I OVERVIEW

The national health insurance system

Japan is recognised worldwide as a society of health and longevity at relatively low costs. Like most developed countries, it has a universal health insurance, referred to as the national health insurance system (NHIS), which was established in 1961 (see Section II below), but Japan also has a privately initiated medical care provision system. These two systems are sometimes called the 'publicly funded and privately delivered' system.

However, the sustainability of the NHIS has been questioned because of the rapid rise in healthcare costs due to the low fertility rate, ageing population, growing use of expensive technologies and Japan's general economic slump for the past two decades.

To tackle those challenges, Japan adopted several reforms, including the following:

a The Medical Care Plan (see Section II below) was adopted in 1985.

b The Long-term Insurance System, which is a social insurance system for those aged 65 and over who require long-term care and social services, was introduced in 2000. This system is reviewed and revised every three years in order to maintain sustainability.

c The concept of the Integrated Community Care System, which is a comprehensive system at the community level that integrates the provision of healthcare, nursing care, prevention, housing and livelihood support, to enable the elderly to live self-sufficiently in environments that are familiar to them, was widespread as a matter of national policy from 2012.

d The Comprehensive Reform of Social Security and Tax was started in 2012. This reform consisted of joint reforms of the social security and taxation systems to improve the fiscal sustainability of Japan's social security system. This cross-system reform plan includes measures for the support of children and child-raising, the employment of young people, the reform of medical and long-term care services, pension reform, measures against poverty and income inequality, and measures for low-income earners.

e The Regional Healthcare Vision (see Section II below) was started in 2015.

Moreover, Japan's privately initiated medical care provision system has been gradually shaped by a planned economy approach to make the healthcare economy more efficient.

Hot issues to be tackled with assistance from professionals

The following are some of the hot issues that we believe will eventually require the support of financiers as well as lawyers, accountants and other professionals.

Uneven distribution of physicians

The phenomenon of karoshi (death caused by overwork or job-related exhaustion) is a reality in Japan, even in the medical industry. In 2017, the karoshi of medical interns in 2015 and 2016 in severe working environments were determined as workers' accidents. Although it is anticipated2 that supply and demand of physicians will balance out around 2028 (on the premise of 60 working hours a week and other conditions) or 2033 (on the premise of 55 hours a week and other conditions), the uneven distribution of physicians, in both geography and practice areas, and their severe working environment remain a major problem. See Section IX below.

Ageing and deterioration of medical institutions

The number of medical facilities rapidly increased from the late 1970s to the early 1980s in anticipation of the introduction of restrictions on the number of hospital beds in 1985. The statutory depreciation period for steel-reinforced concrete buildings of 39 years, which apply to these facilities, is expiring. In addition, these facilities do not satisfy the latest earthquake resistance standards. Therefore, we anticipate that a considerable number of medical facilities will need large-scale repairs, if not complete reconstruction. See Section IX below.

Family-oriented governance of medical corporations

Medical corporations are corporate bodies that are operated by administrative bodies for medical care service programmes without losing the non-profit status of the medical practice.

The seventh major revision of the Medical Care Act (the '7th Revision') promulgated in 2016 and enforced in April 2018 statutorily obligated a certain scale or category of medical corporations to comply with the Japan GAAP for medical corporations, accept external audit procedures, and publish written reports on transactions of a certain scale with their directors, close relatives or other specified persons. As a result, a review of corporate governance systems, especially in family-owned medical corporations, is anticipated. See Sections VI and IX below.

New industrial technologies

Ultra-expensive pharmaceuticals, radiotherapy facilities, ICT, AI, robotic surgery and other industrial technologies have evolved and will keep evolving. These technologies increase and deepen inter-relations between the medical industry and for-profit corporations and organisations that confront the conventional philosophy on the non-profit status of medical practice in Japan. See Section IX below.

