I. OVERVIEW OF MEDICAL DEVICE MARKET
The size of the Japanese medical device market is $21 billion. In total, foreign companies account for approximately 41% of the market segment for high value, durable medical equipment. Japanese imports include advanced medical devices such as pacemakers, laser surgical equipment, cardiac valve prosthesis and MRIs. Foreign equipment is purchased for the most part by national level healthcare institutions.
U.S. firms dominate Japan’s market for imported medical devices and account for about two thirds of all imports. U.S. companies for the most part also supply advanced medical devices in Japan, for example, advanced interventional cardiology products, artificial joints and implants. The market share of U.S. products as a percent of Japan’s total medical device market has grown from 21% in the early 1990s to 28% in 1998.
On the one hand, demand is expected to grow in Japan’s medical device market. With Japan’s rapid technological advancement the market for implantable devices and interventional cardiology devices such as stents has grown. The demand for products like pacemakers is expected to increase by 30 – 40% during the next 10 years. Also, in some areas new technologies such as intracardial defibrillators, stents and catheter products have been added to the national reimbursement schedule.
In addition, Japan’s rapidly aging population has led to the building of new nursing homes and assisted living centers which has also contributed to increased healthcare expenditures. It is estimated that a fourth of Japan’s population will be 65 years or older by the year 2010. The rapid increase in medical bills is noticeable particularly among those over the age of 70. Costs incurred in providing medical services for an elderly person are five times those incurred in the case of a young person in Japan.
Strong demand is projected for products used in providing home healthcare services. Japan’s new nursing care entitlement program will come into force in April 2000. Both domestic and foreign firms are reorganizing so that they will be able to incorporate the new home healthcare service program and take advantage of its corresponding reimbursement system. Finally, an increasing number of Japanese are being diagnosed with cancer, heart disease, and other conditions common in the industrialized nations. This is further driving the demand for advanced medical treatment.1
While the Japanese medical device market is expected to grow, future growth will be slower than in the last five years. This is accounted for by two issues: 1) the increase in insurance co-payments for a large part of the Japanese population; and 2) the current economic recession. A combination of these factors has resulted in a decline in hospital admissions as well as a decrease in demand for outpatient services. Reductions in the National Health Insurance reimbursement rates for diagnostic tests such as in-vitro testing, MRIs and other such imaging tests have also resulted in flat demand for durable medical equipment.
Japan’s government will pay great attention to cost containment and it is expected that this trend will continue in the future. Annual medical costs per person in Japan are estimated to be more than 230,000 yen (approximately $2,200) in 1999, the sixth highest in the world. Average hospital stays are extraordinarily lengthy in Japan when compared to those in the West. Hospital stays average 33.5 days in Japan, while in the U.S. the average is 7.8 days and in Britain 9.8 days. In an effort to be more cost effective, the country is looking to foreign medical companies that can supply innovative products that are cost effective.2
II. PROPOSED DEREGULATION INITIATIVES FOR MEDICAL DEVICES
According to the U.S. government and medical device industry, Japan’s unique medical business and regulatory practices contribute to the high cost of doing business in Japan. Also, while Japanese consumers do not want to pay more for healthcare in Japan, they do want more value for their money. Thus, the greater use of cost-effective medical technology presents a partial solution.
Over the last few years, U.S. medical technology firms have had a variety of concerns with regard to Japan’s medical device market, including:
• The U.S. industry’s trade surplus with Japan decreased by more than $217 million, lowering the balance from $1087 million to $870 million in 1998.
• The Birmingham commitments from the Birmingham Summit of G-8 countries in 1998 have not yet been implemented.
Specifically, the targeted commitments include:
1) a recognition of the value of innovation of pharmaceuticals and medical devices so that cost-effective treatments can be made available to Japanese patients;
2) ensuring the transparency in the consideration of Japanese healthcare policies by allowing foreign pharmaceutical and medical device manufacturers opportunities to state their opinions in relevant councils on an equal basis with Japanese manufacturers and granting them the opportunity to exchange views with MHW officials;
3) a shortening of the approval processing period to 12 months by April 2000; and
4) an expansion in the acceptance of foreign clinical test data through the incorporation of International Conference guidelines into Japanese regulations by August 1998.
• Foreign supplied medical device products are targeted for price cuts.
• Japan is not taking responsibility for streamlining its product approval process and internal reimbursement decision-making.
