Argentina - Facing the challenge of health insurance reform

Report No. 16402-AR Argentina Facing the Challenge of Health Insurance Reform May 30, 1997 Human and Soci a Development Group Latin America and the Caribbean Region The World Bank Social Programs [Divisior Regional L)epartment I The Inter-American Development Bank Document of the World Bank  ARGENTINA FACING THE CHALLENGE OF HEALTH INSURANCE REFORM GLOSSARY OF ACRONYMS ANSSAL Administracion Nacional del Seguro de la Salud DGI Direcci6n General de Impuestos EAP Empresa Administradora de Prestaciones FSR Fondo Solidario de Redistribuci6n IDB Inter-American Development Bank INOS Instituto Nacional de Obras Sociales INSSJP Instituto de Seguridad Social para Jubilados y Pensionados MSAS Ministry of Health and Social Action OECD Organization for Economic Cooperation and Development PAMI Programa de Asistencia Medica Integral PMO Programa Medico Obligatorio Regional Vice President Shahid Javed Burki Country Director Gobind T. Nankani Country Sector Leader Alain Colliou Task Leader Robert Hecht  ARGENTINA FACING THE CHALLENGE OF HEALTH INSURANCE REFORM Table of Contents Main Report Page No. A. Introduction and Summary 1 B. Argentina's Health Status and Health System 3 C. Problems in the Health Insurance System 8 D. Sources and Symptoms of Inequity in Health Insurance 11 E. Problems in the Policy and Institutional Framework for Health Insurance 18 F. Options for Reform 20 G. The Main Features of Reform 23 H. Reform of the INSSJP 30 I. Reform of Pre-Paid Private Health Insurance 33 J. Design and Early Implementation of the Health Insurance Reform Program 34 K. Future Prospects and Problems 39 Annexes Annex A: Obras Sociales with over 50,000 Beneficiaries (ANSSAL) 46 Annex B: The Central Redistribution Fund (FSR) 48 Annex C: Integrated Program of Medical Care (PAMI) 54 This report is based on the work of a team that gathered and analyzed data during late 1994 and much of 1995. The team consisted of Robert Hecht (team leader), Maria Luisa Escobar (Inter-American Development Bank), Ricardo Bitran, Juan Luis Londoiio, Philip Musgrove, and Helen Saxenian. Important background papers and materials were contributed by Dr. Rodolfo Bella, Laura Lima Quintana, and Eleanora Poyard. An early version drafted by Joy de Beyer. Pablo Gottret updated the sections on the INSSJP. The report was processed by Karla McEvoy, Stephanie Vasquez and Vivian Ocran. This report was prepared jointly with the Inter-American Development Bank (IDB). The IDB division chief is Christian Gomez.  List of Figures Paze No. Figure 1: Comparative Health Statistics for Selected Latin American Countries 4 Figure 2: Argentina Health Expenditures in 1993, by Source and Channel 5 Figure 3: Distribution of Obras by Size 9 Figure 4: Population Distribution by Size of Obra 9 Figure 5: Population Distribution by Obra Income per Beneficiary 11 Figure 6: Income Inequality in Obras and Role of Redistribution Fund 13 Figure 7: Estimation of Subsidies Required to Bring Obra Per Capita Income to Minimum Floor Level 14 Figure 8: ANSSAL's Disbursements for High Technology Procedures August, September, December 1994 15 Figure 9: INSSJP Operating Deficit 1994, 1995 and 1996 16 Figure 10: Argentina Health Insurance Reform--Principal Policy Actions 24 Figure 11: INSSJP Projected Accrued Expenditures and Savings for 1997 32 Figure 12: Policy Matrix for Insurance Reform 36 Figure 13: Completing Health Insurance Reform -- The Remaining Steps 42  ARGENTINA FACING THE CHALLENGE OF HEALTH INSURANCE REFORM MAIN REPORT A. Introduction and Summary 1. Argentina's health financing system is in crisis. Even though the country spends $20 billion a year or more than 7% of GDP on health, the two main public pillars of the system -- social security-based health insurance and provincial government health expenditures -- have incurred large deficits in recent years, contributing importantly to Argentina's overall fiscal problems. Within the area of social security-based financing, the health insurance fund for four million elderly and disabled persons (the Instituto de Seguridad Social para Jubilados y Pensionados, INSSJP) had operating deficits of $450 million in 1994 and $600 million in 1995. The 300 statutory national health funds covering about 10 million active workers and their families ("social insurance" known locally as the Obras Sociales) ran combined operating deficits of at least $150 million annually in 1994-95 and by mid-1995 had accumulated debts of more than $450 million. The need to reduce wage taxes in order to make Argentina more competitive internationally is putting additional stress on the social health insurance system's already large chronic financial deficits. At the same time, nearly all of Argentina's 24 provinces, which spend over $3 billion a year on hospital services for the country's 10 million uninsured persons, experienced serious fiscal deficits together amounting to more than one percent of GDP in 1994 and 1995. In this context, the search for greater efficiency in health insurance is being driven in important ways by Argentina's overall macro-economic situation and by the federal government's fiscal strategy which focuses on reducing unsustainable current fiscal deficits at both the national and provincial levels. 2. As the health system has struggled to stay financially afloat in this environment, it has not surprisingly been widely criticized. Private medical providers and providers under contract to the social insurance funds have frequently threatened to cut off services to the ill because many insurance funds have fallen months behind in their payments. Medical and non-medical workers alike in provincial and municipal hospitals have staged demonstrations and occasionally gone on strike to protest deteriorating conditions and planned cuts in employment. Similarly, employees of the INSSJP and some Obras Sociales have protested labor force reductions. On top of this, dissatisfaction with the health system from consumers is widespread. Well-organized groups of retirees have demonstrated against what they fear will be cuts in their currently generous health benefits, while many members of the Obras Sociales complain about what they perceive to be poor quality of health care, mismanagement and corrupt practices in the health funds, and lack of ability to choose among the Obras. A recent household survey found that more than three- quarters of Argentina families currently covered by Obras were unhappy with their coverage and wished to change insurer if given the option to do so.  -2- 3. To resolve this crisis in health financing, the federal government of Argentina has developed over the past two years and is now beginning to implement a series of policies and practical measures. To deal with the provincial health spending problems, some provinces are beginning to create autonomous public hospitals which, it is hoped, will be better managed and will recover a larger share of their expenditures from those able to pay. A World Bank Project' is supporting this in three pilot areas of the country. But Government officials recognize that granting hospital autonomy will not be enough. They are now preparing health action plans as part of the larger process of provincial adjustment, that will include reductions in provincial health employees, savings in the procurement of pharmaceuticals and medical supplies, and possibly the closure of some provincial public hospitals with excess bed capacity. 4. To address the weaknesses of social health insurance, the Government (with assistance of two World Bank loans) has mounted and is beginning to carry out an ambitious program of reform known as the Programa de Reconversion de las Obras Sociales y INSSJP. The program includes: * introducing consumer choice of Obra and related competition for membership among the Obras; * legalizing competition between some Obras and Argentina's private pre-paid health plans (known as the Pre-Pagas) in the market for voluntary health insurance and one restricted segment of the social insurance market; * requiring all Obras to finance a standard package of health benefits; * creating a central redistribution fund that would compensate Obras for differences in members incomes and health risks; * developing an improved regulatory system and an effective regulatory agency for health insurance that would enforce minimum standards of financial and medical conduct; and * providing special loan financing to qualifying Obras and INSSJP to enable them to lay off excess personnel, restructure their financial debts, and improve their organization and management. 