II THE HEALTHCARE ECONOMY

i General

Although Japan residents avail themselves of private health insurance, Japan boasts of a working NHIS for its residents. The NHIS possesses the following features, namely, (1) legal residents in Japan are required to enrol in the public health insurance system, (2) there is freedom of choice of medical institutions (so called 'free access'), and (3) medical services, medication and medical devices that are covered by NHIS are available at a low cost under a nationwide uniform price system.

ii The role of health insurance

As long as Japan legal residents pay the required insurance premiums, they are entitled to medical services covered by the NHIS. The insured co-pay 10–30 per cent of the service fees to the medical provider. While NHIS coverage is wide and includes most basic medical services and conditions, there are medical services, such as heavy particle beam therapy or certain new experimental therapies, that are not covered. The NHIS does not allow NHIS-covered medical treatment to be provided alongside uncovered treatment, and considers the entire NHIS-covered and uncovered medical treatments as not covered by NHIS at all, except in very limited circumstances. Thus, many individuals opt to take out private health insurance for medical services not covered by the NHIS.

iii Funding and payment for services

The NHIS has allowed Japan to enjoy the world's highest level of life expectancy and healthcare standards, but because it allows free access to medical facilities and providers, an enormous amount of public subsidy is required to maintain the universal health insurance coverage. Thus, its sustainability is heavily affected by tax revenues and other public funds.

To control the supply and demand of medical recourses, Japan adopted the Medical Care Plan in 1985, under which the Ministry of Health, Labour and Welfare (MHLW) obligates each prefectural government to make periodic reports on its prefecture-specific healthcare system. These reports must include an estimate of future supply and demand of hospital beds in the 'secondary medical service areas'3 and their medical functions (such as acute phase function and recovery phase function), basically targeting (1) cancer, cerebral apoplexy, cardiovascular diseases, diabetes and mental disorders, referred to as the 'five diseases'; (2) emergency medical care, medical care in case of disasters, medical care in remote areas, perinatal medical care, and paediatric medical care (including paediatric emergency medical services), referred to as the 'five services'; and (3) home medical care. The reports used to be required every five years, but from 1 April 2018, the reports must be submitted once every six years with provisional revisions to be made every three years. If the number of existing hospital beds with certain medical functions exceeds the standard number of that type of hospital beds in the secondary medical service areas set out in the Medical Care Plan, the prefectural governor can directly or indirectly refuse applications for additional hospital beds.

From 2015, the MHLW further obligated each prefectural government to create, within its Medical Care Plan, a prefecture-specific vision called the Regional Healthcare Vision. This vision requires the use of a newly adopted reporting system (introduced from 2014) on medical functions of hospital beds to estimate supply and demand for healthcare for 2025 (when the baby boomers will reach the age of 75) and establish region-specific healthcare systems by 2025.

Medical service fees payable to medical institutions and pharmacies for insured medical services, medication and devices are determined every two years by the MHLW based on discussions within the Central Social Insurance Medical Council. The FY 2018 revision of medical fees covered by the NHIS applicable for two years from 1 April 2018 showed an average decrease of 1.19 per cent from the previous fees. That average decrease represents an increase in medical service fees but a decrease in the prices of drugs and supplies.

III PRIMARY / FAMILY MEDICINE, HOSPITALS AND SOCIAL CARE

Unlike some countries where patients are required to first see a general practitioner even for insurance-covered medical services or have no direct access to high-functioning hospitals, Japan's free access policy allows patients to directly access high-functioning hospitals for medical services covered by the NHIS. In order to cope with increasing medical costs, however, public policy guides patients and physicians to seek a general practitioner first. For example, in the FY 2018 revised fees, medical fees are increased for medical institutions that strengthen its general practitioner practice. Generally, patients without a referral from a general practitioner have to pay ¥5,000 as a first consultation fee to visit hospitals with at least 400 beds.

IV THE LICENSING OF HEALTHCARE PROVIDERS AND PROFESSIONALS

i Regulators

The MHLW regulates the licensing and overall practice of healthcare professionals including physicians and dentists.

Licensed physicians and licensed dentists, however, are not automatically registered with the NHIS. They need to register as insurance physicians or insurance dentists with the Local Bureau of Health and Welfare where they are located.

Prefectural governments are also responsible for overseeing the management and operation of medical institutions on a regional basis.

