We're looking at health care systems around the world, and a striking thing about Japan is [it has achieved] universal coverage and very good results at such a low cost. How have the Japanese done this?

Well, there's the costs explanation to it, [which] is that we have better lifestyles and a better nutrition and, apart from the smoking, the public [health] factors are pretty good. But in Japan, too, the [health] expenditures were increasing at the same rate as the United States' in the 1980s, but then it plateaued after the 1990s. So there must be a system explanation for that, because the costs did not change that much.

So people had a good diet in the '80s when costs were rising. Something changed in the '90s?

Right. I think that it's because the government is able to control the flow of money. And the way the government controls the flow of money is that we have multiple payers and multiple providers, but there's a single-payment system -- not a single payer but a single-payment system -- so that all payers must abide by the payment system, and all providers must be paid by the system.

So this is like a valve, so that if the government wants to contain costs, it can cut, ... and that decreases the flow of money, or at least it contains the increase in the flow of money. This is done by a two-step method. The first step is that the prime minister himself decides how much the macro increase will be.

How much the total medical expense budget is going to go up?

Right. ... Having made that the first step, the second step is how to allocate that [increase] among the various procedures and drugs. And in this we have a completely different approach to that of the United States, where you, in Medicare, ... it's an across-the-board conversion factor, so that if there's a 2 percent decrease, it would be applied 2 percent for every single procedure in the surgical and in the medical procedures.

But in Japan this is done on a procedure-by-procedure basis and by a drug-by-drug basis, and the way that is done is that a survey is made of the financial situation of the providers.

So you're saying the government has the power to determine these prices, what they're going to pay. Don't the providers, hospitals, have power in pricing?

They can certainly negotiate, but after making the first-step decision I was saying -- prices are going to be decreased by 3 percent -- then everything must be fitted within that. So certain prices may go up, certain prices may go down, but in general, the final results should be that the overall budget should be as set by the first step, a 3 percent reduction.

Every two years, when they set the cost for things, they publish them in this big telephone-book-like manual. And everything's in there?

Right.

So there's one price for sutures and another price for stitches?

Yeah. If it's more than 10 square inches, it will be this amount; if it's less than 10 square inches, it will be this amount. So it's very finely defined. ...

Let's take an example of how these low costs work. In Denver, where I live, if you get an MRI of your neck region it's $1,200, and the doctor we visited in Japan says he gets $98 for an MRI. So how do you do that?

Well, in 2002 the government says that the MRIs, we are paying too much, so in order to be within the total budget, we will cut them by 35 percent.

If I'm a doctor, why don't I say, "I'm not going to do them; it's not enough money"?

You forgot that we have only one payment system. So if you want to do your MRIs, unless you can get private-pay patients, which is almost impossible in Japan, you go out of business. ...

... The price of that MRI is so much cheaper in Japan. Doesn't he have to pay the same price, $5,000, for an MRI machine like the man in America?

Well, it depends on what kind of image density the radiologist wants. And the MRIs that are available in Japan are much less expensive than those that are typically found in the United States.

So the imaging machine is cheaper? ... To me that's another advantage of negotiating low prices: Then the supplying industry has to cut its prices, and the MRI makers met this need.

Right. And MRIs have now become very big in [the] export industry.

So the health ministry set a low price, the MRI makers make cheaper machines to help the doctors meet that price, and now Japan is exporting these around the world?

Right. ... This is a situation where the market does work in health care. ...

... How many insurance plans are there in Japan?

Three thousand five hundred, but that's because about 2,000 of them are from local government, which are for plans for those who are not employed, and 1,500 is the number of large companies [which] have their own.

But for the doctor it doesn't matter, because there is one payment form and one set of forms to file.

Right.

Does this also give you a benefit on administrative costs?

It certainly does, because first of all, it's much easier to do the books if there's only one payment system. ... And then because providers and brands cannot individually negotiate, then you need to have highly educated and highly paid staff in order to do the complicated negotiations.

And an American doctor, as you know, when they file a bill with the insurance company, the claim is denied, constantly denied. Can an insurance plan in Japan deny a claim?

It can, but that is a secondary process. The primary process is that in each of our states there's a central [clearinghouse], ... and on average they deny about 1 percent in a month of the claims.

