Report No: AUS0003548 Health Financial Sustainability and Resilience Assessment Report . Health, Nutrition and Population Global Practice November 2023 . . © 2023 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. 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Health Financing Sustainability and Resilience Assessment Report Mexico case study Final version Content Acknowledgements .................................................................................................................... 2 Executive summary .................................................................................................................... 3 Introduction ................................................................................................................................ 4 1. HFSRA framework adaptation to the Mexican context ........................................................ 5 1.1 Brief highlights on the methodology ........................................................................................ 7 2. Mexican health financing structure ...................................................................................... 7 2.1 Most important providers in the health system ...................................................................... 8 2.2 Main approaches to public provision of health services in Mexico (social security and non-social security) ................................................................................................................................ 9 3. Assessment of Mexico’s health financing sustainability and resilience ...............................12 4. Conclusions and lessons learned .......................................................................................46 Bibliography ..............................................................................................................................49 Annex 1. Methodology ..............................................................................................................52 Annex 2. List of interviews ........................................................................................................58 Annex 3. Interview guide ...........................................................................................................59 Annex 4. Preliminary characterization of identified threats ........................................................62 Annex 5. Composition of out-of-pocket payments and catastrophic health expenditures by income quintile in Mexico, 2016 – 2020* ...................................................................................63 Acknowledgements The World Bank (WB) and the International Monetary Fund’s (IMF) Joint Work Program on Health Financing is an initiative of the Health Financing Global Solution Group (GSG) of the WBG and the Expenditure Policy Division of the Fiscal Affairs Department of the IMF. It aims to strengthen the collaboration between the two agencies to help countries develop health financing policies more effectively that accelerate progress toward Universal Health Coverage (UHC) while ensuring fiscal sustainability and sustained economic growth. This report presents the results of the Health Financing Sustainability and Resilience Assessment (HFSRA) framework application in the Mexican context. The framework was developed as a response to discussions at the G20 finance ministers and central bank governors meeting in Fukuoka and the joint session of finance and health ministers at the G20 summit in Osaka in June 2019. We would like to thank the Mexican federal government, in particular the Secretaría de Hacienda y Crédito Público (SHCP), for its committed participation in this case study. The HFSRA case study in Mexico will not only provide guidance for the sustainability and resilience of health financing roadmap in the country but could also provide insights on the applicability of the framework in practice to other countries. We are especially grateful to Héctor Santana Suárez, Head of the Insurance, Pensions and Social Security Unit, at SHCP, and his team, for the support in facilitating a productive engagement with the rest of the Mexican federal government stakeholders and providing valuable feedback for the application of the HFSRA framework in the Mexican context. 2 Executive summary This report presents the results of adapting and applying the Health Financing Sustainability and Resilience Assessment (HFSRA) framework to the Mexican context to identify valuable lessons that can be useful for contextualizing the use of HFSRA to the needs of other countries. The framework assesses health financing based on four core concepts: sufficiency, sustainability, resilience, and efficiency. For the HFSRA case study in Mexico, sufficiency is the main focus, with resilience and sustainability adding a time dimension to the analysis. The objective of applying the HFSRA framework in Mexico is two-fold: to encourage discussions among policymakers, especially in the area of public finance, about the importance of systematically assessing and responding to shocks and threats to health revenues and spending, and to provide input that can be useful for the Ministry of Finance on how to mitigate and smooth fluctuations in health revenues and spending. The main conclusion of this case study is that Mexico’s health system faces important challenges in relation to financial sufficiency and sustainability. In terms of resilience, Mexico has the capacity to provide and use additional resources to face unexpected short-term shocks, as the COVID-19 pandemic illustrated, yet some areas for improvement have been identified. Similarly, developing and implementing broad pro-efficiency policies could represent an opportunity to improve financial sufficiency. Given the policy objective of the current Federal administration to deliver comprehensive health services to the entire Mexican population free at the point of service (Presidencia de la República 2019), improving the financial performance of the health system both in the short and medium terms is an essential intermediate objective to make such endeavor possible. The analysis of the four core concepts in the Mexican context provides several lessons. First, annual budgeting tends to focus on immediate health needs rather than long-term sustainability. To achieve greater sustainability, health budgets should be linked to forecasted needs in the medium (5-10 years) to long term (above 10 years). Second, sufficiency targets should be aligned to the country's needs and constraints to provide a timebound feasibility roadmap. Third, an overarching general risk assessment should be developed to protect public finances under unexpected reductions in revenue and/or increased expenditure. Fourth, linking preparedness and response plans to public finance management is essential to improve resilience. Fifth, stabilization or counter-cyclical funds can be effective for dealing with unexpected shocks, but a wider scope for risks and flexibility in their response should be considered. Finally, efficiency- based health policies should be given greater impulse in the health sector; explicit mechanisms to ensure resource efficiency could be improved and extended beyond fiscal years. 3 Introduction There is an increasing need for countries to meet both health expenditures and revenue generation challenges as they strengthen their health financing in the quest for Universal Health Coverage (UHC) and the attainment of Sustainable Development Goal 3 (SDG3). The recent COVID-19 pandemic has brough to sharp focus how this need must consider threats, both on the revenue and the expenditure side. To better understand and respond to these health finance challenges in a more systematic way, the World Bank (WB) has developed the Health Financing Sustainability and Resilience Assessment (HFSRA) framework. The HFSRA is intended to provide a reference to help countries to strengthen the sustainability and resilience of their health financing. The framework’s innovation resides in using a health financing lens to assess threats on both the revenue and expenditure side to countries’ efforts to attain UHC and to accomplish SDG3 targets. The framework considers the literature on fiscal policy sustainability and resilience, as well as more recent initiatives on the sufficiency of health spending to attain SDG3.The WB has proposed to undertake a case study in Mexico to operationalize and test the applicability of the HFSRA framework at the country level. In addition, the study is timely as it fits in the WB’s dialogue with the Ministry of Finance (in Spanish, Secretaría de Hacienda y Crédito Público – SHCP) for advancing the financial sustainability of the health sector. This is a novel approach since the framework can be interpreted as a flexible tool that can be adapted to specific and varying contexts through a practical approach in order to produce an analysis that resonates with local stakeholders and is more actionable. As an upper middle-income country with a tradition of reliable health financing statistics and a fair share of recent health financing challenges, Mexico offers an interesting case that can provide relevant lessons to other developing countries in different stages of maturity of their health financing structures. Testing the framework entails aligning it to the Mexican context by adapting the definition and/or measurement of the key concepts to the distinct features of the health system and the health system financing information available. This report presents the results of the adaptation and application of the HFSRA framework to the Mexican case and identifies useful lessons to further contextualize the use of the HFSRA to the needs of other countries. The aim of applying this framework to Mexico is to: i) facilitate a discussion of the relevance of systematically assessing and responding to threats to health revenues and spending in the short and medium term, focusing on a policy maker audience, primarily in public finance, in response to discussions and needs expressed by the G20 finance ministers and central bank governors, as well as other authorities, and ii) provide elements that support the SHCP to identify mechanisms to mitigate and smooth fluctuations on health revenues and spending in the short and medium-term, considering that such mechanisms can rest within or outside the health system as such.1 1 The rationale here is that the Ministry of Finance is the ultimate responsible for public finance, although health sector authorities and institutions also have a role within the health system in terms of pursuing financial sufficiency, sustainability, resilience and efficiency. 