Japan has a nationwide, government-run health care system. The government decides how much it will pay for medicines, many of which were invented and produced by American companies.
Over the past year, in a series of unilateral announcements, Japan has announced its intent to change its rules for calculating prices in a way that will limit American companies’ ability to compete fairly in the Japanese market.
Japan’s system for setting prices used to automatically reduce those prices over time, regardless of whether the treatments were in high demand. For years, this departure from market economics predictably resulted in low levels of innovation in Japan and a delay of around three and half years before new, cutting-edge treatments became available to patients there.
In order to remedy this, eight years ago, the Japanese government introduced a “price maintenance” program (PMP). This represented Japan’s key policy aimed at promoting innovation. It worked by keeping prices of covered products constant until they went off patent, at which time all the deferred price cuts were applied at once, providing great value to patients.
The PMP has been a clear success. Spending on research and development is up 25 percent, and Japanese patients enjoy access to new treatments three years sooner than they used to.
Unfortunately, Japan has decided to try to balance its healthcare budget on the back of America’s innovative pharmaceutical industry. Instead of letting the success of the PMP continue, Japan has announced that it is changing the way it decides what companies’ products are fully eligible for it.
The Japanese government developed this new approach in secret and has failed to justify how the outcome is fair or appropriately defines innovation. Under the new rules, “innovation” isn’t based on scientific criteria but on how quickly a product is brought to the market and on the size of the company. So, for example, innovation in a given category that occurs after an arbitrary three-year limit does not get the benefit of the PMP.
This has unacceptably and absurdly put the most prescribed pharmaceutical product in the world, the American innovation Humira, in the “not innovative” category. Further, the new rules use flawed metrics to divide the biopharmaceutical industry into 3 tiers, based on size and domestic market presence rather than innovation.
Only companies included in Tier 1 will continue to receive the full benefit of the PMP. The outcome is telling: Japanese companies were awarded preferential treatment by a more than two-to-one margin over U.S. companies. The remaining U.S. companies receive second-class status.
Digging a little further is even more revealing. The Japanese companies placed in Tier 1 of the PMP spend an average of less than $850 million on research and development annually. But the top American companies assigned to a lower tier spend an average of almost $4 billion a year on research and development, each.
Where is the logic in using a program designed to promote innovation in a way that favors companies that invest less and punishes companies that spend nearly five times more?
This is exactly the type of discriminatory treatment President Trump recently announced he would not tolerate.
The changes to the PMP threaten to turn back the clock in Japan. It will inevitably reduce the resources available for research and development, thereby inhibiting innovation. And basing its innovation benefits on criteria that are neither science-based nor market-based will likely reintroduce a “drug lag,” delaying the availability of breakthrough treatments to Japanese patients.
From the standpoint of promoting innovation, it makes no sense. But in light of the real-world consequence that the new approach disproportionately favors Japanese companies, it is difficult to see this as anything but naked protectionism.
Earlier this month, President Trump announced a series of reforms designed to reduce the cost of healthcare. Included in this package is the recognition that many countries around the world have rigged their systems so that American innovators in health care are shortchanged. The President rightly recognizes this costs American jobs and shifts even more of the burden of paying for research and development onto American consumers.
In the past month, the U.S. Trade Representative released a report that takes note of how Japan is in the process of changing its healthcare system to favor Japanese companies unfairly. If Japan has decided to forsake innovation and patients in favor of protectionist measures to support its domestic companies, then it is time for the Trump Administration to weigh in.
President Trump and Japan’s Prime Minister Abe have launched an economic dialogue that provides an appropriate venue for this issue to be resolved. It would be unfortunate if that dialogue is unnecessarily soured by Japan’s pressing forward with protectionist measures that discriminate against American companies.
Hopefully, the Trump Administration will help them avoid creating trade friction, undermining innovation, and delaying access to new treatments.
Steven Tepp is President & CEO of Sentinel Worldwide and Professorial Lecturer in Law at George Washington University Law School.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.
