Argentina - Health Insurance Reform Loans Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6851-AR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON PROPOSED HEALTH INSURANCE REFORM LOANS IN AMOUNTS TOTALING US$350 MILLION TO THE ARGENTINE REPUBLIC APRIL 2, 1996 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit: Argentine Peso (Arg$) Arg$1 = US$1 FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS AGN - Audutoria General de la Naci6n/National Auditor General ANSSAL - Administracion Nacional de Seguros de la Salud/National Administration of Health Insurance CAS - Country Assistance Strategy DGI - Direcci6n General Impositva/Federal tax collection agency FROS - Fondo de Reconversi6n de las Obras Sociales / Restructuring Fund for the National Health Insurance Funds FSR - Fondo Solidario de Redistribuci6nfRedistribution Fund ICB - International Competitive Bidding INSSJP - Insututo Nacional de Servicios Socialespara Jubiladosy PensionadosfNational Social Services Institute for Retirees and Pensioners MSAS - Ministerio de SaludyAcci6n Social/Ministry of Health and Social Action NCB - National Competitive Bidding Obras Sociales - Social health insurance funds OECD - Organization for Economic Cooperation and Development PAMI - Programa de Atenci6n Medica Integral/Integrated Program of Medical Care PMO - Programa Medico Obligatorio/Standard Health Benefits Package PRESSAL - Proyecto de Reforma del Sector Slud&Provincial Health Sector Development PROMIN - Proyecto Materno Infanfil/Maternal and Child Health Project SOE - Statement of Expenditure UEC - Coordination and Executing Unit  ARGENTINA HEALTH INSURANCE REFORM LOANS FOR OFFICIAL USE ONLY TABLE OF CONTENTS Page No. LOAN AND PROGRAM SUMMARY i I. THE ECONOMIC SETTING 1 A. Recent Performance 2 B. Social Expenditure and Health Insurance Reforn 6 II. THE HEALTH SECTOR 9 A. Background 9 B. Major Issues in Health Insurance 19 C. The Government's Health Insurance Reform Program 25 III. THE REFORM PROGRAM 29 A. Background 29 B. Loan Objectives 30 C. Loan Description 30 D. Cost and Financing Plan 36 E. Loan Conditions 38 F Implementation Arrangements 42 G. Disbursements and Auditing 43 H. Benefits and Risks 43 I. Recommendation 45 ANNEXES A. Policy Matrix 46 B. Letter of Development Policy 48 C. Fondo de Reconversion de las Obras Sociales 67 (FROS) -- Plan of Operation D. Regulation of Obras Sociales 73 E. Health Insurance Policy Reforms 81 F. Project Execution Organizational Structure 86 G. The National Obras Sociales 94 H. The Central Redistribution Fund (FSR) 104 I. The Integrated Program of Medical Care (PAMI) 110 J. Pre-Paid Health Care (Las Pre-Pagas) 120 K. Timetable of Key Processing Events 123 L. Status of Bank Group Operations in Argentina 124 M. Key Macroeconomic Indicators 127 This MJemorandum of the President is based on work of an appraisal team consisting of Robert Hecht (Mission Leader, LA1HR); Richard H. Hoffman, Jose Moscoso, Cristian Baeza, Brenda Enuton (L4 JHR); Helen Saxenian (HDD); Pablo Gottret and Anita Artaza (Consultants). Karla McEvoy was in charge ofproduction. The Managing Division Chief is Alain Colliou and the Country Director is Gobind T Nankani. |his document has a restricted distribution and may be used by recipients only in the performance of their |officia] duties. Its contents may not otherwise be disclosed wiLhout World Bank authorization.   i ARGENTINA HEALTH INSURANCE REFORM LOANS Loan and Program Summary Borrower: Argentine Republic Amount, Two loans totaling US$350 million equivalent Terms, (i) A first loan for US$250 million at the standard amortization term, grace period, and interest rate for fixed- rate US dollar single currency loans expected to disburse in 0-3 years; and (ii) a second loan for US$100 million equivalent, repayable over 15 years, including five years' grace, at the standard variable interest rate for currency pool loans. Implementing Agencies: The Ministry of Health Beneficiaries: The Obras Sociales', INSSJP2, and the Ministry of Health. Commitment Fee: 0.75 percent on undisbursed loan balances, beginning 60 days after signing, less any waiver. Program Objectives: The Government has requested that the Bank finance an operation to reform of the country's health insurance system, focusing primarily on the compulsory payroll tax financed "social" insurance (the Obras Sociales and INSSJP), which covers 60 percent of the population and accounts for 2 percent of GDP. Benefits: Through the introduction of competition and improved regulation of insurers, the development of a basic health benefits package, and the improved use of a health risk and income equalization fund, millions of Argentines will obtain better health care value and improved quality of health services. Waste and misuse of funds will be reduced. Improved health outcomes for a large segment of the country's work force covered by mandatory social insurance will result in lower absenteeism and higher labor Social health insurance fimds. 2 Instituto Nacional de Seguridad Social para Jubilados y Pensionados, the social health insurance fund for the elderly and pensioners.  ii productivity. In fiscal terms, the Obras system will achieve real savings of at least US$150 million a year and will eliminate their operating deficits. The INSSJP will obtain an annual savings of US$300 million by 1998 and attain financial balance. These combined fiscal benefits amount to about one percent of the federal government budget. Risks: The main risk is political. To minimize this risk, the President and Cabinet of Ministers have unanimously endorsed the reform. Key stakeholders (trade union leaders, medical associations, etc) have been consulted and the reform provides strongly incentives for them to embrace the reform. The introduction of consumer choice in the insurance market will advance gradually according to a series of politically manageable steps. A second risk is the continued waste and misuse of funds by the Obras Sociales and INS SIP. This risk will be mitigated by introducing competition among the Obras, establishing stringent criteria for Obras to qualify for assistance from the Fondo de Reconversi6n de las Obras Sociales (FRO S), and setting and enforcing stronger regulatory and prudential standards for the Obras Sociales system. A third risk is of possible delays in the development of the new legal and regulatory framework and institutions for reform because of capacity contstraints This risk will be addressed through a parallel Bank-financed technical assistance project which will obtaining technical guidance from