As can be seen in the adoption of the Medical Care Plan and the Regional Healthcare Vision, there is a tendency to shift administrative powers over medical practitioners and institutions from national government to prefectural governments.

ii Institutional healthcare providers

Under the Medical Care Act, medical practice can only be performed in medical institutions that are categorised as 'hospitals' (with 20 or more beds) and 'clinics' (with zero to 19 beds).

The Medical Care Act also provides for requirements for establishment permits (e.g., staff deployment standards, facility standards, and responsibilities of managers) for each category of hospitals (such as 'general hospitals', 'special functioning hospitals', 'regional medical care support hospitals', 'clinical research core hospitals', 'psychiatric hospitals' and 'tuberculosis hospitals') and the names that hospitals can use.

The setting up of clinics requires notification if the applicant is a physician or dentist, or a permit if the applicant is a corporate body or is neither a physician nor a dentist.

In addition to the licensing requirement, medical institutions must be separately registered as insurance medical institutions to be included in the NHIS system.

iii Healthcare professionals

Healthcare professionals such as (1) physicians, (2) dentists, (3) pharmacists, (4) public health nurse, midwives, nurses and assistant nurses, and (5) others are regulated under:

a the Medical Practitioners Act;

b the Dental Practitioners Act;

c the Pharmacists Act;

d the Act on Public Health Nurses, Midwives and Nurses; and

e other laws, respectively.

A graduate of a medical school (or medical department of university) outside Japan, or a physician licensed outside Japan must be accredited by the MHLW in order to take the National Examination for Medical Practitioners.4 However, (1) a physician, dentist or nurse licensed outside Japan who visits Japan for purposes of acquiring medical knowledge and skills, or (2) a physician or dentist licensed outside Japan who visits Japan for purposes of teaching or researching medicine or dental medicine, may provide medical services to the extent that such services are rendered within the said purposes by special permit from the MHLW. 5

To our knowledge, foreign entities who approach the Japanese medical industry sometimes involve foreign medical practitioners in their R&D or commercial activities. But the performance of any medical act in Japan always requires a licence or its equivalent under the Medical Practitioners Act.6

V NEGLIGENCE LIABILITY

i Overview

Because of an information asymmetry between medical practitioners and their patients, as well as the physicians' expertise, the medical hierarchy or the locked-room nature of the medical profession, medical practitioners do not typically lose medical malpractice cases. In 2016, the average trial period of medical malpractice cases was approximately 24.2 months and their settlement rate was approximately 53.3 per cent, while the average trial period of civil cases (other than overpayment claims) was approximately 8.8 months and their settlement rate was approximately 34.7 per cent.7 This means that medical malpractice cases tend to end in settlement in over 50 per cent of the cases, after prolonged trial periods.

Technically, a 'reasonable causal relationship' between a negligent conduct and damages or death is not easy to establish. Therefore, Japanese courts have eased the plaintiff's burden of proof under various theories, such as 'violation of patient's expectation right' and 'possibility of patient's survival to a reasonable extent at the time of death', among others.

Moreover, it is important to mention that no punitive damages are allowed under Japanese law, and the amount of damages paid to the elderly is generally not large.

ii Notable cases

In a decision issued on 22 September 2000, the Supreme Court adopted the concept of 'possibility of patient's survival at the time of death to a reasonable extent' by holding that in cases where the causal relationship between a doctor's negligent medical act and a patient's death is not proved, but the possibility of the patient's survival to a reasonable extent at the time of death if medical services satisfying fair medical standards were rendered is proved, the doctor shall be liable.

There have been two recent high-profile medical malpractice incidents in Japan. The first is the use of propofol, which is banned for use on children, on 63 children at the Tokyo Women's Medical University Hospital in 2014. The second is the high incidence of deaths in patients who underwent complex liver surgery by laparoscopic operation at the Gunma University Hospital in 2015. Both hospitals involved are 'special functioning hospitals' that provide advanced medical care, develop and evaluate advanced medical technologies, and provide advanced medical research. These incidents led to the eighth major revision of the Medical Care Act (the '8th Revision'), which became effective on 1 June 2018, which reformed the governance of special functioning hospitals, including requiring due procedures for the appointment of hospital managers, establishment of an audit committee to ensure the safety of medical care, and establishment of a compliance system.

