The financial crisis of public hospitals
Many hospitals in Japan are currently experiencing a financial crisis. Hospitals are established by various organisations, such as the national government, public medical institutions and social insurance bodies (Figure 1). Among these, the financial deterioration of hospitals established by municipalities (referred to as ‘public hospitals’) poses a serious challenge from the standpoint of protecting the health of residents. This is because public hospitals serve as the ‘last bastion of regional healthcare’, providing services including policy-driven care and coverage of depopulated rural areas that are difficult for private institutions to offer profitably.
Figure 1: Classification of establishing organisations
Category |
Overview |
National government |
MHLW, National Hospital Organization, etc. |
Public medical institutions |
Prefectures, municipalities, local incorporated administrative agencies, Japanese Red Cross, etc. |
Social insurance bodies |
Health insurance societies and their federations, mutual aid associations and their federations, etc. |
Medical corporations |
Medical corporations |
Individuals |
Individuals |
Others |
Public interest corporations, private university corporations, social welfare corporations, etc. |
Source: Developed by PwC based on the MHLW’s Survey of Medical Institutions
In FY24, roughly 90% of public hospitals operated at a deficit, compared with just under 30% in FY22. This sharp increase reflects a rapid deterioration in the operating environment for public hospitals. As government subsidies are discontinued and both labour and material costs continue to rise, the severity of their financial condition has become increasingly apparent.
What is happening in public hospitals today?
Let’s take a closer look at the financial condition of public hospitals by size. Among large public hospitals with 400 beds or more, operating losses more than doubled between FY23 and FY24, placing significant pressure on municipality finances. While large public hospitals have historically been better positioned to maintain profitability, they are now increasingly likely to operate at a deficit, with the scale of losses continuing to grow.1 PwC Consulting LLC has likewise seen a significant increase in inquiries, not only on hospital-level turnaround initiatives but also on broader structural reform options, including potential consolidation with neighbouring institutions.
Furthermore, nationwide reports indicate that small and mid-sized public hospitals are undertaking measures such as partial bed closure, bed reduction and, in some cases, converting to outpatient-only clinics (Figure 2)
Figure 2: Trends among financially distressed small and mid-sized public hospitals
Date (including planned) |
Hospital type |
Location |
Measures taken |
June 2025 |
Municipal hospital |
Yamanashi |
Partial bed closure |
September 2025 |
Municipal hospital |
Akita |
Bed reduction |
October 2025 |
Municipal hospital |
Fukui |
Partial bed closure |
March 2026 |
Municipal hospital |
Shizuoka |
Suspension of maternity services |
April 2026 |
Town hospital |
Fukushima |
Hospital closure due to absence of designated operator |
Spring 2026 |
Town hospital |
Fukuoka |
Conversion to a privately owned, outpatient-only clinic (no inpatient beds) |
April 2027 |
Town hospital |
Hokkaido |
Conversion to an outpatient-only clinic (no inpatient beds) |
Source: Developed by PwC based on various media reports
Underlying factors contributing to the financial crisis
The question then arises: what factors are driving the financial crisis of public hospitals? From a cost perspective, personnel costs have increased sharply following the FY24 National Personnel Authority’s recommendation to raise wages for medical professionals, thereby placing a substantial financial burden on hospitals. In addition, the recent inflation has resulted in rising expenses across a broad range of categories, including medical supplies, utilities and contracted services.
Conversely, from a revenue perspective, medical fees cannot be adjusted at the individual hospital level—even under inflationary conditions—as they are set by the national government. Surveys conducted by the MHLW also demonstrate that the average number of inpatients per day declined markedly between FY19 and FY20 and is continuing a downward trend.² Given that hospital revenues depend primarily on medical fees and patient volumes, and with the next medical fee revision not scheduled until April 2026, the outlook for revenue growth remains extremely limited.
In addition to these sector-wide trends, public hospitals face several challenges unique to them. For example, medical staff are classified as government employees and are prohibited from holding secondary employment, limiting recruitment through dual appointments. Many management decisions also require approval by local assemblies, constraining the ability to act quickly compared with private hospitals. In addition, seniority-based compensation systems place upward pressure on personnel costs. Finally, the mandate to provide policy-driven, non-profitable services often reduces the focus on financial performance. Together, these constraints significantly limit short-term managerial improvement.