both developing and developed countries with relevant experience in health insurance reform. Povery Catesgory: The project does not respond to a standard poverty category. By implementating a basic health benefits package for all insured persons and redirecting FSR resources to Obras Sociales with lowest levels of revenue per beneficiary, the project will greatly improve the equity of the social health insurance system. On the basis of revenues currently available, redirection of the FSR will benefit over three million persons with average monthly insurance contributions of less than US$18, including over half a million farm laborers' families living below the poverty line. Estimated Disbursements: The package of two linked adjustment loans totaling US$350 million will disburse in three tranches as follows:  tranches of USS150 million and US$100 million from the Single Currency Loan, and a final tranche of USS 100 million from the Currency Pool Loan. Tranche releases will take place once the Government has met both the macroeconomic conditionality and the conditionality related to reform of social health insurance, as described in the Letter of Development Policy and spelled out in Chapter 3 and in the policy matrix. FY 97 (Smillion) FY 98 (Smillion) Annual 250 100 Cumulative 250 350 Financing Plan: The operation will be financed through a pair of World Bank adjustment loans (a Single Currency Loan and a Currency Pool Loan) totaling US$350 million and a national contribution of US$400 million equivalent. Rate of Return: Not applicable   REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON PROPOSED IIEALTH INSURANCE REFORM LOANS TO THE ARGENTINE REPUBLIC IN AMOUNTS TOTALING US$350 MILLION I submit for your approval the following report and recommendation on a package of two inter-related adjustment loans to the Argentine Republic, in a total amount of US$350 million, to improve the efficiency and equity of Argentina's social health insurance system. The first two tranches ($250 million) would be financed as a fixed rate US dollar single currency loan, with the standard amortization term, grace period, and interest rate for such loans that are expected to disburse in 0-3 years. The third tranche ($ 100 million) would be financed as a currency pool loan, repayable over 15 years, including 5 years' grace, at the Bank's standard variable interest rate for such loans. This report is being submitted simultaneously with a Memorandum of the President for a proposed Health Insurance Technical Assistance Project to the Argentine Republic in an amount of US$25 million equivalent, which would finance activities to design and implement improved policies, regulations, and institutional development to support the Government's health insurance reform program. 1. THE ECONOMIC SETTING' 1.1 Five years have passed since Argentina, emerging from the severe economic crisis of 1989-90, adopted the Convertibility Plan. This innovative plan restructured Argentina's economic landscape. From extreme hyperinflation, the country moved relatively quickly to an annual inflation rate of 3.9 percent in 1994. Output and productivity increases have been remarkable for the 1991-94 period, with GDP growth averaging 7.7 percent. The initial consumption-led boom matured into a healthy pattern of investment and export-led growth, sidetracked only by the 1995 recession, when the economy contracted by 4.4 percent. Privatization of state assets has been far-reaching, and much more successful than expected. As a result of the economic recovery, poverty levels have declined, although economic restructuring with a rigid labor market has resulted in increased unemployment. The Government also launched a number of microeconomic reforms, particularly in labor legislation, with the aim of reducing labor costs and increasing productivity. Resulting improvements, combined with favorable I A full exarnination of Argentina's balance of payments and growth prospects in the post-Mexican situation is set out in the Country Assistance Strategy, (Report No. 14278-AR, dated April 10, 1995), discussed at the Board of Executive Directors meeting on May 4, 1995, and in the CAS update to be presented to the Board simultaneously with the health insurance reform loans described in this report.  2 exchange rate developments in Brazil, have allowed export expansion to be strong in recent years and to underpin growth. 1.2 The Convertibility Plan was part of a comprehensive reform program at the national level2 including reforms of the state and financial institutions, privatization, and extensive market liberalization. While fiscal adjustment has occurred at the federal level, provincial fiscal deficits persist, mainly because of the continued inability of provincial governments to contain current expenditures and sufficiently increase their own-source revenues. A. Recent Performance 1.3 With the dynamic evolution of the economy (shifting through phases of consumption-led, export-led and then investment-led growth), GDP in 1993 and 1994 grew by 6 and 7.1 percent, respectively. Gross fixed investment reached 20 percent in 1994, associated with increased national and foreign savings. Exports, which were affected by declining international prices in 1992-93, rose by 20 percent in 1994, with manufactured goods exports exhibiting particular buoyancy, growing at an average of 27 percent in 1993-94. Better international prices for grains and improved economic conditions in Brazil contributed to the growth in exports. In 1994, imports grew at the fast pace of 27 percent. Imports of capital goods led the expansion, indicative of the acceleration in investment and the restructuring of the economy. Financing trade and current account deficits was not difficult, given Argentina's improved access to international financial markets during 1993 and 1994. 1.4 Following the fast expansion of the first four years of the Convertibility Plan, in 1995 the Argentine economy suffered a recession. The main reason behind this contraction was the impact of the Mexican economic crisis, that reverberated throughout Latin America. The sharp recession caused an increase in unemployment, and strained the performance of the financial system. The regional financial crisis was the first severe test of the Convertibility Plan. Yet, by the end of 1995, there were signs that Argentina was pulling out of its recession without serious damage to the Convertibility Plan. To the contrary, significant pressures to deviate from it were met by efforts to further strengthen it during the crisis, indicative of the Plan's popularity and staying power. It can be claimed that in some respects, the credibility of the Convertibility Plan was strengthened from the 1995 crisis. 