Report No. PID11126
Project Name             Mexico-Technical Assistance for Public...
Sector Social Security Reform (ISSSTE)
Region                   Latin America and Caribbean Region
Sector                   Hospitals; Secondary & Tertiary;Reform
and Financing;Pensions & Social Insurance
Project ID               MXPE74795
Implementing Agency
Address: Avda de la Republica 154,
Piso 11
Contact Person: Lic. Enrique Moreno
Tel: 56069597
Environment Category     C
Date PID Prepared        April 13, 2002
Auth Appr/Negs Date      May 4, 2002
Bank Approval Date       July 18, 2002
1. Country and Sector Background
Mexico has been successful in maintaining a sound macroeconomic management
in recent years. The Government of President Fox, which took office in
December 2000, is consolidating the macroeconomic policy started by the
previous administration. Yet, one of the major challenges facing the new
Government is the economy's weak fiscal structure. The Government
proposed significant reforms on the fiscal revenue side, sending a tax
bill to Congress in April 2001. On the expenditure side, Mexico faces an
array of public "contingent" liabilities that, if unattended, can
overwhelm its fiscal position. One of these is the actuarial imbalance of
ISSSTE, especially the deficit of the Pension Fund which is being fully
subsidized by the Ministry of Finance. According to World Bank estimates,
the current deficit of 0.2 percent of GDP in ISSSTE's pension scheme will
reach almost 1 percent of GDP by 2015, making ISSSTE's public employee
pension scheme, as well as its other benefit service areas (including
health), unsustainable over time. Over the last ten years Mexico has made
significant progress in its health sector. Between 1995 and 1999, real
federal expenditures on health services increased by 24 percent, despite
reductions in other sectors. The health sector reforms that started in
the late 1980s have focused on three main goals: improving health
outcomes, decentralizing services, and increasing access to care for the
uninsured population. Most of the reform efforts have concentrated in two
public institutions covering over 80 percent of the population: IMSS, who
is in charge of health care provision to private sector workers and their
dependents, and the SSA, responsible for addressing the health needs of an
important fraction of the population lacking insurance. The reforms
implemented in IMSS from 1995 to this date are aimed towards improving
productivity, efficiency, and the quality of pensions and health care
services. For doing so, a new social security law had to be approved,
introducing three major changes: the creation of private pension fund
administrators; the separation of the source of financing and the
distribution of resources of the old age security system from the health
care system resources; and the modification of the financing of the



pension and health systems to reduce payroll taxes. These three changes
prompted the reform of the financing, organization, and delivery of health
services within IMSS.In the meantime, other relevant public institutions
like ISSSTE have remained untouched by these reforms. ISSSTE is
responsible for operating and delivering social security benefits for
federal public employees and their dependents. As of date, ISSSTE has 2.4
million contributing affiliates--about seven percent of the formal
employed labor force-- and 10.1 million beneficiaries or, roughly, 10
percent of Mexico's population. It covers employees of the federal
government, several government-owned para-statals, and municipal and state
governments. Six states have their own ISSSTE system, but most public
sector employees belong to the federal system. About half of ISSSTE's
contributors are teachers, making the teacher's union an influential group
in ISSSTE's decisions.The original law creating ISSSTE was passed by the
Mexican Congress in 1959. During its 42 years of existence, the ISSSTE
law was amended four times, mostly to add new benefits but never to
increase contributions. In 1983, Congress expanded the benefits further
to include 21 services financed through seven different Funds. Of the
latter, Pension and Health are the most important in terms of resources,
personnel and visibility to the beneficiaries.While the main source of
revenues for ISSSTE health --a 9.5 percent of basic salary compulsory
contributions from employees and the government-- has remained unchanged
since the creation of the Institute, the type and cost of services
financed by it have increased significantly, due in part to the changing
health profile of its captive population and the inefficiencies within the
current organization of health care provision. Since 1998, ISSSTE's
health fund has registered increasing annual deficits, reaching in 2000
about 10 percent of total health contributions (or US$133 million).
Investments have lagged behind while consumer dissatisfaction with the
services increased. The institution needs to undergo profound changes in
order to improve its financial position and the quality of its services.
