Argentina - Health Insurance Reform Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No.: 19426 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF ARGENTINA ]HEALTH INSURANCE REFORM PROJECT (Loans 4002/3-AR) July 7, 1999 Country Management Unit for Argentina, Chile and Uruguay Human Development Sector Management Unit Latin America and the Caribbean Regional Office 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 (Exchange Rate Effective July 27, 1999) Currency Unit = Argentine Peso (AR$) AR$1.00 = US$1.00 US$1.00 = AR$1.00 FISCAL YEAR January 1 through December 31 ABBREVIATIONS AND ACRONYMS ANSeS Administraci6n Nacional de Seguridad SocialNational Social Security Administration ANSSAL Administracion Nacional de Seguros de la SaludlNational Health Insurance Administration APE Administraci6n de Programas Especiales/Special Programs Agency CAS Country Assistance Strategy DINOS Direcci6n Nacional de Obras SocialeslNational Directorate for Social Health Insurance Funds FROS Fondo de Reconversi6n de las Obras SocialeslRestructuring Fund for the National Health Insurance Funds FSR Fondo Solidario de Redistribuci6nlSolidarity Redistribution Fund ICR Implementation Completion Report IBRD International Bank for Reconstruction and Development INSSJP Instituto Nacional de Servicios Sociales para Jubilados y Pensionados/National Social Services Institute for Retirees and Pensioners MSAS Ministerio de Saludy Acci6n Social/Ministry of Health and Social Action Obras Sociales Social health insurance funds (linked to workers' place of employment) Obras Sociales Social health insurance funds for white-collar employees de Personal de Direcci6n Obras Sociales Social health insurance funds for workers under collective labor Sindicales contracts OECD Organization for Economic Cooperation and Development PCU Project Coordination Unit PMO Programa Medico ObligatoriolStandard Health Benefits Package Pre-pagas Private pre-paid insurance plans SAL Structural Adjustment Loan SSS Superintendencia de Servicios de Salud/Superintendency for Health Services Vice President Shahid Javed Burki CMU Director Myma Alexander SMU Director Xavier Coll Task Manager Marie-Odile Waty  FOR OFFICLAL USE ONLY TABLE OF CONTENTS Preface Evaluation Summary .......................... i PART I: PROJECT IMPLEMENTATION ASSESSMENT A. Background ..1........................ B. Project Objectives ........................... 4 C. Achievement of Objectives .......................... . 6 D. Major Factors Affecting the Project .......................... 14 E. Project Sustainability .......................... 15 F. Bank Performance ........................... 18 G. Borrower Performance .......................... 19 H. Assessment of Outcome .......................... 19 I. Future Operations .......................... 19 J. Key Lessons Learned .......................... 20 PART II: STATISTICAL ANNEXES Table 1: Summary of Assessment Table 2: Related Bank Loans/Credits Table 3: Project Timetable Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual Table 5: Studies Included in Project Table 6: Project Financing Table 7: Status of Legal Covenants Table 8: Bank Resources: Staff Inputs Table 9: Bank Resources: Missions APPENDIXES A. Evidence of compliance with loan conditionalities B. Borrower contribution to the ICR C. Map (IBRD No. 29348) 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.   IMPLEMENTATION COMPLETION REPORT ARGENTINA HEALTH INSURANCE REFORM PROJECT LOANS 4002/3-AR PREFACE This is the Implementation Completion Report (ICR) for the Health Insurance Reform Project in Argentina, for which Loans 4002/3-AR in the amount of US$350 million equivalent (US$250 and US$100 million, respectively) were approved on April 25, 1996 and made effective on July 12, 1996 (Ln. 4002-AR) and on December 3, 1998 (Ln. 4003-AR), the date of the third and final tranche release. The ICR was prepared by Marie-Odile Waty, Girindre Beeharry and Marian Kaminskis of the Human Development Sector Management Unit for the Latin America and the Caribbean Region, and Pablo Gottret (consultant). It was reviewed by Xavier Coll (Director of the Sector Management Unit), Charles Griffin (Lead Specialist, HNP, for the same unit), Alexandre Abrantes (Country Sector Leader of the Country Managing Unit for Argentina, Chile and Uruguay), Robert Hecht (former Task Manager), and Phil Musgrove (WBIHD). Preparation of this ICR was begun during the Bank's completion mission, April 12-16, 1999. It is based on the Borrower's own completion report and discussions with project coordinators as well as on material in the World Bank and Project Coordination Unit project files. The Borrower contributed to preparation of the ICR by preparing its own project completion report and by commenting on the draft ICR. The Borrower's comments are reproduced (unedited) in an appendix to the report.   IMPLEMENTATION COMPLETION REPORT ARGENTINA HEALTH INSURANCE REFORM PROJECT Loans 4002/3-AR Evaluation Summary Introduction/Project Background 1. In 1991-1992, the Government of Argentina began investigating options for reforming its health insurance system which was plagued with issues of low efficiency, financial unsustainability, and poor quality of health care. Collectively known as Obras Sociales, the compulsory health insurance funds provide coverage to some 18 million beneficiaries (or 51 percent of the population). They are made up of national Obras Sociales, which cover 8 million employees in the formal sector and their dependents, provincial Obras Sociales, which cover around 6 million provincial public sector employees and their dependents, and the national health insurance fund for retirees and pensioners (INSSJP), which covers the health needs of about 4 million beneficiaries. The national Obras Sociales and INSSJP began to incur large deficits which worsened following the March 1995 financial market crisis and the economic slump of 1995-1996. The combined debts of national Obras Sociales and INSSJP exceeded US$2 billion in 1995. The growing debts of the social health insurance funds exposed the inefficient and rigid structure of the health insurance system and put pressure on the Government to find a sustainable solution to its financial woes. In the second half of 1994, the Government and the World Bank undertook a sectoral analysis of financing issues and options for reforms, with a special focus on the national Obras Sociales and INSSJP. The sector work permitted the identification of the following key policy issues and areas for a first phase of reform: a. National Obras and INSSJP, which had captive beneficiaries who could not select membership in another health insurance provider, had little or no incentive to improve the quality and quantity of services, operate more efficiently and control costs. b. About 50 percent of the 360 or so national Obras Sociales that existed in 1994 had less than 10,000 beneficiaries, and therefore low financial viability as insurers. c. A third issue was the lack of adequate mechanisms of transfer of funds from the Solidarity Redistribution Fund (FSR) to the Obras. These funds, which are financed as a share of employer and employee contributions to their Obra Social, were meant to be transferred back to the Obras to ensure that they are able to finance a minimum package of health benefits for all their beneficiaries, for financial support in the form of loans and subsidies, and to finance costly and complex health care. Eligibility for financial support to theObras was determined in a discretionary manner by the National Health Insurance Administration (ANSSAL). d. A fourth was the weak regulatory environment. Major omissions in the system were the lack of: (a) a mandatory standard health benefits package (PMO); (b) prudential and consumer protection regulations for Obras Sociales and private health insurance; and (c) coordination between the two health insurance supervisory authorities. i  e. Finally, a number of Obras and INSSJP were running substantial operating deficits and were highly indebted to providers and financiers. Many Obras were running deficits because they: (i) were incurring high administrative costs; (ii) had little control over the quantity and costs of services they covered; (iii) ran inefficient health clinics and recreational facilities; and (iv) had weak accounting and management systems. INSSJP ran operating deficits because it had: (i) inadequate and inconsistent contracting practices with providers; (ii) been given responsibility for financing a number of non-medical social programs without a corresponding transfer of financial resources; (iii) a high and uncontrolled level of pharmaceutical expenditures; (iv) excess personnel; and (v) weak accounting and internal control systems. 2. In response to a request from the Government of Argentina to finance the restructuring of Obras Sociales and INSSJP, the Bank approved a loan package of US$350 million (Loans 4002- AR and 4003-AR) on April 25, 1996. On the same date, the Bank also approved a separate Technical Assistance Loan (Loan 4004-AR) for US$25 million equivalent. Project Objectives 3. The objectives of the loan were to support the first phase of the Government health insurance reform program by: a. introducing competition into the market for health insurance, while not creating undue incentives for risk selection; b. automatically reallocating the proceeds of the Solidarity Redistribution Fund to Obras Sociales strictly on the basis of income and health risk of their insured households; c. developing an effective regulatory framework and institutions for health insurance, which would promote competition, ensure greater transparency and accountability and help promote consumer rights; and d. extending financial and technical assistance to the Obras Sociales and INSSJP to enable them to raise internal efficiency, improve their balance sheets, and comply with new standards and regulations. 4. Loan resources were disbursed in three tranches in accordance with conditions for Tranche Release agreed upon with the Government. The reform program consisted of three components: (a) Policy and Regulatory Reforms Component; (b) Restructuring of the Obras Sociales; and (c) Restructuring of INSSJP. The TA Loan was used to finance the development of major policies and regulations, and the preparation and monitoring of restructuring plans for the Obras Sociales and INSSJP. 5. The following measures were envisaged to meet the Loan's three policy objectives: (a) the issuance of legislation to introduce competition among nationalObras Sociales and INSSJP; (b) the establishment and updating of a comprehensive database of the insured population; (c) the standardization of a package of benefits (PMO) and its adoption by all national Obras and Pre- pagas; (d) the development and implementation of objective allocation criteria for the Solidarity Redistribution Fund; and (e) the establishment and development of a single regulatory agency, the design and issuance of prudential and consumer protection regulations for the Obras, and the design of regulations for Pre-pagas. 6. A project restructuring fund (FROS) was established to finance three activities to enable national Obras Sociales and INSSJP to return to and maintain financial and technical viability: (i) debt restructuring; (ii) reduction of personnel; and (iii) institutional development, in order to ii  improve health care services, human resources, and information and communications systems, and to develop organizational and strategic capacity. Achievement of Project Objectives 7. The loan package was fully disbursed in two and half years, instead of the two years estimated at appraisal. The achievement of the objectives of the loan can only be considered satisfactory since some of the objectives need to be completed. Both loans supported the introduction of revolutionary and irreversible changes in the mandatory health insurance system which affected many politically powerful interest groups. The Argentine Government did better than most governments that have been engaged in similar reforms in implementing all the key elements of the reform over a very short period of time, and in weathering the important risks inherent to such radical change processes. The achievements to date must be seen as the critical first steps of a reform process that will, in all likelihood, take several more years. 8. The achievements of the policy and regulatory reforms were satisfactory. Several of the tasks that were contemplated in the reform program, however, remain to be completed to consolidate the reform. Within a period of three years, the Government has: a. Opened up competition among national Obras Sociales, and between INSSJP and national Obras Sociales that have registered as health insurance providers for the elderly. By March 1999, about 278,000 workers (i.e., 7 percent of enrollees of national Obras Sociales), representing 725,000 beneficiaries, had changed Obra since the introduction of free election. Some level of cream-skimming took place with the introduction of competition. The data, however, indicate that while the expected migration of high-income low-risk population towards certain Obras Sociales has occurred, the overall impact on the system has been so far limited. b. Designed and mandated the introduction of a standard health benefits package which is now routinely used as a reference package by national Obras, Pre-pagas, and even the media. c. Introduced an automatic redistribution mechanism to ensure a minimum monthly financing of $40 for each household enrolled with a national Obra Social, therefore reducing the scope for discretionary transfer of funds. d. Established an enrollment database of the population insured by national Obras Sociales, in which 3 million contributing employees and 4 million dependents were registered. e. Created a unified regulatory agency and issued prudential and consumer protection regulations. The Superintendencia de Servicios de Salud (SSS) came into operation in 1998 and has since made progress in setting up a new organization and strategic development plan, developing a consumer services unit, establishing a team of inspectors and auditors, and issuing regulations related to free election of Obras, health plans offered by Obras, including the PMO, contracts with providers, and sanctions and penalties in case of non compliance with regulations. f. Submitted to the Argentine Congress a new draft law to regulate private pre-paid health insurance agencies. The draft law has been approved by a Senate Committee and is awaiting formal approval by the Congress. 9. The achievement of the objectives of the restrupturing of Obras Sociales was highly satisfactory. Thirty-one Obras, covering 5 million beneficiaries (i.e., 62 percent of the population insured by national Obras Sociales) qualified for a loan under the program. The impact was positive for the 20 Obras that had executed at least one tranche of their loans at the time of project evaluation. Each of these Obras succeeded in improving its financial indicators, increasing its internal efficiency, and developing adequate systems to comply with new standards and regulation. The impact on the quality of services provided by the Obras also seemed to be iii  positive, as shown by the results of a consumer poll carried out by the Superintendency in May 1999. The poll shows that, in general, beneficiaries of the Obras which were restructured are more satisfied with the quality of the medical and administrative services covered than those of the Obras that were not restructured. 10. The achievement of the objectives of the restructuring of INSSJP was partially satisfactory. The restructuring program achieved the objectives of eliminating the institution's debts and significantly reducing its operating deficit, but not eliminating it. It is still uncertain whether INSSJP's internal efficiency and quality of care have improved significantly. INSSJP delayed the reform of its current organization and management because its managers contemplated the implementation of an alternative plan that would have radically transformed the mandate of the institution. INSSJP's proposal was to contract out the management of the care of its beneficiaries to three large networks of providers, thereby transferring to these networks all the financial risks associated with the provision of care. This proposal has not yet been implemented. Major Factors Affecting the Project 11. The following political, economic and administrative factors affected the regular implementation of the program: a. Introduction of competition among Obras Sociales Sindicales faced resistance by those interest groups that were comfortable with closed market niches. b. INSSJP had three directors (interventores) during the course of the project. This created several implementation problems, in particular uncertainty among providers, and delayed final negotiations of contracts. c. The decrease in employer contribution established by Presidential Decrees 492/95 and 494/95 implied a reduction of the order of US$10 million per month in INSSJP revenues. This reduction required additional efforts in cost reductions to comply with the zero-deficit requirement of third Tranche Release. d. The delay in the actual transfer of management responsibilities to the three networks of providers has further prevented INSSJP from complying with this condition. e. Lack of counterpart funding has not hampered the restructuring program of Obras Sociales but could do so in the near future since the program would henceforth mostly rely on counterpart funds which are severely constrained because of Argentina's tight fiscal situation. Project Sustainability 12. All the major project outcomes appear irreversible, although consolidation is needed: a. Consumer choice of insurance provider and competition among national Obras Sociales and INSSJP are considered by the major stakeholders as a sustainable reform that is unlikely to be reversed. According to a May 1999 consumer poll, eighty-one percent of the persons enrolled in the system know that they have the right to change Obra; 725,000 persons have exercised this right since it was granted. Seventy or so Obras have expressed their interest in competing with INSSJP by registering as insurers for the elderly. b. The sustainability of the enrollment database needs to be ensured. The most important determinant