in size only to the United States’ $30 billion market.[12] 

Japan’s demand for medical equipment in 1998 was 2,029 billion yen ($15.5 billion). The market grew 4.7 percent in 1998, 3.8 percent in 1997, and 12.7 percent in 1996. The growth is due to increases in both domestic production and imports. Domestic production of medical equipment in 1998 was 1,521 billion yen.  It grew 0.4 percent in 1998, 4.0 percent in 1997, and 9.0 percent in 1996. Imports grew faster than domestic production, growing 11.2 percent in 1998, 5.8 percent in 1997, and 20.5 percent in 1996. In 1998, imports accounted for a full 41 percent of domestic demand. [13]

Production, Imports, Exports, and Domestic Demand* for Medical Equipment

(unit: million yen) 

* Domestic demand = Production + Imports - Exports
Source: “Annual Statistics of Pharmaceutical Industry’s Production Trends,” MHW.

The largest exporter of medical equipment to Japan is the United States, which accounted for more than 63.5 percent of total medical equipment imports into Japan in 1998.  The United States also accounted for by far the largest portion of imports within nine of the top 10 equipment categories of imports.[14] The medical equipment sector is one of the few sectors in which the United States enjoys a trade surplus with Japan, and the surplus has grown since 1991. In 1997, the surplus reached 409 billion yen ($3.38 billion), an almost 13 percent increase over 1996.

Germany is the second largest exporter of medical equipment to Japan, although its import share declined from 12 percent in 1991 to six percent 1997.  Ireland, Switzerland and the United Kingdom followed with import shares of 3.4 percent, 2.8 percent, and 2.5 percent respectively.[15]

2. Regulatory Controls

2a. Product Approval and Manufacturer/ Importer Licensing  

Japan’s Pharmaceutical Affairs Law was enacted in 1943, and from 1961 until 1994 no fundamental changes were made to it. In 1994, however, the law was amended to reflect the demand for better health care along with recent changes in medical technology.

The law is designed to minimize the risks inherent in the manufacture and use of medical products, to improve general health and hygiene, and to promote research and development of medical products.[16] It applies to medical equipment, as well as drugs, quasi-drugs, and cosmetics.

The law has four main sections:

• definition and names of medical products;
• manufacture and import approval and licensing procedures;
• distribution control; and
• post-marketing surveillance.

Product approval and manufacturer/importer licensing procedures

The Pharmaceutical Affairs Law requires manufacturers and importers to obtain a license from MHW in order to sell medical equipment. A manufacturer must obtain a license for each of its plants that will produce an approved product, and importers must obtain a license for each of its offices that will sell an approved product. Licensing decisions are based on an examination of manufacturers’ and importers’ facilities, personnel and the qualifications of their technical directors.

A foreign manufacturer may directly apply for a product approval. If it does not have a legal presence in Japan, it can obtain approval by using a Japanese in-country caretaker (ICC) that will file an application on behalf of the foreign manufacturer (see Appendix 2). If necessary, the in-country caretaker has to make itself available for inquiries from relevant parties including MHW.

The standard processing period for obtaining an approval for “new” medical equipment is 12 months.[17]  “New” medical products are defined as products that are significantly different from previously approved products or those new in indications, effects or uses.[18]  It takes up to four months to approve "me-too" medical equipment—equipment that is essentially the same equipment that is already on the market. These approval periods do not include time spent by the applicant answering questions or supplying additional information during the approval process.

All applications, both new and “me-too,” are first submitted to the provincial government, which forwards the application to the Pharmaceutical and Medical Devices Evaluation Center (PMDEC) of the Ministry of Health and Welfare.[19] PMDEC submits “me-too” applications to the Japan Association for the Advancement of Medical Equipment (JAAME), an independent entity that is responsible for conducting equivalency investigations. PMDEC performs all other necessary evaluations of “me-too” products. PMDEC first reviews new product applications and then consults with the Central Pharmaceutical Affairs Council (CPAC) concerning the application.

PMDEC makes final approval decisions for both new and me-too applications. It then notifies the provincial governor of its decision, and the governor issues the approval to the applicant.[20] (See Appendices 4 and 5.)
  