1.5 Economic Performance in 1995. Preliminary data suggest that, during 1995, the Argentine economy suffered a recession of approximately 4.4 percent of GDP. The initial shock, generating a confidence crisis, contributed to capital outflows, which for the first four months of the crisis prior to the May Presidential elections caused a 17.6 percent loss in banking deposits (US$8 billion), with liquid international reserves declining 2 Past Bank support for this program has entailed various operations in support of financial sector adjustment, capital market development, privatization and modernization of the public sector.  3 by 30 percent (US$4.8 billion). Under the Convertibility Plan, where the monetary base has to be fulfly backed by international reserves, capital outflows resulted in the demonetization of the economy. This demonetization affected both the performance of the financial system, but also real economic activity. There was increasing evidence however, that the economy ceased to deteriorate in the fourth quarter of 1995. Expectations improved considerably: the stock and bond markets rebounded strongly, deposits and international reserves recovered the losses suffered early in the crisis. Furthermore, for 1995 as a whole, cumulative inflation was 1.6 percent, the lowest rate in 51 years. 1.6 As the economy slipped into recession, investment retracted as well (approximately by 15 percent), and unemployment surged, first rising to 18.4 percent (May, 1995), before dropping back to 16.6 percent (October, 1995). The number of bankruptcies surged, reportedly doubling the rate of the previous four years taken together. The impact of the shock was moderated by a strong foreign trade perfornance. A combination of good international commodity prices, the contracting domestic economy, the continuous real depreciation of the peso, and the fast pace of economic expansion in Brazil, resulted in a 32.3 percent growth in exports. With the deepening recession, imports declined by 7.8 percent, producing a sharp improvement in the trade balance, which shifted from a US$5.8 billion deficit in 1994 to a US$0.9 billion surplus in 1995. As a result, the current account deficit was cut to US$4.3 billion, less than half the 1994 level, or 1.4 percent of GDP. Despite the improvement in the current account, the sharp reduction in net capital inflows resulted in a reduction of US$1.7 billion in net international reserves. 1.7 Fiscal performance was also detrimentally affected by the recession. Despite efforts to rein in expenditures, the shortfall in revenues generated a fiscal deficit equivalent to one percent of GDP, or US$2.8 billion (including privatization receipts of USS0.9 billion). Half of that deficit was financed by a tax amnesty program announced in November 1995, and the remainder from other sources. Total federal public sector debt rose by US$7.8 billion in 1995, most of it foreign, reaching a level of US$88.4 billion. In addition to the federal fiscal deficit, preliminary estimates put provincial fiscal deficits at 0.8 percent of GDP, bringing their debt level to over US$11 billion. In a crisis year, where provincial banks faced disproportionately larger difficulties than the rest of the financial system, provincial deficits were increasingly financed through arrears to providers, salaries and pensions. 1.8 Implications of the Crisis. In the first months of the Mexican crisis, the financial markets' reaction suggested that Argentina was perceived as being more vulnerable to the external shock than most other Latin American countries. In addition to the decline in deposits and international reserves mentioned above, between the end of 1994 and mid-March 1995 the stock market index declined by 30 percent, as did dollar- denominated Government bond prices. Argentina's greater perceived vulnerability was due to its relatively heavy reliance on foreign capital inflows, the inflexibility of its exchange rate regime, and the weakness of its financial system. The structural conditions of the banking sector--no deposit insurance, absence of a lender of last resort, and a segmented and inefficient system, as well as the memories of many previous financial  4 crises that ended in asset confiscation-- fueled a mini-run on deposits and a flight to quality among many depositors in the system. Simultaneously, interbank market access shrank down to top private sector banks and the interbank interest rate increased sharply, pushing several solvent but illiquid institutions to the brink of failure. 1.9 The Mexican crisis brought to light important lessons for Argentina. It: (a) highlighted the extent of the economy's reliance on volatile capital flows; (b) revealed the need for a strong financial system, including the relevance of a dollar lender of last resort in an increasingly dollarized system; (c) reemphasized the need to sustain credibility of the economic program; and (d) made obvious the difficulties in changing the exchange rate during periods of crisis. 1.10 Vulnerability. The Convertibility Plan had so far served Argentina well. Nevertheless, under the fixed exchange rate regime, the economy remains vulnerable to sharp swings in capital flows. During periods of decelerating or declining capital flows, lags in the adjustment in relative (domestic to foreign) prices will create a slowdown in economic activity. An economy with a weak financial system and rigid labor markets is even more vulnerable to shocks, particularly under a fixed exchange rate regime where changes in capital flows could be more pronounced. Financial vulnerability could cause great damage in a short period of time since it magnifies the deleterious effects of negative random shocks. As the recent experience in Argentina shows, capital movements usually affect the weakest financial institutions first, creating problems that could subsequently affect the entire financial system, thus reinforcing the effect of negative capital movements. 1.11 A further dimension of this financial vulnerability under the Convertibility Plan is that the Central Bank, under a fractional reserve requirement system, is a weak "lender of last resort", since its dollar reserves are not sufficient to stem a serious banking run. To reduce the risks of a financial crisis in an increasingly dollarized system, there is a need, for example, to get explicit support from other central banks, possibly via swaps. However, while such a facility may be desirable, it is unlikely that a variation of the Mexican emergency support program is replicable. 