of sustainability would be the decision to transfer the responsibility of its maintenance to the Superintendency for Health Services (SSS), which has a higher and more direct stake in its use than the National Social Security Administration (ANSeS) or the iv  federal tax revenue office. Consolidation of the database would also require further technical adjustments, especially regarding maintenance and updating routines. c. Another area of consolidation is the introduction of additional risk-adjustment criteria (family size, age, sex, residence) in the redistribution formula of the Solidarity Redistribution Fund. Their implementation may, however, require new strategies for increasing the amount automatically redistributed, or reducing the scope of the PMO. The challenge in designing a system of solidarity contribution and redistribution mechanisms among Obras is to find the right mechanism that would compensate for the true differences in risks incurred by Obras without compensating for poor management and inefficiencies. d. Some success has been achieved in decreasing the scope of discretionary subsidies to Obras, but the practice was not eliminated. The practice of discretionary subsidies undermines both the FSR objective of promoting equity among Obras, and the financial objectives of the restructuring program of Obras. e. The establishment of an incipient comprehensive regulatory framework was a major step towards improving the sustainability of the system. The challenge is now to ensure that regulations are enforced. f. The empowerment of consumers together with the increased provision of information on the health insurance system are major features that will help ensure continuous improvements in the system. g. The restructuring program of Obras Sociales succeeded in ensuring the financial and technical viability of the majority of Obras which qualified for a loan. The restructuring program introduced an important cultural change in the system by developing a new management culture among Obras as well as new transparent and accountable systems for funding to Obras. h. Many of the Obras that did not qualify for a restructuring loan, especially the small ones, are experiencing today acute financial difficulties which, unless the crisis is adequately resolved, would pose a threat to the sustainability of the entire system. Their financial situation is likely to worsen with the increased capacity of autonomous public hospitals to charge them for services provided to their enrollees. i. The restructuring program of INSSJP has not yet ensured the financial and technical sustainability of the institution. A radical plan to change the organization is currently on hold. Performance 13. Bank performance in the identification, preparation, appraisal and supervision of the Health Insurance Reform Program was highly satisfactory. The Bank responded in a timely fashion to the Government's request for financial and technical support in the overhaul of its health insurance system in 1994. The Bank helped define a long-term vision of a more equitable and efficient health financing system through its sector work and through its dialogue with the government on the goals and instruments of the reform. Bank staff were particularly effective in establishing partnerships with a broad array of stakeholders, a strategy that has been instrumental to ensuring the sustainability of major policy reforms. Finally, the Bank is to be credited for continuity, excellent technical support and close monitoring in the supervision of the reform program. 14. The Borrower's performance was also highly satisfactory. The Government successfully handled strong political pressures while ensuring that the agreed core program and commitments established in the Letter of Development Policy were maintained. In addition to its political savvy, the Borrower should be commended on the degree of professional capacity that it brought v  to the achievement of the objectives of the program, and for its continued commitment to improving the health insurance system. Assessment of Outcome 15. The overall project outcome is considered satisfactory. The policy reforms and regulation component is considered satisfactory. Most of the objectives were met but, in several instances, the achievements need to be consolidated. The restructuring of Obras Sociales is considered highly satisfactory, having achieved dramatic and sustainable improvements in the way Obras conduct business. The restructuring of INSSJP is considered partially satisfactory since the institution is still running an operating deficit. Key Lessons Learned 16. The implementation of the program provided many lessons for future adjustment programs of this type: a. At the project design stage, the focus should be on conditionality based on desired outcomes for the reform rather than on undertaking specific restructuring measures. The Bank team has developed jointly with the Argentine authorities the conditionality matrix and has allowed great flexibility with regard to specific instrumental activities. b. The reform program must be developed with the long-run vision for change in mind yet with a practical focus on small, achievable steps, a reasonable timeline, and flexibility to adjust through careful monitoring and management of the process. c. The reform must be built on broad, multi-agency support, not narrow sectoral backing. The successes to date of the program have depended critically on political support from the highest levels of the Argentine government. d. A key element of the project's success was the fact that it had been preceded by thorough analytic work that helped establish clear and achievable goals for the adjustment program. Equally critical to project success was the development of a strong local capacity in data collection, monitoring and impact evaluation. vi  PART I: PROJECT IMPLEMENTATION ASSESSMENT A. BACKGROUND 1. In 1991-1992, the Government of Argentina began investigating options for reforming its health insurance system that was plagued with issues of low efficiency, financial unsustainability, and poor quality of health care. In addition, there was a growing concern about the high cost of care in the country'. Collectively known as Obras Sociales, the compulsory health insurance funds provide coverage to some 18 million beneficiaries (or 51 percent of the population). They are made up of national Obras Sociales, which cover 8 million formal sector employees and their dependents, provincial Obras Sociales, which cover around 6 million provincial public sector employees and their dependents, and the national health insurance fund for retirees and pensioners (INSSJP), which covers the health needs of about 4 million beneficiaries. In addition, around 200 private health plans (Pre-pagas) provide voluntary health coverage to 2.2 million individuals. Obras Sociales Nacionales have an average annual revenue of US$3 billion from mandatory payroll taxation (5 percent from employers and 3 percent from employees). INSSJP, which has an average annual revenue of US$2.8 billion, is funded by (i) an automatic transfer of three percent of employer and two percent of employer payroll contributions; and (ii) a tax on retirement pay and other pensions. Early reform initiatives included: the regrouping under a unique health insurance law (23660/88) of all the national Obras Sociales; and the centralization of payroll contributions to all national Obras Sociales by the federal tax revenue office. 2. The national Obras Sociales and INSSJP began to incur large deficits which worsened following the March 1995 financial market crisis and the economic slump of 1995-1996 (which resulted in lower payroll taxes). The combined debts of national Obras Sociales rose from US$100 million in 1991 to over US$1 billion in December 1995; the debts of INSSJP similarly spiraled upward from nil to over US$1 billion during the same period. The growing debts of the social health insurance funds exposed the inefficient and rigid structure of the health insurance system and put pressure on the Government to find a sustainable solution to its financial woes. Complaints from consumers about the unavailability and poor quality of health care also added to the crisis. 3. In the second half of 1994, the Government and the World Bank undertook a sectoral analysis of financing issues and options for reforms2, with a special focus on the national Obras Sociales and INSSJP. The sector work permitted identification of the following key policy issues and areas for a first phase of reform. 4. Introducing competition among national Obras Sociales was recognized by the Government as a fundamental step towards improving their efficiency and accountability as well as the quality and quantity of their health care coverage. National Obras Sociales are historically linked to specific industries and professions and are owned and managed by workers' unions or associations. All formal sector workers and their dependents are required by law to receive health 'Argentina spent an estimated 10 percent of GDP on health in 1995. Argentina's health expenditure patterns resembled more those of high income countries (9.6 percent) rather than those of countries in its income group (6.2 percent) or in Latin America (6.3 percent). (Source: WDI, World Bank) The high level of spending in health was, however, not matched by good health and productivity indicators. 2 Summarized in 'Argentina: Facing the Challenge of Health Insurance Reform,' May 30, 1997, World Bank. 1  insurance from the Obra linked to their place of employment. The system of national Obras3, consists mainly of Obras Sociales Sindicales (203 in 1999) which provide coverage to around 6.7 million workers under collective labor contracts and their dependents. The second largest group of Obras is that of Obras Sociales de Personal de Direcci6n (24 in 1999), which provide coverage to around 0.6 million white-collar employees. An additional 0.7 million are covered by Obras of other sorts. 5. Since Obras and INSSJP had captive beneficiaries who could not select membership in another health insurance, they had little or no incentive to improve the quality and quantity of services, operate more efficiently and control costs. In addition, the system was characterized by the existence of a large number of Obras Sociales which were not viable as insurance providers because of their limited risk pool4. It was believed that competition and regulation would provide the appropriate incentives to increase efficiency and consolidate the system by reducing the number of national Obras Sociales. The Government had already introduced by decree the concept of competition among national Obras Sociales in 1993, but the decree had failed to become effective because of the absence of a supporting regulatory framework, strong opposition by labor unions, and the lack of preparedness of the Obras Sociales to face competition. 6. While designing the reform program, two main options for opening competition in the health insurance market were considered by the Government: the radical approach of introducing competition among all health insurance funds (all Obras and Pre-pagas) at once, and the more gradual approach of introducing competition in specific segments of the insurance system. Given the lack of readiness of the regulatory framework and the concern that unions would strongly oppose the insurance reform as a whole if full competition were allowed from the start, the government decided to opt for the phased approach. It was also feared that the wealthier and better organized Obras de Personal de Direccion (white-collar employees) and private health insurance funds (Pre-pagas) would "cream-skim" low risks by attracting the high-income population. In a first phase of the reform, competition was only envisaged: (a) among Obras Sociales Sindicales; (b) between INSSJP and Obras Sociales Sindicales; and (c) between Obras de Personal de Direcci6n and Pre-pagas. 7. The second major challenge was to reform the Solidarity Redistribution Fund(FSR) with a view to eliminate its practice of discretionary subsidization of theObras, and to focus the use of funds exclusively on improving equity and mitigating risk selection. The FSR is financed as a share of employer and employee contributions to their Obra. Social (10 percent of payroll contributions for the Obras Sociales Sindicales and 15 percent for the Obras Sociales de Personal de Direcci6n). Until 1995, the FSR was managed by the National Health Insurance Administration (ANSSAL). The funds were theoretically transferred back to the Obras for several purposes: (a) to ensure that Obras are able to finance a standard package of health benefits for all their beneficiaries; (b) for financial support in the form of loans and subsidies; and (c) to finance special programs or costly high-complexity health care. The lack of transparency 3 Based of data from the Superintendency for Health services, there were 361 national health insurance funds in 1994 and 290 in 1999. 4 In 1999, around 62 percent of national Obras Sociales (180) have less than 10,000 beneficiaries, accounting for 6.2 percent of total enrollees only. 2  and objectivity in the subsidy mechanisms (eligibility for financial support was determined in a discretionary manner by ANSSAL) meant that the FSR was not an effective instrument to promote equity in the system. 8. A third area of reform was the introduction of appropriate regulation and supervision. Major regulatory challenges included: (a) enforcing a standard health benefits package (PMO) in both private and social insurance systems (until 1995, there was no mandatory package of health services to be provided by Obras Sociales and only the wealthier and well-organized Obras were able to provide comprehensive health services); (b) establishing minimum rules for competition; (c) designing prudential and consumer protection regulations for Obras Sociales, including financial requirements, liquidation procedures, and accounting standards; (d) regulating private health insurance (Pre-pagas); and (e) establishing a unique supervisory authority (by merging the Direcci6n Nacional de Obras Sociales, DINOS, with the ANSSAL), that would be professionally staffed, endowed with adequate monitoring and control systems, and be capable of supervising both Obras Sociales and private insurance. 9. The fourth and final area of the first phase of reform was to restructure the Obras and INSSJP in order to improve their operations and cash flow, and upgrade their organization and management practices so that they could compete. Most Obras Sociales were running operating deficits and were heavily indebted to providers (of the 55 Obras Sociales which pre-qualified for program funding, 42 were running operating deficits and held a total debt of US$1.1 billion). Service delivery by providers had, in some cases, been nearly interrupted. Indebtedness was not necessarily related to low revenues: the two Obras Sociales with the highest monthly revenue per beneficiary ($62 and $49) also had the highest total debt per beneficiary ($433 and $335). 10. Obras were plagued with inefficiencies of various sorts that contributed to the operating deficits. First, many Obras were incurring high administrative costs, resulting from excess personnel (often poorly skilled and non-motivated), loose and inflated organizational structures, and the lack of efficient information management systems. Secondly, contracting agreements with providers were not standardized or regulated. This, combined with the absence of medical audits, resulted in inadequate control of the health services actually provided. Control over the quantity and costs of services was weak since most Obras did not maintain a database of beneficiaries and relied mostly on fee-for-service payments to providers. The latter had therefore an incentive to over-bill for services. This led to a vicious circle of deterioration in the relationships between Obras and providers and, consequently, in the quality of services provided to the beneficiaries. Without a beneficiary database, Obras had no knowledge of the epidemiological profile of their beneficiary populations, nor the capacity to tailor preventive and curative programs adapted to the specific health needs of their population. Thirdly, many of the health clinics owned by Obras Sociales offered low-complexity high-cost services, which could be contracted out at better quality and price. Finally, many Obras owned and managed recreational and tourist facilities that were running operating deficits, draining resources from health services. 11. INSSJP's financial situation became critical in 1995. Its average monthly operating deficit of US$72.5 million was financed through increased liabilities with both providers and financial creditors (private and public). INSSJP's debts to providers were increasing at such a fast rate that many providers had disrupted service delivery, either directly or indirectly, by rejecting patients. As of end-1995, INSSJP incurred US$521 million in debts to providers and US$431 million to public institutions such as ANSSAL and financial institutions such as the National Bank. In addition, debts to providers were not always clearly accounted for because of the lack of adequate contracting and financial systems. Reasons for the operating deficit were: (i) 3  inadequate and inconsistent contracting practices with providers (e.g., cost of services could vary significantly within the same city depending on the provider); (ii) payment of non-medical benefits to non-contributing beneficiaries: INSSJP had been'given responsibility for financing a number of non-medical social programs (food security, poverty) without a corresponding transfer of financial resources; (iii) a high and uncontrolled level of pharmaceutical expenditures, arising from poorly designed contracts with providers and co-payment systems, and an unduly extensive list of subsidized drugs; (iv) excess personnel (INSSJP had a workforce of 14,500 in 1995); and (v) a lack of accounting and internal control systems. 