Unit 01 Kick-off Paper: Local Government Financing of Health Insurance and the Revitalization of Japan’s Regional Areas

Wataru Suzuki
Faculty of Economics, Gakushuin University

 The Abe administration has initiated a policy of “regional revitalization” as a new economic policy seeking to correct the over-concentration of population and economic activity in Tokyo and arrest population decline in areas in which it is feared that small municipalities might cease to exist. At present, a variety of measures, including the establishment of new subsidies for regional municipalities, the introduction of tax incentives for companies which transfer their head office functions from Tokyo to a regional area, and the transfer of government agencies to regional areas are either under review or being implemented. Of these, however, the most effective and the most practical policy is the promotion of the movement of members of Japan’s elderly population to the nation’s regional areas.

 Under this policy, the movement of seniors currently living in cities to regional areas while they are still healthy would directly arrest the decline in the population of those areas, and in the near future their demand for medical and nursing care would indirectly both maintain and newly create employment opportunities for young people in the same areas. This is a “win-win” situation both for large metropolises and for Japan’s regional areas.

 The advantages for the nation’s regions are clear. As the agricultural, forestry and manufacturing industries in Japan’s regions have declined, it has been service industries targeting the elderly, such as medical and nursing care, which have provided employment opportunities for local young people. However, the elderly population in the majority of Japan’s regions is already either beginning to decline, or is expected to decline in the near future, which will make the medical and nursing care staff and facilities which have been maintained up to the present unnecessary. With the decline in the elderly population, the last remaining young human resources, who had previously worked as nursing and medical care staff, in particular young women, will migrate to the cities, accelerating the progression of the decline in the regional birthrate, and raising the real possibility that some regional municipalities will die out. Alarm bells were raised regarding this possibility by the Masuda Report (Japan Policy Council, 2015), which sent shock waves through Japanese society. The movement of elderly citizens to regional areas could help to arrest this trend.

 At the same time, the policy also has significant merit for Japan’s cities. In large cities such as Tokyo and Osaka, the fact that many elderly residents are on waiting lists to enter aged care facilities is already a social problem. With the rapid aging of the population in the nation’s cities, this problem is expected to increase in severity in the future. Establishing the necessary number of new care facilities in cities like Tokyo and Osaka, where land prices are high, will entail the investment of an enormous amount of public funds. By contrast, if we were able to promote the movement of the nation’s elderly population to regional areas, we could make use of facilities that were no longer in use, or establish facilities in areas in which land and labor were cheap. This would represent a considerable fiscal saving throughout the nation. Naturally, the policy would not be urged on people who felt no desire to move. However, many of Japan’s baby boom generation were born in regional areas, and for these elderly citizens, the move to a region boasting an adequate medical and nursing care infrastructure could represent an appealing choice, as a return home. With the backing of the government’s policy, this would offer a good possibility of stemming the flow of people from Japan’s regional areas.

 The greatest obstacle to the movement of members of the elderly population to regional areas is the issue of municipal funding of medical and nursing care, as indicated by Hatta (2015) and Suzuki (2015). When elderly people move from a city to a regional area, they join the National Health Insurance and nursing care insurance programs in their new municipality. However, because a very low burden of payment of health and nursing care insurance fees is placed on the elderly in Japan, their actual medical and nursing care expenses significantly exceed the premiums paid. The movement of elderly people to a municipality therefore increases the burden of payment for the municipal administration, and insurance premiums for residents increase. For this reason, elderly people moving from cities represent a burden to municipalities, which are therefore understandably half-hearted about accepting them. As Hayashi (2015) points out, municipalities attempt to block the movement of elderly people to their areas by refusing to grant permission for the construction of new nursing care facilities.

 However, taking Japan as a whole into consideration, the movement of the elderly from cities to regional areas should not change the overall burden that they represent. If the movement of the elderly increases the burden in regional areas, it also reduces the burden in cities. The essence of the problem is that the current National Health Insurance and nursing care insurance systems function as ‘regional (i.e. ‘local’) insurance,’ and are not portable; because of this, the movement of the elderly from cities imposes a burden on regional areas.

 The jukyochi tokurei system provides a partial solution to this problem. Under this system, the burden of medical and nursing care expenses for elderly people who move to a regional area and enter a long-term care insurance facility are borne by the municipality from which the individual has moved (for example, one of Tokyo’s wards). However, this system has limitations, in that it only applies to elderly people who enter regional institutions, and not to those living in normal residences.

 Tokushima, Kochi, and Akita prefectures are currently proposing the conditional expansion of jukyochi tokurei privileges to elderly people who move into normal residences in areas designated as National Strategic Special Zones. However, this proposal is facing strong opposition from the Ministry of Health, Labour and Welfare, which believes that it runs counter to the principle of ‘regional insurance,’ and discussions concerning this as a so-called ‘bedrock regulation’ have reached a deadlock.