5. The main elements in this reform program were shaped during 1995 and early 1996, built upon ideas from studies carried out earlier by the Ministries of Economy and Health, Argentine think tanks, and from public debates involving Government officials, academics, trade union leaders, and others. The reform program also drew part of its inspiration from sector work on health financing issues that the World Bank undertook in late 1994 and the first half of 1995, in collaboration with the Government and the Inter-American Development Bank (IDB). Public sector hospital service delivery capacity and quality has been seriously eroded by inadequate financing and maintenance, obsolete equipment and management weaknesses and lack of accountability and authority. The Government passed a law in 1993 to allow public hospitals greater financial and managerial autonomy, and began in 1995 to implement a package of measures to raise efficiency and quality of care in the provincial hospitals, by: (a) improving management through training, technical assistance, information systems, and the use of strong performance incentives; (b) investing in key infrastructure and equipment; and (c) increasing hospital revenues, especially by encouraging them to bill and collect fees from patients who have insurance coverage. These reforms are supported by a Provincial Health Sector Development Project, for which a World Bank loan of US$101 million became effective in January 1996.  -3- 6. This report attempts to summarize the main findings and recommendations of the World Bank/IDB/Government sector analysis. This is complicated by the fact that most of the key recommendations have been adopted in the already ongoing health insurance reform program. Much additional factual information was also obtained in the process of designing the reform program and the accompanying World Bank loans in 1995 - 1996, after the sector work phase was formally halted. This was the case, for example, for the INSSJP, for which few data were available until July 1995. 7. The main report is organized as follows: The first section examines briefly the health status and health system of Argentina. The second section describes the main problems in health insurance as of 1994-95, that Argentina's public policy and programs needed to address. The third section lays out the main proposals for reform, many of which have been incorporated in the Programa de Reconversion de las Obras Sociales y el INSSJP. The fourth section describes some of the actions that have taken place over the 18 month period July 1995 to late 1996, to design and begin implementing a Health Insurance Reform program. The fifth and final section touches upon the remaining issues, strategies to deal with political resistance to change, and prospects for further reform of Argentina's health financing system. 8. A rich set of technical annexes are included in a second volume to this report. These annexes contain much additional data and analysis on the Obras, the INSSJP, the Pre-Pagas, the construction of standard health benefits packages, and on the complex and fascinating set of contractual and payment arrangements between insurers (health fundholders) and largely private health care providers. Readers are encouraged to refer to these annexes for additional information that could not be compressed into the main report. B. Argentina's Health Status and Health System 9. An Advanced Health System. In many respects, Argentina has a highly developed health system, particularly by developing country standards. Life expectancy at birth is 71, above the average for the Latin America region and for all countries of similar income levels. Infant mortality has fallen by 45% since 1970. Health service coverage is good at all levels of the system. A broad range of preventive and primary care services is available in most of the country, and nearly 80% of young children are vaccinated. There is a diverse set of health providers, including a strong private sector. The doctor-to-population ratio (nearly 30 doctors per ten thousand inhabitants) and number of hospital beds (4.5 per thousand inhabitants) are similar to many OECD countries, and the teaching hospitals in Buenos Aires operate some of the most advanced units in the region for diagnostic imaging, organ transplants, and reconstructive surgery. Seventy percent of the population has health insurance, the rest receive free care in government hospitals, many of which are presently being upgraded. 10. But Health Status is Mixed. Despite these achievements, a number of Argentina's health status indicators are worse than those of other middle-income countries in the region with lower per capita incomes and lower spending on health (Figure 1). For example, Chile, Costa Rica, and Uruguay all have higher life expectancy and significantly lower infant mortality rates, ranging from 14 to 20, compared to Argentina's 29 per 1000 live births. Yet Argentina's per  -4- capita health expenditure is much higher at US$500 than in Chile (US$250), Costa Rica (US$160) or Uruguay (US$124). Argentina has made no progress since 1980 in reducing the proportion of infant deaths that would have been preventable with adequate medical care. Maternal mortality and malnutrition are unacceptably high, especially in the northern provinces and in low-income periurban areas. Adult health also compares unfavorably with countries that devote fewer resources to health: in Argentina the age-adjusted mortality is 8.5 deaths per 1,000, significantly higher than the rate of 7.6 in Costa Rica and Cuba. :Figure 1: Comparative Health Statistiis for Seeted LatinAmericn Countresi; Per Capita Per Average Infant Physicians Hospital % of GDP Capita Life Mortality per Ten Beds per Children (US$/1992) Health Expectancy Rate Thousand Thousand < 1 Spending in Years (1992) Population Population Vaccinated (1993) (1992) (1990) (1990) for DPT (1993) ARGENTINA 6,050 500 71 29 26.8 4.5 79.2 Mexico 3,470 89 70 35 17.0 0.7 91.0 Uruguay 3,340 124 72 20 36.8 4.8 88.0 Venezuela 2,910 89 70 33 16.2 2.3 68.7 Brazil 2,770 132 66 57 13.6 3.6 68.5 Chile 2,730 250 72 17 11.0 3.2 93.7 Costa Rica 1,960 160 76 14 12.6 2.5 86.0 Paraguay 1,380 37 67 36 6.5 1.7 78.9 Colombia 1,330 50 69 21 10.9 1.5 83.0 Source: World Bank, "World Development Report" (1993 and 1994) and Pan American Health Organization, "Health Conditions in the Americas" (1994) 11. Health Spending is Large and Diverse. Total expenditures on health in Argentina -- more than 7 percent of GDP in 1993, the last year for which consolidated data are available but the composition of spending has not changed significantly since then -- are high for an upper- middle income LDC, more closely approximating OECD expenditure patterns. The breakdown by major categories of financing is depicted in Figure 2. Health expenditures are financed by mostly provincial and some federal and municipal government revenues (about 22 percent of total expenditures, of which more than two-thirds are provincial resources), social insurance payroll taxes (36 percent), household and employer contributions to private health insurance (19 percent) and direct out-of-pocket payments by individuals (estimated from household surveys at 23 percent of the total), including insurance deductibles or co-payments (bonos) or as illegal "top-up" payments from insured persons to physicians. 12. The Argentine health system shows the impact of the absence of cost containment incentives. The large numbers of doctors and hospital beds, and lack of controls on acquisition and use of medical equipment and pharmaceuticals has helped drive up health spending and make Argentina an outlier in terms of share of GDP for health, for its level of per capita income.  -5- Figure 2: Health Expenditure in 1993, by Source and Channel Expenditure Source Channel of Expenditure Total % of Total Expenditure Health Spending (Millions in $AR) General Tax Revenues Federal Government 357 2 Provincial Govemment (include. Metro. Buenos 3022 16 Aires) 639 4 Municipal Government Subtotal 3988 22 Earmarked Social Security Taxes National Obras Sociales 2787 15 Provincial Obras Sociales 1311 7 PAMI (INSSJP) 2211 12 Other 367 2 Subtotal 6677 36 Private Payments Contributions to private insurance 3539 19 (pre-pagas, mutuales, private plans) Out-of-pocket spending 4161 23 (medications, direct medical care) Subtotal 7700 42 TOTAL 18374 100 Source: MSAS 13. Health Insurance is Compulsory for the Majority. Most formal sector workers and their dependents in Argentina are required by law (the current law governing this was passed in 1989) to participate in an Obra Social linked to their place of employment. About 300 National Obras with approximately 10 million beneficiaries exist for each occupation or industry, with regulatory oversight provided by the Administracion Nacional del Seguro de la Salud, (ANSSAL). They are funded through a compulsory payroll contribution of 3 percent of income paid by employees (plus 1.5 percent for each additional non-nuclear family dependent) and 3 to 6 percent paid by employers, the latter percentage depending on the geographical location of employment. Taxable income is capped at $3,750 per month. In addition, there are 24 Obras Provinciales -- one for each province -- which cover about 5 million public sector employees and their dependents in the provinces and have their own umbrella organization (COSSPRA) and regulatory framework. The Obras Provinciales are also financed through wage taxes, with the tax rates varying from one province to another. 