Nicaragua - Health Sector Reform Project

c Y -L-A-cs/ I Document of The World Bank FOR OFFICIAL USE ONLY Report No. 12393-NI STAFF APPRAISAL REPORT REPUBLIC OF NICARAGUA HEALTH SECTOR REFORM PROJECT NOVEMBER 24, 1993 MICROGRAPHICS Report No: 12393 NI Type: SAR Country Department II Human Resources Operations Division Latin America and the Caribbean Regional Office This document has a resicted distbution ad may be used by recipients only in the performance of their offichi dutis Its contents may aot oewise be disclosed without Would Bank authozaon.  CURRENCY AND EQUIVALENT UNITS US$1 = 6.2 Nicaragua Cordoba (C) (November 1993) SDR 1.0 = US$1.3934 (November 1993) WEIGHTS AND MEASURES 1 Hectare (ha) = 10,000 m2 I Metric Ton (mt) = 1,000 kg 1 Kilometer (km) = 1,000 m 1 Cubic Meter (m3) = 1,000 liters (l) 1 Liter (1) = 1,000 milliliters (ml) FISCAL YEAR January 1 - December 31 GLOSSARY OF ACRONYMS ARI Acute Respiratory Infections CIPS Center for Supply of Pharmaceutical Products DAM Department of Medical Supply DANIDA Danish International Development Agency ERC Economic Recovery Credit FISE Nicaraguan Social Investment Fund GDP Gross Domestic Product ICB International Competitive Bidding IDA International Development Association IDB InterAmerican Development Bank IEC Information, Education, and Communication IMF International Monetary Fund INSSBI Nicaraguan Social Security Institute KfW German Credit Institute for Reconstruction (Kreditanstalt pir Wiederaufoau) LCB Local Competitive Bidding LIB Limited International Bidding LSMS Living Standards Measurement Survey MIS Management Information System MOH Ministry of Health NGO Non-Governmental Organization ORS Oral Rehydration Salts PAHO PanAmerican Health Organization PCU Project Coordinating Unit PHC Primary Health Care PROFAMILIA Nicaraguan NGO for Family Planning SILAIS Departnental Health Units SOEs Statement of Expenditures TORs Terms of Reference UNFPA United Nations Fund for Population Activities UNICEF United Nations Children's Defense Fund USAID United States Agency for International Development  FOR OFFICIAL USE ONLY NICARAGUA HEALTH SECTOR REFORM PROJECT TABLE OF CONTENTS CREDIT AND PROJECT SUMMARY .......................... v I. INTRODUCTION .............. 1 II. THE HEALTH SECTOR - BACKGROUND AND ISSUES ................. 3 A. The Health Care System ................................. 3 Public Health Sector Organization and Functions ................ 3 Social Security Institute ................................ 4 Private Sector ..................................... 4 C. Key Sector Issues ..................................... 5 Limited Institutional Capacity ..........5......... S Deficiencies in Supply of Pharmaceuticals and Medical Supplies ... .... 10 Deterioration of Physical Facilities ......................... 14 Financing in the Health Sector ........................... 15 D. Government Sectoral Strategy .............................. 17 Decentralizing Health Services ........................... 18 hnplementing a Redefmed Primary Health Care Model .... ........ 18 Strengthening Supply and Distribution of Pharmaceutical Products ... .. 18 Rehabilitating Health Facilities ........................... 19 Strengthening Cost Recovery ............................ 19 III. LESSONS LEARNED FROM EXPERIENCE, COORDINATION WITH OTHER DONORS, AND IDA STRATEGY ........ .. ............. 19 A. Lessons Leaned from Experience ........................... 19 Government Commitment, National Inter-Agency Coordination, and Implementation Capacity . ......................... 20 Flexibility and Simple Design ............................ 21 Monitoring and Evaluation Indicators . ....................... 21 Staff Mix and Assignment in Remote Areas ................... 21 Adequate Supervision ............................ 22 Project Sustinabiity ............................ 22 This report is based on the findings of pre-appraisal and appraisal missions which visited Nicaragua in July and September 1993. Mission members were J. J. de Saint Antoine ML , Task Manager), V. Nguyen (LA2HR), J. Cercone (LATHR), H. Sanchez, C. Oyarzo, P. Cross, F. Vio, N. Gillespie, J. Kleinman (Consultants). Mr. Rune Lea (NORAD) pardciated in the pre-appraisal mission. Mr. Nguyen contributed to the report both in the field and at headquarters. Messrs. Edilberto L. Segura (LA2DR) and Kye Woo Lee (LA2HR) are the Department Director and Division Chief, respectively, for this operation. Peer reuiewers are X. Coll (LA4HR) and K. Lashman (LA3HR). 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.  - ii - B. Coordination With Other Donors ............................ 22 C. IDA Strategy and Role .................................. 23 IV. THE PROJECT .......................................... 24 A. Objectives .......................................... 24 B. Description of Components ............................... 25 Component 1: Institutional Strengthening of MOH ............... 25 Component 2: Primary Health Care ........................ 32 Component 3: Pharmaceutical Supply and Distribution System ... .... 34 Component 4: Rehabilitation and Maintenance of Hospitals and Other Health Facilities ................................ 36 Component 5: Technical Assistance to INSSBI ................. 38 Component 6: Project Administration ....................... 39 V. PROJECT COSTS AND FINANCING .......... .................. 40 A. Project Costs ............ ...................... 40 B. Financing Plan ........... 41 Cofinancing ........... 41 C. Incremental Recumrent Costs and Project Sustainability .............. 41 D. Procurement . ....................................... 42 E. Disbursements ........................................ 45 F. Accounting and Auditing .......... ....................... 46 VI. PROJECT IMPLEMENTATION AND MANAGEMENT ...... .......... 46 A. Project Implementation and Management ....................... 46 B. Project Monitoring and Supervision Strategy ..................... 47 Anmual Reviews . ................................... 47 Mid-Term Review ............ ....................... 48 VI. BENEFITS AND RISKS ............. ....................... 48 Project Benefits . ........................................ 48 Project Economic Benefits ........... ....................... 48 Project Risks .......................................... 51 Enviromnental Rating ..................................... 51 VIII. AGREEMENTS REACHED AND RECOMMENDATION .... .......... 51 Recommendation ........................................ 55  Anneme 1. County an Health Indicators 2. Health Sector Policy Letter 3. Health Sector Expenditrs and Finacing 4. MOH Organization Chart 5. Terms of Reference for Institutional Strengthening Technical Assistae 6. Redefined Primary Health Care Model 7. Human Resources Development Subprojects 8. Existing Family Planning Program in Nicaragua 9. Pharmaceutical Supply and Distribution 10. Emergency Rebabilitation of Hospitals 11. Maintenance System for Health Facilities 12. Technical Assistance to INSSBI 13. Project Costs 14. Finaning Plan 15. Methods of Procurement 16. Disbrsements 17. Project Coordinating Unit 18. Project Action Plan 19. Project Implementation Schedule 20. Key Monitoring Indicators 21. Coordination between Donors 22. Supersion Plan and Mid-Term Review 23. Documents in Project File MAP IEBRD No. 25188  NICARAGUA HEALTH SECTOR REFORM PROJECT STAFF APPRAISAL REPORT CREDIT AND PROJECT SUlMMARY Borrower: The Republic of Nicaragua Beneficiaries: Ministry of Health (MOH) and Social Security Institute (INSSBI) Amount: SDR10.8 million (US$15 million equivalent) Terms: Standard IDA terms with 40 years maturity including 10 years of grace Project Objectives: The objective of the project is to enhance Nicaragua's health status by supporting the implementation of the Government's new strategy for the health sector. In particular, the project would aim to: (a) improve the institutional capacity and management systems of MOH; (b) increase the quality of service delivery; and (c) strengthen the financing of the sector by increasing cost recovery at the secondary level. Project Description: The project has six components: (a) Institutional Strenaghenin Of MOH (US$2.6 million, equivalent to 12.9 percent of total project cost including contingencies) would provide technical assistance to (i) help decentralize budget implementation, improve resource allocation, introduce service provision arrangements with the Departmental Health Units (SILAIS), and increase cost recovery, (ii) design and carry out human resources development and manpower planning and training programs, and (iii) strengthen the MIS; (b) Primary Health Care (US$7.0 million, or 34.8 percent) introduces a new PHC model nationwide, where preventive care is emphasized and parallel programs, including family planning, are integrated at the local level; the project would support PHC by fmancing (i) essential drugs for priority interventions, 'Ii) training of health services delivery personnel, (iii) information, education, and communication (IEC) activities, (iv) rehabilitation of PHC facilities in seven of the poorest SILAIS, and (v) a monitoring and evaluation system; (c) Pharmaceutical Supmly and Distribution System (US$3.2 million, or 15.9 percent) would improve the supply and distribution of essential drugs and pharmaceutical supplies by (i) conducting studies and providing technical assistance to improve policy, regulation, and fiancing, including operating a pilot private pharmacy within an MOH hospital (ii) improving inventory management, strengthening MIS, rehabilitating storage areas, and increasing private sector  - vi - distribution, and (iii) assessing the nature and level of irrational use of pharmaceuticals and starting to reduce its incidence; (d) Rehabilitation and Maintenance of Hospitals (US$5.3 million, or 26.4 percent) would finance (i) emergency rehabilitation subprojects for hospita!3 and (ii) the design of a proper maintenance system, including a study to analyze the impact on recurrent costs so that these costs may be properly budgeted for by the MOH; (e) Tehnical Assistance to INSSBI (US$1.0 million, or 5 percent) would help (i) design and implement a health insune program, for which INSSBI would rirchase health services from the MOH and the private sector and (ii) design and implement a workmen's compensation program and carly out the preliminary economic and actuarial studies to evaluate the feasibility of reforming the pension system; and (f) Project Administation (US$1.0 million, or 5 percent) would finance consultant services and operating costs of the Project Coordination Unit. idmInistration: A Project Coordinating Unit would be established in the MOH to assist this ministry in achieving timely and effective implementation of the project, to manage studies, surveys, and technical assistance, and to undertake monitoring and evaluation of the project. Benefits: The project would have a significant impact on the financial equibrium of the health sector by reducing the cost of providing services and introducing mechanisms to recover a share of those costs. With respect to savings, the project would bring: (a) improvements in the pharmaceutical procurement, distribution, and prescription practices; (b) reductions in the unit cost of providing primary health me services through the integration of parallel programs as the amount of staff time and the opporunity cost of patients would be significantly reduced; (c) improved maintenance and rehabilitation of physical facilities and medical equipment that would defer capital investments, reduce operating costs, produce more predictable output levels, and increase public satisfaction. Decentralization of the budget would result in better cost-effectiveness of health spending. At the same time, availability and quality of health care would be improved. On the revenue side, additional income would be generated through increased cost recovery at the secondary level. If a reasonable 50 percent implementation success rate were reached, economic benefits from the pharmaceuticals and primary health care components would reach US$2.7 million, and cost recovery measures introduced by the MOH would amount to US$13.8 million (principally through sale of services to INSSBI). Should all these savings be properly invested by the MOH in extending services at the current cost of US$18 per  - vii - capita, coverage could be increased from the present 3.0 million beneficiaries (70 percent of the population) to 3.9 million (90 percent). Direct beneficiaries under the primary health care component would represent about 21 percent of the population. Risks: The main risks are: (a) the feasibility of accomplishing a reform program given Nicaragua's weak institutional base; (b) possible delays by MOH to implement policy reforms because of likely opposition from affected interest groups (such as unions, medical associations, pharmaceutical suppliers); and (c) Government counterpart fiuancing constraints. Risk (a) would be mitigated by a gradual implementation of reforms in line with building of institutional capacity through technical assistance and the training of managers who would implement dhe reforms. Risk (b) would be mitigated by donors' united support of reform, the MOH's strong commitment to reform, and the Governent's consensus-building through the staging of seminars with various interest groups to discuss the reform. Risk (c) would be mitigated by limiting the level of Government participation to 10 percent of total project cost and receiving a multi-anmal commitnent from the Government to provide counterpart funds. Environmental Category: The project would have no adverse environmental impact and is classified as C. Poverty Category: The project would support a program of targeted intervention. The project would help reduce poverty through: (a) establishment of a decentralized and improved health care delivery system which would immediately benefit under-served poor populations in remote areas; (b) strong emphasis on primary health care in seven of the poorest SILAIS; and (c) improvement of resource management and mobilization which would enable the Government to continue providing free essential health services to the poor.  - viii - Project Costs Local Foreign Total - US$ million Institutional Strengthening of MOH 0.4 2.0 2.4 Primary Health Care 1.7 4.8 6.5 Pharmaceutical Supply System 0.7 2.4 3.1 Rehabilitation and Maintenance of Hospitals 1.4 3.4 4.8 Technical Assistance to INSSBI 0.2 0.7 0.9 Project Adminstration 0.8 0.2 1.0 Total Baseline Cost 5.2 13.5 18.7 Physical Contingencies 0.1 0.5 0.6 Price Contingencies 0.2 0.6 0.8 TOTAL COSTA' 5.5 14.6 20.1 ancing Pan Local Foreign Total Government of Nicaragua 2.1 0.0 2.1 IDA 2.9 12.1 15.0 Norway 0.5 2.5 3.0 Total 5.5 14.6 20.1 Estimated IDA Disbursements IDA Fiscal Year 1994 1995 1996 1997 Annual 1.52' 4.8 4.5 4.2 Cumulative 1.5 6.3 10.8 15.0 Economic Rate of Return: Not applicable jI Net of taxes and duties. 21 Includes the initial deposit of US$1.5 million to the Special Account and retroactive financing of US$0.75 million (5 percent of Credit) for eligible expendiues incured after October 1, 1993.  NICARAGUA HEALTH SECTOR REFOIM PROJECT STAFF APPRAISAL REPORT I. INTRODUCTION 1.1. This report presents a Health Sector Refonn Project for which an IDA Credit of SDR10.8 million (US$15 million equivalent) to the Republic of Nicaragua is proposed. Total project c .ot is estimated at US$20. 1 million. This report describes the health sector, analyzes the issues it faces, and presents the Government's strategy to address these issues. The report then proposes IDA's involvement in the financing of che Government's health sector reform program, and provides parameters for project implementation. The Government has presented its health sector reform program in a policy letter (para. 2.3 and Annex 2). 1.2. Nicaragua is one of Latin America's poorest countries, with a per capita GDP estimated at US$422 in 1992, substantially lower than the US$850 level prevailing in the late 1970s. When the Chamorro Government took office in April 1990 after a decade of civil strife, it had to transform the centrally planned economy into a market-oriented system. In 1991-1992, the Government successfully implemented a comprehensive stabilization and adjustment program, supported by an International Monetary Fund (IMF) Stand-by arrangement and an IDA Economic Recovery Credit (ERC, September 1991). Inflation was reduced to single-digit annual rates, and GDP recorded a modest growth in 1992. A major challenge ahead for the Govemment is to maintain the recent stabilization gains in the face of lower external resource inflows while simultaneously improving the conditions for resuming growth with equity. At the same time, a drastic reduction in total consumption will be needed to increase domestic savings and release resources for investment. This poses another challenge, i.e., to prevent the anticipated consumption decline from adversely affecting the living standards of the poorest and most vulnerable members of the population. To enhance the viability of the economic adjustment process, social conditions need to be improved and efficiency of social programs increased; hence the importance of the proposed health sector reform project for the Govermnent's overall development strategy. 1.3. For over a decade, Nicaragua has undertaken a major effort to improve the health status of its population. Between 1979 and 1993, total health facilities, including health and medical posts, health centers, and hospitals, increased from 172 to 850. Coverage was extended from 30 percent to 70 percent of the population, aid quality of care improved somewhat during the early 1980s, especially at the primary level. At the beginning of the 1990s, however, it became clear that although the Government had spent as much as 5 to 7 percent of GDP on health during the previous decade, health gains have not been as great as one might have expected. In recent years, inefficiencies in the public health system have been exacerbated, and quality of care has deteriorated substantially both at the primary and the secondary levels. On the supply side, overall scarcity of financing and misallocation of financial and human resources have led to the decline in quality of care. Nicaragua has been  -2 - suffering from major shortages in basic medicines and medical supplies throughout the health system (pans. 2.22-2.23). This has resulted in prolonged treatment requirements, exacerbation of illnesses, and has caused considerable harm to the Government's image as a health care provider. It has also led to lack of credibility, dissatisfaction, and high turnover among health workers. On th. .emand side, demographic factors, combined with a lack of enforcement of referral systems among levels of care have resulted in increases in the demand for services at higher-level facilities which are more costy to operate. As shortages were usually greatest at the primary health care (PHC) level, patients bypassed the first level of care in the community in favor of secondaty level facilities which bave become overcrowded and have misused resources against their comparative advantage. Many of the above problems originated from an excessive centralization of decision-making, complicated procedures, and lack of good communications between departments within the Ministry of Health (MOH). 1.4. At the beginning of the 1990s, public complaints about the system became frequent. Furthermore, the tight fiscal situation pointed to the need for improving efficiency in the use of sector resources. In 1991, recognizing the need to reform the system, the Government took some initial reform measures by decentralizing health services into 19 regional units, the S*LATS, which would have more fiscal and decision-making autonomy, and would be in closer contact with local realities. Some improvements have already been noted in PHC since the introduction of the SILAIS (such as high vaccination coverage,1' an interesting case of integrated PHC service delivery (pan. 2.19) in the Le6n SILAIS, slight improvements in availability of pharmaceuticals at the local level as the SILAIS have been authorzed to purchase limited amounts of pharmaceuticals, and increases in cost recovery by a number of health facilities which used these funds wisely on items such as fuel for ambulances, rehabilitation of infrastructure, or bonuses to nurses), and this initiative has paved the way for major reforms expressed in a new health sector strategy (pans. 2.33-2.34) which the Government started to implement in early 1993. Under this strategy, futher decentralization of administrative functions and fiscal resources would improve care in both medical and economic terms. This would free resources to allow the Government to maintain per capita spending on health as the population increases, and in the longer term would help provide resources for more complex care that will be necessary as changes in the epidemiological profile of the population takes place. Additionally, reforms in the Social Security Istitute's (INSSBI) health insuance system (Annex 12) would lead to a gradual increase of the private sector as a contributor to health services provision, introduce healthy competition, and free up Govermment resources which could be applied to serve the poor. 11 As of June 1993, vaccination coverage of children under one year old was 90 percent for tuberculosis, 67 pent for measles, 98 percent for polio, and 88 percent for DPI.  - 3 - H. THE HEALTH SECTOR - BACKGROUND AND ISSUES A. The Health Care System 2.1. Public Health Sector Organization and Functions. Health care is largely the responsibility of the MOH, which handles a network of approximately 850 facilities (para. 2.21) fairly well distributed throughout the countty, roughly in line with population distribution. The MOH is the second largest ministry and received 14.6 percent of the central government budget in 1992. The MOH employs 21,000 persons, which account for 29 percent of all public sector employees. 2.2. The central office of the MOH has a staff of about 400 (para. 2.15) and is resonsible for the formulation of alt public health policies, definition of norms and stndards applied on a nationwide basis, broad health planning and monitoring, and purchasing of pharmaceical and medical supplies. This office is stll too large in terms of overall staffing and some of the personnel is currendy being redeployed to the Department Health Units (SILAIS) (para. 2.15). It is organized into two large departments, each headed by a Vice-Minister. The first Vice-Minister is in charge of the medical functions, which includes basic health, hygiene, epidemiological surveillance, and therapeutic norms. The other Vice-Minister is responsible for administrative, fmancial, and economic aspects, including infrastrucue and maitenane, pharmaceutical and medical supplies, personnel, and accounting. Also responding directly to the Minister are the Secretary General, who is in charge of the coordination of the 19 SILAIS, and the Director of the health strategy and institutional development department. The organizational chart of the MOH is presented in Annex 4. Because of the ongoing decentalization program, furiher adjustments to this organization are expected as the process evolves. The Government policy letter describes the health sector reform (para. 2.34) and includes a summary description of the role of the Ministry of Health central office in the decetalized health model and the adjustments in personnel management ecessary to implement this policy. Support to strenghen the MOH's institutional capacity in the context of the decentralization program will be addressed under the project (paras. 4.24.10). 2.3. Since 1991, the SILAIS has been the basic organizational unit of the system at the local level. There are 19 SILAIS corresponding to the country's 16 departments plus the capital, Managua, which was divided into 3 SILAIS. They report to the Minister through the Secretary General's office in charge of SILAIS coordination. The SILAIS are responsible for the operation of all PHC facilities and hospitals in their geographical area. This represents, on average, about 40 facilities per SILAIS. The SILAIS include a management unit headed by a Director, assisted by a medical assistant director and an administve assistant director, each with a staff of 4-5 persons. The SILAIS system has fostered the entusiasm and inidative of local administrators who look forward to the enh of their responsibilities. Since SILAIS Directors are medical doctors with limited management training, their administrative skills will need strengthening for decentalization to be wccessful. Under the project, technical assistance and management training wotld be provided to increase management capacity at the SILAIS level (paras. 4.6-4.8). As  - 4 - management training will take some time to bear its fruits, decentralization has been conceived as a gradual process (paras. 2.34 and 4.6). 2.4. Social Security Institute (INSSBI). INSSBI is in charge of administering the social security system and certain welfare activities such as social centers for street children or support to handicapped war veterans, which were transferred from the Ministry of Social Welfare. Formerly INSSBI also administered a health system for its affiliates, but these activities were transferred to the MOH in 1979. The institution is financed through: (a) total contributions from workers and employers ranging from 8.5 to 17.5 percent of salaried income, depending on the industry and its location; (b) profits of the lottery; and (c) subsidies from the Government. INSSBI has a total staff of 3,000. Like at the MOH, the composition of the staffing is unbalanced, with an excess of unqualified staff and a scarcity of technical specialists. Under the project, this would be addressed through the provision of technical assistance (paras. 4.254.27). 2.5. The INSSBI health insurance program covers today about 220,000 workers, representing 5.5 percent of the total population and less than 25 percent of the economically active population. The program has become little attractive to its affiliates as it does not provide them with health services any better than those the population generally receives free of charge from the MOH. Under the project, this would be addressed through a reform of the health insurance program (para. 4.25). 2.6. Private Sector. In response to increasing deficiencies in the public health system, the private sector has undergone some growth in the past several years, but its share of institutional health delivery is still small. It is estimated that NGOs and private providers serve about 5 percent of the population, with services limited mostly to outpatient curative care and private phannacies. In 1987, NGOs and the private sector operated seven hospitals with a total of about 200 beds and over 200 clinics. The largest private hospital, with 40 beds, is located in Managua. Most of the MOH's 2,700 doctors maintain some type of private practice, i.e., they usually see private patients for about three to four hours per day (beyond their normal eight hours for the MOH) in their own private practices. They are also allowed to use MOH hospital facilities for private inpatients, with the hospital charging for room and board, drugs, and other services while the doctor is allowed to collect his fees. There are an estimated additional 400 fully private doctors (very rough estimate as no list or survey is available). As a result of shortages in the public sector, a significant amount of drugs are purchased from the private sector. Following the liberalization of the pharmaceutical market in 1990, the number of private importers increased from eight in 1990 to 67 in 1992 and private pharmacies increased from 200 in 1990 to over 400 in 1993. The country's pharmaceutical industry comprises 17 laboratories, which do mostly formulation. INSSBI's health insurance reform and its decision to purchase services from thid parties provide strong incentives for further growth of the private sector. There has been no rigorous study on the private health sector in Nicaragua and the above mnmbers are therefore rough estimates. More information on the sector will be obtained from data collected in the on-going Living Standard Measurement Survey (LSMS) supported by IDA under the Social Investment Fund Project (FISE) (Credit 2434-NI, approved in November 1992).  - 5 - C. Key Sector issues 2.7. Several issues currently affecting the Nicaragua health system need to be addressed by the Government: (a) limited institutional capacity; (b) imadequaW PHC model; (c) deficiencies in the supply of pharmaceuticals and medical supplies; (d) deterioration of health facilities; and (e) limits in available public sector fmancing. 2.8. Limited Institutfonal CapacIty. Managerial inefficiencies at the central office of the MOH and at the SILAIS constrain sector development. El"= 0jAy is weak, particularly in regard to multi-year planming that responds to national policies and nonrs, and local conditions are hardly taken into consideration. There is also limited capability for harmonizing short-term investment and operational needs with long-term investment requirements. This is aggravated by the shortage of staff with traning and experience in strategic planning and budgeting. 2.9. The transfer of administrative responsibilitv to the SILAIS remained theoretical until recently, as the SIL TS did not have the flexibility to adjust their operations to potentially important variations at the local level. For example, they could not transfer budget resources from one line item to another. This has started to change in August 1993, as some limited reallocations were permitted. Furdtermore, SILAIS Directors and their staff are not properly trained to supervise activities at the service level. Efforts are also being made to monitor and assess the quality of services provided. This would be stengthened under the project, which would help implement service provision arrangements between the central MOH office and the SILAIS (para. 4.4). 2.10. Another issue is the low ntumal i hgDAh. Hospital aministative practices are outdated and do not allow hospital directors to combine input factors efficiently to extract good quality senvces from limited resources. This is an important issue as the cost of secondary level care currently represe;ts about 50 percent of the MOH budget and significant efficiency gains may be possible to free resources to increase coverage and quality of PHC services. A wide range of modern management skills and systems are lacking. Although health and financial data are collected, these are not oriented to management requirements. Performance monitoring indicators are not currently used as management tools and the lack of information about the cost of services makes it difficult to determine the amount of reurces that could be released by the reduction of some services or by the adjusutent of fees which could generate fmancing for other priorities. Also, significant data processing and analysis is done manually, without the aid of computes, resulig in delays in decision-making and monitoring of performance. Improvement of hospital mant is currenly being addressed under an InterAmerican Developamt Bank (1DB) project (para. 2.26). The proposed project would finance the rebabilitation of hospitals and the design of a maintenance system for health facilities (paras. 4.234.24). 2.11. Current 'd&AM prai provide no incentive to improve the overall efficiency. The MOH is both the fmancier and producer of hea!th services and, as services are free as a general rle, there has been practically no demand control policy. Furdtrmore, resources are allocated throughout the sector based on historical trends, with little responsiveness to the  - 6 - changing demands of the population and a lack of financial accountability on how the resources are spent and whether they meet the stated objectives of the national health policy in an efficient manner. Thus, there is a need for changes in the budget system, making it responsive to programs with clear measurable objectives (para. 4.4). 2.12. The ManaiUmneDt Infonnation System (MIS) is currendy being improved, but remains weak and incomplete. The MOH is in the process of developing an extensive database on various health service indicators including, inter alia, hospital discharges, outpatient visits by diagnostic group, number of laboratory exams by specialty, and various indicators of efficiency and productivity such as average length of stay by diagnostic group and occupancy rate. This information is collected by the lower level facilities in the health care system and then introduced into the system at the SILAIS level where it is subsequently delivered to the MOH on diskettes. The information system includes a module for epidemiological and uLtritional surveillance, which collects data from every health unit where children under five years of age are examined, weighed and measured. Despite a wealth of information, a lack of manageable and interpretable indicators for policy-making, planmnig, and management purposes constains the effectiveness of the MIS. In addition, the system lacks necessary financial and accounting information. There is no proper personnel information system, and fnancial, acounng, pharmaeucals, and inventory information systems are highly inadequate. The project would support the development of an MIS to provide the MOH with the necessary information in a timely manner to carry out its policy-making functions and monitoring and evaluation of operational functions (paras. 4.9-4.10). 2.13. The gaff=g of the MOH is characterized by: (a' weak personnel management; (b) an inadequate distrbution of staff through health facilities; (c) a high level of overall staffing; (d) a scarcity of health managers; and (e) a critical shortage of mnrses. Personnel policy is weak, and there is little manpower planning. There are few clear policies and procedures, and there is no complete staff register, which makes it impossible to plan the overall distribution of human resources and optimize their use. For the same reason, it is difficult for the MOH to properly inform tning stitutions on what personnel needs to be trained to reach the proper mix required by its health care delivery model. Neither is there a health career path nor objective criteria for promotions. The latter are based on the assessment of SILAIS or hospital directors and are strongly influenced by seniority. As a result, personnel morale is low, and turnover high (about 30 percent anmally over the 1990-92 period). Productvity has been seriously affected by mnmerous strikes during the period 1990-92, but there have been no work stoppage since the change in management of the MOH in Jamuary 1993. The personnel management issues would be addressed under the Human Resources Development s of the project (pam. 5.6(a)) and the long-term benefits of fuure measures would be carefully balanced against the short-term risk of their causing disruptions in service delivery that could jeopdize the rest of the health sector reform. 2.14. Initial indications are that the staff is inefficiently distibuted. Although no overall staistics are available, a partial survey of the three Managua SILAIS shows overstaffing in some categories at some facilities and understaffing at others. There is also an excess of doctors in Managua and a deficit in rural areas, which the Goverment has started to rmody  - 7 - by providing bonuses to doctors relocating in rural areas. A complete survey of MOH staff distribution would be undertaken under the project (para. 4.5). 2.15. The MOH staff level of 21.000 may still be high. However, a sound assessment cannot be made as there is no available analysis comparing the needs of the health system with the actual staffing. This would be undertaken under the project (para. 4.5). The Goverjment has already made some serious efforts to reduce staffing: 3,000 staff were laid off in 1990 and there has been a hiring freeze since then. Lessons learned, however, show that this is a delicate area where futu-e decisions have to be carefully deliberated. The 3,000 staff were laid off under the Occupational Conversion Plan of 1990, which purported to reduce public sector employment. Participation was voluntary and compensation packages were provided. However, as layoff priority criteria were inadequate, a large number of high-quality nurses, health inspectors, and medical technicians were lost. In line with decentralization efforts, the central office of the MOH was reduced from 1,500 in 1990 to 400 in 1993. About 50 more staff are expected to be transferred to the SILAIS during 1994, after which the staffing of the central office of the MOH would be satisfactoty. 2.16. While there is an oversized administrative staff (about 20 percent of all MOH personnel in 1991), there is a great scarcity of health managers. There are currently some initial efforts of the MOH supported by the PanAmerican Health Organization (PAHO) to strengthen the curriculum of the National Autonomous University to increase the number and quality of health managers and economists. These efforts would be complemented under the project which would help train health managers at the central and SILAIS level (paras. 4.6- 4.8). 2.17. Finally, there is a critical shortage of nurses. During the early 1980s, the MOH made a huge effort to train nurses and increase their seaffing fivefold, but many have left the MOH to work in other sectors, principally because of limited salary incentives and lack of recogniton despite three years of studies in nursing. As a result, there is a nurse:doctor ratio of less than 1:1, resldting in a higher use of doctors than is necessary for simple tasks and more expensive care.Y This issue was brought up to the attention of the Government early during project preparation. During recent months, the Government has started to take a number of steps to improve the nurse:doctor ratio. A first set of measures consists of slowing down the recruitment of doctors by the MOH as follows: (a) resident doctors' training for specialties are not guaranteed any more to be recruited by the MOH as a matter of course; (b) specialists on the MOH payroll are being reduced by shifting these doctors to hourly contracts and removing them from the MOH payroll; (c) discussions are being held with the University to reduce the number of students accepted per year for medical studies (especially the mber of specialists); and (d) inters are being put on scholarships instead of the regular payroll of the MOH; at the completion of their training, the MOH assigns them, on a take-it-or-leave-it basis, a job in the areas of highest priority need for doctors. The ' There is no optimal level of physiciams per capita or optimal murse-to-physician rato, but a rule of thumb is that nmuses should exceed physicians by at least two to one (the ratio is five to one in Africa, but wel under two to one in China, India, Latin America, and the Middle Eastern crescent). Sources: World Development Report 1993 - Invesrg in Healh.  - 8 - MOH intends to provide hospital access to doctors who establish private practices as soon as unit costs of health facilities use are established. To increase the number of nurses, the MOH (a) wiU recruit 300 new nurses in 1994, of which 150 will be nursing school graduates and 150 former nurses who had left the MOH earlier; (b) has started to provide a special bonus to attract and maintain nurses; and (c) allows part of the user fees collected in certain health facilities to be used to provide special incentives to nurses or to increase the number of nurses in their facilities as needed. Further measures would be taken under the project, which would finance a study of the health labor market in Nicaragua and propose measures to improve the nurse:doctor ratio (para. 4.5). 2.18. While the Government's PHC program is well-focused, the current service delivery model is not cost-effective. The MOH places strong emphasis on PHC. The PHC package includes the right mix of health interventions to address the problems described in the epidemiological profile (see box next page). The basic health package covers acute respiratory infections, diarrheal diseases, maternal and child health care, family planning, malnutriton, immuno-preventible diseases, tuberculosis and malaria, plus the treatnent of minor trauma and a number of interventions for chronic diseases (described in detail in Annex 6). However, the method of service delivery is not cost-effective. First, it relies too much upon curative care. Doctors, who earn three times more than auxiliary staff (roughly comparable to a 4:1 ratio in the United States), regularly treat what could have been less expensively prevented by well-trained auxiliary nurses. This is reinforced by the fact that PHC depends disproportionately on doctors. Over the 1985-1989 period, there was an average of 1.7 total consultations per capita annually, of which preventive consultations per capita were only 0.5. An example of the curative bias is the excessive focus on hospital rehydration to control acute diarrheal disease, and the lack of effort to prevent diarrhea through enviromnental sanitation programs and hygiene and nutrition education or to promote simple home oral rehydration treatment. 2.19. The second reason for the higher cost of the current PHC model is the delivery of PHC services through vertical programs which are operated in parallel and are independent in policy, human resources, and equipment. As typically found in health facilities, immunization is provided in one room of a health center, growth monitoring and nutrition education in another, and pre-natal care in yet another room, with each functon conducted by different personnel. Post-natal care is separated from family planning. The failure to integrate maternal health and child survival interventons at the local level has unnecessarly increased the human resource requirements of the health delivery system, duplicating personnel and resources, increasing the number of rooms required to provide the basic mix of services, and wastng the time of mothers visiting the health center. This would be addressed under the project through the introduction of a redefined PHC model (paras. 4.11- 4.17). 2.20. The third reason is that as a result of patients' dissatisfaction at the PHC level, the referral system does not work properly, with many people bypassing the primary level and seeking services directly at hospitals. The problem started to develop during the mid-1980s when patients with routine illness began queuing up outside hospitals while urban health centers and posts were sometimes without patients. This occurred principally because of lack  -9- Nicaragua's drame Pro 1. The public health care system reaches about 70 percent of the population. Yet, Nicaragua remains at an early stage of epidemiological transition with high infbt d matern mortality and high fertility. The infant mortality rate has decreased from 121 per 1,000 in 1965 to 72 per 1,000 in 1992, but it remins the highest in Central America. The main causes are diarrhea, perinatal diseases, and respiratory infections, simila to those in most dmeloping countries, giving rise to 75 percent of all infant deaths and 50 percent of all child deats. Maternal and early childhood malnutrition create the conditions conducive to this high mortality. Prevalence of infant and child malnutrition range between 8 percent and 20 perceu dtroughout the country. Also, there is a high level of maternal anutition, as inticated by a United Nations Children's Defense Fund (UNICEF) estimate that 27 percent of babies have low birth weights (under 2,500g), nearly twice Central America's average of 15 percent. 2. Maternal mortality is high at 159 per 100,000 live births (1989). The main caue are hemorrhages, toxemia, and sepsis; one third is produced by provoked abortion. The high maternal mortality results from: (a) lack of adequate pre- and post-natal preventive care; (b) high fertility rates, especially in rural areas, with low birth spacing; and (c) lack of an adequate referral system for pregnant women. Sixty-five percent of all births currently occur at home, 14 percent of them without the assisunee of doctors, nmses, or midwives. Much of this infant and maternal mortality is preventable and would be significantly reduced by improving delivery of relatively simple interventions at the PHC level. 