FOR OFFICIAL USE ONLY

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT REPUBLIC OF ARGENTINA ]HEALTH INSURANCE REFORM PROJECT (Loans 4002/3-AR) July 7, 1999 Country Management Unit for Argentina, Chile and Uruguay Human Development Sector Management Unit Latin America and the Caribbean Regional Office Report No.: This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective July 27, 1999) Currency Unit = Argentine Peso (AR$) AR$1.00 = US$1.00 US$1.00 = AR$1.00 FISCAL YEAR January 1 through December 31 ABBREVIATIONS AND ACRONYMS ANSeS ANSSAL APE CAS DINOS FROS FSR ICR IBRD INSSJP MSAS Obras Sociales Obras Sociales de Personal de Direcci6n Obras Sociales Sindicales OECD PCU PMO Pre-pagas SAL SSS Administraci6n Nacional de Seguridad SocialNational Social Security Administration Administracion Nacional de Seguros de la SaludlNational Health Insurance Administration Administraci6n de Programas Especiales/Special Programs Agency Country Assistance Strategy Direcci6n Nacional de Obras SocialeslNational Directorate for Social Health Insurance Funds Fondo de Reconversi6n de las Obras SocialeslRestructuring Fund for the National Health Insurance Funds Fondo Solidario de Redistribuci6nlSolidarity Redistribution Fund Implementation Completion Report International Bank for Reconstruction and Development Instituto Nacional de Servicios Sociales para Jubilados y Pensionados/National Social Services Institute for Retirees and Pensioners Ministerio de Saludy Acci6n Social/Ministry of Health and Social Action Social health insurance funds (linked to workers' place of employment) Social health insurance funds for white-collar employees Social health insurance funds for workers under collective labor contracts Organization for Economic Cooperation and Development Project Coordination Unit Programa Medico ObligatoriolStandard Health Benefits Package Private pre-paid insurance plans Structural Adjustment Loan Superintendencia de Servicios de Salud/Superintendency for Health Services Vice President Shahid Javed Burki CMU Director Myma Alexander SMU Director Xavier Coll Task Manager Marie-Odile Waty

3 TABLE OF CONTENTS Preface Evaluation Summary... FOR OFFICLAL USE ONLY i PART I: PROJECT IMPLEMENTATION ASSESSMENT A. Background B. Project Objectives... 4 C. Achievement of Objectives D. Major Factors Affecting the Project E. Project Sustainability F. Bank Performance G. Borrower Performance H. Assessment of Outcome I. Future Operations J. Key Lessons Learned PART II: STATISTICAL ANNEXES Table 1: Summary of Assessment Table 2: Related Bank Loans/Credits Table 3: Project Timetable Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual Table 5: Studies Included in Project Table 6: Project Financing Table 7: Status of Legal Covenants Table 8: Bank Resources: Staff Inputs Table 9: Bank Resources: Missions APPENDIXES A. Evidence of compliance with loan conditionalities B. Borrower contribution to the ICR C. Map (IBRD No ) This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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5 IMPLEMENTATION COMPLETION REPORT ARGENTINA HEALTH INSURANCE REFORM PROJECT LOANS 4002/3-AR PREFACE This is the Implementation Completion Report (ICR) for the Health Insurance Reform Project in Argentina, for which Loans 4002/3-AR in the amount of US$350 million equivalent (US$250 and US$100 million, respectively) were approved on April 25, 1996 and made effective on July 12, 1996 (Ln AR) and on December 3, 1998 (Ln AR), the date of the third and final tranche release. The ICR was prepared by Marie-Odile Waty, Girindre Beeharry and Marian Kaminskis of the Human Development Sector Management Unit for the Latin America and the Caribbean Region, and Pablo Gottret (consultant). It was reviewed by Xavier Coll (Director of the Sector Management Unit), Charles Griffin (Lead Specialist, HNP, for the same unit), Alexandre Abrantes (Country Sector Leader of the Country Managing Unit for Argentina, Chile and Uruguay), Robert Hecht (former Task Manager), and Phil Musgrove (WBIHD). Preparation of this ICR was begun during the Bank's completion mission, April 12-16, It is based on the Borrower's own completion report and discussions with project coordinators as well as on material in the World Bank and Project Coordination Unit project files. The Borrower contributed to preparation of the ICR by preparing its own project completion report and by commenting on the draft ICR. The Borrower's comments are reproduced (unedited) in an appendix to the report.

