The Japanese Reimbursement System

The Japanese reimbursement system offers attractive initial reimbursement rates and reduced reimbursement rate volatility for most medical devices

September 2011

The modern Japanese reimbursement system for medical devices was announced in 1992 and implemented in 1994. Although the system receives criticism for its simplicity, it offers a number of advantages to medical device manufacturers that are often unexplored in public debate regarding the system.

To fully understand the system, it is important to know the basics of its structure. In Japan, medical devices generate two potential reimbursement streams. The first, specialty treatment material (STM) reimbursement, is direct reimbursement for the device itself based on its functional category designation (i.e., the reimbursement rate for other products offering a similar therapeutic function). The second, technical fee reimbursement, is offered for the procedure associated with the device and is paid in addition to the STM reimbursement or as an all-inclusive reimbursement for products that do not qualify as STMs. A key difference between the Japanese and US systems is that Japan provides product and procedure-specific reimbursement as opposed to lump sum DRG/PPS payments.

The type of reimbursement granted varies depending on a product's reimbursement classification (see table below). Most therapeutic devices are classified as B, C1 or C2 and receive both STM and technical fee reimbursement. Generally speaking, the only devices that do not receive STM reimbursement are capital equipment and commodities used during a procedure (i.e., products classified as A1, A2).

Reimbursement Classification Types

To understand the benefits of the system, it is important to understand the reimbursement price setting and adjustment mechanisms that apply to STM products. For STM products, initial STM reimbursement levels are set based on consideration of a variety of factors, including: 1) the current reimbursement levels for similar products or treatments, 2) the manufacturer?s cost for bringing the therapy to market, 3) the price of the product in foreign markets (specifically, the US, UK, France and Germany) and 4) the level of improvement / benefit offered by the product vs. other products / therapies.

The initial reimbursement rate for most therapeutic devices is generous vs. the pricing for the same device in the US or Europe. Japan recognizes the higher cost of bringing products to market in Japan and, in practice, considers reimbursement rates of 1.5x the simple average of the list price for the product in the US, UK, France and Germany to be reasonable. Although there are some products for which the combination of a smaller market size and high regulatory costs makes entry into Japan economically infeasible, in most cases, the reimbursement rate offered in Japan is attractive and allows manufacturers to operate with attractive margins.

Once the reimbursement rate for a device has been set, it is then adjusted every two years based on one of two mechanisms: Foreign Average Price (FAP) or the Reasonable Zone (R-zone). FAP adjustments only occur when reimbursement rates exceed 1.5x the foreign average price for the product. Although FAP adjustments can be significant, they only occur when there are significant discrepancies between the prices charged in Japan and the price charged overseas. In contrast, R-zone adjustments tend to be relatively small and only occur when price-based competition among manufacturers causes pricing levels to drop below the allowable hospital margin. The vast majority of products are only subjected to R-zone adjustments.

Based on the nature of STM reimbursement price setting and adjustment in Japan, for most products, manufactures can expect the following:

1. initial reimbursement levels that are attractive for new devices
2. infrequent reimbursement rate reductions (at most, every two years) that lag actual pricing reductions in the market place
3. gradual predictable reimbursement rate reductions based primarily on the level of price-based competition among manufacturers

As described above, in addition to STM reimbursement, most medical devices also generate a technical fee reimbursement which covers the procedure itself. Technical fees are not subjected to the same systematic reductions that are applied to STM reimbursement. As a result, these fees tend to be more stable further reducing the volatility of the aggregate reimbursement generated by the device.

As with most markets, once reimbursement prices are set, they tend to decline as a result of competition and new entrants. This has undoubtedly created a difficult reimbursement environment for those companies that manufacture products in highly competitive categories. However, the structure of Japan's reimbursement system enables companies to obtain premiums for innovation and ensures that reimbursement price reductions lag that of the actual market.

JETRO North America Medical Device Advisor
Harold Smith