14. An additional payroll tax of 5 percent, also shared between employers and employees, goes to support PAMI, the Programa de Asistencia Me'dica Integral, which is the health fund for about 4 million retired, disabled and pensioned persons and their families. PAMI is managed by the National Social Services Institute for Retirees and Pensioners (Instituto Nacional de Servicios Sociales para Jubilados y Pensionados, INSSJP), which also finances several other social service  -6- 2 programs. Most workers have no choice about which Obra to belong to. There are two exceptions: since 1993 some Obras for white collar workers have offered their members a choice among privately-managed health plans, and retiring or disabled workers of some 50-60 Obras who become eligible for INSSJP membership may choose instead to remain with their Obras de origen. They may move to INSSJP at any time, but may not later reverse the decision. 15. Together, this social health insurance network, made up of more than 300 Obras Sociales at the national and provincial levels, plus the INSSJP, cover nearly 20 million Argentines or about 61 percent of the total population. 16. There is also a significant private sector market in health insurance, probably the largest in Latin America outside of Brazil. Around 200 private insurance plans (Pre-Pagas) cover more than two million individuals. Another one million belong to one of about a thousand non-profit mutual insurance funds (mutuales), which offer health care plans funded by individual contributions. The remaining 30 percent of the population without coverage from either social insurance or private insurance relies mainly on the public hospital system, which generally provides free care. 17. A Heterogeneous and Competitive Delivery System. Health care delivery is broadly shared by public and private providers and entities tied to the statutory health funds, the Obras. Health services provided by the public sector include a set of priority programs such as immunizations, infectious disease control, maternal care, and nutrition for mothers and children, which are sponsored by the federal Ministry of Health and Social Action (MSAS) and the provincial ministries of health. The public hospital system accounts for nearly 40 percent of bed capacity, and is mostly the responsibility of the Provincial Health Ministries and their municipal counterparts. The MSAS owns only a few hospitals. 18. Most insured people receive the majority of their health care from private sector providers. About half of Argentina's hospital beds are in private institutions. Most of the country's estimated 120,000 physicians have either full-time private practice or combine employment in public hospitals with part-time private practice. The commercial insurers and mutual funds who are pre-paid by clients contract with private clinics or networks of private providers to deliver varying packages of health services. 19. The Obras Sociales directly provide some health care through their own facilities which account for less than 10 percent of all hospital beds in Argentina, but purchase most services from private providers. An increasingly common arrangement is for the Obra or INSSJP to contract with an intermediary, known as an Empresa Administradora de Prestaciones (EAP), which is paid a fixed amount (capita) per beneficiary by the Obras and INSSJP to provide a specified set of medical services. The EAP may either be composed of a group of hospitals and clinics which have formed a partnership, or may be a purely financial and administrative entity which then contracts with doctors and hospitals. Depending on the nature of the institutions 2 The main other social assistance programs financed by INSSJP are: Probienestar (a food supplementation program), Asistencia Geriatrica, and since January 1995, the subsidio a al pobreza, which provides cash transfers to retirees and pensioners with monthly incomes below $150 who do not own a home and are not being cared for by their children.  -7- involved and the form of the contracts, the insued health risk may be borne by the EAP, shifted or shared with private medical providers. 20. A Complex and Rapidly Changing Payment System. Historically, most insurers in Argentina (including both social insurance and private insurers) made fee-for-service payments directly to doctors and hospitals. This form of payment contributed importantly to the rapid growth in health expenditures in, which was only moderated slightly by the use of a relative value schedule known as the nomenclador. Introduced in parts of the health system as early as the 1960s, the nomenclador assigns points to each medical act, depending on the relative resource intensity involved; a monetary value can then be assigned to each resource "point" to calculate prices. This monetary value, which has never been standardized throughout Argentina's health system, can then be negotiated bilaterally between individual insurers and providers or groups of these. 21. Since most of the large social health insurance institutions, including INSSJP, have moved away from fee-for-service to other forms of bundled payments, the nomenclador is less important today than it was in the past. It has also proven difficult to keep the nomenclador up to date, so that it reflects changes in medical technology and procedures and in the relative resource intensity of specific medical acts. This generates much debate among medical specialists and insurance administrators over the accuracy of the nomenclador. Nevertheless, many of the Pre- Pagas and mutuales, which still pay providers on a fee-for-service basis, use the nomenclador as a key reference document. 22. Over the past five years, the Obras and INSSJP have moved decisively away from fee- for-service payment to negotiate capitation and other forms of bundled payment with providers (including fixed lump sum amounts to cover specific medical procedures, akin to the Diagnostic Related Groups used by the Medicare system in the U.S.) with providers. In other cases, the social insurance institutions negotiate fix per capita payments to EAPs acting as pure financial intermediaries. The EAPs in turn negotiate a series of contracts -- fee-for-service, capitated, or procedure-related -- with the actual medical providers (doctors, hospitals, laboratories, pharmacies). 23. In the absence of strong regulation of insurers and providers, contracting procedures and payment practices lack transparency, even when public funds (wage taxes) are involved. For similar reasons, consumer interests are not adequately protected when private contributions to health insurance are used in purchasing medical care for members. It is widely acknowledged by Argentines that personal connections and corrupt practices, instead of quality and economy, weigh heavily in the award of capitated contracts and other payments to medical providers and suppliers, and this adds substantially to the inefficiency and high cost of health care in Argentina. 24. Out-of-pocket payments by individual households are part of the cost control strategies of most Obras, the INSSJP, and Pre-Pagas. These insurers pay for only a fraction of the cost of pharmaceuticals, with insured persons required to make a co-payment. Many of the insurance funds, both statutory and private, also require members to buy a book of coupons or bonos complementarios, tickets that typically cost $2-5 each and must be presented to ambulatory care providers for each visit. No detailed information is available on the effectiveness of the bonos in generating revenues or moderating service utilization. Although illegal, it also widely reported  -8- that doctors who feel that they are being inadequately reimbursed by insurers -- whether on a fee- for-service or capitated basis -- actual charge their patients an additional out-of-pocket charge known as plus. Since this kind of informal and largely coercive co-payment more frequently occurs with members of low-income Obras, it is also a very regressive practice. C. Problems In The Health Insurance System 25. As described briefly in the opening section of this report, Argentina's health insurance system is beset by a number of serious problems. The most obvious ones are financial instability and consumer dissatisfaction: many Obras and the INSSJP are losing large sums of money; some parts of the Pre-Pagas system have also shown signs of financial weakness; and insured families are unhappy with the extent of the coverage, quality of health care they receive, and limited choice for those required to contribute to health insurance through wage taxes. 