2. Objectives
The Technical Assistance Loan is closely related to a Programmatic
Sectoral Adjustment Loan (PSECAL) that is currently being prepared, and as
such shares the same main objectives. The purpose of the loan is to
assist the Mexican government and, in particular, the authorities of the
Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado
(ISSSTE) to proceed with the reform of its health and pension benefit
schemes.    The main objectives of this holistic reform are to improve the
fiscal efficiency of social security benefits, especially health and
pensions, for public employees and their dependents in Mexico; to enhance
the governance of public social security through the corporate
restructuring of ISSSTE; and to improve the quality of the services
rendered to its beneficiaries.   A medium term goal of the reform is to
integrate the services provided by ISSSTE with those provided by other
social security institutions in Mexico, so that distortions to labor
mobility are reduced and economies of scale are acknowledged and
exploited. At the end of the reform process, ISSSTE will be self
sustainable and fiscally sound, will provide benefits in an equitable and
efficient way to its 10.1 million beneficiaries, and will have services
integrated with those of other social security institutions.The reform
will be comprehensive, affecting the two main areas where ISSSTE provides
services: health and pensions. This process will also require a new
institutional structure, making corporate restructuring a third -and
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ubiquitous-- component of the project. The TAL will provide funding to
produce the studies and assure the technical assistance necessary to carry
out the reforms intended under the PSECAL.The issues this project is
dealing with are of such magnitude and complexity that it is likely the
reform process will extend well beyond the life of the project. In this
way, the TAL is a first step that will allow the implementation of the
first programmatic loan and set the stage for a second loan. During this
first stage, emphasis will be placed on improving the organizational
structure of ISSSTE, making the institution more efficient and financially
sound, and on identifying and evaluating areas where complementarities
and/or economies of scale with other social security institutions exist.
A second stage of reforms will proceed with the integration of services.
3. Rationale for Bank's Involvement
The use of World Bank resources in the project brings at least two visible
benefits: first, supervision, which creates an incentive for ISSSTE to
respect the imposed deadlines for each component of the project. Second,
by using World Bank procurement rules, the project gets validation and
fosters the participation of international firms that would refrain from
participate otherwise. Third, the technical assistance provided by World
Bank guarantees that ISSSTE will have access to accumulated experience of
similar reforms in other countries and institutions.
4. Description
The project will have six components. COMPONENT lTechnical support for the
redesign of the corporate structure. Changing the current corporate
structure is at the center of the reform project as the new pension and
health care provision schemes will require a new corporate structure with
increased accountability, clear definition of responsibilities and
processes, and better monitoring of performance and activities in the
organization. This activity involves technical assistance to support the
corporate restructuting of ISSSTE, with emphasis in the new business
units, like the health services purchasing area, on issues like: (i)
allocation of competencies across the organizations; (ii) design of
operation manuals of the new organization; (iii) definition of processes
and procedures; and (iv) definition of functions and responsibilities for
each position; COMPONENT 2Development of information systems for the new
pension benefit scheme. The new pension system will be almost identical
to the prevailing system for workers in the private sector in Mexico.
The current information system will have to be upgraded to be able to
provide information about contributors and beneficiaries as required by
the regulatory agency CONSAR, as it is expected that ISSSTE will have to
follow the same regulations that are currently in place for the
institutions that administer pension benefits for workers in the private
sector, the AFOREs. This is independent of the decision that ISSSTE might
take regarding the way the individual accounts are administered, i.e.
through its own AFORE or through contracting out to existing or new
privately managed AFOREs. COMPONENT 3Technical assistance for the
definition and implementation of a health services purchasing area and
identification of complementarities with other health services providers.
One of the core strategies for inducing transformations in ISSSTE's health
services is going to be the separation of financing/purchasing from
provision. The TAL will support a number of activities to assist ISSSTE
to implement this separation. In addition, this component will also
devote some funding to identify areas and processes which could be merged
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with other public health service providers in search for greater
efficiency and synergism. This component will finance four subcomponents:
1. Support for the design and implementation of a beneficiaries database
(including risk profile and the definition of updating mechanisms);2.
Support for conducting a market assessment and benchmarking of ISSSTE's
health services, and designing health benefits plans;3. Development of new
resource allocation formulas (capitation and DRGs), contracting and
payment mechanisms with providers, and a transition plan for
implementation; and4. Identifying strategic complementarities with other
institutions in the health sector. This includes support for conducting
economic analysis (and implementation plans, when feasible) of processes
and activities that could be integrated, including external contracting of
services, opting out (of beneficiaries), beneficiary databases, and other
ancillary services. COMPONENT 4Technical assistance to improve
productivity of health services and strengthen ISSSTE provider units.
This includesTechnical support for the definition of a descentralization
policy and for the creation of descentralized medical area units
(AMGD);Technical support for the design of business plans in provider
units and the design and implementation of performance agreements with the
ISSSTE purchasing area;Technical support for the implementation of
hospitals case-mix classification systems, and new costing and budgeting
systems;Implementation of an inventory of medical equipment and design of
a rational equipment replacement policy; andEvaluation of the purchasing
system for pharmaceutical and medical supplies.COMPONENT 5Definition and
implementation of a new model of family medicine, Nuevo Modelo de Medicina
Familiar Preventivo (MMFP). This involves the following actions: defining
norms, priority programs, protocols and procedures, with an emphasis in
preventive activities; design and implementation of incentive mechanisms
to improve performance; and definition of monitoring and evaluation
systems, including beneficiary satisfaction surveys.COMPONENT 6Project
management. A small proportion of the loan will be used to provide
technical assistance for the monitoring and evaluation of the
implementation of the project, and to guarantee proper coordination both
within ISSSTE and externally (with World Bank and other national agencies
and institutions).