Does the doctor then generally forget that or fight it?

They can appeal, ... but the second part is that the health [insurance] brands can also have a secondary review, and then they can ask the state-level [clearinghouse] ... to reconsider. But it's up to the state level. ...

Is this right that, in Japan, there is just less cutting, less invasive surgery than in other cultures?

Yes, I think it's true. There's several explanations. [One] is that there's a cultural explanation, that we do not like to take aggressive treatment. Also, from the disease perspective, we have less heart disease. But I think, again, the system answer is the most convincing, and that is that our surgical procedure fees are low, so it does not financially pay so much to undertake these surgical procedures. And the fourth aspect is that surgeons who do operate are paid a fixed salary. So there's no incentive -- as we say, economic incentive -- to undertake that one extra surgery.

So, looking at it purely from the economic point of view, if I'm a doctor I could make more money treating somebody over years rather than doing surgery on them.

Yeah, a physician focusing on primary care would make more money than the cardiologist. ...

It seems to me that doctors should be livid about this control [from the government]?

Yeah. Well, again, when you say doctors, each doctor has his or her own stake, and whether that stake can [have an] impact on the general policy or not is another issue. In Japan the private practitioners are very well organized under the Japan Medical Association, so the Japan Medical Association has so far managed to cushion the effect of cost containment on their private practices. But the hospital physicians are not so well organized, so they have taken a harder hit, and that is why there's serious talk about paying hospital physicians more.

In America we tend to think of a doctor as a rich guy who drives a Lexus to the country club for dinner. Is that the image of a doctor in Japan?

To a certain extent. But ... it's only successful doctors in private practice who can have that kind of lifestyle, and not all those in private practice. As far as those employed in hospitals, ... if they are working in an urban, large medical center, they are going to [make] what their peers in the college would be earning in large companies, so there won't be that much difference. If they go to work in the rural hospital, then they might be only twice as much ... as the urban medical center physician. ...

... And this helps lure people to rural hospitals?

Yeah, because the rest of the hospital staff, the nurses and others, are more willing to work in rural hospitals at lower wages, so they can afford to pay higher wages to doctors. ... But this is a whole different notion than the United States, where orthopedic surgeons can get much higher income, especially if they practice in an urban medical center. ...

[Are these lower wages] driving down the number of doctors?

Well, as far as the competition to get into medical school, it's gone up. ...

A major issue in America is this notion that our big manufacturing companies are strapped with lots of health insurance costs, particularly the auto companies. ... For example it is often said that GM pays $1,600 per car for health care, and I just read recently in a big American newspaper that Toyota pays nothing. Is that correct?

That's completely wrong, because every employer is mandated to provide insurance to their employees. But since [health] expenditures are lower in Japan, the resulting premiums that they must pay are lower. So the premium rate for large companies is 7.5 percent of [an employee's] total income, and this is paid just over half by the employer and just under half by the employees. ... The law states that the employer must pay over half. So it can be from 50 percent to 80 percent, and that's negotiable.

For an average worker in Japan, … what would the average health care premium be per month?

Well, the average payment is about $3,000 per month, so 7.5 percent of that would be $230.

That's covering the family, too?

That covers the family.

At least the employer, we know, pays half ... So the employee at a decent Japanese company, for his whole family, is paying about $140 a month in health care insurance?

Right.

That's an incredible bargain by American standards.

You must remember that about one-third of health expenditures is financed by taxes, but at least the health insurance [premium] part would be about that amount. ... Our health expenditure is 8 percent of GDP [gross domestic product], whereas the U.S.'s is 16 percent. ...

... What medical services are covered in the basic insurance package?

... The general rule is that anything that is shown to be effective and safe will be covered.

Anything a doctor would do to you?

Right.

Is dental care covered?

Yes.

Mental health?

Yes.

Visual?

Not for gratis.

For surgery or something?

Yes. ...

The care overall in Japan, the quality, is good?

Well, just the end results, the macro health [indicators] of infant mortality and longevity are the best in the world. If you can say that the health care system has little to do [with it], then you get to the next question: Why are you going to spend so much money?

So here we are in a country with the longest life expectancy, good health results, low costs -- sounds like paradise. Are there problems in paradise?