12. In late March 1995, the Government requested that, as part of the World Bank's US$1.3 billion package of emergency assistance to Argentina, an operation be prepared and appraised for the reform of the Obras Sociales and INSSJP. The Bank approved a loan package of US$350 million (Loans 4002-AR and 4003-AR) on April 25, 1996. The loans consisted of a Single Currency Loan of US$250 million and a Currency Pool Loan of US$100 million equivalent. The loans, together with a Government counterpart of US$400 million5, amounted to a total of US$750 million. On the same date, .the Bank also approved a separate Technical Assistance Loan (Loan 4004-AR) for US$25 million equivalent to finance critical institutional development activities. B. PROJECT OBJECTIVES 13. The objectives of the Loans were to support the first phase of the Government health insurance reform program, by: a. introducing competition into the market for health insurance, while not creating undue incentives for risk selection; b. automatically reallocating the proceeds of the Solidarity Redistribution Fund (FSR) toObras Sociales strictly on the basis of income and health risk of their insured households; c. developing an effective regulatory framework and institutions for health insurance, which would promote competition, ensure greater transparency and accountability, and help promote consumers' rights; and d. extending financial and technical assistance to the Obras Sociales and INSSJP to enable them to raise internal efficiency, improve their balance sheets, and comply with new standards and regulations. 14. Loan resources were disbursed in three tranches in accordance with conditions for Tranche Release agreed upon with the Government (see Appendix A). The Borrower was the Republic of Argentina, and the Ministry of Health was the Implementing Agency. The reform program consisted of three components: (a) Policy and Regulatory Reforms Component; (b) Restructuring of the Obras Sociales; and (c) Restructuring of INSSJP. The TA Loan was used to finance the development of major policies and regulations, and the preparation and monitoring of restructuring plans for the Obras Sociales and INSSJP. 15. Policy and Regulatory Reforms Component. Under this component, the following series of measures were envisaged to meet the Loan's three policy objectives referred to in 13(a), (b) and (c) above: a. The issuance of legislation to introduce competition among national Obras Sociales and INSSJP; 5 Counterpart funds included US$210 million of cash transfer to the restructuring fund for Obras Sociales and US$190 million of debt cancellation for INSSJP. 4  b. The establishment and updating of a comprehensive database of the insured population; c. The standardization of a package of benefits (PMO) and its adoption by all Obras and Pre- pagas; d. The development and implementation of objective allocation criteria for the Solidarity Redistribution Fund; e. The establishment and development of a single regulatory agency, the design and issuance of prudential and consumer protection regulations for the Obras, and the design of regulatory regulations for Pre-pagas. 16. Restructuring of the national Obras Sociales. A project restructuring fund (FROS) was established to finance three activities to enable national Obras Sociales to return to and maintain financial and technical viability: (i) debt restructuring; (ii) laying off excess personnel and, where appropriate, selling underutilized clinics, hospitals, and other facilities; and (iii) institutional development activities, in order to improve health care services, organizational and strategic development, human resources, and information systems and communications. 17. Only Obras with more than 10,000 beneficiaries were eligible for financial support from the project since it was considered that smaller Obras could not meet standards of financial sustainability. Small Obras, however, could become eligible for funding if they merged with other smaller or larger Obras Sociales. Obras had to meet minimum pre-qualification criteria, prepare a restructuring plan and submit it for approval to a supervisory Committee which was chaired by the Secretary of Health and included the Secretaries of the Office of the Chief of Cabinet and of the Ministry of Economy. For its restructuring loan to be approved, an Obra had to: (i) show that it would be able to comply with the new regulations of the Superintendency, including financial ones; (ii) accept the conditions for Tranche Release; and (iii) show it had the capacity to repay the loan, and accept the repayment of the loan through a monthly automatic retention by the federal tax revenue office on the Obra's collection of contributions. Qualifying Obras received financial support for the above-mentioned purposes in the form of subsidiary loans from the FROS, which were disbursed in two or more installments upon compliance with conditions established on the basis of their restructuring plans. These conditions were laid out in legal agreements (convenio subsidiario de prestamo). The rules and procedures for the provision of subsidiary loans to Obras were detailed in an Operation Manual which was agreed upon between the Government and the Bank as a condition of Loan effectiveness. 18. Restructuring of INSSJP. Given the similarities in the issues faced by INSSJP and the national Obras Sociales, the restructuring program for INSSJP bore a strong resemblance to the one for Obras. The restructuring fund was also used to finance similar measures to enable INSSJP to return to and maintain financial viability: (i) debt restructuring; (ii) reduction of personnel; and (iii) the development of a new organizational structure, management team, and monitoring and information systems. The latter included the full restructuring of the institution, the renegotiating of contracts with providers, and the outsourcing of as many services as possible. In addition, INSSJP was required to compete with Obras Sociales for clients. 19. The Loan's objectives were clear and appropriately designed to support the first phase of the Government's health insurance reform program. They were consistent with the Government's Policy Letter on Health Insurance Reform, dated March 26, 1996, and with the recommendations of the Bank-financed Sector Study. The program was also consistent with the Bank's Country Assistance Strategy for Argentina, discussed by the Executive Directors on April 24, 1997 and updated on November 10, 1998, which emphasized the institution's support for creating a more competitive environment for health insurance. 5  C. ACHIEVEMENT OF OBJECTIVES 20. The loan package was fully disbursed in two and half years, instead of the two years estimated at appraisal. The achievement of the objectives of the loan can only be considered satisfactory since some of the objectives need to be completed. Both loans supported the introduction of revolutionary and irreversible changes in the mandatory health insurance system which affected many politically powerful interest groups. The Argentine Government did better than most governments that have been engaged in similar reforms in implementing all the key elements of the reform over a very short period of time, and in weathering the important risks inherent to such radical change processes. The achievements to date must be seen as the critical first steps of a reform process that will, in all likelihood, take several more years. 21. The achievements of the policy and regulatory reforms were satisfactory. Within a period of three years, the Government has: (i) opened up competition among national Obras Sociales, and between INSSJP and national Obras Sociales that register as health insurance providers for the elderly; (ii) designed and mandated the introduction of a standard health benefits package and an income-adjustment mechanism among Obras Sociales; (iii) established an enrollment database of the population insured by national Obras Sociales; (iv) created a unified regulatory agency and issued prudential and consumer protection regulations; and (v) submitted to the Argentine Congress a new draft law to regulate private pre-paid health insurance agencies. Several of the tasks that were contemplated in the reform program, however, remain to be completed to consolidate the reform. 22. The achievement of the objectives of the restructuring of Obras Sociales was also highly satisfactory. Thirty-one Obras, covering 5 million beneficiaries (i.e., 62 percent of the population insured by national Obras Sociales) qualified for a loan under the program. The impact was positive for the 20 Obras that had executed at least one tranche of their loans at the time of project evaluation. Each of these Obras succeeded in improving its financial indicators, increasing its internal efficiency, and developing adequate systems to comply with new standards and regulation. The impact on the quality of services provided by the Obras also seemed to be positive, as shown by the results of a consumer poll carried out by the Superintendency in May 1999. The poll shows that, in general, beneficiaries of the Obras which were restructured are more satisfied with the quality of the medical and administrative services covered that those of Obras which were not restructured. 23. The achievement of the objectives of the restructuring of INSSJP was partially satisfactory. The restructuring program achieved the objectives of eliminating the institution's debts and significantly reducing its operating deficit, but not eliminating it. It is still uncertain whether INSSJP's internal efficiency and quality of care have improved significantly. INSSJP delayed the reform of its current organization and management because its managers contemplated the implementation of an alternative plan that would have radically transformed the mandate of the institution. INSSJP's proposal was to contract out the management of the care of its beneficiaries to three large networks of providers, thereby transferring to these networks all the financial risks associated with the provision of care. This proposal has not yet been implemented. 24. Evidence of the Borrower's compliance with all the loan conditions is provided in Appendix A, "Evidence of Compliance with Loan Conditions," of this report. The following describes in some detail the degree of achievement of each of the project objectives. 6  (i) Policy Reforms and Regulation 25. Competition among Obras Sociales. The introduction of free choice among Obras represented a fundamental change in the health insurance system in Argentina. Enrollees could freely choose any Obra as their health insurance carrier as of January 1, 1997. To limit risk selection, Obras were prohibited from rejecting any worker who chose to enroll with them. By March 1999, about 278,000 workers (i.e., 7 percent of enrollees of national Obras Sociales), representing 725,000 beneficiaries, had changed Obra since the introduction of free election. Average monthly transfers were of the order of 12,500 in 1997 and 9,800 in 1998. A decree was passed in May 1998 that improved the framework for competition by allowing workers to change Obra at any time as long as they do so only once in any 12-month period. The program supported media campaigns to inform the population of their right to choose among Obras. A consumer poll carried out in May, 1999 showed that 81 percent of the population are now aware of their right to change Obra. Seven percent of persons interviewed had changed Obra since 1997. The main reasons evoked were: (i) job change (24 percent); (ii) dissatisfaction with medical services provided by former Obra (17 percent); (iii) easier geogrAphical access to services (12 percent); and (iv) excessive bureaucracy of former Obra (12 percent). 26. Sixty-six percent of the 278,000 transfers were made by workers with a monthly salary of less than US$1,000. However, when analyzed in relative terms, the proportion of high-income workers who changed Obra (64 percent of workers earning more than $2,000 opted for a new Obra) is much higher than that of low-income workers (only 13 percent of those earning less than US$ 1,000 changed Obra). The fact that richer workers have exercised their right to choose their health insurer proportionally more than poorer workers may result from two factors. First, the richer population usually has more and better information about their options, and higher expectations vis-a-vis quality of care. Second, the insurance funds that were able to meet these expectations have inevitably actively sought to enroll this wealthier population. In addition, although the opening of the market was intended to be gradual - with the shielding, initially, of competition from the Pre-pagas - a few Obras did, in effect, enter into partnerships with private health plans and attracted the high-income population, particularly those households with double insurance. This shows that some level of cream-skimming took place with the introduction of competition, a situation that was expected and largely unavoidable. The data, however, indicate that while the expected migration of high-income low-risk population towards certain Obras Sociales has occurred, the overall impact on the system has been so far limited: the seven percent of enrollees in the system who migrated accounted for 10 percent of total revenues. 27. Solidarity Redistribution Fund. The most important challenge with the opening of competition was to avoid that Obras Sociales with a majority of low-income high-risk population become unable to provide the PMO to all their beneficiaries. The change in the reallocation mechanisms of the FSR was meant to allow directing funds to those Obras Sociales with the worst risk pools and to ensure a minimum health security to all beneficiaries, regardless of their ability to pay for health care. This reform hinged upon the achievement of three intermediary objectives: (a) the design and implementation of a standard package of benefits; (b) the establishment of a comprehensive database of the insured population; and (c) the design and implementation of redistribution mechanisms that would compensate Obras for differences in income and other risk factors of their enrollees (such as age, sex, and residence). Each of these objectives is discussed below. 7  28. Standard Benefits Package (PMO). A standard package of services was effectively designed and implemented prior to the program. A decree was passed in 1995 making it mandatory for Obras to provide the PMO. The content of the package itself was defined in a subsequent resolution in May 1996. In November 1996, mandatory provision of the standard package of services was extended to Pre-pagas. The PMO is now routinely used as a reference package by national Obras, Pre-pagas, and even the media. 29. Establishment of an Enrollment Database. A census of beneficiaries of the national Obras was conducted in which 3 million contributing employees and 4 million dependents were registered. The database has been in use by autonomous public hospitals to identify those patients who are enrolled in an Obra so that they can charge the Obra for these services. To that extent, the establishment of the enrollment database has been a success. The census, however, fell short of its objectives in other important aspects. The employer response level was only 80 percent, and a large proportion of the questionnaires that were sent back were incomplete (missing date of birth, sex, province of residence). Several problems prevented the full achievement of the objective. First, the database was established and maintained by an institution, the national social security administration, ANSeS, which had no incentive to maintain the database, nor a stake in the reform being implemented. Secondly, the updating mechanisms were insufficient: the database had to be updated regularly because of the frequent changes in employment status, and had to be cross-checked with that of the federal tax revenue office for consistency. Finally, the census questionnaire requested detailed and sometimes superfluous information, which may have deterred employers from responding. 30. Automatic and transparent reallocation of the proceeds of the Solidarity Redistribution Fund. The objective of reallocating the proceeds of the FSR in a transparent and automatic way was largely achieved. In 1995, as part of the sector strategy that was being discussed with the Bank, an automatic redistribution mechanism was implemented that would ensure a minimum monthly payment of $40 for each enrolled household (i.e., the enrollee and his/her eligible dependents). The FSR automatically compensated Obras for the difference if the contributions of their enrollees did not amount to $40 per month. The new automatic redistribution mechanism met with wide approval and little resistance because: (a) the transfer mechanism from the FSR became more transparent; (b) automation meant that Obras had greater financial predictability and could consequently better plan their operations; and (c) administrative capacity was not stretched since the transfer was automated. 31. In a second phase, the introduction of family size as an additional redistribution criterion to further improve equity was attempted. Ensuring a uniform payment of $40 for households, regardless of size, penalized large families. A decree was passed in 1998 that ensured a minimum monthly coverage of $22.40 for each enrollee and $11.50 for each dependent. This decree was, however, suspended in 1999 despite general acknowledgement that ensuring a minimum monthly financing for each beneficiary (i.e., enrollees and their dependents) would improve equity. The change in distribution criteria led to important alterations in the amount and destination of the funds with the effect that some of the Obras were financially destabilized, especially those that were providing coverage to small low-income households. With this new criterion, some 98 Obras received a lower level of subsidy from the FSR. Of these, the ten most affected ones received a third less than they used to receive from the FSR. These ten Obras are among the largest ones since they account for some 35 percent of all enrollments. 32. A subsequent step involved expanding the criteria for automatic subsidization to include risk-adjustment by age, sex and province of residence of the enrollees and their dependents. The methodological foundations for a subsidization mechanism that risk-adjusted for age, sex and 8  residence were established. Because of the difficulty, however, of establishing a comprehensive database of enrollees with all the necessary information, risk-adjustment for age and sex has not yet been implemented. 