VI OWNERSHIP OF HEALTHCARE BUSINESSES

Various entities including the government, public medical organisations, social insurance related entities, medical corporations, public benefit corporations, private school corporations, social welfare corporations, general corporation associations or foundations, stock corporations and individuals can operate medical facilities such as hospitals and clinics; however, approximately 68.6 per cent of the hospitals in Japan are operated by medical corporations (as of 31 March 2018).8 A medical corporation is either a medical corporation association, which is an assembly of people, or a medical corporation foundation, which is an assembly of funds. A medical corporation association may be with or without equity. When a member (and equity holder in almost all cases) of a medical corporation association with equity leaves the medical corporation by resignation or death, that member or his or her heir has the right to request for the return of that member's equity. When a medical corporation association with equity is dissolved, the residual assets will be distributed to the equity holders proportionately to their equity holdings. On the other hand, when a medical corporation association without equity is dissolved, the residual assets will be distributed to the national government, local governments or other medical corporations without equity.

As of 31 March 2018, out of the 53,944 medical corporations, there were 39,716 medical corporations with equity. As mentioned above, if a member of a medical corporation association with equity resigns or dies, he or she, or his or her heirs, can ask for the return of the equity. The amount to be returned is calculated by multiplying the then net asset value of the medical corporation with the equity ratio. This calculation was upheld by the Supreme Court in a decision issued on 8 April 2010. As can be expected, the operation of a medical corporation association with equity is adversely affected when the association must accommodate a request to return a member's equity. Thus, the government encourages medical corporations with equity to convert into medical corporations without equity by providing time-limited tax incentives.

More specifically, a conversion is done by the voluntary relinquishment by all members of their right to request for the return of their equity. Therefore, the members need a lot of convincing to give up that right. The government hopes to do this through tax incentives, such as the deferral of and exemption from inheritance tax (on deceased member's heirs) and deemed gift tax (on the members who do not relinquish that right at the time of conversion, or even if they do relinquish, on the medical corporation itself that acquires benefits from the relinquishment by all the members), for conversions made from 1 October 2014 to 30 September 2017 (under certain strict requirements), and from 1 October 2017 to 30 September 2020 (with a relaxation of such strict requirements). Once a medical corporation with equity converts into a medical corporation without equity, however, it cannot reconvert into a medical corporation with equity.

One of the major policies of the Medical Care Act is that medical practice must be non-profit. The reasons given for this non-profit policy include (1) Japanese medical services are supported by the universal healthcare insurance backed by public funds and, thus, medical services should not be provided for profit and (2) non-profit organisations have fewer incentives to take advantage of the information asymmetry between physicians and patients for profit and are, thus, a cost-effective way to monitor fraud by medical service providers. Because of the non-profit status of medical services:

a a licence to operate medical facilities is generally not given to for-profit organisations (with limited exceptions);

b medical corporations are prohibited from making dividend distributions (including de facto dividend distributions like rents proportionate to earnings); in other words, any surplus of medical corporations can only be used for medical expenditures such as maintenance and improvement of medical facilities and salaries of the employees and any remaining balance must stay within the medical corporations;

c the directors general of medical corporations must be physicians or dentists, with exceptions under specific permit from the relevant prefectural governor; and

d for-profit organisations such as stock corporations may make monetary contributions to medical corporations but cannot become members thereof (with limited exceptions).

In addition, directors of entities operating a medical facility are prohibited from concurrently serving as directors or employees of other for-profit entities with an interest in the establishment or operation of that medical facility.

Because of the foregoing restraints, for-profit organisations are less incentivised to make contributions to medical corporations, especially in the context of M&A to revitalise distressed ones. Prohibition of rents proportionate to the earnings of a hospital restrains the flexible structuring of attractive products in the area of securitising hospital real estate.