I think it's a mirror image of the United States in that we [underspend] on health care. For example, in the year 2006, health expenditures only increased by 0.1 percent, whereas the nominal GDP increased by ... 1.5 percent.

Health care went up 1/10 of 1 percent?

Right, and the reason why the government has this tight control over all prices is because the national government funds one-quarter of health expenditures, ... and the Japanese government now has a huge deficit amounting to 1.5 percent [of] GDP, and the debt is still increasing as a result of having to make tax cuts and investing in public works during the 10 years of deficit.

So in order to [start] paying back, they are making every effort to cut expenditures. This is across-the-board cost containment, and health expenditures are under that umbrella.

And remember that this is happening at the time when Japan is having a very rapid growth for the elderly. According to my calculations, just aging within the population should contribute a 2 percent increase, so the fact that there has been only a 0.1 percent [increase] means that real ... expenditures did decrease. ...

The United States overspends on health care. To me, overspending is a bad thing, I can see that. You say Japan underspends. Why is that bad? If you can save money, isn't that a good thing?

The investment must be made. ... If you want to have the goodies -- the latest device, the latest drug -- that needs to be paid by someone. And it's difficult to say if this particular procedure or if this drug prescribed, would it be a most efficient use of resources or not? From the patients' perspective, they don't want to be efficient for their particular care. ...

In terms of controlling costs, Japanese people appear to be prodigious consumers of health care. They go to the doctor three times as often as Americans do, [have] many more MRIs, many more scans than Americans have. They stay in the hospital much longer than Americans for the same procedure. Is that an area where they could control costs?

Yeah, but the government has made it a policy goal that they should shorten the length of stay. ... This is going to be [attached] to the subsidies that they're going to give to our new health insurance for the elderly over 75, so this will have some teeth in it. But the problem with health care is this: Health care is like a balloon, that if you squeeze at one end, another end pops up. So the pressure to decrease the length of stay would result in shifting services to outpatient and to long-term care. ...

Why do Japanese people go to the doctor so often, three times as often as Americans? Do they like it?

Well, the one thing is that total time spent by the patient with the physician may not be that different, because the consultation times are pretty short.

Pretty short? Meaning how long?

If it's a repeat consultation, it may be five minutes or so. ... If you're an elderly patient with a chronic illness, you may like to have a short visit to assure yourself, but if you want to have a long time going over the issues, that may not be a good practice. But the doctors may say that, since the consultation fees are kept low, they ask the patients to come more often. But then that's why the co-payment rate has been increased.

The co-payment is what the patient pays when he shows up at the doctor; used to be 20 percent of the bill?

For the employer it used to be zero. There was no co-payment due until 1980, and then they introduced 10 percent, and then it went up to 30 percent ... in 2003.

Do people go to the doctor less often because they have to pay more?

As part of the government team, we looked at the impact of the increase of the co-payment, and it has a short-term effect. ... But if you look at the annual records, it does not seem to have ... an effect.

The difference between paying 20 percent of the cost of a visit and 30 percent is how many yen?

For outpatient, it may seem pretty significant, but once it goes over a certain catastrophic amount, then the co-payment goes down to 1 percent. ... It's on a monthly basis, ... and the amount depends on the income. So if you have a low income, the cutoff point may be about $300, and if you're high-income, it would be about $1,200.

So people who are sick and have to go to the doctor a lot have a big break on the co-pay?

Well, I think it's mostly for inpatients who have very high cost, ... like dialysis and hemophilia. ... For these particular diseases, the catastrophic [rate] kicks in after $100 ... per month. If consecutive months exceed a certain amount, or if there are more members of your household exceed[ing] that amount, then that amount is lowered for the second month or for the second member of the family.

I think what you're getting at here is that they've got a system that makes sure people don't go broke paying medical bills.

Right. I think the main goal of a public health insurance system is to prevent people [from] going broke.

How many people in Japan go bankrupt because of medical bills?

None, or at least there should be none, because first of all, they should be covered, and if they're not covered, then they can get covered by paying back one year's premiums. And if they can't pay back the one year's premium, then they will be on public assistance.

If somebody in Japan loses [her] job, does she lose her health insurance, too?

She loses the employment-based insurance, but then there's the community-based insurance, which is mandated for her to enroll and for the local government to enroll that person.

