As a memorial lecture of the retirement of Graduate School of Economics, Kyoto University, I gave an essay on the past experience of my lecture about Health economics and Social Security and presented my view on Social Security in Japan. During past 20 years, I taught health economics and social security based on the way which behavioral economics suggests, as well as the orthodox principle of neoclassical economics suggests. In this essay, I picked up several topics on designing social security system. My emphasis is placed on the difference of difficulty of predicting future long-term economic growth and predicting the degree of technological progress in health care. As a final remark of this essay, I proposed the necessity of the research of these topics to relate recent development of economics of happiness.

Effective April 2003, the Diagnosis Procedure Combination（DPC）was introduced in 82 special functioning hospitals in Japan, and it has been gradually extended to general hospitals that meet certain prerequisites. Unlike the DRG/Prospective Payment System used in the United States and other countries, the Japanese DPC is a per diem prospective payment system that consists of two components:（1）inclusive payments based on the DPC system and（2）fees based on the conventional fee-for-service system. Inclusive payments include fees for basic hospital stays, medical checkups, image diagnosis, medications, injections, all treatments under 10,000 yen, and medicines used during rehabilitation treatments. Per diem payment rates are set separately for each of the three periods and decrease as the length of stay increases. The three periods are individually set for each DPC code. Fees for all categories other than those covered（1）are paid on the basis of the conventional fee-for-service system.
In this paper, we analyze the effects of the DPC-Based inclusive payment system on the length of hospital stay for patients undergoing cataract surgery, using a new Tobit-type model. This model can be used in various survival analysis, as an alternative to conventional Cox’s proportional hazard model, and it can be easily estimated by a standard statistical package program. Data were collected from five general hospitals before and after the introduction of the new payment system. To reduce the heterogeneity in the treatment used, we limit the data to patients who underwent cataract surgery and insertion of a prosthetic lens in one eye（n=2,533）.
We found that the length of the hospital stay did not change for hospitals, where the length of hospital stay for the surgery had been already short before the introduction of DPC. On the other hand, the length of hospital stay decreased for hospitals where lengths of hospital stay for the surgery had been long before the introduction of DPC. These findings indicate that the new DPC inclusive payment system worked properly for long-stay hospitals, and support the idea of continuing to improve the payment system to provide hospitals with proper incentives for the efficient use of medical resources.

One of the most important policy issues in the structural reform of the current Japanese National Health Insurance system is the consolidation of insurers. Several proposals for the reform have been made public so far, including one to consolidate all the programs within each prefecture, but little scientific evidence exists to support any of the proposed changes. In addition, many small municipal insurers have already been merged in recent national wave of municipality mergers (i.e., Heisei no daigappei), and some insurers particularly with large numbers of insured persons are now reluctant to merge at the prefectural level. In this paper, we estimate the minimum efficient scale (MES), the number of insured persons that minimizes the average administrative cost per insured, and provide an empirical criterion to judge the reform proposals.
Our estimation results are based on the data from the Annual Business Operation Report of the Japanese National Health Insurance, and they indicate the existence of economies of scale in the administrative cost. In order to see how much consolidation will be necessary, we make the following three observations. First, comparison of the MES and the actual number of insured at the end of 2005 shows, when the Heisei no daigappei was almost complete, approximately 67% of municipal insurers fell below the MES levels. Second, comparing the MES with the number of insured persons in the secondary medical districts within prefectures showed that the approximately 4% of insurers would be less than the MES. Third, there would be no insurer whose MES was greater than the number of the insured at prefecture level. Thus, we conclude that at least mergers of municipal programs within each secondary medical district will be required.

This paper explores the most socially desirable arrangement to run municipal hospitals after two municipalities merge, using net social benefit as the criterion. It extends a Hotelling’s model of medical services and compare the social surplus for three cases; （a）two municipal hospitals run by two municipalities （before consolidation）,（b）two municipal hospitals, or（c）an integrated municipal hospital, respectively, after the consolidation.
We conclude that（1）if we focus on the social surplus, the most socially desirable arrangement for running municipal hospitals after consolidation depends on the magnitude of residents’ utility, which means ‘satisfaction’ obtained from curing illnesses; and（2）if a consolidated municipality runs two municipal hospitals, the public burden for medical services is the smallest of the three cases assessed.