4 The main audience of this report are Ministries of Finance, the International Monetary Fund (IMF), amongst other relevant stakeholders. The adaptation of the HFSRA to the Mexican case includes both quantitative and qualitative analysis, depending on the type and availability of data and information - including a macro financing-revenue perspective. However, an overarching general equilibrium model to analyze the expected impact of individual or composite threats on interdependent macroeconomic key variables determining general government revenues, and thus health spending or an in-depth efficiency analysis, fall out of the scope and timeline of this initial assessment. The report is structured as follows: Section 1 describes the framework adaptation for this case study. Section 2 presents a brief description of Mexico’s health financing structure as background. The assessment is presented in Section 3, while the final section contains the main conclusions and lessons for the potential use of the HFSRA in other countries. Annex 1 details the methodology. Annexes 2 and 3 contain the list of interviewees and the interview guide, respectively. Annex 4 includes a preliminary characterization of identified threats to Mexico´s health financing. Annex 5 includes more detail on the composition of out-of-pocket (OOP) payments and catastrophic health expenditures by income quintile in Mexico. 1. HFSRA framework adaptation to the Mexican context The HFSRA framework provides the following rationale about the relevance of health financing: “Health spending is relevant in the context of attaining Universal Health Coverage (UHC) and Sustainable Development Goals. Health financing needs to perform well to accelerate and sustain progress towards UHC and prevent the erosion of gains. Health financing performance depends on choices made by policymakers in three inter-linked health financing functions.� The HFSRA framework also states that “High performance health financing requires equitable and efficient resource mobilization that generates sufficient levels of funding; a pooling that spreads the financial risks of ill-health across the population and allows people to use the health services they need; and spending that is efficient and equitable to assure desired levels of health service coverage, quality, and financial protection for all.� In this context, the HFSRA framework considers four core concepts for the assessment: sufficiency, sustainability, resilience, and efficiency of health financing. Operationalizing the framework and these concepts at the country level requires their translation into practical metrics susceptible of systematic measurement, as well as the use of routinely available information. For the HFRSA case study in Mexico, the main outcome of interest is sufficiency, while the concepts of resilience and sustainability bring into the analysis a time dimension to assess sufficiency. On the other hand, efficiency is considered to the extent of its indirect effect on sustainability and resilience through the impact on the expenditure side. The analysis also addresses some potential implications of shocks or threats affecting some of the core concepts mentioned above. 5 Figure 1 synthesizes the proposed adaptation of the HFSRA. Considering that the HFSRA core concepts may not necessarily be independent from each other, sufficiency -as the main outcome of interest-, can be explained through the relationship between income and expenditure over time. Resilience is conceptualized here as the short-term notion of sufficiency, where unpredictable events in the short run, namely shocks, can affect health system sufficiency by either significantly limiting the financial resources available (income – revenue) or increasing dramatically the expenditure. Sustainability refers to the medium-term notion of sufficiency where threats tend to be more predictable and thus potentially incorporated into longer term measures of expected income or expenditure. Efficiency is prevalent throughout the timeframe, as it affects expenditure, hence indirectly affecting sufficiency. These definitions may vary somewhat from the definitions considered by the IMF and the WB in the framework, in order to better contextualise the framework to the Mexican case. Figure 1. Relationship between HFSRA core concepts For the HFSRA framework, short-run considers 0-4 years, medium-run involves 5-10 years, and long-run is defined as above 10 years. The analysis considers mainly exogenous threats, while policy-related threats that are endogenous to the health system are regarded to the extent that they impact costs and thus expected health expenditures. Further relevant considerations on the scope of the analysis are listed in Box 1. Box 1. Considerations on the scope of the analysis The contextualized framework considers the current health system structure and is not necessarily linked to further or potential structural health financing reforms to attain UHC or improve the Mexican health system performance. In that sense, the analysis is not intended to guide structural reforms in health financing, but to document and highlight key actions, policies and mechanisms that can improve the sustainability and resilience of health system financing. 6 The assessment of the revenue raising capacity of the government considers threats to various income sources, including general taxation and social security contributions, but the report is not intended to suggest or guide fiscal policy reforms. The focus of the analysis is the public sector, e.g. public revenues and public expenditures. Private health spending analysis, primarily out-of-pocket expenditures whose share in Mexico’s total health spending is very high, will supplement the analysis. This is not a general assessment of the threats to more general health system performance (e.g. population health and system responsiveness) or more specifically, on health finance performance of the subfunctions of pooling and purchasing. In terms of the three functions of health systems financing2, sufficiency is mainly related to resource mobilization. Exogenous threats can impact income or expenditures in the short and medium term in such a way that resources available may be insufficient. However, there may be other threats also indirectly affecting sufficiency through their effect on other health system functions, such as resource pooling and/or strategic purchasing. This is particularly the case of some health policies that limit or enhance the efficiency of resource pooling, or the health system capacity to deliver value for money through resource allocation. In both cases, in the context of the adapted HFRSA, efficiency is considered a mechanism whereby threats which are endogenous to the health system, including some recent policies and regulations affecting health financing functions, directly impact on sufficiency, either in the short or medium term. 1.1 Brief highlights on the methodology The full methodology of the adaptation and application of the HFSRA framework is described in more detail in Annex 1. In addition to the study of public accounts and other relevant data, the analysis draws on interviews with Mexican government officials from key areas related to the health financing structure. These interviews with Mexican stakeholders were designed to better understand the viewpoints, challenges, concerns, current policies/actions being carried out, and areas of opportunity in health financing in Mexico – firsthand from the civil servants in charge of these policies. Interviews also served to further contextualize the HFRSA framework to Mexico and to garner local buy-in for the case study. The list of interviewees and the interview guide are presented in Annexes 2 and 3, respectively. 2. Mexican health financing structure The Mexican health system is made up of three main sub-systems: i) employment-based social insurance schemes, ii) publicly funded health care services for the uninsured provided by decentralized state health services and/or other federal health care providers, and iii) private sector. In principle, Article 4 of the Constitution stipulates that “every person has the right to health 2 Health financing functions are: resource mobilization, resource pooling and purchasing or resource allocation. 7 protection�. In practice, this right is exercised differently, depending on the sub-system people have access to. Health care delivery is fragmented as public institutions operate in parallel with limited coordination and based on their corresponding rules, target populations, budgets, benefit packages and infrastructure. The private sector mostly operates independently and delivers health care mainly on an out-of-pocket basis to anyone demanding care with capacity to pay, or to a lesser extent through private health insurance. 2.1 Most important providers in the health system Figure 2 details Mexico’s health system structure through populations and functions, including the most relevant health care providers. Figure 2. Mexico’s health system structure Source: Adapted from Giedion et al. (2014). *As of April 29th, 2023, an initiative to disappear INSABI and integrate its functions and resources into IMSS-Bienestar and the Ministry of Health, was approved by the Mexican Congress. The most important players/providers in the Mexican health system are: • Ministry of Health (MoH): is the steward of the system responsible for planning, oversight and coordination, regulation, evaluation, and public health, including prevention and promotion. It is also responsible of health care provision through the National Institutes of Health and other Federal and High-Specialty Regional Hospitals. • Mexican Institute of Social Security (in Spanish, Instituto Mexicano del Seguro Social – IMSS): is the largest health care and social protection provider in Mexico. Founded in 1943, it provides services to formal private sector workers and their families directly through its own facilities or through subrogated services (to a lesser extent). It is funded through payroll contributions (employers and employees), as well as by the federal government. 8 • Institute for Social Security and Services for State Workers (in Spanish, Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado – ISSSTE): is the second largest social security institution in Mexico, covering federal government employees and their families. Through specific agreements, state governments and other decentralized public entities can also use the services of ISSSTE to enroll their workers. • PEMEX (in Spanish, Petróleos Mexicanos): social security scheme for the national oil- company workers. • Other smaller social security providers include the Army and Navy, and state schemes for local government employees and their families. • Institute of Health for Wellbeing (in Spanish, Instituto de Salud para el Bienestar – INSABI): created to replace the National Commission on Social Protection in Health (in Spanish, Comisión Nacional de Protección Social en Salud – CNPSS), commonly known as Seguro Popular. In principle, INSABI is responsible for channeling federal resources and coordinating the care to be provided by the state health services for the population without access to social security. As of April 29th, 2023, an initiative to disappear INSABI and integrate its functions and resources into IMSS-Bienestar and the Ministry of Health, had been approved by both the Mexican Chamber of Deputies and the Senate, pending publication in the Official Federal Gazette (in Spanish, Diario Oficial de la Federación) to come into effect. • IMSS-Bienestar: originally created in 1979 as a federally funded programme providing health services to deprived populations (and thus without access to social security), both in rural and urban settings, and run by IMSS. • State Health Services (in Spanish, Secretarías de Salud de los Estados – SESA): 32 local Ministries of Health, who provide care through their own facilities for the population without access to social security. 