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7 IMPLEMENTATION COMPLETION REPORT ARGENTINA HEALTH INSURANCE REFORM PROJECT Loans 4002/3-AR Evaluation Summary Introduction/Project Background 1. In , the Government of Argentina began investigating options for reforming its health insurance system which was plagued with issues of low efficiency, financial unsustainability, and poor quality of health care. Collectively known as Obras Sociales, the compulsory health insurance funds provide coverage to some 18 million beneficiaries (or 51 percent of the population). They are made up of national Obras Sociales, which cover 8 million employees in the formal sector and their dependents, provincial Obras Sociales, which cover around 6 million provincial public sector employees and their dependents, and the national health insurance fund for retirees and pensioners (INSSJP), which covers the health needs of about 4 million beneficiaries. The national Obras Sociales and INSSJP began to incur large deficits which worsened following the March 1995 financial market crisis and the economic slump of The combined debts of national Obras Sociales and INSSJP exceeded US$2 billion in The growing debts of the social health insurance funds exposed the inefficient and rigid structure of the health insurance system and put pressure on the Government to find a sustainable solution to its financial woes. In the second half of 1994, the Government and the World Bank undertook a sectoral analysis of financing issues and options for reforms, with a special focus on the national Obras Sociales and INSSJP. The sector work permitted the identification of the following key policy issues and areas for a first phase of reform: a. National Obras and INSSJP, which had captive beneficiaries who could not select membership in another health insurance provider, had little or no incentive to improve the quality and quantity of services, operate more efficiently and control costs. b. About 50 percent of the 360 or so national Obras Sociales that existed in 1994 had less than 10,000 beneficiaries, and therefore low financial viability as insurers. c. A third issue was the lack of adequate mechanisms of transfer of funds from the Solidarity Redistribution Fund (FSR) to the Obras. These funds, which are financed as a share of employer and employee contributions to their Obra Social, were meant to be transferred back to the Obras to ensure that they are able to finance a minimum package of health benefits for all their beneficiaries, for financial support in the form of loans and subsidies, and to finance costly and complex health care. Eligibility for financial support to theobras was determined in a discretionary manner by the National Health Insurance Administration (ANSSAL). d. A fourth was the weak regulatory environment. Major omissions in the system were the lack of: (a) a mandatory standard health benefits package (PMO); (b) prudential and consumer protection regulations for Obras Sociales and private health insurance; and (c) coordination between the two health insurance supervisory authorities. i

8 e. Finally, a number of Obras and INSSJP were running substantial operating deficits and were highly indebted to providers and financiers. Many Obras were running deficits because they: (i) were incurring high administrative costs; (ii) had little control over the quantity and costs of services they covered; (iii) ran inefficient health clinics and recreational facilities; and (iv) had weak accounting and management systems. INSSJP ran operating deficits because it had: (i) inadequate and inconsistent contracting practices with providers; (ii) been given responsibility for financing a number of non-medical social programs without a corresponding transfer of financial resources; (iii) a high and uncontrolled level of pharmaceutical expenditures; (iv) excess personnel; and (v) weak accounting and internal control systems. 2. In response to a request from the Government of Argentina to finance the restructuring of Obras Sociales and INSSJP, the Bank approved a loan package of US$350 million (Loans AR and 4003-AR) on April 25, On the same date, the Bank also approved a separate Technical Assistance Loan (Loan 4004-AR) for US$25 million equivalent. Project Objectives 3. The objectives of the loan were to support the first phase of the Government health insurance reform program by: a. introducing competition into the market for health insurance, while not creating undue incentives for risk selection; b. automatically reallocating the proceeds of the Solidarity Redistribution Fund to Obras Sociales strictly on the basis of income and health risk of their insured households; c. developing an effective regulatory framework and institutions for health insurance, which would promote competition, ensure greater transparency and accountability and help promote consumer rights; and d. extending financial and technical assistance to the Obras Sociales and INSSJP to enable them to raise internal efficiency, improve their balance sheets, and comply with new standards and regulations. 4. Loan resources were disbursed in three tranches in accordance with conditions for Tranche Release agreed upon with the Government. The reform program consisted of three components: (a) Policy and Regulatory Reforms Component; (b) Restructuring of the Obras Sociales; and (c) Restructuring of INSSJP. The TA Loan was used to finance the development of major policies and regulations, and the preparation and monitoring of restructuring plans for the Obras Sociales and INSSJP. 