26. Beyond these very visible problems, health insurance in Argentina also performs relatively poorly in terms of three broad criteria that are commonly applied to health systems around the globe: efficiency in the allocation of resources, equity of access and utilization of health care, and control of overall national health spending. Low efficiency, poor equity, and lack of control over rising health expenditures characterize much of the Argentine system and contribute substantially to the financial disequilibrium and consumer dissatisfaction that currently afflict health insurance. Three features of the system that are currently deficient and are needed to guide reform efforts are: increased competition, stronger regulation, and greater accountability. Sources and Symptoms of Inefficiency in Health Insurance 27. Uneconomic Size. While more than 300 national Obras are registered with ANSSAL, the 17 largest Obras, each with over 100,000 members, account for 57 percent of total enrollment (Figure 3 and 4). Since there is an Obra Social for each occupation or industry, and these health funds are sheltered from competitive pressures that might encourage consolidation, there has been a proliferation of Obras with very small memberships. About one half have fewer than 5,000 beneficiaries each, well below the number needed to spread health risks and administrative costs adequately. By comparison, in the Netherlands, a country with a similar system of statutory health funds financed with payroll taxes, there are at present only about 30 such funds for a total enrollment of 10 million persons, or an average of about 350,000 beneficiaries each. The uneconomic size of the Obras, combined with generally weak organization and management practices, have contributed to excessively high administrative expenditures by these health insurance funds (see below).  -9- Figure 3. Distribution of Obras by Size 80 70 - 060- .0 C040- .0 30 E Z 20- 10 0 _ 1-299 300-999 1,000- 5,000- 10,000- 20,000- 50,000- 100,000- 500,000+ 4,999 9,999 19,999 49,000 100,000 499,000 Size of Obra (Members) Figure 4. Population Distribution by Size of Obra 0 * 50.0% - a. 45.0% - 0 X. 40.0% = 35.0% - E 30.0% 25.0% -A ILl 20.0%- 4015.0%/ di10.0% 50% CL0.0% 1-299 300-999 1,000- 5,000- 10,000- 20,000- 50,000- 100,000- 500,000+ 4,999 9,999 19,999 49,000 100,000 499,000 Size of Obra (Members) 28. Weak Management. Even though the national Obras and INSSJP together spend nearly US$6 billion a year for health care -- almost 2 percent of Argentina's GDP -- their institutional capacity is in general weak. Although a few Obras are well run and have sophisticated computerized information systems, many are poorly managed, have inadequate information systems, and employ staff without the necessary technical expertise. The lack of competition among Obras and the long historical association between the Obras and the main trade unions in  -10- Argentina (going back to the late 1940s and early 50s) help to explain the absence of a modem managerial culture and the common practice of hiring managerial/administrative staff on the basis of personal connections rather than technical qualifications. 29. Similar managerial and technical weaknesses are evident in the INSSJP. One telling example of this: the Institute's financial information system is so antiquated and slow that it currently takes at least two months following the end of each quarter for the head office in Buenos Aires to assemble even a rough picture of INSSJP's consolidated expenditures for that three month period, taking into account the spending incurred by the 27 regional offices that oversee the Institute's health and social services programs. 30. Excess Staff. At the same time that the social health insurance institutions lack technical and managerial capacity, they also have large numbers of whom are seriously underemployed or perform jobs that add little or no value. Preliminary analysis of the INSSJP carried out in order to design the Instituto's restructuring program showed that the agency had nearly doubled the number of its employees between 1988 and 1995, during which time the number of beneficiaries had grown by less than 20 percent. In fact, with the recent move from fee-for-service to capitated contracts with health care providers, it should have been possible for the INSSJP to reduce the number of its administrative personnel. Instead, its payrolls swelled. The study conducted in 1995 for the reform program suggested that the Instituto could shed at least 4,000 of its 14,000 employees without a loss of productivity. 31. The Obras vary enormously in their staffing ratios but many display signs of severe overstaffing similar to the INSSJP. Expert opinion holds that for health insurance institutions that use capitated payment methods and contract with providers, rather than owning their own health facilities, the ratio of insured beneficiaries to administrative staff should exceed 1,000 to 1. Among the 27 largest Obras, only three have achieved such a ratio (Annex A). Ten of the 27 big Obras have one employee serving fewer than 200 beneficiaries, and five of these are so overstaffed that one worker serves less than 100 insured beneficiaries. per staff member, of which five even have a beneficiaries/staff ratio of below 100/1. Excess staffing afflicts Obras of all sizes and income levels and leads to administrative expenditures that frequently exceed the 10 percent limit imposed by the law regulating the Obras. A 1992 study by the Argentine research institute FIEL found that half of all the Obras reporting to the ANSSAL had administrative costs of over 10 percent of total expenditures. Until now, the government regulatory body, ANSSAL, has done little to monitor these administrative costs or enforce compliance with this 10 percent ceiling. 32. Non-Health Activities. Many Obras own and operate other businesses, such as hotels and recreation centers, that make chronic financial losses and contribute to the Obras' poor overall financial condition. These non-health lines of activity run deficits because they lack professional management, suffer from over-staffing sometimes influenced by favoritism and nepotism, and often operate at far below capacity because their use is restricted to Obra members and their families. In most cases, the only way to make these businesses viable would be to sell them off or lease them to specialized private managers on a long-term basis.  -11- D. Sources and Symptoms of Inequity in Health Insurance 33. Unequal Revenue Base Among Obras Sociales. At present, since the vast majority of Obras offer only one health plan for all their beneficiaries, regardless of their individual incomes, there exists an internal leveling or "solidarity" among these members which many Argentines view as an important equitable feature of the current social insurance system. On the other hand, there are great disparities in average revenue and thus health benefits provided across the Obras, because the social insurance funds have "captive" populations from specific industries or occupations that tend to have largely similar income levels. The average revenue per beneficiary varies greatly among Obras, ranging from less than $5 per month to over $80, a sixteen-fold difference. The ratio of insurance revenue between Obras in the 90th and 10th revenue percentiles in 1994 was 5 to 1 (figure 5). By comparison, in the private voluntary health insurance system of the United States, in which employers purchase insurance on behalf of their workers, the ratio of the 90th to 10th percentiles in 1994 was 1.2 to 1. Figure 5. Population Distribution by Obra Income per Beneficiary 30.0%_ 25.0% - ,_20.0% a. 0 E 15.0%/ 0 p 10.0% * 5.0% _ I 0.0% L 0-10 10-15 15-20 20-30 30-40 40-50 50-60 60-70 70+ Average Obra Income per Beneficiary per Month, 1994 (US$) 34. In addition, until recently several Obras obtained exceptional revenues, above and beyond the normal wage taxes, via special levies, that further distorted the revenue disparities among the Obras. The most notorious of these special levies, which was abolished by Presidential Decree in August 1995, was a one percent tax on all banking transactions that flowed to the Obra Social for banking sector employees. Similar levies existed for the insurance and tobacco industries. Payroll tax evasion by employers and workers is a huge problem affecting Argentina's entire social security system, but differential rates of evasion among industries also further aggravate the unequal per capita revenues of the social health insurance funds. Obras for industries prone  -12- to seasonal layoffs -- such as agriculture, which generally has low-paying jobs, and construction -- are particularly affected by the requirement that Obras continue to provide medical coverage for laid-off workers and their families for three months, without receiving any payroll contribution. 