New NHI Drug-pricing System in Japan: Incentives for R&D and Budget Neutrality

  • Naohiko Wakutsu
  • Hiroshi Nakamura


We present an economic analysis of a new NHI drug pricing system in Japan, called “NHI Drug Price Premiums for Promoting the Creation of New Drugs and Eliminating Off-label Drug Use”. This initiative has been implemented on a trial basis since 2010 to spur pharmaceutical innovation, and its full (permanent) implementation is also under consideration. Considering that Japan is already the most indebted developed nation and that the government must walk a fine line between keeping medical expenditures low and encouraging innovation, we introduce the concept of “budget neutrality”, or no net increase in the financial burden on the government resulting from a system change. We then ask the following five questions: (i) How much does a pharmaceutical firm benefit more from the new system than from the current one? (ii) Is the new system budget-neutral? (iii) If not, and it is redesigned to be budget-neutral, then how much does it change the size of the firm’s benefit? (iv) What fraction of the firm’s benefit is attributable to the failure of budget neutrality (i.e., resulting from increased financial burden on the government, public health insurance and patients)? (v) How do the results change if the financial cost of issuing debt is taken into account? To address these questions, we constructed a hypothetical drug using actual data and conducted a numerical simulation. The following conclusions emerged: (i) The new system increases the firm’s discounted sales by 7.2%, which is nearly equivalent to winning a 10% price premium on initial entry price. (ii) The new system is not budget-neutral. (iii) If it is redesigned to be budget-neutral, then the firm’s benefit is reduced to a 3.7% increase in the firm’s discounted sales. (iv) Almost one half of the firm’s benefit is attributable to the failure of budget neutrality. (v) If the financial cost of issuing debt is included, the fiscal burden on the government is increased by 20%, and approximately 60% of the firm’s benefit is attributed to additional financial burden on the government, public health insurance and patients.

Key words

Drug pricing Pharmaceutical innovation R&D incentives Budget neutrality 

Category & Number

8 (Welfare and Social Security Policy) 

JEL Classification



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Copyright information

© Japan Economic Policy Association (JEPA) 2015

Authors and Affiliations

  1. 1.Kyoto UniversityKyotoJapan
  2. 2.Keio UniversityYokohama, KanagawaJapan

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