5. The following measures were envisaged to meet the Loan's three policy objectives: (a) the issuance of legislation to introduce competition among nationalobras Sociales and INSSJP; (b) the establishment and updating of a comprehensive database of the insured population; (c) the standardization of a package of benefits (PMO) and its adoption by all national Obras and Prepagas; (d) the development and implementation of objective allocation criteria for the Solidarity Redistribution Fund; and (e) the establishment and development of a single regulatory agency, the design and issuance of prudential and consumer protection regulations for the Obras, and the design of regulations for Pre-pagas. 6. A project restructuring fund (FROS) was established to finance three activities to enable national Obras Sociales and INSSJP to return to and maintain financial and technical viability: (i) debt restructuring; (ii) reduction of personnel; and (iii) institutional development, in order to ii

9 improve health care services, human resources, and information and communications systems, and to develop organizational and strategic capacity. Achievement of Project Objectives 7. The loan package was fully disbursed in two and half years, instead of the two years estimated at appraisal. The achievement of the objectives of the loan can only be considered satisfactory since some of the objectives need to be completed. Both loans supported the introduction of revolutionary and irreversible changes in the mandatory health insurance system which affected many politically powerful interest groups. The Argentine Government did better than most governments that have been engaged in similar reforms in implementing all the key elements of the reform over a very short period of time, and in weathering the important risks inherent to such radical change processes. The achievements to date must be seen as the critical first steps of a reform process that will, in all likelihood, take several more years. 8. The achievements of the policy and regulatory reforms were satisfactory. Several of the tasks that were contemplated in the reform program, however, remain to be completed to consolidate the reform. Within a period of three years, the Government has: a. Opened up competition among national Obras Sociales, and between INSSJP and national Obras Sociales that have registered as health insurance providers for the elderly. By March 1999, about 278,000 workers (i.e., 7 percent of enrollees of national Obras Sociales), representing 725,000 beneficiaries, had changed Obra since the introduction of free election. Some level of cream-skimming took place with the introduction of competition. The data, however, indicate that while the expected migration of high-income low-risk population towards certain Obras Sociales has occurred, the overall impact on the system has been so far limited. b. Designed and mandated the introduction of a standard health benefits package which is now routinely used as a reference package by national Obras, Pre-pagas, and even the media. c. Introduced an automatic redistribution mechanism to ensure a minimum monthly financing of $40 for each household enrolled with a national Obra Social, therefore reducing the scope for discretionary transfer of funds. d. Established an enrollment database of the population insured by national Obras Sociales, in which 3 million contributing employees and 4 million dependents were registered. e. Created a unified regulatory agency and issued prudential and consumer protection regulations. The Superintendencia de Servicios de Salud (SSS) came into operation in 1998 and has since made progress in setting up a new organization and strategic development plan, developing a consumer services unit, establishing a team of inspectors and auditors, and issuing regulations related to free election of Obras, health plans offered by Obras, including the PMO, contracts with providers, and sanctions and penalties in case of non compliance with regulations. f. Submitted to the Argentine Congress a new draft law to regulate private pre-paid health insurance agencies. The draft law has been approved by a Senate Committee and is awaiting formal approval by the Congress. 9. The achievement of the objectives of the restrupturing of Obras Sociales was highly satisfactory. Thirty-one Obras, covering 5 million beneficiaries (i.e., 62 percent of the population insured by national Obras Sociales) qualified for a loan under the program. The impact was positive for the 20 Obras that had executed at least one tranche of their loans at the time of project evaluation. Each of these Obras succeeded in improving its financial indicators, increasing its internal efficiency, and developing adequate systems to comply with new standards and regulation. The impact on the quality of services provided by the Obras also seemed to be iii