3. Although the pattern of mortality is still dominated by diarrheal and infctious disea, new health problems have started to appear in recent years as a result of a gradual shift frm a rural subsistence economy to an urban industrial society. About 60 percent of the popuaion is urban, and the urban population is growing more rapidly than the rural population. Tbere are new risk factors such as exposure to pesticides, industrial accidents, traffic accidets, abuse of alcohol and tobacco, inadequate diet, and lack of exercise, resuling in heart disaes, cancer, and chronic and pulnonary disease. In the case of AIDS, often reated to urbnizaon, increased income, illicit drugs, and more promiscuous behavior, Nicaragua has only 31 notified cases. 4. Nicaragua has started to take the right steps to address fan isues. The country has a population estimated at 4.3 million in 1993, growing at a rate of 3.4 percent per year. The current estimated total fertility rate of 5.5 is still high and similar to that of the Latin American and Asian regions in the late 1950s. The previous Governnt was vigorously opposed to family planning, which resulted in a gradual erosion in the deUvery of services by the public sector. The present Government, however, has expressed its intnin to improve the MOH's capacity for providing family planning services and introduce intensive family planning education programs. This is included in the policy leter (para. 2.34 and Annex 2). In 1993, modern contraceptive prevalence was estimated at 63 percent in uban areas (reasonably high) and 38 percent (low) in rural areas, based on coverage by the MOH and PROFAMILIA, the largest NGO in family planning in Nicaragua. Several dnrs, imcluding USAID, Norway, and UNFPA are providing the MOH with tchncal assiace, tr , and logistical support for family planning. Given the heavy involvement of other donors, lIDA's support under the proposed project would complement other donors' assistance by ensuring the Implemetation of an integratd primary health care model, which Includes fmily planning.  - 10- of medicines, medical supplies, and equipment, inadequate treatment norms, poor supervision, and limited skills of new doctors in PHC facilities. A study in Manolo Morales Hospital in Managua found that 70 percent of the patients treated in the emergency department had no medical need to bypass their local PHC facility. In 1986, it was estimated that 90 percent of the diarrhea cases attended by doctors could have been treated by auxiliary nurses at the primary level. Under the project, this trend is expected to be reversed by improving the quality of service at the primary level (paras. 4.11-4.17) and introducing cost recovery at the secondary level (para. 4.4(e)). 2.21. The health system is organized in a pyramidal fashion such that, in principle, the higher levels serve as referral points for the lower levels. However, there are no norms defmning the system of referrals and counter-referrals and many patients bypass the primary level. The system is organized into two levels: the primary and secondary levels. The primary level includes 690 health and medical posts and 134 health centers. Health posts serve populations of less than 5,000. They are attended on a full-time basis by one or more auxiliary nurses, providing basic primary care services and, in some cases, supervising community level workers. Health posts also receive two to three visits by a doctor per week. Medical posts provide the same services, but are permanently staffed with a doctor. Health centers serve populations between 5,000 and 20,000 and are generally located in municipal capitals. They are attended by several medical doctors, dentists, nurses, auxiliary nurses, and technical and administrative staff. They provide PHC, medical consultations, radiological and laboratory services, emergency care and referral, and dentistry services. In addition to the MOH staff, over 10,000 trained health volunteers (brigadistas) and about 6,000 trained community birth attendants serve as outreach agents. These are unpaid volunteers organized in local grassroots organizations which coordinate with the SILAIS through the local health centers and posts. The brigadistas have proven efficient in vaccination campaigns and less so on their routine day-to-day work where, often, their lack of training has not allowed to detect cases that needed referrals early enough (e.g., severe cases of diarrhea or acute respiratory infections suffered by babies). To help address that issue, training would be provided to brigadistas under the project (para. 4.14). The secondary level of care is provided by 20 general and seven national hospitals. General hospitals, located in the deparanental capitals, provide the basic services such as gynecology, obstetrics, pediatrics, internal medicine, and surgery. National hospitals, located in Managua, consist of large referral hospitals (usually of about 200 beds each) and provide specialized services such as ophthalmology, oncology, and rehabilitation. A list of the country's hospitals is provided in Annex 11. 2.22. Deficiencies in Supply of Pharmaceuticals and Medical Supplies. In 1993, the MOH budget for pharmaceuticals and medical supplies was US$13 million (drastically lower than the 1992 budget of US$21.6 million), representing 17 percent of the total MOH budget and about US$3 per capita. About three-quarters of drugs and supplies are purchased from the international market and the rest from local manufactrrs. Forecasting of meeds is the responsibility of the Pharmaceutical Planning Department while procurement, storage, and distribution to the SILAIS is undertaken by the Center for Supply of Pharmaceutical Products (Centro de Inswnos para la Sald, CIPS), a central MOH unit. The logistics system operated by the CIPS is complex: several hundred different products, ranging from  - 11 - temperature-sensitive vaccines to dnums of alcohol, are delivered over paved roads to hospitals in Managua as well as over nearly-impassable roads to remote SILAIS on the Caribbean coast. The responsibility of CIPS stops at the SILAIS level. The SILAIS are responsible for distribution to the health centers which are tbemselves responsible for distribution to the medical and health posts. A few products are distributed directly to MOH facilities by suppliers. Overall, this is a rational scheme of decentralization, which facilitates local responses to existing transport infrastructure, geography, and epidemiology. 2.23. The pharmaceutical sector has been poorly managed and has been facing a major crisis which culminated in 1992 and early 1993 with shortages of drugs of up to 60 percent throughout the system. This has induced consumers of health care either to bypass the primary level and go to hospitals where the chance of availability of medicine was perceived to be higher, or to purchase drugs from private pharmacies at relatively expensive prices. There is a clear necessity to address the major shortcomings in the supply of drugs and medical materials in the MOH system. Shortages of drugs due to defective needs forecastng, inventory planning, and distribution, and losses through spoilage, theft, or excessive prescribing impose a high cost on the system. There is an urgent need to: (a) improve policy and regulation; (b) ensure proper selection, supply, and distribution of drugs and pharmaceutical supplies at reasonable costs; (c) promote rational use of drugs through the enforcement of an essential drugs policy and education of health prescribers and consumers; and (d) study ways to improve cost recovery of pharmaceudcals at the secondary level. These issues would be addressed under the project (pans. 4.18-4.22). (a) Policy. Regulation. and Ouality Control. The Government policy for the pharmaceutical sector is part of its overall sector assistance stategy and is descrnbed in the Government's policy letter (pan. 2.34 and Annex 2). Responsibility in the pharmaceutial supplies system is expected to be shared among individual consumers, the central govermment, and the private sector, whose increased participation in the pharmaceutical sector is promoted. The Government intends to improve the cost- effectiveness of the supply system by introducing modem methods of management. Given the Goverment's limited resources, a limited number of priority products would be purchased. However, this policy is not supported by the outdated 1926 Pharmacy Law, which needs to be revised. Pharmaceutical product and establishment registation do not adequately ensure product safety. Registraton criteria are unclear or outdated, and there is insufficient capacity to meet the needs of registration and enforcement. The updating of the 1926 Pharmacy Law, including the issues of pharmaceutical registration, inspection, and supenrision and quality control would be addressed under a parallel project by the Danish International Development Agency (DANIDA), currently under discussion with the Govermnent. Progress in the revision of the 1926 Pharmacy Law would be reviewed at the mid-term review (para. 6.7). The National Quality Control Laboratory, responsible for testing of pharmaceuticals prior to distribution, faces a one-year backlog which is expected to increase as the MOH plans to expand sampling and testing of products. The DANIDA-financed  - 12 - project would help increase the capacity of the National Quality Control Laboratory to control the quality of new products applying for registration and of existing drugs currently being distributed in a more timely and accurate manner. Included in this is quality monitoring of products at the retail level. Financing would be provided by DANIDA to (i) help expand the laboratory facilities and upgrade the laboratory equipment, (ii) train staff in modem laboratory practices, and (iii) improved supe.Vision of national producers. Progress in strengthening of the National Quality Control Laboratory would be reviewed at the mid-term review (para. 6.7). There are two other important policy and regulation issues not covered under the DANIDA project. The first is the system of price controls on pharmaceutical products, which may have the perverse effect of discouraging the marketing of inexpensive products, including generics. The second issue is the need to adapt legislation and regulations on proposals to allow SILAIS to purchase supplies directly, increase private sector participation in the distribution process, and introduce flexible contracts for the purchase of pharmaceutical products. These issues would be addressed under the project (para. 4.19). (b) Supply and Distribution issues affect the areas of selection, inventory management, MIS, procurement, donations of drugs and supplies, infrastructure, distribution system, and supervision. These issues would be addressed under the project (para. 4.21). A major cause of the poor performance of the logistics system is inaccurate forecasting of the quantities required. In the past, purchases of some categories of products that far exceeded demand led to waste due to deterioration of the unused products. Recently, the CIPS collected expired and spoiled products accumulated over several years, with a purchase value of about US$6.3 million which must now be destroyed. Similarly, other products were under-purchased, leading to critical stockouts. The problem results from deficient inventory management practices in local health facilities where pharmaceutcals and medical supplies are not arranged and coded in a standard way, reception and consumption of products is not recorded properly, and storage rooms and shelving are inadequate. In general, inventory management is not based on established maximum and minimum stock levels. Linked to the above is a deficient MIS which does not provide information to CIPS on existing stod:s and past consumption at health facilites and results in poor central inventory management and distribution. Computerized information systems have not generally been implemented in SILAIS headquarters and hospitals where such systems would increase efficiency. At CIPS itself, there is no information on costs related to reception, storage, packing, transport, and supervision. Donations are not handled by standard procedures and may not be properly registered. Procurement has improved significantly since the second semester of 1992. The competitive bidding processes carried out in February and July 1993, with technical advice from the IDA project preparation team, resulted in an average price drop of 37 percent compared to 1992 and savings of about US$0.5 million. There are, however, two remaining weaknesses in procurement. The first is the system for pre-  - 13 - qualification of supplies, which depends too much on the expert opinion of CIPS management and would not be sustainable in case of management changes therein. More detailed and objective performance criteria and a better information systemi would encourage a greater number of qualified suppliers to participate. The second weakness is that purchase contracts indicate a specific quantity and a single delivery deadline which, theoretically, requires CIPS to hold a year's supply plus a safety stock. Flexible contracts would allow CIPS to hold a lower inventory, thus reducing storage costs, and would provide more flexibility to respond to the changing demand from health facilities. The feasibility of implementing flexible contracts would be evaluated under the project (para. 4.19). There are significan infrastructure weaknesses, especially at the local level where both volume and quality of warehousing in the country's 850 health facilities is grossly inadequate. At the CIPS level, excess storage has been eliminated and current capacity is adequate. Excessive heat caused by poor ventilation shortens the life of many products. Finally, the CIPS vehicle fleet is in disrepair, resulting in inadequate operating capacity to respond to the service demand. Partial renewal of the CIPS vehicle fleet would be financed under the DANIDA project. Not enough products are distributed directly to health facilities by suppliers. The MOH intends to change this situation, thus elminuating the direct involvement of the CIPS in the storage and distribution of these products. The MOH needs to assess whether one firm is to be given a general storage and distribution conact or whether each supplier is to make deliveries. Increased private sector distribution would be supported under the project (para. 4.19). Although the MOH is making significant efforts, supervision of the pharmaceutical supply and distribution remains weak. Supervisors are not properly trained and they have no standard objective instuments to compare practices among different facilities and stimulate improvements. Supervision would be strengthened under the project (para. 4.21(c)). (c) Rational Use. Physicians have a tendency to prescribe the most expensive drugs to treat common problems and patients generally associate high cost with high quality. As a result, inappropriate or "irrational" use of pharmaceuticals appears to be a major source of waste both in the public and the private sectors. This happens, for example, when antibiotics are used to treat a common cold although less expensive alternatives are available. It seems plausible that waste due to the unnecessary use of pharmaceuticals could exceed US$2 million per year. Under the project, a study would be undertaken to assess the magnitude of the problem and initial measures to improve rational use would be taken (para. 4.22). (d) Einancng. As the quantities of pharmaceuticals delivered to the destinations served by the CEPS are not directly limited by the budget of the recipient heath facilities, there is no direct financial incentive for the recipient to assure their rational use or to select less expensive alternative products. This issue has started to be  - 14 - addressed through budget decentralization to the SILAIS (para. 4.4), but more progress needs to be made. Another issue is that, as most drugs are provided free of charge, doctors have no incentive to select less expensive alternatives. Many patients, in fact, may attach relatively little value to MOH products, precisely because they are free to them. To improve cost recovery of pharmaceuticals in hospitals, a pilot program to test the operation of a private pharmacy in a Managua hospital would be undertaken under the project and, if successful, the implementation of private pharmacies would be expanded to the other MOH hospitals (pan. 4.20). 2.24. Deterioration of Physical Facilities. Health facilities at all levels are in generally poor condition due to years of lack of maintenance. At the primaty level, over 70 percent of health posts and centers need to be rehabilitated. This has already started with funancing provided from the FISE. under a US$15 million IDA Credit. As the FISE project does not have sufficient funds to cover rehabilitation needs at the primary level, additional financing would be provided under the project (para. 4.16). 2.25. The situation of health facilities is critical at the secondary level. Of the 27 existing hospitals, eight will need to be reconstructed within 4-S years, and 14 require urgent repairs. More than half of the basic equipment is in disrepair, including key equipment such as X-ray machines, anesthesia fans, overhead lamps in operating rooms, boilers and kitchen equipments. Many hospitals also suffer from defects in their physical plant, plumbing, cooling and sanitary systems. Not only are there bottlenecks in hospitals which cause reductions in productivity, but the deteriorated conditions of hospitals pose safety and health hazards to staff and patients alike (such as radiation, infections, and excessive delays before patients are treated, which result in increase in treatment cost). Government financing of maintenance has been insufficient (less than 1 percent of the health budget over the period 1990-93) and while some help has been provided by foreign donors (mainly Finland and Holland), their support has only been able to prevent the situation from detenorating further. 2.26. In July 1992, the Government of Japan signed a Y980 million (US$9.3 million equivalent) grant for the replacement of equipment in 17 hospitals and, in May 1993, the InterAmerican Development Bank (1DB) approved a US$5 million project which includes the strengthening of hospital management and the development of studies on demand and supply of health services. While the IDB-financed project may lead to the replacement of some hospitals and the possible relocation of some facilities, feasibility studies for such investments may take several years, whereas emergency reconstuction or rehabilitation will need to be unetaken sooner. The Japanese grant is currendy being disbursed, but it does not cover all hospitals and does not finance required infrastructure rehabilitation or modification (e.g., incease in the size of a room to meet safety requirements required by X-ray equipment, or upgrading of electric circuitry, which need to be underaken by the Goverment). Moreover, since the Goverment is already actively pursuing a cost recovery policy (paras. 2.29 and 4.4(e)), it is important to improve the physical facilities of hospitals and the quality of hospital care so that health services may be sold to INSSBI affiliates and private patients. To that effect, the Government needs to ensure that the program of essential repair and refurbishing at the secondary level is properly carried out. IDA's financing would make this possible (paws. 4.234.24) and would complement the support to be provided by the  - 15 - Government of Japan and IDB. To minumize increases in recurrent costs, the Government's strategy is to replace existing defective equipment and not add equipment. However, some increases in recurrent costs are expected as degradation of equipment over the years resulted in input savings (e.g., electricity and fuel) and reallocation of staff time. A study of recurrent cost implications of investment in hospital equipment would be undertaken under the project (para. 4.24). 2.27. Financing in the Health Sector is characterized by: (a) a relatively high budgetary allocation to the sector, with no prospects for growth; (b) low efficiency of resource use, resulting in large part from centralized decisions and lack of accountability; and (c) INSSBI's fincial weakness. Despite reductions in the later 1980s and early l990s, the 1993 health budget of US$18 per capita is still higher than that of any other Central American country except Costa Rica (at US$120). The 1993 budget amounted to US$77 million equivalent and accounted for 4.4 percent of estimated GDP and 13 percent of central government budget. Primary health care spending has increased from 22 percent in 1981 to 35 percent in 1992, while allocations to public hospitals have remained nearly constant, rising slightly from 45 percent in the early 1980s to 50 percent in 1992. These spending proportions between levels of care are reasonable, although there is still room for improvement. The Government has declared PHC to be its highest priority (para. 2.33) and the proportion of PHC financing by the Government is expected to increase, given that an increasing share of the financing of secondary health care would be assumed by the private sector as a result of the INSSBI health insurance plan. The proportion of actual expenditures on primary and secondary health care would be reviewed during the annual reviews (para. 6.6). As social indicators have not progressed significantly (Box Nicaragua's Epide iological Profile, p. 9), futher improvements to the health system are required. Also, the population will continue to increase, putting pressure on the demand for health services. 2.28. A major issue over thf years has been the centralized system of financial decision- makcng. This has resulted in ineffective spending and lack of accountability of local health managers. While budgets are designed at the central level, day-to-day management decisions in the field are made by local health managers who cannot reallocate funds from one line item to another in response to changing needs or local conditions and have no incentives to make savings as they are not the "owners" of their resources. Three examples illustrate tbis point. First, is the lack of maintenance. For many years, health managers have had to operate facilities for which limited maintenance funds were provided by the central MOH office. This has resulted in poor quality of service and significant economic losses. Second, the most cost-effective health interventions are not always chosen. Observations mad,; during recurrent visits to hospitals have shown a Mnmber of mild cases of diarrhea treated with intravenous fluids at ten times the cost of oral rehydration salts. A third example of poor financing decision-making has been dramatically demonstrated in the area of pharmaceutical products and supplies where both excesses and shortages have occurred as a result of centralized decision-maldng taking little account of local consumption and needs. These situations have caused the frustration of health managers at the local level as they do not have the flexibility to manage properly, and at the central level, as large amounts of resources are poured into the system with little tangible improvement. This issue would be addressed under the project through the decentralization of the budget (para. 4.4(a)), the  - 16 - improvement of the resource allocation system (pvra. 4.4(b)), the implementation of a cost accounting system (para. 4.4(c)), and the introduction of service provision arrangements with the SILAIS (para. 4.4(d)). 2.29. Given the country's economic austerity situation, however, additional tax revenues will not be available, and reallocations from other ministries may be difficult. External aid, estimated at US$8.2 million in 1994 or about 10 percent of the MOH budget, is not expected to increase. Thus, efficiency gains need to be sought through: (a) better management of the health system; (b) increased emphasis on preventive PHC programs and early diagnosis ai. I treatment which are more cost-effective; (c) improvements in management of drugs and pharmaceutical supplies; and (d) rehabilitation of health facilities. In addition, cost recovery efforts should be pursued through the sale of health services to INSSBI affiiates or other private patients, although the poor should be exempted. During the last two years, there have been a number of fairly successful cost recovery efforts, principally in hospitals. Many hospitals generate between S and 10 percent of total budgetary resources from user fees on service such as X-rays and laboratory exams. Considering that previously health services had been completely free, this is a good first step, but more efforts need to be done. Over the project life and assuming a 50 percent implementation success rate, overall cost recovery by the MOH is expected to reach about US$14 million (Section VII), which would represent 18 percent of the total MOH budget. Hospitals are free to set prices and to maintain any revenue received from the sale of services. In addition to the central government allocation, municipal governments have been given an increasing degree of autonomy to generate revenues from a number of taxes and user fees for public services such as water and electricity. Although spending of these revenues varies between municipalities, there is some evidence that an increasing share of these revenues is used to finance activities or investnents in health centers. In the municipality of Boaco, for example, the central government allocation to the municipality amounts to only US$200 per month while the municipality generates approximately US$20,000 monthly through the two revenue mechanisms cited above. The municipality is free to use the money it raises to finance any activity, and in the case of Beaco, upon the request of the SILAIS Director, it fnanced a cold storage room for vaccines. 2.30. In addition, the Govermment would strengthen its cost recovery efforts through the sale of health services to INSSBI affiliates (paras. 2.32 and 4.25 and Annex 12). Thus, under the project, an increasing proportion of health services in Nicaragua would be financed by the private sector, as a result of the health insurance program to be introduced by INSSBI (para. 4.25). The program would be financed priately through employers' and employees' contrbutions. The MOH would enter into an agreement with INSSBI which would purchase from the MOH and private clinics a package of health services for its affiliates that would include the basic health package (para. 2.18), complemented by a number of more discretionary clinical services such as some surgical procedures and drugs beyond the basic health package. The inclusion of these additional services would be decided in function of their cost-effectiveness. 2.31. INSSBI is fragile financially, with the actuarial deficit in 1991 estimated at US$20 million. Several reasons explain INSSBI's problems: (a) as life expecancy has increased  - 17 - over the years, benefits have increased more than contributions; (b) the minimum number of years required to be eligible for old-age pension and handicap benefits was reduced by the previous Government; (c) the number of welfare benefits to be provided by INSSBI was increased without matching contributions; (d) the hyperinflation of the late 1980s has contributed to decapitalize the fund; and (e) INSSBI has a weak administrative capacity to collect contributions, which has resulted in arrears of 40 percent. .32. To address the above problems, INSSBI has taken a number of initiatives to modernize the institution by: (a) starting to reorganize its administrative strucmtre; and (b) preparing the outline of a reformed health inrance model whereby health services would be purchased from the MOH and the private sector, and quality of benefits and coverage would be improved. It also intends to reform the pension fund and is contemplating the introduction of a workmen's compensation program. However, INSSBI lacks technical capacity to undertake the proposd reforms. Under the project, technical assistance would be provided to help INSSBI design and implement health insurance reform and a workmen's compensation program and evaluate its pension fund (paras. 4.254.27). D. Government Sectoral Strat 2.33. A high priority of the development agenda of the Government is to improve the effectiveness, efficiency, and quality of health services rendered, particularly to the poor, and reduce inequities in access to basic health care, especially when these inequities are related to the population's socio-economic level or geographic location. The Government intends to increase efficiency in the use of existing resources, provide incentives for cost savings by delegating more decisions on resource allocation to local levels, and stimulate the increased participation of the private sector in the financing and delivery of health services. The Govermnent is comnmitted to protect the health sector from budget cuts or if cuts become essential, then to ensure that the health sector would be relatively less affected than other sectors; and that PHC services, which are the MOH's highest priorty, would not be reduced. Since total real public health spending cannot be increased because of the country's tight fiscal situation, savings from efficiency measures and wider cost recovery will allow the Government to maintain, and increase coverage if r"issible, without adding pressure on budgetary resources. INSSBI affiliates as well as patients using private rooms would be charged the full cost of services. Other patients would be required to make small copayments, but the poor (below a certain level of income) would be exempted (poor and non-poor are screened in hospitals by social workers based on income level and place of residence). The Government will focus its efforts on health care for the country's most vulnerable groups. 2.34. The Govermment intends to iplement its strategy by: (a) decentralizing health services; (b) implementing a redefined model of primary health care; (c) strengthening the supply and distribution of pharmaceutical products; (d) rehabilitating health facilities; and (e) strengthening cost recovery. These objectives are set out in a health policy letter, wi ich also includes a detailed strategy for the pharmaceutical sector (Annex 2).  - 18 - (a) Decentralizing Health Services. The MOH will continue the process of administrative and financial decentralization that began in 1991 when health services were organized in SILAIS. MOH's new role will focus on formulating policies and monitoring and supervising program implementation by the SILAIS. The budget will be decentralized; the resource allocation system will be improved to distribute funds to the SILAIS in a more equitable and efficient manner; and a cost accounting system will be introduced. The MOH central office will enter into management contracts with the SILAIS to allocate resources to the SILAIS based on agreed annual operations programs, including specific targets in terms of delivery of services and results for each SILAIS. Performance monitoring indicators will be established, and the SILAIS will be evaluated and rewarded based on their success or failure in improving productivity in services delivery and health outcomes. The MOH will review its organization and functions so that it can improve its administrative, budgeting, and monitoring capacity to operate in a decentralized manner and provide technical assistance to the SILAIS as required. The Government will review progress in the implementation of its cost recovery policy and will assess the need to improve equity and efficiency. In parallel with the above efforts, the Government would improve the management of human resources, provide training to MOH managers and staff, and strengthen its MIS so that the new decentralization system can be properly implemented. (b) Implementing a Redefined Primary Health Care Model. The Government has revised its PHC model to improve quality and efficiency of services provided. The Government will provide a basic package of cost-effective health interventions, including family planning services. The new model focuses on preventive health measures, delegation of simple health tasks to less specialized personnel (nurses and auxiliary nurses), and integration of programs. The Government promotes the idea that each person has an important role to play in caring for his/her own health and should be actively involved in health promotion. Programs will be managed at the local level and will be integrated. Several complementary services will be provided during the same appointment to save time for health personnel and patients alike. The Government will strongly promote family planning as an integral part of the PHC model, by making modern contraceptives widely available and improving the quality of outreach services and information, education, and communication (IEC) activities. The Government will take measures to recruit additional nurses, redistribute the MOH staff more adequately between facilities, and provide incentives to increase the proportion of doctors working in rural areas; (c) StrenMthening Supply and Distribution of Pharmaceutical Products. Given that the Government's fiscal resources are limited, the pharmaceutical budget will be used to acquire only those priority products for which an adequate supply can be purchased with available funds. As the operating and financing role of the central government must be limited to the priority tasks that cannot be satisfactorily undertaken by other entities, responsibility in the pharmaceutical supply system will be shared among individual consumers, the private sector, and the central government. The Government recognizes that the private sector can provide many services more  - 19 - efficiently than the public sector and thus, where feasible, the MOH will use or promote the use of the private sector to provide services, including the distribution of selected medica supplies to public sector health facilities. The Government recognizes the need to improve the cost-effectiveness of the medical supplies system. To that effect, the MOH will take measures to: (i) improve quality control and update pharmaceutical regulations; (ii) improve supply and distribution of drugs and supplies by increasing efficiency of management systems and supporting them by an MIS providing indicators of cost-effectiveness; (iii) promote rational use of drugs; and (iv) strengthen cost recovery when patients have the ability to pay; (d) Rehabilitating Health Facilities. The Government has already started to rehabilitate health facilities, the maintenance of which has been neglected for many years. At the primary level, the MOH efforts will be complemented by the FISE program to rehabilitate health centers and posts. The physical improvements, together with other reforms such as the improvement of pharmaceutical supply, will help reduce the proportion of patients bypassing the primary level and seeking care directly in hospitals. Rehabilitation will also be undertaken at the secondary level where hospitals are in critical disrepair, creating delays in service provision and causing safety problems. Priority will be given to the replacement of defective equipment rather than the construction of additional new hospitals, which may not be sustainable given the county's limited fisal resources. Rehabilitation of hospitals will improve quality of service and allow cost recovery measures to be strengthened (paras. 2.29- 2.30). To ensure continuity of operations, a proper maintenance system will be inutuced; and (e) Strenfthening Cost Recovery. The MOH will significantly increase cost recovery by billing hospital services to INSSBI affriliates, charging user fees to patients in private rooms, and requiring co-payments for selected services from patients not affiliated with INSSBI. About US$13.8 million are expected annually from user fees (see table after para. 7.5). A basic package of PHC services will condnue to remain free. INSSBI has started to reform its health insurance system. The new system will provide its affiiates with a package of health services of better quality than those received free of charge from the MOH. INSSBI will purchase services from the MOH or from the private sector, which will promote competition between the public and private sectors. Larger membership in the INSSBI health insurance scheme will be promoted, in line with the strengthening of INSSBI's institutional capacity and the growth of the formal sector of the economy. m. LESSONS LEARNED FROM EXPERIENCE, COORDINATION WITH OTHER DONORS, AND IDA STRATEGY A. Lessons Learned from Experience 3.1. The proposed project is the first IDA-supported health sector project in Nicaragua. This review of experience and lessons leared therefore draws lessons from relevant Bank  -20 - group projects in other countries, similar projects undertaken by other donors in Nicaragua and elsewhere, and IDA projects in Nicaragua in other sectors. 3.2. The most frequently encountered problems include uncertain Government commitment, lack of cooperation among Government institutions, weak implementation capacity, uneasy fit of the project implementation unit within the implementing agency's organization, and the lack of provisions for attracting and maintaining qualified staff in hardship or remote areas. Other lessons are related to overly complex and rigid designs, lack of adequate monitoring and evaluation indicators, and problems of project sustainability. 3.3. Goverment Commitment, National Inter-Agency Coordination, and Implementation Capacity. Numerous projects have experienced problems in implementation because of lack of commitment by the Government, insufficient capacity in the ministries, or both. For the proposed project, the project life would be limited to three and a bhlf years so that project implementation would cover the rest of the term of the present Government which is fully committed to the project. The lack of a policy framework, which has plagued the sector in the past, has now been remedied. A health care policy, including the reform of the health sector, has been approved by the Social Cabinet and is presented in a policy letter (para. 2.34 and Annex 2). The Government has underlined the importance of its social sector policy, including health, which it sees as an essential complement to its economic adjustment program. In its policy letter, the Govermment undertakes as a minimum to maintain the share of government revenues currently allocated to the health sector. The implementing agencies, MOH and INSSBI, have a clear understanding of current problems and constraints and have been active partners in the analysis of organizational and managerial problems and in the identification of solutions. Furthermore, the proposed reform of the health sector in Nicaragua has been presented by the Government to the population in a number of seminars and has received broad support across various groups of the political spectrum. Resistance comes principally from the press, which highlights the failures of the present health delivery system (lack of drugs, poor condition of hospitals, etc.), but is reluctant to embrace the introduction of new schemes such as cost recovery systems or larger participation of the private sector. There is currently limited resistance from entrenched interest groups such as doctors, but it could potentially increase as the reform is implemented. To build consensur, the Government has been undertaking regular public relations efforts and has taken into consideration the needs of these inerest groups in the design of the reforms. For example, the MOH has started to hire more doctors by hours of service, usually less than the nonnal eight hours of MOH employees. This arrangement provides doctors with more time to carry out their private practice, yet allows them to remain in touch with the public sector. It also provides savings to the MOH, which no longer has to pay their social benefits, and reduces the number of full-time doctors on the payroll while improving the nurse:doctor ratio. Lastly, in 1993 the MOH created a Project Preparation Unit that has coordinated several working groups and managed consultants during project preparation. This unit would be transformed into a Project Coordinating Unit (PCU) (para. 4.28 and Annex 17) that would coordinate, monitor ..., cvahmt+ ;fproje impemeenttion effectively.  - 21 - 3.4. Flexibiit and Simple Desi. Successful projects have been marked by flexibility in design by instituting pilot studies and continuing preparation of country-wide implementation strategies during the first one or two years of the project period, later incorporating and applying test results. Another characteristic of such projects is simplicity and clarity in design. The proposed project focuses on the most immediate needs, both in analytical work for policy and institudonal reforms and in the investment requirements. It would be implemented in a phased fashion which would allow the MOH to build up institutional capacity and demonstrate results in the initial phase before implementng a broader reform. A lesson learned from other health reform projects (e.g., Indonesia and Korea) is that replication of findings from tests is more a matter of tansferring management and design principles, rather than a wholesale adoption of "model" programs or interventions. Although maximum simplicity in design is inherently difficult in projects involving substantial reforms of a social program such as this one, the proposed project design introduces transparency by making the objectives of each component as independent, measurable, and monitorable as possible and by establishing explicit timetables for key actions. The project would include significant technical assistance from experts with practical experience in the implementaton of proposed reforms and investments in other countries of Latin America. 3.5. Monitoring and Evaluation Indicators. Past projects have suffered from the lack of explicit measurable progress and end-result indicators. The problem is especially difficult in the social sectors where data collection is poor or non-existent and concrete indicators are often not available, which is the case of Nicaragua. To remedy that situation, IDA is currently assisting the Government to conduct a Living Standards Measurement Survey (LSMS), which will provide statistics on consumption of health services. In addition, the proposed project would include a number of baseline and tracer studies, notably in the phannaceutical sector, which would track improvement in sector management and monitor project impact. Progress, implementation, and impact indicators have been defined and will be monitored throughout project implementation. Indicators would also be used to monitor the effects of PHC services on the health conditions of local areas (para. 4.11 and Annex 20). Besides providing a powerful tool for sector management, these monitoring efforts wiill help lay the groundwork for future policy actions and health investments. 3.6. Staff Mix and Assignment in Remote Areas. Health projects have faced problems of inadequate staff mix, particularly scarcity of nurses in relation to physicians. Redressing the imbalances in the staff mix takes a long time, since it requires structural changes in salary scales often beyond the means of governments and a better dialogue with universities which in Nicaragua, as in Central America in general, have an autonomous status and budget. To help address this issue, constructive talks have been held between the MOH and the National University during the last year to reduce the number of physicians trained (para. 2.17). Another problem tor developing and developed countries alike is the resistance by health staff to move and to remain in hardship or remote areas. This is being addressed by tme MOH through the provision of hardship bonmses. In the context of this project, these issues would be addressed through stdies on manpower needed for health services and staff incentives (para. 4.5). The Government has already started to use alternative providers (through contracts with private doctors) to deliver health services in areas now not covered  - 22 - with good health services for lack of various types of health staff. The recommendations made by these studies, as well as progress in the use of alternative providers by the Govement, would be reviewed during the mid-term review (para. 6.7) and the resulting agreed action plan would be implemented by the Government thereafter. 3.7. Adequate Supervison. The need for close supervision, especially in the early years of a project, is well acknowledged by IDA. The proposed project would begin with a launch seminar upon effectiveness and include 25 staff weeks of supervision per year, annual reviews and a mid-term Government-IDA review, to assess progress in policy reforms and their implementation (paras. 6.5-6.7 and Annex 22). Besides IDA supervision, a PCU would be responsible for day-to-day follow-up of project activities, monitoring and evaluation, and production of anmnal reports on project implementation using performance monitoring indicators (para. 4.28 and Annex 20). 