Public hospitals also face structural constraints that hinder sustained initiatives. Ultimately, decision-making authority rests with the municipality head rather than the hospital head, whose authority may shift with each election cycle.
While long-term improvement strategies may include hospital reorganisation or consolidation, such initiatives require extensive stakeholder consultation on local healthcare access, staff employment, compensation structures and physician dispatch arrangements, which can be extremely time-consuming and resource-intensive.
Under such circumstances, the scope and speed of implementing initiatives depend heavily on the degree of interest and commitment demonstrated by the municipality head towards healthcare policy.
Challenges in securing physicians
In addition to challenges in maintaining financial viability, public hospitals in Japan face persistent difficulties in securing sufficient numbers of physicians. While physician shortages are a global issue, Japan is characterised by a long-standing structural imbalance: the number of hospitals and beds per capita is disproportionately high relative to the number of physicians. According to OECD data, Japan ranks third among OECD countries in hospitals per capita and has approximately three times the OECD average number of beds, yet its physician supply is only about 70% of the OECD average (Figure 3).
Figure 3: Number of beds and physicians per capita
Source: Developed by PwC based on the OECD’s Health at a Glance 2023
Figure 4: Number of hospitals per capita
Source: MHLW, International Comparison of Healthcare Delivery Systems
Since the number of physicians required per hospital is set by the Medical Care Act, Japan’s large number of hospitals and beds relative to its limited physician workforce results in a dispersed distribution of physicians.
Under these circumstances, a limited physician workforce must care for a large patient population across a wide range of conditions, placing heavy burdens on individual doctors and contributing to burnout and attrition, which further exacerbate physician shortages.
Ambulances are sometimes unable to secure a receiving hospital due to the lack of physicians capable of providing the required care. From a financial perspective, the inability to accept emergency patients also leads to lost revenue, meaning that physician shortages indirectly reduce hospital income.
Japan also stands out for its high per-capita ownership of advanced medical equipment, such as CT and MRI scanners (Figure 5). However, despite widespread availability, utilisation is often suboptimal, particularly as the number of patients requiring advanced interventions continues to decline.
Figure 5: Number of advanced medical equipment per capita
Source: Developed by PwC based on the OECD’s Health at a Glance 2023
Actions required to protect regional healthcare
Given the dual challenges of revenue constraints and physician shortages, what actions must be taken to improve the financial condition of public hospitals?
One potential measure is the introduction of a more flexible reimbursement framework that can better accommodate rising costs, including inflation and the financial burden of non-deductible consumption tax. Discussions are also underway regarding higher patient cost-sharing and revisions to the scope of services covered by public insurance.
However, given the expected decline in the working-age population, more long-term and comprehensive measures are required. From the perspective of optimising the allocation of physicians and medical equipment, the consolidation of medical functions emerges as a viable policy option.
That said, consolidation—whether through downsizing, restructuring or hospital integration—often encounters strong resistance from hospital staff and local residents. Nevertheless, as outlined above, regional healthcare systems are already approaching a fragile state, and it is unrealistic to expect financial recovery without decisive intervention. While the immediate challenges may stem from public hospital management, the broader objective must be to safeguard regional healthcare systems and protect residents’ long-term well-being. The urgency of the situation facing public hospitals cannot be overstated.
When considering local healthcare from a systemic perspective, the decisions of municipality heads—who serve both as the heads of public hospitals and as chief executives of local administrative authorities—carry significant weight. As noted earlier, these leaders serve fixed terms and are elected officials. Their responsibilities encompass a wide spectrum of administrative areas, and some may lack specialised expertise in healthcare administration.
Within such a governance structure, decisions taken by municipality heads may influence not only the operations of public hospitals but also the fundamental configuration of the regional healthcare system. Municipality heads are thus expected to make decisions that protect regional healthcare and the long-term health of residents.
However, it is unrealistic to expect a single elected official to independently determine the optimal structure of a regional healthcare system decades into the future. To support sound decision-making and enable public hospitals and regional healthcare systems to evolve in line with local needs, it is desirable for the national government to advance policy measures that provide guidance and include a degree of enforceability.
Reference
1 JMHA, Announcement of the Results of the FY24 Financial Conditions Survey of Member Hospitals
2 MHLW, Overview of the 2023 Survey of Medical Institutions (Static and Dynamic) and Hospital Report
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