1 Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No2, July The roles of public and private insurance for the health-care reform of Japan Eiji Tajika Hitotsubashi University, Tokyo Jun Kikuchi National Institute of Population and Social Security Research, Tokyo Abstract The purpose of this paper is to identify the main features of Japanese health-care system and to present a direction for reform. It offers the following three as the distinct features of Japanese health-care system: the first is that pubic insurance dominates the health- care market; the second is that insurers fail to play the role as an agent of patients; and the third is that health-care costs has been contained by the price control in a centralized fashion. Based on the conceptualization and the practice of the roles of public and private health-care insurances, it looks into the construction of Japanese health-care system. One of its major findings is that many apparently different problems in Japan have stemmed from the government s significant subsidies to insurers. As for the direction of reform, restoring the cost-reflecting premium is an important step toward a virtuous circle that would ultimately lead to a more sustainable health-care system in Japan. I. Introduction The purpose of this paper is to identify the issues of health-care reform of Japan and to present the ways to cope with them. The way we approach the issues is to shed light from the viewpoints of roles and functions that public and private insurances play in health care. To start with, it is relevant to state some of the salient features of Japanese health-care system. As such we would like to refer to the following three: the first is that pubic insurance dominates the Thanks are due to the valuable comments from Professors Hideki Hashimoto (University of Tokyo), Masako Ii (Hitotsubashi University), Hiroyuki Kawaguchi (Seijo University), Peter Smith(Imperial College London) and Richard C. van Kleef (Erasmus University). The views expressed here are the authors and they are responsible for any remaining errors. The correspondence of the paper should be addressed to
2 124 E Tajika, J Kikuchi / Public Policy Review health care market and the private insurance has offered a very limited category of services; the second is the capacity of insurers has not well been developed and they fail to play the role as an agent of patients (individuals) against health-care providers like hospitals and doctors; and the third is that health-care costs has been contained by controlling the prices of treatments and drugs by the ministry in charge of health care in a centralized fashion. In fact these three aspects of Japanese health-care system are closely interrelated. A common or connecting element of them is a sizable financial input contributed by the government, and that the government has become a big financier of health-care system. Japanese health-care system is considered to be managed by the social insurance: that is, health-care insurers collect premiums from the insured and they manage with their own sources of revenue. This, however, is not entirely true. There are many insurers in Japan, but except for those set up by large-scale companies others are in one way or another financially supported by the central and local governments. The health-care insurer for the self-employed is the most typical receiver of the subsidy from the governments, and a half of its costs after deducting co-payments by the insured is paid by the government. The insurances for the people aged seventy five years and older, and for the employees of private (mostly small and medium sized) companies are no exception, and they receive respectively 50% and 16.4% of their total costs net of their co-payment parts from the governments. Adding these up, the health-care financing in Japan at large in the year of 2008 is such that about a half of total costs is procured by the premiums, 37% by the subsidy of governments and 14% by the out-of pockets fees of those who received medical treatment (Ministry of Health, Labour and Welfare, 2008). With the presence of the massive input from the governments, the costs transmitted to the public has been suppressed. This means not only that the premiums have been set lower than otherwise would have been the case, but the government sets a ceiling of the out-of-pocket fees of individuals so that they do not have to incur the costs beyond the cap. Furthermore, the list of treatments and medications covered by the public insurance is very exhaustive: dental care and part of physical therapy, which are often candidates to be delisted from the coverage of the public insurance, are retaining insurance status in Japan; even when some treatments are not in the list, they are given a chance of clinical test to be added to the list. One of the consequences of these generosities of the government is that the pubic insurance has been a dominant player in the market and the private ones have been dwarfed by it. Simply put, private insurance has a difficulty in being a complementing partner, much less a competitor, to the public insurance due to the heavy subsidization to the public insurers. Another effect by the public intervention to health care is that insurers look to the government for help: when health-care costs rises, it is a more efficient way for them to balance their budgets by asking the government to increase the support than tightening their budgets by paying more efforts to improve disease and hospital management. These, we think, are the