35. Until recently, the system that the INSSJP used to transfer funds to Obras that agreed to continue providing health coverage for workers and dependents after they retired was also a source of serious inequity, and substantially reduced the incentive for Obras to offer such benefits in competition with the INSSJP. Of the roughly 4.3 million Argentines eligible for membership in the Instituto, only about 325,000 remained with Obras, in part because the Instituto transferred only $13-29 per beneficiary per month, as compared with the $42 spent by the INSSJP for its own beneficiaries. 36. Under this system, Obras with large numbers of active workers and few retirees could afford to subsidize health care for elderly (and thus more costly) retirees from the contributions of younger active (and healthier) workers. However, early retirements resulting from the privatization of state enterprises in the early 1990s have left several Obras with high ratios of retired to active workers, making these Obras financially inviable. ENCOTEL, the Obra for telephone workers, with retirees making up 30 percent of membership; Vialidad Nacional, which covers road construction and maintenance workers, with retirees constituting 18 percent of insured persons; and Ferroviario, for railway workers -- have all been hurt by the inadequate level of revenue transferred by the 1NSSJP. 37. Presidential decrees approved in August and September 1995 unified the per capita transfer and raised it to $36 per retiree monthly, and gave Obras the option to accept retired (INSSJP-eligible) persons. This measure helps to reduce the previously embedded inequities and improve the environment for competition between the Obras and INSSJP. Further steps to facilitate consumers' choice between INSSJP and Obras, such as having the government publish information on the Obras' interest and performance in caring for the elderly, need to be taken. The government could also create a compensation fund to adjust the payment to Obras for high- risk patients. 38. Ineffectual Redistribution Via ANSSAL. The regulatory body for the national Obras Sociales, ANSSAL, operates a central redistribution fund called the Fondo Solidario de Redistribuci6n (FSR), which is financed by 10 percent of the payroll contributions for social health insurance (15 percent for the white collar workers known as personal de direcci6n). The law stipulates that 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 their members. 39. However, until last year, the FSR did not serve the objective of redistributing income from the wealthiest to the poorest Obra Sociale. Analysis carried out for this study showed that in fact there was no correlation between FSR subsidies in 1993-94 and Obra income levels (figure 6). E In 1994, about 3.5 million beneficiaries belonged to Obras will average revenue before FSR redistribution of less than $18 a month; after redistribution, about half of these persons still had less than the floor level of $18 a month. Equity criteria were frequently  -13- overruled in practice by political considerations, with FSR subsidies flowing to the largest and most influential Obras. Figure 6. Income Inequality in Obras and Role of Redistribution Fund 100% //%80% Jo, ~ 60% 0 Line of perfect equality 6 Line if redistribution fund 400% distributed solely accordn -V to obra average inco per beneficia income distribution before redistribution 20% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percent of obra beneficiares Note: Data refers to 1994 obra income recorded by DGI for 267 obras. Obras with missing values or out of range values for income and beneficiaries were dropped from the sample. 40. Analysis by the Ministry of Economy and World Bank staff further suggested that if ANSSAL income was distributed through the FSR purely on the basis of average Obra revenue, it could go a long way toward the goal of equalizing resources among the health insurance funds, even though some differences would remain: funds would be adequate to bring all Obras up to a floor of $18 per month per beneficiary, compared by an average revenue of $24 across the entire Obras system (figure 7).  -14- Figure 7: Estimation of Subsidies Required to 41. Presidential Decree 292/95 did in Bring Obra Per Capita Income to Minimum fact overhaul the FSR in this direction. Floor Level Starting in October 1995, the Argentine To Achieve a tax collection agency, the DGI, began to To Achieve a Total Annual Subsidy redistribute FSR resources automatically Minimum Per Capita Required in to Obras on behalf of ANSSAL, to make Monthly Income of: Redistribution Fund: up the difference between actual ($US) (millions of $US) individual payroll contributions and an 14 72 agreed floor level of $40 per family per 15 93 month (which works out to about $16 per 16 122 capita). The cost of this transfer 17 158 arrangement has been about $14 million 18 202 per month or $168 million annually. 19 248 42. Wide Variability in Benefits 20 298 Actually Provided. From the time 21 340 Argentina's social health insurance system 22 400 started after the Second World War until 23 464 now, there has not been a defined set of 24 533 health benefits that the Obras have been 25 604 required to provide to their members. 26 677 Most Obras have claimed rhetorically but 27 756 rather disingenuously that they paid for all Notes: based on DGI data on obra income, 1994, and the health care that their beneficiaries needed. number of beneficiaries by obra, September 1994. Average In reality subsidy is calculated here according to average obra income , however, g n the very level, not according to individual contributions. revenues among Obras and the poorly functioning redistribution system, there has been wide variability in the quantum and quality of services effectively rendered to beneficiaries by the Obras. Wealthier Obras Sociales, such as the health funds for banking and insurance sector workers and for many groups of white collar employees, have offered fairly comprehensive care, including the full range of surgeries, cancer treatments, and psychiatric and dental care. On the other hand, Obras with low average per capita income, such as the health fund for rural agricultural workers and employees in low wage industries, can only pay for limited care. They effectively ration services by refusing to authorize hospitalization, thereby forcing their members to fall back on public hospitals offering free care. 43. A standard benefits package has recently (May 1996) been mandated by a Ministry of Health resolution, but its affordability has not been clearly established and the ability of government regulators to enforce the new statute is still very much in doubt. 44. A Partial Risk Adjustment Mechanism is in Place But Needs Improvement. ANSSAL operates and finances a special fund for "high complexity" medical procedures, known as the Fondo de Alta Complejidad, which functions as a kind of reinsurance for low frequency, high cost health risks. In 1995, the Fondo paid out about $15 million, for procedures such as heart surgery, bone marrow and kidney transplants, and treatment for hemophilia. Since Obras  -15- are supposed to demonstrate financial need in order to access the Fondo, if properly run it could help improve equity in the social health insurance system. 