3.8. ProJect Sustalabillty. Several Bank group project evaluation reports noted that the inability of governments to continue fmancing recurent costs limited the effect of projects to the extent of their durations. This project differs from many other health projects financed by IDA or by other donors that usually require substantial increases in Government expenditures. Expansion of services and improvements in quality would be accompanied by reforms of the financing system which are intended to rationalize expenditures and improve effciency in the MOH health services while finding alternative sources of financing through the introduction of user fees in health facilities (para. 4.4(e)) and the study of greater private sector provision of bealth care through technical assistance to INSSBI (para. 4.25 and Annex 12). An annual incremental recurrent cost of 1.6 percent of the estimated MOH budget in 1993 prices in the last year of the project (para. 5.6) would not be an excessive burden on the MOH annual budget in subsequent years. Moreover, this additional cost should be amply offset by the adoption of altemative financing mechanisms, the participation of private sector providers, and rationalization of expenditures within MOH services. The level of savings could be significant and would range between US$9.9 million and US$26.3 million per year (low and high scenario, respectively), which represents 8 to 34 percent of the estimated MOH budget (see Project Economic Benefits, paras. 7.2-7.7). B. Coordination With Other Donors 3.9. Several donor agencies have been involved in the coordination of assistance programs at the project preparation or initiating stage. USAID, Sweden, and Holland have approved projects to finance 12 of the 19 SILAIS to help improve their management capacity and support a number of priority PHC programs (Annex 21). The same PHC model would be implemented at the national level in all 19 SILAIS (para. 4.11). IDB is implementing a project to: (a) help increase MOH's investment planning capacity; (b) strengthen hospital management; (c) study alternative sources of fiancing; and (d) develop studies on supply and demand of health services as well as feasibility studies that would provide a pipeline of health subprojects for financing. Recently, the Government of Japan has approved US$9.3 million equivalent financing for hospital equipment (para. 2.27). Given the number of donors in the sector, it is important to ensure donor coordination.  - 23 - 3.10. The flrst element of coordination has been at the project design stage. During project preparation, IDA and other donors held regular working meetings with the Government to ensure that: (a) all projects would be designed to support the Government's overall strategy for the sector; (b) there would be no overlap between areas of support; and (c) implementation mechanisms and monitoring indicators would be as similar as possible, especially in the area of support to primary health care. The MOH's Office of External Cooperation has been crucial in coordination during project preparation. 3.11. The second element of coordination will be the coordination between the SILAIS and the central office of the MOH by the Secretary General's office. A third element of coordination would be the inclusion of donors' assistance (IDA, USAID, Sweden, Holland, and Norway) in the national health budget before allocation of funds to the SILAIS so as to avoid inequities between SILAIS. A fourth element would be the establishment by the MOH of a policy regarding external donations of drugs, which in the past have caused significant distortions in the system (para. 4.19). Finally, during project implementation and supervision, there would be regular meetings between IDA, other donors, and the Government to exchange experience, avoid overlaps, and ensure efficiency of project implementation. C. IDA Strategy and Role 3.12. The IDA country assistance strategy is to: (a) support major policy and institutional reforms; (b) support poverty alleviation efforts; (c) help rebuild the institutions; (d) address rehabilitation needs in key sectors; and (e) support efficient and effective use of external resources. This strategy is being implemented through an IDA Credit program for the FY92-96 period, comprising structural adjustment operations and sectoral lending operations combining rehabilitation needs, institutional strengthening and policy reform in the social, infrastructure, agriculture, and environment sectors. The strategy will also require extensive economic and sector work to fill the gap in IDA's knowledge of Nicaragua after seven years of hiatus in operations. A critical component of the strategy will be aid coordination, principally through the leadership of the Consultative Group. Aid coordination would focus on: (a) obtaining co-fnancing for IDA credits; (b) coordinating support with the multilateral and bilateral agencies to ensure the efficiency of aid flow; and (c) helping organize and orient needed technical assistance to slipport the Government's adjustment efforts. To enhance these undertakings, a Resident Mission was established in Nicaragua in early 1992. 3.13. Through its economic and sector work, IDA has been actively involved in supporting the Government to develop a coherent social sector policy encompassing safety net and broad sector reform programs to increase the efficiency, effectiveness, and equity of social services, with particular attention to improving the quality and efficiency of primary health, primary education, and nutrition services provision. This sector work was started in 1991 in close coordination with other donors and the Government. The fnal report, "Nicaragua Social Sector - Issues and Recommendations" (Report No. 10671-NI, February 3, 1993) is being used by the Government to define an overall poverty alleviation policy framework and sectoral strategies, particularly for the health and education sectors. A US$10 million Credit to support FISE, approved by the Board in November 1992, is currently under  - 24 - implementation. PISE finances, inter alia, social infrasucture subprojects (such as primary schools, health posts, water, and basic sanitation) and is helping the Government sustain its povert alleviaton efforts and maintain social cohesion during the penod of economic adjustment, until line ministries strengthen their institutional capacities and complete policy reform progrms. In the context of the FISE project, the Govenmuent's social sector policy was presented in a policy letter dated October 8, 1992. More detailed sectoral plans are currenlly under prepaation and their presentation to IDA is one of the requirements under the FISE project. For the health sector in particular, a policy letter is presented in Annex 2. In 1992, IDA's assistance was requested by the Government for developing this proposed health sector reform operation, and more recently the Government asked IDA to support an education project. A project in the water sector is also part of IDA's program for Niaau. Given the imporace of clean water to improve hygiene and reduce infant mortalt, a water sector project would complement well the proposed health sector reform project. 3.14. The proposed project, the first IDA Credit operation in the health sector in Nicara, is in line with the overall country assistance strategy regarding social sector reform within a fiscal policy that needs to be tightly managed. It complements IDA's Economic Recovery Credit as well as the short-term poverty alleviation efforts supported under the FISE Credit. The project would furter encourage the Government to move ahead with its health reform progam through planning and gadual implementation of crucial policies and instutional reforms in the delivery of primary and secondary health care servies. The project would strengte institutional capacity and lay the framework for futher reforms of the bealth sector that could be supported through future operations pursig similar ficial and quality objectives. Following up the social sector analysis completed in early 1993 (pan. 3.13), the Government requested IDA to play a leading role in assistimg Nicargua design and implement its health sector reform program. The Govenmet valued the Bank Group's experience with other Latin American counties such as Chile and Costa Rica, which have receny been undertaking successful reforms in the helth sector. The Govement expected that experence with those reforms could be usefully adated, with IDA's assistance, to the Nicaraguan context. As Chairman of the Consultative Group Meeting, IDA has been istrumental in mobilizing donor financing for the health sector reform. IDA's presene in the sector would facilitate the coordination of donor activities by providing a policy framework for health sector investments. IV. THE PROJECT A. Objectives 4.1. The objective of the project is to eace the country's health status by supporting the implementation of the Governmet's new strategy for the health sector. In particular, the project would aim to: (a) improve the instiutional capacity and management systems of MOH by decenrlizi services and fiancial resources to the SILAIS, and intoducing performance contacts and monitoring indicators, new administrative and accounting systems, evised budgins mchnisms, and se d MIS; (b) increase the quality of service  - 25 - delivery by supporting the implementation of a redefined model of PHC responsive to local epidemiological conditions, with special emphasis on preventive care and family planning, improving procurement, warehousing and distnbution of drugs, rehabilitating and maintaining facilities and equipment, and improving staff productivity; and (c) strengthen the fmancing of the sector by increasing cost recovery at the secondary level. B. Description of Components 4.2. The following sections describe the project components including the detailed implementation strategy, activities, and fnancing requirements. The sector issues to be addressed by these project activities as well as the corresponding Government strategy and policies are presented in Chapter II. A Project Action Plan (Annex 18) summarizes the timing of key project activities. The project would be implemented nationwide, except for the PHC component which would be limited to seven of the 19 SILAS (para. 4.11); in the other 12 SILAIS, other donors would support the same redefined PHC model. The project would consist of the following components: (a) institutional strengthening of MOH at both cetral and regional levels; (b) strengthening of PHC, with an emphasis on maternal and child health care and family planning, through the implementation of a redefined primary health care model; (c) development of an efficient pharmaceutical supply system; (d) rehabilitation and maintenance of hospitals and other health facilities; (e) technical assistance to INSSBI; and (f) project administration. Component 1: Institutonal Strengthening of MOH (US$2.6 million or 12.9 percent of total cost including contingencies) 4.3. The MOH responsibilities would focus on normative and supervisory finctions. Service delivery finctions would be delegated fully to the SILAIS, which are closer to the users. Specifically, the MOH central office would: (a) concentrate on its responsibility to formulate national health policies, strategies, programs and standards for the purpose of improving the access of Nicaraguan citizens to health care and ensuring efficient use of resources; (b) ensure a comprehensive and harmonious development of the Nicaraguan health system; and (c) enhance its supervision and evaluation funcdons and improve systematically its strategies, programs, and standards. Since the MOH central office would no longer provide health services, a conflict of interest (i.e., responsibility for both oversight and delivery of services) that has existed since the beginning of the MOH's establishment would be removed. The decentralization process would be undertaken in stages so that the instituional capacity of the central MOH office and of the SILAIS would be gradually strengthened to accompany the process. Reforms to be introduced have been designed as simply as possible and would lay the basis for possible introduction of more comnprehensive reforms later. An additional measure to limit the risks associated with extensive policy and institutional changes would be the use of pilot schemes when appropriate (para. 4.4(b)). The project would support the decentralization process through four subcomponents: (a) delegation of authority to the SILAIS; (b) human resources development; (c) instiution of a management information system; and (d) training of managers and other activities.  - 26 - 4.4. Subcomponent A: Delegation of Authority to the SILAIS (US$0.7 million). The project would provide technical assistance in the amount of US$700,000 to help the MOH delegate service delivery functions to all SILAIS. The delegation of these fumntions is proposed to occur through: (a) decentralization of budget allocations; (b) improvement of the resource allocation system; (c) introduction of a cost accounting system; (d) service provision arrangements with the SILAIS; and (e) improvement of its cost recovery system. (a) _ecentralization of Budget (i) The first element of the decentralization process would consist of allowing all SILAIS to execute directly a large proportion of the health sector budget. This would promote a more efficient system of investment and expenditures of health resources as the SILAIS can link them better than the central MOH office with the needs of the population which vary according to geographical area and epidemiological profile. Under this scheme, specific line items would be transferred to the SILAIS who would spend the funds themselves. This process has already started and since August 1993, 20 percent of the MOH budget is being directly executed by the SILAIS. The line items covered include paper and other office supplies, printng, maintenance, food, local travel, fuel, advertising and communication, and limited amounts of pharmaceutical products. This would leave basically two categories of expenses not yet decentralized: pharmaceutical and medical supplies (currently 16 percent of the budget) and human resources (currently 64 percent); (ii) Further decentlization of the budget for pharmaceuticals and medical supplies is cont-mplated as follows. Because of the economies of scale involved, most drugs and pharmaceutical supplies would continue to be procured centally. However, motivation for more cost-effective consumpton would be increased as each health facility would be assigned a budget which it would use to "buy" pharmaceuticals and medical supplies from the CIPS. This would motivate local managers to select the mix of products that is most appropriate to their needs, within a financial ceiling. As a further incentive to ensure efficiency in the procurement process of the CIPS, local managers would be authorized to procure limited quantities of products which are out of stock at the CIPS, provided, however, that the SILAIS can obtain prices and delivery dates that are as good or better than what they can get by purchasing through the CIPS; (iii) The ultimate goal of the MOH is that the SILAIS be able to hire and fire their staff. This will require legal changes that are expected to be made in 1994. During Year 1 of the project, salaries wouId continue to be processed centrally. During this period, the SILAIS would receive more flexibility in bandling human resources as they would propose candidates for recruitment and would be authorized to: [a] define the skills mix within their allotted budget, and [b] link salary incentives to productivity increases, within a centrally-defined salary scale. Under the project, technical assistance would be provided to review the legal framework for human resources management  - 27 - and propose changes that may be necessary in the context of the decentralization reform (para. 4.5 and Annex 5). Based upon the results of that review, broader authority would be given to the SILAIS for hiring and firing of staff during Years 2 and 3 of the project. During negotiations. agreement was reached that a review of budget d,centraliaton b the Government would be completed no later than March 31. 1995 to: {i) anahze strengths and weaknesses of its implementation; (ii) assess whether the pace of budget decentralization is adeauare consideing the SILAIS capacity: and MiiD recommend improvements to the system, Based on this assessmwnt and the progress made in the iLmprovement of human resources administration, an action plan would be agreed upon bv April 3a0 1995 comprising modalities and tminf of decentralization of man resources: implementation of the acdon glan would commence no later than My 31. 1995 (para. 8. l(a)). Should it be decided, as a result of this review, to decentralize human resources, the percentage of the MOH budget decentralized would increase to about 85 percent; and (iv) Large investments in fixed assets (e.g., major rehabilitation of hospitals) would be proposed by the SILAIS but fmanced centally to avoid unnecessary duplication in equipment or the introduction of excessively sophisticated equipment. However, the SILATS would have the authority to undertake small investments in fixed assets (such as for repairs); (b) I=Mrovement of Resource Allocation System. The MOH has already made significant progress in the 1993 budget by allocating resources to the SILAIS on the basis of physical criteria (such as size of facilities, number of beds, number of vehicles, fuel requirements, etc.). The projec. would help introduce funther improvements in budget allocation systems by providing technical assistance to: (i) design a system to allocate resources to all the SILAIS on a population per capita basis with corrective factors to distribute resources between SILAIS in a more equitable and efficient manner ("corrected per capita resource allocation system") using criteria such as differentials between SILAIS in the per capita costs of delivering the same primary care services, poverty, proportion of rural and urban population, epidemiological profile, cost recovery efforts, proportion of preventive health care, etc. There would be strong incentives for cost recovery: (i) health facilities would be allowed to keep 100 percent of user fees; and (ii) they would be allowed to use them for rehabilitation and maintenance, purchase of drugs and supplies, and salary bonuses. Duing negotiations. agreement was reached that the Govemment would present a draft resource allocation svstem on a corrected per Cta basis no later than &pterber 30 1994 for review by IDA and would initiate implementation on a pilot basis. satisfactora to IDA. in at least five SELAIS no later than Januarv 1. 1995 (para. 8.1(b)). A further improvement would be the intoduction of a system of resource allocation on the basis of the cost of delivering health services both at the primary and secondary health care levels. In practice, this requires the prior introduction and implementation of proper management information and cost accounting systems, the training of administrative staff to operate these systems, and registration of the population serviced by each SILAIS. During  - 28 - negotiations. agreement was reached that the Government would: fi) undertake a sadv. to be completed no ater than June 30. 1995. to review the pilot itplementation Qf corrected pet capita resource aotion system, assess the feasibility of extending the svstem to all SJL4IS. and assess the feasibilitv of introducing on a pilot basis a resource acation svstem based on the cost per capita of delivering healtt care senrces: (ii) review the results of the study with IDA at the mid-tenn review: and (iii) start implementing an agreed action plan no later than September 1. 1995 (para. 8.1(c)). Terms of reference of this stdy are presented in Annex 5; (c) Cost Acgounting System. The third element would be the design of a cost accounting system in the SILAIS headquarters and in hospitals, which would provide inputs to: (i) improve fmancial management; (ii) improve the setting up of user fees; and (iii) help set up the resource allocation mechanism. Knowledge of production costs would enable directors of health facilities to better allocate personnel, supplies, equipment, and infmstructure, improve quality, and increase productivity. The MOH has already started to introduce a cost acco"nting system in six large hospitals and three SILAIS. Under the project, technical assistance would be provided to help review the implementation of the existing cost accounting system, design, and start implementing an expanded cost accounting system in a larger number of hospitals and SILAIS (with support from the IDB). Terms of reference are provided in Annex 5. During negotiations. agreement was reached that the Govemnment would: (i) review the exoerience and results of the cost accounting system currentl in use on a limited basis and discuss with IDA. no later than December 31. 1994. the feasibilitv of ndng the cost accounting sstem to all hospitals and SILAS: and (ii) start imoletnenting. no later than Februarv 1. 1995. an action plan. satisfactory to IDA. of vg eee measre_s (pam. 8. 1(d)); (d) Service Provision Aanaements with SILAIS. The fourth element of the decentralization process would be the implementation of anmal service provision arrangements between the central office of the MOH and the SILAIS. The key concept guiding this mechanism is to link performance with resource allocation. Performance would be monitored through a mutually agreed set of indicators, providing a basis for rewards and penalties. Dung negotiations. agreement was reached that the MOH would make satisfactory service Drovisfon arrangements with the SILAIS. which would include compliance with simple key indicators (para. 8. 1(e)). As a condition of credit effectiveness, the Government would have made service provision arrangements. satisactory to IDA. with at least three SILAIS (para. 8.2(a)). As a condition of disbursement for any of the project's seven participating SILAIS under the Primarv Health Care component. individl service provision arrangements would have been made by the respective SILAIS with the MOH (para. 8.3(a)). The project would provide technical assistance to improve implementation of service provision arrangements, including selection of an improved set of key monitoring indicators, and help assess the system of rewards and penalties. Terms of reference for p'nposed assistance are provided in Annex 5. During negotiations. agreement was reached that the Goverunent would review implemenaion of the ongoing service provision arrangements by September 30. 1994. would review the results with IDA by  - 29 - October 31. 1994. and would start implementing the imLroved service provision arrangements in all SILAIS no later than Januarv 1. 1995 (para. 8.1(f)); and (e) Cost Recovery. Finally, the project would review progress made by the Governnent in improving the implementation of its cost recovery policy (pam. 2.33). This subcomponent would be implemented in close collaboration with IDB. Over the last two years, the MOH has introduced cost recovery at the secondary health care level to: (i) increase the financing available for the health sector; (ii) shift part of the demand from secondary to primary care which is less expensive; (iii) increase equity by spending part of the funds recovered on PHC services for the poor; and (iv) stimulate production efficiencies at the secondary level by allowing hospitals to retain a significant proportion of the revenues collected. In addition to the proposed billing of hospital services to INSSBI affiliates and to the ongoing charging of user fees to patients in private rooms, the MOH has also been requiring co-payments for selected serices from patients not affiliated with INSSBI. The initial experience appears to have been a successful first step (para. 2.29), but differences in fee structures and their application may result in possible lack of equity or efficiency. Under the project, the Government would undertake a study to: (a, assess strengths and weaknesses of present cost recovery practices in the MOH facilides, principally with respect to equitable treatment of different income-level groups; (b) review administrative costs of the system (using a representative sample of secondary health care facilities), particularly regarding differentiation between poor patients who receive free care and the non-poor who pay user fees or are insured by the INSSBI; and (c) make recommendations for improvement. The study would be financed by IDB and terms of referr ace and selection of consultants would be undertaken in coordination between the Government, IDA, and the IDB. As discussed in Section VII, potential annual economic benefits from cost recovery range from US$8.3 million (low scenario) to US$21.7 million (high scenario). During negotiations. agreement was reached that: (i) terms of reference for a cost recovery study. satisfactoav to IDA. would be prepared no later than March 31. 1994: (ii) the stuy would be conducted and results discussed with IDA no later than December 31. 1994: and (iii) the Government would start implementing the stud's recommendations no later than Februaav 1. 1995 (para. 8. 1(g)). 4.5. Subcomponent B: Humain Resources Development (US$0.9 million). The project would provide technical assistance il. the amount of US$300,000 to: (a) complete the inventory of the MOH personnel in 16 SILAIS, thus complementing the work already done by the MOH in the three Managua SILAIS; (b) analyze the present job categories, simplify them, defne staffing structures and numbers for each leve: of facility, and prepare job descriptions and operational directives; (c) analyze and adapt the salary and incentives structure, define promotional criteria, and propose improvements that are feasible under the present budgetary constraints; (d) define a personnel planning system; (e) study the health labor market in Nicaragua and propose medium- and long-term improvements, including ways to improve the nurse:doctor ratio; and (f) analyze the legal framework for human resources management and propose changes that may be necessary in the context of the decentralization reform. Terms of reference for the review are provided in Annex 5.  - 30- Management training activities would be developed in response to specific needs of the MOH and would be fnanced through the human resources development subprojects (paras. 4.6- 4.8). The Government has presented a management training plan for Year 1 of the project, satisfactory to IDA. During n,gotiations. agreeme,t was reached that the Government woul conduct by Setmber 30M 1994., a sty of the health nanpower market in Nicarapua. jnduinp ways to teMrove the nure.doctor ratio. ander terms of rerence satisfactory to Md. The reswlts of the st would be discussed with IDA no later than October 31. 1994. and the rcommendtons would be implemented beginning Januav 1. 1995 (para. 8.1(h)). Terms of reference for the study are provided in Annex S. 4.6. As decentralization gradually takes place, new management methods and systems will be introduced. To implement these methods and systems, the MOH will need technical assistance for the training of health managers or to finance activities which wil be identified later as decentralization progresses, such as seminars and media campaigns to explain the purpose of decentralization and promote achievement reached, undertake changes in organizational structure, decentralization of funds to the SILAIS, strengthen human resources management, and implement the MIS. While the menu of activities to be undertaken can be defined now, the actal demand will vary from SILAIS to SILAIS in function of their exstg institutional capacity and perceived needs. Thus, to allocate these trainng and technical assistance funds (US$0.6 million) for human resources development, a mechanism would be created that would combine the supply-oriented normative role of the central MOH office (which would offer to fiance certain types of activities) with demand from the SILAIS in function of their actual requiements. 4.7. The procedures, principles, and criteria to fnance human resources development subprojects are described in Annex 7. Part of the funds (US$150,000) would be set aside to: (a) train SILAIS management and central MOH staff in subproject preparation; (b) provide technical assistance to MOH high-level management in organization and management of decentalized health services; and (c) disseminate project objectives to MOH staff, municipalities, and other institutions. The SILAIS and individual health facilities, as well as various units within the central MOH office, would prepare subproject proposals usiDg standard formats that would be evaluated according to five criteria: (a) consistency with national priorities; (b) types of medical care for which subprojects are geared (outpatient care would have a higher priority than inpatient care); (c) development of human resources at the SILAIS level; (d) expected subproject in,, t; and (e) priority assigned by the SILAIS to the subproject. The subprojects submitted for tinancing would be sent to the PCU for presentation evety month to a Review Committee which would analyze, rank, and recommend approval of the subprojects according to the above criteria on a monthly basis. The Review Committee would be composed of the Directors of Human Resources of the Medical Training and Research and Development of Health Services and the Director of the PCU and, as required, experts in subjects related to the types of subproject proposals (e.g., repeetatives from the University or international consultants). Subprojects screened by the Review Committee would be forwarded to the Minister of Health for final approval. Disbursements by IDA would be made against 90 percent of the cost of subprojects approved.  - 31 - 4.8. An important area to be covered is the trmining of SILAIS and central MOH managers. They would present subproject proposals covering areas of training and number of and qualifications of staff to be trained. Proposals would be ranked in function of priority criteria. Types of subprojects to be fmanced would include: (a) organization and management of health services; (b) resource allocation, accounting and financial management; and (c) program evaluation. To support the decentlization program, the project would also finance subprojects to cover: (a) training of central MOH and SILAIS management in subproject preparation; (b) technical assistance to MOH high-level management in issues such as organization and management of health services in the context of decentralized services; and (c) dissemination of project objectives and activities to MOH staff, municipalities, and other institutions. Subprojects would have a duration of 1 to 12 months and would be contracted with local and regional insututions and consultants. The size of subprojects would vary between US$10,000 and US$100,000. During negotiations, agreement was reached that human resources development subproiects costing more than US$75.00Q and the first three subWrojects. regardless of cost. would require IDA s prior approval (para. 8.1(i)). Asa condition of disbursement for the Human Resources Deeopment sucmzinet the Gover-rnment woul-d hav adoptd an- Opertional Manual for human reyources deopment financing. sadsfactov to IDA (para. 8.3(b)). Subprojects would be submitted, approved, monitored, and supenrised according to this Operational Manual and no changes would be made without IDDA's prior approval (para. 6.5). 4.9. Subcomponent C: MIagement Information System (MIS) (US$1.0 million). Improvement in the quality and timeliness of sector information systems would be a prerequisite to the successful implementation of the policy and institutional reforms, especially budget decentalization, resource allocation, and service provision arrangements. The project would strengthen the MOH information systems through the development of a MIS, the provision of computer hardware and software, and staff traing. This subcomponent would concentrate on support to the central MOH office and would be implemented in close collaboration with USAID, which is helping develop information systems and providing computers at the SILAIS level, and IDB which is supporting improvements in hospital management. All systems would be compatible and would be linked together. 4.10. The MIS would incorporate human resources, administrative, and financial features to provide central support lo the MOH decentralization process. The system would consider the flexibility required by various levels, incluamg the central MOH office, SILAIS headquarters, and primary and secondary health care facilities. It would include modules on epidemiology, service production, human resources, financing, budgeting and accounting, and pharmaceutical inventory. The system would be implemented gradually, in line with: (a) the institutional capacity of the MOH staff to be strengthened under the managerial training subcomponent; and (b) the current status of computer technology and communications in Nicaragua. It would consist of a network between the central office of the MOH and the SILAIS. The terms of reference for tI-- development of this component are presented in Annex 5. During nefotiations. agreement was reached that: (i the MOH woud submit for IDA review termns of reference for the study of the existing MIS. satiufactorav to IDA. no AMter than April 30. 1994: (ii) recommendations for a new system, action plan.  - 32 - and timetable for implementation would be discussed and agreed with IDA no later than D)ecember 31. 1994: and iii) start implementation of an agreed action plan no later than Februy 1. 1995 (para. 8.1(0)). As a condition of disbursement for computer hardware. asreement with the Government would have been reached on a detailed action plan for ihQlementing the new MIS (para. 8.3(c)). Component 2: Primary Health Care (US$7.0 million or 34.8 percent of total cost including contingencies) 4.11. Redefined Primary Health Care Model. Under the project, a new PHC model has been defined where: (a) preventive care is emphasized; and (b) different programs are integrated at the local level to provide services more efficiently to beneficiaries. The MOH would continue to put emphasis on eight priority interventions, which are well adapted to the country's epidemiological profile: acute respiratory infections, diarrheal diseases, maternal and perinatal mortality, family planning, malnutrition, immuno-preventible diseases, tuberculosis, and malaria. The detailed redefined PHC model is presented in Annex 6. The model would be applied nationally by the Government, with support from IDA and other donors. Under the project, IDA would support PHC in seven of the poorest SILAIS in the country (Boaco, Carazo, Granada, Masaya, Region Aut6noma Atlantica Norte, Rivas, and Rio San Juan). This would complement the support provided by USAID, Sweden, and Holland to the other 12 SILAIS through projects already under execution. The location of these SILAIS is presented in the map. This component would benefit about 21 percent of the country's population and 34 percent of the country's territory. A detailed implementation plan for the PHC component is now under preparation. Progress in the implementation of the PHC component would be assessed at the mid-term review, using performance monitoring indicators provided in Annex 20. These indicators would include quantitative perfonnance indicators (such as percentage of children under-5 with growth-monitoring checkups, or number of women using family planning methods), quality performance indicators (such as percentage of health facilities with satisfactory water quality), and outcome indicators (such as diarrhea mortality rate). These indicators have been defined in Annex 20. The Government has presented an implementation plan for Primary Health Care, satisfactory to IDA. The Government wiil use quantified indicators (Annex 20) to monitor and evaluate the progress in the implementation of the redefined primary health care model and its impact beyond the project implementation period. Efforts to strengthen the preventive and community health care actio -s would assist in redirecting a number of patients to the primary level, help the Government implement an appropriate referral system, and promote the efficient use of all levels of the health care system. 4.12. To help implement the redefined PHC model and improve service delivery for the above priority health problems, the project would fimance the following subcomponents: (a) procurement of essential drugs; (b) training of health services delivery personnel; (c) IEC activities; and (d) infrastructure and equipment. This component would provide economic benefits of US$0.5-1.4 million annually (para. 7.5). 4.13. Subcomponenat A: Essential Drugs and Supplies for Priority Interventions (US$3.2 million). The project would complement the national budget and help the  - 33 - Government replenish a basic inventory of essential drugs required for priority interventions such as oral rehydration salts, antibiotics, iron sulfate, folic acid, iodine, and vitamin A. The financing of drugs and supplies would complement the significant reforms contemplated under the project to improve the programming, procurement, distribution, and rational use of drugs (paras. 4.184.20). Drugs to be financed under the project would be selected by the SILAIS out of a reduced essential drugs list. Drugs would be purchased by the central MOH office and allocated to the SILAIS in function of medical, physical, and financial criteria, corrected for equity. As a condition of disbursement for pharmaceutical roducts and medical suWplies. a reduced essential drugs and medical supplies list. satisfactoiv to IDA. would have been presented (para. 8.3(d)). Dmgs and supplies would be financed on a declining basis. Incidence on recurrent costs would be small and sustainability of the program would not be jeopardized (paras. 5.t-5.7). 4.14. Subcomponent B: Training of Health Services Delivery Personnel (US$1.0 million). The project would support a training program aimed at improving the quality of service delivery in the SILAIS. The program would focus on medical and paramedical personnel at both the primary and secondary levels. Training courses and seminars would be provided and would cover prevention and treatrnent of basic health problems. Once trained, the staff would be responsible to train health volunteers and community midwives, with a special emphasis on prevention of disease and early treatment, and early detection of complications for referrals to higher levels of care. A summary of beneficiaries of the training program and costs are provided in Annex 6. The project would finance training modules to be contracted to universities, local training institutes, consultants, or courses delivered by higher-level MOH personnel. These modules would include instuctors' fees, educational materials, and limited transport costs. A detailed taining program for health services delivery personnel has been reviewed by IDA and found satisfactory (Annex 23). 4.15. Subcomponent C: Information, Education, and Communication (IEC) Program (US$0.8 million). The project would help expand the use of mass media and communications to promote better health for the population. The JEC program would focus on priority areas such as prevention and treatment of diarrheal diseases and acute respiratory infections, prevention of immuno-preventible diseases, family planning, pregnancy and delivery, infant care, breast feeding, prevention of malnutrition and more appropriate use of pharmaceuticals, including generic products. To that effect, the project would fiance the preparation, printing, and distribution of educational pamphlets and posters with short and clear messages and illustrations, the purchase of radio spots, community meetings, home visits by MOH personnel and voluntary health workers. The overall IEC planning and program has been reviewed by IDA and found satisfactory (Annex 23). 4.16. Subcomponent D: Infrastructure and Equipment (US$1.7 million). The project would finance rehabilitation of health posts and centers and small water and sanitation subprojects in the seven SILAIS where the PHC component would be implemented (para. 4.11). Subprojects would be in the order of US$4,000-10,000, a range which is on the low side for FISE, which attempts to finance larger subprojects for reasons of efficiency. The project would also finance additional equipment required to implement the revised PHC model. This would include medical equipment (such as scales, scissors, delivery tables,  - 34 - etc.), office and laboratory equipment and furniture, basic equipment for community midwives and volunteer health workers, radio equipment to improve referrals, and vehicles. This would be implemented in close coordination with FISE and would provide some additional financing for rehabilitation of health facilities at the primary level. Subproject implementation modalities (subproject preparation, design, supervision, execution of physical works and disbursement of funds) would be similar to those of FISE, but simpler given the nature of works to be undertaken (small repairs, repainting, simple electrical connections, etc.). The first two subprojects would be sent to IDA for prior approval. As a condition of disbursement for the Infrastructure and Equipmen subcomponentfor PHC facilities, the MON would have adopted an Operational Manual for PHC infrastructure and equipment ftnancing. satisfactow to IDA (para. 8.3(e)). Subprojects would be submitted, approved, monitored, and supervised according to this Operational Manual and no changes would be made without IDA's prior approval (para. 6.5). 4.17. Subcomponent E: Monitoring and Evaluation (US$0.3 million). Thle project would support monitoring by the MOH of the PHC component. Monitoring would be undertaken by the MOH Vice Miistry for Health Care Services, who would contract three local consultants to that effect. They would undertake two supervision visits per year in each of the health facilities of the seven SILAIS to be financed by IDA, using a Supervision Manual currently being prepared by the MOH as an instrument to supervise all SILAIS at the national level. As a condition ofdisbursement for Lhe rmai Health Care co_ne. a Supervision Manual incorporating monitoring and evaluation indicators. sansfactow to IDA. woud have been Dresented (para. 8.3(f)). Supervision of subprojects would be conducted according to an Operational Mamual and no changes would be made without IDDA's prior approval. In addition, the project would finance two national consultants for two months every year to undertake the evaluation of the PHC component using process and impact indicators presented in Annex 20. Component 3: Pharmaceutical Supply and Distribution System (US$3.2 million or 15.9 percent of total cost including contingencies) 4.18. This component would be financed by IDA and would be complemented by the DANIDA project currendy under discussion with the Giovernment. The IDA-financed component would help the MOH: (a) improve the policy and regulation framework; (b) improve procurement, supply, and distribution of drugs and medical supplies; (c) improve fnancing of drugs and supplies; and (d) promote more rational use of drugs. This component would provide economic benefits of US$1.1-2.8 million anmnally (pan. 7.5). 4.19. Subcomponent A: Policy, Regulation, and Financing (US$0.2 million). The project would finance two studies. The first would be a study of: (a) the economic and fiancial impact of existing legislation, including price control legislation, on the marketing of pharmaceutical products; in particular, the study would identify regulatory constraints that discourage the importation, distribution, and sale of generic pharmaceuticals in the private sector; and (b) legal changes required to allow the implementation of new policies to increase purchases by SILAIS and health facilities, increase private sector distribution, and introduce flexible quantity and delivery contracts. The second study would help the MOH establish a  - 35 - policy regarding external donation of drugs. Terms of reference for the studies are provided in Annex 9. Dur_nn negotiations. agreement was reached that the MOH would comolete two harmaceIuical policy and regulation studies and discuss their results and reco-mmendaions with IDA no later than October 31. 1994. and that an action plan. satisfactory to IDA. would start to be implemented no later than December . 1994 (para. 8.1(k)). 