III. ECONOMIC ANALYSIS                               

The Japanese economy plunged into recession in 1994. It has been slowly recovering ever since but remains weak. Insecurity still prevails in the financial and labor markets.  To make matters worse, the government’s debt is increasing.  Managing health care costs will be important to future economic recovery, particularly because Japan’s aging population will demand more health care than ever before in the coming years.

1. Japan’s Recession

     (Source: “Gross Domestic Product: Fourth Quarter 1999 (first preliminary)”, EPA, 1999)

   
Other 1999 indicators are no more encouraging. The unemployment rate hit 4.7 percent—the worst in modern Japan’s history—and there were 10,249 bankruptcies, which is almost the same level as the previous year.[30]

   
2. Increasing Health Care Expenditures  

Japan’s health care expenditures are increasing in tandem with the elderly portion of its population. While total medical expenditures in 1998 were the same as the previous year, the ratio of health care expenditures to national income increased slightly (from 7.3 to 7.5 percent).  In 1999, national health care expenditures were estimated at 30.1 trillion yen ($264.2 billion), and the expenditure to national income ratio grew to 7.9 percent. MHW estimates that health care expenditures will reach to 38 trillion yen ($333.6 billion) in 2000 and 141 trillion in 2025.[31]  
  

(Source: JAAME News, JAAME, 1999 September)

The government is researching various means of reducing health care expenditures.  MHW, for example, is conducting studies of how to reform the reimbursement and hospital systems.  (See the policy analysis section below for a discussion of how new innovative medical equipment can contribute to reducing health care expenditures.)

3. Economic Performance of Japan’s Medical Equipment Industry

The Japanese medical equipment industry has not received as much attention domestically and internationally as Japan’s major leading industries such as the automobile and steel industries.  The medical equipment industry, however, is one of the few industries in Japan that has continued to grow despite the country’s serious recession. In 1998, domestic production of medical equipment was 1,521.4 billion yen ($11.6 billion or 0.3 percent of GDP). The domestic demand for medical equipment was 2,028.6 billion yen ($15.5 billion or 0.4 percent of aggregate domestic demand).  While aggregate national demand and GDP have declined 1996 to 1998, the country’s domestic demand for and production of medical equipment have grown steadily.    

IV. COMMERCIAL ANALYSIS

Japan’s medical equipment market is extremely attractive to foreign manufacturers because it is large and growing rapidly. In 1995, the cost of medical equipment accounted for 5.9 percent of total medical expenditures. If this ratio were to remain constant (and if MHW’s projections for total health care expenditures are accurate), total demand for medical equipment will reach 4,012 billion yen in 2000 and 8,319 trillion yen in 2025. In 1998, the domestic market for medical equipment had already exceeded 2,000 billion yen ($15 billion).

However, despite the fact that imports in 1998 were valued at 834.5 billion yen ($6.4 billion) or 41.1 percent of the total market and despite that imports relative to total market size have risen steadily in recent years, foreign governments have often expressed their concern that the Japanese medical industry is relatively closed. (See Appendix 5 for a comparison of import penetration in the medical equipment market compared to other high-tech markets.) In fact, burdensome government regulations combined with Japan’s cumbersome distribution system have hindered both foreign and domestic Japanese companies from entering the market.

Japan has reformed some of its medical equipment regulations as a result of negotiations with major trading partners during GATT and GATS reviews of Japanese trade policy. For instance, tariffs on medical equipment were dramatically reduced through multilateral negotiations, and now medical equipment is imported duty free.[32] Bilateral negotiations, notably with the United States, have also been successful in achieving reforms. The time it takes to gain approval for new medical equipment has been decreased, approval procedures have been simplified, and the number of items that do not need formal MHW approval have been increased. Nonetheless, unnecessary bureaucratic procedures in the product approval process and certain business practices continue to hinder the entrance of new medical equipment products into the market. Both also increase the cost of supplying medical equipment, which means that Japan’s total health care bill is larger than it needs to be.

