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Medical Device Reimbursement in Japan Presented to MassMEDIC April 10, 2008


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Title: Medical Device Reimbursement in Japan Presented to MassMEDIC April 10, 2008

Medical Device Reimbursement in JapanPresented
to MassMEDICApril 10, 2008
  • Paul Barry
  • Director, International Trade Health Policy
  • Boston Scientific Corp.

Presentation Outline
  • Funding and Healthcare Environment in Japan
  • Responsible Agencies
  • Reimbursement Classifications
  • STMs, Functional Categories
  • Reimbursement Pathway
  • Price Adjustment by Market Method R-zone
  • Price Adjustment by Cost Control Method FAP
  • Policy Challenges, A Look Ahead

Funding Healthcare Environment
  • Compulsory social health insurance system,
    financed by employer contribution, payroll
    deductions, taxes, patient co-payments (30 for
    core population)
  • Achieved universal health coverage/access in 1961
  • Demographics rapidly aging (82 yr life
    expectancy), but shrinking population (127 mil,
    -0.088 growth)
  • 8.2 of GDP spending on healthcare (05)
  • 2nd largest market for med tech at gt26 bil
    growth has flattened in recent years.

Funding Healthcare Environment
  • Social insurance system is financially
  • Social security payments and spending are now
    more than 2X annual income and consumption taxes
  • Lengthy average hospital stays (30 days)
  • Serious over-capacity in hospitals and clinics,
    diffuse services and distribution, lack of
    medical specialization
  • Cost and complexity of business is increasing
    new user fees, Market Authorization Holder
    requirements, audits, post-market surveillance,
  • Pressure to increase medical fees (physicians)
  • Government is resorting to cost-containment and
    price-cutting initiatives targeting drugs and

Responsible Government Agencies
  • Ministry of Health, Labor Welfare (MHLW) is the
    sole agency responsible for regulation and
    payment of medical devices
  • Pharmaceutical and Medical Devices Agency (PMDA)
    is a third-party regulatory review agency under
  • Health Insurance Bureau (HIB) sets rates and
    approves reimbursement coverage
  • Central Social Insurance Medical Council
    (Chuikyo) is an outside advisory body to HIB on
    reimbursement/coverage decisions
  • Ministry of Finance (MOF) approves the healthcare
    budget proposed by MHLW, may adjust line-item
    expenditures for devices, etc.
  • Ministry of Economy, Trade and Industry (METI)
    supports development and competitiveness of
    Japanese Med Tech industry

Two Payment Systems
  • Special Treatment Materials (STMs) also called
    designated insured medical materials - product
    reimbursement price fixed according to a fee
    schedule and is separate from other medical
    service fees
  • STMs represent about 1/3 of overall device
    budget, or about 3 of national healthcare
  • The remaining 2/3, including capital equipment,
    IVDs, commodities, etc, are either purchased
    by-brand or paid for out of the technical fee
    associated with a medical procedure
  • Non-STM product prices are determined through
    direct negotiation between buyer and seller, not
    according to a fee schedule

Functional Category System for STMs
  • Applies only to Special Treatment Materials
  • Announced by MHLW in 1992, adopted in 1994
  • Products previously reimbursed by-brand
  • Functional Categories established with the aim
    of increasing price competition among products
    with identical or similar function
  • Today there are roughly 150 major groupings
    containing about 600 functional categories

Sample Functional Category
132 Catheter for cardiac surgery .1 PTCA (1) General type 151,000 Y
.1 PTCA (2) Infusion type 171,000 Y
.1 PTCA (3) Perfusion type 175,000 Y
.1 PTCA (4) Cutting type 168,000 Y

.2 Cath for passing through coronary stenosis ----- 58,200 Y

.3 Coronary stent set (1) Standard type 279,000 Y
.3 Coronary stent set (2) Emergency treatment type 380,000 Y
.3 Coronary stent set (3) Re-narrowing prevention type 409,000 Y

.4 High-speed rotation style percutaneous translumenal atherectomy catheter ----- 246,000 Y
Reimbursement Application Pathway
Shonin (Regulatory) Approval
Applicant Dossier
1. Application for reimbursement
2. Hearing 5. Notification of Approval
Eco Affairs Div Health Policy Bureau
3. Expert opinion
4. Listing decision
Expert Committee
Med Economics Div Health Insurance Bureau
6. Public Announcement Listing in NHI
Product Pricing Classification System
A1 Covered under technical fee. Product reimbursement is included in technical fee. Commodity-type products, e.g., sutures, gauze.
A2 Covered under technical fee. Product itself gives technical fee. High-end products such as MRI, CT, etc.
B Me-too product reimbursement category. Existing technical fee and separate device fee, with predicates in the market.
C1 New products that are based on existing products/ therapies. Technical fee exists for procedure, but new functional category needed to account for incremental improvement in technology.
C2 New products/therapy. New technical fee and device reimbursement category must be created.
Timing of Reimbursement
A1 Automatically after 20 days of filing
A2 1st day of every month, when filed before 10th day of previous month
B 1st day of every month, when filed before 10th day of previous month
C1 4X / yr Jan 1, Apr 1, July 1, Oct 1 (submitted at least 4 months prior) Provisional coverage prior to final listing
C2 4X / yr Jan 1, Apr 1, July 1, Oct 1 (submitted at least 4 months prior) Provisional coverage prior to final listing
New Product Premiums
Epochal Function Premium 40-100 A) Novel
function of clinical utility and B) Higher
utility or safety than similar products and C)
Improves the method of treatment
Orphan Drug Premium (I) 10 A new listed
product of a new function class designated orphan
drug in accordance with Par. 2 of Article 77 of
Utility Premium (I) 15-30 Meets A or BC from

