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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


STMs represent about 1/3 of overall device budget, or about 3% of national healthcare expenditures

2.

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 PTCA .1 PTCA .1 PTCA .2 Cath for passing through coronary stenosis .3 Coronary stent set .3 Coronary stent set .3 Coronary stent set (1) General type (2) Infusion type (3) Perfusion type (4) Cutting type ----151,000 Y 171,000 Y 175,000 Y 168,000 Y 58,200 Y

(1) Standard type (2) Emergency treatment type (3) Re-narrowing prevention type -----

279,000 Y 380,000 Y 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
Eco Affairs Div Health Policy Bureau

Expert Committee

3. Expert opinion

4. Listing decision

Chuikyo

Med Economics Div Health Insurance Bureau

6. Public Announcement: Listing in NHI Reimbursement

Product Pricing Classification System

A1 A2 B C1

Covered under technical fee. Product reimbursement is included in technical fee. Commodity-type products, e.g., sutures, gauze. Covered under technical fee. Product itself gives technical fee. High-end products such as MRI, CT, etc. Me-too product reimbursement category. Existing technical fee and separate device fee, with predicates in the market. 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. New products/therapy. New technical fee and device reimbursement category must be created.

C2

Timing of Reimbursement

A1 A2 B C1 C2

Automatically after 20 days of filing 1st day of every month, when filed before 10th day of previous month 1st day of every month, when filed before 10th day of previous month 4X / yr Jan 1, Apr 1, July 1, Oct 1 (submitted at least 4 months prior); Provisional coverage prior to final listing 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

Utility Premium (I): 15-30% Meets A or B+C from above

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

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 (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

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

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 means to help cover other operating costs

 Allows for small margin to be kept by hospitals as a  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 5 4 3 2 1 0 1990 1994 1997 2000 2004 2008 Drugs Med Dev Docs

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 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%)

 If the domestic market price is more than 1.5X of average

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 March, new prices effective April 1

 Final price adjustments published and distributed to hospitals in

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 therapies; product generation gaps are growing viewed very differently than in the past

 Creating disincentives for introduction of new products and  Uncertainty regarding return-on-investment, Japan is being

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 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 being considered

 Intensified price scrutiny; annual price surveys and revisions  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 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?

2.