 However, we do have available a proposal for fundamental reform which will 1) Maintain the framework of ‘regional insurance’; 2) Not impede the movement of elderly people to regional areas; 3) Correct disparities in the burden of National Health Insurance and nursing care insurance premiums between municipalities; and 4) Enable small municipalities to achieve fiscal stability. This is the concept of ‘risk adjustment’ between municipalities proposed by Professor Yasushi Iwamoto in his paper in this inaugural edition of SPACE NIRA (Iwamoto, 2015). This idea would kill four birds with one stone. In essence, this proposal would produce a mechanism whereby average per-person medical and nursing care costs for each age stratum would be calculated for the entire country, and the national government would provide each municipality with funding to cover standardized expenses (Average cost of medical and nursing care per age stratum × Number of residents of the municipality in each age stratum) tailored to its specific age makeup. This would mean that no additional fiscal burden would accrue to municipalities with the movement of elderly people to their areas, and that regional areas would therefore welcome an influx of the elderly. A mechanism by means of which insurance premium and taxation rates were calculated to cover the total cost of medical and nursing care for the nation as a whole, and were levied uniformly throughout the country based on the income level and age makeup of the specific region, would represent a fair system. If a municipality was negligent in initiatives such as conducting checks of medical institutions or implementing activities to promote better health among its residents, and the cost of medical and nursing care increased above the calculated national standardized expenses, insurance rates would increase by the necessary amount in that municipality alone.

 However, because the law of large numbers does not function effectively in relation to small municipalities, if risk adjustment as described above was implemented, risk from small insurers would remain, as Professor Masayoshi Hayashi points out in his paper. The system of risk adjustment would be completed by the institution of a system of reinsurance in order to address this problem.

 As Professor Hayashi discusses in detail in his paper, a variety of systems of fiscal adjustment and subsidies already exist within the current regional insurance framework, the purpose of which is to ensure fiscal stability for small municipalities and to reduce disparities in burden between municipalities (Hayashi, 2015). However, these are an aggregate of exceptional measures and small-scale policy responses that are added to every time a problem arises, and they now represent a highly complex patchwork. Because they have involved no fundamental change in design concepts, they also produce insufficient effect. An even greater problem is the fact that these fiscal adjustment and subsidy systems also adjust for factors other than differences in age makeup and income levels between municipalities, which results in laxness in the fiscal management of insurance by the municipalities. In economics, this is known as the problem of soft budget constraint. The discussions underway towards the reform of Japan’s system of medical care are seeking to expand the domain of insurance from the village, town and city level to the prefectural level, but there is a possibility that this might encourage soft budgets.

 By contrast, the introduction of the risk adjustment method would maintain the current municipalities as the managing entities while making it possible to adjust differences in age makeup and income level as if the management of insurance was centralized for the entire nation, but without resulting in a relaxation of fiscal discipline by municipalities.

 A rapidly declining birthrate and aging population, in addition to overall population decline, is shaking the foundations of Japan’s ‘regional insurance system,’ and it is clear that it has become impossible to respond using the stopgap measures that have been applied to date. From the perspective of the reform of Japan’s social security system also, it is time to fundamentally address the problems through the introduction of risk adjustment. However, it would be difficult for adjustments between parties with vested interests to be administered by the Ministry of Health, Labour and Welfare, which is constrained in this area. In order to realize regional revitalization that transcends the framework of specific government agencies, it will be necessary to plan comprehensive adjustment that represents the overall optimum under political leadership. At the same time, it will be essential to remember that if the Abe government’s regional revitalization policy does not go beyond mere regulatory reform and fiscal allocations to the regions to take in reform of the social security system, it will fail to bear fruit.


  • Yasushi Iwamoto (2015), “Designing New Systems through Risk Adjustment,” SPACE NIRA Unit 01-A
  • Masayoshi Hayashi (2015), “Health Care, Long-term Care, and Local Public Finances,” SPACE NIRA Unit 01-B
  • Tatsuo Hatta (2015), “Chiho soseisaku o tou (Ge): Iju shoheki teppai koso senketsu (Scrutinizing the Regional Revitalization Policy (Part 2): The First Issue is the Removal of Barriers to Internal Migration),” Keizai Kyoshitsu, Nihon Keizai Shimbun Morning Edition, February 6, 2015
  • Wataru Suzuki (2015), “Shakai hosho kaikaku no shiten (Jo): “Kongo kaigo” de rodoryoku kakuho o tokuyo no toji kaikaku isoge koreisha no chiho iju o sokushin (Perspectives on Social Security Reform (Part 1): Secure a Labor Force for “Mixed Care” and Reform the Administration of Intensive-care Old People’s Homes to encourage the Movement of the Elderly to Japan’s Regions),” Keizai Kyoshitsu, Nihon Keizai Shimbun Morning Edition, April 6, 2015
  • Japan Policy Council (2014), Sutoppu shoshika / chiho genki senryaku (Strategy to arrest Japan’s Declining Birthrate and Revitalize the Regions)