4.20. The project would provide technical assistance in the amount of US$100,000 to help the MOH: (a) promote the delivery of phannacy services by the private sector; and (b) design the specifications for operation by the private sector of a pilot pharmacy in a MOH hospital, help prepare and evaluate bids, contract private pharmacy operator, evaluate the first six months of operation of the pharmacy using monitoring indicators, and make proposals for modification and replication in other hospitals. Terms of reference for the technical assistance are provided in Annex 9. Durink negotiations. agreement was reached that the MOH would complete the pilot program for the support of pilot private pharmacy operations in a Managua hospital no later than June 30. 1995. that the recommentions would be discussed with IDA during the mid-tenn review, and that an action plan. stfaoia to IDA. would start to be implemented no later than August 1. 1995 (para. 8.1(1)). 4.21. Subcomponent B: Inprovement of Supply and Distribution System (US$2.7 million). The project would: (a) Provide technical assistance to help improve inventory management at the S.ILAIS and central levels. At the SILAIS level (in all health facilities), the project would help organize phannaceutical and medical supplies in a standard arrangement according to code numbers; document and destroy expired and spoiled products; divide supplies at health facilities into two inventories, one, a working inventory (opened packages considered as having been consumed) and the other, a bulk inventory (unopened packages); design ptescription slips that provide a record of the final distribution of pharmaceutical products; design inventory reports and requisitions pre-printed with the names and codes of products; design a cardex systm which provides an accurate history of supply flows into and from the bulk inventory; establish maximum and minimum stock levels for the working and bulk inventories; and establish a standard methodology to forecast future needs. At the cental level, the project would strengthen the CIPS MIS so that CIPS may receive up-to-date informaton on inventories of pharmaceutical supplies and products at the SILAIS level and in hospitals. In addition, the MIS would provide CIPS managers with periodic information on the costs related to reception, storage, packing, transportation, and supervision so that they may devise alternative strategies to improve performance and cost-effectiveness. This would help notably to develop and implement selection criteria to identify products that can be cost-effectively distributed by suppliers and implement contract provisions which specify direct distribution of additional products directly to health facilities; (b) Help renovate and repair storage areas and shelving in all health facilites so that inventories may be rearranged properly according to code numbers;  - 36 - (c) Support the MOH efforts to increase the number of reliable suppliers through technical assistance to develop and implement a computerized infonnation system to track orders and monitor supplier performance; and (d) Provide technical assistance to help the MOH design and implement innovative, objective supervision instruments and train supervisors in their use. 4.22. Subcomponent C: Rational Use of Drugs (US$0.3 million). The project would help the MOH improve the rational use of drugs by financing a study to establish a baseline level of inefficient drug use and recommend measures to correct these problems. Terms of reference for the study are provided in Annex 9. During negotiations. agreement was reached that the MOH would complete the rational dru use study no later than December 31. 1994. that the recommendations would be discussed with IDA no later than Januar 31. 1995. and that an action plan. satisfactorv to IDA. would start to be implemented no later than March 1. 1995 (para. 8.1(m)). Technical assistance, including support for health manpower training, would also be provided to help implement the recommended corrective measures. Component 4: Rehabilitation and Maintenance of Hospitals and Other Health Facilites (US$5.3 million or 26.4 percent of total cost including contingencies) - This component would consist of: (a) rehabilitation of hospitals; and (b) maintenance system for health facilities. 4.23. Subcomponent A: Rehabilitation of Hospitals (US$5.0 million). To complement PHC activities supported by IDA and other donors, the project would finance emergency rehabilitation and repair subprojects to address, at the national level, the physical and technological deficiencies that prevent hospitals from functioning adequately. The procedures for financing emergency rehabilitaton subprojects have been designed to allow the allocation of scarce financial resources to hospitals through a demand-driven mechanism, i.e., rehabilitation/investment subprojects would be generated and proposed by the hospitals through their respective SILAIS. The size of the subcomponent was determined on the basis of a preliminary survey of hospitals and on the estimation of small and simple rehabilitation programs that would be highly cost-effective and would complement the support of other donors. The involvement of the SILAIS and the hospitals in the identification, preparation, and its participation in the execution of the subprojects is in itself a training for a possible later decentralization of investment resource allocation and utilization decisions in the health sector. As a condition of disbursement for rehabilitation of hospitals, the MOH would have adopted an Operational Manuel. satisfacto,v to IDA (para. 8.3(g)). Subprojects would be submitted, reviewed, approved, monitored, and supervised according to this Operational Mamal and no changes would be made without IDA's prior approval (para. 6.5). The subprojects would be implemented by the central office of the MOH, with support from local health facilities. Periodic monitoring and review of implementation progress would be exercised by the PCU, using monitoring indicators presented in Annex 20. The project would also finance some maintenance of hospitals during the first year.  - 37 - (a) Subfroject Selection Criteria. The selection criteria are spelled out in the draft Operational Manual for emergency rehabilitation of hospitals which has been reviewed by IDA and found satisfactory (Annex 23). The principal selection criteria to qualify the subprojects have been agreed with the Government (see Annex 10 for details). These are differentiated between basic criteria, which are necessary but not sufficient conditions to qualify, and priority criteria, which would help in the priority allocation of a set amount of fuids for the immediate rehabilitation needs of these hospitals. The basic criteria include the following: (i) siubroject types would consist of repair, replacement, or purchase of equipment and/or vehicles; repair, improvement, replacement, construction of infrastructure; andtor a mixture of these subprojects; (ii) subproject costs would not exceed US$150,000 with an implementation period of no more than 12 months; (iii) subprojects should not generate additional recurrent costs; in cases where incremental recurrent costs would be generated, certificadon by the MOH Vice-Minister for Administration that the subproject can count on sufficient budget for required operation and maintenance would be required; and (iv) subprojects presented should be in line with the Government investment strategy in the health sector. (->b) The Priority Criteria would rank subprojects according to the following expected benefits: (i) reduction of bottlenecks in medical procedures or hospital support services; (ii) reduction of patients and personnel risks; (iii) emphasis on rehabilitation/replacement versus new construction or purchase of new equipment; (iv) emphasis on maternal and child health care improvement; (v) promotion of ambulatory care; and (vi) improvements in the handling of medical wastes. The rankig methodology for these criteria is discussed in detail in Annex 10. Difficulties in arrivig at exact measurement of these benefits are well recognized. Nonetheless, an exercise of assigning points to reflect a group of reviewers' perception of the relative importnce of each of the subprojects presented would minimize the chances of allocating the project funds to 'favorite hospitals' or "less urgent' subprojects. The selection criteria for rebabilitation of hospitals and other health facilidtes would be reassessed during the mid-term review and modified as necessary (pam. 6.7). (c) Selection css. The process of subproject generapon and approval would involve the hospital directors and staff, the SILAIS Directors, and an Approval Committee of the MOH as major actors. The Approval Committee would be composed of the Administrative and Financial Vice-Miister, the Director of Investments, the Director of Health Services, the Director of External Cooperation, the Budget and Fiance Director, and the Director of the PCU. Every month, the central MOH office would request the SILAIS to submit subproject applications for those areas which they consider of highest priorty. The SILAIS Director, together with the directors of hospitals in their area of jurisdiction, would review the proposals and assign priority to those subprojects that would best meet perceived needs of the population, with the clear understanding of their financial commitment for recurrent costs for such investments over the long-term. These subproject applications would be sent to the Investment Department of the MOH for prentation to the Approval Committee which would review, rank, and recommend the subprojects for approval  - 38 - according to the priority criteria discussed above. Disbursements would be made by IDA against 90 percent of the cost of subprojects approved before December 31, 1994. As indicated in the Operational Manual, the first three subprojects and those costing more than US$100,000 would be sent to IDA for prior approval. As part of the annual reviews (para. 6.6), the Govermnent would provide IDA with: (i) an aual report of the physical and financial status of the subprojects fimanced for the emergency rehabilitation of hospitals; and (ii) every November 30 of each year, an annual progress report and proposed investment plan for the following calendar year. 4.24. Subcomponent B: Maintenance System for Health Facilities (US$0.3 million). A maintenance policy for health facilities is now under preparation by the Government. This conponent would finance two studies that would help design a maintenance system for health facilities in Nicaragua. The study would: (a) diagnose the present status of health facilities; (b) determine maintenance needs; and (c) propose a maintenance system adapted to Nicaragua which would complement the efforts currently supported by Finland and Holland. Terms of reference for the study are presented in Annex 11. The study would be completed in about six months and would cost about US$200,000. Given the time required for the study to be completed, emergency maintenance requirements would be presented as ubprojects under the emergency rehabilitation of hospitals (para. 4.23) during the first year of the project. During subsequent years, maintenance costs would be supported by the Government. The second study would analyze the impact that recently installed equpent as well as those planned under the Japanese (para. 2.27) and IDA fiacing would have on recurrent costs. The study would be completed in about six months and would cost about US$100,000. The Government has presented a health facilities maintenance policy, satisfactory to IDA. During negotiations, agreement was reached that the MOH would: O comolete the maintenance and recurrent cost studies, discuss their results and recommendatons. and agree on an action plan with IDA no later than December 31. 1994: and (ii) the MOH would starn implementing the action pian no later than March 1. 1995 (pua. 8.1(n)). Component 5: Technical Assistance to INSSBI (US$1.0 million or 5 percent of total cost including coningencies) 4.25. Subcomponent A: Health Insurance (US$0.7 million). The project would provie technical assistance to INSSBI to redesign its health insurance model so that it can provide to its affiliates a package of quality health services in line with their contributions. The project would also help strengthen INSSBI's MIS and would provide technical assistance and taining in the implementation of the new health insurance model and the MIS. Terms of reference are provided in Annex 12. Progress in implementing the component would be assessed on the basis of monitoring indicators and would be reviewed with the Government at the mid- term review, and agreement would be reached on changes to be introduced as a result of the review. This subcomponent, together with subcomponent B, is expected to provide economic benefits ranging from US$7.4 million to US$19.6 million (para. 7.5). Durng negotiatons. agreement was reached that the Government would: (io review the progress in the reorm gf the health insurance progrm and its implemenion no later than September 30. 1994: Cii)  - 39- discuss the results of the review with IDA no later than December 31. 1994 and start imenting an agreed action plan no later than Februaav 1. 1995 (para. 8. 1(o)). 4.26. Subcomponent B: Workmen's Compensation Program and Pension Fund (US$0.3 million). The project would provide US$210,000 of technical assistance in the following areas: (a) establishment by March 1995 of insurance program against work-related injuries and illness, including the design of technical norms, an accreditation scheme for providers, a system to limit occupational risk, and incentives to encourage affiliation to the system; and (b) training over the 1994-96 period of technical specialists to facilitate implementation of the system. Tenns of reference are provided in Annex 12. Progress in design of worlanen's compensation program and training of implementation specialists would be discussed with the Government at the mid-term review (para. 6.7). 4.27. The project would provide US$90,000 of technical assistance to analyze the fmancial status of the pension system and to make actuarial projections related to the financial equilibrium of the pension system over the medium-to long-term. Additional support will be included to evaluate alternative pension systems that may be more efficient and equitable over the long-term. Terms of reference are provided in Annex 12. Preliminary results of this analysis would be discussed with the Government at the mid-term review, as well as the need for possible additional IDA or other donor su-. ort for reform of the pension fund. 4.28. Component 6: Project Administation (US$1.0 million or 5.0 percent of total cost including contingencies). The PCU would be responsible for technical and financial management of the project. The PCU would have a Director, appointed by the Minister of Health, and would report directly to the Secretary General. The Director would coordinate project implementation within the MOH, with other Government agencies and with IDA. The PCU Director would be assisted by six higher-level professionals and one senior secretary. One senior level professional would be responsible for administtion and procurement and each of the remaining would be in charge of one project component: (a) institutional s g of MOH; (b) primary health care; (c) pharmaceuc supply and distribution system; (d) rehabilitation and maitenance of hospitals and other health facilites; and (e) technical assistance to INSSBI. The PCU would also have the means to contract specialized consultants as reqired to help support project implementation. The major functions of the PCU would be to facilitate project implementation by working in close coordination with the executing agencies, oversee the implementation of the various components, supervise procurement activides, and coordinate the fnancial flows. The PCU would provide the Government and IDA with annual progress reports on the project, using agreed indicators (listed in Annex 20), would produce fiancial reports of expenditures and reimbursements required by IDA, and would also be responsible for preparing the required documentation for the amwal and mid-term reviews (paras. 6.6 and 6.7). The PCU terms of reference and the detailed operational directives related to PCU responsibilities for project implementation would be contained in a PCU Operational Manual (Annex 17). The Government has formally established the Project Coordinating Unit and appointed the Director, satisfactory to IDA. Durng negotiations. agreement was reached that the Project Coordinting Unit would be maintained with structure and ffctions. and sta(t'ed with  - 40 - Dersonnel with qualifications and exper.ence. satisactory to IDA until completion of the poet(Pama. 8.1(p))). V. PROJECT COSTS AND FINANCING A. Project Costs 5.1. The total project cost, including physical and price contingencies is estimated at about US$20.1 million equivalent (net of taxes) of which an estimated US$15.2 million would be foreign exchange. Investment costs amount to 89 percent of base costs and incremental recurrent costs amount to 11 percent of base costs. Project costs were estimated at July 1993 price levels and include physical contingencies of five percent for computer hardware, equipment and supplies, and infrastrcture improvements. Price contingencies were calculated at 1.2 percent for 1994, 2.4 percent for 1995, 3.2 percent for 1996, and 3.4 percent for 1997 according to IDA's estimated Index of Unit Value of Manufactured Exports. These rates have been applied to local and foreign costs as well, as regular currency exchange rate adjustments based upon purchasing power parity would compensate for the difference between projected US dollar and local inflation rates. Project Cost Summary (in US$ millions, net of taxes and duties) Local Foreign Total - US$ million stitutional Strengthening of MOH 0.4 2.0 2.4 Primay Health Care 1.7 4.8 6.5 Pharmaceutical Supply System 0.7 2.4 3.1 Rehabilitation and Maintenance of Hospitals 1.4 3.4 4.8 Technical Assistance to INSSBI 0.2 0.7 0.9 Project Administration 0.8 0.2 1.0 Total Baseline Cost 5.2 13.5 18.7 Physical Contingencies 0.1 0.5 0.6 Price Contingencies 0.2 0.6 0.8 TOTAL COST 5.5 14.6 20.1 5.2. Estimated rehabilitation and constuction costs for the MOH health facilities are based on unit prices derived from current contracts and costs analyses for similar standards of construction in Managua. Estimated unit costs of medical, odontological and office equipment are based on prces quoted in recent international competitive bids. Estimates for technical assistance and studies are based on current rates for local and foreign experts, and cost estimates for training on current costs or costing standards used by MOH and INSSBI.  - 41 - B. Finacing Plan 5.3. The proposed project would be finned as follows: Loca Foreign Total Government of Nicaragua 2.1 0.0 2.1 IDA 2.9 12.1 15.0 Norway 0.5 2.5 3.0 Total 5.5 14.6 20.1 5.4. The proposed Credit of US$15.0 million equivalent would finance about 75 percent of the total project cost, net of taxes and duties. The Credit would fnance about 83 percent of foreign exchange expenditures and 53 percent of local expenditures. This level of local expenditure is justified because it would cover mostly small scattered civil works, small supplies contracts, and expenditures for technical assistance and training, areas in which no greater benefits would be obtained by contracting these services internationally. The Goverment contribution would be US$2.1 million. Durng negtiain. agreement was reached that the Government would: (i) provide the following minimum amounts, as couterartfuns or the financing of the proect: fal USL].0 million for 1994, fbi US$07 w-gWa iI _--_ _z1 milion for 1995: and [ck US$0.4 milion for 1996: and (i) advance from the above amounts. and not later than the first de of each guarter. amounts sicient to cover estimated coWunerpaqt & n requirements durink that quarter (para. 8.l(q)). 5.5. Cofinancdng. The Government of Norway, which participated in the pre-appraisal of the project with IDA, would provide a US$3.0 million equivalent grant for cofiancing the project with IDA. The Government of Norway intends to appoint IDA the administrator of the Norwegian funds. Norway will cofmance the PHC component. Once the proportions of Norway disbursement per project component are confirmed, IDA disbursement percentages would be adjusted accordingly. Durin negotiantons, an event of default was agreed to which would allow IDA to suspend disbursements if the Government failed to flfIll all conditions for effectiveness of the Noiway Grant Agreement. other than those related to the effectiveness of the IDA Credit Agreement. no later tLhan June 30. .994 (para. 8.4(a)). C. Incremental Recurrent Costs and Project Sustainability 5.6. During the implemenatio period, the project would add a total of about US$3.6 million to the recurrent expenditures budget of the MOH. Incremental recurrent costs would be generated by incremental drugs and medical supplies, which would be financed by IDA on a declining basis. The above mentioned anmnal incremental recurrent costs in the last year of the project represent 1.6 percent of the estimated MOH budget in 1993 prices, a small increase that could be easily absorbed by the MOH.  - 42 - Recurrent Cost Financing (US$ million) 1994 1995 1996 Total Total Cost 1.2 1.2 1.2 3.6 IDA Financing 0.8 0.5 0.3 1.6 Govemment Financing 0.4 0.7 0.9 2.0 5.7. This increase should be amply offset by savings generated by the implementation of a redefined PHC model, improvements in revenues, and increases in efficiency. Indeed, one of the main objectives of the proposed project is to strengthen the fmancial position of the MOH by reducing the cost of procurement of pharmaceutical and medical supplies, strengthening cost recovery at the secondary level, and rationalizing expenditures. Furthermore, the project involves structural changes that are expected to have major fmancial (as well as qualitative) benefits on the health system which should continue well beyond the project period (paras. 7.2-7.7). D. Procurement 5.8. The project would include procurement of civil works, goods and drugs as well as studies and consultancy services, in accordance with IDA guidelines for procurement (May 1992) and consulting services (August 1981). 5.9. Procurement Arrangements in the PCU. To strengthen the Borrower's procurement implementation capacity, the PCU would include a specialist to carry out procurement for the project and supervise procedures in the SILAIS. In addition, arrangements have been for FISE to provide technical assistance to the MOH at the early stages of implementation, taking advantage of the experienced gained by PISE's staff in procurement and disbursements of IDA funds. Funds have also been included in the project administraion component (para. 4.28) for the contracting of consultants as needs arise during proect implementation. 5.10. Civil Works. Hospital rehabilitation subprojects would be managed by the SILAIS. The bulk of civil works contracts in these subprojects would consist of refurbishing of hospital facilities (e.g., reconstruction or repair of operating rooms, bathrooms, roofs, kitchens, etc.) in small amounts, with an estimated average cost of US$25,000 per contract. Therefore, no international competitive bidding (ICB) in works is expected. Civil works contracts in the different subprojects are expected to total approximately US$4.3 million equivalent. As much as possible, similar types of subprojects would be bid in packages to minimize administrative costs and take advantage of contractors' specialization. For contracts valued at US$25,000 equivalcnt and above, awards would be made on the basis of local competitive bidding procedures (LCB) and stadard bidding documents, satisfactory to IDA. For contracts below US$25,000 per contract and not exceeding an aggregate amount of US$2.1 million equivalent, local shopping procedures requiring at least three price quotatons would apply. Local shopping is justified because most rehabilitation subprojects  -43 - would be carried out in scattered places and it is unlikely that large domestic cotactrs would be interested in bidding for small rehabilitation works. 5.11. Goods. The bulk of goods consists of medical equipment and supplies for hospitals and other facilities, spare parts, computer and peripheral equipment, software, some vehicles, and office equipment and supplies for the PCU. To the extent possible, purchases of similar items of equipment, materials or supplies would be packaged to permit bulk procurement and to benefit from economies of scales. For procurement of the MIS, the MOH would use a two-step ICB bidding procedure. About 20 vehicles costing a total of about US$400,000 would be procured through LIB from a list of foreign manufacturers with established service facilities in Nicaragua. 5.12. Except for medical equipment, drugs, and vehicles, contracts of goods packaged at a value of US$150,000 equivalent and above would be awarded following ICB procedures. In the evaluation of bids obtained under ICB, a margin of preference of the lesser of 15 percent of the c.i.f. price of the goods or the difference between the amount of custom duties and other import taxes which a non-exeinpt importer would have to pay for the importation of goods offered in a foreign bid and that applicable to a qualified Central American Common Market (CACMO bid, in accordance with Appendix II of IDA's guidelines, may be granted to bids offering goods manufactred to a substantial extent in any country, imcluding Nicaragua, which is a party to the CACM Treaty. Uniform procurement procedures using Bank Group standard bidding documents (May 1993) would be followed for procurement of goods through ICB. Contacts valued at US$50,000 and above but less than US$150,000 equivalent would be carried out following LCB procedures, satisfactory to IDA, up to an aggregate amount of US$0.6 million equivalent. Contracts below US$50,000 equivalent would be procured by shopping procedures through price quotations obtained from at least tee eligible suppliers, unless otherwise agreed by IDA, up to an aggregate limit of US$0.6 million equivalent. It is expected that mostly international shopping procedures would be used for goods not manufactured in Nicaragua. During negotiation. agreemen s reahed that the Government would use IDA standard bkdn documents for *CB. mth modifitons agreed uon durng negotiations. and standard bidAng cuentsforLC (para. 8.1(r)). 5.13. Phbrmaceuticals and Medical Equipment and SuppLies. These specilized items (e.g., biomedical and odontolog;cal equipment, generic drugs, and contraceptives), valued at at US$25,000 equivalent and above and up to a total amount equivalent of US$3.3 million, for reasons of economy, efficiency, and strict quality requirements, would be procred dtrough Limited International Bidding (LIB) procedures in accordance with IDA guidelines. Small purchases of these items, valued at less than US$25,000 per contract and not exceeding US$1.3 million in aggregate, would be done through price quotations from at least three qualfied internatonal suppliers. Procurement of drugs of US$25,000 equivalent and above would be done through UNICEF or another procurement agent satisfactory to IDA, and the Government would enter into an agreement satisfactory to IDA for such purpose. Procurement from UNICEF is proposed because: (a) UNICEF procures essential generic drugs in bulk, according to procument procedures satisfactory to IDA, using pr-qualified laboratories that ensure their quality as suppliers; (b) UNICEF pre-packages these drugs at the UNIPAC facility in Copenhagen according to specifications to be provided by the MOH;  - 44 - and (c) UNICEF schedules shipments annually, according to supply schedules to be specified by the MOH. Procurement Arrangements (US$ million) Non-IDA Category ICB LCB Other Financed Total Civil Works and Materials 2.2 2.1W 1 4.3 (1.9) (1.8) (3.7) Goods and Equipment 0.6 0.6 0.6a} 2.2 4.0 (0.6) (0.6) (0.5) (1.7) Vehicles - - 0.4W - 0.4 (0.4) (0.4) Medical Equipment - - 0.6& - 0.6 (0.6) (0.6) Pharmaceutical Products & Supplies - - 3.3W' 3.3 (2.0) (2.0) Management Information System 0.9 - - - 0.9 (0.8) (0.8) Tra - - 1.7 0.8 2.5 (1.7) (1.7) Consultants - - 4.1 - 4.1 (4.1) (4.1) TOTAL 1.5 2.8 12.8 3.0 20.1 - _ *^~~~~~1.4) (2.5) (11.1) (15.0) Figures in parentheses are the amounts estimated to be finaced by IDA. ' To be procured through prce quotations from at least three suppliers (local shopping) hi To be procured through Limited International Bidding (LIB) ' To be procured through international shopping (US$0.2 million) and LIB (US$0.4 million) ' To be procured through intemational shopping (US$1.3 million) and LIB (US$2.0 million) 5.14. Consultan. Individual consultants and consuldtg firms contracts carrying out technical assistance, studies or training would be hired following IDA guidelines for consultnts. Timetables for contracting the consultants and performing the studies under the proposed project's techimcal assistance activities were reviewed by IDA and found satisfactory. 5.15. Prior Review. Prior review of procurement procedures by IDA would be required for aU p ment documentaton for ICB and LIB contracts. IDA would review the first contr for LCB contracs for civil works or goods irrespective of value and all contracts for civil works valued at US$200,000 and above and for goods costing US$100,000 and above. All other conts would be subject to review in the field (ex-post) during IDA supervision  - 45 - mission on the basis of random sampling. For consultants, prior review would be required for all individual consultants. For contracts with consultants' firms, only contracts valued at US$50,000 or above would be reviewed ex ante by IDA. The prior review arrangements would cover about 75 percent of the value of total contracts. All documentation for consultants not subject to prior review would be reviewed in the field by IDA supervision missions for acceptability. 5.16. No detailed Country Procurement Assessment on Nicaragua has been undertaken recently. However, Nicaragua's procurement regulations (Lev de Contrataciones Administrativas del Estado, August 1992) clearly authorize, as a special provision, the applicadon of procurement procedures of international financial institutions in the procurement of works, goods, and services. E. Disbursements 5.17. The proceeds of the Credit (US$15.0 million equivalent) would be lent to the Republic of Nicaragua, which would transfer US$1.0 million under the same terms and conditions as the IDA Credit to INSSBI. The balance of US$15.0 million would be allocated to the MOH as a grant. As a condition of Credit effectiveness, the Government would have entered into a Subsidiarv Agreement with INSSBI for malang the && avai to .SSSBI. satsfactory to IDA (para. 8.2(b)). The proposed IDA Credit would be disbursed over a period of about three and a half years, to be completed by June 30, 1997. The Credit closing date would be December 31, 1997 (i.e., six months after the completion date). The proceed. of the Credit would be disbursed as follows: (a) civil works for storage facilities, 90 percent of expenditures; (b) goods and equipment (other than for medical equipment and pharmaceuticals), 100 percent of foreign expenditures, 100 percent of local expenditures (ex- factory cost), and 75 percent of expenditures for other items procured locally; (c) goods for the PCU, 100 percent of local expenditures (ex-factory cost), and 75 percent of expenditures for other items procured localy; (d) medical equipment, 100 percent of total expendiures; (e) pharmaceutical products and supplies, 100 percent up to an aggregate amount of US$0.8 million, 50% up to an aggregate amount of US$1.2 million, and 25 percent for the remainder; (f) training, 90 percent of expenditures; (g) consultants, 100 percent of expenditres; (h) MIS, 90 percent of expenditures; and (i) subprojects, 90% of amounts disbursed by MOH for each subproject approved by MOH on or before June 30, 1996 (Annex 16). To facilitate project start-up activities, retroactive financing of up to US$0?75 million (5 percent of Credit amount) would be provided for eligible expenditures made after October 1, 1993; funds would be used for urgently needed initial technical assisance, training, and project administration activities. 5.18. Proceeds of the proposed Credit would be disbursed against withdrawal applications to be fMlly documented for contracts valued at US$50,000 or more equivalent for consultants, US$200,000 or more for civil works, and US$100,000 or more for goods. Claims for expenditures of lesser amounts and for incremental operating expenditures would be disbursed against presentatiou of Statements of Expendiure (SOEs) for which the supporting documentation would be retained by the PCU for periodic inspection by IDA and by external auditors. All expenditures and SOEs would be transmitted to IDA through the PCU. Ihe  - 46 - Government would set up a Special Account in US dollars in the Central Bank with an initial deposit of US$1.5 million. Documentation requirements for withdrawals from the Special Account would be the same as required above. F. Accounting and Auditing 5.19. The MOH would establish and maintain separate project accounts and records for project expenditures. The PCU would maintain a consolidated account of all expenditures under the project. These accounts would be audited annually by independent auditors, in accordance with appropriate auditing principles, with terms of reference approved by IDA, and would include an audit of the SILAIS. The audit reports, which would include a separate opinion on the adequacy of SOEs and on the Special Account, would be forwarded to IDA no later than six months after the end of each fiscal year. VI. PROJECT IMPLEMENTATION AND MANAGEMENT A. Project Implementation and Management 6.1. The MOH has been radically transformed and improved during the past year and would have the capacity to implement the project or to absorb the technical assistance to be provided. The MOH has established a clear strategy for the sector and is fully committed to the project. During project preparation, the MOM has already taken a number of bold initiatives that demonstrate its capacity to get things done. First, it has radically transformed the budget allocatior system from a historical system to one where allocations are based on objective physical and financial criteria. It has delegated to the SILAIS the implementtion of 20 percent of the MOH budget, which has brought tangible improvements in the use of resources (e.g., better availability of drugs, fumctioning ambulances, repairs of infrastrucure and equipment). A number of non-performing SILAIS Directors have been or are already being replaced and a bonus system has been introduced to remunerate better-performing SILAIS Directors. 6.2. In addition, the MOH has already started to use technical assistance funds available from the FISE project to: (a) strengthen the SILAIS on specific management aspects related to the project (preparation of the SILAIS to the use of monitoring indicators for managemen contracts, supervision of application of redefined primaty health care (PHC) model, improvement of organization and job descriptions, preparation of training plans); (b) start preparing changes in the legal framework; and (c) improve supply and distribution of pharmaceuticals. This complements a training program for SILAIS managers and hospital directors initiated last year by the MOH and provided by the University. 6.3. These initial efforts demonstrate that the MOH recognizes its institutional limitations, but is detrmined to address themn specifically and systematically. To that effect, the project will provide significant technical assistance and is designed in a phased fashion in line with institutional capacity buildup.  - 47 - 6.4. The reforms undertaken by the new MOH management during the past year have been endorsed by the MOH staff both at the central and SILAIS level. This represents a broad-based support by various ideological groups, including some key personnel who bad been closely associated with the previous centralized system. Thus, commitment to the reform is not expected to change significantly even if there were a change in the top management of the MOH. B. Project Monitoring and Supervision Stratey 6.5. The proposed project would require about 25 staff weeks of supervision per year. A supervision plan is presented in Annex 22. The supervision team would be carefully planned, and would be a combination of IDA staff and consultants with expertise in institutional development, health care fiancing, management information, primary and secondary health care, pharmaceuticals and medical supplies systems, and social security issues. Supervision missions would be timed so that each year a mission would visit Nicaragua in November to participate in the annual reviews (para. 6.6) and agree on the plan of action for the following fiscal year and the budget. On the Government's side, the PCU would be responsible for monitoring and evaluation of all project components, using key monitoring indicators. These monitoring indicators (Annex 20) and the terms of reference for the mid-term review (para. 6.7 and Annex 22) were reviewed and agreed to during negotiations. Data for periodic calculation of process indicators would be obtained through the information systems of the MOH and INSSBI. Examples of indicators to be used would be percentage of budget decentralized, degree of satisfaction of SILAIS Directors and central MOH managers with the use of service provision arrangements, completeness and timeliness of information provided by the MIS, degree of integration of the PHC model, PHC indicators to measure health improvements such as infant and maternal mortality rates, and finally increase in cost recovery at the secondary level. As it may take more than the three and a half years of the project life to observe significant improvements in health outcomes such as reductions in fertility or infant mortality, the proposed system of impact monitoring indicators would be used by the Government beyond the project life. In addition, a special module on health, including the measurement of outcomes, would be incorporated into the Living Standard Measurement Survey (supported by IDA through the FISE project). Operational and Supervision Manuals would govern the operation of the project's components and would be maintained satisfactory to IDA. An event of default was agreed to which would allow lDA to suspend disbursements _the Operational Manuals for Hunan Resources Development. Infrastructure and Eauipment. and Emergencv Rehabilitation Subiroects. resnective&. and the Supennsion Manual for Primar Health Care were amended so as to materiall and adversel affLect. in IDA's opinion. the cariving out of the respectrive coMponents (para. 8.4(b)). 6.6. At the Annual Reviews, IDA, the MOH, and INSSBI would review progress made against agreed an agreed set of indicators (Annex 20) and include, whenever applicable: (a) review of implementation of sector strategies as spelled out in the policy letter; (b) analysis of the previous year's performance (i.e., compliance with targets, decentralization progress, budgetary allocations, functioning of implementation arrangements, main issues, and remedial actions to overcome the constraints); (c) review of work plan for the coming  - 48 - period; and (d) modifications in project design, if needed, to adjust to changing circstances. Durinf negotiations. agreement was reached that the MON and INSSU would: (i) undertake annual project implementation reviews no later than November 30 0f each year. startinf in 1994: and (iU) submit plans for each component for the coming vear for IDA's approval (para. 8.1(s)). 6.7. In June 1995, a Mid-Term Review of progress in implementing the project and the program described in the policy letter (Annex 2), with the participation of the MOH, INSSBI, IDA, and Norway representatives would assess progress of policy and institutional reform, results of pilot testing and steps toward expansion of new modalities of service provision and findings and recommendations of studies and possible applications. The mid- term review would focus on: (a) compliance with the health sector policy letter; (b) progress made in the institutional strengthening of the MOH, its impact on strengthening the decentralization process and the functioning of the human resources development subprojects; (c) the results, application and expansion of the decentralization mechanisms; (d) progress in the implementation of the MIS; (e) implementation and impact of the redefined PHC model on the efficiency, quality and equity in the delivery of health care services; (f) the planning, selection and procurement of pharmaceuticals and medical supplies, distribution system, the prescription and use of drugs, and quality control; (g) the functioning of the emergency rehabilitation subprojects for hospitals and the implementation of a maintenance program; (h) the progress in the design and implementation of the INSSBI health insurance reform program; and (i) the PCU performance (see Annex 22 for details). The PCU would be responsible for organizing the mid-term review based on the terms of reference presented in Annex 22. On the basis of this review, IDA, the MOH, and INSSBI would agree on adjustments to project design, and implementation as necessary, and other donors would be informed about the outcome of the review. During negotiations. agreement was reached that the MOH. INSSBI. and IDA would conduct jointly an in-depth mid-term review of the project and the gro-ram described in the Doli-v letter by June 30. 1995. under terms of reference satisfactora to IDA. to be presented no later than Januwa 31. 1994. and on the basis of this review, the MOH and INSSBI would prepare and camv out an action plan. satisfactory to IDA (para. 8.1(t)). VII. BENEFITS AND RISKS 7.1. Project Benefits. The project's main benefit would be to enhance the country's health status by increasing the efficiency of the Nicaraguan health system through improved and decentralized management of resources, increased cost recovery, and sustainable maintenance of facilities. It would help improve: (a) availability and quality of PHC services, particularly PHC programs, including maternal and child health care and family planning; and (b) quality and efficiency of secondary health care, an essential requirement for cost recovery. 7.2. Project Economic Benefits. The proposed project would have a significant impact on the financial equilibrium of the health sector by introducing a nunber of measures to reduce the cost of providing services and concomitantly itroducing mechanim to recover a  - 49 - share of those costs. Although it is difficult to quantify the precise impact of the investment due to the long-term effects, the following section attempts to quantify the economic benefits that would accrue as a result of the project interventions. A more detailed description of these calculations is contained in Annex 3. With respect to savings, benefits can be broken down into the following categories: (a) improvements in the pharmaceutical selection, procurement, distribution, inventory control, and utilization, including prescribing practices; (b) reductions in the unit cost of providing primary health care services; and (c) improved maintenance and rehabilitation of health facilities and medical equipment that would defer capital investments, reduce operating costs, produce more predictable output levels, lower unit costs and increase public satisfaction. On the revenue side, additional income woul(d be generated through: (a) increased cost-recovery at the secondary level; and (b) full cost pricing of services provided to INSSBI affiliates. 7.3. Project components oriented toward improvements in the pharmaceutical sector would reduce the cost of procuring drugs and supplies and increase the effectiveness, in terms of health status, of each dollar spent on pharmaceuticals, while concurrently exploring options to expand pharmaceutical cost recovery. Cost reductions would result from: reduction in the frequency of stockouts, decreased unit costs of pharmaceuticals and supplies, reduction in inappropriate selection, product expiration, poor quality of procured products, and shortages, dereased operating costs of the CIPS, increased availability of generics, and decreased inapproprate use of pharmaceuticale. The reduced cost per unit would release additional resources that would allow the MOH to expand services to at risk groups that do not curenty have access and to improve the quality and convenience of care for those that do. Based on conservative targets established by the MOH and IDA, these improvements should provide between US$1.1 million and US$2.8 million of economic benefits per year. Potential Economic Benefits from Selected Project Interventions Total Potential Economic Benefits (US$ Millions) Area of Economic Loss Annual Loss (According to Success of Project Implementation) (US$ Millions) Low (30%) Medium (3%) High (80%) Pharmaceuticals 4.1 1.1 1.8 2.8 Primary Health Care Model 1.8 0.5 0.9 1.4 Maintenance N.Q' INSSBI Payment and Workmens' 24.5 7.4 12.3 19.6 Compensation Insurance Improved Cost Recovery (from N.Q2 0.9 1.5 2.5 non-affiliates of INSSBI) TOTAL 30.4 9.9 16.5 26.3 A lack of adequate data renders it impossible to estimate the total loss resulting from improper maintenance and investment. 