In February 1999, the Health Industry Manufacturers Association (HIMA) announced that in keeping with the Japanese commitment to deregulate its medical technology sector, the U.S. device industry has proposed the following list of deregulation measures:
1. Once the Ministry of Health and Welfare (MHW) has determined the safety of a product (i.e. shonin has been issued), the appropriate functional classification for the product should be established within 45 days. If this does not take place within the given timeframe, the product in question should be allowed to enter the market and be reimbursed at two times the price requested on the application for shonin. This would serve to generate regulatory efficiency and stimulate market competition thereby resulting in lower prices and greater patient access to medical improvements.
2. The MHW should eliminate its Highly Advanced Medical Technology (HAMT) program (in conjunction with 1. above), because the concept that all Japanese medical institutions are equally competent and can thus all keep pace with technological concepts is outdated. The HAMT program requires companies to give away their products without insurance-related reimbursement for a long time even after shonin has been issued. The HAMT program slows the entry of new competing products into the marketplace and reinforces a key inefficiency in the healthcare system where Japanese doctors perform relatively few high-tech procedures on Japanese patients.
3. Japan should accept foreign clinical data and not expect additional local clinical testing, especially in the case of products that are already available in the U.S. or in Europe. The MHW should also make an effort to harmonize its clinical trial and post marketing surveillance requirements with those of other countries in order to cut costs and eliminate redundancy.
4. The MHW should attempt to speed up approval of products that have been available in the U.S. or European market for over two years.
5. The MHW should treat in vitro diagnostic (IVD) products as medical devices rather than pharmaceuticals. More specific regulations with regard to IVDs will be identified by the industry in the future.3
III. JAPAN TEMPORARILY PLACED ON “WATCH LIST”
In April 1999, HIMA filed a Section 301 petition asking that the U.S. Trade Representative’s Office place Japan on its “Watch List.” This petition was a reaction to the perceived lack of Japanese cooperation with respect to reforms that aimed to speed the entry of cost-effective and life-enhancing medical technologies into the market. Also, HIMA’s executive vice president for global strategy, Edward Rozynski stated dissatisfaction with the fact that U.S. products are often subjected to an unusual degree of scrutiny; targeted products include pacemakers, PTCA catheters and artificial joints.
According to HIMA, the price differential between Japanese and foreign goods cannot be alleviated simply by adding more regulations on pricing. Instead, structural problems that make Japan a slow and difficult market to penetrate would have to be addressed. HIMA also stated that specific suggestions it had made over the past two years to improve and expedite the regulatory and approval process in Japan were simply ignored.
In May 1999, following the Clinton-Obuchi Summit, HIMA withdrew its Section 301 petition. At the summit, Japan agreed to reform its reimbursement system that relies on set prices for medical technology. There is, however, no mechanism for creating new categories for reimbursement to reflect advances in medical devices. Japan has agreed to streamline approval procedures and harmonize its system with procedures followed by regulatory bodies in other countries. It will also, at least in theory, accept more foreign clinical data to support safety and reimbursement approvals.
Japan has implemented a timeframe within which to implement these changes. The target start date for these reforms has been set for fiscal year 2000. HIMA is pleased with the proposed reforms but implementation is key. Once these reforms are initiated, market access for U.S. exports of medical devices and supplies to Japan and patient access to these products should improve.4
Benchmarks for success have been devised after the Clinton-Obuchi summit. Japanese industry and government have assured that meaningful healthcare deregulation will take place and products will reach end users, i.e. Japanese patients, more quickly.5
IV. KEY INEFFICIENCIES IN THE APPROVAL PROCESS AND TIMEFRAME
Under the Pharmaceutical Affairs Law in Japan, in principle, regulatory approval is required for the manufacture, import, and sale of medical devices and other such products. Also, insurance coverage applications must be filed in order to determine the insurance price so that medical institutions that purchase and use these products can recover the costs that they incur.
In September 1999, Bain & Company published a report that identified specific issues with regards to the inefficiencies in the approval process. 6 First, approval processes are long and complicated. Although careful and thorough inspection is essential for the approval of medical devices related to the lives of patients, often the approval process is much longer than that specified by the MHW’s own standards (4 months for a new application). There have been several situations where approval times have exceeded one year from the time of submission.
Second, there are a variety of problems with the Medical Device Center and the Inspection Center. The responsibility for “equivalency review” was transferred to the Medical Device Center in July 1997. This has simply prolonged the approval process. Approval is supposed to be granted after equivalency is established at the Medical Device Center. Now that the Inspection Center carries out its evaluation after the Medical Device Center, problems that have previously been brought up during the evaluation process are brought up here again several months later. The role of the Medical Device Center is unclear and its intervention in the registration and approval process has simply led to a prolonging of approval times.