45. In practice, however, the Fondo has not succeeded fully in compensating Obras for higher than average health risks or for lower than average revenues. The Fondo does not cover some high-cost procedures like intensive care for premature infants or costly chronic care for diabetics, while it continues to pay for fairly low cost items such as prostheses (figure 8). In 1994, over half of the claims paid by the Fondo were for less than $5,000 apiece. Financial need criteria have also been weakly applied in practice. Figure 8. ANSSAL's Disbursements for High Technology Procedures August, September, December 1994 Claim Size Number Average Total Percent Examples of of Claims Claim Size of Total Procedures Covered <$1,000 14 $565 $7,910 0.2% Wooden prosthesis $1,000-2,449 84 $1,642 $137,928 3.2% Wooden prosthesis $2,500-4,999 52 $3,415 $177,580 4.1% Wooden prosthesis $5,000-9,999 49 $7,249 $355,201 8.3% Cardiovascular interventions $10,000-49,999 82 $29,633 $2,429,906 56.7% Bone marrow and kidney transplants $50,000+ 17 $69,222 $1,176,774 27.5% Other organ transplants TOTAL 298 $14,380 $4,285,240 100.0% Source: ANSSAL Sources and Symptoms of Financial Weakness in Health Insurance- 46. During the past three years, Argentina's social health insurance system has suffered from severe financial disequilibrium, as revenues have fallen substantially while expenditures have remained steady and in some cases even risen slightly. Revenues have been hurt by a combination of a downturn in overall economic activity (and thus in the taxable wage base), continued high rates of tax evasion (currently at around 40 percent), and the gradual implementation of laws reducing employer contributions to the social security system, including the Obras Sociales and the INSSJP. As a result, INSSJP accrued revenues, for example, have fallen from a monthly average of nearly US$250 million in 1993 to US$233 million in 1994, US$ 212 million in 1995 and US$198 million in 1996 (figure 9). Moreover, starting in 1994, the Government has been retaining from the INSSJP revenues to pay debts with the other Government agencies and to cover tax collection costs. This implies that cash monthly revenues  INSSJP OPERATING DEFICIT 1994,1995 and 1996 (in millions of pesos) Difference Difference 1994 1995 1996 (p) 1995-1994 1996-1995 Revenues Contributions From Active Workers 2,031.3 1,838.30 1,697.45 (193.00) (140.85) Contributions From Retirees 687.8 399.93 391.21 (287.87) (8.72) Other Revenues 71.1 302.73 290.15 231.63 (12.58) Total revenues 2,790.2 2,541.0 2,378.8 (249.24) (162.15) Revenues Accrued But Not Received /a - 288.9 141.85 288.85 (147.00) Total Cash Revenues 2,790.2 2,252.1 2,237.0 (538.09) (15.15) Services and Expenses Health Services and Products 2,384.4 2,344.47 2,169.77 (39.93) (174.70) Social Services. 229.0 305.24 385.24 76.24 80.00 Delivery Costs 349.0 365.80 362.00 16.80 (3.80) of which Severance Payments 0.91 17.54 0.91 16.63 Direct Administrative Costs 187.1 94.70 80.92 (92.40) (13.78) Total Services and Expenses 3,149.5 3,110.21 2,997.93 (39.29) (112.28) Operating Income (359.3) (858.1) (761.0) (498.80) 97.13 'Operating Income Excluding Severance Pay (359.3) (857.19) (743.43) (497.89) 113.76 Depreciation and Other Expenses 0.6 5.60 0.99 5.00 (4.61) Net Financial Income (95.1) 24.70 (7.73) 119.80 (32.43) Net Income (455.0) (838.1) (752.2) (383.09) 85.94 p/ Preliminary a/ These are revenues retained by the Social Security System to cover: (i) past debts of the INSSJP with ANSeS; and (ii) administrative expenses corresponding to revenue collection. Source: INSSJP Executing Unit Ii 11P~~~~~~~~~~~~~~~~~~~~~~~~~C  -17- for the INSSJP have fallen from an average of US$250 million in 1993 to only US$186 million in 1996. 47. The need to lower wage taxes has been a major theme of the current Argentine government. Until recently, those taxes, to cover pensions, unemployment insurance, and family allowances, as well as health insurance, amounted to about 56 percent of gross wages, one of the highest levels in Latin America. The Government has viewed this high level of wage taxation as an important factor hurting Argentina's international economic competitiveness and depressing the domestic demand for labor, thus contributing to relatively high unemployment. 48. The presidential decrees passed in 1994 and 1995 reduced employers' wage tax contributions to these social benefit programs by 30 - 70 percent, depending on the province of Argentina in which the employer operates. This lowered the overall burden of payroll taxes to an average of about 42 percent of gross wages nationwide. In the case of health insurance, where the cuts in employers' contributions were strongly contested by the trade unions, a special decree was passed in late 1995 which imposed an across-the-board reduction of 30 percent of gross wages. As a result, the effective taxation rate for social health insurance fell from 14 percent (9 percent for Obras and 5 percent for INSSJP) to about 11 percent (7 and 4 percent, respectively, for the two types of social insurance). Under these conditions, the search for greater efficiency in the use of resources in the social health insurance system is being driven in important ways by Argentina's macro-economic situation and the Government's broad fiscal strategy. 49. At the same time, medical expenditures by the Obras and INSSJP have been relatively inflexible. With political patronage considerations driving INSSJP hiring decisions and corruption widespread in the award of contracts until the first half of 1995, for example, the Instituto's expenditures remained at around $260 million per month during 1994-95. INSSJP's ability to finance members' health care needs frustrated by the agency's responsibility for financing a widerange of non-medical social programs, some of which have been transferred to INSSJP over time without a corresponding increase in financial resources. During the first half of 1995, for example, about $300 million of INSSJP's budget was withheld by the social security agency to pay for an income subsidy to the elderly poor (the subsidio a la pobreza3) and for a subsidy for death-related expenses (subsidio por sepelio). Major social assistance programs financed by the Instituto include Probienestar, a food supplementation program with 1995 expenditures of about $110 million, and wide-ranging "Economic Subsidies and Health Protection" activities costing about $40 million. 50. The impact of staff layoffs and of re-bidding capitated medical service contracts in the late 1995 and 1996 have had some positive impact -- monthly spending for 1996 (excluding severance payments for laid-off employees) averaged $248 million, as compared with $260 million in 1995 -- but much still remains to be done if the INSSJP is to reach financial equilibrium. The subsidio a la pobreza, created in 1993, provides additional assistance to retirees and pensioners with monthly incomes below $150, who do not own a home and who are not cared for by their children. Qualifying individuals aged 80 and above receive a monthly supplement of $80, while those under 80 receive a monthly supplement of $60.  -18- 51. The chronic operating deficits of the Obras and INSSJP have been financed through debts to a combination of financial institutions and health service providers -- such debts have mushroomed in the last three years. The INSSJP's arrears to providers grew by more than 160% between January 1995 and December 1996, from $320 million to around $860 million, while debts to financial institutions grew from zero to $650 million in the same period. While some of this financial debt was essentially an interest-free loan from the Government (in the form of an advance from the government's social security administration), it also included short-term credits from the Banco de la Nacion carrying an interest rate of over 20 percent per annum. E. Problems in The Policy and Institutional Framework for Health Insurance 52. The grave inefficiencies and inequities and the financial instability of the Argentine health insurance system described above persist because of serious shortcomings in the policy and institutional framework for the sector. These shortcomings include the lack of competitive pressures on insurers for good performance, lack of accountability of managers to their customers and "shareholders", and weak regulatory mechanisms for defining and enforcing the rules for appropriate conduct by the health insurance funds. 