Specific to family-owned medical corporations, a for-profit organisation, called a 'medical services corporation' or an 'MS corporation', is often established by a family, and provides to the medical corporation such services as laundry of linen, leases of medical devices and hospital/clinic building, procurement of medical goods and drugs, and provisions of accounting and other administrative services. There are suspicions that surpluses from medical services are paid to MS corporations for those services to circumvent the principle of non-profit status of medical institutions. The current arrangement with MS corporations is expected to be affected by the requirement of the 7th Revision for the auditing of the financial statements of medical corporations and filing requirements for, and public disclosure of, transactions with closely related entities.

VII COMMISSIONING AND PROCUREMENT

Commissioning is a process where the delivery of certain public services to be provided by the public sector is commissioned to the private sector, whereas procurement is a process where the public sector procures from the private sector goods and services it needs to deliver public services. In Japan, medical services are provided by private entities, which are not subject to commissioning and procurement procedures applicable to governmental entities.

VIII MARKETING AND PROMOTION OF SERVICES

Restrictions on advertisement of medical services

Before the 8th Revision, there were two different sets of restrictions on the advertisement of medical services: (1) one for advertising media such as advertising inserts, TV commercials and signboards under the Guidelines for Advertisements on Medical Services, and (2) another for advertisements on websites under the Guidelines for Home Pages of Medical Institutions.

Before the 8th Revision, generally, no-one may advertise any matter with respect to medical services other than certain limited information (such as the name of a physician or dentist, his or her clinical department name, and medical services to be rendered). False advertising was subject to penalties (so called 'direct penalties'), while comparative advertising, exaggerated advertising, objective-truth-not-proven advertising and advertising with contents in violation of public orders and morality (collectively, 'exaggerated advertising') were subject to orders for suspension or correction from the relevant prefectural governor but only subject to penalties in violation of such orders (so called 'indirect penalties'). In any event, if there was a threat of false or exaggerated advertising, the prefectural governor was entitled to request the submission of a report and to have its officials enter and inspect the sites. Advertising on the websites of medical institutions was not treated as 'advertisement', which was prohibited under the Medical Care Act, and therefore no penalties were imposed on the violation of the Guidelines for Home Pages of Medical Institutions.

However, because numerous consumer problems related to aesthetic medical services arose from advertising on the medical providers' websites, the 8th Revision defined advertising under both items (1) and (2) above as statutory 'advertisement' subject to direct penalties for false advertising, indirect penalties for exaggerated advertising (to which definition the 8th Revision added advertising by use of patients' experiences on a subjective or hearsay basis and advertising by use of misleading pictures before and after medical treatments), and site inspection by the relevant prefectural governor. The 8th Revision also clarified the limited cases that are not subject to the aforementioned limitations on advertisement, taking into account medical treatments that are not covered by the NHIS or other information that patients need to know. The Guidelines for Home Pages of Medical Institutions were integrated into the Guidelines for Advertisements on Medical Services on 1 June 2018.

Healthcare providers and their commissioned advertising agencies and affiliate marketers may also be subject to other advertisement regulations under other laws of more general application, such as the Act against Unjustifiable Premiums and Misleading Representations, the Pharmaceuticals and Medical Devices Act,9 the Health Promotion Act, and the Act on Unfair Competition Prevention.

Restrictions on marketing and promotion activities toward healthcare providers and professionals

Medical institutions and universities (including healthcare professionals) not only buy from pharmaceutical and medical device companies, but also collaborate with these companies for medical and pharmaceutical research, safety measures, and reliefs from adverse drug reactions, and arrangements are often accompanied by monetary payments in return for their contribution.

The MHLW and the Pharmaceuticals and Medical Devices Agency10 are the principal regulatory authorities under the Pharmaceuticals and Medical Devices Act. In addition, the Fair Trade Commission and the Consumer Affairs Agency oversee those relations through the relevant self-regulatory organisations11 pursuant to the Fair Competition Code Concerning Restrictions on Premium Offers in the Ethical Pharmaceutical Drugs Marketing Industry and the Fair Competition Code Concerning Restriction on Premium Offers in the Medical Devices Industry, both of which are based on the Act Against Unjustifiable Premiums and Misleading Presentation.12

At an industry self-regulation level, pharmaceutical and medical device companies have made efforts to make such relations more transparent through their industry associations and industry regulations based on high ethical standards. These industry regulations include corporate activity charters, compliance programme guidelines, codes of practice, promotion codes and transparency guidelines. It should be noted, however, that these industry regulations are not legally binding and violations thereof are not penalised.