33. A major achievement of the reform program has been to increase the transparency in the use of the FSR and to substantially reduce the scope for discretionary transfer of funds. The formula-based automatic redistribution of funds to the Obras gradually increased from nil in September 1995 to 66 percent of the budget of the FSR (corresponding to $236 million) in 1998. The program also supported the creation of the Special Program Agency (APE) to manage the subsidies for long-term and high-complexity care. The program assisted in the institutional building of the APE, the design of transparent eligibility criteria and the establishment of information, monitoring and control systems. Clarification of the contents of the PMO also helped to increase transparency in the use of funds by the APE. In particular, since the provision of those services that are in the standard package is mandatory, Obras cannot apply for APE subsidies to finance them. On the other hand, subsidies, although in much smaller amounts than before, are still being granted to a few Obras that have large operating deficits. These subsidies are typically granted unconditionally, i.e., without requiring that theObras restructure and meet financial benchmarks. 34. Health Insurance Regulation. The Superintendencia de Servicios de Salud (SSS) was created in early 1997 but only came into operation in 1998. Since then the SSS has made progress in: (i) setting up a new organization and strategic development plan; (ii) hiring new personnel and training its staff; (iii) developing a consumer services unit; (iv) establishing a team of inspectors and auditors; and (v) issuing regulations related to free election of Obras, health plans offered by Obras, including the PMO, contracts with providers, the outsourcing of administrative and medical services, publicity and communications, including the contracting of promoters, and sanctions and penalties in case of non compliance with regulations. As of March 1999, the SSS had, for example, controlled 96 Obras (representing 6.5 million beneficiaries) for compliance with regulations on the content of their health plans, including the PMO (23 Obras failed to comply), and on their contracts with providers, administrators, and promoters. 35. The SSS still needs to issue important regulations on financial and economic requirements for Obras, such as minimum capital, solvency margin, cash flow requirements, accounting and reporting practices, as well as sanctions and liquidating procedures. These financial requirements are part of the conditions of the third tranche release of the Special Adjustment Loan (Ln. 4405-AR) which was signed between the Government and the Bank in November 1998. The SSS also needs to be further strengthened to carry out its duties and to take on additional ones, such as the supervision of the private voluntary insurance market. In particular, the SSS needs to design and implement an efficient system for the supervision and control of Obras, further strengthen its managerial and administrative system, and revamp its personnel (through pre-retirement, recruitment of new staff and training of existing personnel). Finally, the SSS should better publicize its consumer services; 69 percent of the persons interviewed during the May 1999 consumer poll indicated that they didn't know they could file complaints with the SSS and 77 percent didn't know that the SSS has a toll-free phone line for information, claims, etc. 36. Regulation of Private Health Insurance (Pre-pagas): A draft law was designed under the program which provides for: (i) financial regulation (minimum capital requirements, technical reserves); (ii) regulation of health plans; (iii) a period of 120 days during which the insurer may decide not to accept the applicant, after which pre-existing conditions cannot be a basis for rejection, unless the applicant has withheld medical information; (iv) automatic renewal of health 9  plans under terms which may vary with age or other conditions, but which cannot be modified by the insurer unless the modification applies to all beneficiaries of the same plan, so as to limit risk selection; (v) the freedom of the insured to drop a plan at any time on 30 days notice, without cause; (vi) inclusion of the full PMO in at least one of the plans offered by the insurer. The draft law has been approved by a Senate Committee and is awaiting formal approval by the Congress. The draft law opening competition among private health insurers and Obras de Personal de Direcci6n has not yet been debated in Congress. (ii) Restructuring of Obras Sociales 37. Project achievement for this component has been highly satisfactory. Ninety Obras Sociales applied for the restructuring program, 55 of them pre-qualified, and 31 Obras, covering 5 million beneficiaries (or 62 percent of the population insured by national Obras Sociales), met the eligibility criteria to qualify for a loan. The restructuring loans amounted to a total of US$ 276.9 million, and were used in the following ways: (i) 47 percent for debt restructuring; (ii) 21 percent for laying off excess personnel; and (iii) 32 percent for institutional development activities. The average number of loan tranches for the qualified Obras was three, varying from two (in case of small Obras) to six (in case of large ones). Seventy-five percent of the tranches, corresponding to a loan amount of US$184.7 million or 66 percent of total commitment, are already executed or being executed. All the Obras, except for one, have complied with their loan conditions. The failing Obra had its loan canceled and is now repaying it on an accelerated basis. 38. All, except for three6 of the qualifying Obras have shown signs of success in improving their financial accounts, increasing their internal efficiency, and developing adequate systems to comply with new standards and regulations. The evaluation below includes only the 20 Obras which had executed at least one tranche of their respective loan at the time of project closing. The evaluation compares the situations before and after project implementation, and includes data from the last monitoring that was carried out at the end of 1998 and beginning of 1999. 39. Debt and financial restructuring. For the 25 Obras Sociales which have started implementing a restructuring program (and for which data are available), total debts decreased by 25 percent, from $578 million to $436 million, and the debt-equity ratio was reduced from 22.82 to 1.99. Of the 20 Obras evaluated, 16 had debts and needed to use part of the restructuring loan to repay them. Eleven of them had disbursed more than 50 percent of these funds at the time of the evaluation, and 5 had disbursed less than 50 percent. As shown in the table below, the financial indicators of the 16 Obras improved substantially, particularly those which had disbursed more than 50 percent of their respective loan. 6 As mentioned, one of the three unsuccessful Obras had its loan canceled for lack of compliance. The other two Obras (Agriculture and Textile) achieved poor results because revenue per beneficiary was too low, and, in the case of the textile sector, because of a sharp reduction in the workforce over the last few years. 10  FINANCIAL Average 16~r :-a. -6 Aver?age ;f etbe JI - er 11r1he ,- . . .ICA.OfS O-" ,Gau5G - i -e thac 50 p.Ueent WORKING CAPITAL Increased by 207 Increased by 214%, from Increased by 145%, from from (-) $103 million to $91 million to (+) $104 (-) $11 million to (+) $5 (+) $110 million million million LIQUIDITY RATIO Increased from 0.67 to Increased from 0.65 to 1.8 Increased from 0.75 to 1.14 (a ratio of 1.5 is 1.65 considered satisfactory) DEBTS WITH Decreased by 15%, from Decreased by 19%, from Decreased by 0.4%, from PROVIDERS $130 to $ 110 million $102 to $83 million $27.5 to $27.4 million Provider payment delay Decreased by 20 days, Decreased by 25 days, from Decreased by 9 days, from from 104 to 84 days 106 to 81 days 101 to 92 days LEGAL DEBTS Decreased by 44%, from Decreased by 49%, from $81 Decreased by 22%, from $86.8 million to $48.5 million to $41 million $7.4 million to $5.8 million million 40. Net equity improved dramatically for the 12 Obras that had negative net equity and a debt-equity ratio superior to 2 at the start of the project. For this group of Obras, net equity increased by 429 percent, from (-) $43 million to (+) $144 million. The debt-equity ratio changed from (-) 9.35 to (+) 2.16. The return on assets improved from a negative return of 1.1 percent to a positive return of 1.48 percent. Their equity mobilization ratio improved from 3.83 to 0.69. 41. Improved internal efficiency. Qualifying Obras were also required to improve their economic and financial performance by reducing personnel costs, renegotiating contracts with providers, selling off inefficient assets, and developing new management methods and systems. Of the 25 Obras Sociales that started implementing a restructuring program (and for which data are available), 14 (i.e., 56 percent) had an operating deficit. At the time of the project evaluation, four of them were running a surplus, three of which had disbursed more than 50 percent of their restructuring loan. All Obras under the program had to strengthen their organizational and managerial capacity. For many Obras, this meant a profound change in their organization and in the way they were running the business. 42. All of the twenty-five Obras that started implementing a restructuring program were required to cut back personnel expenditures. A variety of measures were, and are being used by the Obras for that purpose, including laying off excess personnel, modifying salary scales and contracts, and transferring staff by contracting out medical services. An amount of US$57 million from loan proceeds has so far been used to pay severance packages to 5,575 staff, representing an average cost of $10,300 per person. As a result, the administrative cost for the 20 Obras under review decreased by 42 percent on average, and by 56 percent for the 12 Obras which executed more than 50 percent of their restructuring loan. 43. Under their restructuring plans, many Obras ceased operating costly and inefficient medical services and contracted them out to public and private providers. For the 20 Obras under review, the share of contracted services increased from 65 percent to 76 percent, and up to 84 percent in the case of the 12 Obras with more than 50 percent of execution of the loan. Only a small group of national Obras Sociales owned medical clinics with bed capacity. Four of them joined the restructuring program and three were required to contract out these clinics to qualify for a restructuring loan. 44. The majority of Obras also modified their payment methods to providers, shifting from costly fee-for-service payment systems to more cost-effective ones, such as payment per-capita, 11  per module, or for a fixed quantity of services (when the number of beneficiaries was variable and uncertain). In the case of pharnaceuticals, Obras were required to use a reference list of essential drugs, to pay providers per capita, and to implement drug information campaigns targeted to family doctors and patients. 45. Compliance with new regulations and standards. The 31 Obras that qualified for a restructuring loan had to implement institutional development activities to comply with the new regulations and standards of the Superintendency, as well as to improve their management and information systems. A third of loan proceeds were used to finance five main lines of action: (a) improving health care services (21 percent of expenditures); (b) strategic development (6 percent); (c) organizational development (16 percent); (d) training in organization and medical care (6 percent); and (e) marketing and commercialization (14 percent). 46. Together with the financial restructuring of Obras, the most significant change mandated by the restructuring programs has been the profound modification in the health care model provided by the Obras. First, a majority of Obras had to extend and improve their medical coverage to comply with the law, that is to say, to provide the standard health benefits package (PMO) to all their beneficiaries and spend at least 80 percent of total income on medical coverage. Second, primary care services were strengthened with more emphasis placed on family doctors. Third, the Obras' networks of providers were re-appraised on the basis of their quality. Medical audit systems were also improved in order to avoid under-provision of services and ensure quality and continuity of services. Finally, contracts with providers were renegotiated in order to ensure: (a) guaranteed coverage of the PMO to all beneficiaries of each Obra; (b) the use of co-payments according to the law (including the waiver of co-payments for maternal and child care and oncology); (c) coverage of emergency and home care services, especially in rural areas; and (d) protection from malpractice. These contracts, which also included a three-year budget for the medical services that were provided, were closely monitored under the restructuring program. 47. Another major result was the strengthening of the organizational and managerial capacity of the Obras. It was achieved through the contracting of management consultant firms and the training of the personnel of the Obras. Computerized financial and monitoring systems, costing US$17 million so far, have also been established. For the beneficiaries, this also meant a true improvement in the administrative handling of their care through the use of magnetic cards, faster handling of their files and complaints, round-the-clock telephone lines, and the computerization of the clinical histories of each patient. Marketing and communications also had to be developed in all of the 31 Obras, as these functions did not exist prior to the reform (beneficiaries were previously captive affiliates). 48. Impact on the perceived quality of care. As shown by the results of the consumer poll of May 1999, beneficiaries of the Obras that were restructured are, in general, more satisfied with the quality of the medical and administrative services provided than are those of Obras that were not restructured. In addition, beneficiary satisfaction is higher for the Obras which have completed more than half of their restructuring plan, showing that the restructuring of Obras has an immediate and visible impact for the beneficiaries. Thirty-one percent of the population affiliated with Obras that have disbursed more than 50 percent of their restructuring loan think that the quality of services has improved as opposed to 23 percent on average for the mandatory insurance system as a whole. The following table summarizes the perception of quality forObras that have disbursed 50 percent (Obras 50+) of their restructuring loans relative to the universe of all Obras (whether restructuring or not). It is worth noting that the level of satisfaction with the Obras Sociales as a whole is quite high, at above 70 percent in all cases. 12  AsPe o D A r : a o fiOd Quality of health care provided All Obras 86.6% ___baSG 50+ O8WN Quantity of health services covered All Obras 81.1% Quality of medical staff All Obras 85.5% Obras - -0+3 Appointments close to date requested All Obras 6.3% _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 7bras 50+ 7 % Ease of administrative procedures All Obras 73.9% Ob* 50+ 79j1% Quantity of health staff and clinics available All Obras 76.3% (iii) Restructuring of INSSJP 49. Debt restructuring. At the end of December 1998, INSSJP's remaining debts to providers and financial institutions were either cancelled (in the case of the debt with ANSeS) or transferred to the Treasury through the Presidential Decree 197/97. However, INSSJP financial accounts will continue to show liabilities because of a clause specifying that debts prior to March 1997 will be transferred to the Treasury only once they are audited by the Comptroller's Office. Such verification is underway. INSSJP succeeded in eliminating half of its debt to providers during the project lifetime, which decreased from US$521 million in August 1995 to US$238 million in December 1998. The volume of debts cancelled was in reality more important since 1NSSJP accumulated further debts throughout project implementation to finance its high operating deficit. 50. Internal efficiency. INSSJP succeeded in achieving a significant reduction in its monthly operating deficit, which reached the order of US$7 million at the end of 1998 (the operational deficit was estimated on the basis of a monthly revenue of US$200 million, which the Government guaranteed to INSSJP by decree 197/97). The savings plan that INSSJP intended to develop so as to meet the zero-deficit condition of the third Tranche Release could only partially be implemented, as INSSJP's proposal to contract out medical services to large networks of providers was suspended due to legal challenges. INSSJP intended to pay a monthly capita of US$21 to large networks of providers which would have managed nearly all the medical services provided to its 4 million beneficiaries; the latter would have been able to choose their network once a year. By transferring all the financial risks associated with the provision of care to the networks, INSSJP would have only focused on its regulatory functions. Such a plan would have immediately generated monthly savings of the order of US$3.4 million. In addition, INSSJP was planning to contract out in a similar way all the remaining medical services that had not been included in the first proposal (e.g., geriatrics, psychiatry, hemodialisis, etc), thus generating further savings. 51. INSSJP launched the bidding process for the contracting out of its medical services at the end of 1998. It finalized the evaluation, and in doing so complied with the condition of the Special Adjustment Loan. INSSJP signed the contracts with the three winning networks in early 1999, but could not go further as the process was challenged in court immediately after the signing of contracts. Some 4 or 5 more legal cases were filed against INSSJP in the next months. The most important one relates to the allegation that INSSJP has not provided sufficient information to its beneficiaries to allow them to select their network well. As of today, it is impossible to say when or whether INSSJP will be able to resume the contracting process. 