Can they turn her down if she has heart disease or something?

That is forbidden. ... Neither can the employer deny in hiring someone because of health conditions.

So if lose my job I don't lose my health insurance; in fact, I'm required to buy it, but from the city instead of an employer?

Yeah. ... It's more like taxes rather than having something that you want to pay or must pay. ...

So in Japan you can walk into the hospital and say, "I need to see a heart specialist," and you can see one that day [without a referral]?

Right, and the government is trying to discourage that by a higher co-pay if you don't come with a letter, but that is only ... for the first visit; then everything else is covered. So it's not really acting too efficiently or effectively. ...

As a patient, I think that's great; I want to walk in and see a specialist without an appointment. As an economist, what do you think? Is that a good system?

No, but then for that gatekeeper function to be desirable, ... the patient must trust the gatekeeper. ... But then we have the reverse situation in that the patient may think he needs to be seen by a cardiologist, ... but may actually have another disease or maybe a psychological condition which could be better [if] followed up by a primary care physician.

We have a debate going on about health care in America. Some of the candidates basically say that anything in a foreign country is socialized medicine. Is Japan using socialized medicine?

Yeah. I mean, ... this is all part of the social health insurance system, so it is socialized medicine. For the government to decide unilaterally that the prices would go up or down, this is a socialized system.

Does the government own the hospitals?

No. ... The federal government owns only 10 percent. ... Ten percent is for the voluntary organizations. Eighty percent is truly private.

That's a higher percentage of private hospitals than in the U.S., isn't it?

Right.

The doctors are privately employed businesspeople, is that correct?

Two-thirds of our doctors are employed by hospitals. One-third are private practitioners working in clinics, but they do not have hospital privileges. ...

So hospitals are private, only 10 percent of the doctors work for the government, to me that's not the description of socialized medicine: the government running, the government providing, the health care.

But, for example, England's National Health Service, they have tried to privatize their hospitals by creating foundation trusts. I think that is a general direction in that it's just a tradition of the government being both the financing part and the providing part. They have been trying to split that so that there should be more market efficiency. It's the same internal market argument.

Do market efficiencies work in medicine?

To a certain extent. For example, the lowering of drug prices and for devices, that is an area where there are tangible aspects of it so that you can compare apples to apples. But if you are talking about comparing health insurance grants and trying to make them compete, they will compete on cherry-picking.

By picking healthy patients?

Right.

These health care plans covering basic health care for a worker and his family, do they make a profit?

No, because they are not allowed to make a profit. And anything left over is carried over to the next year, and if there's a lot carried over, then the premium rate would go down.

We've been hearing about Japan moving toward a more market-oriented system. Would that be moving toward the American direction?

... Back when [Junichiro] Koizumi was prime minister, there was a strong movement to allow extra billing. ... Extra billing is like, for example, using off-label drugs: The insurance says that this cancer drug can only be used for lung cancer because its studies have been only made for lung cancer, and we don't know whether that's effective for other cancer.

Now, the pro-market economy business leaders who were under the prime minister's council said that this should be deregulated, and providers can bill the part that is covered by the public health insurance to the public health insurance [and] the part that is not covered directly to the patient. But ... they decided, in effect, that the prohibition would remain, so that extra billing and balance billing would not be allowed.

Do you agree?

Yes.

That's not a good way to go.

No, I don't think it's a good way to go, because the whole notion of choice in health care is very different from the typical market-economy situation. For example, plastic surgery may be the one area where market forces can work, where there's time available to make that rational choice; it is not a life-and-death situation, and the outcome is fairly predictable. ...

Do you think the Japanese people feel that everyone in this country should all have a basic package of medical coverage?

According to opinion polls, I would not only say basic but egalitarian coverage [for] all. Over 70 percent of the Japanese, when they're asked that question, say they're not only in favor of basic coverage, they are in favor of egalitarian coverage.

Do you think we're going to make [a] major change in U.S. health care?

Aside from Iraq, it would be the biggest election issue in the presidential election. Instead of a big-bang solution, you would need to have incremental adjustments so that eventually you get there. So if the presidential term is four years, aim for a three-year plan.

To do it in one term would be quite an achievement.

I think you do need to do it in one term, because there's no assurance that the president will be re-elected.