Some groups within the MHLW are pushing to partially elevate such industry self-regulations into official MHLW notifications that are subject to 'indirect penalties' if violated.13

IX FUTURE OUTLOOK AND NEW OPPORTUNITIES

Discussed below are possible solutions currently being considered or in progress to the hot issues pointed out in Section I above.

Uneven distribution of physicians in regional areas and among departments

A bill for amendments to the Medical Care Act and the Medical Practitioners Act was submitted to the Diet in March 2018 and if enacted, will be enforced on 1 April 2019 or 2020. The main features of the bill are:

a Introduction of a new system on MHLW's accreditation of physicians with certain working experiences in regional areas facing a shortage of physicians, as managers of 'regional medical care support hospitals';

b Establishment of 'plans to procure physicians' in the 'Medical Care Plans', based on a PDCA cycle by prefectural governors, and enhancement of the cooperative functions of councils for regional medical services in prefectures;

c Reinforcement of measures for procuring physicians through training programmes, including having regional quota for admissions to medical schools in universities; and

d Promotion through conferences and setting up of policies for functional differentiation and cooperation among healthcare providers and professionals inside and outside of each medical service area.

Ageing and deterioration of medical facilities

Solutions to ageing and deteriorating medical facilities include complete reconstruction and large-scale repairs (including renovation for earthquake-resistant structures) of these facilities. We anticipate that these necessary repairs or construction will be financed primarily through debt financing by the Welfare and Medical Service Agency14 or other financial institutions and secondarily through asset financing, rather than equity funding, because of the low return on investment due to the non-profit status of medical practice.

As to asset financing such as securitisation of real estate for hospitals, on 26 June 2015 the Ministry of Land, Infrastructure and Transport issued the 'Guidelines Concerning REITs Investing In Real Estate For Hospitals', which took effect on 1 July 2015. The guidelines were issued after discussions with various interested parties including the MHLW and the Japan Medical Association (JMA)15 and placed importance on healthcare business operators and internal management systems in the licensing requirements for asset management companies of REITs. It bears mentioning that the securitisation of hospital real estate essentially requires a separation of the ownership of fundamental assets and the operation of the healthcare business, which is different from the traditional view by originators of hospital real estate that medical assets should be owned and operated by medical practitioners.

Despite the said guidelines, however, there has not been much progress in investments in hospital real estate so far. The first deal made by a healthcare REIT listed on the Tokyo Stock Exchange was the acquisition by Healthcare and Medical Investment Corporation of Niigata Rehabilitation Hospital by purchasing trust beneficial interest on 10 October 2017. But no other listed REITs have acquired hospital real estate since, and it seems private REITs that are preparing to acquire hospital real estate have not been listed yet. In our view, one reason is that the JMA continues to be vigilant against the entry of 'funds' that represent for-profit entities, which are inconsistent with the non-profit status of the medical practice. This approach creates anxiety among healthcare business operators about the possible discontinuation of their business because of the loss of hospital real estate in the event of non-payment of rent.

New approaches to connect the healthcare industry and the 'fund' industry are crucial. These approaches include (1) eliminating the old-fashioned view that the ownership of hospital assets and the practice of medicine should be one and the same, (2) encouraging healthcare business operators to establish and implement a more enhanced and transparent governance system, and (3) encouraging 'fund' investors not to seek excessive returns through 'ESG investing', 'SRI' or 'impact investing'.