1.12 The Exchange Rate Regime. Under a fixed exchange rate regime, where capital flows could be volatile since changes in relative prices are more difficult to generate, crisis management in a fractional reserve requirement system requires either the Central Bank to hold large international reserves, or international support needs to be assured in order to provide a lender of last resort to the financial system. Flexible exchange rates, however, are less attractive in a highly dollarized economy, and, in any case may lead to undue volatility in the real exchange rate, as the Mexican experience made all too obvious. In the case of Argentina, approximately three-quarters of private sector liabilities, four-fifths of government debt, and over half of bank credit is in US dollars, and a devaluation would have a further destabilizing effect on the banking system, as well as on corporate and public finances. A devaluation under crisis conditions could prove to be highly counterproductive, deepening the crisis it is intended to correct. It could discredit hard won gains obtained under the Convertibility Plan, and would result in capital outflows, a banking crisis, higher inflation, and a possible economic depression.  5 1.13 Credibility. With a vulnerable financial sector, it is imperative to strengthen the credibility of the economic program. This is another lesson one can draw from the recent Mexican crisis. While the Argentine adjustment process remains robust, and reforms to make financial and labor markets more flexible were proposed, since mid- 1993 there was a hiatus, with some important reforms deferred pending legislative or provincial approval and implementation. Additionally, during the second half of 1994, the national government's fiscal surplus was reversed, primarily on account of social security reform efforts and higher expenditures. National deficits compounded provincial deficits, reversing an improving trend in consolidated fiscal accounts. While longer term, inter- generational transfers may in one sense justify the higher transitory net costs of the reforming social security system, in retrospect, short-term considerations regarding the credibility of the adjustment program showed that a relaxation of fiscal policy was premature. Thus, when the Mexican crisis erupted, the Government had to address both the vulnerability of the financial system as well as the credibility of its economic program. 1.14 The Government's Response. The Government reacted forcefully to the crisis. Early on, it took strong measures to redress the fiscal balance by cutting expenditures on, among others, export subsidies, public sector wages, and social security expenditures, while raising temporarily VAT rates (by three percentage points to 21 percent) and other taxes. Swift action by Congress in approving unpalatable emergency measures at the early months of the crisis added to the credibility of the measures, which were supported by programs of multilateral institutions. As the Government was announcing these measures in mid-March 1995, it also assembled an international financial package of approximately US$11 billion in support of the Convertibility Plan. The announcements effectively stopped the accelerating decline in bank deposits. 1.15 During the crisis, the Government successfully resisted growing pressures to reverse the economy's liberalization. To its credit, it decided to deepen this process and further accelerate economic adjustment, through labor, social security, and fiscal reforms. In the labor area, Congress approved a law increasing the flexibility of the labor legislation for small and medium enterprises, a work-related accidents law, and a Bankruptcy Law. Congress also approved the Social Security Solidarity Law, to reestablish maximum limits for all beneficiaries, eliminate the automatic adjustment of benefits, apply the provisions of the Convertibility Law to the determination of pensioners, and modify the associated legal proceedings. The Law also allowed for the establishment of a limit on pension outlays, which have been an important cause of macroeconomic instability in recent years. 1.16 In the fiscal area, the Government obtained Congressional approval for implementing during early 1996 a Second Public Sector Reform (steamlining public administration, increasing its efficiency and predictability), and another law giving extraordinary authority to the Executive for 1996 to resolve fiscal shortfalls without further recourse to Congress, including broadening the personal assets tax, and the extension for a second year of the temporary increase of the VAT to 21 percent. Additionally, it implemented a successful tax moratorium, generating a flow of $4 billion in revenues over the foliowing 30-35 months. The announcement of such measures, and the continuity of the Convertibility Plan, were well received by the markets. Were it not for  6 inteal political difficulties that emerged in the second half of 1995, and later subsided, it is likely that economic activity in Argentina would have recovered earlier The proposed reform of the payroll tax financed health insurance system, currently under way and being supported by these proposed World Bank loans, will also make a significant contribution to eliminating the fiscal deficit in 1996, 1997, and beyond. 1.17 On the financial side, immediately after the Mexican crisis erupted, the Central Bank tightened liquidity to prevent a curency run. It subsequently set up facilities to assist small banks in crisis. To counter the risk of further bank failures, it also facilitated the use of interbank credit, and reduced temporarily reserve requirements in both dollar and peso deposits, and used rediscounts at a faster pace. The use of excess reserves, and the reduction of the reserve requirement (established for prudential reasons earlier, but not a requirement for the Convertibility Plan) at the height of the crisis, provided limited but badly needed margins of liquidity that the absence of a lender of last resort could not provide. The Government, with the assistance of two World Bank loans, established a Trust Fund for Privatization to handle the workout of provincial banks, and a Bank Capitalization Trust Fund to handle the recapitalization/restructuring of distressed private banks. These Trust Funds made a significant contribution to averting a full scale systemic banking