10 positive, as shown by the results of a consumer poll carried out by the Superintendency in May The poll shows that, in general, beneficiaries of the Obras which were restructured are more satisfied with the quality of the medical and administrative services covered than those of the Obras that were not restructured. 10. The achievement of the objectives of the restructuring of INSSJP was partially satisfactory. The restructuring program achieved the objectives of eliminating the institution's debts and significantly reducing its operating deficit, but not eliminating it. It is still uncertain whether INSSJP's internal efficiency and quality of care have improved significantly. INSSJP delayed the reform of its current organization and management because its managers contemplated the implementation of an alternative plan that would have radically transformed the mandate of the institution. INSSJP's proposal was to contract out the management of the care of its beneficiaries to three large networks of providers, thereby transferring to these networks all the financial risks associated with the provision of care. This proposal has not yet been implemented. Major Factors Affecting the Project 11. The following political, economic and administrative factors affected the regular implementation of the program: a. Introduction of competition among Obras Sociales Sindicales faced resistance by those interest groups that were comfortable with closed market niches. b. INSSJP had three directors (interventores) during the course of the project. This created several implementation problems, in particular uncertainty among providers, and delayed final negotiations of contracts. c. The decrease in employer contribution established by Presidential Decrees 492/95 and 494/95 implied a reduction of the order of US$10 million per month in INSSJP revenues. This reduction required additional efforts in cost reductions to comply with the zero-deficit requirement of third Tranche Release. d. The delay in the actual transfer of management responsibilities to the three networks of providers has further prevented INSSJP from complying with this condition. e. Lack of counterpart funding has not hampered the restructuring program of Obras Sociales but could do so in the near future since the program would henceforth mostly rely on counterpart funds which are severely constrained because of Argentina's tight fiscal situation. Project Sustainability 12. All the major project outcomes appear irreversible, although consolidation is needed: a. Consumer choice of insurance provider and competition among national Obras Sociales and INSSJP are considered by the major stakeholders as a sustainable reform that is unlikely to be reversed. According to a May 1999 consumer poll, eighty-one percent of the persons enrolled in the system know that they have the right to change Obra; 725,000 persons have exercised this right since it was granted. Seventy or so Obras have expressed their interest in competing with INSSJP by registering as insurers for the elderly. b. The sustainability of the enrollment database needs to be ensured. The most important determinant of sustainability would be the decision to transfer the responsibility of its maintenance to the Superintendency for Health Services (SSS), which has a higher and more direct stake in its use than the National Social Security Administration (ANSeS) or the iv

11 federal tax revenue office. Consolidation of the database would also require further technical adjustments, especially regarding maintenance and updating routines. c. Another area of consolidation is the introduction of additional risk-adjustment criteria (family size, age, sex, residence) in the redistribution formula of the Solidarity Redistribution Fund. Their implementation may, however, require new strategies for increasing the amount automatically redistributed, or reducing the scope of the PMO. The challenge in designing a system of solidarity contribution and redistribution mechanisms among Obras is to find the right mechanism that would compensate for the true differences in risks incurred by Obras without compensating for poor management and inefficiencies. d. Some success has been achieved in decreasing the scope of discretionary subsidies to Obras, but the practice was not eliminated. The practice of discretionary subsidies undermines both the FSR objective of promoting equity among Obras, and the financial objectives of the restructuring program of Obras. e. The establishment of an incipient comprehensive regulatory framework was a major step towards improving the sustainability of the system. The challenge is now to ensure that regulations are enforced. f. The empowerment of consumers together with the increased provision of information on the health insurance system are major features that will help ensure continuous improvements in the system. g. The restructuring program of Obras Sociales succeeded in ensuring the financial and technical viability of the majority of Obras which qualified for a loan. The restructuring program introduced an important cultural change in the system by developing a new management culture among Obras as well as new transparent and accountable systems for funding to Obras. h. Many of the Obras that did not qualify for a restructuring loan, especially the small ones, are experiencing today acute financial difficulties which, unless the crisis is adequately resolved, would pose a threat to the sustainability of the entire system. Their financial situation is likely to worsen with the increased capacity of autonomous public hospitals to charge them