Japan’s $21 billion medical device market is currently the second largest in the world behind the U.S. Market demand grew about 13% annually from 1993-95, but slowed between 1996-98 as Japan’s economy dove further into recession, the yen lost about 16% of its value, unemployment rose and traditional political mechanisms collapsed.
However, Japan’s economy is now beginning to recover. Japan’s gross domestic product grew by an annualized 7.9% for first-quarter of 1999, and by 1.9% during fourth-quarter 1998. Consumer confidence is up—May 1999 household spending was 2.4% higher than 12 months earlier, and spending by wage earners rose 1.5% despite a 1.4% fall in disposable income. Recently, the Japanese government’s Economic Planning Agency also announced that for April, May and June 1999, the country’s index of leading indicators stood far above 50 (indicating economic expansion).
As a result, demand for medical devices has rebounded and is expected to grow at least 6% annually for the next few years. Other forces will also drive this market in the future—by the year 2000, for example, about 20% of Japan’s population will be over 65, causing demand for cardiac pacemakers to increase by 30-40% for a number of years. A growing number of Japanese are also being diagnosed with cancer, heart disease, and other conditions common in industrialized countries, further driving demand for advanced Western medical treatment. And since Japan’s domestically-manufactured medical equipment is among the most expensive in the world, the Japanese government (which currently loses over $7.7 billion a year in medical expenses) is looking increasingly to foreign medical companies that can supply innovative medical products at a much lower cost.
Slow Progress on Deregulation
There are still some challenges for foreign medical device companies in Japan. U.S. and European medical device manufacturers are still waiting for the Japanese government to make good on its 1998 medical industry deregulation initiative, which among other things promised to cut average approval times from 18 months to 12 months and widen the acceptance of foreign clinical test data by the year 2000. However, significant approval delays still exist, which is especially problematic for U.S. device companies considering the industry’s 2-3 year product life cycle. Japanese officials also routinely seek transfer price information, internal cost data and other data so as to dissect, regulate and manage both the product and integral services that make U.S. companies successful in Japan. In addition, foreign clinical data is used much less than one would expect. These measures have simply added to the cost and inefficiency of the Japanese healthcare system.
Although progress on deregulation has been slow, Japan is trying to respond to some foreign device company concerns. The Ministry of Health and Welfare (MHW) is currently creating a new product approval process, and is also trying to improve internal transparency to allow foreign companies to give “meaningful input” into regulatory reforms.
The government has also made some concrete steps in improving market conditions for foreign device companies. As of February 17, 1999, local governments are authorized to use overall greatest value methodology (OGVM) when procuring medical products. OGVM allows the purchaser to procure products based on the best overall value for their performance and specification requirements, not simply on the initial cost of the products. Before this decision was made, OGVM was widely used by procuring agencies at the national level, but local governments were still obligated to use the lowest-bid methodology—thereby impeding the ability of more sophisticated, higher-priced foreign equipment to sell in this significant portion of the Japanese medical market. Since OGVM tends to be applied for advanced technology products, however, the new legislation will greatly benefit foreign companies offering advanced medical equipment such as advanced diagnostic equipment, angiographic equipment and other innovative products with a high initial price.
The U.S. first raised the issue of authorizing OGVM at local levels in the U.S.-Japanese MOSS Medical Device and Pharmaceutical meeting in September 1997. As a result of the Japanese government’s decision, U.S. manufacturers expect procurement of their medical products in Japan to increase over $100 million annually for the next few years.
Finally, the Japanese government made several concessions in the May 1999 U.S.-Japan Enhanced Deregulation Initiative, which covered a number of sectors including the medical industry. Under this initiative, the Japanese government agreed to streamline and harmonize Japanese product approval procedures with other countries’ regulatory bodies, as well as widen its acceptance of foreign clinical data for safety and reimbursement approvals. A key to the agreement was the inclusion of specific time frames for implementation, primarily by Japan’s fiscal year 2000.