2 Given that cost recovery will not be applied to all patients and in all facilities it is not feasible to quantify the Total Current Loss that results from not having user fees at present.  - 50- 7.4. With regard to modifications to the current PHC model, the integration of PHC programs would reduce the unit cost of providing services, such as immunizations and family planning, as the amount of staff time required would be significantly reduced. Further, patients would realize significant savings as the opportunity cost of seeking care would be reduced. These would result in a conservative 10 percent reduction in the unit cost of delivering primary health care services. Given that the MOH allocated roughly US$18 million to primary care in 1992, a 10 percent reduction would produce between US$0.5 million and US$1.4 million of savings. 7.5. Another important element related to reducing the recurrent costs of the sector and improving the efficiency and quality of service is the proper maintenance and rehabilitation of equipment. Adequate investment in preventive maintenance and repair of equipment would: (a) lower variable operating costs resulting from more efficient methods of service provision, e.g., care provided at the proper level and time; (b) minimize investment requirements to compensate for the decline in availability of existing equipment capacity and lifespan; (c) maximize institutional revenues, as facilities become more able to collect user fees on equipment that is functioning; and (d) lower the patient's opportmity cost of seeking care, as well as limiting the obstacles to providing preventive care. 7.6. In addition to the savings that will be made as a result of improvements in the operation and efficiency of the health sector, the MOH and the project would support government initatives to search for alternative means of generating revenue and reducing costs. The first initiative would be the sale of health services by the MOH to INSSBI. At present, INSSBI collects approximately US$21 million dollars in health care premiums from public and pnvate sector affiliates. In theory, these revenues are earmarked for the purchase of health care for INSSBI members. In practice, however, these revenues are not transferred but are used to subsidize the reserve fund of the Social Security System. The project would provide technical assistance to develop collection mechanism to ensure that the health care premums currently collected by INSSBI will be used to purchase health care services from the MOH, which are currently provided free of charge. According to preliminary estimates, the improved collection mechanism would generate additional revenues between US$7.4 million and US$19.6 million annually. In addition, the MOH would develop the framework to systematically collect and allocate user fees from those who are not affiliated to INSSBI but who can afford to pay for selected services in secondary level facilities. Based on the calculations contained in Annex 3, minor charges for services such as X-rays (US$1.70) and general consultation (US$1.00), would generate additional revenue that could be used to improve the quality of service and expand coverage to meet unmet demand, Using seven basic service categories, including, inter alla, laboratory exams, X-rays, and inpatient and outpatient visits, hospitals would generate additional revenues between 3 percent and 8 percent of current total MOH budgetary allocations. 7.7. One of the primary objectives of the project is to improve the current model to ensure the sustainability of an efficient health care system that delivers quality care to the maximum number of people. Due to the paucity of necessary data and the uncertainty involved in the reforms, it is difficult to estimate precisely the economic retums from the various components of the proposed investment. The estimates presented in the above table,  - 51 - however, use a conservative range of assumptions to estimate yearly savings plus additional revenues. Based on these estimates, and assuming a reasonable 50 percent success rate for each project intervention, the economic benefits of the project would amount to over US$15 million per year, considerably greater than the IDA Credit. The track record of reforms iimplemented by the MOH and INSSBI in 1993 and the determination of these institutions' current management to implement further reform point to a potentially high success rate. However, given possible disruptions in project implementation linked to the country's historically delicate economic and political situation, a 50 percent implementation success rate appears reasonable. Although more difficult to quantify, additonal benefits would be realized as a result of decentralization. These benefits would likely manifest in the form of improvements in the allocative efficiency of the health sector as SILAIS directors are given the autonomy and the financial resources to allocate their resource according to the needs expressed at the local level. 7.8. Project Risks. The main risks are: (a) the feasibility of accomplishing a reform program given Nicaragua's weak institutional base; (b) possible delays by MOH to implement policy refonns because of likely opposition from affected interest groups (such as unions, medical associations, pharmaceutical suppliers); and (c) Govemment counterpart financing constraints. Risk (a) would be mitigated by a gradual implementation of reforms in line with building of institutional capacity through technical assistance and the training of managers who would implement the reforms. Risk (b) would be mitigated by donors' united support of reform, the MOH's strong commitment to reform, and the Govermment's consensus-building through the staging of seminars with various interest groups to discuss the reform. Risk (c) would be mitigated by limiting the level of Government participation to 10 percent of total project cost and receiving a multi-annual commitment from the Government to provide counterpart funds. 7.9. Euvironmental Rating. The project would have no adverse environmental impact, and is classified as C. 7.10. Program Objective Categories. The project would support a program of targeted interventions. The project would help reduce poverty through: (a) establishment of a decenralized and improved health care delivery system which would immediately benefit the underserved poor populations in remote areas; and (b) continued strong emphasis on free PHC care services for the poor. VmI. AGREEMENTS REACHED AND RECOMMENDATION 8.1. During negotiations, agreement was reached: (a) that a review of budget decentralization by the Govermnent would be completed no later than March 31, 1995 to: (i) analyze strengths and weakesses of its implementation; (ii) assess whether the pace of budget decentralization is adequate considering the SILAIS capacity; and (iii) recommend improvements to the system. Based on this assessment and the  - 52 - progress made in the improvement of human resources administration, an acdon plan would be agreed upon by April 30, 1995 comprising modalities and timing of decentralization of human resources; implementation of the action plan would commence no later than May 31, 1995 (para. 4.4(a)(iii)); (b) that the Government would present a draft resource allocation system on a corrected per capita basis no later than September 30, 1994 for review by IDA and would initiate implementation on a pilot basis, satisfactory to IDA, in at least five SILAIS no later than January 1, 1995 (para. 4.4(b)); (c) that the Govermment would: (i) undertake a study, to be completed no later than June 30, 1995, to review the pilot implementation of corrected per capita resource allocation system, assess the feasibility of extending the system to all SILAIS, and assess the feasibility of introducing on a pilot basis a resource allocation system based on the cost per capita of delivering health care services; (ii) review the results of the study with IDA at the mid-term review; and (iii) start implementing an agreed action plan no later than September 1, 1995 (para. 4.4(b)); (d) that the Government would: (i) review the experience and results of the cost accounting system currently in use on a limited basis and discuss with IDA, no later than December 31, 1994, the feasibility of expanding the cost accounting system to all hospitals and SILAIS; and (ii) start implementing, no later than February 1, 1995, an action plan, satisfactory to IDA, of agreed measures (para. 4.4(c)); (e) that the MOH would make satisfactory service provision arrangements with the SILAIS, which would include compliance with simple key indicators (para. 4.4(d)); (f) that the Government would review implementation of the service provision arrangements system by September 30, 1994, would review the results with IDA by October 31, 1994, and would start implementing the improved service provision arrangements in all SILAIS no later than January 1, 1995 (para. 4.4(d)); (g) that: (i) terms of reference for a cost recovery study, satisfactory to IDA, would be prepared no later than March 31, 1994; (ii) the study would be conducted and results discussed with IDA no later than December 31, 1994; and (iii) the Government would start implementing the study's recommendations no later than February 1, 1995 (para. 4.4(e)); (h) that the Government would conduct by September 30, 1994, a study of the health manpower market in Nicaragua, including ways to improve the nurse:doctor ratio, under terms of reference satisfactory to IDA. The results of the study would be discussed with IDA no later than October 31, 1994, and  - 53 - \ the recommendations would be implemented beginning January 1, 1995 (para. 4.5); (i) that human resources development subprojects costing more than US$75,000 and the first three subprojects, regardless of cost, would require IDA's prior approval (pan. 4.8); (j) that: (i) the MOH would submit for IDA review terms of reference for tbe study of the existing MIS, satisfactory to IDA, no later than April 30, 1994; (ii) recommendations for a new system, action plan, and timetable for implementation would be discussed and agreed with IDA no later than December 31, 1994; and (iii) start implementation of an agreed action plan no later than Febnay 1, 1995 (para. 4. 10); (k) that the MOH would complete two pharmaceutical policy and regulation stdies and discuss their results and recommendations with IDA no later than October 31, 1994, and that an action plan, satisfactory to IDA, would sit to be implemented no later than December 1, 1994 (para. 4.19)); (j) that the MOH would complete the pilot program for the support of pilot private pharmacy operations in a Managua hospital no later than June 30, 1995, that the recommendations would be discussed with IDA during the mid- term review, and that an action plan, satisfactory to IDA, would start to be implemented no later than August 1, 1995(para. 4.20); (m) that the MOH would complete the rational drug use study no later than December 31, 1994, that the recommendations would be discussed with IDA no later than January 31, 1995, and that an action plan, satisfactory to IDA, would start to be implemented no later than March 1, 1995 (para. 4.22); (n) that the MOH would: (i) complete the maintenance and recurrent cost studies, discuss their results and recommendations, and agree on an action plan with IDA no later than December 31, 1994; and (ii) the MOH would st implementing the action plan no later than March 1, 1995 (para. 4.24); (o) that the Government would: (i) review the progress in the reform of the health insurance program and its implementation no later than September 30, 1994; (ii) discuss the results of the review with IDA no later than December 31, 1994; and start implemendng an agreed action plan no later than FebnrY 1, 1995 (para. 4.25); (p) that the Project Coordinating Unit would be maintained with structure and functions, and staffed with personnel with qualifications and experience, satisfactory to IDA until completion of the project (para. 4.28);  - 54 - (q) that the Government would: (i) provide the following minimum amounts, as counterpart funds for the fmancing of the project: [al US$1.0 million for 1994; [b] US$0.7 million for 1995; and [c] US$0.4 million for 1996; and (i) advance from the above amounts, and not later than the first day of each quarter, amounts sufficient to cover estimated counterpart funding requirements during that quarter (para. 5.4); (r) that the Govermment would use IDA standard bidding documents for ICB, with modifications agreed upon dunng negotiatons, and standard bidding documents for LCB (para. 5.12); (s) that the MOH and INSSBI would: (i) undertake anmual project implementation reviews no later than November 30 of each year, starting in 1994; and (ih) submit plans for each component for the coming year for IDA's approval (para. 6.6); and (t) that the MOH, INSSBI, and IDA would conduct jointly an in-depth mid-term review of the project and the program described in the policy letter by June 30, 1995, under terms of reference satisfactory to IDA, to be presented no later than January 31, 1994, and on the basis of this review, the MOH and INSSBI would prepare and carry out an action plan, satisfactory to IDA (para. 6.7). 8.2. As conditions of Credit effectiveness, the Government would have: (a) made service provision arrangements, satisfactory to IDA, with at least three SILAIS (para. 4.4(d)); and (b) entered into a Subsidiary Agreement with INSSBI for making the funds available to INSSBI, satisfactory to IDA (para. 5.17). 8.3. As conditions of disbursement: (a) for any of the project's seven participating SILAIS under the Primary Health Care component, individual service provision arrangements would have been made by the respective SILAIS with the MOH (para. 4.4(d)); (b) for the Human Resources Development subcomponent, the Government would have adopted an Operational Manual for human resources development financing, satisfactory to IDA (pan. 4.8); (c) for computer hardware, agreement with the Government would have been reached on a detailed action plan for implementing the new MIS (pam. 4.10);  - 55 - (d) for pharmaceutical products and medical supplies, a reduced essential drugs and medical supplies list, satisfactory to IDA, would have been presented (para. 4.13); (e) for the Infrastructure and Equipment subcomponent for PHC facilities, the MOH would have adopted an Operational Manual for PHC infrastructure and equipment financing, satisfactory to IDA (para. 4.16); (f) for the Primary Health Care component, a Supervision Manual incorporating monitoring and evaluation indicators, satisfactory to IDA, would have been presented (para. 4.17); and (g) for rehabilitation of hospitals, the MOH would have adopted an Operational Manual, satisfactory to IDA (para. 4.23). 8.4. Events of default were agreed to which would allow IDA to suspend disbursements if: (a) the Governent failed to fulfill all conditions for effectiveness of the Norway Grant Agreement, other than those related to the effectiveness of the IDA Credit Agreement, no later than June 30, 1994 (para. 5.5); and (b) the Operational Manuals for Human Resources Development, Infrastuctr and Equipment, and Emergency Rehabilitation Subprojects, respectively, and the Supervision Manual for Primary Health Care were amended so as to materially and adversely affect, in IDA's opinion, the carrying out of the respective components (para. 6.5). 8.5. Recommendation. Subject to the above conditions, the project would constitute a suitable basis for an IDA Credit of SDR1O.8 million (US$15 million equivalent) to the Republc of Nicaragua on standard IDA terms with 40 years maturyt, including 10 years of grace.  NICARAGUA HEALTH SECIOR REFORM PROJECT ANNEXES 1. Country and Health Indicators 2. Health Sector Policy Letter 3. Health Sector Expenditures and Financing 4. MOH Organization Chart 5. Terms of Reference for Institutional Strengthening Technical Assistance 6. Redefined Primary Health Care Model 7. Human Resources Development Subprojects 8. Existing Family Planning Programs in Nicaragua 9. Phannaceutical Supply and Distribution 10. Emergency Rehabilitation of Hospitals 11. Maintenance System for Health Facilities 12. Technical Assistance to INSSBI 13. Project Costs 14. Financing Plan 15. Methods of Procurement 16. Disbursements 17. Project Coordinating Unit 18. Project Action Plan 19. Project Implementation Schedule 20. Key Monitoring Indicators 21. Coordination between Donors 22. Supervision Plan and Mid-Term Review 23. Documents in Project File  NICARAGUA ANNEX 1 HEALTH SECIDR REFORM PROJECT Page 1 of 1 t.. I COUNTRY AND HEALTH INDICATORS *I hndicator Value Year Source Country and Income Data Area (000 km2) 130 N/A WDR GNP per capita (US$) 422 1992 IDA est. Population Indicators Population (millions) 4.3 1993 MOH est. of which urban (percent) 61.0 1992 UNFPA Pbpulation growth rate (percent) 3.4 1991 MOH est. Lif expec ncy at birth (years) 67.0 1992 UNFPA Health Care Indicatrs Crude death rate (per 1,000 population) 7.0 1991 WDR 93 Immunization (under 1 yr, % of age group): Measles 83.0 1990 MOH DPT 88.0 1993 bberulosis 90.0 1993 lblio 98.0 1993 -lbtal health expendiures as percent of GDP 4.9 1991 IDA est. Health expenditr as percent of Government spending 18.2 1991 IDA est. Reproductive Health Share of women who are of childbeag age 46.0 1991 WDR 93 Crude birth rate (per 1,000 population) 40 1991 - WDR 93 Fertility rat (births per woman) 5.1 1991 WDR 93 Conraceptive prevalence (share of nimales 1549) Urban 63 1993 PROFAMIL1A Rural 38 1993 PROFAMILIA Infant mortality rate (per 1,000 live births) 72 1990 IDA est. Under-5 mortality rate (per 1,000 live births) Urban 78 1990 Bread for the Rural 209 1990 World Institute Maternal mortality rate (per 100,000 live births) 159 1989 MOH Nutrition Indicators Low birthweight infant (percent) 27 1991 UNICEF Malnourished children under 5 yrs of age (percent) 13 1991 MOH Sting, children 6-9 (percent) 22 1986 INCAP Daily calorie intake (percent of recomm. minimum) 86 1989 MOH Daily protein intake (percent of reomm. minimm) 75 1989 MOH Environmental Health Access to saf water (percent of population) Urban 78 1989 INAA Rural 18 1989 INAA Access to saniaon (percent of populaton) 16 1989 INAA  MCARAGUA ANNEX 2 HEALTH SECIDR REFORM PROJECr Page I of 9 Ma1agua, November 17, 1993 Mr. Lewis T. Preston Preslient The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Dear Mr. President, As part of the preparation of the Nicaraguan Healt Sector Moderization Prqject that the Government of Nirgua hopes to undetk with World Bank financng, we would like to present to you the prinples underlyg the Social Policy of the Government of Nicua and specifically, the polcies of the Ministry of Health that prwide the context for the activities contemplate under the prposed project. I Socil and EconomDc Policy of the Goverment of Nic a Consistent wih its overall economic limitations and with the Letter of Socal Sector Policies sent to you in October 1992, the Goenment's Social and Economic Policy emphase actions that aim to transform the role of the State from a central planner to a facitator, limiting its interventions to those areas where publhc sector partpatn is essential for improvng the equity of access to economic opportunities and basic social services. In prall, the Goement is encouraging greater community participaon to enable the people of Nicragua to play a larer role in shaping their own development. it is also promoting ger sinability of public actions by building a colaborie r onship between the State, the society, the private sector and inteatol donor To achieve these goals, the Goverment is developing an integrted and cohert framework for social policy, desiged to imprve the efficc and equity of socia prgams though a variety of means, including exploring new opportUnites for resource mobilization. The decentraliztion of prgram administ, as well as of policy formulation, control and evaluation is an important element of this stategy. In line with the Government's general policy famework, the Ministy of Health has established fundamental principles to guide its new Health Sector Policy and undepin a new model of health sector management and sevice delivery. These principles include: a) Health as a right of all the people: The State will guarantee the people's access to all acdions to ensure their health; it will also guatee their liberty to choose among the public or privawe health sstems available. *,  NICARAGUA ANNEX 2 HEALTH SECTOR REFORM PROJECT Page 2 of 9 2 b) Equity in te health sector. The State wil guarantee a sytm of health care delivery that will minimize inequlits of access to basic health care. c) Soldaity in health: The State will target its health care provision effirts to te most vulnerble groups; and d) The individual bear pnncipal responsblity for his health: Since people play an important role in teir own healft mainuwanrc, they sould actively particpate in health promoton, protection, recovery and rehabilitation activides. Tne Government of the Republic of Niragua is conscious of the urgent need to unpove the living conditions and health of the N'iarga people. For this reason, it strongly suppors te refms in the Ministry of Health. It will protect the Ministry's budget allocadon and promote an increase in primary health care spending within the overal sector budget II PrEindpal Problems of the Nkaraguan Health System Nicaragua entued the decade of the 1990s as one of the poorest counties of the Americas, and with an imposing gap between the basic needs of ner people and the real possibilities of the goernment to sasfy thse needs. Basic hygiene and health conditions are those of an early stage of theepidemioloicaltansition, as reflect in high aes of matunal and infant morality as wel as in high fertiity rates. Although the infant mortality rate has decined from 121/1000 live birhs in 1965 to 72/1000 live births in 1992, it remains one of the highest in Central Ameica The principal causes am diafrhea, perinatal illnesses and acute respirawry infecdons, which alone account for 75% of infant mortality and 50% of child mortality. Approximately 28% of children sufer some degre of malnutrition. The matenal mortality rate is 159/100,000 live births, prinmarily due to hemorrhage, toxemia and sepsis; one third is due to induced abortions. Ihe total frtility re is 5.5. Coverg of basic water and sanitation services is inffcient, leaving the populatin vlnerable to water borne diseses, especially in ru areas where wate services reach only 19% of the population and whre basic sniton is available to only 16%. More than 20% of the population is illitere, while the repetition and dropout raes between first and second grades is 47%. Only 30% of the childr who enter primary school complete sixth grade after six years. These socal condiins present an eve greater challnge considering at we inheied a health sysem that is instituionally weak, and which had lost its prestige in the eyes of the people, the Government, the inteational community and even its own workers. The system has been charctrzed by a lack of nmagement, controls and systems, and by the absence of polices to guide the nmagement of medical supplies, personnel, maintenance and inwstments. Moreover, even after the adoption of decentralied management structures based in the Loc1 Inteated Health Care Systms (SILAIS), the primary health care proallis in the centrak  NICARAGUA ANNEX 2 HEALTH SECIOR REFORM PROJECT Page 3 of 9 3 ministy have been developed verficaly, with no integrtion of activities directed at mothse and children, and with iadequate local and nattona retra and counter-referral sytms. The financal mangmet of the health ytem has been charactid by an i allocation of resoucs, inefficiency in their use, inequity in sector spending and an explosion in the costs of sevices delivered. Ihe struc of the health system's labor force is disorted, with a distibution in September 1993 of medical staff to administrative staff of 83.7% and 16.3%, respectvly. The sucu and composi of the medical staff reveal inratios of nurs to doctors (2.5:1), and of speciists to genema doctors (1.5:1). Health stis and inrmation are deficient, eflcting the lack of integration of health aiid management infomation stems and constaining adequately informed decision maing at all levls of the health systen. This wealness is also manifest in a lack of of sufficient indicators to monitor health sector plans and progamms. TMe chronic shoage of medical supples in health facilities is another of the most serious problems of the helth sector. The main fAo underlymg this problem include the absence of: programming mechanisms to guide purchase orders; supervision mechanisms and sructus; inventory control mechanisms; and an adequate distibution system. Finally, as the result of years of virtually no public investmt in the sector, the absence of a cea maintenan and invetmt policy, low echnical cmpbilities and high staff rover rates, the miisty of HealA now finds that approiay 70% of health posts and centers and 50% of hostas require urgent rehbili ton. These figures do not even consider the complete subtitun that many othes require or will requre in the near future. in Healh Polices Fulfilling its responsibility to guide the health activities of the State, the Ministry of Health has defined the folowing polcies as the basis to improve health service quality and stengthen sector institutions. Developing Pd*ay HeaWh Care Primary health care constitutes the central stategy of our health care model. We are curnty reorganizing basic health services accordng to the most urgent health needs of the populatn in each SILAIS. In. partcular, we are prioritizing preventive health care for mothers and children wough integrated health care actions to reduce matemr and infant morbidity and mortality, as well as the promonn of basic sanitary education and nutritional surveillance. We are also strengening our capacites to identify and control societ and epidemiological health risks, including tho caused by e nmental deterioration, the absence of basic sanition sevices, and biological, physical and chemical contamination. We will target and prioritz actions locally, to have a greater impact on those facto tht are susceptible to cost-effctive intervntions. /  NICARAGUA ANNEX 2 HEALTH SECTOR REFORM PROJECT Page 4 of 9 4 Strengthening Hospil Care Ihe secondaty level hospitals are the referal and support cents for the local networks of health services. To sege service coordiation, we are adaptng the model of hospital care to complement primary care sevces, and modernizing hospital management. Developing Social Panicdpatior. Including social participatton in healdth care management structures reinforces their democatic chracter. To achieve local patcipation for pogm acountability and ownership, we are consolidating the National Healith Council, Loal Health Councils, and Governing Boards of Hospitals, as well as working with various commissions and movements that support health sector efforts. Strengthenfng the Decentralzaion Process Decentraliaon is one of our principal instruments to reform the national health system. The decentralizion process is conceived as a planned and ordered transfer of the political, administrative and technical authonty from the central organisms to fte SILAIS, along with the responsibility for the actions that stem from this authority. To support this process, we are strengthening SlLAIS planning capacities as wel as their analytic, programmatic and operational capbilities. As part of the decentralizaion process we are strengthening popular participation in the management of health services, through a process of negotiation, coordinaton and consensus building. Communities, individuals and health sector personl are being encouraged to take greater responsibility for the conduct, progamming and management of services and fcilitiea In this context, the State retains its responsibility to chamel the necessay basic resources, to protect institutional property, and to improve servce quality and the access of vulnerable groups to basic health services. Strengthening the Central Minisry of Heah The central level of the Ministry of Health is responsible to set norms and regulate the health system. To fufill this role, we are strengthening policy development and general sector srategy design capabilities to respond to the principal health problems of the country. We are also reinforcing the roles of deparment directors in establishing performance goals and objectives, and untrducing a new concept of supavision. Hwman Resources Our human resources constitute the principal asset of the health system. The planning, training and administration of human resources in health must respond to the needs of the system, according to prvailing models of service delivery, and facilitate the rationalization of occupational structures and a gradual comection in the spatal distibution of health personnel. Infomwion Systems Information systems are the source of health and management infornation for adequate decision making at all levels of the health system. We will redefine our system to develop appropriate information systems which ensure uniformity and compatibility in the information generated. Medica" Supplies The reorganization of the pharmaceutical supply system is the basis for optimizing resource use and ensunng the wide availability of basic supplies. We plan to explore new modalities of X\ ,  NICARAGUA ANNEX 2 HEALTH SECrOR REFORM PROJECT Page 5 of 9 5 prmming, purchasing, storage (including inventory management and control), distribution and prescripon, and evaluate the potential for greater private sector participation in some of these processes. Developing the Legal Frmewrrk Developing the legal framework of the sector will help guarantee the sustainability of the health sector modemization. We plan to establish the legal basis of the sector, defining among other things, a Genal Health Law that establishes the responsibility of State and society in the delivery of health svices. Aernadw Sources of fNancng The Ministry of Health is promoting altenative sources of financing. Principal among those under considertion are the sale of services to the Nicaraguan Social Secunty Institute (INSSBI), the introduction of private rooms for hospital patients, and specal arrangements with communities. To complement these new servce provision and financing modalities, the Ministry of Health wil advocate the development of medical insurance packages wnthin the INSSBI that reflect the criteria established in the National Health Policy. IV Pincipal Strategies for Health Polic lIy plementation The Ministry's stragies for health policy implementation include: A) Phimwy Healh Came The Ministry of Health is deepening its Primary Health Care strategy, to correct deficiencies due primarily to the lack of integration among programs - especially at the central level of the ministry - and to inadequate coordination between the primary and secondary levels of service provision. The main challenge facing the Mfinistry in this area is the implementation of an integmted prmary health care model in every SILAIS. This new model will provide the impetus to improve our strtegies of prevention, early detection and control of prncipal health problems, relying on low cost actions and supported by community participation. The Government will promote fmily plannig as an integral element of the pnmary health care model and will increase the capacity of the Ministy of Health to deliver these services and progams. Specifically, it wiU improve the Ministry's capacity for community outreach, information, education and communication services, while making available modern contraceptive methods for birth spacing and to reduce high risk pregnancies. In support of these objectives, we are undertaking the following activities which together constitute a coherent and integraed program of primary health care: * Training, developing technical and managerial capabilities in the SILAIS, and focussing on intgrated services to confront the country's priority health problems; / * Introduction of a system of referral and counter-referal, with the aim of improvin service quality;  NICARAGUA ANNEX 2 HEALTH SECTOR REFORM PROJECT Page 6 of 9 6 * Introduction of information, educadon and communication programs for health, aimed at imprving popular awareness of principal health problems, with emphasis on their prevention and early detcdon; * Strengthening community partcipation so as to obtain popular involvement in the solution of priority health problems; * Providing medical and non-medical supplies according to a inewr basic suppUes list that prioritizes prmary care programs; * . Rehabiliing primary health care infrasucte to facilitate service quahity improvements with the introduction of the integrated model of prmary health care. B) Insdonal Strengthening The Ministry of Health is implementing reforms that will strengthen insttutional capacites at all levels, while reaffirming the normative role of the central structu. To this end, the Ministry's principal efforts are in the following areas: Finance To attain its overching objectives of improvmg local opeatin capacities and the eficency of resource use, the Ministry of Health is deepening the process of budgetary decentralon. This strategy will permit the SILAIS to direcdy execute a growing proportion of their budget twough a gradual process, taking into account needs to increase local capabilites. Tbis process will -delegate not only budgetary authority but also the responsibility for the results obtained. As of July, 1993, the SILAIS are directdy executing 20% of fte allocable budget, and we expect that this amount will reach close to 100% at the end of the decentralion process. In paralld with the budgetary decentalition, the Ministry is defining a more equitable methodology for allocating financial resources to the SILAIS. We wdl establish capitaion models which incorporate population and epideminological varables and which take into account both fiscal and donor resources. Resource allons will be governed by annual management arrangements signed between the central ministry and the SlLAS. The objective of this mechanism is to link the results of SILAS management performance to resource allocation. Results wil be monitored according to a set of muually agreed indicators that will provide the basis for performance-rdated incentives and sanctions. The introduction of a cost accounting system to identify service production costs is anotier prerequste for equtable resource allocations. The Minisay of Health plans to desgn and implement such a system as an integral element to support its decentalition strate. In the context of national budgetary restrictions, the Gvemet of Nicaragua will protect the health sector from budget cuts, especially in the priority area of pdmary health care programs. 7 In the event tat budget cuts become unavoidable, the health sector budget will not be cut, proportionately more than budgets of othr sectors, and these pniority programs will be prtec relative to others.  NICARAGUA ANNEX 2 HEALTH SECTIOR REFORM PROJECT Page 7 of 9 7 In fte sm vein, fte Ministry of Health plans to improve the quality and efficiency of basic health caservice delivery as well as the equty of access to hese sces by seeking altenative sources of financing. In this process, the Ministry wiU maintain its policy of free basic primary health care. The Ministry is contemplatng varous financing altenatives, of which fte most importnt are: i. The sale of services to the INSSBI, which will permit the Ministry of Health to recover a significant share of service delivery costs. Under this arangmt, the Miistry will attend to insured worker and their bencars with difeentiated servi, while preservig eqity in the quality of services delivered. The introducdon of this health financing uaragement wil help establish the basis for a private health insurance madket and srengthen the market for public health insurance. In paallel to these initiatives of the Ministry of Health, the INSSEI is: (i) designing and implementing a system of health insurance through which it wiU purchase services from the Ministry of Health and from the private sector, (ii) designing and implementing a system of women's compensation insurance; and (iii) undertaing the preliminary economic and actuarial studies to evaluate the feaibility of reforming the pension system. ii. The sale of services to patients in private hospital rooms, which will permit tie Ministry of Health to collect revenues based on charges for service delivery. These services will be diffeentiated only in their conditions of patient acmdaons, and will be offered to those persons, oganisms or companies that request them. These new sources of finance wil partially resolve hea facility needs by allowing them to use funds colletcd for pr i eaptng ependitures. Huma Rcources The Ministry of Health plans to develop a Human Resouces Polcy that will indicate those elements most imporant for the planning, development and administration of the human resources of the Ministry. The policy will identify means to raionalize the occupational stucture and spaial distribuion of the health labor force to conrspond to the epidemiological profile, sevice needs and levels of attention to be provided in each territory. As part of this process, the Ministry of Health is daeveping a new adminitrive model which includes such key instruments as: a new stucure of jobs and fiuntons, a salary strucure and a benefits and incentves system. These instruments will be logical, and compatible with both insttutional finacial possibilities and individual levels of development and productivity. The model wil also incorporate systems of evuation and promotion and, importanly, a reguatory Law of Adminisrtdve-Health Careers. In addition, corTecting disequiibria in the composition of the health labor force is one of our priorities. We have taken vaious actions that aim, anong other things, to imprwe the nurse:doctor ratio. A first group of measu consists of the esblishment of new employment relatonsips with medical intens as wel as with general practdonen and specialists who compete for job vacancies accoding to the needs of the system.  IIEI tr ft 1; U, .hr I!I Ru I' 41 pr* ''I siph 1111 44 1  di LI! [[If III I4II 411 0. I. .3 P I   UI liii nIl I"" iifl 31 at II if a 'ct  NICARAGUA ANNEX 2 HEALTH SEC'IDR REFORM PROJECT Page 9 of 9 9 * Rehabilitation of health poss and centers, incorporaing the requiremts of fte new integrted model of prnmary health care; * Rehabilitation of criical areas of hospitals, such as: labor and deivery Ooms, matel_ and child care aras, cntica sevces (emergency, intsve care, and opeag rooms), as well as fee-based private accommodations; * Design of a maintenance system which will guide acvities in this area; and * Elaboraton of a study for the desig of a unibrm mecthodology to detemine the recurrent cost impact of new inestments. In conlusion, uld like to rteat e importance of donor reso s in conttibutng to the infit dee nof the Miny of Health. To promote effective coordin and unified lines of intweention, we are enung tat donor activit support the frumework set out the i Minsts National Hedth Polcy in adtion, donor resour are being consieed as part of the budget of the Ministry of Health to ensure the complementuity of resoe allocation in sffp ofw l priority progams. Tsare the ptncipal areas in which the Ministry of Health is concentating its efforts and for which the Govnment of Niargua hopes to obtain the deive support of the World an/neratina Devlopment Aociation in financing te Nica_g Health Sector 5ach componen of this proect will maki a dirct contbution to achieving the desired results of our ref process and to solving the principal problms cofronting the Ministry of Health: Nicrguan Health Sector M niztion Project Comrponent I: Primary Health Care; Component Il: Instiutional Strengthening of the Ministry; Component III Improving the System of P au Supply; Componet IV-: Rehbilitaion and Maintnce of Infr and Equipment; Component V_-: aAssia to J B. Mr. Preston, the policies prented in this lelter and the actions to be generated in their implementtion, reent perhaps the most important effort that the Goverment of NiCaiagu has n in the health sector. The Go ment, along with the var sectors Of our society, is cmmitted to these policies, and thy rees our bet chance to impr the health condo of the Nicazaguan people. , / r ,/ , Sineredy Yours, 1;',<~~4 ;t'& K - Mart L Paladio a Miister of Health of Fmce  NICARAGUA ANNE 3 HEALTH SECIOR REFORM PROJECT Page 1 of 10 HEALTH SECTOR EXPENDITURES AND FINANCING A. Overview 1. TIn years of civil war ravaged the central govermment's capacity to generate revenue and limited public sending. But despite significant reductions in overl government spending, health care expenditures increased as the governent exanded the existing infrastructre of clinics and health posts to extend coverage from 30 percent of the population to 70 percent. This commitment to the health sector has been maintained as the central govermnent continues to spend 19 percent of public expendituhes on the sector. Table 1 shows the incra in bealth spending durng the period between 1970 and 1991. Public health care spending increased from 0.53 percent of GDP in 1970 to over 7 percent in 1986 and then fell to pre-war levels of 2.7 percent in 1991 before incasing in the last two years. The 1993 health sector budget of US$77 million equivalent accounts for 4.4% of GDP. In per capita terms, health spending rose from just under US$8 in 1970 to over US$65 in 1986 and decreased significanty afwards during the late 1980s. The 1993 public health budget of US$18 per capita is sfill higher than that of any other Cental American countries etcept Costa Rica (US$120). Despite these relatively high spening levels, the health gains have been limited and the quality of care has declined significauly in recent years. In response to the increasing deficiencies in the public system, private spending has increased in the past several years. Nicaguan fmilies spend over 2 percen of total family imcome on health; estmates indicate that private spending has icreased fom 2 percent of GDP in 1980 to about 4 percent in 1992. Table 1 PUBLIC HEALTH CARE SPENDING, 1970-1991 v-=-e e5! _ _ _ _- Public Health Public Hedth Per Capita Pubfic Year GDP Per Capita Expendituis Eexeitums Heolth Expend. (US$, 1988) % GDP (US$ million, (US$, 1988) l~ . 1988)1i 1970 1945 0.53 14.50 7.92 1975 1634 1.16 - 40.75 18.95 1978 1581 0.70 26.67 11.07 1979 1130 1.89 56.38 21.36 1980 1147 3.20 100.20 36.7 1981 1171 5.00 167.45 58.55 1982 1124 5.20 173.01 55.71 1983 1137 4.90 170.48 51.94 1984 1082 4.80 164.12 51.94 1985 1003 6.00 196.79 60.18 1986 921 7.10 221.72 65.39 1987 919 4.80 137.59 39.31 1988 745 7.80 210.36 58.11 1989 700 5.00 131.08 35.00 1990 651 2.78 70.40 18.21 1991 7 661 2.72 67.50 16.9 Sounles: MOH, -Objectives, Strti*es and Priorities in EIenma Resoutces-.  NICARAGUA ANNEX 3 HEALTH SECIOR REFORM PROJECT Page 2 of 10 2. Aflocatlon of ISnancal PRsu . The 1993 MOH budget allocations are shown in figure 1. Low wage levels in the MOH have limited oerall spending on salaries. In 1989, salaries represented only 32 percent of the MOH spending; slight increases in recent years have now aised this to a budgeted 38 percent in 1993. Most of the remaining resources are used to purchase pharmauticals. In the past seveal years, efforts by the MOH have resulted in a sharp decline in expenditures on phamaceuticals and supplies, from nearly 60 percent of the MOH budget in 1989 to roughly 30 percent in 1993. Consumers spend an estimated additional US$5 per person on average on pharmaceuticals in the private sector. Furthermore, improvements in the procurement of pharmaceuticals has reduced the need for the MOH to divert resources from the imvestment and maintenance budget to finance emergency purchases of drugs and supplies. These emergency purchases along with overall budget constaints limited spending on investment and maintenance to under 3 percent of MOH spending during the 1980s. However, as a result of the improvements in the pharmaceutical subsector and more rational spending, in general, the investment and maintenance budget share have increased to about 9 percent and 1 percent, respectively, in the last 2 years. 