Medical Device Reimbursement in Japan

Introduction

The Japanese economy has rebounded over the last few years, after almost 15 years of stagnation. The unemployment rate hit an eight-year low of 4.0 percent in May 2006 and private consumption has risen at an annual rate of 1.2 percent since 2002 . Domestic sales growth has also grown by about 2 to 3 percent. Japan’s medical device market is no exception, being worth over $25 billion -- a considerable portion of the total Asian medical device market of approximately $36 billion. With its rising elderly population, demands for medical devices and healthcare continue to increase in the country.

Japan GDP Real Growth Rate*

*courtesy CIA The World Factbook

The Ministry of Health, Labor, and Welfare

The MHLW is responsible for ensuring good living standards among Japanese people and promoting the development of new health programs or innovations to improve their lives. Social security, public health, working conditions, and social welfare are all regulated by the MHLW. Additionally, the MHLW oversees all health programs in Japan, including health insurance, food, drugs, and medical devices. The Pharmaceutical and Food Safety Bureau within the MHLW is responsible for medical device and pharmaceutical regulatory policy making.

The MHLW has addressed healthcare in Japan by creating new branches such as the Pharmaceutical and Medical Device Agency (PMDA) and enacting a new Pharmaceutical Affairs Law (PAL) to help streamline medical device registration.

Overview of Medical Device Registration

Under the new Pharmaceutical Affairs Law (PAL) issued in April 2005, foreign companies must use a Marketing Authorization Holder (MAH) when applying for medical device registration. As employing a MAH often requires disclosing a manufacturer’s confidential information, some manufacturers are now choosing to register a master file (MF) directly to the PMDA. PMDA officials are more rigorous with their audits in Japan and may audit the foreign manufacturing site to ensure GMP (Good Manufacturing Practice) standards are followed. The new PAL also covers new labeling and licensing requirements for medical device companies, including updates on clinical trials, GCP (Good Clinical Practice), AE (Adverse Event) reporting, GVP (Good Vigilance Practice), GPSP (Good Post-marketing Study Practice), GQP (Good Quality Practice) and GLP (Good Laboratory Practice).

Medical devices must first have regulatory approval before negotiations on reimbursement prices can start. There are four reimbursement classes -- A, B, C, F -- and each class, except for F, has its own application form. The Central Social Insurance Medical Council (Chuikyo) assists and advises the MHLW in deciding reimbursement classification and pricing.

Overview of Medical Facility Reimbursement

Medical facilities are reimbursed after sending out an invoice to a patient and a receipt to an assessment party. The patient pays a portion of the fees (co-payment) based on age where those over 70 years pay 10-20% depending on region and income, 3-69 years pay 30% and those under 3 years pay 20%. The remaining cost is sent as a receipt to an assessment party with a description of the medical care provided and devices or drugs administered. The assessment party consists of the Foundation of Social Insurance for Medical Service Expenditure and the National Insurance Association, both of which are regionally located and not directly affiliated with the MHLW. These two associations also usually work with a Medical Systems Payment Investigations Committee to confirm fees on medical services.

Hospitals have two different payment structures: Fee-for-Service and Diagnostic Procedure Combination (DPC). The Fee-for-Service system bases their costs on individual medical services, where each cost and fee are given Hospital Insurance Points (1 point=10 yen). The MHLW controls these HIP, and costs include items such as technical fees, surgery fees, and examination fees. In contrast, the DPC system bases its fees on the severity and nature of an illness, where each diagnosis has specific fees attached to it. Currently, 82 university medical institutions are under this DPC structure.

The Central Social Insurance Medical Council

Otherwise known as Chuikyo, the Central Social Insurance Medical Council was established in 1950. Under the MHLW, the Chuikyo is responsible for medical service fee issues, including setting the reimbursement points and prices for medical devices and drugs. These prices are prepared by the Health Insurance Bureau (HIB) and the Drug Price Organization (DPO). The Chuikyo also opens discussions to the public to evaluate revised points/prices for medical service fees, including medical devices and drugs.

Chuikyo is comprised of 22 General Meeting Members and four main subcommittees. The General Meeting Members include the following representatives:

8 pay ers (government and associations)
8 healthcare professionals (5 medical doctors, 2 dentists, 1 pharmacist)
4 general public representatives (academics, societies, etc)
2 experts (such as experts on medical service fees for the elderly)
Chuikyo subcommittees :
Medical Service Fees Basic Issue Subcommittee
Survey Subcommittee
Drug Price Expert Subcommittee
Insure d Medical Device Expert Subcommittee
Additional subcommittees

The Chuikyo revises medical fees every two years. These price revisions start with two surveys -- a national survey of all distributors in Japan for four months (May-September) and a comparison study of major foreign countries such as USA, UK, Germany, and France. The weighted average of purchasing prices in Japan from the national survey cannot be more than 1.5 times the arithmetic average of prices in the foreign countries.

Reasons for revision are as follows:

To control medical expenditures
To improve quality of life of patients
To improve efficiency and quality of medical treatment and/or cure
To develop an assessment system of medical treatment and care

Though the MHLW ultimately makes the final decision on medical device reimbursement classification and pricings, the Minister should consult the Chuikyo for advice before setting reimbursement points.

Reimbursement Classes

Type A

A1 class products are medical devices which are widely used and are not a specified technology. Examples include gauze, gloves, and needles. The cost of the device itself is not reimbursed, as reimbursement is based solely on technical fees. Upon receiving the one-page A1 reimbursement application, the MHLW will approve most medical devices for reimbursement 20 days later. Many Class I devices (Ippan Iryou Kiki or General Medical Devices) fall into this category.

A2 class products are devices with a specified medical technology, such as vector cardiographs for cardiograms. Often, A2 devices require “ facility criteria ” which is a specific condition that a medical facility must comply with when using these devices. Noncompliance results in a 30% reduction in reimbursement points for technical fees, while compliance results in a 5% increase. Some examples of medical devices requiring facility criteria are implantable pacemakers, artificial ears, and brain stimulators. For A2, the device will be reimbursed on the first of the following month provided the paperwork was submitted before the 10 th of the month.

For both subclasses of A, reimbursement is based solely on technical fees and not on the device itself. Payer assessment parties and patients cannot reimburse the retail price of medical devices and materials categorized as “Category A.” These retail prices are determined freely between distributors and hospitals. Importers and manufacturers cannot deal directly with medical facilities to determine the retail price and must negotiate indirectly through the distributor.

The “Request for Reimbursement Listing” form must match the information in the Regulatory Application document. A2 classification requires specific Japanese Medical Device Nomenclature (JMDN) for each function of the medical device, which the applicant must demonstrate for their submitted device. Applicants should also describe the expected price and include any brochures for their products. Upon receiving the paperwork, the MHLW will confirm the equivalence of the new device with existing (already approved) devices based on all descriptions included in the application such as structure, shape, performance, intended use, targeted patients, anticipated effects, etc. The MHLW also confirms whether these descriptions match the definitions of “Functional Category” for reimbursement.

Type B

B class devices are similar to A2 class devices in that they have a specified medical technology. However, this reimbursement class allows for full reimbursement of the cost of the device along with the technical fees. Prices are based on clinical benefit, or “ functional category,” where a higher clinical benefit leads to an increase in price. For example, the medical treatment fee of PTCA catheters is set at 22,800 points (228,000 yen or US$1,955) while each different type of catheter is given an individual price (such as the Infusion type costing 212,000 yen while the General type costs 192,000 yen).

Once the functional category is confirmed, the medical device is reimbursed on the first of the following month if the paperwork was submitted before the 10 th of the month. For both A2 and B classes, the price will be the same as for existing devices in the same functional category. Requests for reimbursement will be reviewed in three different MHLW divisions: (1) Insurance, (2) Economics, and (3) Review Control to confirm that the device requested corresponds to the definition of the functional category.

If the government cannot confirm the equivalence of the requested device to an existing functional categorized device, the reimbursement category will be changed to “category C.” Even if the shape or appearance of the new medical device is the same as that of an existing Category B device, the new medical device will be categorized as C1 if it has new indications.

For both A and B devices, a medical device must have a regulatory approval number before applying for reimbursement. The documents confirming approval must be attached with the reimbursement application forms. B application forms are relatively similar to A2, with product description and explanations of how the device fits B type functional category. After the MHLW reviews the documents, the device will be classified under a certain reimbursement category such as A, B or nonA, nonB which stands for “not approved for A,” “not approved for B classification.”

Applicants who disagree on the reimbursement category have the option of presenting their application and going through a hearing with experts (doctors) whom the MHLW has chosen beforehand. These experts (not the Chuikyo) work with the MHLW to review the paperwork and make a final decision on the device. Once this final decision is made, negotiations on classification may not take place.

Most Class II devices ( Kanri Iryo Kiki or Controlled Medical Devices) requiring certification fall into the A2 or B reimbursement category, though some may fall into other reimbursement categories depending on their function.

Type C

C1 classification means that a device is in the same product category as a B class device but has a new function. Technical fees are already settled, but a new functional category must be developed to determine reimbursement. Unlike the B “Request for Reimbursement Listing” form, the application for category C is much longer and requires the following information:

Request Form
Description of device
Attachments:

Grounds for selection of reimbursement category
Grounds for selection of Functional Category
Reason for no similar Functional Category
Reason for Added Values
Reason for Marketability Plus
Information Cost Account
Price adjustment
Information on Medical Economics
Information on Maintenance

A device applying for C1 classification must also present the device to government officials, especially the Economics Division. After 4 months, starting on the 1st day of the next month after submission, the category will be confirmed. An applicant then agrees and accepts a provisional price, which is a price identical to that of a device having the most similar function. This price is temporary as in January, April, July, and October of every year, newly requested devices will be reimbursed with newly settled functional categories and prices.

The basis for pricing on a new functional category depends on the situation. If a similar functional category is present, then prices of those similar devices are calculated together with added clinical benefit, safety, and marketability of the new device.

1. Clinical and Safety benefits:

a) New mechanism provides clinical benefit

b) Safer than existing devices belonging to the same or similar Functional Category

c) Improved medical cure, treatment compared with current technology

d) Higher objective usefulness and safety than existing similar devices

e) Safe to medical professionals through the ingenuity of the device such as a different structure from existing similar devices

f) Improved medical treatment of the targeted injury or cure of the target diseases

g) Smaller environmental impact from waste after usage of the device than existing similar devices.

2. Marketability

a) Designated orphan devices (10%)

b) Population of new device is expected to be smaller than of similar

devices (3%)

Prices are then compared with prices of the same devices in foreign countries (Foreign Reference Price or FRP). The calculated price for new device should be less than 2 times the average of FRP.

If no similar functional category is present, then the applicant adds up values (such as safety and marketability) from the initial cost and submits a target price. This process takes much longer than the first scenario, so many companies choose do not choose it. Prices are then calculated using a cost accounting method and compared with FRP. Therefore, firms have the option of electing an existing reimbursement and accepting a provisional price in exchange for faster market arrival, or choosing a higher new reimbursement which takes more time for approval.

C2 classification refers to devices which have both new technology and new performance. Like C1 classification, applicants for C2 must present their device to government officials (Insurance and Economics Divisions) and apply using the same form as for C1. After the MHLW reviews the paperwork, an applicant presents their device at a hearing with experts (not Chuikyo). An expert decision on category and provisional price is made after 5 months, which starts from the 1st day of the next month after submission. If there is disagreement on classification (C1 versus C2) or price, an applicant may submit a petition, present their device and have a hearing with an expert panel (not Chuikyo). The experts and MHLW then make a final decision on a provisional price and inform the Chuikyo, which makes its final decision.

The Chuikyo may agree to the “provisional price,” may negotiate the price, or put the device on a waiting list to decide later if the reimbursement is appropriate. Once devices are categorized as C1 or C2, the MHLW and the Chuikyo must settle on a technical fee for the new device, which will be effective from the next revision of the reimbursement system. Again, similar to C1, in January, April, July and October in every year newly requested devices will be reimbursed with their newly settled functional category and technical fee.

Type F

F reimbursement classification signifies that the requested medical device does not match the reimbursement system in Japan. These devices are extremely innovative and their use requires very advanced technology. Often, the risks can seem rather high compared to clinical benefit as technology for the use of such a device is immature in Japan. One example of a device receiving such classification was an artificial heart.

Class II, III and former IV devices requiring regulatory approval from the MHLW often fall into class C or F reimbursement categories. The new class III device classification encompasses the old Class III and IV classification and is also referred to as Kodo-kanri Iryo Kiki or Highly Controlled Medical Devices.

Further Points

Though some MHLW officials deny the influence of politics in decision making, lobbying efforts may still direct Chuikyo members prior to the actual meetings. Also, medical doctors elected by the Japan Medical Association and payers may still have more influence in the Chuikyo meetings than the general public representatives.

To assuage these concerns, Chuikyo plans on becoming a more data-oriented system rather than a politically-oriented system. Features of this new system include a fair system that avoids favoritism to certain medical policies, groups, and products, and conducts appropriate review of relevant data on efficacy, safety, popularity, efficiency, technical improvements, and societal needs. Chuikyo also plans on increasing the number of public members in the council to bring in more neutral, unbiased opinions.

As mentioned under the type A classification section, reimbursement classification and pricings do not dictate the price between a medical facility and a distributor, or a distributor and an importer, respectively. The retail price of the medical device is determined by negotiations between distributors and medical facilities.

Pre-consultation is available for firms who wish to receive a preliminary read on their product reimbursement. Firms can ask MHLW officers for their input via consultative sessions about how their reimbursement application is likely to be received.

Conclusion

Medical device reimbursement mainly depends on which reimbursement class is picked. Some companies may apply for an existing reimbursement category for the opportunity to get them released on the market sooner. On the other hand, others may opt for a higher, new reimbursement that may take more time to get approval and onto the market. In either case, regulatory approval of the device is essential before starting the reimbursement application process. The key is making sure the medical device fits all the criteria for a reimbursement class when applying.

Japan ’s medical device registration and reimbursement process has often been criticized as overly lengthy and expensive for foreign importers. This past spring , members of the Ways and Means Committee of the U.S. House of Representatives asked the International Trade Commission (ITC) to investigate why Japanese regulations are so burdensome for U.S. device manufacturers. To address these issues, President Bush and Japanese Prime Minister Koizumi have also recently issued a joint report on deregulation to allow for easier access to the Japanese medical device market and increased dissemination of medical technologies in Japan. Despite these changes, though, it will take some time to see a fully improved, streamlined and efficient network of MHLW, PMDA, and Chuikyo.

Ames Gross - President and founder. Mr. Gross is recognized nationally and internationally as a leader in the Asian medical markets. Mr. Gross founded PBM in 1988 and has helped over 200 medical companies with business development and regulatory issues in Asia.

Momoko Hirose – Associate, Pacific Bridge Medical. Ms Hirose works on research, writing, and consulting projects.

For more information, please see our website at www.pacificbridgemedical.com.