Medical equipment that does not require approval

The law also lists medical products for which no approval is necessary. These products are considered to pose only minimal risk to human health.  MHW regularly reviews the list and has steadily increased the number of items on it.[21] 

2b. Application for Insurance Coverage

Japan’s national health insurance program covers all citizens.  The two major types of health insurance are business and community health insurance. For business insurance, companies collect insurance fees from their employees. For community insurance, the fee is collected at a person’s residence. In both cases the fees are forwarded to the government and put in a payment fund.[22]

When patients receive medical treatment, they pay a part of the cost out of their own pockets. Medical institutions are reimbursed from the payment fund for the rest of the cost (see Appendix 3).  Only insurance-approved treatments (including equipment) are eligible for reimbursement. Accordingly, both medical institutions and doctors are only willing to buy and use insurance-approved equipment. Medical institutions also cannot be reimbursed for the use of approved medical equipment until MHW determines what reimbursement price will apply to the use of that equipment. Not surprisingly, it is almost impossible to sell medical equipment for which MHW has not yet determined a reimbursement price.[23] 

For a product to be covered under the national medical reimbursement system, an importer or a manufacturer of that product must indicate its intention to apply for insurance coverage on its application for product approval. The product’s class must also be indicated:

  Class A:    Medical equipment that has already been evaluated and assigned a reimbursement price (excluding Class B equipment).

Class B:    Medical equipment that falls under the existing “Special Insurance-Listed Medical materials.

Class C:    Medical equipment other than A and B.  This class is for devices that contain new technology.

After MHW approves a new product, there is a 20-day period during which MHW may notify applicants of flaws in their applications for insurance. If manufacturers who request Class A or B insurance for their product receive no notice during the 20-day period, procedures to set the reimbursement price and establish insurance coverage are automatically undertaken. Applicants who chose Class C insurance must wait until the end of the 20-day period and then, if no notice is made, they may apply for insurance. New insurance coverage is introduced four times per year.
   

3. Bilateral Negotiations between Japan and the United States

The Japanese and U.S. governments began discussing deregulation of Japan’s medical equipment market in 1985 as part of the Market-Oriented Sector-Selective (MOSS) talks. The talks where aimed at removing trade barriers that limit market access within specific industrial sectors: medical equipment and pharmaceuticals, telecommunications, electronics, and forest industries. 

The MOSS discussions on medical equipment focused on further opening the Japanese health care market. In the United States’ view, the Japanese regulatory system was inefficient, inflexible, and prevented new producers and products from entering the Japanese market. The Japanese Government responded that its regulatory system for the medical sector provided equal opportunities to both foreign and domestic companies. Nonetheless, the Japanese also recognized the importance of simplifying administrative procedures, and as a result, took steps to streamline its approval and licensing procedures and reimbursement system.[24]

In 1997, both governments launched the U.S.-Japan Enhanced Initiative on Deregulation and Competition Policy (Enhanced Initiative) under the U.S.-Japan Framework for a New Economic Partnership (Framework).  The goal of the Enhanced Initiative is to increase efficiency and promote economic activity in order to better serve consumers' interests. Toward this goal, both governments agreed to conduct a serious exchange of views concerning competition policy, distribution practices, and issues related to transparency and government practices.

With the launch of this bilateral dialogue, the MOSS discussion was made into a working level discussion under the Enhanced Initiative. The Initiative includes five expert-level working groups similar to those established in the MOSS process: medical devices and pharmaceuticals, telecommunications, housing, financial services, and competition policy and distribution. 

As of May 1999, the Enhanced Initiative had reached agreement on a number of deregulation measures for the medical equipment sector.[25] These included Japan’s agreement to:

• improve the consistency and speed of its approval process for medical equipment;
• improve the consistency and speed of its reimbursement process; and
• accept foreign clinical test data for the approval of new medical equipment.

   

4.  The United States’ and Other Developed Countries’ Regulatory Systems

Prior to 1997, the United States’ approval process for medical equipment was considerably longer than that of Japan and certain European countries. It took two to three years to acquire approval for new equipment in the United States, two months to a year in Japan, and even less time in the United Kingdom, Germany and France. Consequently, U.S. manufacturers sometimes received approval for their products in Europe and Japan before receiving approval in the United States. They also began selling their equipment in Europe and Japan before the United States.  

In 1997 in response to requests from its domestic medical industry, the United States amended its law that controls medical equipment, and approval times decreased markedly.[26] Currently it takes longer to obtain approval in Japan than in the United States.[27]

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