Examples from US Policies to Reduce Oversupply and Overutilization: Lessons for the Japanese Health Care System

Introduction

The Japanese health care system provides universal coverage to its citizens. Enrollment is through employment-based or residence-based plans that cover hospital and physician services and prescription drugs. Patients have relatively low cost sharing and a free choice of providers. The government sets the national fee schedule, which has been cited as one of the primary mechanisms for containing health care expenditures. The provider fee schedule is revised every two years and a target revision rate, which acts as a global budget, is set for spending increases. The revision rate takes into account the aging of the population and a shift toward new technologies. Japan also has some of the best health outcomes among developed countries, including one of the longest life expectancies and low infant mortality rates primarily because of its healthy lifestyle. ¹

Issues and Challenges of the Japanese Health Care System

Although Japan has been able to restrain the growth in health care spending mostly through its regulated provider prices, the rapidly growing elderly population and adoption of new drugs and technologies have placed increased fiscal pressures on its health care system. Health care spending as a percent of Japan’s gross domestic product increased from 7.0% in 2000 to 10.9% in 2020. Further, Japan does not have the infrastructure in place to restrain utilization, which may be a key driver of increases in health care spending.

Among OECD countries, Japan has the second most hospital beds per capita (12.6 beds per 1,000 people vs. 4.3 beds per 1,000 people among OECD countries and 2.8 beds per 1,000 people in United States in 2021) and the second longest hospital average length of stay (ALOS) (16.0 days vs 7.6 days in OECD and 6.1 days in the United States in 2019). ² In addition, Japan has the most advanced imaging machines (CT scanners, MRI machines, and PET scanners) per capita among OECD countries (171 advanced imaging machines per 1,000,000 population vs. 45 advanced imaging machines per 1,000,000 population among OECD countries and 91 machines per 1,000,000 population in the United States in 2019). ³ Those machines are commonly found in small clinics and hospitals that compete against each other to attract patients for outpatient services. Japan’s fee-for-service payment system and lack of regulation over large capital expenditures may have resulted in supplier-induced demand and overutilization.

Japan also has the second highest number of physician visits per year among OECD countries (11.1 annual visits per person vs 6.0 annual visits per person among OECD countries and 3.4 annual visits per person in United States in 2021). ⁴ Patients face low cost sharing for medical services and because of its open access system (no gatekeeping by a primary care physician), patients can visit any provider, including specialty care without proof of medical necessity. This has resulted in moral hazard from patients routinely seeking medical care for relatively minor ailments. Further, many patients with primary care problems tend to use tertiary care facilities, which has resulted in overcrowding of hospital facilities. Physicians may also choose any specialty without any additional training and primary care is typically managed by specialists who are self-trained to be generalists. Although the Ministry of Health, Labour, and Welfare (MHLW) has been trying to systematically train physicians in primary care, the number of primary care physicians (PCPs) in the country remains low.

Overview and Lessons From the US Health Care System

In contrast to the Japanese health care system, the US health care system is a multipayer system with a mix of public and private payers. Just over half (53.7%) of the U.S. population is insured through employment-based coverage. The federal government provides coverage to the elderly and disabled through the Medicare program (18.9% of the U.S. population), and the federal government and states provide coverage to low-income adults through the Medicaid (18.9% of the U.S. population). ⁵ The benefit and cost sharing structure are determined by the public and private insurers within federal and state laws and regulation.

Over the past several decades, the US has experimented with various payment and delivery system reforms that are aimed at reducing overutilization of health care services or the efficient delivery of care. The US experience illustrates several policy options that Japan could consider to address the overutilization of health care services and oversupply of acute care beds and advanced imaging. Each policy option has their advantages that need to be weighed against their disadvantages and their impact on patients and providers.

One option that Japanese policymakers could consider to improve the efficiency of its health care system is to reform how it pays providers for hospital stays. For example, to reduce the hospital ALOS, Japanese policymakers could set a prospective fixed fee per stay, similar to the US Medicare program, instead of a prospective fixed fee per day. Under the current system, hospitals in Japan are paid based on the diagnosis procedure combination (DPC). The DPC payment is a prospective fee per day based on the patient’s diagnosis and procedure codes. Each DPC category is assigned points based on the amount of resource use. A conversion factor then translates those points into a payment amount. The per diem payment amount differs under the three stages of the DPC system—it is highest under the first stage, which corresponds to the 25th percentile of the ALOS, and then it declines under the second stage (which lasts until the ALOS) and it further declines under the third stage (which lasts until the ALOS plus two standard deviations). In contrast, the US Medicare program pays hospitals using diagnosis related groups (DRGs), which is a fixed amount per stay based on a patient’s diagnosis or procedure and any comorbidities and complications with some exceptions for high-cost outliers. The prospective DRG payment gives hospitals an incentive to reduce the ALOS. Australia implemented a similar national DRG system in the 1970s and 1980s and it covers the entire patient population. ⁶ Although Japan previously considered the DRG payment system during the 1990, it did not implement DRGs because medical care was less standardized than it is today.

A possible advantage of using a fixed payment per stay is that hospitals would have an incentive to reduce unnecessary care and use resources more efficiently. ⁷ Another advantage is that hospitals would have predictability in their payment rate. Shorter lengths of stay might also result in fewer nosocomial infections. Some disadvantages of implementing a DRG system are that a risk adjustment system may not adequately capture the complexity of patients which could result in “cherry picking,” and hospitals might stint on the quantity of care or limit the access to care of certain patients. ⁸ This might result in poorer outcomes for patients with multiple comorbidities and chronic conditions. The transition toward a DRG system from the current DPC system would also be quite challenging.