13  52. Deficit reduction was mostly achieved through: (i) reducing personnel expenditures (of the order of US$8.5 million per month); (ii) renegotiating contracts with health care providers, in particular for laboratory and ambulances services and pharmaceuticals (around US$36.1 million per month); and (iii) transferring to the Secretariat for Social Development the cost of health care for non-contributing pensioners (US$12 million per month). 53. Monthly personnel expenditures were reduced by 27 percent, from US$3 1.9 million in 1995 (or 12.9 percent of total operating costs) to US$23.4 million at the end of 1998 (or 11.3 percent of total costs). INSSJP staff was reduced by 34.5 percent, from 14,500 to 9,500 employees. Severance packages were financed through a fund which had been created by the Government to finance personnel restructuring in the public and parastatal sectors. 54. Monthly pharmaceutical expenditures were reduced from US$32 million in 1995 to US$27.5 million at the end of 1998, corresponding to a decrease in expenditures per beneficiary from US$7.32 to US$6.77. This reduction was achieved through negotiating a payment system per capita for almost all drugs with the pharmaceutical industry, which meant transferring all risks to the industry. 55. Institutional development. INSSJP did not carry out most of the institutional development activities that had initially been contemplated. For example, INSSJP did not implement the recommendations of a study on the restructuring or outsourcing of the only two clinics it owns. Since INSSJP was contemplating a radical transformation of the institution through the contracting of its health services, many of the recommendations of the studies on its institutional restructuring were not directly applicable anymore. Most of the recommendations were, however, included in the design of the contracts with the three provider networks. For example, although INSSJP did not adopt the new health benefit package and new regulations that had been recommended by experts, it did include them in the contracts with the provider networks. 56. Quality of health services. INSSJP carried out a beneficiary satisfaction survey in December 1998 with program funding. Results of the survey show that a high percentage of INSSJP's beneficiaries (96 percent) is satisfied with the quality of the services provided by the institution. Ninety-four percent of the persons interviewed are satisfied with the quality of inpatient care and 95 percent with the quality of medical staff. D. MAJOR FACTORS AFFECTING THE PROJECT 57. The following political, economic and administrative factors affected the regular implementation of the program. 58. Introduction of competition among Obras Sociales Sindicales faced resistance by interest groups which were comfortable with closed market niches. Such resistance included: (i) lobbying to issue regulations creating disincentives for people to transfer. An example of such practices would be for people to leave part of their contribution in the Obra with which they had previously affiliated; and (ii) lobbying the supervisory authority to introduce practices to increase red tape to hamper the migration of enrollees between Obras. Government authorities were able to handle adequately most of such lobbying efforts. Of the 141,063 requests for transfers that were reviewed by the supervisory agency, only 3,710 were rejected, and these, for valid reasons. 14  59. Regulation of the Pre-pagas was somewhat resisted by the latter and led to difficult discussions in the Senate. The draft legislation was, however, approved by a Senate Committee, and is now with the Congress for approval. The draft legislation allowing competition between Obras Sociales de Personal de Direcci6n and Pre-pagas has not yet been examined by Congress. 60. INSSJP had three directors (interventores) during the course of the project. This created several problems. First, plans developed and approved by one of the directors were not necessarily followed by the next. Thus most studies drafted with support from the technical assistance loan were never implemented. Second, many agreements already negotiated by one director were reviewed by the second, and so on. This created uncertainty among providers and delayed final negotiations of contracts. 61. The decrease in employer contribution established by Presidential Decrees 492/95 and 494/95 implied a reduction of the order of US$10 million per month in INSSJP revenues. Such reduction required unexpected additional efforts in cost reductions to comply with the zero-deficit requirement of third Tranche Release. The delay in the actual transfer of responsibilities from INSSJP to the winning provider networks have further prevented INSSJP from complying with this condition. 62. Lack of counterpart funding has not hampered the restructuring program of Obras Sociales but could do so in the near future since the program would mostly rely on counterpart funds after loan closing. Only US$135 million of the US$210 million of counterpart funds have been so far transferred by the Government to the project restructuring fund for Obras Sociales. 63. Evasion of payroll contributions and economic crisis reduced the financial sustainability of INSSJP and of the Obras. The average monthly contribution to the Obras Sociales which qualified for a restructuring loan, for example, decreased by 1.75 percent during project lifetime. E. SUSTAINABILITY 64. Competition among national Obras Sociales and INSSJP is considered by the major stakeholders as a sustainable reform that is unlikely to be reversed. The reform was introduced and consolidated through several Presidential Decrees, through regulations issued by the Superintendency for Health Services, as well as through resolutions approved by INSSJP's Board of Directors. Unless modified by legal instruments of a similar nature, these legal and regulatory instruments ensure that the reform introduced is sustainable. More importantly, new rights and expectations for both beneficiaries and Obras have been introduced that would be difficult to constrain or reverse. According to the May 1999 consumer poll, eighty-one percent of the persons enrolled in the system know that they have the right to change Obra and 725,000 persons have exercised this right since it was granted. Seventy or so Obras have expressed their interest in competing with INSSJP by registering as insurers for the elderly. 65. The reform needs however to be consolidated in the next months to improve equity among Obras Sociales and seek to ensure that those which cover a majority of the poor, high-risk population have enough resources to finance the standard benefits package for all their beneficiaries. Several important tasks remain to be completed to meet these objectives. First, the sustainability of the enrollment database needs to be ensured. The most important determinant of sustainability would be the decision to transfer the responsibility of its maintenance to the Superintendency for Health Services, which has a higher and more direct stake in its use than the 15  ANSeS or the federal tax revenue office. Consolidation of the database would also require further technical adjustments, especially with regard to maintenance and updating routines. 66. The second area of consolidation is the introduction of additional risk-adjustment criteria (family size, age, sex, residence) in the redistribution formula of the Solidarity Redistribution Fund (FSR). Technical analysis and simulations have been already done, and the new mechanisms are ready to be implemented. Their implementation would, however, only be feasible and sustainable either if the amount assigned to the automatic redistribution is increased or if the PMO is reduced (the PMO currently covers a very exhaustive list of services). The redistribution criteria based on income and family size were calculated on the basis of expected FSR revenues without contemplating increases in the total amount to be redistributed. The financial destabilization of large Obras that was provoked by the introduction of a monthly compensation per beneficiary (without increasing the amount to be redistributed) indicated that the current level of automatic redistribution of funds is insufficient to ensure the financing of the current PMO for all beneficiaries. 67. The optimal strategy to increase the level of automatic redistribution to Obras would be to extend automation to other parts of the FSR, thereby decreasing the practice of discretionary subsidies to Obras. Although the recourse to such subsidies was significantly reduced, it was not eliminated. The practice of discretionary subsidies undermines both the FSR objective of promoting equity among Obras, and the financial objectives of the restructuring program of Obras. It is indeed inconsistent to approve restructuring loans to some Obras against strict compliance with the implementation of a restructuring plan with targets and benchmarks and, at the same time, grant discretionary subsidies to other Obras without imposing benchmarks that would help to improve their sustainability. Increasing the availability of funds for automatic transfers could also be achieved by further improving the financing of complex care (through the Special Program Agency - APE). Ensuring the sustainability of such financing would also require exploring avenues for re-insurance by Obras again catastrophic health expenditures. Another strategy that might be envisaged to increase the revenues of the FSR could be to index the contribution rate of the Obras to the FSR on the basis of average revenue per beneficiary. 68. The challenge in designing a system of solidarity contribution and redistribution mechanisms among Obras is to find the right mechanism that would compensate for the true differences in risks incurred by Obras without compensating for their poor management and inefficiencies. In that respect, the proposal currently being aired to allow for a retention of part of the beneficiary's total contribution in the Obra of origin, in case the beneficiary transfers to another Obra (the latter therefore receiving only part of the total contribution), would create disincentives for efficient management of Obras and would significantly reduce the scope for competition. 69. Even if not yet fully enacted and enforced, the establishment of a single regulatory framework was a major step towards improving the sustainability of the system. The challenge is now to ensure that existing regulations are enforced and new ones (such as guidelines and regulations for financial crisis prevention and resolution) are issued. Although the sustainability of the PMO is ensured to the extent that the concept is now well established and that it is routinely used in the marketing of health plans, there are, however, no clear and efficient mechanisms to enforce compliance by Obras Sociales. The same applies to other regulations. As mentioned earlier, the SSS needs to further strengthen its capacity to enforce compliance with key regulations by Obras Sociales (and, in the near future, by Pre-pagas) and to protect consumer rights. 16  70. Equally important was the introduction of mechanisms to empower consumers to claim their rights and express their level of satisfaction with their insurance carrier. As previously mentioned, consumer services (toll-free phone lines, claims, etc.) have been established for the first time by the Superintendency as well as by some Obras. As part of the conditions of the Special Structural Adjustmnent Loar?, the Superintendency will complete the publication in July 1999 of the first annual public report on the evolution of the system of national Obras Sociales and on the characteristics and performance of each Obra. This report, of which the first volume has already been published, will be made available to beneficiaries at no cost in all the Obras Sociales and at the SSS. The SSS will also publish and distribute widely the results of the consumer poll carried out in May 1999. It is expected that the Superintendency will continue to carry out similar consumer poll to monitor evolution in consumer satisfaction. Many of the Obras that qualified for a loan have also started implementing regular satisfaction surveys to obtain continuous feedback from their beneficiaries. 71. The restructuring program of Obras Sociales succeeded in ensuring the financial and technical viability of the majority of Obras which qualified for a loan. Since these Obras represent a significant share of total enrollees, the impact on the sustainability of the entire system of Obras is therefore not negligible. Compliance with minimum standards was ensured, especially with regard to provision of the PMO, and the obligation to spend more than 80 percent of revenues on medical services and less than 12 percent on administration. The restructuring program also introduced an important cultural change in the system by developing a new management culture among Obras as well as new transparent and accountable systems for funding to Obras. Although the impact of such a change cannot be measured in the short term (as the continuous practice of subsidies to a few Obras demonstrates), transparent and sustainable mechanisms were established for the first time in the system and a significant proportion of Obras have adhered to them. 72. However, many of the Obras which did not qualify for a loan are experiencing today acute financial difficulties which, unless the crisis is adequately resolved, would pose a threat to the sustainability of the entire system. Many of these Obras have less than 10,000 beneficiaries. The market did not consolidate spontaneously when competition was introduced, as shown by the limited reduction in the number of Obras in the system (which decreased from 360 in 1994 to 290 in 1999). Their financial situation is likely to worsen with the increased capacity of autonomous public hospitals to charge them for services provided to their enrollees. Ensuring the sustainability of the system would mean introducing in the near future: (i) regulations for crisis resolution and prevention that would include regulations for mergers, absorption, association and liquidation of Obras, as well as capital requirements and solvency margins so as to ensure minimum standards of financial sustainability; and (ii) transparent and adequate funding mechanisms for Obras in financial difficulties, similar to the ones developed through the restructuring program of Obras Sociales. The issuance of these regulations, satisfactory to the IBRD, is one of the conditions of the Special Structural Adjustment Loan (Ln. 4405-AR). 73. The restructuring program of INSSJP has not yet ensured the financial and technical sustainability of the institution. The main reasons are: (a) INSSJP is receiving US$150-$160 million per month of revenues, i.e. US$40-$50 million less per month than the Government had agreed to guarantee; and (b) most of the measures aimed at improving its internal efficiency were not implemented because INSSJP was contemplating an alternative plan (i.e., the contracting out ' The Loan, amounting to US$2.5 billion, was approved by the Bank in November 1998 (Loan 4405-AR) as part of package to mitigate the effects of the current international financial instability on the Argentine economy and protect vulnerable groups. 17  of the management of medical services to large network of providers) that would have radically altered its mandate and organization. In case this plan is not implemented, the financial crisis of INSSJP would deepen. INSSJP would then need to implement an alternative restructuring plan, including transferring back to the State the responsibility for the provision of unfunded, non- medical social programs. 74. Finally, a lot remains to be done to ensure greater equity in access to care among the insured, by extending mandatory health insurance coverage to workers in the formal sector who earn less than $240 per month. This group (estimated at 800,000 beneficiaries) currently has no access to health insurance coverage since their salary is below the threshold level for mandatory health insurance. They can receive coverage only if they pay the difference between their salary and the threshold levels, which most do not do. A decree was proposed to the Government which makes health insurance coverage mandatory for this population at the same level of employer and employee contribution as for the rest of the insured population. While the thrust of the decree was not disputed, it was rejected because of the fear that, at a time of severe economic recession, this would imply an unbearable increase in labor cost for employers. F. BANK PERFORMANCE 75. Bank performance in the identification, preparation, appraisal and supervision of the Health Insurance Reform Program was highly satisfactory. The Bank responded in a timely fashion to the Government's request for financial and technical support in the overhaul of its health insurance system. The project was innovative and the appraisal team was cognizant of the technical complexity and political risks involved in the reform program. The Bank helped define a long-term vision of a more equitable and efficient health financing system through its sector work, "Facing the Challenge of Health Insurance Reform," and through its dialogue with the Government on the goals and instruments of the reform. The Bank's financial support significantly contributed to restoring the financial health of the compulsory health insurance system. 76. Continuity of Bank staff and consultants was maintained from preparation to implementation. Bank staff were particularly effective in establishing partnerships with a broad array of stakeholders, a strategy that has been instrumental to ensuring the sustainability of major policy reforms. The Bank's global reach allowed it to bring a broad spectrum of international skills and experience with health insurance to bear on the project. Finally, the Bank team is to be credited for outstanding supervision of the program. On average, during project lifetime, a supervision mission was carried out every three months (see Table 9 in annex), allowing the Bank to keep abreast of changes and react to them speedily. 