3 Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No2, July background of the aforementioned Japanese health-care characteristics. Another side of the coin is that the government has so far been able to control the health-care costs, for they are the ultimate owner of the pubic insurances, which pays to the hospitals, doctors and pharmaceutical companies. Now the question is: can this system be sustained? In this regard there is already a signal of alarm from the OECD: Japan s strategy of repeatedly cutting the fees for physicians and hospitals and the price of drugs and equipment cannot continue forever. Prices can fall only so far before products become unavailable and the quality of care suffers; some would argue that this point has already reached (OECD, 2009a, p.112). The progress of aging in Japan and increasing costs of health care with the advent of sophisticated treatment will make our answer to the question more in the negative than the caution made by the international organization. This paper intends to find ways to sustain the financing of Japanese healthcare by carefully studying the roles of public and private health insurances in concept and practices, and by identifying the problems to fix. The rest of it consists in the following way: the second section classifies public and private insurances and discusses the role of private insurance with the cases mostly drawn from EU countries; the third section goes deeper into the Japanese health-care system to locate the problems to tackle, and discusses the roles that public and private insurances have so far played with as much as evidence as possible; the last section concludes our diagnosis of the difficulty of Japanese health-care system with an idea of the direction for reform. II. Clarifying the role of private insurance in comparison with the public II.1. Defining public and private insurances This section defines public and private insurances in health care, and mostly discusses the role played by the private one. Comparative study of the two insurances has been done by OECD(2004) and Paris et.al (2010), and we would like to proceed on the facts accumulated by them. We start with the classification of the two insurances. Here, OECD(2004) defines the insurance according to its source of funds: when either tax revenues or income-related premium is the source of funds, the insurance is called public; and when otherwise, it is called private. An awkward aspect of this definition of public and private insurances is that the collection of community-rated premium is not synonymous with the income-related premium, which is usually proportional up to a certain level of it. A case in point is the situation where the insurance is applicable to all people and a fixed-rate premium is charged with credits granted to the insured with income smaller than certain threshold. The OECD definition pushes this type of insurance away from public, and puts it into private insurance. Switzerland is the country of universal coverage with this type of insurance, and the OECD treats the country s insurance as
4 126 E Tajika, J Kikuchi / Public Policy Review private. Since Switzerland s insurance may be better (and in fact has been) regarded as pubic rather than private, the OECD classification needs a reconsideration. The way we instead employ for the classification of insurances is to first discriminate the health-care system according to whether it is universal or not. We then delve further into the universal insurance, and classify it according to whether the membership is mandatory (in some case, automatic as well) or not. Based on this configuration of types of insurances, we define insurance as a public one when it is universal and compulsory. Private insurance can either exist in a universal or non-universal system; but when it is in the universal, it is the one the membership of which is not mandatory. The insurance of Switzerland is now classified as the public, for it is universal and requires compulsory participation. An interesting fact is that it has indeed been classified as such in other OECD publications (e.g., System of Health Accounts, SHA). Figure 1 Classification of Health-Care System Universality Enrollment Sources of funds Universal Compuslory (Automatic) General tax NHS system UK, Canada, Australia Income-related tax or premium SHI system France, Netherlands, Germany, Japan Fixed premium (including community rating) Public Health System SHI system Switzerland Risk-rated premium Primary-PHI Germany (high-income earners) Roles of PHI Non-compulsory (Non-automatic) Duplicate Supplementary Complementary Non-universal Private Health Inurance (PHI) Note: NHI and SHI refer respectively to National Health Service and Social Health Insurance. Figure 1 shows our classification. Based on it, we continue to classify public insurance: this time according to the sources of funds. As is depicted in the figure, public insurance can be financed by general revenue from tax, income-related tax or premium, and fixed premium. Of the three sources of funds, we consider the U.K., Canada and Australia belong to the first; France, Netherlands, Germany and Japan to the second; and Switzerland to the third.