1. Unnecessary Bureaucratic Procedures

In today’s world of fast paced technological innovation, some products are outdated almost as soon as they hit the market. The life-cycle of medical equipment is already down to about two to three years. [33]

In this environment, it is crucial to a company’s survival for it to get new products to market as quickly as possible and to continually introduce products. Lengthy product approval procedures can significantly diminish a product’s profitability, as well as delay the incorporation of new technologies into the research and design of future products.

Japan’s approval process is longer than that of any other major developed country; it usually takes a full year to obtain new product approvals in Japan. There are several reasons for this:

• MHW’s policies are too risk averse and therefore hurt both medical equipment manufacturers profits and the quality of patient care.
• MHW does not have enough personnel to keep up with new medical product applications.[34]  
• Obligatory third-party investigations unnecessarily slow the approval process for “me-too" products, which incorporate technology that is already widely available on the market.

   
This last problem concerning third-party investigations is actually a result of the U.S.-Japan MOSS talks. It was the United States that asked Japan to commit a certain part of its new product approval procedures to a third party.[35]  The goal was to improve transparency and to speed up the procedures by using external sources. However, the situation became worse after the reform. 

Before the reform, MHW’s Pharmaceutical and Medical Devices Evaluation Center (PMDEC) conducted similar approval investigations for both new and “me-too” equipment.[36] But because “me-too” equipment only incorporates previously approved technology, full-scale new equipment examinations are redundant. “Me-too” products only need equivalency examinations to ensure that they have the same effect as equipment that has already been approved.  The redundancy was compounded by the fact that PMDEC was chronically understaffed and lacked transparency.

In 1995, the Japanese government significantly revised the Pharmaceutical Affairs Law with the goal of providing appropriate regulations for each type of what is a growing diversification of medical devices.[37]  As part of the revision, Japan established a new institution, the Japan Association for the Advancement of Medical Equipment (JAAME), devoted to examining “me-too” products.[38]  JAAME was supposed to review “me-too” applications, make equivalency determinations, and report the results to PMDEC (see Appendix 6). However the new procedures did not shorten (and in some cases even lengthened) the approval period for “me-too” products because PMDEC still reviewed JAAME’s findings, and it sometimes rejected these findings and initiated its own equivalency investigation.

2. Business Practices

Most medical equipment is sold in Japan through a complex system of distribution channels. Although manufacturers directly provide expensive and high-tech equipment such as CT scans and MRIs, it is common for hospitals to purchase the rest of their products and equipment from just one or two distributors.[39] In both the United States and the European Union, the portion of sales that go through distributors is much smaller and the distribution systems are much simpler—which means that medical products are often much cheaper because dealer systems raise the price of medical equipment by 15-25 percent.[40]  A 25 percent drop in prices in Japan could mean a 5.5 percent ($849.1 million) increase in sales.[41]

Problems surrounding Japan’s hospital system are largely responsible for the complex configuration of the country’s medical equipment distribution system. These problems are further detailed in the policy analysis section and Appendix 7.
   

V.  POLICY ANALYSIS

In addition to the prolonged process for approving new medical equipment, a number of other factors impede access to Japan’s market for medical equipment, including MHW’s overly cautious policies, and both the medical equipment and hospital care reimbursement systems. MITI’s Millenium Project may help the medical equipment industry grow in the coming years, but the industry has until now maintained only weak relations with this ministry—which means that the industry has not benefited from MITI’s industrial policies.

1. MHW’s Policy

One of MHW’s main missions is to improve public health. Since medical equipment directly impacts human lives, MHW is particularly concerned with ensuring its safety.  The public holds not just manufacturers but also MHW responsible for any medical accidents that occur due to faulty equipment. It is not surprising then that, even if a manufacturer has a good track record for introducing safe products into the market, MHW scrutinizes all new product approval applications carefully. However MHW has been somewhat too prudent in accepting new technology, and as a result, medical manufacturers, both domestic and foreign, have lost opportunities to introduce new technologies. 