18  G. BORROWER PERFORMANCE 77. The Borrower's performance was also highly satisfactory. Project preparation and implementation were carried out in a successful and collaborative way with the Bank team. The Ministry of Health (the implementing agency) sought support outside the health sector and maintained the practice of intersectoral collaboration throughout project lifetime. Despite strong political pressure in a program that affected many interests, the Government handled the pressures with flexibility while ensuring the maintenance of the agreed core program and commitments established in the Letter of Development Policy. Continuity in the political leadership, through the Minister of Health, was maintained throughout the lifetime of the program. Lack of continuity in the management of the program was not particularly an issue, except for the restructuring of INSSJP. The Borrower should also be commended on the degree of professional capacity and political savvy that it brought to the achievement of the objectives of the program, and for its continued commitment to improving the health insurance system. H. ASSESSMENT OF OUTCOME 78. The overall project outcome is considered satisfactory. The policy reforms and regulation component is considered satisfactory; most of the objectives having been met but, in several instances, still needing completion and consolidation. The restructuring of Obras Sociales is considered highly satisfactory, having achieved dramatic and sustainable improvements in the way Obras conduct business. The restructuring of INSSJP is considered partially satisfactory since the institution is still running an operating deficit. 79. The ultimate objective of a reform program such as the one that has been implemented in Argentina is an improvement in the access to health care provided to the insured population, and ultimately in the quality of care. It is too early in the process to measure the end impact of the project. The good intermediary results achieved so far, such as improved beneficiary satisfaction, increased efficiency and equity in the use of spending on health care, introduction of checks and balances in the system (including through the empowerment of consumers) are, however, indicative that the reform program is on the right track. I. FUTURE OPERATIONS 80. Several follow-up operations are contemplated to consolidate the first phase of the health insurance reform and to design and implement the second phase. 81. First, the Government and the Bank have agreed to use savings of US$4.2 million of an on-going Bank-supported operation, the Provincial Health Sector Development Project (Loan 3931-AR), towards consolidating some critical elements of the health insurance reform and preparing the second phase of the reform. An amendment to Loan 3931-AR is being processed for that purpose. The funds would be used for: a. The design of pilot restructuring plans for the insurance funds that were not included in the first restructuring program, such as provincial Obras Sociales, and Obras Sociales with less 19  than 10,000 beneficiaries. The design and implementation of these pilot programs would help to clarify the specific issues faced by these three groups of social insurance funds, to review alternatives for their restructuring, and to identify the support that could be provided on a large scale by a second adjustment operation. b. The institutional strengthening of the Superintendency for Health Services in the following areas: (i) monitoring and control systems; and (ii) design and implementation of guidelines and regulations to prevent and resolve financial crisis of social health insurance funds. 82. Secondly, the Government has requested support from the Bank to design and implement a health insurance plan for the non-insured poor in two pilot provinces. The loan amount is estimated at US$4.8 million and would be financed through a Learning and Innovation Loan (LIL). The project is being prepared and is expected to be presented to the Vice-Presidency for the Latin America and the Caribbean Region for approval during FY2000. Important lessons would be learned from the design and implementation of these two pilots that would help in their replication on a larger scale. 83. Thirdly, a second adjustment operation is being proposed for FY2001 to support the implementation of the second phase of the health insurance reform. This operation would also be accompanied by a Technical Assistance Loan. The second loan package would support the following activities: (i) consolidation and extension of the policy and regulatory reforms; (ii) restructuring of the social health insurance funds which have not benefited from the support of the first operation, including the provincial health insurance funds; (iii) support to the merger, acquisition and association of social insurance funds of less than 10,000 beneficiaries; and (iv) development of provincial health insurance plans for the non-insured poor. 84. Finally, a follow-up project to the first two Provincial Reforms Loans is being prepared, with a special emphasis on hospital management autonomy, reform of provincial Obras Sociales, and development of health insurance for the poor. In addition, the Government of the Province of Buenos Aires has requested support from the Bank to design an adjustment operation for the social sectors. The Bank is currently reviewing the Government's proposal. J. KEY KESSONS LEARNED 85. The implementation of the program provided many lessons for future adjustment programs which involve difficult and politically sensitive reforms. 86. At the project design stage, the focus should be on conditionality and not on specific restructuring activities. Intensive discussions on conditionality also help to bring out clearly at the beginning the areas of disagreement or resistance to change, and define the political space within which the reform operation will take place. Using this lesson, the Bank team has concentrated its early efforts on developing jointly with the Argentine authorities the conditionality matrix and has allowed great flexibility with regard to specific instrumental activities. 87. The reform program must be developed so as to keep the long-run vision for change in mind, but gets there through a series of practical, achievable steps. Experience from Argentina and other countries with health insurance reform indicates that most countries in the region need to move toward more equitable and efficient health insurance systems through a series of carefully planned steps which together add up to a bold transformation, but may take 5-10 years or longer to put in place. 20  88. The reform must be built on broad, multi-agency support, not narrow sectoral backing. The successes to date of the program have depended critically on political support from the highest levels of the Argentine government, including the President; from a broad coalition of ministries, including the Ministries of Health and of Economy and the Office of the Chief of Cabinet; and from a substantial number of the social health insurance funds and health care provider associations in the country. The Program committee for the loan has included representatives of the Ministries of Health, Economy, and the Office of the Chief of Cabinet. 89. Crucial institutional development must be assisted through long-term technical assistance lending. The technical assistance loan was instrumental in building the institutional capacity to develop the reform and in designing appropriate tools for its monitoring and evaluation. 90. A key element of program success was the fact that it has been preceded by thorough analytic work that helped establish clear and achievable goals for the reform program. Technical clarity and transparency, especially with regards to the eligibility and Tranche Release criteria for restructuring loans, was crucial in establishing a climate of trust and in reducing litigiousness. Equally critical to project success was the intense supervision activity that allowed the Bank to keep abreast of difficult political situations, and to adapt design to new conditions while making sure that the core conditions were being met. 91. Finally, while the best alternative for social health insurance could be that of a single public insurer or a small number of insurance funds competing in a highly regulated environment, this reform program demonstrated that a lot of progress can be made by introducing competition and tight regulation in a system characterized by a large number of insurance funds. 21   PART II: STATISTICAL ANNEXES Table 1: Summary of Assessment Table 2: Related Bank Loans/Credits Table 3: Project Timetable Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual Table 5: Studies Included in Project Table 6: Project Financing Table 7: Status of Legal Covenants Table 8: Bank Resources: Staff Inputs Table 9: Bank Resources: Missions  Table 1: Summary of Assessment A. Achievement of Objectives Substantial Partial Negligible Not applicable Macro Policies - D O Sector Policies E l:i Financial Objectives 5 O 5 Ipstitutional Development E E El Physical Objectives 5 5 5 Poverty Reduction 5 a E Gender Issues a E O:i Other Social Objectives 5 5 5 Environmental Objectives 5 I 5 - Public Sector Management 5 5 5 Private Sector Development 5 5 5 Other (specify) l 5 5 a B. Project Sustainability Likely Unlikely Uncertain (/) (/) (/) e ~El E Highly C. Bank Performance satisfactory Satisfactory Deficient (1) (e) (/) Identification 5 E Preparation Assistance E ] Appraisal 5 5 Supervision j 5 5  Highly D. Borrower Performance satisfactory Satisfactory Deficient Preparation C Implementation E [ Covenant Compliance C El Operation (if applicable) El Higl Higl E. Assessment of Outcome satisfactory Satisfactory Unsatisfactory unsatisfactory El El C  Table 2: Related Bank Loans/Credits Lo/cdi t,,,itl Pu-; 07 0 rpose Yea o S-tat Preceding operations 1. Provincial Health Strengthening policy-making and capacity of 1995 Supervision Sector Development central and provincial MoHs, improvements in (PRESSAL) hospital efficiency, and pilot imnplementation of management autonomy in public hospitals. 2. Provincial Reform Support an overall environment of incentives for 1995 Closed restructuring provincial public finances. Accelerate reform in ten provinces in: (i) tax structure and administration; (ii) budgetary and administrative controls; (iii) downsizing public employment; (iv) improving efficiency of transfers to municipal government; and (v) privatizing public enterprises and banks. 3. Provincial Reform 2 Help four Argentine provinces (Rio Negro, Salta, 1997 Supervision San Juan, and Tucuman) reform and restructure their governments so as to ensure an efficient and responsive delivery of public services (notably social services) within fiscally sound policies. 4. Special Structural Mitigating the deleterious effect of the international 1998 Supervision Adjustment Loan fiscal instability on the economy and protecting vulnerable groups. Following operations 1. Health Insurance for Provision of necessary technical assistance and 2000 Preparation the Poor (LIL) inputs in 2 pilot provinces to help design and implement a health insurance scheme for the non- insured poor. 2. Health Insurance Consolidate and extend results obtained by the first 2001 Proposed Refonn SAL 2 Health Insurance Reform Project (Lns. 4002/3-AR) in the following areas: (a) policy reforms and regulatory development; (b) restructuring of provincial and national health insurance funds; (c) merger, acquisition and association of health insurance funds of less than 10,000 beneficiaries; and (d) health insurance for the poor. 3. Health Insurance The project would provide the necessary technical 2001 Proposed Reforn TA 2 assistance and inputs to design and implement the second health insurance reform program, and build institutional capacity to sustain the reforms.  Table 3: Project Timetable Steps in Project Cycle Dat -an lae _ t/ ______________________-,at.-t e imate-- -I 1. Identification (Executive Project Summary) March, 1995 March, 1995 2. Preparation March, 1995-February, 1996 March, 1995-Febriary, 1996 3. Appraisal June, 1995 June, 1995 4. Negotiations February, 1996 February, 1996 5. Letter of Development Policy March 26, 1996 March 26, 1996 6. Board Presentation April 25, 1996 April 25, 1996 7. Signing April26, 1996 April26, 1996 8. Effectiveness April, 1996 July 12, 1996 (Ln. 4002) ___ __ __ __ __ ___ __ __ __ __ ___ __ __ December 3, 1998 (Ln. 4003) 9. First Tranche Release July, 12, 1996 (Ln. 4002) July 12, 1996 (Ln. 4002) 10. Second Tranche Release July, 1997 (Ln. 4002) July 23, 1997 (Ln. 4002) 11. Third Tranche Release June, 1998 (Ln. 4003) December, 1998 (Ln. 4003) 12. Project Completion June, 1998 December, 1998 13. Loan Closing (Ln 4002) June 30, 1997 (Ln 4002) July 23, 1997 (Ln 4003) May 31, 1998 (Ln 4003) December 31, 1998 Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual (US$ million) FY1997 FY1998 FY1999 Appraisal Estimate 250.0 100.0 Actual 150.0 100.0 100.0 Actual as % of Estimate 40.0% 100.0% -- Date of Final Disbursement: December 3, 1998 Disbursements 3 300 200 A pp_- Appraisal 100 ..Estim ate : 0O~ .-u - l A ctual FY 1997 FY 1998 FY 1999 Fiscal Year  Table 5: Studies Included in Project Policy and Regulation Component 1. Institutional Strengdtening Establishment of a unit in charge of the analysis, monitoring and evaluation Completed (i) Strengthening of the MSAS capacity in analysis Regulation of the Health of health policies, with a special focus on the health insurance reform and evaluation; (ii) establishment and maintenance Sector program. of a database on Obras Sociales; and (iii) Development of database and information systems on national Obras development of policy and regulatory instruments Sociales (Obras'beneficiaries and revenues, labor market, etc.) for the health insurance reform. 2. Solidarity Redistribution Monitoring of FSR revenues and design of the redistribution formula to Completed (i) Implementation of the automatic redistribution Fund compensate Obras for differences in income. Identification of the relative system of the FSR based on income; (ii) improved impact on cost of other risk factors such as family size, age, sex, and knowledge of FSR revenue and transparency in the residence. use of funds; (iii) identification of formulas to risk- adjust by family size, age, sex and residence, and of their respective impact on the system of Obras Sociales. 3. Enrollment Database Design and implementation of a database of the beneficiaries enrolled in the Completed (i) Census conducted in which 7 million system of national Obras Sociales. beneficiaries were registered; the database is incomplete and needs further adjustment 4. Regulatory Framework Designing the regulatory framework, including: (i) the draft law on Completed (i) Draft law on Pre-pagas approved by the Senate regulation of Pre-pagas and on competition between Pre-pagas and Obras Committee; (ii) mandatory provision of the PMO de Personal de Direccion; (ii) the content of the PMO and the analysis of imposed to national Obras and Pre-pagas; (iii) complementary health plans; (iii) regulations for competition between competition allowed between Obras de Personal de Obras de Personal de Direccion and Professional Associations; and (iv) the Direcci6n and Professional Associations; and (iv) draft law allowing competition between Obras de Personal de Direccion draft law allowing for competition between Pre- and Professional Associations. In addition, an evaluation of the technical pagas and Obras de Personal de Direcci6n and financial feasibility of setting up a health insurance plan for the self- prepared. employed was caried out. 5. Strengthening of the Design and implementation of information and management systems (MIS) Completed (i) Improvement in the management and Special Programs Agency for the Special Program Agency (APE) and training of APE and Obras' transparency of APE funding; (ii) institutional personnel in the use of the new MIS. strengthening of APE; and (iii) MIS established within APE and common procedures established for all Obras.  Table 5: Studies Included in the Project Page 2 of 4 7~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 6. Strengthening of the Dlesign and implemnentation of the regulatory frarnework, including: (i) the Completed ~ ~ TeSSS adopted its strategic plan and issuedl Superintendency for Health organization, strategic plan, human resources, management and information prudential and consumer regulations in 1998. Services (SSS) systems, and communication strategy of the Superintendency for HealthI Services (SSS); and (ii) the design of prudential and consumer protection regulations. Implementation of media campaigns about free election of Obras Sociales. Completed Media campaigns implemented (81% of the population is now aware of their right to choose among Obras). Obras Sociales Component 1. Design of Legal Completed throughout Agreement on implementation targets and loan Agreements for Subsidiary the life of the program tranches. Loans and Restructuring Plans 2. Reports on fulfillment of Reports on each Obra Social's fulfillment of objectives in the following Completed according to Targets and conditions complied by each Obra loan conditions by Obras areas: (i) institutional strengthening; (ii) reconversion of personnel; (iii) each Obra Social Social. Sociales economic and financial situation; and (iv) medical services. throughout the life of the program 3. Reports of verification of Reports from audits carried out in the field. Completed throughout Targets met for each tranche, as certified by the fulfillment of loan conditions the life of the program monitoring agency for each Obra Social. by Obras Sociales 4. Monthly Progress Reports Completed throughout from the Program the life of the program Coordinating Unit 5. Internal documents from Methodological guidelines and reports from each Sector Specialist. Completed throughout Helped determine unit costs, utilization rates, and the Coordinating Unit the life of the program other standard indicators for the health insurance system.  Table 5: Studies Included in the Project Page 3 of 4 INSSJP Component 1. Pharmaceutical Study Analysis, definition and costing of a strategy for provision of Completed in May, Although all the conclusions of the study were not pharmaceuticals to INSSJP ambulatory and oncology patients. 