Regulated medical fee schedule of the Japanese health care system

  • Makoto Kakinaka
  • Ryuta Ray Kato


This study presents a theoretical framework for examining the effect of the Japanese government-regulated medical price schedule, ‘Shinryo-Houshu-Seido,’ on the behavior of medical providers. In particular, we discuss the optimal rule of this price schedule for the regulator, taking into account information asymmetry between the regulator and providers. Our simple model predicts that heterogeneous providers either under-provide or over-provide medical inputs in comparison with the socially optimal outcome. Moreover, our results show that when the allocated budget is reduced to a certain level, even the second-best outcome becomes unachievable, no matter how the price schedule is regulated. While the limited budget size is shown to have a clear negative effect on social welfare, we suggest that the prospect of obtaining the second-best outcome is left to negotiation between the regulator and the budget allocator.


Asymmetric information Budget caps Regulated medical fee schedule Japanese health care system 



We thank all participants in the Health Economics Workshop regularly held at Saku General Hospital, Nagano, Japan, and the Fifth Irvine-Japan Public Policy Conference at University of California, Irvine (March 2009) for their helpful comments and suggestions. The research fund by Promotion and Mutual Aid Corporation for Private Schools is acknowledged. Remaining errors are ours.


  1. Allen, R., & Gertler, P. (1991). Regulation and the provision of quality to heterogeneous consumers: The case of prospective pricing of medical services. Journal of Regulatory Economics, 3, 361–375.CrossRefGoogle Scholar
  2. Anabacken, O. (1994). Japanese hospitals—culture and competition: A study of ten hospitals. International Journal of Health Planning and Management., 9, 87–101.CrossRefGoogle Scholar
  3. Beitia, A. (2003). Hospital quality choice and market structure in a regulated duopoly. Journal of Health Economics, 22, 1011–1036.PubMedCrossRefGoogle Scholar
  4. Boadway, R., Marchand, M., & Sato, M. (2004). An optimal contract approach to hospital financing. Journal of Health Economics, 23, 85–110.PubMedCrossRefGoogle Scholar
  5. Bos, D., & De Fraja, G. (2002). Quality and outside capacity in the provision of health services. Journal of Public Economics, 84, 199–218.CrossRefGoogle Scholar
  6. Chalkley, M., & Malcomson, J. M. (1998). Contracting for health services when patient demand does not reflect quality. Journal of Health Economics, 17, 1–19.PubMedCrossRefGoogle Scholar
  7. Coscelli, A. (2000). The importance of doctors’ and patients’ preferences in the prescription decision. Journal of Industrial Economics, 48, 349–369.CrossRefGoogle Scholar
  8. Crainich, D., Leleu, H., & Mauleon, A. (2008). The optimality of hospital financing system: The role of physician-manager interactions. International Journal of Health Care Finance and Economics, 8, 245–256.PubMedCrossRefGoogle Scholar
  9. Custer, W. S., Moser, J. W., Musacchio, R. A., & Willike, R. J. (1990). The production of health care services and changing hospital reimbursement: The role of hospital-medical staff relationships. Journal of Industrial Economics, 9, 167–192.Google Scholar
  10. Dor, A., & Watson, H. (1995). The hospital-physician interaction in U.S. hospitals: Evolving payment schemes and their incentives. European Economic Review, 39, 795–802.CrossRefGoogle Scholar
  11. Dranove, D. (1987). Rate-setting by diagnosis related groups and hospital specialization. RAND Journal of Economics, 18, 417–427.CrossRefGoogle Scholar
  12. Dranove, D., & Satterthwaite, M. A. (2000). The industrial organization of health care markets. In A. J. Culyer & J. P. Newhouse (Eds.), Handbook of Health Economics (Vol. 1B). Amsterdam: North Holland.Google Scholar