5 Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No2, July Since the U.S., Mexico, Turkey and Chile are only countries among OECD members which do not have universal health insurance, we would concentrate on the countries with universal coverage and move on to private insurances. Here, we think that the private insurance can be classified into four types as in the OECD (2004): the first is so called primary insurance, and it takes care of those people who are willing to or mandated by the government to opt out of the public insurance (say due to a high-income status) ; the second is called a duplicate and it offers insurance on top of health services offered by the public health system; the third is supplementary and it offers additional health-care services that are not covered by the public insurance; and the fourth is complementary and it insures the costs not reimbursed by the public insurance, typically the co-payment part of the costs. These are the classifications of health insurance into public and private ones we will be using in this paper, and we would like to discuss further the characteristics of private insurances. II.2. Functions and effects of private insurances It is fair to say that the primary insurance is special, or different from other three types of private insurance since it deals with only those who are not taken care of by the public insurance. As such it can be either designed to be independent of or aligned with other public insurance schemes; however, the point is it is not applied to the general public. We will therefore do not discuss further the primary insurance, and stay on other three types: duplicate, supplementary and complementary insurances. Hereinafter, we proceed by enumerating important aspects in the functions and the effects of each of the three insurances. Discussion here is mostly conceptual, and the experiences and historical developments of various countries are relegated to Tapay and Colombo (2004) and other studies of OECD. Duplicate private health insurance (PHI) Functions: As we have seen in Figure 1, duplicate PHI exists in OECD countries where public health system is financed by general revenue from tax (Australia and U.K.). In these countries, there is a separation between publicly-funded and privately-funded providers and public health system covers basically treatments received in public providers. Duplicate PHI covers treatments in private providers and offers increased choices over providers and timely care.
6 128 E Tajika, J Kikuchi / Public Policy Review Effects: 1) Cost savings Duplicate PHI is often seen as an instrument in reducing cost pressures on public systems by shifting demand and cost from public to private providers. But cost-saving effect may not be as big as initially envisaged due to the following reasons: a) Private providers tend to pay more attention to elective cares; b) Privately insured people continue to use publicly financed health services; c) Cost-saving effect is also offset when there are public subsidies to the purchase of PHI services (e.g., Australian case). 2) Equity aspect Duplicate PHI increases inequity in access to care and is suspected to divert physicians and other human resources from the public sector in those countries where the dual practice is permitted (OECD, 2004). Some countries prohibit the duplicate PHI in order to avoid the creation of a two-tiered system (e.g., Canadian case). Supplementary private health insurance Functions: Almost all OECD countries where PHI markets exist have some types of supplementary insurance. Supplementary PHI covers services not offered by public health system and the typical services covered by it are optical, dental, physical therapy, cosmetic surgery, luxury services and improved hotel and accommodation amenities in hospitals (OECD, 2004). Effects: 1) Cost-saving effect Delisting services from public insurance helps to restrict health-care costs of the public sector. But those services that can be delisted from the public insurance, such as optical and dental care, do not generally account for a large share of total health-care costs. Moreover, it is often politically difficult to delist services from the coverage of the public insurance. 2) Risk selection Under the managed competition framework, supplementary PHI could be used as an instrument to attract lower-risk people, thus it may enhance the possibility of risk selection.
7 Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No2, July Complementary private health insurance Functions: Most OECD countries charge the insured the co-payments or require them to share costs for services provided by the public health-care system. The complementary private insurance mitigates the portion of costs passed to the insured. It helps to limit the exposure to high medical costs coming from serious/catastrophic illness. The complementary private insurance is most prevalent in France among the OECD countries where 90% of the population is said to have this kind of insurance. This is partly due to the widely developed mutual insurances before the universal insurance. Effects: 1) Increased accessibility A high share of co-payment reduces the access to health care by poor people and results in an inequitable use of the health care services. Spreading the complementary PHI and enabling the poor to buy it will reduce inequity. 2) Enhanced use of health-care services However, the complementary PHI works against the purpose of health-care cost sharing: sharing treatment and drug costs should make individuals (patients) more conscious about the costs than without. But if insurance is applied to this portion of the costs, they would perceive that the marginal costs of health care is reduced, and hence consume more. These moral-hazard effects will end up with increased health care costs. In fact, many studies show that complementary PHI increases the utilization of health-care services (OECD, 2004). This is one of the reasons why governments prohibit the extensive use of the complementary PHI for some cases. II.3. How public and private insurances stand side-by-side: country cases Given the classification of public and private insurances in health-care systems and the nature of the private insurance in health care, we would like to consider next how the two insurances co-exist and work together. We do this by studying the health-care institutions of some of OECD countries: the U.K., Canada, Australia, France, Netherlands and Germany. Here, we will refer to three aspects of health-care insurances (systems) for each of the six countries above: the first is how the public insurance (system) extends to the people; the second how and in which form the private insurance has been made available; and the third resulting policy issues the countries have been facing. Discussion here is not complete, either, like the one above on the nature of private insurances. But it aims at detecting noteworthy features of each