1- Reform of the Corporate Structure in ISSSTE
2- Development of Information Systems for the New Pension Benefit Scheme
3- Definition and Implementation of a Health Services Purchasing Area and
identification of complementarities with other health services providers
4- Technical Assistance to Improve Productivity of Health Services and
Strengthen ISSSTE's Provider Units
5- Definition and Implementation of the New Model of Family Medicine,
Nuevo Modelo de Medicina Familiar Preventivo (MMFP)
6- Project Management
5. Financing
Total ( US$m)
BORROWER $1.00
IBRD $8.65
IDA
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Total Project Cost $9.65
6. Implementation
The project will be implemented over a period of three years. As a result
of the somewhat discouraging IMSS experience regarding the use of a
project coordinating unit, the implementation and execution of the TAL in
ISSSTE is going to be handled by a team within ISSSTE. The Director will
assign a general coordinator under his direct supervision (or his
designate), who will interact with an implementation committee, composed
by the directors and subdirectors of the respective areas and a technical
secretariat of 6 consultants.As this is the first operation between the
Bank and ISSSTE, a procurement capacity assessment as well as a financial
management assessment need to be performed. These two assessment are
currently being produced and will be ready by mid-March.
7. Sustainability
The trigger action identified for achieving the project objectives is a
reform of ISSSTE's law transforming its corporate structure and, more
important, introducing structural reforms to the financing, managing, and
delivering of pension and health services. Such legal reform may only be
reversed through another legal amendment, hence providing the project with
solid grounds. As the strategies and objectives of the proposed reform
are closely articulated with broader national policies and have been
closely discussed with the national authorities (Ministry of Economy, SSA
and IMSS), it seems highly improbable that a legal counter-proposal would
advance in the short or medium term. Later on, as the implementation of
the reform progresses, the evidence of its benefits for various
stakeholders (including beneficiaries and the government) must become in
the stronger argument for sustainability. Nonetheless, the comprehensive
nature and complexity of the reform being proposed for ISSSTE's social
security services will require intense follow-up from the World Bank and
other interested development agencies (such as IDB) even beyond the
timeframe of this operation, not only to assure sustainability but also to
support further progression and consolidation of changes. A proper
communication strategy by ISSSTE will also contribute to this.
8. Lessons learned from past operations in the country/sector
The design of the project has benefitted significantly from the experience
in the design and implementation of a similar technical assistance loan,
used to support a reform to health care provision for private sector
workers in Mexico. The health system reform technical assistance loan
(Ln. 4367-ME) to help in the implementation of the IMSS health care reform
was implemented between 1998 and 2001, and a number of lessons have been
drawned:As explained above, the lending instrument in the case of ISSSTE
(a programmatic loan) is going to be different than the one used with IMSS
(sector adjustment loan) in order to provide more flexibility to ISSSTE
and to the GOM in the implementation of the reforms (as compared to the
IMSS case)it was determined that the implementation of the reforms would
have been much more successful if the reform to the corporate structure
had accompanied or even preceded the other changes in the health care
provision model. That is, managerial decisions clearly signaling the
separation of purchasing and provision of health services must come at the
beginning of the reform process. This should be done either through an
internal committee decision or through changes in the law that regulates
the corporate structure of the organization. developing TORs for
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consultants as part of the project preparation helps in preparing the
groundwork for a faster implementation of the work.the reform process and
the TAL activities need to be implemented within the first two years of
the administration period. In the case of IMSS, there were significant
delays in the commencement of the actual consulting activities.there are
some key inputs and crucial methodological tools for the health reform
achieved by IMSS that could be transfer to the ISSSTE project without
additional cost.having consulting firms work closely with hospitals during
the implementation of DRGs and the new model for family health rendered
very positive results.the training component of the project was not very
successful as it turned out to be too general and nor related to specific
problems. For that reason, in this TAL it was decided that the training
component will be given in the context of specific activities. the
creation of a beneficiary data base was not a very successful component of
the project, as it turned out to be very ambitious and large. In order to
achieve cost effective strategies new data on the insured population has
to be collected in a simple way, with only the crucial variables.
9. Program of Targeted Intervention (PTI)     N
10. Environment Aspects (including any public consultation)
Issues     :  The project does not present significant
environmental issues. A hospital waste management evaluation is going to
be conducted during the month of April.
11. Contact Point:
Task Manager
Daniel Dulitzky
The World Bank
1818 H Street, NW
Washington D.C. 20433
Telephone: 202 473-2528
Fax: 202 614-0930
12. For information on other project related documents contact:
The InfoShop
The World Bank
1818 H Street, NW
Washington, D.C. 20433
Telephone: (202) 458-5454
Fax:        (202) 522-1500
Web: http:// www.worldbank.org/infoshop
Note: This is information on an evolving project. Certain components may
not be necessarily included in the final project.
This PID was processed by the InfoShop during the week ending April
19, 2002.
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