for services provided to their enrollees. i. The restructuring program of INSSJP has not yet ensured the financial and technical sustainability of the institution. A radical plan to change the organization is currently on hold. Performance 13. Bank performance in the identification, preparation, appraisal and supervision of the Health Insurance Reform Program was highly satisfactory. The Bank responded in a timely fashion to the Government's request for financial and technical support in the overhaul of its health insurance system in The Bank helped define a long-term vision of a more equitable and efficient health financing system through its sector work and through its dialogue with the government on the goals and instruments of the reform. Bank staff were particularly effective in establishing partnerships with a broad array of stakeholders, a strategy that has been instrumental to ensuring the sustainability of major policy reforms. Finally, the Bank is to be credited for continuity, excellent technical support and close monitoring in the supervision of the reform program. 14. The Borrower's performance was also highly satisfactory. The Government successfully handled strong political pressures while ensuring that the agreed core program and commitments established in the Letter of Development Policy were maintained. In addition to its political savvy, the Borrower should be commended on the degree of professional capacity that it brought v

12 to the achievement of the objectives of the program, and for its continued commitment to improving the health insurance system. Assessment of Outcome 15. The overall project outcome is considered satisfactory. The policy reforms and regulation component is considered satisfactory. Most of the objectives were met but, in several instances, the achievements need to be consolidated. The restructuring of Obras Sociales is considered highly satisfactory, having achieved dramatic and sustainable improvements in the way Obras conduct business. The restructuring of INSSJP is considered partially satisfactory since the institution is still running an operating deficit. Key Lessons Learned 16. The implementation of the program provided many lessons for future adjustment programs of this type: a. At the project design stage, the focus should be on conditionality based on desired outcomes for the reform rather than on undertaking specific restructuring measures. The Bank team has developed jointly with the Argentine authorities the conditionality matrix and has allowed great flexibility with regard to specific instrumental activities. b. The reform program must be developed with the long-run vision for change in mind yet with a practical focus on small, achievable steps, a reasonable timeline, and flexibility to adjust through careful monitoring and management of the process. c. The reform must be built on broad, multi-agency support, not narrow sectoral backing. The successes to date of the program have depended critically on political support from the highest levels of the Argentine government. d. A key element of the project's success was the fact that it had been preceded by thorough analytic work that helped establish clear and achievable goals for the adjustment program. Equally critical to project success was the development of a strong local capacity in data collection, monitoring and impact evaluation. vi

13 PART I: PROJECT IMPLEMENTATION ASSESSMENT A. BACKGROUND 1. In , the Government of Argentina began investigating options for reforming its health insurance system that was plagued with issues of low efficiency, financial unsustainability, and poor quality of health care. In addition, there was a growing concern about the high cost of care in the country'. Collectively known as Obras Sociales, the compulsory health insurance funds provide coverage to some 18 million beneficiaries (or 51 percent of the population). They are made up of national Obras Sociales, which cover 8 million formal sector employees and their dependents, provincial Obras Sociales, which cover around 6 million provincial public sector employees and their dependents, and the national health insurance fund for retirees and pensioners (INSSJP), which covers the health needs of about 4 million beneficiaries. In addition, around 200 private health plans (Pre-pagas) provide voluntary health coverage to 2.2 million individuals. Obras Sociales Nacionales have an average annual revenue of US$3 billion from mandatory payroll taxation (5 percent from employers and 3 percent from employees). INSSJP, which has an average annual revenue of US$2.8 billion, is funded by (i) an automatic transfer of three percent of employer and two percent of employer payroll contributions; and (ii) a tax on retirement pay and other pensions. Early reform initiatives included: the regrouping under a unique health insurance law (23660/88) of all the national Obras Sociales; and the centralization of payroll contributions to all national Obras Sociales by the federal tax revenue office. 