Japan's Push to Cut Drug Costs Risks U.S. Trade FrictionBy and
Potential changes could reduce profits for drug companies
Government is considering whether to review prices annually
Japan’s effort to rein in soaring health-care costs threatens to become a source of tension in economic relations with the U.S. after running into opposition from the American pharmaceutical industry.
While the U.S. Commerce Department sees Japan’s drug market, the world’s third largest, as the top near-term growth opportunity for its pharmaceutical exporters, the view from Tokyo is of crippling medical bills as the ranks of the elderly swell and the working-age population declines.
With this in mind, Japan’s health ministry is looking into reviewing drug pricing annually, instead of every second year as is the case now. The most recent review helped the government shave 150 billion yen ($1.4 billion) from its 10 trillion yen in spending on medicines in the 12 months through March, according to the finance ministry.
Japan rebuffed a suggestion from the U.S. in April that drug pricing should be included in the bilateral economic dialogue, according to a person in Tokyo with knowledge of the discussions. He asked not to be named due to the sensitivity of the discussions. The Office of the U.S. Trade Representative and Japan’s Ministry of Foreign Affairs both declined to comment on the economic dialogue.
There is some doubt as to whether Japan will be able to maintain this position when the talks resume, potentially as early as next month.
"Especially in the Trump era, if the Japanese government wants to ensure a healthy economic relationship with the U.S., they have to be prepared to at least talk about U.S. priorities," said Matthew Goodman, a senior adviser for Asian economics at the Center for Strategic and International Studies in Washington.
Goodman, who was with the Treasury at the U.S. embassy in Tokyo in the mid-1990s, headed Goldman Sachs Group Inc.’s government relations team in Japan and also worked at the National Security Council as director for Asian economic affairs, said the issue could end up "pretty high" on the agenda in the bilateral talks.
Japan spent about $90 billion on pharmaceuticals in 2016, making it the No. 3 market after the U.S. and China, according to the QuintilesIMS Institute, a service provider for pharmaceutical companies. The Commerce Department has estimated that U.S.-origin pharmaceuticals had about 20 percent of the market in Japan, with 6 percent imported directly and the remainder manufactured locally by American companies or under license.
While drug companies are free to set the prices they charge hospitals and pharmacies based on market conditions, sales are affected significantly by the rebate the health ministry pays back to these health-care providers to help keep treatment affordable for patients. Reviewing this subsidy price every year instead of biennially could be a more effective way for Japan to hold down costs.
Finance Minister Taro Aso said in a Sept. 1 press conference that he wants to keep increases in social-welfare spending, including medical care, under 500 billion yen in next year’s budget. He said switching to annual reviews for drug pricing was among the potential ways to control costs.
The U.S. Trade Representative has urged Japan to "follow transparent processes" and "provide all stakeholders, including U.S. stakeholders, meaningful opportunities for input" into any changes in the drug-pricing scheme.
The Pharmaceutical Research and Manufacturers of America industry group said pro-innovation policies put in place by Japan over the past decade have brought great benefits to patients but could now be in jeopardy.
"We are concerned about potential policy proposals that could threaten this progress and put at risk the ability of patients to access the treatments they need to live healthier, more productive lives,” said Amy Jackson, the group’s Japan representative.
Health Minister Katsunobu Kato said in a recent interview that he would maintain transparency in the process while changes are considered but he also emphasized that "drug pricing is a totally domestic issue." A decision is expected by the end of the year.
Mizuho Research Institute’s Junichi Sugawara said that it’s always difficult to strike the right balance between protecting manufacturers -- who wouldn’t be able invest in large-scale research and development without a sound financial return -- and ensuring access to medicines for patients.
But he sees Japan’s demographics and budget position leaving it in a difficult place.
"More than in the past, the ability to accommodate the U.S. requests is limited," said Sugawara, who is an economist and the institute’s chief researcher.
— With assistance by Kanoko Matsuyama