An analysis of the new medical payment system in Japan

Based on the report of the Central Social Insurance Medical Council concerning the 2002 Revision of the Medical Service Fee Schedule, a new inclusive payment system was introduced in 82 special functioning hospitals (university hospitals, National Cancer Center, National Cardiovascular Center) in Japan in April 2003. Beginning in April 2004, the system was gradually extended to general hospitals which satisfy the required conditions. This was the largest and most important revision of the payment system since the Second World War. Under the new system, medical payments comprise two components: inclusive payments based on the Diagnosis Procedure Combination (DPC) system and non-inclusive payments based on the conventional fee-for-service system. Although, strictly speaking, the new payment system is a case-mix payment system (Okamura et al. 2005), we refer to it as the DPC-based inclusive payment system, since the latter is the more commonly used description (Yasunaga et al. 2005). The DPC classifies diseases, operations, treatments and conditions of patients using a 14-digit code. The first 6 digits classify principal diseases based on the International Classification of Diseases-10 (ICD-10). From the seventh to the fourteenth digits, information on operations, treatments and conditions of the patients is given. Unlike the Diagnosis-Related Group/Prospective Payment System (DRG/PPS) used in the United States and other countries, the Japanese DPC-based payment system is a per diem prospective payment system. The daily payment decreases as the length of hospital stay becomes longer. One of the major purposes of the DPC-based payment system is to reduce the length of hospital stay. However, since the system was introduced recently, sufficient evaluations of the system have not been done. Although the DPC Evaluation Division of the Central Social Insurance Medical Council (2005 and 2006) published reports about the effects of introducing the DPC for the fiscal years 2004 and 2005, the contents are no more than simple comparisons of the lengths of hospital stays. Empirical studies of the lengths of hospital stays and medical payments by hospitals are necessary to evaluate the system correctly. For an analysis, a simple comparison of the average length of stay by hospital is not enough, and differences in types of diseases must be considered. Furthermore, the individual characteristics of patients and types of treatments must also be considered for the same disease. In this paper, we evaluate the new inclusive payment system for cataract operations (DPC Category Code: 020110). We utilize the data pertaining to 1,225 patients hospitalized for cataract who underwent lens operations from July 2004 to September 2005. We find large differences in the length of hospital stay and the inclusive payment based on the DPC among hospitals, despite eliminating the influence of patient characteristics. The highest average inclusive payment is 3.5 times higher than the lowest payment. On the other hand, differences in the non-inclusive payments based on the conventional fee-for-service among hospitals are relatively small. The largest deviation from the average of all hospitals is about 10%. The payments based on the DPC account for only one-third of the total medical payments for this disease. However, the major differences in medical payments by hospitals are caused by the payments based on the DPC. The results of the study strongly suggest the necessity of revising the payment system to more efficiently use medical resources in the future.