Family-oriented governance of medical corporations

On 2 April 2017, Japan started a new corporate system called 'Corporations Promoting Regional Medical Cooperation' under the 7th Revision. Under this system, general incorporated associations that meet certain criteria may be accredited by prefectural governors as 'Corporations Promoting Regional Medical Cooperation'. These criteria include (1) establishing a policy of providing functional differentiation of, and cooperation among, healthcare services within a healthcare service area and (2) engaging in activities involving non-profit organisations who agree with the said policy and participate in meeting hospital bed quota and cooperative purchasing of pharmaceuticals and medical devices, exchange of personnel, and R&D among those organisations.

However, as of 1 April 2018, there are only six such accredited corporations. Of those, a corporation called Japan Sea Healthcare Net Corporations Promoting Regional Medical Cooperation was accredited on 1 April 2018. This corporation is unique in that it is managed by an independent administrative agency that was established in April 2008 as a result of a merger of two hospitals that were sponsored by different local governments. This merger represents a 'hard-type' business integration initiated by medical organisations that are sponsored by and reliant on local governments. It bears studying whether that kind of 'hard-type' business integration will become a preferred choice of local-government-sponsored medical organisations, given that, according to the latest survey reports,16 approximately 90 per cent of them were in deficit without local government funding and 'hard-type' business integration may be unavoidable.

On the other hand, for private medical corporations, we expect that 'soft-type' solutions will be more easily employed than 'hard-type' solutions because the integration of varied human resources and payroll systems generally takes considerable time and effort. These soft-type solutions include (1) business alliances or management integrations of medical corporations and (2) M&A transactions where the purchaser acquires controlling power (and if the target is a medical corporation with equity, the purchaser also acquires the equity).

We also expect that, like many other legal entities in Japan, medical institutions will start enhancing their governance systems such as safety, compliance and whistle-blower systems.

New industrial technologies

The most recent major amendments to the primary data protection law in Japan, the Act on the Protection of Personal Information (APPI) completely came into effect on 30 May 2017. The amended APPI strictly restricts the utilisation of patients' medical history and other sensitive information referred to as 'special care-required personal information'. In this regard, a special but related law, the Act on Anonymised Medical Data to Contribute to R&D in the Medical Field came into effect on 11 May 2018 with the aim of balancing industrial needs and privacy protection. Another recent law, the Act On Clinical Research, which came into effect on 1 April 2018, safeguards the quality of, and protects data subjects in, certain types of clinical research called 'Specified Clinical Research', by requiring the researchers to comply with certain clinical research standards, submit research implementation plans and be reviewed by certified clinical research review committees, and by requiring the marketing authorisation holder to disclose conflicts of interest arising from the provision of research grants.

It is hoped that these new laws, which aim to address issues arising from new industrial technologies, will not only create legislative and administrative regulations but also strengthen self-regulation and cooperation between the non-profit healthcare industries and the for-profit industries.

Possibility of inbound or outbound investments into or from, or business partnerships with, healthcare providers

Inbound investment by foreign entities by way of contributions in medical corporations in Japan is not likely to be permissible in the near future. The JMA has taken the view not only that profit organisations should not have any controlling power over medical corporations but also that foreign entities should not have such power.

Inbound investment by way of shares of peripheral profit companies (usually family-owned companies) is possible under certain procedures under the Foreign Exchange and Foreign Trade Act, except where national security is affected. In any case, M&A purchasers who have their own R&D or commercial activities that involve medical practice in Japan must have the necessary licence under the Medical Practitioners Act before they may perform medical acts on legal residents in Japan.

On the contrary, outbound investments by Japanese medical corporations into shares of foreign medical entities are permissible, subject to compliance with notifications issued by the MHLW,17 as long as (1) their overseas operations will not adversely affect their original business of running hospitals, clinics, long-term-care health facilities or long-term-care medical centres, (2) the aggregate investments in local entities are within their retained earning reserves on their latest balance sheet prepared in accordance with the 'Medical Corporation Accounting Standards', and (3) they make prescribed prior and periodic reports to the MHLW.