  13. Ellis, R. P. (1998). Creaming, skimping and dumping: Provider competition on the intensive and extensive margins. Journal of Health Economics, 17, 537–555.PubMedCrossRefGoogle Scholar
  14. Ellis, R. P., & McGuire, T. G. (1986). Provider behaviour under prospective reimbursement. Journal of Health Economics, 5, 129–151.PubMedCrossRefGoogle Scholar
  15. Ellis, R. P., & McGuire, T. G. (1988). Insurance principles and the design of prospective payment systems. Journal of Health Economics, 7, 215–237.PubMedCrossRefGoogle Scholar
  16. Ellis, R. P., & McGuire, T. G. (1990). Optimal payment systems for health services. Journal of Health Economics, 9, 375–396.PubMedCrossRefGoogle Scholar
  17. Ellis, R. P., & McGuire, T. G. (1993). Supply-side and demand-side cost sharing in health care. Journal of Economic Perspectives, 7, 135–151.PubMedCrossRefGoogle Scholar
  18. Evans, R. G. (1974). Supplier-induced demand: Some empirical evidence and implications. In M. Perlman (Ed.), The Economics of Health and Medical Care. London: Macmillan.Google Scholar
  19. Glazer, J., & McGuire, T. G. (1994). Payer competition and cost shifting in health care. Journal of Economics and Management Strategy, 3(1), 71–92.CrossRefGoogle Scholar
  20. Grabowski, H. G., & Vernon, J. M. (1992). Brand royalty, entry and price competition in pharmaceuticals after the 1984 drug reform act. Journal of Law and Economics, 35, 331–350.CrossRefGoogle Scholar
  21. Hellerstein, J. K. (1998). The importance of the physician in the generic versus trade-name prescription decision. RAND Journal of Economics, 29, 108–136.PubMedCrossRefGoogle Scholar
  22. Ihori, T., Kato, R. R., Kawade, M., & Bessho, S. (2011). Health insurance reform and economic growth: Simulation analysis in Japan. Japan and the World Economy, 23(4), 227–239.CrossRefGoogle Scholar
  23. Ii, M., & Ohkusa, Y. (2002). Price sensitivity of the demand for medical services for minor ailments: Econometric estimates using information on illnesses and symptoms. Japanese Economic Review, 53, 154–166.CrossRefGoogle Scholar
  24. Iizuka, T. (2007). Expert’s agency problems: Evidence from the prescription drug market in Japan. RAND Journal of Economics, 38, 844–862.PubMedCrossRefGoogle Scholar
  25. Iizuka, T. (2009). Generic entry in a regulated pharmaceutical market. Japanese Economic Review, 60, 63–81.CrossRefGoogle Scholar
  26. Ikegami, N., & Campbell, J. C. (1999). Health care reform in Japan: The virtues of muddling through. Health Affairs, 18, 56–75.PubMedCrossRefGoogle Scholar
  27. Ikegami, N., & Campbell, J. C. (2004). Japan’s health care system: Containing costs and attempting reform. Health Affairs, 23, 26–36.PubMedCrossRefGoogle Scholar
  28. Jacobson, M., O’Malley, A. J., Earle, C. C., Pakes, J., Gaccione, P., & Newhouse, J. P. (2006). Does reimbursement influence chemotherapy treatment for cancer patients? Health Affairs, 25, 437–443.PubMedCrossRefGoogle Scholar
  29. Kurata, K. (2009). The development of new drugs in the Japanese pharmaceutical industry (in Japanese). RIETI Highlight, 28, 10–13.Google Scholar
  30. Lewis, T., & Sappington, D. (1999). Using subjective risk adjusting to prevent patient dumping in the health care industry. Journal of Economics and Management Strategy, 8, 351–382.CrossRefGoogle Scholar
  31. Liu, T., & Ma, C.-T. A. (2012). Health insurance, treatment plan, and delegation to altruistic physician. Department of Economics Working Papers, Stony Brook University.Google Scholar
  32. Liu, Y.-M., Yang, Y.-H. K., & Hsieh, C.-R. (2009). Financial incentives and physicians’ prescription decisions on the choice between brand-name and generic drugs: Evidence from Taiwan. Journal of Health Economics, 28, 341–349.PubMedCrossRefGoogle Scholar