Third, there are a number of issues regarding the Central Pharmaceutical Affairs Council and its subcommittees (“Chosa-kai”). For applications that require clinical data, deliberations are necessary at the Council’s Subcommittees. The committees meet very sporadically (once every two months). Thus, over 6 months is required for just a few council meetings and this further lengthens the evaluation process.
Fourth, there are also a number of factors that need to be considered with regard to inspection standards. There is practically no consistency in the inspection process. Due to the lack of clearly defined inspection standards, manufacturers and other applicants for approvals cannot predict the extent of documents that must be submitted to regulatory authorities. Consequently, a number of items that are missing in a submission are pointed out at the time of inspection. This results in documents being submitted over and over again. The process is thus time consuming and inefficient. There are no clear guidelines and rules change suddenly with no notification to the parties concerned. For example, detailed data on the composition of materials and pigments has not been required in the past, but such data has suddenly been demanded as of mid-1999.
Fifth, in terms of clinical trials, the judgment criteria for reporting clinical effects of trials is not specified. In some instances the same criteria used for other approved cases has been applied, but the parties involved have been told that these criteria are inappropriate and that they have to conduct new trials. Thus the prevailing system lacks consistency.
Further, the lack of international harmonization is a big problem with the regulatory approval process. There are a number of differences between the procedures and classification systems in Japan and those prevalent in the West in the U.S. and Europe. This slows down the regulatory process for companies that want to speedily enter the Japanese market.
Sixth, insurance coverage applications also take a while after product approval (typically an additional 6 months). Thus, even after a product is approved, hospitals and patients have to pay all costs related to treatments before insurance coverage is filed and approved. Moreover, since the Ministry does not provide a time frame for insurance coverage approval, the time period required up through the final determination of insurance reimbursement prices remains unclear.
Under the current guidelines, applications for the insurance approval of medical devices requiring physician’s technical fees can only be submitted after reimbursement of the technical fees for the relevant techniques is approved. Technical fee approvals are, however, granted only once every two years. Thus, there are times when it takes 1 – 2 years from the time that regulatory approval is granted for medical materials before the insurance coverage is approved. There are a variety of cases where a given medical device is approved for insurance reimbursement on the basis of a very limited set of criteria. Thus, often, patients suffering from certain diseases cannot enjoy the benefits provided. For example, while pacemakers can be used for hypertrophic obstructive cardiomyopathy (HOCM), their use is limited to bradycardia, because insurance reimbursement for a pacemaker for HOCM has not been approved.
V. IMPROVING HEALTHCARE QUALITY 7
Bain & Company’s report also highlighted four issues to improve the overall healthcare for Japan’s citizens.
1. Economic evaluations of medical technologies and advancements in the field.
This includes facilitating the spread of new medical technology by providing adequate insurance reimbursement for equipment that improves the quality of life of patients. A proper evaluation process is required in order to determine the value of medical technologies. This will also result in long-term savings in national healthcare expenditures. In the short-run, the number of functional categories should be reconsidered.
For example, the reimbursement framework should be revised for IVDs whose access is limited due to the lack of reimbursement. In regard to this category, insurance reimbursement prices should be set for tests that are currently not promoted due to the lack of reimbursement. For example, with respect to the self monitoring of blood glucose, diabetics other than those who self-inject insulin should be provided with insurance reimbursement.
Also, tests that can improve the quality of healthcare should be separately reimbursed from conventional tests. An example is diagnostic imaging – based on the proper recognition of technology advances of diagnostic imaging, the reimbursement framework should be corrected in such a way that adequately reflects current Japanese health problems.
2. Greater transparency combined with expedition of the approval and insurance coverage processes.
Specifically, clarified inspection standards should be established and publicized. Information sharing should be set and duplicate procedures should be eliminated. For example, the roles of the Medical Device Center and the Inspection Center should be reviewed and the overlap in the functions of the two centers should be eliminated. Also the number of specialized inspectors should be increased. Unresolved international conformity issues such as the regulatory distinction between pharmaceuticals and reagents and medical devices should be eliminated.
Currently, an application for insurance can be filed only after approval has been granted. In order to speed up the approval process, applications for insurance and approval should be filed together and the two acceptance processes should take place simultaneously. Parallel consideration could be conducted up to the point of judgment on whether or not reimbursement would be provided at all.
The Inspection Center in Japan (equivalent to the U.S. FDA) is severely understaffed, with only 10 employees. In 1997, for example, each staff member in the U.S. had to inspect 54 applications as opposed to 210 applications per Japanese inspector. There is also a need for more qualified inspectors. Currently, there are a number of situations, where the qualifications of inspectors do not match the product being tested. This results in the prolongation of the evaluation process, because the inspectors ask a lot of basic questions. Addition of staff with specialized knowledge would facilitate the approval process.