8 130 E Tajika, J Kikuchi / Public Policy Review of the three aspects of each country s insurances for better characterizing the Japanese health-care system. The U.K. public health-care system, the National Health Service (NHS), is financed by taxes and offers a wide variety of services including in-hospital and outpatient cares, primary doctors fees, drugs and dental care. However, as for the care at hospitals and from specialists, the reimbursement from the NHS is allowed to be made to those institutions that have contracts with the NHS. Health-care providers are permitted dual practice, that is, to practice both publicly and privately reimbursed cares, but they have to manage the two practices on separate accounts. Tables 1 and 2 show respectively the proportions of people and expenditure of public and private insurances. As of the year 2006, 11.1% of the population of the U.K. bought private insurance in one way or another, and 1.1% of total health-care expenditure is covered by it. The private insurance is of a duplicate type, and it provides the insured primarily with a better and rapid access to elective cares. Thus, the public and private insurances offer the same services in the U.K., but individuals are not permitted to receive both services at a time. Table 1. The proportion of the population covered by the PHI Share of population purchasing PHI Total Primary Duplicate Complementary Supplementary United Kingdom Canada Australia France Netherlands Germany Sources: 1. OECD Health at a Glance OECD Health at a Glance 2009 Table 2. Financing health-care expenditure by public and private agents Public Private Total Private Co-payment insurance and others United Kingdom Canada Australia France Japan Netherlands 1, Germany Source: OECD Health Data (Data extracted on 09 Feb :18 UTC (GMT) from OECD ilibrary) Notes: 1. In the Netherlands, it is not possible to clearly distinguish the public and private share related to investments. 2. Estimate
9 Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No2, July Canada has also tax-financed public health systems, and each one is governed by the provinces. Tax-source revenues are both from provinces and the central government: Canada Health Act stipulates the conditions for eligible health-care system and the grants from the central government are made on the premise that provinces satisfy the conditions (Flood and Haugan, 2010). Public health system covers hospital, primary doctors and specialists cares, and the drugs prescribed at hospitals, but it does not pay the drugs for the outpatients. Dental care is also off the list of public coverage. The private insurance in Canada is of a supplemental type: it has developed to offer the cares that are not covered by the public health-care system. The proportion of the population buying the private insurance is 68% and about 13% of the total heath expenditure is paid by it. Unlike the U.K., Canada does not permit the dual (public and private) practice of medical providers, implying the publicly provided cares cannot be mixed with those paid by private insurances (Flood and Archibald, 2001). The reason for this regulation seems to have stemmed from keeping the public health-care system from becoming two-tiered: one for the affordable with two kinds of services and another for the less well-to-do with only public services. Therefore, the private insurance of duplicate nature is not in place in Canada. Australia is another country with a health-care system financed basically by taxes. The Medicare is the name of it, and as compared with its counterparts of the U.K., and Canada, it looks like the Medicare is much closer to private insurances. Firstly, the Medicare reimburses the treatments offered at private medical institutions; and secondly the expenditure of patients covered by private insurance is partly reimbursed by the Medicare. Moreover, the government gives the people incentives to buy private insurances by providing subsidies and by even penalizing the high-income people for not buying it. The reason of this public support for the private insurance is the awareness of the government that the erosion of the private insurance with the development of the Medicare would shift the costs to it (Colombo and Tapay, 2003). Probably as a consequence of these polices, about a half of the population have bought private insurance and the share of total health expenditure paid by it amounts to about 8%. However, the expansion of private insurance has not contributed to containing health-care costs; it would rather be the case that the health-care costs have increased due to the public subsidies. We move on to the case of France, where health care is not managed by a single national agent, but mostly by occupational insurers. However, an interesting aspect about the country s financing the health-care costs is that taxes constitute important revenue sources: the share of the total health expenditure born by income-proportional premium is about 50%, whereas taxes finances about 40%, the most notable among them is General Social Tax (Chevreul et.al., 2010). General Social Tax is an income-based tax earmarked for social benefits. Hence, from the viewpoint of health-care cost financing, the French system is a hybrid one mixing taxes and premiums. The coverage of cares by the public insurance is wide-ranging including dental and optical