2. The national Obras Sociales and INSSJP began to incur large deficits which worsened following the March 1995 financial market crisis and the economic slump of (which resulted in lower payroll taxes). The combined debts of national Obras Sociales rose from US$100 million in 1991 to over US$1 billion in December 1995; the debts of INSSJP similarly spiraled upward from nil to over US$1 billion during the same period. The growing debts of the social health insurance funds exposed the inefficient and rigid structure of the health insurance system and put pressure on the Government to find a sustainable solution to its financial woes. Complaints from consumers about the unavailability and poor quality of health care also added to the crisis. 3. In the second half of 1994, the Government and the World Bank undertook a sectoral analysis of financing issues and options for reforms 2, with a special focus on the national Obras Sociales and INSSJP. The sector work permitted identification of the following key policy issues and areas for a first phase of reform. 4. Introducing competition among national Obras Sociales was recognized by the Government as a fundamental step towards improving their efficiency and accountability as well as the quality and quantity of their health care coverage. National Obras Sociales are historically linked to specific industries and professions and are owned and managed by workers' unions or associations. All formal sector workers and their dependents are required by law to receive health 'Argentina spent an estimated 10 percent of GDP on health in Argentina's health expenditure patterns resembled more those of high income countries (9.6 percent) rather than those of countries in its income group (6.2 percent) or in Latin America (6.3 percent). (Source: WDI, World Bank) The high level of spending in health was, however, not matched by good health and productivity indicators. 2 Summarized in 'Argentina: Facing the Challenge of Health Insurance Reform,' May 30, 1997, World Bank. 1

14 insurance from the Obra linked to their place of employment. The system of national Obras 3, consists mainly of Obras Sociales Sindicales (203 in 1999) which provide coverage to around 6.7 million workers under collective labor contracts and their dependents. The second largest group of Obras is that of Obras Sociales de Personal de Direcci6n (24 in 1999), which provide coverage to around 0.6 million white-collar employees. An additional 0.7 million are covered by Obras of other sorts. 5. Since Obras and INSSJP had captive beneficiaries who could not select membership in another health insurance, they had little or no incentive to improve the quality and quantity of services, operate more efficiently and control costs. In addition, the system was characterized by the existence of a large number of Obras Sociales which were not viable as insurance providers because of their limited risk pool 4. It was believed that competition and regulation would provide the appropriate incentives to increase efficiency and consolidate the system by reducing the number of national Obras Sociales. The Government had already introduced by decree the concept of competition among national Obras Sociales in 1993, but the decree had failed to become effective because of the absence of a supporting regulatory framework, strong opposition by labor unions, and the lack of preparedness of the Obras Sociales to face competition. 6. While designing the reform program, two main options for opening competition in the health insurance market were considered by the Government: the radical approach of introducing competition among all health insurance funds (all Obras and Pre-pagas) at once, and the more gradual approach of introducing competition in specific segments of the insurance system. Given the lack of readiness of the regulatory framework and the concern that unions would strongly oppose the insurance reform as a whole if full competition were allowed from the start, the government decided to opt for the phased approach. It was also feared that the wealthier and better organized Obras de Personal de Direccion (white-collar employees) and private health insurance funds (Pre-pagas) would "cream-skim" low risks by attracting the high-income population. In a first phase of the reform, competition was only envisaged: (a) among Obras Sociales Sindicales; (b) between INSSJP and Obras Sociales Sindicales; and (c) between Obras de Personal de Direcci6n and Pre-pagas. 7. The second major challenge was to reform the Solidarity Redistribution Fund(FSR) with a view to eliminate its practice of discretionary subsidization of theobras, and to focus the use of funds exclusively on improving equity and mitigating risk selection. The FSR is financed as a share of employer and employee contributions to their Obra. Social (10 percent of payroll contributions for the Obras Sociales Sindicales and 15 percent for the Obras Sociales de Personal de Direcci6n). Until 1995, the FSR was managed by the National Health Insurance Administration (ANSSAL). The funds were theoretically transferred back to the Obras for several purposes: (a) to ensure that Obras are able to finance a standard package of health benefits for all their beneficiaries; (b) for financial support in the form of loans and subsidies; and (c) to finance special programs or costly high-complexity health care. The lack of transparency 3 Based of data from the Superintendency for Health services, there were 361 national health insurance funds in 1994 and 290 in In 1999, around 62 percent of national Obras Sociales (180) have less than 10,000 beneficiaries, accounting for 6.2 percent of total enrollees only. 2