3. Despite real declines in financial resources to the health sector (see Mible 2), Ministry of Health the distribution of spending between the 1993 Budgetary Allocations prima and hospital levels has remained frly constaX,. Primy health care sening has increased from 22 percent in 1981 to 35 percen in 1992, while 7 allocations to public hospitals have remained nearly consta, rising slightly from 45 percent in the early 1980s to S0 percent in 1992. ::-__ 4. Sources of Revnues. Health care 14S is financed by budgtay allocations from the cental government, social security . -.-.. contibuions and international aid On& S e hwiws ent oranizations. The budgety allocations, 'U 9% which account for approximately 70 percent of the health sectr income, are financed primarily by sales taxes on goods and Trfers incudes, Inter ala, pensins, overtme, services and, on a smaller scale, reven and social securty premkims from income taxes. INSSBI resources cover benefits for approximately 250,000 employees, or 35 percent of the economically activ population. The social security revenues are financed through a tripartite contribution that consists of payroll taxes paid by the worker and the employer and a govenmet subsidy. While the total contribution, including pensions, ranges from 8.5 percent tD 17 percent, depending on the industry and gegrphical location, only 9 percent is budgeted for health care. For health insurance premia, workers contribute 4 percen of salaried income; at the same time, employers are obligated to contnibute an additonal 4 perce of the wkers' salay. In practice, however,  NICARAGUA ANNEX 3 HEALTH SECIOR REFORM PROJECT Page 3 of 10 the MOH is unable to distinguish between INSSBI affiliates and those covered solely by the MOH; furthermore, a lack of information on the cost of providing services and inadequacy of cost-recovery mechanisms currently prevent the MOH from collecting for services provided to INSSBI members. The MOH has started discussions with INSSBI, which is reforning its health care insurance, with a view to purchasing health services for its affiliates from the MOH and the private sector. Teclical assistance would be provided by the project to support these efforts by the MOH and INSSBI. A significant part of the MOH services are financed by extnal sources. While these resources are generally directed toward investments such as hospital rehabilitation and equipment, primary health care programs including vertical programs to combat specific diseases have also been funded by international donors. The 1993 budget includes an estimated US$ 22 million, or 30 percent of the MOH budget, in external aid. Additional revenue is generated through the use of cost-recovery in the hospitals. Hospitals are free to set prices and to maintain any revenue received from the sale of services. As a result, many hospitals generate between 5 and 10 percent of total budgetary allocations from user fees on service such as X-rays and laboratory exams. This effort is significant and represents a major change from the previous Govement where all health care services were free. It is a transition toward the present Government's objective of about 20-30 percent total cost recovery (as a proportion of total MCH budget) that would be achieved once INSSBI's health insurance system is implemented and hospital services are purchased from the MOH. This would be a reasonable target as it would cover services with a significant private good content benefitting non-poor patients. Finally, direct payments are made to private sector physicians and private pharmacies to purchase medicines when the public sector is stocked-out. 5. An important source of financial resources for the health sector is municipal revenues. Although the Nicaraguan government has not yet decentralized the financing of public services, recent legislation that gives municipalities greater autonomy is a first step toward fiscal federalism. Under that legislation, municipal goverments collect revenue generated from user fees on publicly provided services such as water and electricity. Although they remit 70 percent of the income to the central level, the income represents an important source of revenue for the local governments. In addition, the municipal governments collect a variety of other fees that also generate sizable income. In the municipality of Boaco, for example, the central govemment allocation to the municipality amounts to only US$200 per month while the municipality generates approximately US$20,000 monthly through the two rvenue mechanisms cited above. The municipality is free to use the money it raises to finance any activity. Other important sources of resources available to the health sector are in-kind payments. These transelrs come in the form of donations of physical materials such as bricks to consruct a new health post, in the form of donations of manual labor and even financial resources that are provided by organizations ranging from religious orgnizations to non-goverment organizations. The proximity of these revenue sources to the users dramatically increascs the effectiveness of the spending as the expenditure directly corresponds to local needs. B. Project Economic Benefits 6. The Nicaraguan health system consumes a large number of financial resources, given the size of the population and the level of care provided. At nearly 4.4 percent of GDP,  NICARAGUA ANNEX 3 HEALTH SECTOR REFORM PROJECT Page 4 of 10 Nicaragua is the second largest spender on health in Centrl America behind Costa Rica (8.4 percent). Health expenditures reached over US$65 per person during mid 1980s, but the impact of these expenditures has been impaired by a number of inefficiencies in the health sector, such as a high unit cost of health services resulting from an inadequate PHC model and other inefficiencies in the system such as poor purchasing and distribution of pharmaceuticals. Many of these issues would be addressed by the proposed project. 7. Although it is difficult to quantify the impact of the investment due to the long-term effects, the following section attempts to quantify the economic benefits that would accrue as a result of the project interventions. The economic benefits can be classified into those that result from changes to the current model and will produce savings in the unit cost of producing health and those that increase the revenue generating capacity of the MOH and will, therefore, introduce new income to the MOH budget. Specifically, the benefits can be broken-down in to the following categories: (i) unprovements in the pharmaceutical procurement, distribution and prescribing practices; (ii) reductions in the per unit cost of providing primary health care services; and (iii) improved maintenance and rehabilitation of medical equip,ment that would defer capital investments, reduce operating costs, produce more predictable output levels, lower unit costs and increase public satisfaction. On the income side, the project would support measure to increase MOH revenues, these include, inter alia, increased cost-recovery at the secondary and teriary level and full cost pricing of services provided to INSSBI affiliates. Although more difficult to quantify, additional benefits would be realized as a result of decentralization. These benefits would likely manifst in the form of improvements in the allocative efficiency of the health sector as SILAIS directors are given the autonomy and'the financial resources to allocate their resources according to the needs expressed at the local level. 8. Economic Benefits of Improvemepts in the Pharmaceutical Subsector. The proposed project would address the major shoricomings in the procurement, distribution and management of pharmaceuticals and supplies in the MOH system. The MOH and a team of experts in the pharmaceutical sector have estimated that roughly 70 percent of every dollar spent on pharmaceuticals is wasted due to the mnmerous problems in the system. Figure 1 shows how these losses are allocated among the varous prblem areas. 9. The project will use these figures as baseline data in order to evaluate the progress of the project during implementation. The project would help reduce the cost of procuring drugs and supplies and to increase the effectiveness, in terms of health status, of each dollar spent on pharmaceuticals. The project would result in the following: * 50% reduction in the fequency of stockouts * 75% reduction in the average duration of stockouts * 10% reduction in unit costs paid for pharmaceuticals and supplies * 75 % reduction in losses due to product expiration and deterioration in storage * 15% reduction in the operadng costs of the CIPS * 20% reduction in inappropriate use, on both the demand and supply sides 10. These estimates have been developed based on successfil experiences from the reform of pharmaceutical logistcs systems in other developing counties. Assuming various degrees  NICARAGUA ANNEX 3 HEALTH SECrOR REFORM PROJECT Page S of 10 of success in attaining these results, it is possible to Lo and Inefftlloney In Drug Supply and Procurement estimate the economic (Sh of Each US dollar spent Lost to Ineffclency) benefits that would accrue to the MOH as a result of the proposed project investment. The following table presents . 7% / . the annual and cumulative . . savings that would accrue, assuming a 30 percent, 50 percent or 80 percent project * success rate. The trck -_. record of reforms already imnplemented by the MOH | aeas. -oand INSSBI in 1993 and the ounry' coai._ determination of these . _ institutcal cuionsent a o%/ _ *. * aaement t implementato futnher reform point to a potentially high success - rate. However, given possible disruptions or delays in Z project implementation linked to the country's historically delicate economic and political situation, a 50 percent implementation _____________________ success rate appears reasonable. Table 2 ESTIMATED SAVINGS RESULTING FROM SELECTED PROJECT INTERVENTIONS (US$) PlftAnmalS saving (US,) ll ( saccording to success of pwojea imetheon Area of Economic Loss LoDssPr US dollar 30% 50% 80% Spent Expiration and Loss 0.18 445,500 742,500 1,188,000 High Unit Costs 0.10 330,000 550,000 880,000 High Administrative Costs 0.02 38,500 97,500 156,000 inappropriawe Use and 0.35 231,000 385,000 616,000 Prescribing Total Annual Saving 1,064,500 1,775,000 2,840,000 Somme: Management Sciences for Health (MSH) and IDA estinates II. Even using conservtive estimates and a range of success rates in achieving these targets, the project would produce signficant economic returns for the health sector.  NICARAGUA ANNEX 3 HEALTH SECrOR REFORM PROJECT Page 6 of 10 Assuming 30 percent, 50 percent or 80 percent success in reaching the desired results, savings of US$1.1 million, US$1.8 million or US$2.8 million, respectively, would be produced. As a percentage of the MOH's yearly expenditure on pharmaceuticals these benefits range from just under 10 percent to over 25 percent. These additional resources would allow the MOH to expand services to at risk groups that do not currently have access and to improve the quality and convenience of care for those that do. Additional savings have already been realized in the area of selection. As a result of reductions and modifications to the MOH's essential drugs list during project preparation, between US$1 million and US$2 million would be saved annually. 12. Economic Benefits of the Integrated Primary Health Care Model. The lack of unit and program costs at the primary level makes it difficult to derive quantitative estimates of cost savings resulting from the integration of services and the increased efficiency in the PHC model. The project would support the integration of vertical programs which deliver, in separate rooms and on separate occasions, immunizations, growth monitoring, nutrition education and pre- and post-natal care and family planning. Moreover, the project would strengthen the capacity of the primary level to resolve basic health problems, thereby eliminating the need to pass to the next, more costly, level of care, and aim to improve financial resource allocation by emphasizing the most cost-effective interventions.l' 13. The integration of primary health care programs would reduce the unit cost of providing services, such as immuniztions and family planning, as the amount of staff time required would be significantly reduced. In addition, the patients would realize significant savings as the opportunity cost of seeking care would be reduced. Patients would no longer need to return 5 or 6 times to receive various tpes of care because most preventive services would be delivered at the same time. This would also have a positive impact on the cost of delivering services at the secondary and tertiary levels. For example, a Manolo Morales study found that 70 percent of emergency room patients had no medical need to bypass the PHC facility. The cost of treatment at the emergency room is significantly higher than the cost of treatment at the primary level. The project would improve the ability of the pimary level to resolve these problems and, therefore, reduce the financial burden on the secondary and tertiary level facilities. 14. These interventions would have important financial implications for the health care system. The magnitude of the savings can be approximated by assuming that the sum of all project interventions related to the introduction of an integrated PHC model would result in a 5 to 10 percent reduction in the unit cost of delivering primary health care services. Given that the MOH allocated roughly US$18 million to primary care in 1992, a conservative 5 to 10 percent savings would produce savings of between US$900,000 and US$1.8 million. 15. Maintenance. Field surveys completed in 1991 indicate that as much as 70 percent of the equipment in health facilities has not been properly maintained and over 40 percent of 1I Evidence from El Salvador indicates that the cost of hospital rehydration is US$47 per unit, whereas oral rehydation, which.is equally or more effective, costs only US$0.82 per unit. Fmily Health Services Prolect Paper. USAID/El Salvador. 1990.  NICARAGUA ANNEX 3 HEALTH SECIOR REFORM PROJECr Page 7 of 10 many types of equipment do not function. The paucity of data on the unit cost and the operatng costs of using various maches makes it difficult to quantify the returns to investing in maintenance and new invesments to improve efficiency in the health sector. Nonetheless, the following section sketbhes out the various costs associated with improper maintenance and investment. 16. Inadequate maintenance leads to the deterioration of the health sector inrastuce, which in rn affects the production of health services and consumers. On the supply side, the costs of the neglect in maintenance are: (i) additional variable operating costs caused by the use of inefficient methods of provision. As an example, poorly functioning equipment at a health clinic may tequire transportation, by ambulance, to a hospitl where equipment is functioning, but the unit cost is higer than at the clinic (in many cases, the unit cost of the ambulance service could be greater than one year of matece); (ii) higher investment requirements to compensate for the decline in availability of existing capacity and in their life span; and (iii) potentially lost revemnes as facilities are unable to collect user fees on equipment that is not functioning. 17. On the demand side, the deterioration of bealth infrstructure results in subsial costs, both economic and social, to the users of the services. The costs of poor maintenance to the users of the public system can have the form -uf higher costs as inadequate facilities forces consumers to look elsewhere for care, thus incring additional transportation costs as well as the opportnity cost of seeldkg care elsewhere. Additionally, consumers may defer treatment or preventive diagnosis thereby producing greater expenses for the public health care system at a later stage as the condition must be treated curatively; or, consumers may suffer discomfort and il-health as a result of the unavailability of appropriate equipment. The poor suffer the most from inadequate maintenance in public facilities as they often lack rsources to compenate for unreliable services. That is, the poor are less likely to have the economic resources to use private facilities or to have access to trnsportation to access the next higher level of the health care system. 18. The benefits of good mainenance accrue directy to the health facilides concerned in terms of deferred capital invtments, reduced operating costs, more predictable output levels, lower unit costs and greater public satisfaction. Proper maintenance and new imvestments are particularly relevant under the present situation of severe budget constraius on the availability of financial resources. The project would also help increase the MOH project evaluation capacity, which would help avoid: (i) problems in the selection of equipment because of lack of adequate consideration of resource constraints such as foreign exchange, skills and facilities to service and repair and (ii) reliance on expensive technology that is not cost-effective. 19. Potential User Fee Rel ues from Cost Recovery. IDA macroeconomic projections for Nicaragua predict a period of slow growth, a high extemal debt burden and restricted spending on high recurrent cost sectors, such as health. Without compensating actions, these fictors could reduce or limit the budgetary allocations available to the ministry of health and seriously affect the health of the population. The financing problems are exacerbated by the fact that external aid, which currently accounts for nearly 30 percent of public health spending, could st to be reduced soon.  NICARAGUA ANNEX 3 HEALTH SECIOR REFORM PROJECT Page 8 of 10 20. Tb redress this issue, the MOP is seeking to reduce inefficiencies in the current system (notably by increasing the efficiency of pharmaceutical supply and introducing a more cost-effective primary health care model) and to search for altenative means of generating revenue or reducing costs. The need to augment financial resources has led some hospital administrators to instiute an unofficial policy of user fees in some hospitals. These revenues serve as important source of income for many of the hospitals in Nicaragua. In a sample of four hospials analyzed for which data is available, user fees revenues accounted for between 2 percent and 5 percent of the hospital's total annual budget.1Y Data collected indicate that these revenues are often used, inter alia, to finance incentive payments for doctors and mues that service private rooms in hospitals, to purchase pharmaceuticals which are unavalable fmnn cental supply or to make repatrs to the facilities and equipment. Table 3 POTENTIAL REVENUE TO BE GAINED FROM COST RECOVERY (US$) fetage of Patients PaWiWg Fees (according to success of project iaplemention) Type of Sevice 30% 50% 80% ,"OW.Jiatn (US$) Emorgmq Consultation (US$2) 490,454.40 817,424.00 1,307,878.40 Chaeoel Conuwltaon (US$ 1.00) 46,577.10 77,628.50 124,205.60 SpcaUtCnYdtation (S 1.70) 219,119.51 365,199.18 584,318.69 Serology MS$1.79) 10,560.98 17,601.64 28,162.62 Microbiology (US$1.70) 14,467.87 24,113.11 38,580.98 X-Rays (US$1.70) 143,537.21 239,228.69 382,765.90 lgCt7uL ~~~~~~~924,717.07 1,541,195.12 2,465,912.00 % ~lTOW Hospital EVpen~tuni 3.00 5.00 8.00 Soues: Mission estiae. Note: Exap rate: 6.1 Cordobas per US$ 21. In order to ejtahliqh a policy of charging for health services including hospitalization, outpatient visits, lab exams, X-rays and some pharmaceutical products, the MOH has proposed a number of rforms. These reforms would be supported under the proposed project and though comlementary assistance from USAID and other active donors. The proposed user fees, which would be implemented at the secondary and ertiary level facilities ould represent a significant source of al ernative finance for the MOH. Using a fee schedle prposed by the MOH in early'1993, the following table presents rough estimates of the potial revees that could be derived through moderate cost recovery. ' These estimates are based on exrpolatons from a 3 month period. Revnue was generated from user fes on servces ragig from iat treament, priced between US$2 and US$20, to laboratory exams priced betwen US$1 and US$20. Alugh the study did not explicidy discuss the possibilit that us es were too high for some patient, thus liming acoess to services, tere does not appear to be evidene to that effect  NICARAGUA ANNEX 3 HEALTH SECIUR REFORM PROJECT Page 9 of 10 22. Authorities in the Nicaragan health sector estimate that between 40 percent and 50 percent of the population bas the economic capacity to pay fees for health services. The table shows sensitivity analysis for charges on either 30 percent, 50 percent or 80 percent of the patient population. Table 3 shows the range of options for the number of patients that are able to pay the set fees and the revenue that would be generated under each sceniario. Even with minor charges for services such as X-rays (US$1.70) and general consultation (US$1.00), Nicaraguan hospitals would be able to generate a significant amount of revenue that could be used to improve the quality of service. Using seven basic service categories, including, inter alia, lab exams, X-rays, and inpatient and outpatient visits, hospitals wowld generate between 3 percent and 8 percent of total MOH budgetary allocations. Actual experience in hospital cost recovery shows that these numbers are realistic. A comparison of the projected revenues based on the above methodoaliqy with the actual revenue for four hospitals currently collecting user fees shows that tNo of the hospitals are currently colk.-'ng a greater level of revenue than projected above while the other surveyed two report actual revenues of half the projected income. 23. Development of Payment M Between INSSBI and MOH and Degn of Workmen's C1tn I Race. Uinder the current health care system, it is impossible to distinguish between INSSBI affiliates and the beneficiaries of the public system, and, in addition, there is no distinction in the type or quality of service that the two groups receive. The lack of mechanisms to purchase health care services from third party providers, primarily the MOH, is a significant drain on public resources as the app ly 300,000 beneficiaries of the health insurance system are able to use the public system at no cost. The project would provide technical assistance to support the design and development of two key areas: (i) the design of payment mechanisms, whereby INSSBI reimbures the MOH for services provided to INSSBI members; and (ii) the design of workman's compensation insurnce. lTble 4 POTlENTIAL REVENUE FROM INSSBI FOR THE PURCHASE OF MOH SERVCES (US$) Type doce Estiatd Transfer Outpatient Care 1,084,208 InatientCare 4,761,863 Ailiai Services (Lab m, X-rys, 18,694,436 Ipharmaceicals and supplies, ec) TOTAL 24,540,507 24. Table 4 provides INSSBI estimates of the resources that would be trn d from INSSBI to MOH using the new payment mechanisms. It asumes that, duing the project life, INSSBI would purchase most of its health semces from the MOH gin tie current limited supply from the pnvate sector. Revenues from INSSBI would exceed US$24 million and would, terefore, constitute an important revenue source for the MOH. The project would help develop mechanisms to calcula the value of the services provided and to ensure  NICARAGUA ANNEX 3 HEALTH SECIOR REFORM PROJECT Page 10 of 10 collection, and would thus make an important contribution to the financial stability of the MOH. 25. With regard to workmends compensation insnce, the project would provide technical assistance to implement a plan to protect Nicaraguas workers against work-related accidents. This would be preventive in nature by mitigating risk in the work place, and also curative by providing mechanisms to ensure treatment once the injury occurs. Although it is not possible to quantify the monetary value of this investment, it is clear that the development of an explicit policy and insurance program would redistribute the financial burden of these risks. The MOH, which currently covers the injuries and accidents that occur in the work place, would be relieved of the financial obligation to cover work-related accidents and injuries as employers would begin to bear a greater share of the financial burden. This would free-up valuable MOH resources that could be used to improve MOH bealth care services. Tible 5 ALLOCATION OF PROJECT ECONOMIC BENEFITS TO THE EXTENSION OF MOH HEALTH SERVICES Alative Scenaios to Extend Health Coverage Low (30%) Medium (50%) High (80%) Additional Papulation Covered 270,000 450,000 720,000 Cost of Extnding Coveae US$4.9 milion US$13.0 million Total Expected Project Benefits US$9.9 million US$16.5 million US$26.5 million Asumptions: Current cover is 70% of the population or 3 million. brget Population Coverage: 90% or 3,900,000 Cost of Health Care: US$18 per capita 26. The proposed project would result in overall improvements in efficiency and quality in the delivery of health care services. Many of the proposed project interventions would also produce economic benefits which would free up additional resources that the MOH could use to expand coverage and improve quality. Table 5 reflects the cost of using these additional remsources to extend services to the estimated 30 percent of the population currently without access to health services. Assuming that the additonal resources could be used to provide services to the 900,000 people without coverage after the last year of the project, the followig table demonstrates that the expected economic benefits derived from the project surpass fte revenues reuired to finance the expansion. Extending coverage to 30 percent of the taget population of 900,000 would cost the MOH an estmated additional US$4.9 million, while under the same conservative 30 percent estimate, the total expected economic benefits from the project could reach US$9.9 million, leaving an estimated US$5.0 million to finance imp in the quality of services provided by the MOH. Further expanding coverage to 50 percent and later 90 percent of the target population would cost the MOH US$8.1 million and US$13.0 million, ewectively; both of these would be amply covered by the epWcted economic benefits fom the ptoject.  | National Bealtnister of 1 31111 Poliy & Institutio Al Legal Development Infor2ation Systems Social Participation I External Cooperation Scetary Generar Coi{mumic Pubtoison & |t~ Health P .S1AIS & .ie ste or t m ice-iknmster for1 D e e t eal ini5te er hc c _ _ D inuistration &vestm nt Surveillancehac SAnizatio ot a e ce I CoSILAIS Hospitalsti Na~~~~~~~~~~~~~~~~- ;;tioa Bed I 4; t Spply Fiace baaea eore | unsc | DevlealB teh n o t rlpmegt Ca | IPS Bulget | lnestsett. | iseae Prevention | evices |SupptlCies D evelo aten Rsach Supply Accoucting |Maintenance Treasury SILAIS & Hospitals  NICARAGUA ANNEX S HEALTH SECIOR REFORM PROJECT Page 1 of 12 TERMS OF REFERENCE NSTITUTIONAL STRENGTHENING TECHNICAL ASSISTANCE A. Deenthalizaton of Budget 1. The consultants would make a proposal to modify, adjust or substitute mechanisms and standards for sectoral budget planning, perfonnance, output and evaluation. This proposal would: (a) analyze the accounting and budget performance system, including: * its effects on efficient use of resources, on quantitative and qualitative aspects of health care, and on cost management; * degree of compliance with defined objectives and goals; * basis used for calculation; * criteria used in budget plannmg and resource allocation; * . * data support systems; * identification of problem areas and their respective elements; * monitoring, control and evaluation mechwniSmS uscd; and * relationship to asset accounting systems; (b) assess current legal standards and restrictions (including Government, MOF and MOH internal standards and restrictions); (c) review standards and procedures related to budget performance, and propose, if necessary, changes to such standards or incorporation of new stndards; (d) design a system to monitor the management and transer of intra-sectoral financial resources, describing the flow of resources in the sector: * from the MOF to the MOH and/or to the SILAIS; * from MOH headquarters to the SILAIS; * from the SILA1S to prmary and secondary health care institutions; and * * from the MOH to laboratories with which it has agreements; (e) design financial resource control mechanisms for the various budget headings, subheadings and line items: staff and non-staff services, inputs, investment and maintenance, transfers and others; (f) design simple monitoring indicators: * on process: how to monitor progress in the financial decentralization process; * on results: control indicators and budget evaluation, such as debt indicators, * . . indicators on tmnfer between line items, correlation of expenditures between line items, etc;  NICARAGUA ANNEX 5 HEALTH SECIOR REFORM PROJECT Page 2 of 12 (g) help prepare instruments and tools for resource transfers, i.e., operational manuals and forms rquired for pla , performance, output and evaluation. These instruments would be an input, consistent with the MIS to be designed under the project; (h) determine quantity and qualifications of human resources and equipment required for implementing the system, particularly with regard to SILAIS departments or offices which will be in charge of local-level budget operations as required by headquartrs; (i) define training program, indicating content, dates, costs, and target population; and O) produce an implementation schedule as well as a calculation of investment and operating costs required to undertake the above reforms. 2. The consultants would provide a detailed explanation of methodology, principles and criteria used in defining proposed lines of action. Three person-months of international consultants and 20 person-months of local consultants would be required. The assignment would start in March 1994, would last about seven months, and would cost about US$60,000. B. hnprovement of Resource Allocation System 3. The consultants would help implement an improved resource allocation system that would be designed in the following two stages: 4. Resource Allocation System Based on Corrected Per Capita Criteria. In this first stage, the consultants would help design a corrected per capita resource allocation system. This would include: (a) definition of corrected per capita based on the budget; (b) definition of a preliminary population base for the per capita system; (c) development of criteria for payments to Managtua hospitals directly controlled by MOH; and (d) establishment of criteria for the allocation of resources from the SILAIS to health facilities. 5. Resource Allocaton System Based on Per Capia Cost of Service Delivery. In this second stage, a comprehensive study on the design and implementation of the allocation of resources system would be undertaken, including the following aspects: (a) Des4:ription of agents participating in allocation mechanism: (i) technical definition of the agents involved in the resource allocation mechanism (priiaiy, secondary and tertiary levels);  NICARAG3UA ANNEX 5 HEALTH SECITOR REFORM PROJECT Page 3 of 12 (ii) mechanism through which an agent can join the resource allocation mechanism (such as private agents with whom agreements may be reached); and (iii) survey of the health agencies that are part of the SILAIS care network, characterized with minimum indicators describing their capability to provide services; (b) Per capita calculation. To design the per capita calculation, the consultants would: (i) establish a comprehensive basket of curative, preventive and rehabilitation benefits corresponding to the primary care level and compatible with the Nicaraguan health care model. An alternative differentiating between primary and secondary health care in the payment mechanism would be evaluated. The possibility of adopting the per capita mechanism for the transr of resources from the SFLAIS to health facilities would be assessed; (ii) value the basket defined above to cover the costs of an average provider of the first and second care levels; (iii) evaluate the alternative of per capita differentiation through corrective fctors for populations in distinct bio-medical risk situations, poverty levels, or eventual differences of urban-nrral costs; (iv) carry out simulations of the financial impact on the MOH's budget to determine the effect of setting the per capita at different levels; (v) ensure that the methodology for the per capita development would be flexible to allow future adjustments, such as the exclusion or inclusion of benefits or health progmas at the per capita level or the readjustment of the per capita due to variations in the cost of health services; (vi) define the intervals at which resources should be transferred from the central level to the decentralized units. Special attention would be placed on the coordination between the transfer of resources and the transfer of resources from the primary level agents to other health system levels; (vii) design a per capita mechanism for the transition period solely on the basis of the budget,11 but incorporating the corrective factors mentioned in point (iii) above; and (viii) propose a timetable for the redistribution of inter-SILAIS resources as a result of the implementation of the assignment system. (c) Definition of the population base. The consultants would: ./ The most simple per capita calculation is the result of dividing the MOH budget by the population it has to asist. Tbis simple wcise can be complemented wi the inclusion of corrective factrs. However, in spite of the awimnfirItv nf thA xanie nneinational- administrtie and nolitical problems are imporlant since they would  NICARAGUA ANNEX 5 HEALTH SECIOR REFORM PROJECT Page 4 of 12 (i) help deemine the approximate population assisted by each of the health units as well as the main demographic and epidemiological characistics of their users; to that effect, they would use the best available iformation such as existng local census undertaken by the SILAIS or other information based on an updating of the national census; (ii) on the basis of the information obtained through the above demographic study, propose, if necsary, the redefinition of the number of health facilities under SILAIS administration or, if justified, a change in the geographical coverage of SILAIS; (iii) define the concept of beneficiary to differentiate the MOH beneficiary population from that of INSSBI; and (iv) indicate the mechanism for identifying beneficiaries within a given health facility or area and determine the degree of affiliation freedom of the beneficiary; (d) T_hnsaction between the SILAIS and fr ystem. With respect to payment of benefits to be made among the different agents within the system, the consultants would: (i) develop a rate or health benefit tariff schedule to allow the standardiztion of procedures and benefits which serve as the basis for determ g their vWalue. This schedule would be compatible with the health care model developed; and (ii) coordinate the referral system between SILAIS with the per capita system, especially with reference to: [a] defining the suitability of a system of payments between SILAIS on the basis of the development of an enllment system; [bl propose an easily implementable administrative procedure for payment of benefits between SILAIS, both for cross-referrals of the population and benefit transactions; and lcl Evaluate whether the alternative of free prices is feasible in view of [i] market imperfections, in particular monopolistic or oligopolistic situations that imply the under-provision of services and [ii] uneven redistribution of resources (from or to the centers of greater complexity); (e) IHealth and administration indicators and incentives. The consultants would: (i) identify health adminisation and administrative-financial indicators for monitoring and control of SILAIS administration; (ii) identify process indicators, health data and/or impact that permit the evaluation of health administration of the SILAIS and bealth establishments; and (iii) design an incentive system for financial assignment which uses perfomance monitoring indicators;  NICARAGUA ANNEX 5 HEALTH SECIOR REFORM PROJECT PAge 5 of 12 (f) &WmmIaiAgANt= poi. The consultants would analyze and propose policy options to iegulate the managment of surpluses resulting from the operation of the different health providing organaons (reinvestment of surpluses, salary ncaes, etc.) (g) SndAd 1" intm s The consultants would develop standard legal instrments to be used as the basis for the tsactions or resource transfers between the different providers contemplated in the assignment model, in particular in the later stage of incorporation of private prvders; (h) Le reform r rmoents. The consultants would determine all the legal reforms that need to be undertaken to implement the assignment of resources mchanism, identifying major and minor legal modifications; (i) Timtable for implementation of mechanism for allocating financial resources. The consultants would propose a timetable for the implementation of the mechanism for assigmng financial resources that takes into account legal and organizational aspects as well as internal coherence of the model based on the modernization criteria; j) Adjsnent to MOH organizational stucture. The consultants would: (i) review the MOH's organizadon in its participation as partner in the new decentralized scheme and modalities in its role as purchaser of services and evaluator of providers; (ii) establish the mechanisms and administrative structures required by the MOH to determine need and demand for services that would be provided by the different service providers; (iO) detemine the legal, administative and institutional factors that could limit the implementaton of the allocation mechanism; and (iv) identify the mechanisms and negotiating documents and definition of SILAIS budgets under the new financing scheme; (k) 3kinig. The consulta would: (i) help prepare operational manuals sunmanig operation of the assignment mechanism to be managed by MOH staff at the different levels: central, SILAIS and health establishments; and (ii) tmain the top pmfessional staff and other personnel involved in the adminitaion of the new system of assignment of rmsources at the MOH central level and at the SILAIS headquarters.  NICARAGUA ANNEX S HEALTH SECrOR REFORM PROJECT Page 6 of 12 Activities and Requirements for Impwvement of Resource Allocation System Consultant Requiremets1' stw ~ Acdvtivies Duato SW-UP Lc | ain Cost __________ ________________(monfth) Month LOca Intrntina Fi2st Stas - Aooounti - redefinition 4 1 14 2 41 Stlnatheline af budA decetralSionBasic MOmitotf 3 1 6 1 19 Second Stop - Defie3 1 6 1.5 24 Corrected per capita on budgtay basis capita basis Define base 6 1 18 0.5 32 Criteria br payment to 1 1 1 0.5 6.5 Managua hoWitals Criteria for assignment 1 I 1 0.5 6.5 *om SLAIS to facilities Third Stage - Comprehensive stdy 8 8 48 4 112 Per capita cost of service I4l_i6on 4 12 1 28 deliwvy _ Notes: 1/ Conswltant cost have been established at US$1,500/mo. for local consultans and US$10,000/mo. for intnational consultas a' eCosts refered to design and equipment for the inAnnation sstem should be caed to the dcentalization cmpon, inkrmatics subcompone. C Cost Accountn System 6. The consultants would: (a) review local or international expeence in cost accounting in health and recommend which methodology (including possible modification) would be best adapted to the needs of Nicaragua; (b) define the services to be produced and those that will be sold to the public or private sectors; provide codes, names, and technical definitions, tking into consideration the need to break down services (sufficiendy but not excessively as it would complicate the implementtion f the system); (c) design a costing methodology hat would be tansnt and easily replcable in hospitals; (d) develop a database to determine total costs of each service defined above by adding costs of varioUs inputs or intermediate services used in producing a given service; (e) develop a methodology to price services in function of or independently from the cost of services and price all services; (f) apply the methodology to a representative sample of hospitals;  NICARAGUA ANNEX 5 HEALTH SECIOR REFORM PROJECr Page 7 of 12 (g) check methodology by comparing expected total revenues of each sample hospital to its actual total operating costs; and (h) design a system to monitor hospital costs and prepare operational manuals; the system should provide the elements for an efficient and periodical adjustment of prices of services. 7. The study would rquire three tnonths of international consultants and 54 months of local consultants. It is expected to start in March 1994 and be completed in December 1994. It would cost about US$150,000. A Service Provision Arngements with SIAIS 8. Service provision arrangements would be used as a tool to reflect the commitment between the MOH and the SILAIS on the type and volume of services to be rendered and the corresponding financial, human, and capital resources required to provide those services. Performance, which would be linked with allocation of tesources, would be monitored through mutually agreed upon annual aigets using a set of indicators being developed under the project. A simplified system would be implemented since start-up. During the first year, the project would provide technical assistance to help review and improve the design and implementation of service pwvision arrangements. 9. The consultants would: (a) review the complete system of indicators used for monitoring SILAIS perf-ormance and select 5-10 indicators that could be added to the ones already used in the current simplified version of servie provision arrangements, takdng into consideration need for indicators to be: (i) easily measurable in function of information systems existing or to be developed; (ii) fully acceptable as objective indicators of performance by the central MOH office and by SILAIS Directors; and (iii) designed in a well-balanced package to avoid adverse results (e.g., production of certain services beyond what is necessary for a given epidemiological profile, and under-production of other serAvces as a result of the influence of poorly designed indicators); (b) review design of service provision arrangement and propose methodology for preparation and negotiation of service provision arrangements; (c) assess needs for technical assistance that the SILAIS may need to improve preparation and implementation of service provision arrangements; (d) design a system to monitor indicators, specifying information to be measured periodically and source of data; assess to what extent the system can be computerized, estimte software and hardware needs (if applicable), and ensure complementarity or integration with the rest of the MIS; (e) design an operational manual defining the modalities, responsibilities, and deadlines for presenting, tansmitg, and verifying monitoring indicators (e.g., for cene of vaccination coage, the mamual would define vaccination for wnich  NICARAGUA ANNEX 5. HEALTH SECTOR REFORM PROJECT Page 8 of 12 disease, age of children vaccinated, number of times vaccinated, responsibility for data collection at the SILAIS level, verification at the central level, frequency of presentation of indicators, deadlines, feedback to SILAIS on quality of data presented, etc.); (f) propose an implementation schedule for the implementation of the revised system of service provision arrangements and evaluate the desirability of introducing the new system through a pilot program in a few SILAIS; and (g) estimate detailed cost of implementation. 10. The assignment would require one and a half months of international consultants and 15 months of local consultants. It is expected to start in March 1994 and be completed in September 1994. It would cost about US$80,000. E. Cost Recovery 11. Due to the health sector's current budget restrictions, the MOH has started to introduce cost recovery at the secondary level. In principle, each SILAIS should responsibly review possible ideas and projects which, if imaginatively administered, may be used to increase the institutions' recovery of internal resources without jeopardizing the public health system's beneficiaries. As a result, the financial status of the SILAIS and facilities that promote this type of policy would improve, together with the quality of care offered to their beneficiaries. If not properly designed and implemented, however, this could anslate into a deterioration in the volume and quality of care provided to beneficiaries. Thus, there is a need to review the cost recovery system. 