A study conducted by the private management consulting firm, Bain & Company Japan, shows that MHW’s policies delay the introduction of new technologies.  The study found that the industry has missed business opportunities for many years and that patients and the Japanese government have wasted health care dollars because of these delays. For example, the study found that Japan would save 5.3 million yen ($ 46,500) per patient by approving Implantable Cardioverter Defibrillators (ICDs) for the treatment of tachyarrhythmia (racing of the heart).[42] In April 1996, after the completion of the study, MHW finally approved the product. Other countries had already been using ICD therapy for up to ten years[43] (see Appendices 8 and 9).

2. Medical Equipment Reimbursement

Under the Health Insurance Law and the National Health Insurance Law, the Japanese government insures medical services (including equipment use fees) for all Japanese citizens.  The government collects medical insurance fees from the public and pools the money into a governmental payment fund, such as the Social Insurance Medical Fee Payment Fund.  Doctors and medical institutions are reimbursed for their services by the payment agency based on uniform reimbursement prices set by MHW. As previously noted, it is almost impossible to sell products without reimbursement approval because medical institutions do not want to use products for which they will not reimbursed.

Unfortunately, Japan’s reimbursement policy skews competition by creating a situation in which hospitals are price indifferent in their new equipment purchases. [44]  Hospitals often do not make cost comparisons when buying equipment because reimbursement prices usually reflect the sale price of a piece of equipment; each brand of products is assigned its own reimbursement price (even though a product has the same function as another product) and the government guarantees to pay back the purchase cost of equipment.[45] Under the current reimbursement system, new, more cost-effective equipment is no more appealing than less cost-effective because the government reimburses more expensive equipment at a higher rate than more cost-effective cheaper equipment.

This system is clearly disadvantageous to newcomers, especially to domestic newcomers because Japanese manufacturing industries have typically grown by producing cheaper versions of foreign products. Japan has the skill and technology to produce cost-effective manufacturing products.  However, the current reimbursement system makes it extremely difficult for Japanese companies to get new products into the market.

3. Hospital Care Reimbursement

Japan is famous for its long hospitalizations. In 1996, the average hospital stay in Japan was 33.5 days, whereas in the United States, United Kingdom and Sweden average stays were just 7.5 days, 9.8 days, and 7.5 days respectively.[46]  While this phenomenon is largely due to the fact that the reimbursement system rewards hospitals for keeping patients in the hospital as long as possible,[47] increased use of innovative medical equipment would likely shorten costly hospital stays. Shortened stays would result in significant cost savings because the cost of hospitalization accounts for over 50 percent of the remuneration hospitals receive.

                                                   (Source: “Health Care Reform”, Kawabuchi, 1998)        

           Length of Hospital Stays in Japan and the United States

                                                             (Source: Heath Industry Manufacturers Association)

4. The Medical Equipment Industry’s Weak Relationship with MITI

MHW largely controls the medical equipment industry because medical equipment plays a crucial role in maintaining public health.  In order to facilitate product approvals, the industry has concentrated its energies on developing good relations with this agency. However, MHW’s interest lies in studying advanced medical technology and protecting public health, not in protecting the industry’s commercial interests.

In order to gain more support for the development of a strong industry, the medical equipment sector needs to develop stronger relationships with MITI, the only ministry that promotes commercial interests and industrial competition.  MITI has succeeded in enhancing the competitiveness of strategic industries such as the electronics, automobile, and steel industries.

5. MITI’s Millennium Project[48]

In 1999, MITI proposed a comprehensive project, the “Millennium Project,” to help build Japan’s competitiveness in the 21^st century. The project covers 15 technology areas and is geared toward creating “frontier markets” that will create new market and job opportunities.

One of the primary goals of the project is to build greater collaboration between business, universities and the government. Toward this end, the government will provide generous financial support for research and development and the development of smoother technology transfers from the research phase to the product-engineering phase. The project also includes the elimination of regulatory impediments that prevent business form achieving its full potential.

The senior services market was selected as one of the 15 target areas. MITI proposes to promote the development of technologies that help senior citizens lead rich and fulfilling lives. The project will support research and development within the medical industry and help the industry introduce new cost-effective and innovative products into the market.   
   

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