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Cutting Japan's growing drugs bill without harming patients

Insurers should switch cash away from cheap everyday medicines to vital new treatments

Public health insurance should be adjusted to pay out less for common drugs, to help fund costly new treatments.   © ullstein bild /Getty Images

With an aging population, medical bills in Japan's national health insurance system are rising. And nothing is going up as fast as spending on drugs.

The Ministry of Health, Labor and Welfare recently revealed that while Japan's estimated medical bills in the fiscal year 2017 (ending in March 2018), rose 2.3% overall to 42.2 trillion yen ($370 billion), the increase in medication spending was 2.9%, the largest increase in any category.

One of the main reasons behind the rise is demand for new and expensive drugs, such as hepatitis C treatments Harvoni and Sovaldi, and Opdivo, the anti-cancer drug developed by Ono Pharmaceutical on the basis of research by the joint winner of the 2018 Nobel Prize in Medicine, Dr. Tasuku Honjo.

Opdivo's price in Japan was initially set at about 730,000 yen per 100 milligrams, costing a patient 35 million yen a year. It will be lowered in November to about 170,000 per 100 milligrams after a price reduction, following a special regulatory decision from the health ministry.

The Ministry of Finance plans to call for further cuts in drug prices in budget preparations for the fiscal year starting April 2019. From the fiscal year 2021, the welfare ministry plans to begin enforcing the revision of drug prices every year, instead of every other year as now.

However, there are other new medications that are even more expensive than Opdivo reaching the clinical application stage in Japan, including leukemia drug Kymriah, lymphoma treatment Yescarta and Luxturna, a gene therapy for inherited retinal disease, costing in the U.S. $475,000, $373,000 and $850,000 per treatment, respectively.

Cuts in standard prices of drugs and other cost-controlling measures will be expected to improve the fiscal sustainability of Japan's national health insurance. According to OECD statistics, Japan currently spends 11.2% of gross domestic product on health care (fiscal 2015 data), compared withto 11.1% in Germany and 16.9% in the U.S. As elsewhere in the developed world, the government is struggling to control costs in the face of demographic change.

But critics say developing drugs requires huge investments and squeezing drug prices further will make it harder to provide patients with groundbreaking new treatments. It will also hold back companies involved in medical drug development, including startups, and badly damage Japan's pharmaceutical industry in harsh global competition.

In fact, in the face of the globalization and worldwide corporate restructuring, the world's biggest 10 companies by sales in 2015 were all European and U.S. companies. Japan's highest ranker was Takeda Pharmaceutical at No. 16 -- proof that Japan's pharma industry is far behind the West.

The global market was estimated at about 100 trillion yen in 2015, and is expected to grow 3%-6% annually over the next few years. Japan would miss huge opportunities if its companies are handicapped by price restraints at home.

Then, how do we cope with this problem? In a book published in Japanese in July, which I wrote with professor Takuma Sugahara -- "Economics of Drug Prices under National Health Insurance" -- we set out some possible solutions.

First, reform is needed in the way the government determines spending in Japan's national health insurance system, including drugs costs.

Currently, the public insurance system covers a part of the cost. Patients contribute on an age-related basis, with a 30% base rate for those aged 20-70, 20% for those aged 70-74 and 10% for patients who are 75 and older.

This should be replaced by a system in which contributions are assessed on the basis of the seriousness of the disease being treated and the effectiveness of the drugs used.

Insurance payments should be focused on serious illnesses and on the often-innovative and sometimes-expensive drugs that can be used to treat such disorders. This would allow us to concentrate insurance funds on expensive cases where support is necessary to protect patients and their families against financial risks.

We don't have to reinvent the wheel in Japan. In France, for example, patients' contributions are set according to how innovatory and how important in treatment terms the drugs used are. The system requires a 0% contribution for irreplaceable and expensive medication such as anti-cancer drugs; 35% for normal medication; 70% for gastrointestinal agents; 85% for medication evaluated as low in usefulness; and 100% for vitamins and other health-boosting drugs.

In our book, using France as a reference point, we propose establishing three categories -- A) medication for illnesses that are fatal or have serious long term health effects; B) medication for illnesses which are not very serious but for which there are as yet no low-cost generic treatments; and C) other drugs.

I have suggested, as a possible pilot test, setting contribution rates of 0%, 30% and 70%, respectively. The idea is to protect the seriously ill, while raising the cost to patients of drugs that have cheaper alternatives to promote using such alternatives, while not changing the rates under the current system.

My trial calculation shows insurance payments could be cut by about 800 billion yen -- or approximately 10% of the annual drugs bill -- while shifting resources to more important medications. The savings could be used for anything, ranging from promoting other health care, such as prevention (which also reduces costs), to cutting overall government spending.

In controlling the budget, it is also necessary to look at size of the market for a given drug, i.e. volumes as well as prices. Super-expensive drugs attract attention because of their prices, but they are often applied to rare diseases, meaning the number of patients is small and their impact on the insurance budget is often small. Of course, their impact on the overall budget might become bigger depending on their future applications.

In cases like this, the introduction of health technology assessment, or HTA -- the systematic evaluation of a health technology -- being considered by the health ministry could become useful.

Deploying HTA would control total medical drugs costs effectively. But we must remember the true role of the health care lies in helping patients and contributing to society as a whole. Cost control should not be an end in itself.

Kazumasa Oguro is a Hosei University professor and a consulting fellow at Research Institute of Economy, Trade and Industry.

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