53. Lack of Competition. Because participation in the social health insurance system is compulsory for all workers affected by collective bargaining agreements, yet these same workers are unable to choose their Obra either individually or in groups, a supremely powerful incentive for good performance and accountability -- competition for members and thus revenues -- has been entirely lacking from social insurance. Until recently, a small minority of retirees was able to choose between the INSSJP and their Obra of origin, but the playing field for competition was hardly level. Since the per capita financial transfer from the INSSJP was inadequate, most Obras had little interest in entering such a competition, 54. By contrast, the private pre-paid health plans have been subject to substantial domestic and increasingly, international, competition. This pressure is having a positive result in stimulating mergers and acquisitions as insurers try to reach a more economical size, and in encouraging modernization of organization and management of the private health funds. However, in the absence of a regulatory framework for the Pre-Pagas, it is also causing a number of bankruptcies, with consumers suddenly losing their pre-paid benefits. As the Pre- Pagas strive for commercial viability in this market, they are also increasingly looking for ways to avoid the worst health risks by excluding pre-existing conditions and certain expensive treatments such as drug therapies for AIDS. 55. Weak Regulation. Experience with social insurance funds in many OECD countries such as Germany, Holland, and Japan and with private insurance serving both as a major source of financing (as in the U.S.) or as a complement to public insurance of one kind of another, suggests that a certain set of minimum regulations need to be in place to ensure financial soundness and stability, protect basic consumer rights, and make fund managers accountable for their actions. These regulations typically cover: * minimum capital and liquidity to operate; * financial accounting standards and independent audit;  -19- * definition of standard benefits packages; * norms for specifying benefits in contracts; * public disclosure of information on financial and health-related performance; * procedures for handling complaints. 56. Until now, neither the Obras nor the Pre-Pagas have developed a functioning and effective regulatory system containing these elements. In the case of the Obras, the laws governing the system do provide for some basic regulatory measures, such as financial audits and reporting to the ANSSAL, the definition of standard benefits, and procedures for investigating complaints. Obras are also supposed to r port to ANSSAL other information, such as the number and demographic composition of their members and the contracts and methods for paying providers. In practice, however, ANSSAL has generally not developed the detailed guidelines for implementing these measures, and the agency's capacity to enforce regulations has been technically and politically constrained. In recent years, for example, Obras have not been required to obtain independent financial audits and only a few have actually submitted data on their members, benefits structure, and contracts. 57. There is no regulatory system for the Pre-Pagas. The two main associations of pre-paid plans claim to practice self-regulation of their own members, and they have strenuously resisted proposals for public regulation of their industry. In reality, however, such self-regulation has been minimal, and as a consequence it is reported that thousands of lawsuits against the Pre- Pagas are now pending in Argentine courts. 58. Lack of Accountability. The absence of competitive pressures among the Obras and of regulations requiring the disclosure of information to the public means that the social health insurance funds are not accountable to their beneficiaries. In fact, with governance structures very closely tied to the hierarchical and secretive organization of Argentina's trade unions, many of the Obras are only very weakly accountable to their rank and file members. Similarly, until the last 18 months, the managers of the INSSJP, while legally accountable to the President of Argentina and the rest of the Government, were not in practice made to answer for the Instituto's performance. On the contrary, the post of INSSJP Interventor -- the presidentially-appointed CEO who governed without a board -- was used by a series of incumbents as a platform for political advancement. Performance targets were unknown. Beginning in January 1995, however, the last three Interventors were asked by the President to develop and implement restructuring programs with specific targets for expenditure cuts. Moreover, in March 1997 the Government ceased intervention of the INSSJP and a Board of Directors was chosen to represent the retired beneficiaries, the trade unions, and the Government. The last Interventor was then reappointed as the Board's President. The Board has approved a drastic restructuring plan which will cut expenditures to $200 million per month by January 1998. (See paras 10 1-102).  -20- F. Options for Reform 59. Early Initiatives by the Menem Government. The increasing problems besetting health insurance have been analyzed, bemoaned and debated in Argentina by political leaders, health care professionals, academics and the public for a number of years. Early in the first administration of President Carlos Menem (1991-95), the Government started investigating options for reforming the health insurance system and pursued a concrete initiative in late 1992 and early 1993. The adoption of two decrees (Decretos 9/93 and 576/93) did encourage limnited competition among the Obras Sociales for white collar workers and helped to weaken the monopolistic practices of many of the provincial medical associations in their provider contract negotiations with the Obras. 60. The clauses in Decree 9/93 allowing for competition among Obras was never implemented, however, because of strong political opposition from the trade union leaders. More profound changes in the social health insurance were also thwarted by (a) the political unacceptability of the radically egalitarian proposals of the Ministry of Economy to pool all payroll contributions and allocate a uniform insurance premium per capita (the cuotaparte para asistencia medica or CUPAM), (b) the absence of an independent and competent regulatory body to set and supervise standards for financial and health services conduct and to redistribute compensatory financing, and (c) the shortage of financial resources and incentives for the Obras to restructure their debts and personnel, improve their operations and cash flow, and upgrade their organization and management. 61. An Improved Environment for Reform. Beginning in late 1994, the political and economic environment for major reform of Argentina's social health insurance system improved considerably, for a number of reasons: the Argentine economic recession, sparked by the Mexico financial crisis in November 1994, brought into sharp relief the financial problems of the Obras and the INSSJP, while at the same time highlighting the importance of achieving financial balance in social insurance as part of the overall Government program to limit the fiscal deficit. The Government thus came under growing pressure to obtain greater efficiency and control spending in social insurance, in order to avoid an expensive bail-out of the insurance fund further down the road; * with the reform of state enterprises largely accomplished in the early 1990s, the second Menem administration, re-elected in May 1995, recognized that reforms in social spending were central to the Government's political program during the 1995- 99 period; * despite vocal opposition from some trade union leaders, a number of Obras bosses also began to show more flexibility toward a possible reform. This was partly based on their loyalty to the ruling political party, partly based on their sometime desperate need for the kind of emergency financial support that might accompany a reform program, and partly on the calculation of some of the stronger Obras that they might  -21- be able to compete successfully and even prosper in a more open and competitive setting; * the oversupply of doctors in many parts of the country, aggravated by the large number of medical graduates coming onto the market, meant that the medical monopolies of the past were rapidly breaking down, thus weakening the organized opposition of medical providers to new, more competitive contracting and payment arrangements; and * newspaper articles and household surveys increasingly suggested that consumers -- the insured public -- were discatisfied with their Obras and were demanding improvements in access to and in the quality of insured medical care. 62. Based on the data collected and analyzed for this sector report, the World Bank in June- July 1995 recommended a set of reforms of Argentina's health insurance. These recommendations were largely adopted in the Government's own reform program, which was further refined in late 1995 and early 1996. A number of the policy changes have already been fully or partially implemented, and more are scheduled to take effect over the coming year and a half. What follows below is an account of the reform strategy and program recommended in 1995. After