crisis. Measures were also taken to strengthen the supervision of the financial system. To stem capital inflows, the authorities facilitated the further dollarization of the banking system, by further limiting distinctions between dollar and peso deposits. '.18 At the provincial level, the national crisis aggravated an already problematic situation, in view of the absence of meaningful reforms in the early years of the Convertibility Plan. Faced with a serious deterioration in their fiscal affairs, and social unrest in a number of provinces, in 1995 various local governments, assisted by the Federal Government's incremental support to the provincial reform effort, accelerated their adjustment process: five provincial banks were privatized (with another 10 in the process of privatization), three social security systems were transferred to the streamlined national system, salaries were cut, and a number of redundant public employees were let go (contributing to the rise in unemployment). Additionally, a significant number of public enterprises, particularly in provinces committed to a reform program, were privatized. Of the total of 35 enterprises slated for privatization in eight such provinces, 17 were privatized by early 1996, and privatization laws have been passed for all of the rest. B. Social Expenditures and Health Insurance Reform 1.19 Public social expenditure3 under the Convertibility Plan has been growing in absolute and relative terms, reflecting the Government's commitment to invest in human capital and reduce poverty. Consolidated public social expenditure increased from 16.4 percent of GDP in the 1984-88 period to 17.3 percent during the first Menem 3 Public social spending includes expenditures of the naiond govnment, the provnce municipalities in the social sectors (culture and education, alth, hosing nutrition, waer am I station, social welfare, labor, sports, et al.), and social nce (social wecurit, family allowances, health fnds, and unmployment insurance).  7 Administration (1989-94), reaching US$51.4 billion or 18.4 percent in 1994. It is worth noting that this increase took place as the size of the overall public sector diminished from 33.2 percent of GDP during the previous administration to 29.9 percent in the 1989-94 period, on account of a major privatization effort. Consequently, overall social spending as a share of total public expenditure rose significantly from 49.5 percent in the 1984-88 period to 67.2 percent in 1994. 1.20 Within total social expenditures, more than half of the 1994 budget (57.3 percent) was devoted to social insurance programs, including old age and disability pensions, health insurance, family allowances, and unemployment insurance. This high proportion of spending for social insurance, mostly financed through earmarked payroll taxes, reflects Argentina's aging population profile, non-communicable disease epidemiology, and an increased pool of unemployed persons and the working poor requiring social assistance. Within social insurance, the largest proportional increases in spending have occurred in social security pensions (up from 34 percent of the total in 1984-88 to nearly 39 percent in 1994) and in health insurance for the elderly under the Instituto Nacional de Seguridad Socialpara Jubilados y Pensionados (INSSJP, from 4 to 5.1 percent during the same period). 1.21 In response to the recent economic crisis, the Federal Government in December 1994 and again in March 1995 cut its original 1995 budget by a total of 3.9 percent or US$1.6 billion (from US$42.9 billion to US$41.3 billion). Leaving aside social insurance expenditures, the federal budget for the "traditional" social sectors was reduced by about 6.3 percent, from US$8.6 billion to about US$8.1 billion. The programs suffering the largest cuts were education (down by 9.2 percent), health, and labor (each down 3.5 percent). In order to preserve the most essential health and nutrition services and publicly-financed jobs for the poor and newly unemployed, the Government agreed to maintain spending for a core set of "targeted" social programs with an annual budget of about US$1 billion, as an important conditionality in its social safety net operations with the Inter-American Development Bank and the World Bank3. 1.22 Even though the Government did not announce specific cuts in Argentina's federal social insurance programs, expenditures for these programs which depend on earmarked wage taxes are also expected to decline in 1995 and beyond. This is because employment and thus taxable wages have contracted substantially during the current recession, while tax evasion by employers remains high despite a vigorous Government 4 To cushion the impact of these budget cuts, assi families adverly affected by economic adjustment, and improve tat and cost-ffctiveness of social senmice delivery the Bank developed with the Government a Socal Protection Project supported by a loan of US$152 million. The projoct provides assistance to improve social expenditure managent and taring of services, while financing poverty-reduction activities to communities in extrem poverty. The loan for the Social Protection Project (Ln 3957-AR) was presented to the Board on November 21, 1995 and became effective on December 13, 1995.  8 effort to combat evasion. Revenue collections for social inurance have also been negatively affected by another of the Government's policies to make Argentina's economy more competitive internationally and to encourage employers to hire more labor, by lowering the overall burden of wage taxes. These taxes in recent years amounted to nearly 54 percent of wages and included payroll deductions for pensions, health insurance, and unemployment insurance. Starting in 1994, a series of reductions in employers' contributions have been gradually phased in. The reductions vary from province to province, averaging about 30 percent of employers' contributions nationwide. Several recent analyses suggest that overall, they could depress earmarked revenues for the health insurance program for the elderly by as much as 12 percent and for active workers and their dependents by up to 20 percent. 