2.2 Main approaches to public provision of health services in Mexico (social security and non-social security) Within the social security subsystem, there are various schemes covering different groups of salaried workers and their families. These institutions tend to have greater budget allocations per beneficiary and are vertically integrated. Coordinated at the federal level, they provide care through their own facilities and varied benefits packages. The largest providers are IMSS and ISSSTE. On the other hand, health care for the population without social security is delivered through the 32 state health services; the National Institutes of Health and other Federal and High- Specialty Regional Hospitals, which are directly managed by the Ministry of Health; and/or IMSS- Bienestar, the health programme for deprived population in rural and urban settings. The current Federal administration has placed a special emphasis on health. As part of the National Development Plan 2019 – 2024 (in Spanish, Plan Nacional de Desarrollo) the Mexican government stated that it would: “…take the necessary actions to guarantee that by 2024 all the inhabitants of Mexico can receive free medical and hospital care, including the supply of medicines and healing materials and clinical examinations…� (Presidencia de la República 2019). Hence, several legal reforms to the health system have been implemented. One of the most relevant involved the creation of INSABI to replace the Seguro Popular. Until December 2019, funding of health care for the population without social security was channeled to the 32 states 9 through a financial mechanism commonly known as Seguro Popular. A reform to the General Health Law, replaced Seguro Popular with an alternate scheme run by the INSABI. Nonetheless, more recent modifications in the operation of the public sector provision of health services have involved favoring IMSS-Bienestar over INSABI for the direct coverage of the population without social security. As of April 29th, 2023, an initiative to disappear INSABI and integrate its functions and resources into IMSS-Bienestar and the Ministry of Health, had been approved by both the Mexican Chamber of Deputies and the Senate, pending publication in the Official Federal Gazette (in Spanish, Diario Oficial de la Federación) to come into effect. IMSS-Bienestar has become a public decentralized entity (in Spanish, Organismo Público Descentralizado – OPD) and will lead public health care coverage of the population without social security, through the gradual incorporation of State Health Services. By July 2022, IMSS-Bienestar was already fully operating health care services in three states: Nayarit, Tlaxcala y Colima (IMSS, 2022) and, according to IMSS authorities, might be operational in 24 to 26 states by the end of 2023. The Mexican health financing structure emulates the fragmented nature of the health system. Figure 3 describes in detail the structure of financial flows to health providers. The main financing sources in Mexico are firms and households (via employer/employee contributions to social security institutions and taxes paid to federal and state governments), and general government income, mainly through tax collection. Resources are channeled through different health financing schemes and are allocated to different service providers. The main budget branches/accounts (in Spanish, Ramo) in the Federation Expenditures Budget (in Spanish, Presupuesto de Egresos de la Federación – PEF) related to health financing from the federal government are the following: • 7 – National Defense (Mexican Army) • 12 – Health (direct budget allocated to the MoH and other federal decentralized health providers and partially distributable per state) • 13 – Navy (Mexican Navy) • 19 – Social Security Contributions (including the budget specifically pertaining to IMSS Bienestar) • 33 – Federal Contributions to States (in Spanish, Fondo de Aportaciones para los Servicios de Salud - FASSA) • 50 – Mexican Institute of Social Security • 51 – Institute for Social Security and Services for State Workers The above does not include health expenditure financed by local sources at the states and/or municipalities. 10 Figure 3. Mexico health financing structure - financial flows to payment of health providers Source: Adapted from Block et al. 2020. From Figure 3, it is clear that a highly fragmented structure of the health system translates into multiple budget branches feeding in the provision of health care. Amidst this multiplicity of funding channels, a salient feature relevant to the HFSRA analysis is the varying degree of vulnerability and flexibility between contributive and non-contributive schemes. Social security institutions incomes based on legislated contributive schemes such as IMSS’ and ISSSTE’s have clearer rules to secure income sources. IMSS and ISSSTE incomes are basically determined by the number of registered workers. These resources are protected from being reallocated elsewhere or reduced by federal authorities. In addition, budgets within these institutions can be more flexible given their higher degree of autonomy in the management and allocation of resources. In addition, instances such as IMSS, also have financial reserves whose resources are necessary. In contrast, budgets allocated under non-contributive schemes through the MoH, IMSS-Bienestar and SESA are determined annually by Congress. Reallocation of 11 federal resources, and federal budget increases need to comply with rules and constraints established at the federal level by SHCP for all federal budget expenses. Budgets allocated through these channels compete with other government areas of federal expenditure and are more vulnerable to other sources of pressure. Regarding the uninsured population, there is a recognition that public budgets are insufficient to fully address health needs. In this case, federal budgeting tends to be inertial and subject to overarching constraints defined by the Ministry of Finance, including budget ceilings. In addition, regulations establish that modifications to the annual budgets approved by Congress implying a 5% or more variation in the total budget of allocated to a particular sector (Ramo) or entity are to be subject to the opinion of the Chamber of Deputies’ Budget and Public Accounts Commission.3 In practice, modifications above this threshold are limited. 3. Assessment of Mexico’s health financing sustainability and resilience 3.1 Identified threats. Several threats identified by this study are listed in Table 1. All of them have major implications or effects on the economy and social conditions. These threats are not exclusive to the Mexican health system, and the list is not necessarily comprehensive of all items that could be relevant from a public finances perspective. However, the threats listed are those most closely associated to the health system. Those perceived as highly relevant by government authorities in this context are indicated in bold. Table 1. Key threats Threat Description (Those perceived as highly relevant by government authorities are indicated in bold) 1. Economic crisis and recession Economic crisis and recession comprise financial crisis, public debt crises, sustained negative output growth, unemployment, and fiscal and monetary policies to manage them leading to inflation, devaluation, public deficit, or budget cuts, etc. 2. Epidemiological transition Driven by combined demographic, economic, environmental, and social changes in societies, population health needs change reflecting a greater share of non-communicable diseases and injuries in the total burden of disease. 3. Natural disasters and climate Natural disasters triggered by natural phenomenon or hazards include for change example: earthquakes, draughts, heat waves and fires, hurricanes/typhoons, winter storms, avalanches, flooding, tornadoes, volcanic activity. Those relating to weather conditions are already more frequent or of higher intensity because of climate change. 4. Labor market dynamics Changes in labor markets, including their structural conditions, encompass increased informality, outsourcing practices, increases in labor costs due to varying factors such as trade agreements or minimum wage legislation, nearshoring, etc. 5. Demographic changes As fertility rate and life expectancy increases, the population distribution by age group changes resulting in greater shares of the population aged 60 and older. The ageing process has relevant implications in various economic and social areas. Demographic changes also include migration – be it legal or illegal, forced or voluntary-, which is an important determinant of populations in many countries. 3 Article 58, Ley Federal de Presupuesto y Responsabilidad Hacendaria. 12 Threat Description (Those perceived as highly relevant by government authorities are indicated in bold) 6. Pandemics and other biological Pandemics and other biological threats are amongst the more relevant threats threats to health systems in terms of their effect on populations health, but also in terms of health systems’ response capacity . As shown by the COVID-19 pandemic, this set of threats has also significant implications for the economy and social conditions. 7. Technological change Technological change has resulted in significant improvements in medical science and health care delivery over the past century, which have resulted in major health gains. However, new technologies tend to be more expensive and represent a major source of financial pressure for health systems. 8. Violence/war/political instability This threat encompasses various forms of violent disruption. An illustrative characterization of threats is included in Annex 4, as a preliminary exercise in the Mexican context. To some extent various threats are more or less expected, and hence can or should be incorporated more explicitly when thinking about strategic planning or policies to support the resilience and sustainability of health systems financing. For example, the ongoing demographic and epidemiological transitions have been widely identified and documented, not only in Mexico but in many other countries over the last twenty years. Natural disasters, for example, are frequent in a country like Mexico. Nonetheless, what is uncertain or less predictable is their precise timing and location - their expected probability of occurrence could be more explicitly integrated into mechanisms and tools to support health systems financing. Systematically identifying and analyzing threats and their characteristics is an intrinsic element of risk management. In the Mexican context, the acknowledgment of some of these threats has been usually in charge of the Ministry of Finance, for example in relation to natural disasters and in economic planning with a focus on macroeconomic variables and population ageing and their implications on predicted government revenues and expenses. This has led to the development of mechanisms to mitigate the risks of natural disasters or reduced government revenues. Box 2 illustrates the case of the risk of natural disasters and a recent initiative to promote overall risk management. A more systematic identification and analysis of threats as an overarching activity to support policy developments, not only for economic planning but across a variety of economic sectors, such as health, seems to be an area of opportunity. Within the health sector, threats such as the demographic and epidemiological transition have been considered, alongside technological change, as cost drivers and thus, as arguments behind requests for budget increases. The threat of pandemics has also been considered in past response and preparedness plans, but without specific financial measures to support potential increases in health expenses. For example, the General Health Law considers some risks and extraordinary measures to be taken by health authorities at the federal level in such cases to protect the population, but these provisions do not consider or are not linked to specific financial measures. There is no cross-cutting risk identification and analysis framework in place. Many of the threats highlighted in Table 1 affect more than just the health sector. It would make sense from a public finance perspective, for a dedicated instance to have the responsibility to identify, analyze and coordinate the necessary financial measures to mitigate risks across various sectors and between levels of government. This is a relevant area of opportunity. 