1997 considered, INSSJP reduced its spending on Recommendations to INSSJP authorities on contract negotiations for pharmaceuticals by $5 million/month through pharmaceuticals. negotiating a contract with the pharmaceutical industry. 2. Restructuring and/or Diagnosis of the actual situation of both clinics and identification of Completed in June, No impact. externalization of INSSJP's alternatives for their restructuring and/or externalization. 1997 two policlinics in the city of Recommendations of the study were not considered Rosario by INSSJP. 3. Strategic plan for the Formulation of a strategic plan for systems and organizational development Strategic plan Recommendations were not implemented as INSSJP institution's organization and of INSSJP at the central and local levels, as well as technical assistance for completed in May, 1997 was developing another alternative (i.e. contracting systems implementation of the proposals. out the management of its medical services to large entities) which would have radically changed NSSJP's organization and systems. 4. Contracting out of the Design of the mechanisms for contracting out ambulance services for Completed in July, 1997 Although the conclusions were not considered, programmed and non- programmed and non-programmed patients in the Metropolitan Area (Local INSSJP renegotiated the amounts and terms of prograrnmed ambulance offices: VI-Capitol; VIII-San Martin; X-Lanus; and XXIX-Mor6n) contracts with providers, for a savings of $2 services million/month. 5. Model of Medical Care Formulation of a new model of medical care, consistent with the new Completed in October, Partial Impact. management policies (contracting out all medical services), clarifying the 1998 content and scope of the application of these policies, and the analysis and definition of the benefits provided. Audit of the second-level health providers. 6. Social Communication Definition of publicity strategies, diffusion, communication and education It was decided to not No impact. campaigns targeted at stakeholders in the health sector, health authorities, execute this technical medical technicians and professionals, Obras Sociales and any other actors assistance linked to the health sector.  Table 5: Studies Included in the Project Page 4 of 4 Study Puose as Defnwod at Appa WikReddfied tat Ipt of Study 7. Definition of new (i) Institutional and legal framework; (ii) model of medical care and Completed in INSSJP initiated the call for bidding for entities management systems for the obligations of the entities managing medical services; (iii) Program of November, 1998 managing medical services (of levels 1-3). care of INSSJP's Integrated Medical Care; (iv) quality standards for medical services; (v) Contracts were signed, yet implementation of the beneficiaries calculation of the payments per capita; (vi) requirements of services for new system was suspended by a legal issue. INSSJP providers' networks; (vii) basic requirements of the information system for appealed and the legal case is pending. entities managing medical services; and (viii) criteria and methodology for evaluating the management capacity of the entities. 8. Legal standards Collection, analysis and consolidation of all resolutions signed by INSSJP; Completed in July, 1998 The study and activity were implemented elaboration of a computerized program for registration of legal standards, satisfactorily. including the subject and date of approval; and training on the use of the program. 9. Diagnosis and Diagnosis and restructuring of the "Probienestar Program"; development Technical assistance Technical assistance was carried out, but without restructuring of social of baseline data for a management system to attract new beneficiaries; completed on April 30, impact. Recommendations were not implemented. programs restructuring of other social programs; terms of reference for the 1999 development of a national database on social services provided by INSSJP. 10. Refining the monitoring Improvement in the monitoring and evaluation systems, and in INSSJP's Completed in March New monitoring systems were implemented. land accounting systems accounting plan. 1998l andlaccounting systems accounting plan. 1998 The new accounting plan was developed but not implemented since this would have required a complete reformulation of INSSJP's information systems. 11. Obligations imposed in Verification of compliance with the obligation of payment cancellation. Completed in The study was completed satisfactorily, and verified contracts with financial September 1998 INSSJP's compliance with its financial obligations. auditors of INSSJP 12. Beneficiary Satisfaction INSSJP Beneficiary Satisfaction Survey. Completed in December The study provided knowledge about the level of Survey 1998 satisfaction of the beneficiaries. 13. Contracting of a Monitoring the evaluation process for the contracting out of the Completed in January The contracting of the procurement agency ensured procurement agency management of medical services to management entities. 1999 transparency in the evaluation of bids. 14. Monitoring of medical (i) Registering and monitoring of medical services provided by the Not implemented No impact services contracted entities; (ii) control of service utilization; (iii) contracting agreements between providers and beneficiaries and monitoring requirements; and (iv) evaluation of the quality of services provided and verification of compliance with agreements.  Table 6: Project Financing r o S DS X Loat Pore;'tlg,0:i Tota Local'X! Forig Total' !BRDi DA - ~ 350.0 350.0 350.0 350.0 Domestk - ~~~~~~~~~400.0 -325.0 - Transfrs W the210.0 210.0 135.0 135.0 -~a,*ceIathrnof190.0 190.0 190.0 190.0 IN1tSS~40000s TOA 4100. 50 .0270.0 1325.0 35.065.0  Table 7: Status of Legal Covenants Agreement Section Covenant Present Description of Comments type status covenant 4002/3-AR 2.02(b) 3 C The Borrower shall open, prior to furnishing to the Bank the first request for withdrawal from the Loan Account, and thereafter maintain in Banco de la Naci6n on terns and conditions satisfactory to the Bank, a deposit account in Dollars on terms and conditions satisfactory to the Bank. All withdrawals from the Loan Account shall be deposited by the Bank into the Deposit Account. 4002/3-AR 2.02(c) 3 C The Borrower undertakes that the proceeds of the Loan shall not be used to finance expenditures excluded pursuant to the provisions of Schedule I to this Agreement. 4002/3-AR 2.02(d) 3 C No withdrawal shall be made from the Loan Account unless the Bank shall be satisfied: (i) with the progress achieved by the Borrower in the carrying out of the Program; (ii) that the macroeconomic policy framework of the Borrower is consistent with the objectives of the Programn and with the fiscal measures for 1996, 1997 and 1998 set forth in the Letter of Sector Policy; and (iii) that the actions described in Schedule 3 to this Agreement have been taken in form and substance satisfactory to the Bank. 14002/3-AR 3.01(a) 9 C The Borrower and the Bank shall from time to time, at the request of either party, exchange views on the progress achieved in carrying out the Program and the actions specified in Schedule 3 to this Agreement. 4002/3-AR 3.01(b) 9 C Prior to each such exchange of views, the Borrower shall furnish to the Bank for its review and comment a report on the progress achieved in carrying out the Program and the actions specified in Schedule 3 to this Agreement, in such detail as the Bank shall reasonably request. 4002/3-AR 3.01(c) 9 C The Borrower shall exchange views with the Bank on any proposed action to be taken after the disbursement of the First or Second Tranche which would have the effect of materially reversing the objectives of the Program, or any action taken under the Program. 4002/3-AR 3.02(a) I C The Borrower shall have the Deposit Account audited in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Bank. 4002/3-AR 3.02 (b) I C The Borrower shall furnish to the Bank as soon as available, but in any case not later than 4 months after the date of the Bank's request for such audit, a certified copy of the report of such audit 4002-AR 3.03 3 C The Borrower shall, after the disbursement of the proceeds of the First and Second Tranches has been made, make available to the UEC for the execution of the Program resources equivalent to, respectively, $300 and $225 million; provided, however, that unless the Bank otherwise agrees, not more than $350 million equivalent of the aggregate of said resources shall be used for the restructuring of INSSJP of which not more than $150 million equivalent shall be used for purposes other than cancellation of debts to financial institutions.  'A wt etim Coesn r~ J"f.sit* 4003-AR 3.03 3 C The Borrower shall, after the disbursement of the proceeds of the Loan has been made, make available to the UEC for the execution of the Program resources equivalent to $225 million, provided, however, that unless the Bank otherwise agrees, not more than $50 million equivalent of said resources shall be used for the restructuring of INSSJP, the entirety of which shall be used for purposes other than cancellation of debts to financial institutions. 4002/3-AR 3.04(b) 5 C The Borrower shall ensure that: (i) the UEC will be managed by a national director and that the sub-units and the finance and administration section of the UEC will be managed by staff with experience and qualifications acceptable to the Bank; (ii) the Program Committee will be chaired by the national director of the UEC and will have a composition acceptable to the Bank; (iii) the UEC will ensure the execution of the Program in accordance with the Operational Manual as approved by the Bank pursuant to Section 5.01 (b) of this Agreement; (iv) the UEC and the Program Committee will not authorize loans in connection with the first three reorganization plans of Obras Sociales to be financed under the Program and thereafter with respect to all reorganization plans of Obras Sociales involving proposed loans in excess of $1 0,000,000 equivalent, unless the Bank shall have provided its no-objection to said loans; and (v) the UEC will provide to the Bank on a quarterly basis a report on the progress achieved in the reorganization of all Obras Sociales receiving loans out of the resources referred to in Section 3.03 of this Agreement and on the progress of all aspects of the reform of INSSJP, said reports to be of such scope and in such detail as the Bank may reasonably request. 4002-AR 3.05 1 C The Borrower shall have the reports on the availability and use of the resources referred to in para. 2 of Sched. 3 to this Agreement audited no later than 4 months after the date of disbursement of the First Tranche. l 4003-AR 3.05 1 C The Borrower shall have the reports on the availability and use of the resources referred to in para. 2 of Sched. 3 to this Agreement audited no later than 4 months after the date of disbursement of the Second Tranche  Table 8: Bank Resources: Staff Inputs Stgeof ?aadAta weeks S($0 Wek Identification to Pre-Appraisal 0.0 0.0 18.8 64.5 Pre-Appraisal to Appraisal 34.8 120.1 43.2 160.2 Negotiations through Board Approval 4.2 13.5 9.2 25.1 Supervision 92 376.4 128.6 518.1 Completion 10.0 13.6 8.2 19.9 TOTAL 151.9 404.7 208.0 787.80  Table 9: Bank Resources: Missions April, 1995 4 6 TM, HE, HIS N/A N/A (2) June, 1995 7 10 TM, HIS, HE, N/A N/A .m=an-? PA, F, IS, P ZMI=~ Sept., 1995 2 4 TM, HE N/A N/A Nov., 1995 5 10 TM, HE (3), F N/A N/A May, 1996 4 11 TM, HE (2), P N/A N/A Mission purpose was to assess readiness for effectiveness July, 1996 3 5 TM, HE (2) N/A N/A IP Sept., 1996 1 5 HE N/A N/A IP, M Oct., 1996 4 4 TM, HE (2), S S IP, P .______ ______OA Dec., 1996 5 8 TM, HE (2), S HS IP ________ _____ _ lSSS, HIS March, 1997 1 5 HE N/A N/A May, 1997 6 11 TM, HE (2), S HS IP I___ _ _OA, RS, HIS . Sept., 1997 3 3 TM, HE, QA N/A N/A CF, M Nov., 1997 6 7 TM, HE (3), S S CF, DIS ________ ____ _ Q OA, SSS March, 1998 5 5 TM, HE (2), HS S SSS, OA 29=i April, 1998 1 6 SSS N/A N/A April, 1998 1 2 HE N/A N/A rJuly, 1998 TM,HE (3), S HS July, 1998t; 5 4 TM, BE 3)HOA Nov., 1998 43 TM (2), HE, HS HS Nov., 1998 _4 _ 3 TA OA___HE,_HS_HS Feb., 1999 6 4 TM, HIS, L N/A N/A _______ _____< (2), HE, OA April, 1999 3 5 TM, HE (2) N/A N/A SAU=Auditor; E=Economist; F=Financial Analyst; HS=Health Specialist; HE=Health Economist; HIS=Health Insurance Specialist; IS=Information Specialist; M=Management Specialist; OA=Operations Analyst; P-Procurement; PHS=Public Health Specialist; TA=Team Assistant; RS=Regulations Specialist; SSS=Social Security Specialist; TM=Task Manager; PA=Projects Advisor 'A=Accounting; CF=Counterpart Funds; DIS=Disbursements; IP-lmplementation Progress; L=Legal; M=Management; P-Political Situation; PR=Procurement; T=Technical  Appendix A Evidence of Compliance with Legal Conditions * rb;edl. y.- < e Con40t nl - '.' '1.: :':- : Fh*t Trawke Ret- - Macroeconomic Stability The macroeconomic policy framework of the Macroeconomic and fiscal conditionalities were met based on a comfort letter Borrower is consistent with the objectives of the received from the Secretary of Economic Programming, Juan Jos6 Llach. The letter Program, and with the fiscal measures for 1996- establishes several principles regarding Argentina's efforts to eliminate its fiscal 98. deficit, including the need to shift important outlays to above the line and to reduce this redefined deficit during 1997 and 1998. The letter was welcomed by the IMF and provides the basis for the renegotiation of their agreement with Argentina. Policy and Regulatory Reform - Enrollment Database The Borrower has fumished to the Bank draft The Bank received draft terms of reference, an interagency agreement and a terms of reference and a draft contract for workplan for the national insurance enrollment database on June 18, 1996. These improving the enrollment database satisfactory to were found satisfactory to the Bank. the Bank. - Regulation of Pre-paid Private Health The Borrower has issued the necessary The Government issued Ministerial Resolution 241/96 (May 17, 1996) establishing a Plans ministerial resolution for the establishment and commission to propose regulations for private pre-paid health plans. operation of a commission to propose regulations for pre-paid private health plans. Project Coordination Unit The Borrower has furnished to the Bank the The Bank received the Operational Manual on June 2, 1996. It was found Operational Manual satisfactory to the Bank. satisfactory to the Bank. ntd tihe RMeae - 7_ :_ : _ - _ . _v.- Macroeconomic Stability and The macroeconomic policy framework of the Argentina's macroeconomic performance over the past year has been positive, and Performance of the Program Borrower is consistent with the objectives of the the Government met the standards agreed with the Bank. Argentina has also Program, and with the fiscal measures for 1996- complied with the IMF's performance criteria in the modified Stand-By program 98. during the last two quarters of 1996 and the first quarter of 1997. The Bank is satisfied with the progress of the The Bank is satisfied with the overall progress of the Program because of the Program. following: 1. Competition among Obras Sociales Sindicales began, with about 150,000 beneficiaries exercising the option to switch, since February 1997; 2. Restructuring of INSSJP is underway; 3. Standard benefit package was approved; 4. Allocation of resources to Obras from the Solidarity Fund has been put in place; 5. Enrollment data base is operational; 6. Obras Sociales covering more that 90% of system beneficiaries entered the  Appendix A: Evidence of Conpliance with Legal Conditions Page 2 of 7 Program and obtained, or began preparing, restructuring plans; 7. Single supervisory body for the health insurance market (Superintendencia de Servicios de Salud) has been established; 8. Draft law regulating private pre-paid system has been sent to Congress; and 9. Draft law for competition between Obras Sociales for executive workers and the pre-paid plans has been sent to Congress. Policy and Regulatory Reform - Competition between Obras Sociales The Borrower has issued and has furnished to the 1. Government issued of Decree No. 1141 (October 7, 1996), establishing the right Bank appropriate legal instruments setting forth of free selection, giving the MSAS 60 days to issue regulations for its the rules and timeframe for free selection of implementation. health insurance services between Obras Sociales 2. The MSAS produced a resolution and a subsequent modification (No. 633, Sindicales. December 18, 1996; and No. 481, January 29, 1997) to regulate the decree by establishing the specific mechanisms for transferring from one Obra Social to another. 3. In the first open season (January-May 1997), some 150,000 affiliates, or about 400,000 covered persons, requested a change of Obra. The Borrower has introduced into the legislative Draft Law No. 640/97 was sent to Congress on July It, 1997, along with the draft branch a draft legislation to establish free law for regulating the private pre-paid health plans (Prepagas). This draft law allows selection of health insurance services between private pre-paid health plans to compete with Obras Sociales de Personal de Obras Sociales de Personal de Direcci6n and Direcci6n. private pre-paid health plans. - Solidarity Redistribution Fund The Borrower has issued and has furnished to the 1. The GoA issued Decree No. 1615 (December 23, 1996), which established the Bank the necessary regulations for the operation Directorate of Special Programs in the Secretariat of Policy and Regulation of the of the Fondo de Alta Complejidad. MSAS, and assigned to it the responsibility for resources from the Solidarity Redistribution Fund previously administered for this purpose by ANSSAI, under Law 23661. 2. The GoA further regulated implementation of Decree No. 1615 with Decree No. 651/97 (July 17, 1997), which: (i) establishes the structure for the Directorate; (ii) defines thefunctions of the Departments and of the Director, who determines the assignment of the budget and defines the ceiling or stop-loss level of an Obra's financial responsibility, after which subsidies can be paid; (iii) establishes the procedures by which an Obra can request a subsidy, and the procedures for agreeing to or denying it; and (v) specifies the diseases and treatments covered. - Enrollment Database The Borrower has established the Enrollment 1. The legal basis for the Database (Pad6n) was given by Decree No. 1141 (October, Database. 