Japan’s Hospitals Face Unprecedented Financial Strain
Hospitals across Japan are grappling with severe financial difficulties as rising prices, labor costs, and demographic shifts converge to create a crisis in the nation’s healthcare system. More than 60% of Japanese hospitals are now operating in the red, with many forced to reduce services, close departments, or delay essential equipment upgrades. The situation has become so acute that experts and medical organizations are warning of a potential collapse of local healthcare infrastructure if urgent reforms are not enacted.
This article examines the root causes of the crisis, the unique challenges of Japan’s healthcare financing system, the impact on patients and communities, and the debate over possible solutions.
Why Are Japanese Hospitals Struggling Financially?
The financial woes of Japanese hospitals stem from a combination of rising operational costs, stagnant government-set medical fees, and the pressures of an aging population. Unlike many industries, hospitals in Japan cannot simply raise prices to offset increased expenses. Instead, they are bound by a government-controlled fee schedule that is only revised every two years, often with minimal increases that fail to keep pace with inflation and wage growth.
According to a recent emergency survey by the Japan Hospital Association and five other organizations, 61.2% of hospitals reported a deficit in current profit in the second half of 2024, up from 50.8% the previous year. The survey, which included over 1,800 hospitals, found that while revenue from medical services increased by 1.9%, personnel costs rose by 2.7% and expenses for medical supplies and utilities grew by 2.4%. In short, costs are outpacing revenue, pushing hospitals deeper into the red each year.
Takao Aizawa, president of the Japan Hospital Association, summarized the situation:
“Expenses are rising much faster than the increase in revenue. If nothing is done, our country’s hospital system will collapse.”
Several factors are driving these rising costs:
- Labor costs: Wages for medical staff are increasing, both due to broader economic trends and the need to retain skilled workers in a competitive labor market.
- Material and utility costs: The price of medical supplies, equipment, and utilities has surged, with a 14% increase in material and utility costs for medical services between 2018 and 2023.
- Demographic pressures: Japan’s rapidly aging population means more patients require complex, long-term care, further straining hospital resources.
- End of COVID-19 subsidies: Government subsidies provided during the pandemic have been discontinued, removing a critical financial lifeline for many hospitals.
The Unique Structure of Japan’s Healthcare Financing
Japan’s healthcare system is renowned for its universal coverage and high health outcomes, such as long life expectancy and low infant mortality. However, the system’s financial underpinnings are complex and increasingly strained.
Government-Set Fee Schedule
At the heart of the issue is Japan’s fee schedule system, which sets the prices for all medical procedures, drugs, and devices nationwide. This schedule is revised biennially by the government, with input from medical organizations, but the increases are often modest. For example, in the 2024 revision, the main portion of medical fees—intended to cover personnel and other core costs—was raised by only 0.88%, despite much higher inflation in other sectors.
This system is designed to contain national healthcare spending and ensure equity, but it leaves hospitals unable to adjust prices in response to rising costs. As a result, even as expenses climb, hospitals’ main source of income remains largely fixed.
Impact of an Aging Society
Japan’s demographic profile is a major driver of healthcare costs. With nearly 30% of the population aged 65 or older, demand for medical services is high, especially for chronic and complex conditions. Elderly patients account for a disproportionate share of healthcare spending—over half of total expenditures—while contributing less in insurance premiums due to lower incomes.
This demographic shift not only increases the volume and complexity of care required but also reduces the pool of working-age contributors to the health insurance system, further straining finances.
Private and Public Hospital Dynamics
Japan’s hospital sector is dominated by private institutions, which account for about 80% of hospitals and 70% of beds. These hospitals operate under the same fee schedule as public hospitals, but often face greater financial pressures due to smaller scale and less access to government support. The lack of differentiation among providers and the absence of a strong primary care system also lead to inefficiencies, with patients frequently seeking care at hospitals for minor ailments.
Real-World Impact: Service Reductions and Department Closures
The financial crisis is not just a matter of balance sheets—it is having tangible effects on patient care and community health. Hospitals are being forced to make difficult decisions to stay afloat, including:
- Closing departments: Ojiya General Hospital in Niigata Prefecture, for example, discontinued its neurosurgery, cardiovascular surgery, and respiratory surgery departments in April 2024 to reduce a deficit of over ¥500 million. Patients now must travel to neighboring towns for specialized care.
- Delaying equipment upgrades: University hospitals, such as the Institute of Science Tokyo and Nagasaki University Hospital, are unable to replace aging MRI machines and other essential equipment, risking a decline in the quality of advanced medical care.
- Reducing staff bonuses and benefits: Some hospital groups have cut employee bonuses and sought local government subsidies to stem losses, impacting staff morale and retention.
JA Niigata Kouseiren, a federation operating 11 hospitals, projected a record-high deficit of ¥6-9 billion in fiscal 2024. To address this, it plans to discontinue seven medical departments across three hospitals in 2025, aiming to halve the deficit. However, such measures inevitably reduce access to care for local residents.
Yoshihiro Ota, vice chairman of the Association of Japanese Healthcare Corporations, warned:
“Local hospitals could be closed suddenly, leaving patients with nowhere to go.”
Why Can’t Hospitals Raise Prices?
Unlike businesses in other sectors, Japanese hospitals cannot independently raise prices to cover increased costs. The government’s fee schedule is intended to keep healthcare affordable and prevent runaway spending, but it also means hospitals have little flexibility to respond to economic pressures.