13 Box 2. Risk management in Mexico: FONDEN and the creation of a Public Risk Financial Management Agency Mexico is prone to natural disasters and has accordingly developed disaster risk management capacity over the last decades. As part of these efforts, in 1996 the Mexican Federal Government established the Natural Disaster Fund, commonly known as FONDEN, as an inter-institutional financial mechanism for natural disaster relief. The original mandate of FONDEN was to ensure the availability of resources for the federal government and the 32 states immediately after the occurrence of a natural disaster to finance the reconstruction of public infrastructure and housing, specifically in low-income sectors, without compromising existing budgets or other previously approved public programs. To obtain FONDEN resources, the Federal Government entities or the states had to prove that damages exceeded their financial capabilities and file an application in which they detailed the reconstruction needs and estimated costs. Municipalities did not receive the support directly, since it was state governments who were responsible for the submission of applications to restore municipal assets. As FONDEN started operations, it was deemed the assigned budgets were insufficient to counter natural disasters, leading to the introduction of a fixed yearly percentage allocation to the Fund by the Ministry of Finance. Hence, it was defined that the resulting annual allowance in the Fund’s budget should not amount to less than 0.4% of the total programmable expenditure of the government, taking into account resources accumulated over time in the Fund’s corresponding reserves. Under this rule, for example, FONDEN’s total budget for 2021 would have amounted to approximately 0.08% of GDP. FONDEN was responsible for allocating resources in accordance with its operating rules and unused resources at the end of the fiscal year were transferred to financial mechanisms and trusts, as reserves to be used in subsequent years. Figure I. Natural Disaster Fund (FONDEN) - Annual budget allocations from 2008 to 2022 (USD million - 2022). Figure I shows the annual budget allocations for FONDEN between 2004 and 2022. It is interesting to note that the highest approved budgets coincide with the aftermath of the occurrence of relevant natural disasters in Mexico: 2010 is cataloged as a year with multiple natural disasters (earthquakes, rains, floods, and landslides across the country); while the September 2017 earthquakes caused relevant damages in different parts of Mexico. 2018 annual budget allocation for FONDEN amounted to approximately 0.7% of total Federal Government expenditure. It is also important to point out that resources prior to 2010 were particularly low, as the operating rules, guidelines, and their corresponding trusts, were being set in place. The current federal administration repealed FONDEN, along with other similar public funds and trusts that did not have an organic structure, proceeding to recall resources to the Federal Treasury. This move was further exacerbated due to the need for channeling resources for economic recovery during the COVID-19 pandemic in Mexico. 14 Following FONDEN’s elimination, a budget program for natural disasters was created. The 2022 Federal budget still assigned 465 million USD (9,054.9 million pesos) to the newly FONDEN budget program, together with other natural disaster budget programs. A limitation of transitioning from a fund to a budget program, is that the latter cannot accumulate unused resources from one year to the next. Hence, when a contingency occurs, if annual resources allocated to the budget program are insufficient, approvals for additional resources tend to be lengthy. In parallel, in December 2020 the Chamber of Deputies approved the General Law of Comprehensive Risk Management of Disasters and Civil Protection, which was sent to the Senate for its consideration and approval. It is worth noting that this piece of legislation proposal is still pending approval from the Senate and its subsequent publication in the Official Federal Gazette, prior to coming into effect. Nonetheless, it is important to stand out that as part of this Law proposal, the creation of a decentralized Public Risk Financial Management Agency under the Ministry of Finance is envisioned (Article 72). If the General Law is approved and published, and until the is Agency created, the Ministry of Finance will exercise the functions and powers conferred in this Law to the decentralized body. The Public Risk Financial Management Agency will oversee the financial risk management process, identifying and quantifying financial threats and risks to determine, propose and hire disaster risk management and transfer instruments for federal public entities, and likewise provide similar advice to state and municipal authorities. It will also analyze and evaluate current disaster risk management and transfer instruments for federal public entities, to determine their effectiveness and, where appropriate, suggest changes or propose new mechanisms. The creation of this Agency would be a significant move forward in risk management in Mexico. Ensuring the availability of financial instruments such as funds, trusts or other would be relevant to ensure that the Agency has the capacity to manage risks in a more comprehensive manner and to secure financial resources to face a wider variety of risks. Sources: Fondo de Desastres Naturales “FONDEN�, 2022. Centro de Estudios de las Finanzas Públicas. Cámara de Diputados. LXV Legislatura. Minuta Proyecto de Decreto por el que se expide la Ley General de Gestión Integral del Riesgo de Desastres y Protección. Cámara de Diputados. LXV Legislatura. December 3rd, 2020. 1) Sufficiency Over the last 20 years, it has been argued that the Mexican health system is largely underfunded. Most often, insufficiency has been documented through international comparisons and by comparing public budgets across health subsystems. It is important to emphasize that currently there is no explicit official target regarding health spending in Mexico – nonetheless, as established in the General Health Law 4, the annual federal budget allocated to health cannot be less than the immediately preceding fiscal year. In this section, sufficiency is analysed considering three types of target measures: 1) International benchmarks 2) A suggested national benchmark 3) A financial protection target 4 Article 77 bis 12, Ley General de Salud. 15 a) International benchmarks Although national health spending has grown over the last decades, Mexico’s total health spending amounts to only 6.2% of GDP (2020), still well below the OECD average of 9.7%. This figure includes both public and private health spending, at 53.2% and 46.8%of the total spending, respectively. Figure 4 shows the trends of total, public and private expenditure on health as percentage of GDP in Mexico, compared to the OECD average, since 2000. Year 2020 shows a steep increase in health spending across all OECD countries due to additional needs imposed by COVID-19 pandemic. This spending pressures, together with reductions in economic activity, pushed total health spending in Mexico from 5.4% in 2019 to 6.2% of GDP in 2020 (OECD, 2022). Total health spending as a share of GDP in Mexico has averaged around 60 to 75% of the OECD average in recent years. Figure 4. Evolution of total, public and private expenditure on health as percentage of GDP in Mexico and the OECD average, 2000 – 2020 WHO (2010) public expenditure on health of 5-6% of GDP threshold Source: OECD Health Statistics 2022. http://stats.oecd.org/Index.aspx?DataSetCode=SHA In particular, public health spending in Mexico has always been considerably low when compared to the OECD average. In this case, the pre-pandemic level of Mexico’s public spending in health as percentage of GDP amounts to only 41% of the average level shown by OECD countries in 2019. Figure 4 also shows the WHO standard set at a public health spending share of 5-6% of GDP (green band) (WHO 2010). Mexico’s public health spending also falls short of meeting the lower boundary of this standard by more than 2.3 percentage points on average during the last 20 years. 16 Likewise, government expenditure in health has remained relatively unchanged over the last decade. Figure 5 shows the evolution of public expenditure as share of total net expenditure in the federal expenditure budget (in Spanish, Presupuesto de Egresos de la Federación – PEF); either spent (2012-2021) or allocated (2022) and proposed (2023). The trend of public health expenditure has remained constant (between 9.59% and 11.22%) and is still relatively far from the share of 15% of total government spending as recommended by the World Health Organization (WHO 2010). Note that this proportion only includes federal government expenditure and does not include expenditure financed by local sources at the states and/or municipalities. Figure 5. Evolution of the share of public health spending relative to total health spending in Mexico, 2012-2023 Source: Expenditure Budget of the Federation (PEF: approved 2012-2022 and proposed 2023). At the same time, private health spending has constantly remained above the OECD average during the same period. Analyzing in more detail the evolution of per capita health expenditure in Mexico since 2000 (constant Mexican pesos) (Figure 6), the data suggests that beyond the recent COVID-19 related increase for 2020, total health expenditure per capita has remained relatively stable over the last years, comprised by an almost equal share between public and private expenditure. However, during some years, increased public per capita spending seems to be accompanied by a diminishing trend in private spending, and vice versa. 