this, some of the first actions already completed to carry out the reform are described. Long-Term Vision of Health Financing and Insurance 63. In the recent debate on the future of health insurance in Argentina, a wide range of positions have been expressed. At one extreme, some trade union leaders have insisted on maintaining the status quo, arguing that the system of multiple Obras with captive membership is the only way of guaranteeing the protection of workers' health and the solidarity of the health care system. They have rejected the notion of free choice among Obras and of competition among the social insurance funds, and argued vehemently against allowing private capital into the social insurance arena. They have called for the repeal of Decrees 9/93 and 576/93, which threatened the existing system. At the other extreme, the business community, through various trade groups including the powerful Union Industrial Argentina, have proposed that there should be full competition among the Obras and the Pre-Pagas immediately -- presumably, still within the general framework of mandatory participation (no individual opting out) and payroll tax financing. The UIA has also suggested at various times that the INSSJP should be liquidated or privatized, though it has not been clear exactly how this would be done -- whether the Instituto would be sold to private owners, handed over to private managers, or eliminated by allowing its members to move to other insurers. 64. The study team for this report considered the full range of possible options for Argentina's future health financing system, taking into account the experience of the OECD countries and a number of middle-income developing countries which are currently struggling with many of the same issues facing Argentina. The options weighed included the broadening of voluntary private insurance; the unification of the currently fragmented markets for mandatory social insurance; financing public insurance through payroll taxes instead of general revenues;  -22- and various ways to enhance efficiency, service quality, and consumer satisfaction under the umbrella of public insurance. 65. A major expansion of voluntary private insurance was viewed as likely to be incompatible with Argentina's objectives of universal coverage and rigorous cost containment, given the inherent problems of risk selection and open ended fee-for-service payment systems that tend to predominate with this type of health insurance. The study therefore focused its analysis on options for strengthening public insurance, building on the existing Argentine tradition of social insurance. The approach recommended here essentially involves retaining some of the main features of social health insurance, but improving this type of insurance substantially through competition and better regulation, which in reality have never been a part of the Argentine system since its creation 50 years ago. The long-term vision of health financing in Argentina proposed here, to be attained over the next five to ten years, is one of: * universal coverage of the population, going beyond the partial (70 percent) coverage achieved today; * a standard set of health benefits available to every Argentine, and composed of a generous package of both preventive and clinical services; D a multiplicity of non-governmental insurance institutions (evolving from today's Obras and Pre-Pagas) competing for members and their contributions; * predominantly public financing of insurance, from wage taxes initially (a continuation of social insurance) and potentially from general revenues over the long run, for the standard benefits package; * room for regulated private financing of insured benefits supplemental to the standard package; and * a single regulatory agency, properly staffed and equipped and with adequate means for sanctioning improper behavior, overseeing the entire insurance system. 66. There is relatively little controversy, either within Argentina or among specialists in international health financing, over the desirability of achieving universal insurance coverage of a broad set of health benefits or about having an effective regulator for the insurance system. There is less consensus, however, regarding the recommendation to have a number of competing insurance fundholders or to rely heavily on wage taxes as the principal source of financing. Many would argue that a single-payer system such as the ones prevailing in Canada's provinces and in the Nordic countries has the advantages of lower administrative costs; less tendency by insurers to avoid bad risks and "skim the cream" of the market; and stronger bargaining power in negoJiating prices and payment methods with private health care providers. Some would also argue that general revenue financing is better than wage taxes, because the latter form of earmarked financing is distortionary and thus inefficient. 67. A Multi-Payer System. While both points of view have some merit, at least in theory, there are a number of arguments, both practical and conceptual, in favor of the multi-payer and wage tax-financed scheme advocated above for Argentina. Concerning the multi-payer system, Argentina's insurance is currently handled by more than 500 separate fundholders (not counting the hundreds of very small mutual insurance institutions, the mutuales). It would be unrealistic to expect that politically this system could be transformed in the short run into a single payer set-  -23- up. Somewhat smaller fundholders also have the potential to behave less bureaucratically and to be more responsive to consumer needs than a single large agency, especially if the multiple fundholders face competition for business. The experience elsewhere in Latin America with single national social insurance agencies -- the Institutos de Seguridad Social of many countries -- has been a disappointing one of waste, corruption, and bureaucratic paralysis. Beyond this, the growing experience with multiple social insurance fundholders competing in a regulated environment, from Holland, Germany, and parts of the United States, suggests that this type of "managed competition" can combine the benefits of broad health coverage, technical efficiency, and consumer choice. 68. Wage Tax Financing Base. Concerning the use of payroll taxes instead of general tax revenues to finance health insurance, the fact that Argentina already has in place a reasonably well-functioning system of wage tax collections, fund management, and transfers to the Obras and INSSJP argues strongly in favor of maintaining this revenue-raising device, at least in the medium term. The direct and explicit link between payroll tax contributions made by workers and health services they received is furthermore an important motivating factor in having beneficiaries choose their fundholders from among the competing institutions and insist on prompt, good quality health care. This sense of having a personal financial stake in the performance of the Obra -- "I contributed that money and expect to receive something for it" -- would be diluted or lost completely if health benefits were financed from general tax revenues. To the extent that workers are indeed obtaining highly-valued health services, in fact, some public finance economists would argue that the payroll deductions should not be viewed as a tax but as an in-kind employment benefit. G. The Main Features of Reform 69. To arrive at the longer-term vision of a unified, competitive health insurance system with strong regulation and supervision, Argentina needs to move forward in the medium-term (i.e., over the next three years) with a series of important policy changes affecting the Obras, the INSSJP, and the Pre-Pagas. These changes are shown in the figure below:  -24- Figure 10: Argentina Health Insurance Reform Principal Policy Actions For Mandatory Social Insurance: * introducing consumer choice of insurer and related competition, initially among Obras but later extended to all institutions wishing to enter this market and compete for business which can meet minimum standards.; . designing and enforcing a standard health benefits package; * re-engineering the Fondo Solidario de Redistribucion to compensate for household differences in income and health risk; * developing strong regulatory framework and regulatory institutions; . allowing more balanced competition between the INSSJP and other insurers for the elderly population; . using explicit performance contracts between the Government and INSSJP managers; * extending technical and financial assistance to the INSSJP to permit it to reduce its expenditures and improve its management practices. For Voluntary Private Insurance: