Mexico - Health System Reform (IMSS) Adjustment Loan Project

Report No. PID5984 Project Name Mexico-Health System Reform--IMSS Adjustment Loan Region Latin America and the Carribean Sector Human Development Project ID MXPE7720 Borrower BANOBRAS, S.N.C. Guarantor United Mexican States Implementing Agency Mexican Social Security Institute (IMSS) Eduardo Gonzalez, Ph.D. Melchor Ocampo 479, 7 Piso Col. Nueva Anzures Distrito Federal, Mexico Telephone: (525) 727-2824 Fax: (525) 625-1226 Date This PID Prepared January 26, 1998 Appraisal Date January 26, 1998 Projected Board Date April 7, 1998 Country and Sector Background 1. While Mexico's health indicators have improved markedly over the last 50 years, its population is aging rapidly. In 1970, 47 percent of Mexicans were under 15; in 1990 the figure was 39 percent and, in the year 2000, it is expected to be 35 percent. Over the same period, the proportion of Mexicans over 60 is expected to have risen from 5 percent to 7 percent and, by the year 2020, to reach 12 percent. While this is a fairly universal phenomenon, it has important implications for health delivery, expenditures and insurance-based financing. Due to strong economic and regional inequalities, Mexico also combines two epidemiological situations: while the northern states have health indicators similar to OECD countries, urban slums, rural areas and the southern states are still subject to a pattern of common infectious diseases and malnutrition typical of low-income countries. Mexico's achievements in the health sector over the past several decades have led to significant improvements in the health status of the population, a broadening of access to basic services, and support of important public health measures. But its health sector faces major structural problems, as measured by financial access to health care, efficiency and, increasingly, total cost. 2. Following extensive consultations and deliberations with all segments of society, the Social Insurance Law (SIL) was passed in December 1995, formalizing major policy changes in both pensions and health. The most important provisions in the SIL affecting the health sector include: (a) shifting a major financial burden from payroll taxes to Government financing through general revenues; (b) introducing greater consumer choice in the selection of providers  (e.g., primary care physicians, secondary hospitals, etc.) and, gradually, of Managed Care Organizations (MCOs); and (c) increasing coverage of the social security system to the self-employed and informal sector workers through a publicly subsidized insurance scheme. Program Objectives 3. This operation has the broad objective of supporting the design and implementation of major policy changes in the health sector in Mexico, mainly through reforms in the Mexico Social Security Institute (IMSS), which covers approximately 36 million people and accounts for about 66 percent of public health expenditures. For the short- to medium-term, these policy changes aim to: (a) improve the financial management of the health insurance system to ensure financial transparency, introduce new resource allocation mechanisms, and limit the fiscal impact of the proposed reforms; (b) strengthen the institutional and regulatory framework for health insurance to extend coverage to the self-employed and informal sector workers, ensure greater transparency and accountability among providers, develop measures for quality assurance and consumer rights, and promote consumer choice; and (c) improve the quality and efficiency of the IMSS health delivery system by supporting the decentralization of decision-making, restructuring of the health care delivery network around a population-based system, and the introduction of performance-based incentives for providers. Program Description 4. The reform program for the period 1998-2000 to be supported by the loan would follow a two-pronged approach: (a) developing and implementing health insurance financing reforms and the necessary regulatory framework through (i) separating financing from provision of services, (ii) increasing consumer choice and extending coverage, and (iii) developing and implementing purchasing mechanisms; and (b) institutional strengthening of IMSS through (i) changing its corporate structure and (ii) strengthening its health care delivery network. Bank assistance would consist of this adjustment operation to help finance the costs of the reform and of a parallel Technical Assistance Loan (TAL). Program Financing 5. The loan of US$750 million will be disbursed in two tranches, first upon effectiveness--projected to be in May 1998, then upon compliance with conditions of second tranche release--projected for January 2000. Program Implementation 6. The loan would be implemented by IMSS through a PCU, assisted by consultants financed under the parallel TAL. The PCU, which will be integrated within the regular structure of IMSS, will be in charge of overall coordination and reporting, technical and logistical support to IMSS' Regional Offices and Medical Zones, supervision and auditing, and monitoring and evaluation of the -2 -  project. Oversight of the broad reform program would be the responsibility of a committee within IMSS composed of representatives from the Ministry of Finance, Ministry of Health, IMSS, and other governmental agencies. Program Sustainability 7. The SIL shifts a major burden of financing public health expenditures from payroll taxes to general revenue taxes mainly with the objective of encouraging growth in formal employment. Correspondingly, the Government's obligation to fund health expenditures of IMSS members increased significantly, from .07 percent of GDP to an estimated .5 percent of GDP by the year 2000. Nevertheless, the burden of Government contributions to health insurance as a share of non-financial public sector expenditures-- which increased from 0.3 percent to an estimated 3 percent--is still considerably lower than in other LAC countries. 