Orphan Drug Premium (II) 3 A newly listed
product of a new function class that has less
target patients than do listed products of a
similar function class
Utility Premium (II) 5-10 a) Higher utility or
safety and b) Increased safety for healthcare
professionals and c) Improves the method of
treatment and d) Environmental (disposal)
New Product Pricing
  • If no similar technical fee use Cost Calculation
  • Cost of production/import
  • Promotion expense
  • General administrative expenses
  • Distribution expenses
  • Operative profit
  • Consumption tax
  • Price of a material of a new function class

Whats Not Required?
  • Paradox regarding lack of evidence requirements
    for coverage and pricing
  • Hindrance to securing new categories
  • Allows for price management by government without
    consideration of value
  • No economic or clinical benefit data needed for
    A1, A1, B product applications
  • Supporting economic and clinical data helpful for
    C1/C2 applications, but not defined
  • No rigorous tech assessment in place, yet.

Distribution Flow
Overseas Company
Companys Japan Affiliate
Primary Dealer
Secondary Dealer
Sales activities, OR (Operation Room) Support
Follow-Up, OR Support, Inventory Management,
Delivery, Billing, A/R, etc
Price Adjustment Method R-zone
  • Actual Market Price Weighted Average Fixed Zone
    Method or R-zone
  • R-zone is the allowable discounting margin
    between official reimbursement price from
    government and actual price paid by hospital to
  • Allows for small margin to be kept by hospitals
    as a means to help cover other operating costs
  • The current allowable R-zone value is 4 for STMs

Price Adjustment Method R-zone
  • Has been the primary, competition/market-based
    mechanism MHLW uses to manage prices in Japan
  • Bi-annual price adjustments based on government
    surveys of the discounts being provided by
    distributors to hospitals
  • Sample R-zone revision
  • official reimbursement price product A 1000 yen
  • if average selling price per survey 900 yen
  • add 5 consumption tax to ave 945 yen
  • add 4 R-zone value (of official price) 40
  • new official reimbursement price 985 yen

Average R-zone Price Adjustment, 1990-2008
Price/Cost Controls FAP
  • Foreign Average Price (FAP) Rules
  • Compares Japanese price to arithmetic average of
    prices in US, UK, Germany and France
  • For new products, in case the calculated price
    is higher than 2X of FRP, the price is adjusted
    down to 2X of FRP
  • When the current domestic market price average is
    2X or greater than the average overseas price,
    adjustment occurs
  • If the domestic market price is more than 1.5X of
    average overseas price AND the rate of decrease
    from the standard material price since the last
    revision is less than 15, then the price is
    reduced by formula (up to a max of 25)

Price/Cost Controls FAP
  • FAP adjustment formula
  • A weighted average of current market prices in a
    particular functional class
  • B overseas average price of the subject product
  • Standard Material Price X B x 1.5
  • Before the Revision

FAP Survey Process
  • Revisions to fee schedules occur April 1 of
    even-numbered years 2002, 04, 06, 08, etc
  • MHLW identifies select group of Functional
    Categories for survey, 6 months before price
    revision is effective
  • Industry provides overseas price data (company
    List Prices) to MHLW via a third-party, collated
    and submitted by Functional Category
  • Price data is protected not shared with any
    third parties
  • Preliminary R-zone and FAP cuts announced to
    industry in Dec/Jan, begins a 2-3 month comment
  • Final price adjustments published and distributed
    to hospitals in March, new prices effective April

Impact of Price Controls on STMs
  • More than 3 Billion in forsaken medical
    technology industry revenues since 2002 (as of
  • Nearly half of all categories surveyed in 2006
    more than 80 categories suffered FAP cuts
    (totaling 161m)
  • 2008 only 14 categories cut, 31m impact
  • The combined effect of R-zone and FAP has been a
    downward price spiral, with political and
    economic pressure for expanded application
  • Creating disincentives for introduction of new
    products and therapies product generation gaps
    are growing
  • Uncertainty regarding return-on-investment, Japan
    is being viewed very differently than in the past

Impact of Price Controls on STMs
  • Foreign Direct Investment (FDI), what incentives
    remain for medical technology industry?
  • Will undermine goals of METI Medical Device
    Vision to expand access to cutting-edge
    technology, and to grow Japans own med tech
  • Short-term budget fix, not a long-term
    healthcare financing solution
  • Souring relationships among Industry, MHLW,
    doctors, policy-makers, key opinion leaders, and
    the public

Future Developments
  • An age when greater weight is placed on value
    and price MHLW, Sept. 2004
  • Correction of domestic-foreign price disparity
    remains priority Council on Regulatory Reform
  • Intensified price scrutiny annual price surveys
    and revisions being considered
  • FAP R-zone revisions to continue rules changes
    to expand scope and depth of cuts seem almost

Future Developments
  • Two potentially major systemic changes looming
  • DPCs Diagnosis Procedure Combinations
    Japanese-style DRGs, per-diem rate which
    decreases over time. DPC pilot has expanded to
    534 hospitals, and shown modest results
  • Will STMs be folded in to DPCs?
  • Usual problems associated with DRG systems
  • HTA healthcare technology assessment
    requirements METI studying development of HTA
    guidelines ISPOR chapter established in Japan to
    develop same
  • First-ever economic/outcome data requirements for
    med tech coverage and reimbursement in Japan?
  • Potential market barrier?