The Changing Face of Japan’s National Health Insurance (NHI) System
The Japanese healthcare market has been undergoing major changes in the past three years regarding where and how patient care is being delivered. The impetus for these changes has been the country’s burgeoning healthcare costs—Japan’s per capita medical expenditure ranks seventh in the world, and national medical expenditures are expected to exceed $240 billion in 1999. Furthermore, private health insurance organizations will incur a deficit of at least $3 billion in 1999, mostly due to the increasing health expenditures incurred by Japan’s rapidly aging population.
The MHW’s cost cutting efforts include reducing the length of a patient’s annual hospital stay (one of the highest in the world at 44.2 days per person). For example, it is gradually reducing reimbursement rates under its National Health Insurance (NHI) system for hospital stays up to and in excess of 30 days, and is also emphasizing preventative treatments. The MHW has also been emphasizing home health care for bedridden or elderly patients that do not necessarily need to be treated in a hospital.
Japan’s Home Care Market
While the developing Japanese home care market has taken the outward appearance of the U.S. home health care model, there is a key difference relating to health insurance coverage and reimbursement. The current National Health Insurance (NHI) scheme, along with the anticipated home care insurance (to be implemented in 2000), will account for the majority of coverage for services and therapy equipment used in the home environment. Although care services and medical supplies may be delivered in the patient’s home, all billing and reimbursement will be executed through the hospital and all equipment used for home health care will be controlled from the hospital.
Currently, for example, a patient who will use an oxygen concentrator at home (known as home oxygen therapy) must first be examined and “qualified” at a hospital by a physician. Upon the physician’s instructions, an order is sent to a medical equipment supplier who will then deliver the oxygen concentrator to the patient’s home. Once a month, the patient must be reexamined at the hospital to re-quality for coverage, and will pay a deductible self-pay portion at that time. Every month, the equipment supplier will bill the hospital for the rental of the oxygen concentrator being used at the patient’s home. And finally, every month, the hospital will file a claim with the Health Insurance Agency for the oxygen concentrator and the doctor’s examination fee (a.k.a. guidance fee).
Thus, when the equipment is used in the “home health care” environment, the control, billing and administration is accomplished through the hospital. The implication for an equipment vendor/supplier is that the patient has little choice of the therapy equipment brand or model. The “selling” effort must be targeted at the hospital to the key decision-maker, which will either be the physician or head nurse who will select the equipment to be rented from the supplier.
In case no health insurance coverage is available for the medical equipment, the decision-making process will usually start at the hospital through the nursing department or the doctor during the patient’s hospital stay. Due to the lack of discharge planning department in most Japanese hospitals, the “discharge consultation” will occur at the bedside or directly with the patient’s family. Should there be any need for equipment, the nurse will make recommendations and the patient can then be directed to either a Social Welfare showroom or one operated by a city of prefecture government. At such location, information on various brands and models, as well as a supplier, will be provided. The patient or her/his family would then contact the supplier directly and have the product delivered to the home or would be advised as to where it can be purchased.
New Nursing Care Insurance System for the Elderly
Due to the unprecedented speed at which Japan’s population is aging, the Japanese government will introduce a new nursing care insurance system by April 2000. To date, insufficient nursing care services have created an immense financial burden for Japan’s National Health Insurance (NHI) system, as the elderly have resorted to long-term, medically unnecessary hospitalization. The new nursing care system, which is expected to save NHI about $10.4 billion, separates nursing services from medical care and introduces a separate social insurance scheme for the former. Instead of allowing the elderly to be hospitalized, most will either be brought home or placed in nursing homes. According to the MHW’s program model, those needing the least care will receive visits from nurses, home help, and day-care service once or twice a week; those in most need of nursing care will be looked after every day. In April 2000, hospitals and wards will be able to choose whether to accept patients under existing medical insurance programs or the new nursing insurance system.