8. The reform program is designed to bring systemic changes to help contain long-term fiscal costs and thus enhance sustainability: (a) the projected increase in the tax base due to the expansion of formal sector employment should lead to an increase in total government revenue; (b) greater transparency in the management of financial reserves would prompt IMSS to tackle demographic and epidemiological transition issues sooner rather than later at lesser overall cost, and would help control the open-ended liability of public health care expenditures; and (c) new regulations and instruments will help contain health insurance costs and raise efficiency through the promotion of gradual competition both within IMSS and from the private sector. 9. The program was designed by the Ministry of Finance and IMSS in a prudent manner to have a neutral or slightly positive overall effect on government revenues in the long-run, offsetting higher immediate outlays with increased tax collections in the future. Lessons Learned 10. The reform concept and process supported by the project are of a long-term nature and politically and institutionally involved. Nations that have followed reform principles similar to those proposed include Germany, the Netherlands, Israel and, more recently, Russia, as well as Latin American nations supported by the Bank, including Chile, Costa Rica, and Argentina. All have evolved from employer-based insurance schemes. The key lesson learned from the unfolding collective experience is that no two systems are alike and therefore each system must be carefully considered on its own merits. Nevertheless, the following universal lessons which are critical to the loan can be identified: -- The need for political will and leadership. This has been demonstrated by the Government and IMSS in their reform initiative and their active participation and ownership in the choice of key project alternatives. -3-  -- Flexibility. Because of the nature of the reform process, it is not possible to anticipate all issues which will arise. The operation must therefore make room for a fair amount of flexibility, supported by pilot activities and robust, timely evaluation. -- Cost of transition. Even rich nations tend to allocate resources toward reform design, and not toward its implementation. This is often a key obstacle to reform, unwittingly reenforcing innate political and institutional opposition. Program Benefits 11. The reform would contribute to the economy and society by: (a) reducing the fiscal burden of the current health system and its concomitant potential distortions, while improving its financial sustainability; (b) improving the system's efficiency; (c) providing incentives for private sector participation; (d) raising the quality of care; and (e) increasing its contribution to equity. The reform would ultimately contribute to greater welfare and productivity, based on improved health status and satisfaction with the system. Program Risks 12. Support within the current Government for the reform is strong, but such support needs to be sustained. It will also be necessary to continue to internalize the reform within the IMSS in order to ensure that personnel at all levels understand the reform objectives and support it. A second risk is the difficulties that may arise within IMSS, both institutionally and politically, in the decentralization of health services. Continued centralized decision-making, budgeting and purchasing will inhibit efficiency improvement and competition. A third risk is possible delays in the approval and implementation of key norms and resolutions (i.e., capitation formulas, guidelines for Medical Zone operations, guidelines for opting-in and opting-out). 13. To overcome these risks, the TAL has been carefully designed to provide the necessary inputs to help IMSS carry out its reform, through, e.g., direct technical assistance, training programs, communications campaigns, etc. Poverty Category 14. Not applicable. Environmental Aspects 15. The program does not finance any investment activities and is proposed to receive an environmental rating of "C". One of the conditionalities would support the adoption of good environmental practices through an Operational Manual governing IMSS' investment program. Program Objective Categories -4-  16. The loan belongs to the category of Economic Management by helping the Government develop policy and tools to limit the fiscal impact of health finance reform and stimulate growth in the formal employment sector. The loan will also have long-term effects in Private Sector Development by opening avenues for private sector competition in the delivery of publicly financed health services. Poverty Alleviation would also be supported through the extension of social security coverage to informal sector workers and the self-employed. Contact Point The InfoShop The World Bank 1818 H Street, N.W. Washington, DC 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the InfoShop week ending February 6, 1998. - 5 -