Japanese policymakers could also encourage providers to shift care away from the inpatient setting to the less costly outpatient setting. Many procedures that are routinely and safely performed in the outpatient setting in the United States, such as hip and knee replacements, are predominantly performed in the inpatient setting in Japan. The US Medicare program maintains a list of procedures that can only be performed in the inpatient setting. In recent years, several procedures, such as hip and knee replacements have been removed from that list, which allowed for those procedures to be performed in the outpatient setting. ⁹ One advantage of this approach is that health care resources could be allocated more efficiently when care is delivered in a lower-cost setting. ¹⁰ A limitation, however, is that there could be safety issues if patients with complex conditions receive procedures in an outpatient setting. Care might also shift toward the most profitable setting depending on how the provider payment is structured. ¹⁰ To address the overutilization of medical visits, Japanese policymakers could consider paying some providers using partial capitated payments instead of on a FFS basis. For example, some US managed care organizations use capitated payments to pay physicians a fixed amount per patient. This payment method incentivizes providers to reduce unnecessary and low-value care. ¹¹ If partial capitation were to be implemented, then Japan’s payment rules would need to be modified. Routine primary care and chronic care disease management could be paid for under capitation while acute and specialty care could be paid on a FFS basis. An advantage of this approach is that providers could more efficiently improve their utilization of services, such as through care coordination. Providers might also reduce the use of low-value services. Partial capitation also poses less financial risk to providers than full capitation due to the fact that many PCPs may not have the capability to accept full financial risk. A limitation, however, is that providers might stint on care because of the fixed payment so policymakers may need to monitor the quality of care to prevent underutilization and worse patient outcomes. Another limitation is that the types of services covered under the partial capitated payment would need to be clearly defined to prevent gaming by providers. ¹²

The Japanese national fee schedule could also be used to address overutilization. Although the Japanese government cannot control the volume of services provided in a given year, they can reduce the reimbursement for services that are overutilized to discourage utilization of such services in future years.

Another option that Japanese policymakers could consider is to encourage a larger role for PCPs by imposing financial incentives on patients. In the US, most patients enrolled in managed care plans are assigned to a PCP, which acts as a gatekeeper to coordinate patient care and refer patients to specialists. Primary care has been associated with better quality of care, patient experience, and outcomes. Although patients in Japan have free access to see any provider, policymakers could incentivize patients to select a PCP by imposing higher premiums or cost sharing if they do not choose one. Higher cost sharing would help to reduce moral hazard and dampen patient demand. In conjunction with partial capitation payments and specialty withholds, primary care physicians operating under a gatekeeping model would have a stronger incentive to reduce specialty referrals. ¹³ Other countries, including fifteen European countries, have implemented primary care gatekeeping. ¹⁴ Although, the Ministry of Health, Labour, and Welfare has been promoting the concept of kakaritsukei or “home doctor,” patients do not face higher cost sharing if they do not choose a PCP. Higher cost sharing could also be imposed if patients visit a tertiary care or other hospital facility without a prior referral. If patients faced higher cost sharing, they might become more sensitive toward the types of care and which types of providers they use. On the other hand, patients might indiscriminately reduce all types of care and forgo both necessary and unnecessary care, which could result in decreased patient satisfaction or worse health outcomes. ¹⁵

Prior authorization is another tool that Japanese policymakers could consider to manage the utilization of high-cost services. In the US, prior authorization is used by some health plans to reduce the use of certain high-cost tests and procedures, such as CT and MRI scans or elective procedures. Under this approach, a provider must seek prior approval from the patient’s health plan to ensure that a certain service or procedure is medically necessary before it is provided to qualify for payment. Because Japanese policymakers are not allowed to directly restrict patient access to care, they could impose higher cost sharing if a patient decides to receive a certain service or procedure without a prior authorization, or they could withhold payment to a provider if prior authorization was not obtained. Some advantages of prior authorization are that it could decrease unnecessary care. Providers might order less, or patients might demand less low-value care. On the other hand, increased prior authorization might increase the administrative burden on payers and providers, and it could result in substantially higher administrative costs. ¹⁶ Prior authorization might also decrease access, delay care, decrease patient satisfaction and outcomes, and increase provider burnout. ¹⁷

Lastly, to moderate the supply of acute care hospital beds and advanced imaging machines, Japanese policymakers could consider implementing certificate of need laws. In the US, some states maintain certificate of need laws (CON) where a state agency must approve a major capital expenditure or project before it can proceed. Those laws were designed to control health care costs by avoiding unnecessary duplication or expansion of services in an area. One the one hand, CON laws could reduce the use of costly expenditures that are duplicative. ¹⁸ In addition, health care resources could be allocated according to a prefecture’s needs. On the other hand, CON laws could reduce provider competition and create additional regulatory burden on providers. Reduced competition could result in possible monopolies by providers or barriers to entry by new competitors. This could also result in longer wait times for patients if there is reduced supply. ¹⁹

Conclusion

Japanese policymakers should weigh the advantages and disadvantages of each policy option, and they should be pragmatic in their approach because implementing all of the policy options through broadly sweeping reforms might be challenging and disruptive. More importantly, policymakers should consider designing policies in ways that mitigate the disadvantages of each option. For example, an accurate risk adjustment would help prevent against providers cherry picking patients. In addition, including quality monitoring would mitigate stinting on care and ensure that care is provided in the most appropriate setting.

Although Japan has been able to control health care expenditures primarily through its regulated prices, it does not have the infrastructure in place to restrain utilization, which may be a key driver of increases in health care spending. The US health care system might be able to offer Japan some lessons on ways to reduce unnecessary utilization and oversupply of acute care hospital beds and advanced imaging that could achieve greater value in its health care system.