Medical Device Reimbursement in Japan

Presented to MassMEDICApril 10, 2008

Paul BarryDirector, International Trade & Health

PolicyBoston 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 >$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) 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

MHLW

ApplicantDossier

ExpertCommittee

Chuikyo

6. Public Announcement: Listing in NHI Reimbursement

Eco Affairs DivHealth Policy Bureau

Med Economics DivHealth Insurance

Bureau

Shonin (Regulatory) Approval

1. Application for reimbursement

2. Hearing5. Notification of Approval

3. Expert opinion

4. Listing decision

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 andB) Higher utility or safety than similar products andC) 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 andb) Increased safety for healthcare professionals andc) Improves the method of treatment andd) 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 SecondaryDealer

Customers

Sell$200

Sales activities, OR (Operation Room) SupportSales activities, OR (Operation Room) Support

Follow-Up, OR Support, Inventory Management, Delivery, Billing, A/R, etc

Follow-Up, OR Support, Inventory Management, Delivery, Billing, A/R, etcPaymentPayment

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

0

1

2

3

4

5

6

7

8

9

10

1990 1994 1997 2000 2004 2008

Drugs

Med Dev

Docs

Price/Cost Controls: FAP

Foreign Average Price (FAP) Rules: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 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?