X CONCLUSIONS

The world has been watching Japan as it faces enormous and unprecedented challenges in healthcare ahead of any other country because of Japan's twin population problems of inevitable ageing and persistent population decline. As Japan continues to confront and overcome these mounting and increasing difficulties, the medical, healthcare, nursing care and related industries will need the ever increasing and ever crucial support, resourcefulness and initiative investors, innovators and professionals, including lawyers, especially in the context of M&A, financing, governance, restructuring and rehabilitation to navigate the growing needs of Japan's citizens.


Footnotes

1 Noboru Suwa is a partner at, and Fumiharu Hiromoto is counsel to, Mori Hamada & Matsumoto. Noboru Suwa is also a healthcare management consultant registered with the Japan Association of Healthcare Management Consultants. Our thanks go to our colleague Jane Pardinas.

2 See 'The Third Interim Report' from 31 May 2018, prepared by the Physicians Supply and Demand Subcommittee under the Healthcare Providers Supply and Demand Review Committee (set up by the Health Policy Bureau of the MHLW).

3 Secondary medical service areas are areas determined by each prefectural government in its Medical Care Plan as enabling the provision of relatively highly specialised medical services including hospitalisations. On the other hand, primary medical service areas are those for the provision of daily medical services that generally correspond to minimum administrative districts, and tertiary medical service areas are those determined by each prefectural government in its Medical Care Plan as enabling the provision of advanced medical services that generally cover the said prefecture, except Hokkaido Prefecture and Nagano Prefecture, which are large and are divided into multiple tertiary medical service areas.

4 See 'Accreditation of Qualification for Taking National Examination for Medical Practitioners' (Notification No. 0324007 of 24 March 2005) issued by the Chief of the Health Policy Bureau of the MHLW.

5 See Act on the Exceptional Cases of Article 17 of the Medical Practitioners Act regarding Advanced Clinical Training of Foreign Medical Practitioners, etc. (Act No. 29 of 1987).

6 Under Article 17 of the Medical Practitioners Act, no person but a licensed medical practitioner may engage in medical practice.

7 See the 'Report on Verification of the Expediting of Trials (7th)' published by the Supreme Court on 21 July 2017.

8 See 'Vital Survey of Medical Institutions (Approximate Number as of 31 March 2018)'.

9 The Act on Ensuring Quality, Efficacy and Safety on Pharmaceuticals, Medical Devices, Etc.

10 It is an Incorporated Administrative Agency sponsored by the MHLW, engaged in approval reviews, safety measures and health damage control in relation to pharmaceuticals, medical devices and regenerative pharmaceutical products.

11 They are the Fair Trade Council of the Ethical Pharmaceutical Drugs Marketing Industry, and the Fair Trade Council of the Medical Devices Industry. These further consist of member organisations, such as the Japan Pharmaceutical Manufacturers Association (JPMA) and the Japan Federation of Medical Devices Association (JFMDA).

12 For instance, the provision of food and drink to healthcare providers and professionals is permissible to the extent that it is not determined to be an ornate or excessive method for inducing the selection or purchase of pharmaceuticals or medical devices under socially accepted standards. There are safe-harbour rules, however, such as ¥5,000 (excluding consumption taxes) per person not being determined as such method.

13 See 'Report on FY 2016 Surveillance Activities of Advertisement and Promotion of Pharmaceutical Drugs' prepared by the Compliance and Narcotics Division, Pharmaceutical Safety and Environmental Health Bureau of the MHLW.

14 This is an Incorporated Administrative Agency sponsored by the MHLW, which provides low-interest long term loans to private social welfare institutions (e.g., intensive care homes for the elderly, support facilities for persons with disabilities, and nurseries) and private medical institutions (e.g., hospitals, clinics and long-term care facilities) for construction, maintenance and operation of facilities.

15 It is the largest physicians' organisation, consisting of approximately 167,000 members from 47 prefectural medical associations in Japan.

16 One of them is the Summary of Survey Analysis Report on Hospital Management Conditions 2017 (Survey on June 2017) jointly prepared by the Japan Hospital Federation and the Japan Hospital Association on 1 March 2018.

17 See 'Regarding Overseas Operation of Medical Corporations' (Notification No. 0420 (7th) of 20 April 2016 Issued by the Chief of the Health Policy Bureau of the MHLW).