17 Figure 6. Evolution of total, public and private expenditure on health per capita in Mexico, 2000 – 2020 (USD, constant 100 = 2000) Source: Own elaboration with data from OECD Health Statistics 2022. http://stats.oecd.org/Index.aspx?DataSetCode=SHA As illustrated in this section, Mexico’s health system financial sufficiency falls short of targets based on an international comparison with OECD countries and by WHO standards. In particular, shortfalls in public health spending significantly explain the gaps observed over the last 20 years. b) National benchmark Benchmarks involving countries’ GDP are useful as they allow for international comparisons between health spending levels by different countries. Nevertheless, they also suffer from some limitations since implying that there is a single right or wrong spending-to-GDP ratio for all countries might seem simplistic under some circumstances. Hence, it could also be useful to think about a given level of health spending that could be perceived as appropriate by a population. This would be the case for a national benchmark in health spending. In a fragmented health system like Mexico’s, it’s common knowledge for decades that the population insured by social security receives a broader package of medical services than the population not covered by any social security scheme. For this reason alone, it is reasonable to expect that per capita spending in health will be higher for those insured by social security than for the uninsured. Thus, behind the use of a national per capita spending benchmark lies the UHC policy goal of convergence toward a common package of benefits for all the population, regardless of the circumstances of their employment or sources of income. In the case of Mexico, health spending varies across several subsystems, each one of them targeting a different subset of the population as described in section 2.1. The financial and budgeting rationale is also different between subsystems. IMSS follows an insurance-based logic, with actuarial forecasts of income and expenditures to assess its financial position in the short 18 and long term, and the identification of risks with potential impact on its finances. In principle, ISSSTE follows the same rationale. In contrast, federal budgets allocated to the Ministry of Health are conceived as part of an annual process with no formal projections in the medium to long-run, and by definition, incomes are equal to expenditures. Multiannual contracting for which planning of the required budget considers more than one year would be the exception to this annual perspective (this is the case of some investment projects and the procurement of some health inputs). The scope of services available for the uninsured is narrower when compared to those available to the beneficiaries of social security. In this study, IMSS per capita spending is used as a benchmark to assess sufficiency, both in the short and in the medium terms (sustainability). IMSS’s spending is considered a more stable and representative benchmark of what it costs to provide the Mexican population with a broad set of public medical services. This is the case for several reasons: • IMSS is the largest medical services provider in the country. • Other than some of the usual exclusions (aesthetic surgery, for example), the coverage of services and procedures includes most, if not all, of treatments related to accident and disease. Because of the broad range of medical services provided by IMSS, it is conceivable that its production function closely reflects the true cost of a hypothetical universal coverage, publicly provided, health plan in Mexico. • Financial information about IMSS processes and insurance policies or subcomponents is readily available in several of its reporting channels. Also, IMSS’ revenue is clearly defined by Law, which provides transparency when trying to assess the balance between revenues and spending.5 Figure 7 shows the evolution of per capita expenditure for those with access to IMSS and those without access to any social security scheme. In 2019, before the COVID-19 pandemic, per capita spending for those without access to social security was 18.3% lower than the corresponding amount for the population with access to IMSS. During the pandemic years (2020 and 2021) the gap reduced slightly to 16.5% and 11.2% respectively, because of increases in the federal budget allocated to the uninsured population to respond to the pandemic (although these allocations included the cost of the vaccines which benefitted the total population, for example). 5 IMSS mainly provides health services to registered workers and their families through the Sickness and Maternity Insurance (Seguro de Enfermedades y Maternidad, SEM), but it also runs a voluntary insurance (Seguro de Salud para la Familia, SSFAM) which represents 0.7% of the total number of enrolled workers/affiliates paying social security contributions. 19 Figure 7. Per capita health spending for the population without social security and IMSS beneficiaries, 1999-2021 (USD, constant 100 = 2013) Source: Per capita expenditure for the uninsured was calculated with data from SICUENTAS. DGIS. Ministry of Health. Last update: January 19th, 2023. http://www.dgis.salud.gob.mx/contenidos/basesdedatos/da_sicuentas_gobmx.html Per capita expenditure for IMSS beneficiaries was calculated using data from Memoria Estadística del IMSS, 2021. Total spending for Seguro de Enfermedades y Maternidad (SEM) and Seguro de Salud para la Familia (SSFAM) was used after subtracting the following spending accounts: financial interest paid, monetary benefits paid, compensatory tax rebates and reserve provisions for future spending. After 2013, some modifications to accounting processes were enacted, hence some slight impact on comparability is to be expected between before and after 2013 periods. Potential beneficiaries are used as a proxy to population with access to IMSS in order to account for those individuals with legal rights for accessing IMSS, even if they are not actively using IMSS’ health services . Moreover, the gap is still substantial but has clearly been reduced in the last two decades. As observed in the same Figure 7, the largest gap occurred in 2003. In that year, per capita spending in health for the uninsured was 56% lower than per capita spending for IMSS’ beneficiaries. The gap started to close in 2004, as a result of sustained increases in federal spending in health for several years afterwards. Comparing resources available between social and non-social security historically has been useful to show inequalities in health system financing in Mexico and to advocate for increased funding for the population without social security. The general idea behind using IMSS spending as a point of reference is that, as long as the Mexican population considers the coverage provided by IMSS as a desirable coverage, a first sufficiency-goal is to make sure that all the population (not only IMSS’ beneficiaries) have access to the same broad package of services. Lowering IMSS’ benefits to equalize across subsystems is not a legally or politically feasible. 20 The relevant question then becomes how much it would cost to provide the uninsured the same level of services that IMSS’ beneficiaries. More explicitly, what is the monetary difference between resources devoted to IMSS’ population and those devoted to the population that lacks social security coverage? As of 2019, the difference in per capita spending between both groups is roughly 38 dollars per person. The incremental cost to cover around 55-60 million uninsured individuals with the same level of services than IMSS-covered population is estimated as 2,101 to 2,292 million dollars per year, if conditions encountered in 2019 were to persist.6,7 The use of IMSS’ cost of providing medical services allows for a more pragmatical approach to have a conversation on sufficiency and sustainability in the Mexican context. Considering the limited fiscal space and the complexities involving a major fiscal reform, a gradual approach to health system sufficiency in the short and medium term would be more viable. Aiming at a more equal financial basis for all the population could be considered by improving per capita allocations for the population falling behind this benchmark. A subsequent discussion on how to increase health spending levels beyond the observed benchmark would also be relevant. Up to this point the analysis has focused on the existing gap in spending levels between IMSS’ beneficiaries and the uninsured population. An additional issue arises when considering whether IMSS’ per capita spending in medical services is being fully and sufficiently funded by IMSS’ current revenues. From a cash flow perspective, this has not been the case at least for the last two decades as IMSS’ main medical services schemes do not collect enough revenue to cover for the cost of those services. Therefore, IMSS’ financial reserves have been chronically used and are expected to continue to be used unless payroll tax rates intended to finance IMSS services are revised. The estimated deficit for the Seguro de Enfermedades y Maternidad in 2019 was 2,895 million dollars, whereas for Seguro de Salud para la Familia the deficit was 399 million dollars.8 c) Financial protection target A third approach to assess sufficiency involves prioritizing financial protection for the population most vulnerable to catastrophic health expenditures. This is relevant in a context of a high prevalence of out-of-pocket health expenditures alongside budgetary constraints and limited fiscal capacity to achieve universal coverage through publicly funded health services. Out-of-pocket payments (OOP) exist in most health systems, although their participation in total health spending varies widely. How prominent should OOP be as a funding source is a question 6 For this sufficiency analysis, 2019 results are used because the data from the pandemic years are considered atypical and not suitable for making inferences about future spending patterns. 7 The precise number of uninsured individuals in the country has always been a matter of debate as administrative records from social security entities show that in 2019 IMSS, ISSSTE and PEMEX accounted for 84.5 million beneficiaries for the sum of those three institutions. If that were precise and, in addition, no person was allowed to be a beneficiary of more than one scheme, then only around 42 million individuals would be uninsured. Nevertheless, it is possible for a person to belong to more than one scheme, hence significant duplicities in coverage are to be expected. For this reason, the true number of uninsured individuals in Mexico is currently estimated to be closer to a range between 55 to 60 million residents. 8 According to IMSS’ anual financial report to the Executive and Congress (Informe al Ejecutivo Federal y al Congreso de la Unión Sobre la Situación Financiera y los Riesgos del Instituto Mexicano del Seguro Social 2019-2020). 