OBJECTIVES: In April 2018, Japan’s Ministry of Health, Labor, and Welfare (MHLW) enacted two key revisions to its cost-based pricing methodology, which aims to calculate a National Health Insurance (NHI) list price from sponsor-provided costs of drug manufacture. Sponsors have traditionally chosen to report a transfer price from a foreign company to a Japanese-based one rather than detailed cost accounting, presumably to achieve higher list prices. To promote transparency in cost reporting, the MHLW has created a Transparency Coefficient (TC) to reward or penalize a drug’s premium based on the level of Cost of Goods (COGs) transparency. The MHLW also now calculates premiums based on the entire drug price, rather than just the profit margin. We sought to determine if these changes have resulted in the desired effect of actual COGs transparency.

METHODS: All Chuikyo pricing decisions published since April, for new drugs granted premiums and priced through the cost-based method, were reviewed to identify under what circumstances different TCs were applied. Using Chuikyo’s formulae, we calculated the NHI list prices that would have resulted under the former system given published premiums and manufacturing costs to determine the impact of MHLW’s pricing revisions.

RESULTS: Among 45 new drug pricing decisions, eight were priced under the cost-based method, and seven received premiums (meeting the study criteria). Of these, one reported COGs and received the highest TC (1.0); the remaining six reported transfer costs and received the lowest TC (0.2). These same six drugs would have had lower premiums under the old system.

CONCLUSIONS: The two changes to the cost-based Japanese pricing system do not appear to sufficiently incentivize transparent disclosure of manufacturing costs. Depending on how much of an increase over true COGs a sponsor can achieve using a transfer price, the prospect of a low TC will likely not incent actual transparency.