10 132 E Tajika, J Kikuchi / Public Policy Review cares on top of others usually on the list. However, the cost coverage of the public insurance is rather small: 80% of the hospital care, 70% of the ambulatory and dental cares and 60% of medical checks. This has resulted in another interesting aspect of the French health-care insurance: that is, the cost-sharing (co-payment) part of individuals has turned out to be very widely insured. We have called this type of private insurance complementary, and it attracts more than 90% of the population and pays 13.3% of the total health-care expenditure. The effect of this complementary insurance is said to have increased the overall health care costs by making its marginal cost lower for the purchasers of the insurance (Buchmueller and Couffinhal, 2004). The netherlands has long-term and basic health insurances. They are separate insurances and what we have been discussing as health-care system in this paper refers to the basic one in Netherlands. Managed competition is a rule of the game in this insurance: the insurers (sickness funds) have been made private organizations, and people can choose the one they like. In order to avoid risk selection on the part of insurers, risk-adjustment mechanism and open enrollment have been put in place. Premiums consist of two parts: the first one is income-proportional and paid into national Health Insurance Fund, and the rate is the same for all insurers; the second is called nominal premium and charged at a fixed amount per insured by the insurer, and it fills the gap between the actual costs and the risk-adjusted payment from the Health Insurance Fund. Of the two kinds of premiums, the income-proportional one charged at the same rate across insurers purports to finance mainly the systematic risk of insurers arising from differences in the structure of age, sex and other elements. On the other hand, the fixed premiums make up the costs which are not fully adjusted by the risk factors and therefore they are paid by each insurer (Schäfer, et al., 2010). The coverage of public insurance is wide, but excludes dental care for the people who are older than twenty two years. There is a deductible amounting to 155 Euro per year, but basically no co-payment. The private insurance offers supplementary services which are not provided by the public insurance, and it covers 90% of the population, and pays about 5% of the total health-care expenditure. Germany has also long-term care and health-care insurances, and they are different insurances as that of Netherlands. The health-care insurance in the country is also based on managed competition with risk adjustment and free choice of insurers. A characteristic of the German system is that opting out of the public insurance is permitted for certain group of people, mostly high-income people and the civil servants (Blandt, 2008). The private insurance for those out of the public is therefore primary one, which is a different type of insurance observed in the countries we examined so far. Other than this German health-care insurances have more or less the same features of others: the coverage of cares of the public insurance is far reaching and includes dental care. There is small co-payment, but capped at the two percent of the total income of a household (Busse, 2004). As the result, about 30% of the population
11 Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No2, July purchases the private insurance, of which one third the primary, and the rest are either complementary or supplementary. The share of the expenditure paid by the private insurance is about 9%, which is rather high among the countries we overviewed reflecting the portion of the people who have opted out of the public insurance. III. Health-care system of Japan III.1. Some distinct aspects of public insurance of Japan At the outset of the paper, we introduced major issues of Japanese health-care system, and remarked that the costs could not forever be contained by the price control by the government and that its sustainability would become a serious problem. Population aging and the advancements of technology in health care among others will increase the costs, and this will make the continuation of the government s price control difficult without sacrificing the quality of care: rationing certain types of care or eliminating them from insurance coverage can be an outcome of this policy. This section explores further Japanese health-care system by using the framework of the preceding section: we study public and private insurance aspects of Japanese health-care system and seek to present the ways of reform toward a more sustainable system. We start with the pubic insurance with focus on its critical elements that have very much to do with the future of the insurance. Discussion does not intend to be extensive, or a very articulate recapitulation of health-care institutions of Japan: instead we would deal specifically with the construction of insurers (namely who are in the insurance business), how the health-care costs is financed and how the government has guided the insurers to pay (reimburse) the costs of health-care providers. Broadly speaking, there are two types public of insurers in Japan: the first is employment-based one for the people working at companies (private and public alike), educational facilities and various levels of governments; the other is called National Health Insurance (NHI) and consists of people left out from the first type of insurers. Historical background of the two insurances is different: the employment-based insurance came into being earlier than the NHI, and was promulgated in the 1920s as a law to improve the living conditions of the workers in organized economic sectors and to enhance their productivity; and civil servants were not integrated into this insurance, but their own insurance was set up in Thus, there are two institutions of the employment- based insurance in Japan, and this situation has been unaltered till now. With some amendments after its establishment, the employment-based insurance was extened to the entities employing five or more people. In comparison with the employer-based insurance, the NHI went through a much more complicated and winding path to be established as the insurance for the rest of population: it was put into law in 1938 as the insurance for the people in informal sectors, that is, either peasants or the self-employed people at that time.