Material and utility costs have risen sharply, but the government’s 2024 fee revision increased the main portion of medical fees by less than 1%. Meanwhile, the government’s target for medical worker pay raises (2.5%) lags behind the private sector (3.56%), making it harder for hospitals to attract and retain staff.
Some hospitals have managed to remain profitable through aggressive management strategies, such as accepting more emergency patients, consolidating supply purchases, or specializing in high-demand services. However, these approaches are not feasible for all institutions, especially smaller or rural hospitals.
The End of COVID-19 Subsidies and Lingering Pandemic Effects
The COVID-19 pandemic initially brought a surge of government support to hospitals, including subsidies for treating infected patients and offsetting lost revenue from reduced elective procedures. However, these subsidies were discontinued in fiscal 2024, removing a critical financial buffer just as costs continued to rise.
Research shows that hospitals admitting COVID-19 patients suffered significant financial losses, with monthly profits per bed dropping by as much as ¥600,000—15 times the average monthly profit in 2019. Even as the pandemic receded, some patients remained reluctant to seek hospital care, further reducing revenue.
Broader Economic and Policy Context
Japan’s economic environment adds another layer of complexity. While the country has seen modest economic growth and wage increases, inflation—especially for food and energy—has outpaced wage gains, squeezing household budgets and limiting the ability of hospitals to pass on higher costs to patients.
The government is also planning to revise the High-Cost Medical Expense System in 2025, raising out-of-pocket caps for many patients. While intended to curb public spending, this move has sparked concern among patient groups, who fear it will make essential care unaffordable for those with chronic or serious illnesses.
From a macroeconomic perspective, the government faces the challenge of balancing fiscal sustainability with the need to maintain access to quality healthcare. Public health insurance deficits are growing, and the burden of financing care for the elderly is increasingly falling on younger generations and working-age contributors.
Efforts to Improve Efficiency and Reform the System
Recognizing the unsustainable trajectory, experts and policymakers are calling for both immediate and long-term reforms. Some of the key proposals and ongoing efforts include:
- Emergency loans: The Health, Labor and Welfare Ministry began offering interest-free, collateral-free loans of up to ¥720 million to hospitals in April 2024 as a stopgap measure.
- Fee schedule reform: Medical organizations are urging the government to make the fee schedule more responsive to inflation and rising labor costs, with the next major revision scheduled for fiscal 2026.
- Management improvements: Hospitals are encouraged to adopt more efficient management practices, such as bulk purchasing, specialization, and collaboration with other institutions to share resources.
- Acute care hospital reform: The Diagnosis Procedure Combination/Per-Diem Payment System (DPC/PDPS) was introduced to incentivize early discharge and reduce inpatient costs. While it has improved some aspects of care quality and competition, it has not fully achieved cost reduction goals, especially given the aging population.
Kenji Shimazaki, professor of medical policy at the International University of Health and Welfare, emphasized the need for systemic change:
“The government should consider not only emergency support but also a system for determining medical fees that responds to inflation and other situations.”
However, not all stakeholders agree on the best path forward. Some caution against across-the-board fee increases, arguing that certain hospitals remain profitable through effective management and that reforms should target inefficiencies rather than simply boosting funding.
The Human Cost: Patients and Communities at Risk
For patients and communities, the financial crisis in hospitals translates into longer travel times for care, reduced access to specialized treatments, and potential delays in receiving necessary procedures. Rural areas are particularly vulnerable, as hospital closures or department shutdowns can leave entire regions without nearby emergency or specialty care.
Patient advocacy groups are also concerned about the planned increases in out-of-pocket expenses, warning that higher costs could force some individuals to forgo essential treatment, especially for chronic or life-threatening conditions like cancer.
Mizutobe Yuko, a lung cancer patient in Tokyo, shared her fears about the upcoming policy changes:
“Even a moderate increase of ¥30,000 per month could force patients to discontinue essential treatment due to financial hardship.”
Such stories highlight the delicate balance policymakers must strike between fiscal discipline and ensuring that all citizens have access to affordable, high-quality healthcare.
Looking Ahead: Can Japan’s Hospital System Be Saved?
Japan’s hospital system stands at a crossroads. The current crisis is the result of long-standing structural issues—an aging population, rigid fee controls, and inefficiencies in care delivery—now exacerbated by inflation and the aftermath of the COVID-19 pandemic.
While emergency measures and management improvements may provide temporary relief, experts agree that more fundamental reforms are needed. These may include:
- Making the fee schedule more flexible and responsive to economic conditions
- Strengthening primary care to reduce unnecessary hospital visits
- Encouraging consolidation and specialization among hospitals to improve efficiency
- Balancing cost containment with the need to invest in new technologies and equipment
- Ensuring that reforms do not disproportionately harm vulnerable patients or rural communities
The coming years will be critical in determining whether Japan can adapt its healthcare system to meet the needs of a super-aged society while maintaining the high standards of care for which it is known.
In Summary
- Over 60% of Japanese hospitals are operating at a deficit due to rising costs and stagnant government-set fees.
- Hospitals cannot raise prices independently and are struggling to cover increased labor, material, and utility expenses.
- The aging population and end of COVID-19 subsidies have intensified financial pressures.
- Service reductions, department closures, and delayed equipment upgrades are affecting patient care, especially in rural areas.
- Emergency loans and management reforms offer short-term relief, but systemic changes to the fee schedule and care delivery are needed for long-term sustainability.
- Upcoming policy changes may increase out-of-pocket costs for patients, raising concerns about access to essential care.
- The future of Japan’s hospital system depends on balancing fiscal responsibility with the need to provide accessible, high-quality healthcare for all citizens.