12. To that effect, while providing detailed explanation of principles, criteria and methodology used in defining proposed lines of action, the study would cover the following elements: (a) a review of current cost recovery schemes and identify and determine resources, organization and procedures involved, including cost and billing systewis, (b) an identification of legal, structural and procedural changes required to implement the proposed lines of action; and (c) establishment of cost recovery targets in function of affordability (i.e., equity consideration of patients' income level), actual cost of services delivered, and budgetary considerations; (d) an estimate of investment and operadng costs for implementation of proposed design. F. Human Resources 13. Inventory and Analysis of Human Resources. This inventory is essential for the MOH to take decisions regarding decentralization of personnel management. The consultans would help comnlete and exoand the inventory of human resources to cover all MOH  NICARAGUA ANNEX 5 'HEALTH SECIOR REFORM PROJECT Page 9 of 12 the assistance of PAHO and GTZ in the ree Managua SILAIS covering a total of approximately 7,151 workers. Tb that effect, inquirers and data collectors would be contracted, trained, and supervised by the SILAIS human resources administrators. 14. The 16 rmaining SILAIS would be provided with the minimum computing equipment to undertae the inventory and analyze the data which would build up the required capacity to implement human resources administration in a decentralized form. The human resources information sstem would then be linked to the MIS of the MOH. The survey is expected to last two months and would cost about US$100,000. 15. PlanIng and Training of Hwman Resources. The consultants would: (a) analyze and simplify the present structure of positions and prepare personnel and operational manuals that would be used by the SILAIS to review and adjust the mix and level of human resources required by each type of facility (health post, medical post, health center, and hospital); (b) analyze the present structure of salaries, benefits, and incentives and propose an improved strucure which could be feasibly implemented under the current budgetay system of the MOH; (c) propose a simple evaluation and promotion system geared toward improving the productivity of MOH's human resources; define clear promotion criteria based on merit and design the appropriate instruments to implement the promotion system; (d) propose simplifications in the overall human resources management; (e) undertake a study of the labor market in Nicaragua that would prepare the basis of medium- and long-term reforms; the study would cover notably: (i) comparison of salaries and incentives between the public and private sectors for some key categories (doctors, nurses, auxiliary nurses, health technicians); (ii) review of areas with critical shortage of staff; (iii) survey of nurses having left the MOH to analyze reasons for their leaving government service, and assess changes required to make MOH work more attractive for nurses; and (iv) training requirements; (f) design a methodology for human resources planning that would provide the necessary instruments to determine the quantity and quality of human resources required by the MOH in the short-, medium-, and long-term; (g). analyze the legal framework governing human resources administration and propose the legal changes and modifications required to implement a new model of decentralized human resources management, including hiring and firing by the SILAiS; and  NICARAGUA ANNEX 5 HEALTH SECTIOR REFORM PROJECr Page 10 of 12 (h) propose ways to regulate the teaching process and accredit teaching institutions so as to improve the quality of graduates and adapt their skills to the future requirements of the Nicaraguan health system. 16. The above technical assistance would require t bout 25 person-months of international consultants and 75 months of local consultants. The implementation would start in March 1994 and would be completed in March 1995. The estimated cost is US$300,000. H. Management Information Systm 17. The consultants would help develop the MOH's data systems, focusing on solving both the MOH's basic administrative and operational problems and issues related to financial, administrative (including client services) and health service provision management in the SILAIS. To develop some of these data system components, the SILAIS may be provided with computer assistance, if necessary, to complete computer support by USAID. 18. The MIS would collect and deliver data to and from the MOH, the SILAIS, CIPS, and regional governments. To the extent possible, the sysm would be interconnected to allow communication among them. 19. The consultans would: (a) identify and quantify the resources, organization, methodology, and procedures ivlvng in the existing MIS and undertake a diagnosis of the systems covering: (i) efflciencq of MIS regrding support to top management, resource allocation, improvement in quality of service delivery, and cost-continment; (ii) adequacy of MIS for support of objectives and targets defined by the MOH; (iii) identification of problem areas, monitoring and supervision mechanisms; (b) propose a basic design of an MIS that would include administrative, financial, and epidemiological aspects, to provide central support to the MOH's decentralization process; (c) develop an integrated MIS that covers the flow of aggregated data in the public health system, yet kig into consideration the flexibility requied by various levels. In particular, the MIS should cover the generation of information and its tanmission between: (i) users in the central MOH office (Departments, CIPS, etc.); (ii) the central MOH office and the SILAIS; (iii) the SILAIS and the PHC level; (iv) the SILAIS and hospitals; (v) the SILAIS and municipalities (itms (ii) to (v) to be supported by USAID); (d) evaluate the necessity and feasibility of integrating the MIS between the two levels of health care;  NICARAGUA ANNEX 5 HEALTH SECIOR REFORM PROJECT Page 11 of 12 (e) help the MOH determine equipment needed to support information systems existing in the various departments of the MOH cental office; to detemine these needs, systems should be considered in three areas as follows: (i) admiistraion * reporting to central government * payoll * supplies inventory management * public health system (ii) magement control * accounting * budgeting * health status monitoring * monitoring of service provision arrangements (iii) communicaiions * electronic mail * word processing * spreadsheets * psenations 3 archives management (f) provide a detailed estimate of design and implemtion of identified systems and of their operating costs, covering more specifically: (i) detailed esdmate of investment and operating costs of proposed MIS; (ii) proposal for monitonng and supervision mechanism and cost estimate; (iii) needs in human resources and equipment for implemenaton f MIS; (iv) traming programs necessary to support implementation, including target beneficiaies and cost estimates; and (v) implementaton schedule for the above; (g) test the proposed methodology in one SILAIS to ensure its feasibility. This would require the consultants to: (i) design a methodology that would help detennine in a flexible manner the needs for changes in the current MOH information systms, and would incorporate the human resources and equipment already existing in the MOH in the design of the revised MIS; and (ii) est the methodology in one SILAIS, which would allow to undertake the necsary corffeons before the system is expanded at the national level; (h) propose a eystem to evaluate the functioning of the MIS, including appropriate monitoring ind1.ton; and (i) explain in detail the principles, criteria, and methodology used in the proposal.  NICARAGUA ANNEX S HEALTH SECIOR REFORM PROJECT Page 12 of 12 20. The above technical assistance wold equie two person-months of intetional conslants and 24 months of local cosmlta. It would cost about US$100,000 and would provide the preliminary design of a proposal for an MIS estimats4 to cost about US$800,000 includig software and hardware. The technical assistnce would start in April 1994 and would be completed in September 1994, at which time the proposed design for MIS would be discussed with IDA. Bidding woud then be undertaken.  NICARAGUA ANNEX 6 HEALTH SFCOR REFORM PROJECr Page 1 of 4 RED)EFIED PRIMARY HEALTH CARE MODEL 1. As part of its reform proam, the Government has redefined the method of delivery of a minimum package of essential PHC sernices. Under the redefined model, the MOH would ensure tht: (a) PHC services are managed at the local and not at the central level; (b) preventive care is emphasized; and (c) vertical progams are integrted at the local level to provide services more efficiently to beneficiaies. 2. The PHC atvenions covered by the model and supported by the project would support are described below: (a) Acute B lay ni dons (ARI). The project would promote the strategy of early detection by MOH staff and voluntay health workers, and graduated treatment of acute respiratory infections accordig to MOH norms. Training would be provided to help professional staff and volunteers: (i) recognize the danger signs of severe ARI and decide wben it is necessary to take children to a health center for treatment; and (ii) promote prvention tecbniques in the community. To complement these efforts, oral antbiotics would be provided to help facilities meet the increased demand for tratment expected to come from a better-educated public; (b) D.rbeal Diases The project would support preventi've educational progms, coverig the use of potable water and waste disposal, hand washing, food handling, and general hygiene education. The project would also finance essential drugs and supplies, includig oal rehydration salts (ORS) for children under five years of age who can be expected to have diarnheal episodes requiring rehydration. The SILAIS would receive financing under the present project for the financing of small water and sanitation projects, which would complement FISEs support in that area; (c) Mate=nal and Perinatal Mortality. The project would seek to increase the timely use of both p _nt and postnatal care, to encourage women experiencing high-risk pregnancies to gie birth in hospitals, and to promote fmily planmng and birth spacing. Training of medical and paramedical personnel would emphasize the essentials of safe motherhood, the diagnsis and treatment of sexually transmitted diseases, the identification of high-risk preganies (in particular those that should be referred to a health cener), and the improvement of bygienic practices in home delivery. Tb complement these efforts, the project would finance equipment and furnishings in hospitals and health centers for proper examinations and vimmins to reinforce matemal health; (d) m . Other donors (UNFPA and USAID) are already very active in the family planning area (Annex 8). In particular, USAID contemplates the financing of US$2.6 million of family planig commodities and contraceptives over the nex three year at the national level. The project would support the integation of family planning services into the regular acvities of the SILAIS, i.e., in the *~~~~~ . . - * -2 -1tt* I- . - t- .,- _ +t *Utm  NICARAGUA ANNEX 6 HEALTH SECTOR REFORM PROJECT Page 2 of 4 contraceptives are properly used, the project would help train MOH personnel in family planning counseling, method selection, and contra-indications, (e) Malnutition. The percentage of ifants visiting public health facilities is currently about 22 percent and may include more well-babies than at-risk babies. The project would help icrease the number of mothers who brng at-risk children to health facilities and improve the quality of implementation of the growth-monitoring progran. The project would help train voluntary health workers and midwives in early detction and referral. The project would finance scales and measuring tapes and would support training of MOH staff in growth monitoring. The project would also finance supply of micronutrients (iron sulfate, foUic acid, iodine, vitamin A, and multiple vitamins) to be delivered to pregnant and lactating women and children with nutritional deficiencies. The project would support visits by heaith personnel to pre- primary and primy schools to detect and treat micronutrient deficiencies and provide deworming medicine. Furthermore, the project would promote breast feeding and proper weaning practices by financing educational programs for mothers; (t) Immuno-pMIventible Diseases. The project would promote the underaking by MOH personnel of routine immunization of patients who visit health facilities for other treatments. Focus would be placed on children under-five and women in ferdle age. Vaccines (principally for measles, polio, tuberculosis, diphtheria, whooping cough, and tetanus) and supplies would be financed by USAID; and (g) Tuberculosis and Malaria. These programs would be focused on the SILAIS where there is a high incidence of these diseases. The project would support detection of tuberculosis so that infctious cases can be cured at an early stage and tansmission to others avoided. The project would finance laboratory products, dnrgs, and other supplies. In the case of malaria, the project would si'pport fumigation and destruction of mosquito breeding grounds, blood tests, and treatment of patients with chloroquine and primaquine. 3. Managent of PHC Services at the Local Level. Under the new decentralization policy of the MOH, the SILAIS are now responsible for delivering health services. They are allocated an anmnal budget, of which 20 percent is a money ainser. Under the project, they would enter into management contracts with the central office of the MOH and their performance would be judged on the basis of monitoring indicators. 4. Empha on Preventive Care. The MOH will put more emphasis on prevention and early detection of illnesses at the primary level and referrals of patients to higher levels of care to reduce costs of curing illnesses which are more advanced. Health personnel will undertake community education campaigns to stress the importance of washing hands before cooking or eating, boiling water and vegetables, disinfecting water with chlorne tables, and instaulling latrines. Additional taining will be provided to nurses and voluntary health workers on early detection of danger signs of ARI and those of dehydration resulting from diarrhea. Proper prevention techniques will be promoted, such as avoiding exposure to cold, smoke, and dust, especially for infant under three months of age. The community training  NICARAGUA ANNEX 6 HEALTH SECIXR REFORM PROJECT Page 3 of 4 program will also reinforce the importance of completing antibiotic treatment at home, even though initial symptoms may have subsided, once such treatment has been initated. 5. lutegraton of Vertical Programs at the Iocal Level. Under the redefined PHC model, the MOH will: (a) provide norms to integrate maternal and child health activities at the health centers and health posts, including the requirement that immunizations in the first year of life of the infant would be carried out in scheduled health check-ups for children, reducing emphasis on the immlnization "campaign" strategy and increasing that on the "routine" strategy; (b) design mechanims to integrate nutrition prgrams (e.g., breast feeding, weanig process, nutition education) with growth monitorng durig health check- ups, and design interventions to improve nutritional status of malnourished children; (c) establish a straty and norms for early and more frquent prenatal controls, including immunizations, for pregnant mothers; and (d) provide family planning assistance at the time of postnatal controls. 6. Reallocation of Tfss to Nurse and Auxiliary Nurses. Under the redefined PHC model, many tasks now performed by doctors could effectively be undertaken by nurses, thus reducing unit cost of service delivery. A similar delegation of tasks from nurses to auxiliary nurses would also apply. This tansfer would be gradual, in line with the changing of the human resources profile of the MOH. The potential reallocation of tasks are presented in the table on the next page. 7. Supervision would consist of technical and training activities undeitaken to ensure that the proper methodology and norms are implemented to reach the objectives of the project. Supervision activities would emphasize taing of staff implementing the project and identification of necessary changes and adjustments. The project would support technical and "trining" supervision in the health centers and health posts of the seven SILAIS supported by IDA financing. Three PHC consultants would be contracted to that effect by the PCU in coordination with the Vice Minstry for Health Care Services. 8. Supervision would be undertaken periodically to ensure a minimum of two supervision visits per year for each health facility. To that effect, supervisors would use the Supervision Guide of the Vice Ministry of Health Care Services, which is the same guide used at a national level for the supervision of all 19 SILAIS. 9. Follow-Up. This would consist of regular administrative activities undertaken to ensure the proper implementation of the project. They would be carried out by the SILAIS Directors who would take appropriate measures to correct problems. They would use an implementation schedule to check progress in project implementation. 10. Evaluation. This activity would allow to compare the proje..t s a. hievements to the targets for a given period and make the requird adjustments. Evalutionm would be undertaken everv Year using process indicators and impact indicators i'tbk'i would evaluate  NICARArUA ANNEX 6 HEALTH SECIDR REFORM PROJECI Page 4 of 4 the effects of given activities on project beneficiaries (Annex 20). For that purpose, the project would finance two national consultants, specialized in project evaluation, for periods of two months each. oAc es Pre.e Siuation Modd I Resources PRENATAL Wiht & height MCH aux. nurse All the activities One room and one CONTROL ought to be MCH aw yliary Bbod pressure MCH aux. numW conducted by nutse at the health Ttubis tomxoid immuniztion Aux. mire (in MCH auxiliary post. another room) nuseO Detection of complicatiens Phrysician char of an Education MCH aux. nue prenat activities ____________________________ ____________at ft e health Detection of cervical cancer Physcian center. Syphilis & STDs treatment Physician Two or three Malark uumnt Malaria ux. pem ~~~~~MCHI auxiliary Malaria treatment Malaria aux. pers personnel in one Prnision of micro-nutrienti (iron, Physician or aux. room workiug in iodine, vitamin A) per. intgrmed prenatal Promotion of birlhs in maternides MCH aux. nurse activites BIMWrS Increase percenage of births delivered Physician or amined nuse or Health cent with in maternity waris trained nurse physician beds or hospital Impwved conditions for births delivered Relaes or Only trained Home with a good at home (safe and clean births with community birth community birth referral system delivery pacmges) atea at PO -INATAL _WeI MCH aux. se Most services can Posnal conml ICONTROL Blood pressure MCH aux. numse be delhvered by should be Check-up of birth consequences Physician MCH ax. nurse inegraed with 'except some femily ptannimg in Promotion of breast feediiw MCHI aux. nuse check-wups and the same room and Famiy planniug (IUD, pills, condoms Physician or Ijis) with the same ec.) MCH aux. pers. petson Detecdon of cervical cancer (pap smear) WELL-BABY Weight MCH aux. urse All the health All these acdvities AND CHID Classification of nutritonalstatus MCH aux. nurse check-up activities should be done in EWALT fImmunins mtion aux. ouht to be one room and by CHECK-UPS pers. conducted by one person at the _______________pen. MCH aux. nurse health center as Promotion of breas ediug (exclusive at MCH aux mm or by community well as the health leas 4-6 months) _eal workers post by MCH Nutrition and health education (espec. MCR aux. nrse (CW) auxiliary nurse or weanwg food) by CHW. Dewormiit MCH aux. nurse Micnutriet (iron, iodine, vitamin A) MCH aux. nurse Integraed managem of the sick child Physician or with detection and treatment of: MCH personnel - diartheal disases - ue resp. infecidons - meanies - malaria _Malaria pewsonnel  NICARAGUA ANNEX 7 HEALTH SECIOR REFORM PROJECT Page 1 of 2 HUMAN RESOURCES DEVhOPMENT SUBPROJECIS Appraisal Criteria 1. BenciarIes. Subprojects would benefit individuals or groups of individuals. 2. lypes of Subprjec". Subprojects eligible for financing would consist of formal management training courses, participation at workshops, attendance at congresses, seminr, and symposiums, and courses abroad. Financing would cover the cost of participating in taining activities as well as the cost of preparing and presenting the courses. For example, a subproject for the training of a group of SILAIS Directors would cover the cost charged by the training institution plus transport and subsistence when applicable. Subprojects would cover the following categories, from which sponsors may select any combination according to their needs, thus creating progams tailor-made for the needs of specific SILAIS: (a) V3eneral Decentralization of Services Epidemiology (b) SILAIS Management SILAIS Organization and Management Strategic Planning Management Information System Personnel Management Budgeting Pharmaceutical Supply Management estment Maintenance and Project Preparation Alternative Sources of Financing Monitoring and Supervision Impact Evaluation (c) Hospital Management Hospital Oranization and Management Strategic Planning Management Information System Personnel Management Budgeting Pharmaceutical Supply Managent Intment MaintenaLce and Project Preparation Health Insurance Cost Accounting Cost Recovery Monitoring and Supervision Impact Evaluation (d) Other Areas critical to implemenation of MOH decentralization strategy by  NICARAGUA ANNEX 7 HEALTH SECTOR REFORM PROJECT Page 2 of 2 3. Sponsors would imclude all 19 SILAIS Directors, the 27 hospital Directors, and Department Directors of the central MOH office. 4. E sc,ut Agencies would include local or foreign universities, training institutions, and consulting firms. 5. Allocation of Resources. Out of a total fund of US$600,000, US$150,000 would be set aside for specific activities in the fbllowing areas: (a) training of central MOH and SILAIS management in subproject preparation; (b) technical assistance to MOH high-level management in issues such as organization and management cf health services in the context of decentralized services; and (c) dissemination of project objectives and activities to MOH staff, municipalities, and other institutions. 6. The balance of US$450,000 would be divided among each of the 19 SILAIS and the central level in function of their number of staff. Subprojects would be reviewed according to appraisal criteria described below and approved for each SILAIS and the central level untl their respective ceilings are reached. As indicated above, weaker SILAIS would receive assistance in subproject preparation. Disbursement of finds would be reviewed at the mid- term review. Should no requests have been made by one or more given SILAIS (or made but not accepted by the Review Committee), allocation of funds would be reviewed and may include reallocation from non-performing to performing SILAIS. 7. Contents of Proposals ovuld include: (a) a broad analysis of main areas of institutional weaknesses; (b) training propsal including type and mimber of staff to be rained, curriculum, training calendar, and cost analysis; (c) if cost of proposal is less than total amount allocated to SILAIS or central MOH office, explanation of how given proposal fits within overall plans to use rest of funds allocated; (d) expected impact; (e) potential of tansmitting knowledge and skills acquired to other staff not attending the course; and (f) short list of prospective eecuting agencies. 8. Appraisal Criteria would be as follows: Pbints Impact expect on management of health services 45 Cost-effectivness of proposal (i.e., cost of delivering training compared to alternatives) 20 Experience and capability of prspective agencies 20 Potental benefits to other staff 15 Tbtal 100 9. Disbursements would be made by IDA against 90 percent of the cost of subprojects approved.  NICARAGUA ANNEX 8 HEALTH SECIOR REFORM PROJECT Page 1 of 2 EXISTING FAMILY PLANNING PROGRAMS IN NICARGUA 1. The country's cufrent estimated total fertility rate of 5.5 is still high and similar to that of the Latin American and Asian regions in the late 1950s. The previous Government was vigorously opposed to family planning, which resulted in a gradual erosion in the delivery of services by the public sector. The present Government, however, has expressed its intention to improve the MOH's capacity for provision of family planning services and inoduce intensive faily planning education progrms. In 1993, modem contraceptive prevalence was estunated at 63 percent in urban areas anim 38 percent in rural areas, based on coverage by the MOH and PROFAMILIA, the largest NGO in family planning in Nicaragua. Several donors, including USAID, Norway, and UNFPA are providing the MOH with technical assistance, tainig, and logistical support for family planning. 2. Knowledge of contraception in Nicaragua is vezy high, as 97 percent of women aged 15-49 have knowledge of at least one modem method of contraception (orals, IUDs, injectables, implants, vaginal methods, condoms, female strilization, or vasectomy).1' The most used methods a-e oral contraceptives, IUDs, female sterilization, and the condom. Nicaragua's contiaceptive prevalence is estimated to be intermediate, between Costa Rica (with 69 percent, the highest in Central America) and Guatemala (with 23 percent, the lowest). Sixty-eight percent of married women aged 15-40 use contraception to limit their childbearing while 30 percent want to space their pregnamncies. 3. Sources of Contraception. The most important suppliers of contraceptives are public sector facilities, primarily those belonging to the MOH. It is only in Managua that a higher proportion of contraceptive users rely on the pnvate sector rather than on the public sector as their source of coMtaception. Of the private sector sources, pharmacies are the ranking suppliers, followed by privaWte clinics and physicians, then NGOs such as PROFAMIUA and IXCHEN. The MOH is the principal source of fmale sterilization (74 percent) and IUDs (65 percent) hr the country. Pharmacies are the prmary sources of oral contraceptives (43 percent), condoms (52 percent), and injections (83 percent). PROFAMILIA is the second Iargest provider of female sterilization in the country (10 percent), followed by private clinics (9 percent). Private clinics are the second largest provider of IUDs (17 percent), followed by IXCHEN (10 percent). 4. Educational atinmment is an important deteminant of where users obtain their method. Women with a secondary or post-secondary education are four times more likely to obtin their contraception from pharmacies or private physicians than women with no formal education. In contrast, the majority of less educated women rely solely on the MOH for their contraceptives. 5. Reasons for Non-use of Contraception. Of married women recently surveyed and not currently using contraception, 63 percent were not using any method for reasons related Il The source of miuch of the inlrmation provided in ftis Annex is based on provisional results of a sur8y prvided in a 1993 OPANMIUA report.  NICARAGUA ANNEX 8 HEALTH SECIOR REFORM PROJECT Page 2 of 2 to pregnancy, subfecundity, or lack of sexual activity. This lucludes 18 percent wbo were postpartum or breast feeding, many of whom were probably at risk of pregnancy. Two- thirds of tbese 63 percent (approximately 278,000 married women) are potential high priority target women for contraceptive use following their current pregnancy or postpartum period. The remaining 37 percent of non-users, i.e., those who gave "other reasons" in a recent PROFAMIUA survey for not using contraception could be considered himmediate potential candidates for adopting contraception at the time of the survey. Only one percent of women stated they were not using contraception because of religious reasons. Only four percent stated that they discontinued use because they did not have the money to purchase contraceptives or their wethod cost too much. 6. Desire to Use Contraception in the Future. More than two-thirds of fecund non- users said that they desired to use a method of contraception in the next 12 months. 7. Donors Support for ftmily Planning and IDAts Proposed Involvement. USAID, the International Planned Parenthood Foundation (IPPF), and UNFPA all provide conDtaceptives and technical assistance in family planning to the Goverment of Nicaragua. The largest donor is USAID, which has approved a project that includes the provision of contraceptives for a total value of US$2.6 million equivalent over the next three years. This would amply cover the country's absorptive capacity d-ring the period. Since 1991, the UNFPA has been providing condoms, oral contraceptives, and inter-uterine devices (IUDs) to the MOH. In 1993, the UNFPA expects to donate US$375,000 of contraceptives. UNFPA also plans to assist MOH in introducing Norplant implants into the Ministry's family planning program by providing 1,000 starter kdts. The UNFPA plans to work closely with MOH's Division of Maternal/Child Health and Family Planning (MCH/FP) to strengthen the management of the MOH family planning program, and give technical training to service providers. In collaboration with USAID/Nicaragua and the Division of Reproductive Health of the Adanta-based Centers for Disease Control (CDC), the UNFPA will assist the Division of MCH/FP in the implementation of a computerized contraceptive commodity management information system. Once installed, this system would provide information on the supply status of the MOH family planning program and for forecasting contaceptive requirements. 8. The proposed project would support the provision by the MOH of a basic health service packge, principally maternal and child care. One important element of this package is family plannimg to be provided as an integal part of PHC services. Iraining would be provided to MOH personnel in family planning counseling, method selection, and contra- indications.  NICARAGUA ANNEX 9 HEALTH SECTOR REFORM PROJECT Pae 1 of 10 PHARMACEUTICAL SUPPLY AND DISTRIBUTION A. Quantification of Major Benefits 1. Based on experience with pharmaceutical logistics systems and with the reommended interveions in other developing countries, the achievement of the following targets is thought to be feasible by the end of project implementation. Special studies would be undertake to determine baseline levels for each indicator and the suggested quantitative argets would be reviewed during the first annual review. 2. Increased Availability of "Vital" Supplies. A list of "vital" pharmaceuticals and supplies (shorter than the basic list) would be developed. A special study would determine the baseline frequency and duration of stockouts for these supplies at the CIPS, SILAIS, and health facilit levels. Tentatively, the pharmaceutical component is expected to r_hieve: (a) 50 percent reduction in the frequency -f stockouts; and (b) 75 percent reduction in the average duration of stockouts. 3. Decreased Unit Costs of Pharmaceuticals and Supplies. Procurement savings of 37 percent were achieved in 1993, which is significant. However, furither savings are possible, albeit smaller. The unit costs paid for all identical products purchased in two consecutive years would be compared and weighted in proportion to each productes contribution to total qxenditures. After adjusting for inflation, the resulting figure would constitute an indicator of procurement efficiency. Tentatively, the project is expected to achieve a 10 percent reduction in unit costs paid for pharmaceuticals and medical supplies. 4. Reduced Losses of Pharmaceuticals and Supplies. The project would help reduce losses of pharma ical and medical supplies by improving forecasting, acquisition procedures, inentory management, and distribution procedures. In the past, losses have represented a substatial but undetermined proportion of all acquisitions. Actions have been aen to reduce losses, particularly at the central level, but much remams to be done. lTnatively, the phannaceutical component is expected to achieve: (a) 75 percent reduction in losses due to product expiration and deterioration in storage; and (b) significant, but unmeasuable, reduction in losses due to product filtration to the black market. 5. Decreased Opeating Costs at the CIPS. The project would help reduce CIPS operating costs by supportig the trnfer of some responsibilities to the private sector, e.g., customs clearance and some transportation services. Operatng costs would be further reduced (i) as a consequence of lower storage volume requirements made possible through improved procurement and inentory management practices and (ii) increased efficiency in personnel management. atively and after adjustments for inflation, the pharmaceutical componat is expected to achieve a 25 percent reduction in the operating costs of the CIPS. 6. Increased Avalabilt of Generic Pharmaceuticals. The pharmaceutical component would support a study of private sector marketing of pharmaceuticals and of the related govnme legislation and regulations. Recommendations would be made for revisions in both legiion and gulatons to facilitate the import and marketig of generic products.  NICARAOUA ANNEX 9 HEALTH SECIOR REFORM PROJECT Page 2 of 10 This would result in increased aalbility f geneic product and affordability of pbhaaceuticals. The study woud establhsh baselin avaability indicators and unit price inrormation for a list of "vital" pharmaceutical product for which legal generic equivalents exist. A follow-up survey two years after implementation of the recommendations is expected to demonstate: (a) 50 percent increa in the aailability of generic products; tb) 20 percent decrease, after inflation, in the unit price of the leas ex psive geerically equivalent formulation of each product on the "vital" list; and (c) 100 percent increase in the esftimated market share of generic phamacticals. 7. Decrased Inappropriate Use of Pharaceuticals. Reliable information on the degree of irrational use of pharmaceuticals in MOH facilities is not available. The project would develop this information and would propose intventions to conrect priority problems. As in the case of benefits mentioned above, quantitative targets are tentative at this point. Study results would pernit refinement of the target and prvide a baseline agaist which to measre progrss, expected to be a 20 percen teduton in loss due to irrational use of pharmaceuticals at facilities where itrventions are tested. 8. Despite lack of solid baseline inlfmation for quantitadve target, it is evident that potental financial savings far exceed the projected cost of the pharmaceutical component. B. lrms of Reference for Study legal Cnges quired to lmprove Drug Ditribution and Purcasing Pat 1: Genic Drug Distibution 9. Bacound. Brand name phaacutical prot, which are relatively expensive, have a latger share of the retil market than might be predictd for a country with the level of income of Nicaragua. A relatively small proportion of the Nicaraguan population can afford thse products. The private sector, therefor, has relatively low coverage of the populaiion. 10. Genenc pharmaceutical products, which in otber counties offer substanial savings, have a correspondingly small market share, For example, the unit cost of the least expensive form of adult aspirin in a leading Managua supermarket is more than 200 percent greater than the corresponding cost in supermars in the Unied States. If the priVate sector is to be responsible for supplying the needs of a greater proportion of the population, as envisaged by current MOH policy, unit sales prices will have to decrase. 11. Objectives. The study would attempt to iden*tf legal, regulatory, and other constran that inhibit the private sector from selling essential pharmaceutical products to a much larer proportion of the population. It is anticipatd that the elimination of these constints would facilitate the manufctue and/or importation of generic products which could be marketed at a frction of the cost of band name equivalents. This would put the product within the economic reach of many Nicarapa that currently cannot afford to purchase them in the private sector.  NICARAGUA ANNEX 9 HEALTH SECTOR REFORM PROJECT Page 3 of 10 12. Methodology. The study would collect data on {he costs of operadon of a small nmmber of retail pharmacies. Particular attention would be given to the accurate classification of fixed and vriable costs. The data would be used to construct an economic anw .nancial model of a private sector phamacy, which would be used to simulate the impact of different shares of inexpensive generic products on the pharmacy's profitability. The data would provide a baseline from which to measure the impact achieved through implementation of the study's recommendations. 13. The study would also collect infbrmation on the following areas in an attempt to identify factors that affect the markting of generic drugs by the private pharmaceutical retail industry: (a) laws and regulations; (b) product registration procedurs; (c) consumer acceptance; (d) prescriber acceptance; (e) quality control; and (f) procument procedures 14. As appropriate, these fctors would be incorporated into the economic and financial model of a pharmacy. The completed model would facilitate analysis of sim"lated changes in those factors, includig the effect on the unit sales price of priorty products and on pharmacy profitability. The results of the simulations would be used to substntiate recommended ions to increase the import, distribution, and sale of generic products. 15. Outputs. The consultants would produce a report that would: (a) identfy constraints to the marketing of genenc pbarmaccuticals; (b) provide a quantified estimate of the impact of these constaints on a typical retail unws profitability; (c) provide detailed recommendations on how to eliminate or reduce constaints to the marketng of generic products; and (d) provide an estmate of the benefits that could be achieved through implementation of the recommendations. 16. Project Inputs and Schedule. The study is estimated to cost US$80,000 and would require approximately six person-monfts of international consultants' services and four person-months of services from a Nicaraguan lawyer. Two intenational consultas would be rqired. The lead consultant would be knowledgeable in business administrtion, have finacial management skills, and ample experience in the health and/or phamceutical sectorm Hetshe would be supported by a pharmacist knowledgeable in quality control proedures and generic drug legislation. The project would also provide funding to contract pharmacy and/or medical stdents to collect data on the product sold by private sector pharmacies. Given the importnce of this study as a means to increase access to priority pharmaceuicals without significant rerrent.costs, this study would be completd by September 30, 1994.  NICARAGUA ANNEX 9 HEALTII SECTOR REFORM PROJECr Page 4 of 10 Part 2: Other Iga Changes that May be Required in the Pharmaceudcal Sector 17. Mawn of Nicarau's curret pharmaceutical laws and regulations w*re writn in 1926 and support many policies which the current govemment has abandoned. Several of the contemplated project reforms in the bharmaceutcal sector would reqire that adjustments be made to existing laws and regulations. Such reforms include, but re not limited to: (a) purchase contcts witi flexible total quantities; (b) tenders that rquest alternative prices depending on the point of reception, i.e., port, CIPS, SILAIS, etc.; (c) increased purchase authority br SILAIS and health facilities; (d) fomaion of sWpplier performance tracking system; (e) lease of hospital space to a private pharmacy; and (f) sale of pharmaceutical products in public hospitals. 18. Tecbnical assistance would be provided to help the MOH prepare required govemenal decrees, resolutions and/or legislative proposals. The technical assistance wud reqire four months of a national lawyer and is estdmated to cost US$8,000. Specific tk covered by the technical assistance include: (a) identfication of xistiDg laws and regulations that constrain implemention of MOH Policies; (b) collection and review of laws and regulatons imple in counties where similar forms have previously been implementd; (*) formlation of goermeal decrees, resolutions and/or legislative proposals in close collaboration with MOH legal council (tehical assistance would provide pertise in inteional supply systems orgition, while MOH legal couil would provide specific knowledge of Nicaragua's legal and political system); (d) implemeion f approed governmenal decrees, resolutions and/or legisltion tbrough the development of manuals and implemetaftion of required training; and (e) evaluation of cost-effectiveness of legal interntions. C Trm of Reference for Study on Pha Donations 19. Nicargua receives donations of pharm cals from many donors, as well as financing for phanraceuticals from several interntional development agencies. Small donations from philantopic o ations camnot be cost-effectively handed by the CIPS and would be better diuected to specific health facilites or prefrably to NOOs. Donations and financing frm inlternaional development agencies, while badly nd, redqire an intensive i _geeI effort.  NICARAGUA ANNEX 9 HEALTH SECrIOR REFORM PROJECT Page 5 of 10 20. Donations from different agencies have their own lead times and are subject to different constraints and conditions, but the MOH does not have a multi-year pharmaceutical procurement plan. As a result, in the past, procurement has often been based on erroneous estimates and resulted in significant waste. Specifically, the study would: (a) help the MOH establish a policy document on pharmaceutical donations; (b) assist the implementation of MOH policy on pharmaceutical donations, including the development of manuals and training activities and in the diffusion of the policy to involved donors; (c) collaborate on the aggregation and analysis of planned pharmaceutical donations of international agencies; (d) assist in the development of a multi-year pharmaceutical procurement plan that includes the plans of both the MOH and the development agencies; (e) assist in the development and implementation of a process by which the multi- year pharmaceutical procurement plan is quarterly updated; and (f) analyze the sustainability issues associated with large donations of pharmaceuticals and present recommendations to the MOH on how to reduce the impact of future decreases in such donations. The study is esdmated to cost US$20,000 and would require two months of international consultants. D. lrms of Reference for Pharmacutical Financing Study 21. Background. Pharmaceutical products account for a large fraction of private sector spending for health services in Nicaragua. The population probably has a greater willingness to spend scarce financial resources on medicines than on any other form of health care. The relative willingness of the population to spend financial resources for different forms of health services will be investigated by a demand study that is being financed by the IDB. Despite this willingness, the free distribution of these products still constitute one of the MOH's largest expenditure categories. 22. While there is general agreement on the relative willingness of the population to pay for pharmaceutical products, there is less agreement on whether, when, and how to capitalize on that willingness. Possibilities include: (a) rotating funds operated in public sector health facilities by government personnel; (b) non-profit pharmacies operated by community members; (c) referral of all or some patients to the private sector where they can purchase the needed products; and (d) leases of the rights to operate a private pharmacy within a public sector health facilit.  NICARAGUA ANNEX 9 HEALTH SECTOR REFORM PROJECT Page 6 of 10 All of the above alternatives can be supported to a greater or lesser degree by subsidies for priority population groups and/or for certain serices which te government wishes to promote. 