3. Centralization of special treatment materials (STM) procedures – introduction of Centers of Excellence.
Currently, procedures involving STMs are widely dispersed at hospitals nationwide in Japan. This dispersion represents an obstacle to the introduction of advanced medical treatment. STM procedures should be centralized at medical institutions handling a certain minimal number of procedures per year (Centers of Excellence). This will take time to implement and should be a goal for the long-term.
The number of STM procedures carried out in Japan is significantly dispersed in comparison with the situation in the U.S. The number of procedures conducted by each individual doctor is small on average and the accumulation of experience occurs very slowly. This may result in less favorable outcomes when providing advanced medical treatment to patients in Japan. Structural issues such as the dispersion of procedures make the costs of conducting STM business very high in Japan. For example, the centralization of pacemaker implant operations, stents and artificial joints will facilitate the improvement of such advanced medical treatment within each product category.
The extreme dispersion of the procedures implies insufficient knowledge and experience of pacemaker knowledge. With respect to pacemakers, the North American Society of Pacing for Electro-physiology states that individual doctors should perform a minimum of 12 new pacemaker implants and 5 replacement implants to enhance knowledge and technique. In Japan, less than 10% of medical institutions perform these procedures at this frequency and individual institutions may have multiple doctors performing this number of procedures.
4. Improvements in infrastructure for the provision of information on medical institutions and treatments to patients.
The diffusion of advanced technologies and the improvement of healthcare is only possible if consumers have the capability of sound decision making. This requires an understanding of superior treatment and testing technologies and patients should have access to quality information on healthcare providers. The regulatory bodies in the country should support this by formulating policies that promote information disclosure and the disclosure of medical records in order to increase transparency in medicine.
In Japan, there has been a major shift in the mindset of Japanese patients and medical institutions and now there is a greater degree of information sharing. Such activities only involve a small number of advanced hospitals and patients. Overall, patients do not have strong political representation in the healthcare reform process and are not informed customers.
In June 1998, the MHW released a report that specifically stated that laws would be enforced for the disclosure of medical records and other treatment information. Legislation on this issue has, however, been postponed.
In Japan, the accreditation of medical facilities by the Medical Function Evaluation Body began in 1996. To date (as of June 1999), however, only 227 or 2.4% of Japanese facilities have been accredited.
There are several issues with regard to this system. Restrictions on advertising prevent medical facilities from making an appeal to patients based on the fact that they have been accredited. Also accreditation criteria are difficult for hospitals to understand.
It is hoped that discussions will be continued among the MHW, medical professionals, and Japanese citizens. This will facilitate the achievement of an appropriate balance between cost reductions and improvement of the quality of healthcare. Japanese patients will thus ultimately be able to enjoy advancements in medical technologies and have increased access to state-of-the-art healthcare.
VI. JAPAN’S LIBERALIZED PROCUREMENT POLICY
Japan’s Ministry of Home Affairs (MHA) issued a seirei (cabinet order), to amend the Local Autonomy Law to authorize local bodies to use overall greatest value methodology (OGVM) on February 27, 1999. It became effective immediately. Local governments are now authorized to procure products based on the long-term and overall value for their performance, not just on the initial cost. OGVM procurements tend to be applied for advanced technology products. This is a significant development for U.S. medical equipment companies that manufacture innovative and high performance products.
While OGVM has been used at the national level for a long time in Japan, local procurements that represent a large share of the market have in the past been obligated to use the lowest-bid methodology. U.S. equipment is generally more innovative and offers more special features at a higher initial price. In local hospitals, under current procurement practices, the long-term value and higher quality that goes with superior technology, is not taken into account. The use of OGVM will ensure that these important factors are considered.8
With pressure from a variety of foreign groups, Japan’s medical device industry is slowly changing and becoming more Westernized. If foreign medical device companies carefully and tenderly “work the system,” the chances of success are slowly getting better.
1. Japan: Leading Sectors for U.S. Export and Investment. www.tradeport.org/.
2. In Pursuit of a bright tomorrow: Official Opinion Split on Health Service Reforms. Yomiuri Shimbun, November 9, 1999.
3. List of Proposed Japanese Deregulation Initiatives for the Medical Technology Sector. www.himanet.com.
4. HIMA Withdraws 301 Petition. May 3, 1999. www.devicelink.com.
5. U.S.-Japan Medical Technology Trade Concerns. April 20, 1999. www.himanet.com.
6. A Turning Point of the Japanese Healthcare System – The Increasing Role of Medical Technology Innovation (English Translation). Bain & Company, September 1999.
8. Japan Liberalized Procurement Policy. February 23, 1999. www.tradeport.org.