21 involving societal values, the existing financial arrangements, and governmental budgetary constraints. In a country like Mexico, given the relevant prevalence of poverty and large income inequalities, it would be expected that reducing OOP or moreover, providing financial protection against those OOP payments that are catastrophic, should be a key policy target. Financial protection is also particularly relevant in Mexico’s case given the high prevalence of OOP. Figure 8 shows the pre-COVID-19 pandemic (2019) composition of health expenditure by type of financing for OECD member and non-member economies. While government financing schemes and compulsory health insurance, which make up public health expenditure, make up around 50% of total expenditure in Mexico, private expenditure is almost entirely made-up of OOP expenditure (42% of the total health expenditure). The OOP share in Mexico was the largest in OECD member countries for 2019 and was only exceeded by India (63%) amongst non-member countries. OOP expenditure in Mexico also exceeds other Latin American nations, such as Colombia, Chile, and Costa Rica (OECD, 2021). Figure 8. Health expenditure by type of financing, 2019 (or nearest year) 1All spending by private health insurance companies reported under compulsory health insurance. Category “Other� refers to financing by NGOs, employers, non-resident schemes and unknown schemes. Source: OECD Health at a Glance 2021. Permanent location of this file: https://stat.link/fnap0l Financial protection has been part of the health policy agenda for the last 20 years and SDG target 3.8 includes two indicators on financial protection (indicators 3.8.2):9 • Population with household expenditures on health greater than 10% of total household expenditure or income • Population with household expenditures on health greater than 25% of total household expenditure or income 9 SDG Target 3.8: Achieve universal health coverage, including financial risk protection, access to quality essential health-care services and access to safe, effective, quality and affordable essential medicines and vaccines for all. 22 These indicators refer to health expenditures above a certain threshold, but the rationale behind them is the same as the initial definition of catastrophic health expenditures developed two decades ago by the WHO - household expenses above a threshold of 30% of disposable income. Ideally, a complete assessment of sufficiency based on financial protection should ponder the elimination or reduction of catastrophic out-of-pocket expenditure at a specific threshold level based on financial risk protection targets, hence estimating its implications in terms of additional government health spending. This would require developing a detailed model to estimate the expected effect of an additional dollar invested in health from public sources in terms of the potential substitution of a dollar spent through out-of-pocket payments that could lead to catastrophic expenses. Exploring alternatives for such estimation falls out of the scope of this case study, but it is an issue that would be worthwhile exploring. The prevalence of OOP expenditure in Mexico has remained at high levels for the past 20 years. Figure 9 depicts the OOP expenditure trend since 2000, including a considerable reduction in this type of health financing during the second half of the 2000’s. In 2019, prior to the COVID-19 pandemic, OOP expenditure accounted for 42.3% of total health spending while during the first year of the pandemic (2020) it reduced to 38.8% (OECD, 2022). The 2020 data is partly explained by the significant additional public resources used to face the pandemic during that year. Figure 9 also shows the publicly available data on household catastrophic health expenditures from two different sources and with different thresholds. A household falls into catastrophic health expenditures when the proportion of the total household health expenditure is 30% or more –or 25% or more or 10% or more- of its disposable income or ability to pay, depending on the methodology used for the estimation. The 30% threshold was defined by the WHO in 2005 (Xu, K. 2005) and it is the threshold used by CONEVAL to estimate this indicator in Mexico. The threshold levels of more than 10% or more than 25% of household disposable income are both used to track the SDG 3.8.2 target related to financial risk protection. The indicator reported by CONEVAL shows a relatively constant trend, with a very pronounced increase in 2020 which relates to COVID-19 expenditures (almost double as the 2018 figure). On the other hand, the WHO SDG indicators show a downward trend since 2008 to 2016 (last available year). 23 Figure 9. Evolution of household out-of-pocket payments on health as share of current expenditure on health and available data on household catastrophic health expenditures in Mexico, 2000 - 2020 Sources: OECD Health Statistics 2022. http://stats.oecd.org/Index.aspx?DataSetCode=SHA Consejo Nacional de Evaluación de la Política de Desarrollo Social (CONEVAL). Evaluación Estratégica de Salud. Primer Informe: CONEVAL, 2022. WHO. Population with household expenditures on health greater than 10% of total household expenditure or income (SDG 3.8.2) (%) https://www.who.int/data/gho/data/indicators/indicator-details/GHO/population-with-household- expenditures-on-health-greater-than-10-of-total-household-expenditure-or-income-(sdg-3-8-2)-(-) The different trends observed for these indicators suggest that an analysis of sufficiency based on this approach requires further understanding of the differences between the underlying estimates, and exploring which would be the most suitable indicator. In Mexico’s case, CONEVAL estimates are official and are widely accepted and used to monitor social policy including health. For this case study, the indicator produced by CONEVAL at a 30% threshold was replicated using CONEVAL’s methodology and the ENIGH data. Using this same method, results for the 10% and 25% thresholds were also calculated to promote international comparability. Figure 10 shows these estimates for the latest datasets available. As shown, the indicator is sensitive to the threshold used. At the same time, regardless of the threshold, the observed trend between the years 2016 - 2020 is the same: a slight reduction from 2016 to 2018, and a significant increase in level from 2018 to 2020. Minor differences between the two estimates shown for the 30% threshold in figures 10 and 11 can be explained by differences in the definition of subsistence spending and household payment capacity.10 10 For subsistence spending, such differences could be for example: estimation of spending at the household level using an equivalent household scale defined by CONEVAL vis a vis using aggregate household sizes reported in the ENIGH survey. For household payment capacity estimates, differences could result, for example, from using the monetary expenses variable 24 Figure 10. Household catastrophic health expenditures in Mexico, 2016, 2018 and 2020 Source: Own calculations with ENIGH data using the same conceptual framework as WHO (2005) and CONEVAL. A more detailed analysis by income quintiles, using only the 30% threshold, indicates a higher concentration of households with catastrophic health expenses in the lowest income quintile (Figure 11). Furthermore, the share of households facing catastrophic health expenditures increased more in the lowest income quintile during the COVID-19 pandemic, compared to other income quintiles. Figure 11. Percentage share of households with catastrophic health expenditure by income quintile, México, 2016, 2018 and 2020* 5.76% 3.73% 3.84% 3.60% 3.62% 3.44% 2.99% 2.08% 2.13% 1.57% 1.75% 1.52% 1.35% 1.46% 1.50% I II III IV V 2016 2018 2020 * Households with expenditures on health greater than 30% of disposable income. Source: Own calculations with ENIGH data using the same conceptual framework as WHO (2005) and CONEVAL. calculated by INEGI in the survey database vis a vis constructing a monetary consumption variable, which excludes some spending items such as: basic education, communications, to name a few items. 25 Figures 12 and 13 show the composition of OOP and catastrophic health expenditures by income quintile, respectively. This analysis was performed to further understand the drivers of OOP and catastrophic expenditures and identify differences by income level. Both figures show that expenditure on medicines represents the highest driver, particularly on the lowest income quintiles, followed by ambulatory care. Hospitalization becomes a relevant driver of catastrophic health expenditures as income levels increase. A possible partial explanation to the low share of hospitalization as a driver of catastrophic health expenditures in the lowest income decile could be potential unmet needs (i.e., it is not that these households do not face financial risk in relation to hospital care, but simply they cannot even access these services in the private sector). Annex 5 presents these findings for the 10% and 25% thresholds. Figure 12. Composition of households’ out-of-pocket payments on health in Mexico by income quintile, 2016-2018* 74% 70% 67% 64% 56% 27% 22% 23% 17% 20% 11% 5% 5% 6% 7% 2% 2% 2% 3% 2% 3% 2% 3% 3% 3% I II III IV V Medicines Ambulatory Hospitalization Maternity Other* * Average weighted by total households in the 2016 and 2018 surveys. ** Expenses on orthopedic devices and alternative medicine. Source: Own calculations with ENIGH data using the same conceptual framework as WHO (2005) and CONEVAL. Figure 13. Composition of households’ catastrophic health expenditure by income quintile, 2016- 2018*, ** 52% 42% 32% 31% 27% 28% 29% 28% 27% 24%24% 23% 21% 15% 14% 13% 11% 10% 8% 7% 9% 7% 7% 6% 5% I II III IV V Medicines Ambulatory Hospitalization Maternity Other*** * Households with expenditures on health greater than 30% of disposable income. **Average weighted by total households in the 2016 and 2018 surveys. *** Expenses on orthopedic devices and alternative medicine. Source: Own calculations with ENIGH data using the same conceptual framework as WHO (2005) and CONEVAL. 26 The results shown above not only document the persistence of inequities in health financing in Mexico but suggest that any effort to increase public funding to reduce the share of households facing catastrophic expenditures needs to be targeted to the lowest income groups and the main drivers of such expenditures. The result that the lowest income groups face greater financial risk is not new and the key role of OOP expenditure on medicines has been widely documented. However, under a sufficiency lens, the quantification of the necessary additional public resources to reduce catastrophic spending in this population is not straightforward. One additional dollar spent from public sources will not necessarily translate into a reduction of one dollar in OOP payments with the potential to become catastrophic expenditure. Moreover, the link between a financial protection approach to sufficiency and medium-term sustainability should also need to consider whether OOP and catastrophic expenses prove to affect disproportionately different population groups, for example, those lacking access to social security. Table 2 displays the proportion of households with catastrophic health expenses based on their social security affiliation between the years 2016 and 2020. It is important to exercise caution when interpreting the results for the year 2020, as it was an atypical year due to the Covid- 19 pandemic. The analysis considers the catastrophic expenditure threshold of 30%. Results indicate there is a significant gap in financial protection for households in Mexico between those with and those without social security. Table 2. Proportion of households with catastrophic health expenses by social security coverage, Mexico, 2016, 2018 and 2020 Access to social security 2016 2018 2020 HCHE % HCHE % HCHE % With social security 239,445 35% 259,904 36% 570,074 41% Without social security 451,032 65% 452,486 64% 825,555 59% All HCHE 690,477 100% 712,390 100% 1,395,629 100% HCHE: Households with catastrophic health expenditures. Households with social security include households with at least one household member aged 12 or older who is enrolled or receives medical care from any of the following health institutions: IMSS, ISSSTE, state-level ISSSTE, Pemex, Sedena, and/or Semar. The rest of the households are considered to have no access to social security. Source: Own calculations with ENIGH data using the same conceptual framework as WHO (2005) and CONEVAL. Differences in OOP and catastrophic expenses between those covered by social security and those without access to social security benefits, could be related to different coverage of interventions across health subsystems or publicly funded insurance schemes. Therefore, when trying to close the financial gap between insurance schemes/subsystems or population groups, it is relevant to consider not only the additional public resources required as such, but to explicitly address differential coverage policies. This would imply, using additional resources over time to fund interventions and services in such a way that benefits covered -and effectively delivered- are equalized across subsystems. 