23. Objectives. The study would help the MOH examine and test several different mechanisms for recoveig at least part of its e ipenditures on phuarmcals and for using the private sector for delivery of drugs. Of particular interest to the Government is the possibility of leasing space within public hospitals to private pharmacies. 24. Terms of Reference. The study would consist of two parts: Part I. Referral of Patients to Private Pharmacies. The study would assess the feasibility for the MOH of using a network of private phamacies to provide drugs to patients referred to these pharmacies by the MOH. Patients would go to a MOH facility for examination by a doctor who would then provide a prescription to the patient to be filled by a private pharmacy accredited by the MOH. The patient would receive drugs for PHC priority programs free of charge, and the pharmacy would bill the MOH. The study would help defne: (a) the accreditation crieria for private phannacies (such as numbers of hours the pha-macy is opened each week, conditions of storage of pharmaceutical products, agreement to sell a minimum percentage of generic products, etc.); and (b) administmtive arrangements (list of drugs to be provided to patiens free of charge, billing and payment mechanisms, etc.). Part II. easIng Space within Public Hospitals to Private Pharmacies. Part II would be conducted in three phases: design and feasibility analysis, start-up and itial operation, and evaluation. During the first phase, one of the MOWs large hospitpIs in Managua would be selected as the study site, a location identifed for the pharmacy, the i1st of products to be sold determined, pricing and subsidy policies as well as payment mechanisms determined, reports designed, a tender document developed, and the ender aMounced. During the second phase, the tender offers would be analyzed, the winner selected, contracted and installed in the hospital, and the sale of pharmaceuticals initated. During the final phase, the first six months of operation would be evaluated. Key indicators would be calculated, including: (a) total income from patient charges; (b) total subsidy paid by the Government; (c) average price paid per prescription; (d) distribution of subsidies among patients; (e) distribution of subsidies among products; (f) frequenc and duration of product shortages; (g) percen of prescriptions presented that were filled; and (h) mnmber of prescriptions not filled for lack of funds. In addition, the pharmacy's compliance with the terms of its contract would be evaluated and clients interviewed to determine their level of satsfction with the service.  NICARAGUA ANNEX 9 HEALTH SECrOR REFORM PROJECr Page 7 of 10 25. Outputs. For Part It, the consultants would produce: DN Phase I: (a) detailed design and feasibility study for the pharmacy's operation; (b) detailed implementation plan; and (c) detailed draft tender document. (a) evaluation of the tender offers received; (b) signed contract; (c) installation of the private pharmacy in the selected hospital; and (d) inidation of pharmaceutical sales. Du:rin Phase III (a) detailed evaluaton of the first six months of operation of the pharmacy, including estimates of the eight indicators mentioned above; (b) recommendations concening necessary modifications in the operaton of the pharmacy and/or in the terms of the contract; and (c) recommendations concerning possible replication of the model in other hospitals. 26. Orpnization and Schedule. Part I of the study would require two person-months of consultant services and is estimated to cost US$20,000. Part II of the study would rquire approximately eight person-months of consultait services, three months during Phase I, three months during Phase II, and two months during Phase HI, and is estimated to cost US$80,000. For Part II, tWo cCosultants would be required: the lead consultant would be knowledgeable in business administtion and financial management skills; he/she would be supported by a pharmacist knowledgeable in pharmacy management, and the two would work as a team. E. Terms of Reference for Rational Drug Use Teclnical Assistance Phase I - Quan ive hIstgaion 27. Description. The study would collect data from a total of 50 facilities, including each of MOH's principal service delivery levels (ealth post, medical post, health center, and hospital outpatient departmen). Thirty of the facilites would be within the SILAIS included in the project. At each health facility, data would be collected on at least 30 prescribing encounters. The data collected would be used to: (a) measure the magnitude of inapprriat pharmaceutcal use; (b) identify which aspects of the problem are most important and warrant further ivestgtion; (c) identify possible inhtrventions to reduce the problem; (d) justify the use of resources to reduce the problem; and (e) establish a basis on which to evaluate the impact of interventions designed to reduce the problem.  NICARAGUA ANNEX 9 HEALTH SECIlR REFORM PROJECT Page 8 of 10 28. Outputs. The consultants would produce: (a) detailed study protocol for MOH approval; (b) training of five days duration for four data collectors, including tests of questionnaires at two facilities; (c) final report, with executive summary, which provides baseline levels of each of the 12 "core drug use indicators# for each service level, identification of the primary problem areas, and analysis of their impact on patient care (e.g., morbidity and mortality) and costs (direct and indirect); and (d) presentation of the results to the Minister of Health. 29. Project Inputs. Phase I is estimated to cost US$42,000. The project would finance approximately eight person-weeks of technical assistance, nine person-months of compensation for the data collectors (who will be pharmacy and medical students), and trl and transportation costs, including those of MOH counterparts. Phase H - Qualite nstigation 30. Desciption. Having identified the principal dmg use problems, interventions would be designed for the purpose of changing the behaviors that cause irrational drug use. The interventions would be developed from a more in-depth qualitative investigation into the problems i4entified in Phase I. The focus would be upon simple, cost-effective interventions 'hat produce quick results. 31. Outputs. The consultants would produce: (a) list of at least four proposed interventions from which two would be recommended for implementation in ten facilities each; (b) implementation plan for each intervention; (c) budget for each intervention; (d) estimated cost-benefit analysis for each intervention; (e) final report, with exective summary, including items (a)-(d) above; (t) presentation of the report to the Minister of Health. 32. Project Inputs. Phase II is estimted to cost US$26,000. The project would finance eight person-months of technical assistance, including travel and trasportation costs. Both Phase I and Phase II would be completed by December 31, 1994. Phase II - Implementation of Ihterventions 33. Description. Based on the recommendations of Pe II, two interventions wold be selected for implementtion. Each intervention would be implemented in ten of the facilities that were included in the initial indicator baseline study in one or more of the SILAIS  NICARAGUA ANNEX 9 HEALTH SECIOR REFORM PROJECI' Page 9 of 10 financed by the projectfs PHC component. The remaining health centers in the project SILAIS wold be used as contols for the purpose of evaluation. 34. Output. During this phase of the study, the consultants would support implementation of two interventions in ten health centers each and would produce: (a) rpo on the progress of the project; and (b) presenation of the progress report to the Minister of Health. 35. P"oect Inputs. Phase m is esimated to cost US$74,000. It is estimated that 16 person-weeks of technical assistance would be required, along with travel and transportaton costs and approximately US$20,000 for each intervention for implementatdon activities (e.g., traing, mass media, etc.). Ple IV - Evalaion ofs 36. Description. Approximately nine months after the implementaton of interventions, a repeat indicator study would be conducted to determine the impact of the interventions. The swdy would coLect data from the twenty facilites where the interventons were implemented as well as from the ten facilities in the control group. The same questionnaires and sampling methodology for patient encounters would be used as were used in Phase I. 37. The data would be analyzed and the effectiveness of each intervention detmined. The evahlaton would also incorporate an analysis of the costs of each intervention. On the basis of this evaluation, the MOH and interested donors would be able to detmine if the interventions should be implemented tbroughout the county. 38. Outpuls. The consultan would produce: (a) taining of five days duration for four data colRectors, including test application of the quesionnaires in two facilities; (b) quantitatve results of the study; (c) evuation of the interventions that inchldes, for each intervention, an analysis of cost-effectiveness, lessons learned, and recommendaions for further implementation; (d) final report, with executive summary, which includes items (b) and (c) above; (e) presentation of the report and recommendations to the Minister of Health; and (1) formal presentation of the report and recommendations at seminar for government officials, university faculty, private sector representatives, and the donor comunity. 39. Project loputs. ase IV is estimated to cost US$38,000. During this phase, the project would finance ly eit perso-we of techical assis, c no*msation for the tam of data collectors, who would be pharmacy and/or medical  NICARArUA ANNEX 9 HEALTH SECrOR REFORM PROJECT Page 10 of 10 students (approximately five person-months), the trvel and tansportation costs of these personnel and MOH counterparts, and production and distibution of the final report.  NICARAGUA ANNEX 10 HEALTH SECTOR REFORM PROJECT Page I of 4 EMERGENCY REHABILITATION OF HOSPITALS 1. The MOH will apply two types of criteria for the analysis and approval of hospital subprojects: the basic cnteria and the criteria for determining the priority rating. Approved subprojects based on these criteria will be endorsed for MOH approval. 2. Basic Criteria. The basic criteria are necessary but not sufficient conditions that must be met by the subprojects. Subprojects that do not fulfill the basic criteria will be immediately returned by the MOH to the corresponding SILAIS. Those that qualify under the basic criteria will be included for the second stage analysis of priority ranking. (a) Amount: Subproject cost should not exceed US$150,000, including a 10 percent allowance for physical and price contingencies; (b) Hospital types: All public hospitals, as listed in the Operational Mamal for Emergency Rehabilitation of Hospitals would be eligible for financing; (c) FinancingR,equest: The subproject should be presented from a priority list prepared by each SILAIS after consultation with hospital directors. Subproject application should be signed by the SILAIS director and the hospital director; (d) Operabng Eadi=: The project would give priority to subprojects that do not generate additional recurrent expenditures. Should there, however, be cases where a subproject wold generate additional recurrent expendiures, the subproject application should be accompanied by a letter signed by the Minister of Health confirming that financing for these expenditures would be provided by the MOH and included in the budget; (e) Euding of Last Resort: Subproject requests should confirm that no alternative sources of financing are available; (t) Implementation Period: Should not exceed 12 months year from the initiation of bidding procedures; (g) Consistency with Goverment Strateg: The proposed subproject should be consistent with the imnestment strategy of the Govemment in the health sector; and (h) lpe: Subprojects should belong to one of the following categories: (i) Equipment Purchase Replacement New Repair and/or maintenance (ii) Vehicles Purchase Replacement New Repair (iii) Inffastructure Replacement Repair Constuction (iv) Mixed Combination of (i) to (iii)  NICARAGUA ANNEX 10 HEALTH SECIOR REFORM PROJECT Page 2 of 4 3. Definitions (a) Equipment: Medical or industrial equipment which can be repaired or purchased (either as replacement for an existing old/obsolete equipment or to add the capital stock): (i) Medical equipment: includes medical and therapeutical equipment required for clinical services, radiology units, clinical laboratory, blood bank and sterilization units; (ii) Industrial equipment: includes equipment for support services, i.e., refigeration equipment, boilers clinical gases, laundry and kitchen facilities, water storage systems telephone and infbrmation network; (iii) Purchase: refers to investment in equipment that cannot continue operaing and is replaced by a new one to fulfill similar purposes; (iv) Replacement: would be allowed if the repair cost exceeds 35 percent of the replacement value; (v) New: refers to purchase of equipment not considered as replacement; and (vi) Repair: undestod as the actions needed to put in optimum functioning condition an already existing equipment. As a rue of thumb, repair cost should not exceed 35 percent of the replacement value and the useful life of the eqwipment should increase at least 50 percent accordmng to the producer's technical specifications. (b) VehicIes: Vehicles for ansportation of personnel and patients. Under no circumstances would it be possible to exceed the maximum number of vehicles assigned to a service; and (i) Purchase: reers to imvestment required to replace damaged or obsolete vehicles or to incorporate new ones; (ii) Replacement: when a non-operating vehicle is replaced by a new one to fulfill similar purposes. Replacement would be allowed it the repair cost exceeds 35 percent of the replacement value; (iii) New: corresponds to an acquisition not considered as replacement; and (iv) Repair: understood as the actions needed to leave in optmum functioning condition an already existing vehicle. Repair cost should not exceed 35 percent of the replacement value and the useful life of the equipment should increase at least 50 percent according to the producer's techmical specifications; and (c) Inf ratuc : Refers to civil works for repair, total or partial replacement, or construction of new facilities: (i) Replacement: undertood as the partial or total replacement of a facility that cannot conue operatng by new infrastuctre to fulfill the same purposes. "Partial" refers to a complete set of infrastructure which represents a self-sufficient fumntional unit that does not imply other complementary  NICARAGUA ANNEX 10 HEALTH SECIOR REFORM PROJECT Page 3 of 4 modifications not included in the subproject. Replacement would be allowed if the repair of existg foundation is not viable, i.e., (i) the facility is sruurally damaged or (ii) the repair cost would exceed 3S percent of the replacement value: (ii) Repair: refers to actions required to leave i optimum functioning condition a part or parts of an establishment. Repair cost should not exceed 35 percent of the replacement value; and (iii) Construction: civil works that cannot be considered as replacement or repair. 4. Priority Criteria. The following criteria would be used to rank subprojects based on a weighted point average. Subprojects should get 50 or more poins to be approved for financing. (a) Minimiation of bottlenecks in medical procedures or hospital support services 40 points (b) Reduction of patient and personnel risks 15 points (c) Emphasis on rehabilitation/replacementlrepair versus new construction or purchase of new eqipment 15 point (d) Emphasis on mawmal and child bealth care improvements 10 ponts (e) Emphasis on promotion of ambulatory care 10 points (f) Improements. in handling of medical wastes 10 points 5. Both the basic and priority criteria will be reviwed and modified, as appropriate, duing the mid-tem review. During this review, the inclusion of improved cost recovery as a priority criteria would be analyzed t into account the results and recommendations of the cost recovery study to be implemented during the fasr year of the project. 6. Disbursements would be made by IDA against 90 percent of the cost of subprojects approved. Would apply only to hospitals which alrady provide matunal and id heth care senrices.  NICARAGUA ANNEX 10 HEALTH SECTOR REFORM PROJECT Page 4 of 4 NICARAGUA - PUBUC HOSPITALS Number of Beds No. Hospita <10iOn w<P0 i5 100 & 20000 1 <200 ICesar Augst Salinas Somoto -9 2 Modes Agria Ocoa G 78 3 Alejandlo Davila Bolaflos Estcl G _ 102 4 Pedro Altamirano La TGnlad 0 84 5 Mauico Abdalah Chinmdega G 200 6 Oscar Danilo Rosales Ie6n G 364 7 Rosario LaWo Le6n Sh' 129 8 Aldo Cbavaffia Managua Occideal SY 49 % 9 Francisco Soto Maaua Occidenal SLY 74 10 Jos Dolores Fletes Occidental 174 11 Antonio Lenin Fonseca Managua Ocient GP 280 12 Manolo Morales Managua Central G . : 201 13 Carlos Marx Managua Orient G 202 14 Bertha Calderor Managua Centa Sal 291 15 Fernando Velez Paiz Managu Orien _ _ __ 250 16 Mauel de Jesus Rinra Managua Central S 217 17 Gapa Gancia Laviana RiVas G 189 18 Ber io Diza Ochoa Gina G 158 19 sup JM__ 43 G 216 20 Hilario Sanchez MM" G 150 _ 21 Jose Niebo ik Boaco ; G 65 22 Camilo Orteg Saavedra Jgpa G 180 . 23 Amin Halum iotega G 126 24 Cesar Amador Molina Matagalpa 0 180 25 Gry Memora Puerto Cabe 71 26 Agusto Cesar Sandino BluSelds G 118 27 Luis Felipe Moncada San Carlos G 51 Lk/ G = General Hospital; S = Speciairzd Hospitl Santorium for patients with tberulosis National rer cent for rebabilitation and kinesitherapy gi Center for treament of slkn diseases (dermatology) I/ Pycharic hospital Y/ Although the Lenin Ponseca hospitad is classified as a general hospital, it has been devaloping specialties in otorino' and neurosurgery K' National rference centr in gynecology, ophtmology, ad oncology Children's hospital secializing in the tcatme of burs, orthopedics, and operations of babies and infets V Specialiwd in podiaty  NICARAGUA ANNEX 11 HEALTH SECrIOR REFORM PROJECT Page 1 of 5 MAINTENANCE SYSTEM FOR HEALTH FACILITIES A Bakund 1. The Nicaraguan Health Systm is facing problems in maintaiing buildings, instalations, industrial and medical equipment. In recent years, premature deterioration has been observed, together with loss of equipment and unreliable installations and equipment, as well as limited investment, all of which translate into low productivity and loss in the quality of health care. The problem has worsened as a result of the financial constraints of the health sector. 2. Planning and execution of maintenance activities are currently done partially in light of funding from bilateral sources (Holland Project, FINNIDA) in a decentralized manner for preventive activities and through external agents with MOH coordination for more complex aciivities. 3. To avoid further deterioration and maintain newly install equipment and rehabilitated infsticture, the MOH would implement a coherent naintnance policy for its physical assets. In this context, the policy would translate into a design that would decentralize maintenance activides and strengthen the autonomy of the SELAIS and health facilities to manage this task. 4. The following main variables affecting maintenance would be considered by a relevant study: (a) the sector's policy decision to allow the SILAIS to maintain their assets, establishing a decentralized maintenance policy for the SIAIIS and the country's health facilities; (b) the need to design a system to encourage and facilitate this task; (c) financing mechanisms for maintenance activities, assuring optimum use of available resources and financial stabilit for programs which are often affected by budget restrictions; (d) the concentration in Managua and, in some cases, in other countries of the Central America region of consultnts, professional teams, laboratories, suppliers, imporers, manufacturers and specialized commerce; and (e) the current technical capacity of suppliers and their prospects under conditions such as those indicated in these lORs. 5. To strengtn the public sector, the MOH has indicated the priority of making significant future imnestments in infast ture, industral, and hospital equipment.  NICARAGUA ANNEX 11 HEALTH SECIOR REFORM PROJECT Page 2 of 5 B. Terms of Reference for Maintenance Study 6. It is necessary to design a maintenance system that allows health institutions, through the use of specific methodologies and instruments, to plan, prioritize, formulate, execute, supervise and evaluate maintenance programs and activities. 7. Methodology. The Iaysis of sample cases was selected as a methodology option for carryig out the study. Thus, the consultants, together with the MOH, would group the health institutions into thee categories, based on variables relevant for analyzing the subject of maintee. For each category, a maintnance system would be designed for a selected representative establishment, as shown below. 8. The MOH would detail the extent and features of maintenance under its maintenance policy framework; this would be provided to the consultants together with other background materia for the study. The maintenance system to be developed for each sample case would have a modular, flexible and self-sufficient design in order to be implemented quickly, without suctnu changes, in at least eight to ten health establishments of the Nicaraguan public health system. The overall implementation would be carried out in a medium-term time fame, in the context of the financing of other bilateral and multilateral funding sources. 9. InformatiOn Sources. As basic data for the study, the consultants would be provided all background iformation on the MOWs equipment through the General Office of Technological Development which has recent specific studieW on the subject, as well as registers and technical stanards, and which has also had relevant participation in the preparation of the Holland Plan and the FINNID Project. With respect to infrastruce, data is scarcer; this is where the consultants would make a significant contribution. 10. Content of Phases. The following are the proposed phases for carrying -out the study, including the minimum contents of each part: (a) Phase I: Analysi of the Current Situion. Although, as stated above, the maintenance system would be designed based on sample institutions, in this phase the consultants would carry out an overall analysis with regard to the maintenance of health insfitutons in order to identify the following issues: (i) existing standards and degree of knowle'ge and application; (ii) administrative structure for maintenance in bealth institutions; (iii) decision-making scheme in the process of assigning priorities and -resources for maintenance and subsequent performance of needed actions; (iv) administrative and operational practices for maintenance of health institutions: existence of planned and preventive maintenance progam, extent of the program, results, etc.; (v) human resources allocated for this activity; (vi) financial resources actually allocated to the maintenance category as a percentage of the health institution's operating expenses;  NICARAGUA ANNEX 11 HEALTH SECTOR REFORM PROJECT Page 3 of 5 (vii) aalysis of the current status of medical and industrial equipment, buildings and instllations. The consultants would update the MOH's equipment intory list containing the basic information; and (viii) principal maince providers for health institutions, according to their areas of expertise. For this point, suppliers' historical and current market status should be known with regard to at least the following matters: * size * technical and specialization level * capacity and timeliness of response * types of contracts * coverage * real incentives for outside contractors In the analysis of the current situation, additional information ayailable in the MOH would be considered; this information is found in planning and analysis documents for Nicaraguan health institutions, showing the current status of buildings and equipment. The analysis would conclude with data systematization and preparaton in order v F reach conclusions on the various subjects studied, by means of interactive worfi . .-Ih responsible MOH staff as well as health institutions. During this phase the consultant wuld examine other national or intnational experiences in this area which, when inchlded in the stated policies and strategies, could be useful for the study. (b) Phase H: Derination of Manace Requirents. Based on the analysis prepared in phase I, the consultants would determine the maintenance reqirements of representative institutions included in the study. To prepare their %fntmates, the consltants would use the inventory lists updated in phase I, both for equipment and ifrastucture The actvities in this phase would be: (i) classification of the inventory list by lines of equipment; (ii) determiation of maintenance activities and preparation of maintenance standards and procedures for each type of equipment; (iii) determination of technical standards and procedures for buildings and installations; (iv) detenation of general stmdards for replacing equpment, in terms of the cost-benefit or cost-effectiveness ratio, including handling rejects; and (v) determination of general standards for keeping an infbrmative, up-to- date register of equipment (control of operating costs). (c) Phe mH: Proposals for Executing a Mntnce System and Selection of Best Options. When creating maintnance system models, it is important to consider the Govmenst' general policy, especially regarding decentalization policy. The consultants would give preference to those options that strength local level decision- malkng and encourage the participation of the private sector in defining maintenance nrurams. Self-sufficin altrnatie, if any, would only be considered on a  NICARAGUA ANNEX 11 HEALTH SECIOR REFORM PROJECr Page 4 of 5 supplementauy basis sad for well-founded strategic reasons, and centralized alternatves wold only be considered for justified technical and economic reasons. In this phase, the consultuns would define the main ables that they wold consider while preparing the matenan system, prioritzing them according to their respective importance in each situation defined, based on the analysis. Options would be proposed for canrying out the maintenance system. These would be technically evaluated, rating all those fidling under management decentralization strategies being implemented trough sectoral policies. During this selecdon process, the consultants would also consider the specific maintenance policy which wowld define priorities and relevant areas under the national hospital maintenance system. The proposed options would contain general characteristics that prvide flexibility for efficiendy adapting to those variables that most directly affect maintnace progms, as well as their realization and development over time. All options prposed in this phase should contain a general design of the maintenance system's operation, in order to gauge and evaluate it. Given the development of computerized data systems, all proposed alternatives should be able to be computerized during the d.velopment phase, in each health institution. (d) Phase IV: Deveopment of Matce Sy for Heath hnttons. This pbase deals with the development of the option selected in the previous phase. It wuld reach the level of details for each sample case. The features to be at least included would be: 0i) Standar aSe - stands and procedures for equipment maintae * sandards and procedures for maintenance of buildings and insalaLations : general standards for replacement of equipment in terms of the cost benefit or cost-effectiveness ratio, including handling of rejects * general stdards for keeping an up-t-date, informadve equipment register (control of operating costs) * general ,peventive maintenance planning models * corrective maintnance and emergency management schemes * sample technical assistmce contracts (ii) ational Featres * basic stucture and general organization * oqranization at the level of SILAIS and health institutions, including a definition of roles and functions * staff equirements and level of staff training (iii) Eecutive Features * managerial and decision-making system * administrtive systems * stem to rate consultas, technical services and suppliers * service contng systems * system to evaluate the degree of compliance by maintenance programs and the result of activities performed * spare parts and matrial control system  NICARAGUA ANNEX 11 HEALTH SECIOR REFORM PROJECT Page 5 of 5 * management eWaluation system * staff taining and instruction system (iv) Economic u . The consultants would estimate the flow of resources required by the option, separately by equipment, building and instllation line items, for each institution. They would also estimate the aggregated cost for the MOH to carry out an adequate yearly maintenance program. This information would be delivered in an appropriate softare format to allow the MOH to simulate scenarios of maintenance system operations. Cost estimates for each item would contain a breakdown of unit prices to allow the MOH to discern the relative incidence of cost components. 11. lbmIng and Cost. The maintenane system study would require 18 months of foreign consultants and 15 months of local consultants and is estimated to cost about US$200,000. It would start in March 1994 and is expected to be completed by August 1994. F. TAms of Reference for Recurrent Costs Study 12. Introduction. The recurent costs for a hospital are those corresponding to human or physical inputs requited to produce a given output. For Nicaragua, rehabilitation of hospitals and replacement of equipment are expected to cause increases in recurrent costs as new equipment will require additional human resources (formerly idle or occupied elsewhere when the equipment did not work), fuel, and materials (such as X-ray film). 13. The purpose of the study is to analyze the impact of various investmente -. hospitals on the recurrent costs supported by the MOH. A simple methodology would be used to esmate for each hospital what would be the additional requirements in human resources, physical inputs, and maintnance that would result from recent or proposed investments in Niaraguan hospitals financed by bilateral and multilateral agencies. The aggregate would provide an estimate of additional recurrent needs that would have to be supported by the MOH (or through user fees) in the future. 14. Methodology. The study would focus on three categories of recurrent costs: human resources, physical inputs, and maintenance. For human resources, coefficients would be designed to define the relationsbip between human resources required and services produced. Distinction would be made between higher- and lower-level professionals and fixed and variable costs. On-going MOH salary and benefit levels would be used. For physical igpiM, a matrix of all physical inputs entering into the production of services would be constmcted (final, intermediary, and support services) to establish unit cost per production center. Project chans in frequency of service production would also be considered. For simple types of diagnosis and treatment, simplified methods or estimates would be used. For , indicators wwld be developed for groups of similar or complementary equipment to estimate future mainknance needs as well as for civil works. 15. iming and Cost. The study would be carried out over a period of five months, strting April 1994. It wold require 9 months of international consultnts and 7 months of local conltants and is exected to cust US$100,000.  NICARAGUA ANNEX 12 HEALTH SECIOR REFORM PROJECT Page 1 of 7 TECHNICAL ASSISTANCE TO JNSSBI A. 'bdichcal Assistance for Reform of INSSBis Health insurance 1. Prject Framewor. The Government of Nicaragua is in the midst of reforming the health sector to improve coverage, access, and quality of health services on the basis of cost- effectiveness criteria and the country's economic situation. To that effect, the Government has strted to strengthen the management and planning in the sector, improve the quality, effectiveness, and efficiency of the health care services. These objectives would be supported by the proposed project. The project would provide tecmical assistance to INSSBI to help it develop a new health insumance model, based on a more efficient administration of the instiuon, that would allow the implementation of more cost-effective health care aternatives and would improve faimness in access to services. 2. INSSBI Health Care Insurance Subcomponent. This subcomponent would finance studies that encompass an integrated, coherent, and supported set of proposals end specific actions to modernize and develop an adequate health insurance system. The proposals would be made within the policy framework defined by the sectoral authorites. 3. For methodological puiposes, the terms of reference of the study have been separated into different components and subcomponents. However, the study would be carmed out in such a way that it would be possible to introduce changes to different areas at a later date, uaking into consideration the whole project. The studies would propose generl and specific plans of action, implementation mechanisms, and the associated investment and operational costs of these actions. 4. Background. INSSBI uMenty needs to redefine its care and financing models for social security and welfare in accordance with the current Government strategies within the framework of the political, economic, and social reality of the country. Tb that effect, INSSBI is currently discussing the design of a social security health model geared toward user satisfaion, faiss in access to the most basic level of health for its beneficiary population, on the basis of fair competition between public and private providers, increased efficiency in the prvision of services to help reduce health costs. Under this new model, INSSBI would manage the mandatory health insurance contributions, define the plans and coverage for medical care of its beneficiaries and, through agreements, would buy health care services from public and private providers to guarntee the medical coverage of its insured. S. For the initial phase of the reforms, INSSBI would start to offer a single health plan to its present universe of beneficarnes (affiliates, maternity expenses of spouse of affiliates, and children under the age of two) on the basis of a basic basket of comprehensive benefits -w th zmghhasis on heilth promotion and prvention among the population. Under this system, INSSBI would purchase health services from comprehensive medical care centers in which users would be free to enroll either individually or collectively and would receive from INSSBI a monthly benefit per insured beneficiary independent of their work category or  NICARAGUA ANNEX 12 HEALTH SECrOR REFORM PROJECI Page 2 of 7 place of work. However during an initial tnsition period when offer of services from the private sector will still be limited, INSSBI will mantain a system of payment for services. 6. These changes would be the result of a significant functional and organizational reform process which would allow INSSBI to deliver social security services to its beneficiary population in a just, efficient, and timely manner and with a level of quality in the provision of these services that effectively corresponds to the mandatory payments made by the beneficiaries for these services. At the same time, improvement in the provision of social security benefits is being considered within a context of modernization of INSSBI's oinzational strucure and the decentralization of its functions to the regional level. 7. Objectives of the Project. The main objectives would be: (a) to reform the INSSBI social security health insurance model; (b) to develop and implement a proper MIS; and (c) to stengthen INSSBrs management capacity. (a) Reform of INSSBI Social Security Health Insuas Model. Through the development of this subcomponent, INSSBI`s senior management would be provided with the necessary consultant SUpport for studies and proposals for reforms of the social security health model, including: (i) insurce administation, which would evaluate the possibility of private health insurance based on the mandatory contribution, subject to an adequate reguatory framework related to health in the third age and the problems of pnvate caophic patients that would permit economies of scale to maintain the proportion of administrdve costs at a reasonable level; (ii) coverage and beneficiaries, which would revise the basic plan on the basis of exerience acquired during the pilot phase, analyze the possibility of expanding coverage to empIoyees' families, and evaluate the convenience of inoducng plans with differentated coverage according to the affiliate's income or on the basis of additional contributions; and (ii) purchase moae'l or model of services, which would review the purchase model with a view io reducing the payment per service provided and favor the greater participation of comprehenive medical centers through the inclusion in their payments of the referral costs, evaluate the possibility of introducing a differeniated payment by beneficiary according to the different levels of relative medical risks, and design of process by which health facilities would bill and receive payment from INSSBI; (b) Manafement Infmation Systms Development. The proposed changes for INSSBI require the implementation of an MIS that would allow the efficient management of available resources. The MIS would include mainly admmistrative, infrmation, and acuarial ystems, although it may be deemed convenient to define addition information sytems during the study, including: (i) administrave information system (AIS), which would include all the documenation required by INSSBI to execte its main functions and finance the health services roquired by its beneficiares efficiently and likewise, the  NICARAGUA ANNEX 12 HEALTH SECTOR REFORM PROJECT Page 3 of 7 flow that such informadon will have within the oranization, including the agents imolved in its generation. The following modules would be included: [a] employers module, which would define how employers would declare and pay required contributions and how INSSBI would monitor the payment of contributions; [b] beneficiaries module, which would establish mechanisms to allow beneficiaries to enroll in INSSBI, have access to the benefits of the basic health plan, and sign up with a health care provider; a fixed amount per employee would be assigned to a health provider selected by the employee; [ci health providers module, which would allow INSSBI to maintain registry of health providers to define the amounts that must be perodically allocated to them according to the enrolled population and monitor their ability to provide the agreed upon services; and [dl health services module, which would help INSSBI build a registry of the health services that the different providers render to its beneficiaries and of the work disability subsidies that it will pay directly; specify control, audit, and management statistics to be kept to provide efficient decision-making tools, and define the framework (forms or computer files) through which the information will be requested from the providers; and (ii) actarial information system (ACIS), which would include the necessary infbrmation to allow INSSBI to audit and control its revenues and operational expenses in order to efficiently manage the resources at its disposal. To that effect, the following modules would be developed: [a] beneficiaries module, which would provide comprehensive data on beneficiaries and their frequency of use of the system; and [b] health services module, which would provide information on the health services and subsidies for work disability being financed by INSSBI; and (c) Management Support Pam. This program would help strengthen INSSBrs management capability through the taining of its managing staff on technical subjects related to the implementation of the new social security health model and the new information systems. 8. Development of Studies, Relations with Counterparts, Management and Coordination Mechan. To carry out the studies, INSSBI would contract consultants with expertise in the specific areas to be stuidied. The counterpart of the studies would be the Project Coordiat Unit (PCU). The consultans would carry out their activities in coordination and under the direction of staff designated by the PCU. In addition, consultants would maintain permanent interaction with the PCU, which would provide the guidelines to ensure that the studies would be developed comprehensively within the global framework of  NICARAGUA ANNEX 12 HEALTH SECITOR REFORM PROJECT Page 4 of 7 the reforms and with the proposals generated in other areas of the project. The PCU would be able to make racommendations for adiecting the studies as work prgress dictates. 9. The conult would conduct rguar dialogue and otherwise work to sensitize, commit, and completely integate INSSBI authorities, managers, professionals, and workers in the development of the studies and proposals to foster their sense of ownership in both the process and results of the studies. 10. Sub-ooponent Activities and Requi ts. Resource requirements for this subcomponent are as follows: Sat-up Nat'l. Intl. | Cost Subcomponent Acvities Duration (project Consultantst1 ConsultantsV _______ .____________ (monfts) month) (cons-imn.) (cons-mos.) (US$000) S _eagtbe of INSSBrs rebrm process 24 13 18 9 117 dministmtive Emplqmers Module .75 1 - 1.5 15 lan Beneficiaries Module .75 1 - 1.5 1S ,ystm Headth Pwvideas Module .75 1 - 1.5 15 Health Services Module 1.25 1 - 2.5 25 Actuarial Beneficiaries Module 1.25 2 - 2.5 25 SyGemation Health Services Module 1.25 2 - 2.5 25 Implementation of the Information Systems 3 5 _ _ 70 Maagement Support ProgrnmY 36 1 3 _ 280 TOTALS 67.5 N/A 21 21 587 Notes: 1' Nationa consultants cost esdmaed at US$1,500 per month Ineationad consulns cost estimated at US$10,000 per month t udget r Mangemet Suo Prgm icludes ta cost of geal and sefic trn curs 11. Monitoring and Evaluation Indicators. The development of the component would be monitored through aggrgte indicators that would help evaluate the implementation of the project and adopt timely actions to correct possible delays or deviations from the timetables and expected reslts. On the other hand, some other indicators would allow to evaluate the final results of the implementation of the new management and health care models and assess whether the reorms in the social secuity health insurnce area had the impacts cxpected. 12. Indicators for moniting of component development include: (a) timely delivery of final reports for each of the activities, duly appwved by the national counterpart; and (b) ime taken by INSSBI and its detizd units to implement the new management and health care models. 13. Indicators for eWluadon of component results are built on the basis of the objeces and policy principles that have led to the refrms of the INSSBI social security health insace model. Within each line of action, the following would be highlighted:  NICARAGUA ANNEX 12 HEALTH SECIOR REFORM PROJECI Page 5 of 7 (a) improvement of the reform of INSSBrs health isurn model, to be carried out on the basis of the implemention of changes agreed as a result of consultants' work; (b) infDrmation tems development, focusing on the following key areas: (i) immediate access of the beneficiaries of the health system to medical services and greater matchimg with their social security contributions; (U) improvement and flexibility in the relations between INSSBI and employrs, especially in the areas of submiting the health contributions and compliance with payments; (iii) performance of the health providers, which would allow INSSBI to improve its negotiation skills in the agreements to be signed; and (iv) control by INSSBI of the real demand for health services from its beneficiaries; and (c) manem support progrms, which would be evaluated on the basis of staff trained in the n ent process. A particular aspect tD be considered on this subject is the reteton time of trained staff. IL Techlcal Assstance for Workme's Compesation Program 14. Backound. INSSBrs current workmens compensation system suffers problems smilar tO that of the health insurance system: (a) low coverage (only 52 percent of workers in the fonnal sector); (b) no incentive for employers to promote prevention of accidents as ptem_ims are under the form of a flat rate of 1.5 percent of the worker's salary; (c) limited incentive to contibute to the system as rehabilitation services are provided free by the MOH; (d) concentration