There are some problems with the new system. The MHW is relying on local governments to boost their staff levels and facilities to provide the additional nursing services, and many elderly are therefore at risk of receiving inadequate care if their prefecture cannot afford to meet the new system’s standards. Many families are also reluctant to take back relatives that were hospitalized under the previous system, particularly since only special nursing care homes, not residential homes, will be covered by the new insurance. And even in nursing care facilities, insurance given is proportionate to the seriousness of the patients’ conditions, and thus the milder a resident’s condition is, the less money a special home receives from nursing insurance. As a result, such residents are encouraged by these homes to move out.
Pricing and Reimbursement
Until recently, foreign device companies were also having difficulty complying with Japan’s reimbursement system. Japan’s “ by-function” reimbursement system for medical technology, which sets prices for each product type, had no mechanism for creating new categories of reimbursement regulations, and the Japanese government was notorious for forcing U.S. manufacturers to separate service and product pricing for products in which the U.S. had a technical edge over domestic producers (such as pacemakers).
However, some progress has occurred in this area. In April 1999, a group of U.S. medical device manufacturers filed suit against the Japanese government under the Super 301 clause of U.S. trade law, claiming that the government unfairly controlled the product pricing of U.S. companies in Japan. As a result, Japan agreed to improve the transparency of the system by issuing requirements in writing and allowing medical device firms to engage in pre-filing consultations with Japanese regulators. The government’s announced commitments and following assurances of full implementation led the group of U.S. manufacturers to eventually withdraw their Section 301 comments from the U.S. Trade Representative office (USTR).
Market Entry Strategies: Company Experience in Japan
To choose the best market entry strategy for Japans’ medical device industry, a manufacturer must analyze the size and growth rate of the possible market for its products. On one hand, if the company is only interested in exporting, and the size of the market is not very large, it should consider marketing its products through a skilled distributor. If the market size for the company’s products is large, though, it should consider establishing an office or setting up some type of joint venture to market and/or manufacture its products in Japan.
• Distribution and Marketing Agreements: Visible Genetics and PLC Systems
Extra time and effort are needed to find a qualified distributor in Japan. One reason is Japan’s unique corporate culture, which emphasizes long-term relationships, and hence extra time spent by Japanese companies considering distribution agreements with Western firms. Another reason is the large size and strategic importance of the Japanese medical device market—foreign companies must make sure they find a trustworthy distributor that will represent the company in the long term, not simply copy the company’s products. With such careful research being performed by both parties, finding a good distributor in Japan usually takes 6 to 18 months.
Small medical companies who do not have the resources to manage distributors or set up a marketing joint venture on their own can consider using the resources of a foreign company that is already in Japan. For example, in June 1999, Visible Genetics Inc. (VGI; Toronto, Canada) and Roche Diagnostics K.K. (RDKK; the Japanese subsidiary of Switzerland-based Roche AG) entered into an agreement whereby RDKK will be the exclusive distributor in Japan for VGI’s GeneKits? and OpenGene? automated DNA sequencing systems.
And in March 1999, PLC Systems Inc. (Franklin, MA) announced the renewal of its distribution agreement in Japan with Imatron Japan Inc., which distributes medical products in Japan for the diagnostic equipment manufacturer Imatron Inc. (San Francisco, CA). Between 1995 and 1997, Imatron Japan Inc. purchased 12 Heart Laser? systems from PLC to conduct clinical studies in Japan; the new agreement includes a commitment to purchase at least five more during 1999.
• New Joint Ventures: GE Medical Systems and Essilor
After the foreign company is confident of its relationship with its distributor, the next step is the formation of a joint venture to establish a direct presence in Japan. Generally, a manufacturer pursuing this strategy will set up an alliance with its existing distributor or a marketing company in the firm’s sector. Ideally, the partner should be a company that offers different products than the manufacturer, but wants to represent the firm’s products and expertise in order to gain a stronger cooperative position in the marketplace.