1996), which established a Census of Employers and required that information available from ANSSAL be merged and reconciled with these data to provide a  Appendix A: Evidence of Conpliance with Legal Conditions Page 3 of 7 single, uniform database. The Census was completed, with responses from 320,000 employers, with about 7.7 million Obras beneficiaries. 2. As second Decree No. 1615 (December 23, 1996) establishes the responsibility of ANSSAL to register voluntary Obra affiliates who, because they are self-employed, are not captured -by the Employer Census. - Regulation of Pre-paid Private The Borrower has furnished to the Bank a draft Draft Law No. 639/97 for the Prepagas was presented to Congress on July 11, 1997. Health Plans resolution or, if necessary, has introduced into its The draft provided for: (i) financial regulation, including minimum capital legislative branch a draft law, to establish a new requirements and technical reserves; (ii) regulation of the content of contracts, to regulatory regime for pre-paid private health avoid ambiguity and to require the insured's assent to specific provision; (iii) a period plans. of 120 days during which the insurer may decide not to accept an applicant, after which pre-existing conditions cannot be a basis for rejection, unless the applicant has withheld medical information; (iv) automatic renewal of contracts under terms which may vary with age or other conditions but which cannot be modified by the insurer unless the modification applies to all beneficiaries of the same plan, so as to limit risk selection; (v) freedom of the insured to drop a plan at any time on 30 days notice, without cause; and (vi) inclusion of the full Obligatory Medical Program in at least one of the plans sold by an insurer. - Regulation of Obras Sociales The Borrower has furnished to the Bank a plan 1. By Decree No. 1615 (December 23, 1996), the Government established the (including a timetable) and appropriate draft Superintendency of Health Insurance, extinguishing ANSSAL, INOS and DINOS legal instruments for institutional strengthening of and fusing most of their functions. This means that there is only one single the regulatory agency with oversight over the regulatory entity for all insurers offering health care plans, whether obligatory or Obras Sociales and for the application of voluntary. regulatory and prudential requirements to Obras 2. A complete institutional strengthening plan, including a timetable, was sent to the Sociales. Bank on June 30, 1997. The plan covers the new functions, structure, and staffing of the Superintendency, and a series of planned actions to build up its regulatory capability in the areas of medical and financial oversight and consumer protection over the coming year. The plan was fully satisfactory to the Bank. Restructuring of the Obras Sociales The Borrower has: (i) signed loan agreements (i) Loan agreements signed with Obras Sociales for $120 million covering 2 million with Obras Sociales in an aggregate amount of beneficiaries, and II restructuring loan proposals covering more than 1.8 million not less than $60 million equivalent and covering beneficiaries to be approved shortly; and (ii) A total of US$37 million was disbursed at least 3 million beneficiaries; and (ii) disbursed under said loan agreements. not less than $30 million under said loan agreements. The Borrower has signed Convenios de Adhesion 30 Convenios de Adhesi6n were signed with a total of 85 Obras Sociales covering with Obras Sociales covering at least 3 million 7.6 million beneficiaries. additional beneficiaries.  Appendix A: Evidence of Compliance with Legal Conditions Page 4 of 7 Restructuring of the INSSJP The Borrower has cancelled not more than $150 The debts to financial institutions are being renegotiated and will be paid from other million of INSSJP debts to financial institutions. sources of Government funds than the loan proceeds. INSSJP has reduced its cash flow deficit by 40% As of December 31, 1995 the average monthly deficit was US$71.4 million. A from the level of December 31, 1995, without a reduction of the deficit by 40% implied that such deficit must at most be US$42.8 net increase in liabilities. million as of the month prior to second tranche disbursement. The deficit for the month of May was US$21.6 million, well below the required US$42.8 million. INSSJP has: (i) reduced personnel costs by 10% (i) The average monthly expenditure on personnel was US$31.9 million per month in from the average level of personnel costs during 1995. Compliance required that such average monthly expenditure decline to 1995, and (ii) reduced debts to service providers US$28.7 million or less. Personnel spending for January/April 1997 was US$22.6 by 20% from the level on December 31, 1995 and million a month, or nearly 30% less than the 1995 average and the number of INSSJP to financial institutions by 50% from the level of employees was about 24% lower than at the end of 1995; August 31, 1995. (ii) The Government approved Decree 197/97 (March, 1997) by which all INSSJP debts are transferred to the Treasury, effectively eliminating for the INSSJP liabilities with providers and financial institutions. INSSJP has completed a study on the INSSJP completed the study and its findings were implemented, with one major management of pharmaceuticals and has started result being the March 1997 umbrella agreement with the pharmaceutical industry implementing it. which reduces INSSJP's monthly pharmaceutical spending by nearly 20%. INSSJP has completed the conceptual design of Conceptual design of the reorganization was completed in December 1996 and was its reorganization and the letter of invitation for presented to INSSJP management at that time, and subsequently to the new President detailed design and implementation of the of INSSJP who was appointed in March 1997. Bidding documents for the new reorganization has been sent to the short-listed management information systems were issued, and implementation of the firms. reorganization started in February, 1997. The new President appointed a committee to oversee the restructuring process. Project Coordination Unit The Borrower has furnished to the Bank a report In April-May 1997, the UEC presented reports on the use of the proceeds of the First on the availability and use of the resources made Tranche for the Obras Sociales and the INSSJP. At that time, a total of US$103.7 available upon disbursement of the proceeds of million had been used to provide restructuring loans to the Obras Sociales, of which the First Tranche. $37 million had been disbursed. The report was accompanied by certified statements from the Banco de la Naci6n. In the case of the INSSJP, details were provided on the use of $90 million for personnel reduction and $70 million to pay provider debts. Thfrd Thanch'; 'XdfAS dAd Rele 7X . '-77777 Macroeconomic Stability and The macroeconomic policy framework of the Argentina's macroeconomic performance was positive, and the GoA met the fiscal Performance of the Program Borrower is consistent with the objectives of the performance standards agreed with the Bank. Argentina also complied with the Program and with the fiscal measures for 1996- IMF's performance criteria or the Extended Fund Facility in the first three quarters of 1998. 1998.  Appendix A: Evidence of Compliance with Legal Conditions Page 5 of 7 Objective - Conditionality Compliance The Bank is satisfied with the progress achieved The overall progress of the reform was satisfactory to the Bank. The following was by the Borrower in the carrying out of the achieved: (i) competition among Obras Sociales Sindicales was maintained. Decree Program. 504/98 (May 1998) improved the framework for competition; (ii) the standard benefits package continues in effect; (iii) allocation of resources to Obras from the Solidarity Fund to cover low income families has been enhanced through Decree 1359; (iv) the enrollment database for Obras was completed by March 1997; (v) Obras Sociales covering more than 90% of system beneficiaries entered the program and either had restructuring loans or were preparing them. Restructuring loans for $240 million have been signed and loans for another $100 million are being developed; (vi) the first round of restructuring of INSSJP is complete; (vii) a single supervisory body - Superintendencia de Servicios de Salud - has been established and is operating; and (viii) two draft laws regulating private pre-paid insurance and allowing competition between Obras Sociales for executive workers and the pre-paid insurers were submitted to the Congress. Policy and Regulatory Reform - Competition between Obras Sociales The legal instruments referred to in paragraph 6 The GoA modified pre-existing regulations with Decree 504 (May 1998) which of Schedule 3 to the First health Insurance allowed members of the system to change Obras at any time during the year, as long Reform Loan are being implemented in as individuals do not change more than once in a 12 month period. The Decree also accordance with their terms. transferred from the social security agency to the health insurance regulatory body the main responsibility for overseeing the system of consumer choice of Obra. The 8.1 million members of the Obras Sociales system have been able to exercise their 'right to select an Obra. Since May, 1998, an additional 130,000 workers (about 350,000 beneficiaries) have switched to a different Obra Social. - Solidarity Redistribution Fund Automatic distribution of resources of the Decree 1359 (November 24, 1998) modified Decrees 292 and 492 (1995), which Redistribution Fund to Obras Sociales has been established a system of automatic distribution from the Solidarity Fund on the basis modified to permit allocation of such resources, of the worker's individual contribution, without regard to family size or composition. to the extent technically practical, on an The new Decree allocated resources from the Solidarity Fund on the basis of family individual household basis, using the Enrollment size, ensuring that Obras receive at least $21 per worker and $12.50 per additional Database and incorporating other risk adjustment family member each month. Detailed simulations by the MSAS showed that the new factors such as beneficiaries' age, gender, place of allocation formula would cost about $21 million a month, well within the resources residence, and prior health services utilization. available from the Solidarity Fund. The MSAS also made detailed analysis of alternative scenarios for further adjustments in the formula for automatic distribution from the Solidarity Fund on the basis of beneficiaries' age and gender. - Regulation of Pre-Paid Private Health Provided no new legislation is required for the It was determined in 1997 that to regulate the Prepagas, a new law would be Plans establishment of a new regulatory regime for pre- required. The Government subsequently submitted to Congress on July 11, 1998 paid private health plans, the Borrower has issued Draft Law 639/97. The draft law was approved by the Health Committee of the a ministerial resolution for its establishment. Senate on November 11, 1998. The draft law still needs to receive formal approval ._____________________________ ._____________________ by the Senate.  Appendix A: Evidence of Conpliance with Legal Conditions Page 6 of 7 - Regulation of Obras Sociales The Borrower is implementing the plan referred Decree 177 in March 1997 named the new Superintendent, and Decree 405 in April to in paragraph 9 of Schedule 3 to the First Health 1998 authorized the new operating structure of the Superintendency and attributed to Insurance Reform Loan Agreement in accordance it a series of specific functions, according to a detailed strategic plan. The with its terms, including the timetable set forth Superintendency proceeded satisfactorily to implement its new organizational plan therein [Re: The Borrower has furnished to the and work program. Despite some delays, the Superintendent has appointed qualified Bank a plan (including a timetable) and individuals to occupy all key management positions; issued regulations governing appropriate draft legal instruments for free choice and competition among Obras Sociales; drafted new financial regulations institutional strengthening of the regulatory and hired inspectors and auditors; issued regulations related to the content of health agency with oversight over Obras Sociales and plans, advertising by insurers, and contracts between Obras and HMO-like for the application of regulatory and prudential management companies; and developed new procedures and services for inforning requirements to Obras Sociales.] consumers of their rights and options among health insurers. A series of five major resolutions dealing with these regulatory issues was signed by the Superintendent on November 19, 1998. Restructuring of the Obras Sociales Out of the resources made available to the UEC As of October 1998, 30 loan agreements had been signed for a total of US$274 upon disbursement of the proceeds of the Second million, covering a total of 5.0 million beneficiaries, or 62% of the actual enrolled Tranche as set forth in Section 3.03 of the First population of 8.1 million. When the reform program was designed in 1996, the Health Insurance Reform Loan Agreement, the population covered by the Obras Sociales was estimated to be about 12 million, and Borrower has signed loan agreements with Obras the condition was framed to require that the Obras Sociales participating in the Sociales covering at least three million restructuring cover at least half of the insured population. Upon cleaning of the beneficiaries in addition to those already covered. insured population database, it was determined that the enrolled population amounted to just 8.1 million persons. For both the Second and Third Tranches of the adjustment loan, the targets were recalibrated in terms of the original percentage of the insured population. For the Third Tranche, 50 percent of the population is 4.1 million. By signing restructuring loans with 30 Obras covering 5.0 million persons, the condition has been met. Restructuring of the INSSJP INSSJP has: (i) eliminated its cash flow deficit (for the month (i) Using INSSJPs guaranteed revenues of $200 million a month or 1998, the deficit prior to the month in which the Loan is declared or the month of August 1998 was only $7.1 million. In order to meet the zero deficit effective); condition of the Third Tranche, INSSJP's Board of Directors (Acta 40, dated October 21, 1998) committed itself to implement the following plan to save $9.7 million: (i) an additional reduction of 2,000 employees for a total monthly savings of $4.6 million, as authorized by the INSSJP Board; (ii) cutting $0.9 million in monthly administrative costs through a reduction in promotional activities; (iii) savings of $0.8 million by increased efficiency in social services (geriatric, death benefits, and nutritional feeding programs); and (iv) completion of the plan to award health service contracts to qualified health maintenance organizations at a fixed price of $21 per capita monthly, resulting in savings of an additional $3.4 million per month. Following a decision of the Board of Directors of INSSJP (Acta 43 dated December ._____________________ _ ___ 3, 1998), it was agreed that INSSJP will save the amount of $4.6 million through  Appendix A: Evidence of Conpliance with Legal Conditions Page 7 of 7 further reducing the cost of medical and social services, rather than through firing 2,000 employees. (ii) reduced personnel costs by 20% from the (ii) Personnel spending in September 1998 was US$21.9 million a month, or 31 average level of personnel costs during 1995, percent less than the 1995 average. (iii) reduced debts to service providers by 50% (iii/iv) On December 31, 1997, all INSSJP debts were transferred to the Treasury, from the level on December 31, 1995; (iv) effectively eliminating all past INSSJP liabilities with providers and financial eliminated debts to financial institutions; and institutions. Since that time, INSSJP accumulated no new debts. Decree 1318 (November 6, 1998) authorized the use of public consolidation bonds ("BOCONes") up to $800 million to enable the GoA to settle these old debts with healthcare providers and suppliers. (v) completed the detailed design of its (v) INSSJP carried out the institutional strengthening activities agreed to. This reorganization, and the organizational changes included (i) completion of studies and implementation of recommendations to reduce required by such design have been substantially spending on pharmaceuticals; (ii) restructure ambulance services and INSSJP's two implemented. hospitals in the town of Rosario; (iii) update the Institute's legal statutes; and (iv) conduct a survey of consumer satisfaction with recent changes in the INSSJP. In addition, the INSSJP has completed its design of the new system for contracting health maintenance organizations to manage medical care for the Institute's four million members and has called for bids from qualified HMOs. An international procurement agency was hired to ensure transparency in selection procedures and the award of contracts. Project Coordination Unit The Borrower, through the UEC, has furnished to In September 1998, the Government presented reports on the use of the proceeds of the Bank a report on the availability and use of the Second Tranche. Of the $100 million disbursed under the Second Tranche, $50 the resources made available to the UEC upon million was deposited in the account in the Banco de la Nacion for restructuring of disbursement of the proceeds of the Second the Obras Sociales. These funds, plus $60 million from the First Tranche and nearly Tranche. $165 million from the Government, have been used to make restructuring loans amounting to $274 million to date. Certified statements from the Banco de la Nacion documenting the use of these funds were fumished to the World Bank. The remaining $50 million from the Second Tranche was allocated to the INSSJP and used to settle debts with health care providers. The Government in May 1998 furnished to the Bank a complete list of these transactions and a certification of their __________________________________ .accuracy through a broad sample audit.  APPENDIX B .aisdki. d. Aan