1.23 Since health care spending has not been reduced but has instead continued to grow during this period, the Obras and INSSJP are now incurring large operating deficits and growing arrears. The Obras' combined losses for both 1994 and 1995 are estimated at about US$150 million annually. INSSJP, which lost US$360 million in 1994, has reported operating shortfalls as large as US$40 million per month during the first part of 1995. While the INSSJP has recently begun to take measures to bring expenditures into line, a dip in revenues in the latter months of 1995 and the use of the Instituto 's revenues to pay an income support subsidy to low-income pensioners during the year is likely to result in another large annual operating loss conservatively estimated at US$200 million. Correcting these financial imbalances is an important part of the Government's current efforts at fiscal adjustment. 1.24 Although over the longer run it may be possible to generate additional revenues for health social insurance, in the short run Argentina will only be able to restore financial equilibrium to its health insurance system by containing expenditures. This will require the imposition of limits or a clearer definition of the health benefits covered, and the adoption of measures to raise internal efficiency substantially. It is widely recognized that even though the Obras Sociales and PAMI provide a wide range of important health care services to about half the population of Argentina, they operate with serious inefficiencies due to excess staffing, poor contracting practices, and weak management. The recent economic crisis and its negative impact on the revenues and balance sheets of the Obras and INS SJP have only added greater urgency to the reform of the social health insurance institutions, which account for about US$6 billion in annual spending (more than 2 percent of GDP). The Government is now planning to undertake such a reform of the country's health insurance system, with assistance from the World Bank. The proposed reform strategy and the related Bank-financed program are described in detail in the following chapters of this report.  9 2. THE HEALTH SECTOR A. BACKGROUND 2.1 Health Status. In many respects, Argentina already possesses a highly developed health system, particularly by developing country standards (see Table 2.1). The country has one of the highest doctor-to-population ratios in Latin America (nearly three doctors per thousand inhabitants), while the number of hospital beds (4.5 per thousand inhabitants) is similar to that of many OECD countries. Vaccination of young children is widespread, and a broad range of primary care services is available in most parts of the country. At the other end of the health services spectrum, the top teaching hospitals in Buenos Aires operate some of the most advanced units in the region for diagnostic imaging, organ transplants, and reconstructive surgery. 2.2 Despite these achievements, the Argentina health system faces several major problems. In comparison with other middle-income Latin American countries -- most of which have lower per capita incomes and spend less on health -- a number of health status indicators in Argentina are worse. Infant mortality, for example, with a rate of 29 per 1000 live births, is higher than in Chile, Colombia, Costa Rica, and Uruguay, all of which have per capita incomes that are half of Argentina's or less. Serious inefficiencies and inequities in the use of resources for health services -- with the majority of these resources flowing through the country's health insurance system -- are a major factor contributing to these disappointing health outcomes. 2.3 Demographic and epidemiological changes in Argentina are also creating major challenges to the health system, both to respond effectively to a greater share of non-communicable diseases and to contain the associated health care costs. As fertility declines and life expectancy increases, the Argentine population is aging -- in 1993, about nine percent of the total population of Argentina was 65 years or older. This demographic trend is accompanied by a rising prevalence of chronic and degenerative diseases such as cancers, traumas and cardio/cerebro-vascular diseases, which accounted for about 63 percent of all deaths in 1992. The high cost of treating these diseases enhances the priority of health insurance reform. 2.4 Health Sector Structure. The Argentine system of health includes a wide range of public, semi-public and private institutions, for both the delivery and the financing of health services. Although this heterogeneity is one of the strengths of the system, the complex structure of the sector creates problems of coordination and, in some cases, contributes to the inequalities and inefficiencies of health care in Argentina.  10 Table 2.1: Comparative Health Statistics Per Capita Average Infant Physicians Hospital % of GDP Life Mortality per thousand Beds per Children <1 (US$/1992) Expectancy Rate Population Thousand Vaccinated in Years (1992) (1990) Population for DPT (1992) (1990) (1993) ARGENTINA 6,050 71 29 2.7 4.5 79.2 Mexico 3,470 70 35 1.7 0.7 91.0 Uruguay 3 3,340 72 20 3.7 4.8 88.0 Venezuela 2,910 70 33 1.6 2.3 68.7 Brazil 2,770 66 57 1.4 3.6 68.5 Chile 2,730 72 17 1.1 3.2 93.7 Costa Rica 1,960 76 14 1.3 2.5 86.0 Paraguay 1,380 67 36 0.7 1.7 78.9 Colombia 1,330 69 21 1.1 1.5 83.0 Source: World Bank, "World Development Report" (1994) and PAHO, "Health Conditions in the Americas" (1994). 2.5 Health Service Delivery. In Argentina, health care delivery responsibilities are broadly shared by public providers, private providers and semi-public entities. The majority of doctors have either full-time private practices or combine employment in public hospitals with part-time private practice. With regard to facilities, about 50 percent (67,000 beds) are in private hospitals and clinics, 39 percent (47,000 beds) in public institutions, and the remaining 11 percent (8,000 beds) are operated directly by the semi-public health insurance funds known as the Obras Sociales. 2.6 Within the public sector, the federal Ministry of Health and Social Action (Ministerio de Saludy Acci6n Social, or MSAS) retains important policy-making, norm- setting and regulatory functions, but has few health care facilities of its own. Most responsibility for service provision lies with the Provincial Health Ministries (Ministerios Provinciales de Salud, or MPS) and, in some cases, their municipal counterparts. The scope, quality and size of public delivery systems vary significantly, according to the economic and political strength of individual provinces and the extent of local insurance coverage. 2.7 Service delivery capacity in the public sector, predominantly hospital- based, is seriously eroded, as a result of both inadequate financing and management weaknesses. Most hospitals are old and inadequately maintained, have obsolete equipment, and are poorly managed. Internal inefficiencies are further magnified by the lack of accountability of hospital directors. As decision-making is highly centralized at the level of the MPSs, hospitals have limited authority to achieve improvements in efficiency. 