In early July 1999, GE Medical Systems (Waukesha, WI) announced that it had reached an agreement to acquire the Japanese distribution operation from NEC Medical Systems, a wholly-owned subsidiary of medical diagnostic NEC Corporation. GE Medical is a leading provider of medical diagnostic equipment and services, and NEC Medical develops and manufactures patient monitors, cardiovascular equipment and cerebral nerve equipment.
As part of this agreement, GE Medical and NEC Medical will form a joint marketing and distribution network for both companies’ products and services. GE will hold a majority stake in the venture, and NEC Medical will design, develop and provide the new company with medical products manufactured at NEC Medical’s facility in Gunma, Utsonomiya, Japan. Also, NEC Medical’s Japanese sales offices and sales staff of 300-350 in Japan will be transferred to the joint operation. The new distribution network will produce healthcare facilities with patient monitoring systems for adult, fetal and neonatal patients, electrocardiograph (ECG) and clinical information systems from GE Marquette Medical Systems, a wholly-owned subsidiary of GE Medical Systems. In addition, the network will distribute patient monitors, cardiovascular products and cerebral nerve diagnostic equipment delivered by NEC Medical Systems.
This agreement builds on GE Medical’s existing $1 billion operation in Japan. It reinforces GE Medical’s strong commitment to the Japanese healthcare market, and will further ensure a flow of GE Medical’s state-of-the-art medical technology to the country.
Also, in May 1999, Japan’s Nikon corp. announced that it had reached a basic accord with France’s Essilor International to form an alliance in the ophthalmic products business. The two companies signed a memorandum of understanding to form a 50-50 joint venture in corrective lenses in Tokyo. Nikon is the third largest glass maker in Japan, and Essilor is one of the world’s leaders in corrective lenses.
• Setting Up Manufacturing Facilities: Boston Scientific and Fresnius Medical Care
Finally, if a manufacturer believes that there will be a large Japanese market for its product, the firm should consider setting up a manufacturing facility or a manufacturing joint venture in Japan. Setting up direct manufacturing operation in Japan has several benefits over simply exporting a medical product or setting up a marketing joint venture. If a company manufactures locally, products can be modified more easily to meet the needs of the local market, with appropriate input from the members of the local medical community. And in general, the Japanese take foreign companies more seriously when they have their own offices in Japan.
For example, Fresnius Medical Care AG (Frankfurt, Germany) the world’s leading provider of dialysis products and dialysis services, announced in July 1999 that it will build a production plant for dialysis products in Japan. The new $29 million plant will be situated in Fukuoka province in the south of Japan, and will employ about 100 people. The new plant will strengthen the company’s long-term commitment to the country, as well as with its local joint venture partner Kawasumi.
And Boston Scientific Inc. (BSCI; Natick, MA) recently switched from exporting to actually manufacturing its cardiac catheters in Japan. The company’s Japanese factory now produces in two weeks what would have taken the company three months to import. BSCI’s Tokyo subsidiary has also opened a technology and training center in the Satohara, Miyazaki prefecture to work on new and advanced technologies and procedures tailored to the Japanese market. Pilot manufacturing lines at the Miyazaki Techno Research Park facility will allow the company to test production of the resulting products. The center also will be used for intensive training of medical personnel in the use of the company’s coronary catheters and other products.
The Japanese market still remains relatively difficult to penetrate by foreign device companies. Although U.S. companies are the primary supplier of the latest medical innovations to the Japanese market (including almost all implantable medical devices), U.S. medical equipment manufacturers currently maintain only 30% of the Japanese medical device market—compared to their worldwide average of 50%. Nevertheless, the Japanese government is trying to speed up and streamline its approval process, and some concrete steps towards deregulation this year have already yielded many new business opportunities for foreign medical companies. Foreign device firms should therefore continue their efforts to penetrate this vast and lucrative market.