  33. Lundin, D. (2000). Moral hazard in physician prescription behavior. Journal of Health Economics, 19, 632–662.CrossRefGoogle Scholar
  34. Ma, C.-T. A. (1994). Health care payment systems: Cost and quality incentives. Journal of Economics and Management Strategy, 3, 93–112.CrossRefGoogle Scholar
  35. Ma, C.-T. A., & McGuire, T. G. (1997). Optimal health insurance and provider payment. American Economic Review, 87(4), 685–704.Google Scholar
  36. McGuire, A. (1985). The theory of the hospital: A review of the models. Social Science and Medicine, 20(11), 1177–1184.PubMedCrossRefGoogle Scholar
  37. McGuire, T. (2000). Physician agency. In A. J. Culyer & J. P. Newhouse (Eds.), Handbook of Health Economics (Vol. 1A). Amsterdam: North Holland.Google Scholar
  38. Mougeot, M., & Naegelen, F. (2005). Hospital price regulation and expenditure cap policy. Journal of Health Economics, 24, 55–72.PubMedCrossRefGoogle Scholar
  39. Naito, H. (2006). The Japanese health-care system and reimbursement for dialysis. Peritoneal Dialysis International, 26, 155–161.PubMedGoogle Scholar
  40. Newhouse, J. P. (1983). Two prospective difficulties with prospective payment of hospitals, or it’s better to be a resident than a patient with a complex problem. Journal of Health Economics, 2, 269–274.PubMedGoogle Scholar
  41. Newhouse, J. P. (1996). Reimbursing health plans and health providers: Efficiency in production versus selection. Journal of Economic Literature, 34, 1236–1263.Google Scholar
  42. O’Malley, A. J., Frank, R. G., Kaddis, A., Rothenberg, B. M., & McNeil, B. J. (2006). Impact of alternative interventions on changes in generic dispensing rates. Health Services Research, 41, 1876–1894.PubMedCrossRefGoogle Scholar
  43. Pauly, M. V., & Redisch, M. (1973). The not-for-profit hospital as a physicians’ cooperative. American Economic Review, 63, 87–99.Google Scholar
  44. Pope, G. C. (1989). Hospital nonprice competition and medicare reimbursement policy. Journal of Health Economics, 8, 147–172.PubMedCrossRefGoogle Scholar
  45. Poterba, J. (1994). A skeptic’s view of global budget caps. Journal of Economic Perspectives, 8, 67–73.PubMedCrossRefGoogle Scholar
  46. Rogerson, W. P. (1994). Choice of treatment intensities by a non-profit hospital under prospective pricing. Journal of Economics and Management Strategy, 3, 7–51.CrossRefGoogle Scholar
  47. Selden, T. M. (1990). A model of capitation. Journal of Health Economics, 9, 397–409.PubMedCrossRefGoogle Scholar
  48. Shortell, S., Morrisey, M. A., & Conrad, D. A. (1985). Economic regulation and hospital behavior: The effects on medical staff organization and hospital-physician relationships. Health Services Research, 20, 597–628.PubMedGoogle Scholar
  49. Siciliani, L. (2006). Selection of treatment under prospective payment systems in the hospital sector. Journal of Health Economics, 25, 479–499.PubMedCrossRefGoogle Scholar
  50. Tirole, J. (1988). The Theory of Industrial Organization. Cambridge, MA: The MIT Press.Google Scholar
  51. Tokita, T. (2002). The prospects for reform of the Japanese healthcare system. Pharmacoeconomics, 20, 55–66.PubMedCrossRefGoogle Scholar
  52. Van de Ven, W. P. M. M. (1995). Regulated competition in health care: With or without a global budget? European Economic Review, 39, 786–794.CrossRefGoogle Scholar
  53. Wagstaff, A. (2007). Health systems in East Asia: What can developing countries learn from Japan and the Asian Tigers? Health Economics, 16, 441–456.PubMedCrossRefGoogle Scholar
  54. Wright, D. J. (2007). Specialist payment schemes and patient selection in private and public hospitals. Journal of Health Economics, 26, 1014–1026.PubMedCrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.Graduate School of International RelationsInternational University of JapanMinami-UonumaJapan

Personalised recommendations