2.8 Since most public expenditures for health take place at the provincial level, and since the vast majority of this spending occurs in hospitals, the Government is focusing on raising efficiency and quality of care in the provincial hospitals, through a  11 series of measures designed to: (a) improve management (through training, technical assistance, information systems, and the use of strong performance incentives); (b) increase the quality of the hospitals' physical assets (through selected investments in infrastructure and equipment); and (c) ensure a strong and sustainable flow of financial resources to the hospitals, especially by encouraging them to bill and collect fees from patients who have insurance coverage.' To achieve these reforms, the Government is providing public hospitals with the legal basis for greater autonomy in managing their own resources and in generating revenues through billing, in the form of a new law for self- managed hospitals (hospitales de auto-gestion). To support the reforms, the Government has also prepared a Provincial Health Sector Development Project, which it is financing in part with a World Bank loan of US$101 million. 2.9 The large and influential private sector provides care to Argentines affiliated with a commercial health plan, able to pay "out of pocket," or with access to the semi-public Obras Sociales, which contract the bulk of services with private providers (see also paras. 2.14 to 2.19). The vast majority of Argentine physicians, who are organized in provincial and national professional associations, are engaged in private practice at least on a part-time basis. Private health services have grown rapidly in recent years as a result of skillful marketing, growth of contractual opportunities with the Obras Sociales, and increasing consumer dissatisfaction with the quality of public health services. 2.10 Although the bulk of services covered through the Obras Sociales are contracted from private (about 90 percent of all contracted services) or public providers, some of the Obras Sociales do provide a portion of services directly through their own network of facilities. Traditionally, providers have been paid on a fee-for-service basis, although Obras Sociales today employ a variety of other contracting methods, including capitation and case-based arrangements. Some of the Obras Sociales for white collar workers have contracts with private insurance plans to provide services to their members.2 2.11 Health Care Expenditures and Financing. Argentina's total expenditures on health (more than 7 percent of GDP in 1993) are high for an upper-middle income developing country, more closely approximating OECD expenditure patterns. Sectoral expenditures are financed by federal and provincial taxes and other government revenues (about 22 percent of total expenditures), social insurance taxes (36 percent), and household payments, either direct (e.g., drug purchases) or through private health insurance (42 percent). (See Table 2.2). Surveys of several general public hospitals revealed that 30 to 50 percent of patients actually have insurance, even though the hospitals recover only a negligible fraction of their costs from the insurers. Five percent of Obras Sociales members who were hospitalized in 1994 reported that they relied on public health services, frequently without cost recovery. For the roughly one-third of the Argentine population without health insurance who rely heavily on the public delivery system, the Government is also studying options for implementing some form of subsidized insurance in which "money follows the patient" to the doctors or hospital chosen by the patient. 2 More information on private health care is provided in Annex K of this report  12 Table 2.2: Health Expenditures in 1993, by Source (as percent of GDP and percent of total healtb expenditures) Total Expenditure % of Total % of GDP (million current Health (1993) ArS) Spending Federal Government 357 2 0.14 PUBLIC SECTOR Provincial Governments (including Metro. Buenos Aires) 3022 16 1.18 Municipal Governments 639 4 0.25 Subtotal 3988 22 1.57 National Obras Sociales (ANSSAL) 2787 13 1.09 OBRAS SOCLI LES Provincial Obras Sociales 1311 7 0.51 PAMU(INSSJP) 2211 12 0.87 Other 367 2 0.14 Subtotal 6677 36 2.61 Indirect (pre-pagas, mutuales, PRIVATE SECTOR private plans) 3539 19 1.39 Direct (medications, direct medical care) 4161 23 1.63 Subtotal 7700 42 3.02 TOTAL 18,374 100 7.20 Source: MSAS 2.12 Health care delivered in public facilities is financed from general tax revenues, with 75 percent of funding from provincial governments, 16 percent from municipalities and 9 percent from the federal government. The role of MSAS is now largely limited to funding of a handful of high priority programs (e.g., immunization and food supplementation) and a statistical service. Provincial governments finance health expenditures through locally raised taxes on assets and economic transactions and selected automatic federal transfers, channeled to the provinces through discretionary grants or federal revenue sharing. In municipalities which have assumed responsibility for health service delivery, local revenues are supplemented by provincial transfers. 2.13 In addition to "out of pocket" expenditures for drugs and services, private financing is represented by the financial intermediation of commercial insurers or similar financial groups, who cover on a pre-paid basis services provided by private clinics or HMOs. Around 200 private insurance plans (pre-pagas) cover an estimated three million individuals. In addition, there are about 1,000 non-profit mutual insurance funds (mutuales), which offer health care plans funded by individual contributions. 2.14 Social Health Insurance Funds (the National Obras Sociales). The Argentine social insurance system, collectively known as the Obras Sociales, accounts for about 36 percent of health sector expenditures3. The national Obras Sociales make up the 3 More information on the Obras Sociales is provided in Annex H of this report.  