2) Sustainability Under a medium-term perspective, threats such as ageing, the epidemiological transition or an increase in workforce informality will influence the demand and the availability of resources for 27 social health insurance schemes. To the extent that some of these threats, like ageing or the epidemiological transition, are already expected to happen they can be incorporated to forecasted health needs and into the planning of institutional response. Sustainability is analyzed considering the expected changes in target spending over a 10-year period. Two key issues are considered to this end: a) In addition to quantifying the existing sufficiency gap between different populations groups, as illustrated in the sufficiency subsection, it is necessary to calculate how much additional resources are needed not only to give the uninsured a similar services coverage to the one received by the insured by IMSS, but to maintain that coverage in the long term. b) Whether IMSS’ current and future income is enough to cover its current and future expenses. Sufficiency analysis suggests that it would cost between 2,101 to 2,292 million dollars to offer the uninsured a coverage of services like those available for IMSS’ beneficiaries, just for one year. The yearly gap between these two groups of the population was estimated to be 38 dollars per person as of 2019. But equalizing coverages only makes sense if permanently maintaining homogeneous coverages is a policy objective. Therefore, the relevant cost to anticipate is not the cost of equalizing coverages for just one year, but the total expected cost of that measure in the medium to long-run. This would imply not only injecting resources into the health system to equalize per capita budget allocations, but also to align interventions and service coverage across subsystems. This would be necessary not only to reduce the financial gap over time, but also to help attaining financial protection targets and reducing the higher odds for the uninsured and the poorest households to face catastrophic health expenses. IMSS is legally bound to report every year the state of its financial situation and associated risks for the short and long run, hence a projection of its expected spending is readily available. By combining this information with a projection for the number of IMSS’ beneficiaries, it is possible to obtain a projection for the future expected per capita spending in medical services available to IMSS’ beneficiaries.11 The resulting projection is shown in Figure 14 in 5-year segments. IMSS’ per capita spending is expected to grow 15% in real terms between 2019 and 2050. Since IMSS’ per capita spending is also the benchmark level of health spending used in this analysis, the per capita spending for the uninsured observed in 2019 is used to calculate the expected gap with respect to the per capita spending projection for IMSS’ beneficiaries, for every year until 2050. 11 The effect of demographic ageing and the epidemiological transition are implicitly embedded in IMSS’ expenditure projections by taking into account the projected increases in the demand for medical services associated to an increased share of older/sicker beneficiaries in the total demand for health care. The resulting effect does not reflect changes in interventions/services covered but changes in the quantity demanded of currently provided interventions/services. 28 Figure 14. Per capita health spending for the population without social security and IMSS beneficiaries, 1999-2021 and projected IMSS 2022-2050 (USD, constant 100 = 2013) Source: Per capita expenditure for the uninsured was calculated with data from SICUENTAS. DGIS. Ministry of Health. Last update: January 19th, 2023. http://www.dgis.salud.gob.mx/contenidos/basesdedatos/da_sicuentas_gobmx.html Per capita expenditure for IMSS beneficiaries was calculated using data from Memoria Estadística del IMSS, 2021. Total spending for Seguro de Enfermedades y Maternidad (SEM) and Seguro de Salud para la Familia (SSFAM) was used after subtracting the following spending accounts: financial interest paid, monetary benefits paid, compensatory tax rebates and reserve provisions for future spending. After 2013, some modifications to accounting processes were enacted, hence some slight impact on comparability is to be expected between before and after 2013 periods. Potential beneficiaries are used as a proxy to population with access to IMSS in order to account for those individuals with legal rights for accessing IMSS, even if they are not actively using IMSS’ health services. For IMSS’ projections beginning in 2022, expected expenditures data for SEM was extracted from Informe al Ejecutivo Federal y al Congreso de la Unión Sobre la Situación Financiera y los Riesgos del Instituto Mexicano del Seguro Social 2021-2022, whereas IMSS’ beneficiaries were assumed to grow at an average yearly increase rate of 2.35%. Expenditures of SSFAM were assumed to grow by the same rate than SEM, since the report does not include detailed projections for SSFAM. This exercise results in a maximum per capita spending gap of 77 dollars by 2040, which will reduce to 70 dollars per person by 2050. The resulting accumulated gap for the period between 2019 and 2050 is estimated in 113,602 million dollars if 55 million individuals are to be equalized to IMSS current coverage or 123,930 million dollars if the number of uninsured approaches 60 million individuals. Regarding the second issue about whether IMSS’ current and future income is enough to cover its current and future expenses to provide medical services, the short answer is no. IMSS financial report to the Congress for the period 2021-2022 estimates an accumulated deficit of 166,607 29 million dollars for the period 2022-2051 when considering its two main health insurances (SEM and SSFAM).12 According to the report, this would be equivalent to 12.1% of GDP in 2022.13 In sum, Mexico would require spending between 113,602 and 123,930 million dollars for the next three decades, in addition to current levels of health spending, to move the uninsured toward a level of coverage like the one currently available for IMSS’ beneficiaries. In addition, IMSS will require additional resources of about 166,607 million dollars for the next three decades to finance its projected health spending and sustain the current level of coverage for its beneficiaries. Alongside this financial gap lies the structural difference in the covered set of interventions and services between subsystems. Securing additional resources to close the financial gap between the insured and the uninsured would be a first step to explicitly address differences in interventions/service coverage among population groups. At the same time, if benefits provided were to be expanded over time to better address the population health needs, the financial cost of bridging the gap between the insured and the uninsured would be even larger. These inferences depend on the robustness or limitations of IMSS’ valuation of its future revenues and expenses. For this reason, it is useful to describe in more detail the main elements and assumptions underlying IMSS’ financial balance projections. IMSS’ financial projections are not derived from an economic forecasting model, much less from a dynamic economic forecasting model. Therefore, it is important to conceive IMSS’ valuation model as an actuarial model. In consequence, the main drivers in its revenue and expenses projections are the demographic parameters of IMSS’ beneficiary population. For example, as retired workers covered by IMSS expand both in number and as a percentage of total beneficiaries, if other things remain constant, expenses are expected to grow more than revenues, as retirees require more health services because of their age. In addition, they no longer receive salaries and hence they do not add to IMSS’ main source of revenue: a payroll tax. IMSS’ model considers two main sets of possible risks or threats to the financial balance of its medical services coverage (Seguro de Enfermedades y Maternidad): a) A decrease in revenues collected from a payroll tax to salaried work either because of lower formal employment or because of an adverse economic environment. b) An increase in life expectancy of IMSS’ beneficiaries which would require to provide more costly services for an older population for a longer period. A set of demographic and financial assumptions are key parameters in IMSS’ valuation model. Table 3 summarizes some of these parameters in more detail. 12 IMSS mainly provides health services to registered workers and their families through the Sickness and Maternity Insurance (Seguro de Enfermedades y Maternidad, SEM), but it also runs a voluntary insurance (Seguro de Salud para la Familia, SSFAM) which represents 0.7% of the total number of enrolled workers/affiliates paying social security contributions. 13 Informe al Ejecutivo Federal y al Congreso de la Unión Sobre la Situación Financiera y los Riesgos del Instituto Mexicano del Seguro Social 2021-2022. 