Transcript Slide 1

Medical Device Reimbursement
in Japan
Presented to MassMEDIC
April 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 copayments (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 >$26 bil; growth has flattened
in recent years.
Funding & Healthcare Environment
 Social insurance system is financially unsustainable
 Social security payments and spending are now more than 2X
annual income and consumption taxes collected
 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, etc.
 Pressure to increase medical fees (physicians)
 Government is resorting to cost-containment and price-cutting
initiatives targeting drugs and devices
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 MHLW
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
1.
“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

2.
STMs represent about 1/3 of overall device budget, or about 3%
of national healthcare expenditures
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 (STMs)
 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
Applicant
Dossier
1. Application for
reimbursement
Shonin (Regulatory)
Approval
2. Hearing
5. Notification of Approval
MHLW
Expert
Committee
3. Expert
opinion
Eco Affairs Div
Health Policy Bureau
4. Listing
decision
Chuikyo
Med Economics Div
Health Insurance
Bureau
6. Public Announcement: Listing in NHI Reimbursement
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
A2
Automatically after 20 days of filing
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
1st day of every month, when filed before 10th day of
previous month
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
Utility Premium (I): 15-30%
Meets A or B+C from above
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) advantage
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 PAL
+
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
New Product Pricing
If no similar technical fee: use Cost Calculation Method:
Cost of production/import
+ Promotion expense
+ General administrative expenses
+ Distribution expenses
+ Operative profit
+ Consumption tax
= Price of a material of a new function class
What’s 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
Company’s
Japan Affiliate
Primary Dealer
Secondary
Dealer
Customers
Sell
$200
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 supplier
 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 yen
• new official reimbursement price = 985 yen
Average R-zone % Price Adjustment, 1990-2008
10
9
8
7
6
Drugs
Med Dev
Docs
5
4
3
2
1
0
1990
1994
1997
2000
2004
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
Before the Revision
X
B x 1.5
A
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 period
 Final price adjustments published and distributed to hospitals in
March, new prices effective April 1
Impact of Price Controls on STMs
 More than $3 Billion in forsaken medical technology industry
revenues since 2002 (as of 2006)
 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 Japan’s own
med tech industry
 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 2006
 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 certain
Future Developments
Two potentially major systemic changes looming:
1.
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 expected
2.
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?