13 largest share, at 15 percent of national health expenditures.' Most formal sector workers and their dependents in Argentina are required to receive health insurance through a health insurance fund (Obra Social) linked to their place of employment -- workers are "captive" members of their Obra Social, to the extent that they are automatically assigned and have no freedom to select membership in other funds. There are about 310 Obras Sociales in operation,5 which together cover about 18 million Argentines (about 55 percent of the total population), including: (a) 9 million members of the national Obras Sociales; (b) 5 million members of province-based Obras Sociales (health funds for employees of the provincial and municipal governments); and (c) about 4 million members of the Program of Integrated Medical Care (Programa de Atenci6n Medica Integral, or PAMI), a special Obra serving primarily the elderly and disabled (see also paras. 2.20 to 2.27). 2.15 The Obras Sociales differ among themselves considerably in terms of size, benefits provided, and financial stability. The seventeen largest national Obras Sociales, each of which has over 100,000 members, account for 57 percent of total enrollment. However, given the establishment of individual Obras Sociales by occupation and industry, there is a proliferation of Obras Sociales with very small memberships. Although there are eight legally recognized types of Obras Sociales, the most important at the national level are: (a) the Obras Sociales sindicales, made up of workers under collective labor contracts (55 percent of beneficiaries); (b) Obras Sociales de administraci6n mixfa, which are jointly managed by the public sector and workers' representatives (28 percent of beneficiaries)6; and (c) Obras Sociales for white collar employees (personal de direcci6n), which serve managerial employees from one or more industries (seven percent of beneficiaries). 2.16 The Obras Sociales receive most revenues through the Social Security system, through a flat percentage of wages paid by both employers and employees, up to a ceiling of US$3,750 per month.' As the social insurance funds group together workers with similar income levels, the average revenue per beneficiary varies greatly across the 4 Discussion here reflects only these national Obras. 5 ANSSAL records indicate an additional eighty Obras Sociales which remain on the books, but report no current activity or members. 6 Presidential Decree 492/95 (September 1995) calls for the dissolution of the Obras de administracion mixta, which would then be reconstituted as Obras Sindicales. This would permit these Obras to reorganize and shed excess personnel without being subjed to civil service regulations. 7 A handful of Obras Sociales receive what is called 'extraordinary' income. For the Obras Sociales of banking sector employees, this extraordinary income consists of a percent of the commissions of bank transactions. In the insurance sector, extraordinary income accrues from insurance transactions. The Obra Social for tobacco workers receives a percent of cigarette sales. Many Obras Sociales also receive subsidies from ANSSAL on a month-to-month basis. Obras Sociales also receive inflows from fees from the sale of coupons that entitle members to visit physicians or to be admnitted into hospitals. Obras Sociales members also pay co-payments for services. Some of the richest Obras Sociales earn income from other sources, particularly assets (in some cases, including non-health-related assets) which they might own.  14 Obras Sociales (see Table 2.3), which, in turn, results in a wide disparity in the health services that insured workers are able to receive. Table 2.3: Average Monthly Revenue per Beneficiary (1994) Type of Obra Social (national only) % of Monthly Revenue per Total Beneficiary (US$) Sindicales 56 19 Mixed administration 28 28 "White Collar" (Personal de Direcci6n) 7 51 All Others 9 28 TOTAL 100 23 Source: DGI 2.17 The National Administration of Health Insurance (Administraci6n Nacional del Seguro de la Salud, or ANS SAL), the regulatory body representing the "national" Obras Sociales, has operated a central redistribution fund (Fondo Solidario de Redistribuci6n, or FSR), which is financed by ten percent of the aggregate payroll contribution of each of the Obras Sociales.8 The FSR is supposed to provide cross- subsidies, on the basis of transparent and automatic criteria, to Obras Sociales which are not able to purchase a basic level of services for its members. However, in practice, FSR has not served the objective of redistributing income from the wealthiest to the poorest Obras Sociales, because equity redistribution criteria are frequently overruled by political considerations, and because the resources flowing into FSR are insufficient to equalize or nearly equalize average per capita revenue across the Obras Sociales.9 2.18 Efforts to promote greater equity and efficiency across the Obras Sociales are frustrated by the absence of cost containment incentives and by the influence of other factors encouraging waste of resources. There is no mandated package of services that Obras must provide for their members. This fact, combined with varying revenues, means that while some of the wealthier Obras Sociales are able to offer health services which are comprehensive in nature, the poorer funds with lower average per capita income can cover far less than is necessary. Second, as Obras Sociales serve captive populations -- frequently reimbursing medical services on a fee-for-service basis -- who cannot leave even if they are unhappy with the services provided, managers of the funds do not have strong incentives to operate efficiently. Third, lax enforcement of existing regulations robs 9 The white collar Obras Sociales contribute 15 percent of total payroll contributions, and special taxes on banking and insurance transactions have also provided an important source of revenue for the FSR With the adoption of Decree 292/95 in August 1995, responsibility for managing the FSR was taken away from ANSSAL and a new system of "automatic distribution" by the Ministry of Economy's internal revenue service was introduced. 9 More information on the operations of the FSR is provided in Annex I of this report.  15 the Obras Sociales of resources that should be available for workers' health care. For example, many employers keep some workers "off the books" to evade payment of the stipulated payroll taxes, while some of the Obras Sociales have failed to keep administrative outlays below the legally mandated ceiling of ten percent of total expenditures. 2.19 As a result, many Obras Sociales do not operate on the basis of sound business practices and are now in financial disarray. As of late 1995, ANSSAL estimated that the national system carried a debt of more than US$500 million, mostly owed to providers.'