30 Table 3. Main assumptions for revenue and expenses forecasting for the period 2022-2051. Base scenario for Sickness and Maternity Insurance (SEM) Variable Assumed value Average yearly growth rate of insured population 2.35% (This applies only to the 30-year forecast) Average number of days worked per worker within a year 336 days Average age for first registry at IMSS for general workers 25 years Average age for first registry at IMSS for IMSS workers 27 years Average yearly growth rate of Average Daily Salary 0.48% Average yearly growth rate of the cost of medical services 1.4% Survival probabilities by age Life tables issued by the Comisión Nacional de Seguros y Fianzas (CNSF) Source: Informe al Ejecutivo Federal y al Congreso de la Unión Sobre la Situación Financiera y los Riesgos del Instituto Mexicano del Seguro Social 2021-2022. IMSS’ valuation of current and future financial sufficiency seems to be a very complete actuarial exercise. Nevertheless, the forecasting model could be enriched by considering some elements of potential systemic change that could impact IMSS’ revenue-spending balance in the near future. For example, the current model used by IMSS only considers inertial growth in medical services spending, without considering financial pressures arising from the need to rapidly replace ageing medical equipment or from rapid technological change that could result in potentially better therapies at a higher cost. Another example of systemic change that could be considered in future exercises relates to a potential permanent shift of workers and businesses from informality to a formal market. This could represent increased revenues buy whether this could improve or damage IMSS’ financial sustainability in the long term depends on the demographic profile and health needs of the population and whether these can be covered under the current contribution structure. Also, with ongoing discussions about the potential transfer of some manufacturing processes from China to Mexico in the short term, or “nearshoring�, it would also be useful to consider some scenarios about the possible impact on IMSS’ finances. The potential impact from an increased contributing base through increased labor force enrollment is not completely clear as additional revenue would also be accompanied by additional medical services required by newly insured workers. Considering raising revenues will be relevant for a discussion on sustainability, especially in terms of the actual fiscal space in a country like Mexico, and the feasibility to embark on future fiscal reforms to increase the government margin to attain health system sustainability in the medium to long terms. Between 2003 and 2020, general government fiscal revenues as a share of GDP remained, on average, at 41% of the equivalent share for OECD countries. Even though IMSS, currently and in the past, has made it clear that a solution to IMSS long-term financial sustainability requires a rebalancing of the payroll tax it charges for the set of insurance benefits it provides to formal sector workers, this would not close the health spending gap between IMSS’ beneficiaries and the rest of the population. The latter would most probably require additional general taxation resources devoted to financing health services for the population with no access to social security. Alternatives for increasing tax revenues can be summarized as follows although they are perceived as limited: 31 a) Income or value added tax increase in marginal rates in the short or medium terms (very low feasibility because of economic and political context). b) Income and value added tax base increase derived from growth in economic activity (low feasibility in the short term, uncertain in the medium term as Mexican economic growth has been relatively low even before COVID-19 pandemic). c) Income tax base increase derived from converting informal sector workers and businesses into the formal market (perhaps relatively feasible and this has been the dominant strategy used during the last ten years for increasing government revenues). d) Already available general taxation resources moving out from financing other sectors and into financing the health sector (low feasibility in the short term). e) Considering new health taxes (very low feasibility in the short and medium terms as historic precedent in Mexico for labeled or “fixed destination� taxes is scarce or even null, with the exception of the payroll tax that finances social security). In Mexico, medium-term projections (5-year horizon) are developed at the macro level to assess public finances and a medium-term budgetary capacity. However, the main priority when determining sector-specific budgets, in line with expected revenues, is budget definitions for the following year. No medium- or longer-term projections seem to guide allocations to specific sectors, such as health, over time. Usually, it is the specific areas or departments in charge of program implementation or service delivery that estimate their budget and projected needs over time. Hence, an overarching medium to long-term financial planning of the overall health sector is lacking. Setting an overarching financial goal for the health sector in the medium to long-term would be desirable. However, any goal would need to be assessed considering fiscal constraints and the balance required in public finances. Given the health system fragmentation, such responsibility would necessarily involve the lead of the Ministry of Finance and a coordinated approach with the main health subsystems. 3) Resilience The analysis of sufficiency in the short term - resilience - is particularly relevant in the face of unexpected shocks. In a context where there is already financial insufficiency, unexpected shocks can severely affect the delivery capacity of the health system. This was clearly the case of the recent COVID-19 pandemic in many countries, including Mexico. The COVID-19 experience has brought into the spotlight the relevance of the health system’s capacity to secure sufficient resource availability to deal with the consequences of an unexpected shock, and to enable an agile and an adequate access to and use of resources at all levels of government. The first six to nine months of the COVID-19 pandemic meant a shock on public finances accompanied by an increase in the demand for emergency and intensive care and thus in health care spending. How quickly the health financing system responded to a greater services demand is an indicator of the resilience of the system. When the pandemic hit Mexico during the first quarter of 2020, and as hospitalizations started to increase significantly, it became evident that the response to the pandemic required additional resources, not only to support the public health response through early epidemiologic surveillance 32 and testing, and contact tracing of initial cases, but to strengthen the response capacity of medical care services through contracting of temporary personnel, procuring health inputs, and later to procure COVID-19 vaccines. Financial resilience in such context involves: i) the capacity and timeliness of allocating additional resources, ii) the flexibility, feasibility, and timeliness to re- allocate existing resources to different uses, and iii) the capacity to actually spend those resources when needed. During 2020, additional federal allocations to health were prioritized, compared to the rest of the government (see Figure 15). This is in line with international evidence showing that governmental health spending increased more than expenditure for the general government from 2019 to 2020 (WHO 2022). Figure 15. Annual real growth rate: total federal government expenditure and federal health expenditure in Mexico, 2012-2022 (percentage) 15% 10% 5% 0% -5% -10% 2013/2012 2014/2013 2015/2014 2016/2015 2017/2016 2018/2017 2019/2018 2020/2019 2021/2020 2022/2021 Federal health expenditure Total Federal Government expenditure (excl. health) 2023/2022 Source: Own elaboration with data from Cuenta Pública SHCP – 2012-2021 and PEF 2022 and 2023. Variations in federal health budgets throughout the year provide another way to look at the extent to which additional resources had to be unexpectedly allocated to face the pandemic. Figure 16. compares resources initially approved by Congress and those actually spent by the end of each year for years 2012 to 2021.14 Both in 2020 and 2021 budgetary over-spent amounted to 3.2% and 3.6%, respectively, of the initially approved federal budget in health, while in 2019 there was an underspent. Variations between spent resources and initial allocations are expected, yet figures shown for the pandemic years suggest a greater over-spent compared to the most recent years. Increased allocations and reallocations were possible despite existing regulations that routinely tend to limit major budget increases relative to the budget approved by Congress as well 14 In Mexico, an annual federal income budget -including expected revenues from the oil industry as well as from fiscal revenues and a ceiling for the federal government debt capacity-, is proposed by the Ministry of Finance and then discussed, modified, and approved by Congress in October of the prior year. This is followed by the Congress approval of the federal annual budget in November. 33 as the margin to reallocate budgets within budget lines or entities. For example, budget cuts for cross-cut programmes such as gender equality and science technology and innovation which run through various sectors and budget areas and entities are no allowed. The lack of explicit rules and a mechanism to enable financial decisions implies a risk for those making such decisions, since they are left vulnerable to subsequent audits. Figure 16. Evolution of annual variations between the federal health budget initially approved and the actual expenditure in Mexico, 2012 – 2021 (%) Source: Own elaboration with data from Cuenta Pública SHCP – 2012 to 2021. This is shown again in Figure 17, where it can also be seen that in 2020 and 2021, the actual spent is only slightly lower than the budget modified throughout the year. Budget modifications are a regular mechanism whereby, during the year, the Ministry of Finance identifies potential areas of under or over expenditure, and reallocates resources within areas or sectors, or allocates additional resources. In this case, the figures suggest that the overall underspent in both years was relatively small. This would indicate that by the end of both years, there was no limitation on using the additional resources allocated to the health sector. 34 Figure 17. Evolution of yearly approved, modified, and spent federal health budget in Mexico, 2020 and 2021 (USD billions - 2021) Source: Own elaboration with data from Cuenta Pública SHCP – 2020 and 2021. When looking at the three main subsystems: IMSS, ISSSTE and the population without access to social security, differences between the modified and actually spent budget also show a minimal underspent by the end of each year (Figure 18). In IMSS’ case it is noted that in 2020, there was a budget reduction relative to the originally approved budget, while this was also the case for ISSSTE in 2021. During the first year of the pandemic the demand for routine care at IMSS reduced significantly, and this was a factor explaining why IMSS managed to reallocate resources to respond to the pandemic without increasing their total budget or having to drawing resources from IMSS’ actuarial reserves. Figure 18. Evolution of yearly approved, modified, and spent federal health budget in Mexico, 2020 and 2021 by main subsystem (USD billions - 2021) 35 Source: Own elaboration with data from Cuenta Pública SHCP – 2020 and 2021. In IMSS case, for example, the unexpected effect of the pandemic meant required the contracting of temporary workers. Around 30 thousand personnel were temporarily hired in 2020 to compensate for an increased demand of acute and emergencies hospital care, especially in ad hoc temporary facilities set up to treat COVID-19 patients, as well as absenteeism and sickness leave among IMSS personnel. IMSS financial autonomy enabled a faster budgetary reallocation between budget lines, for example to increase the budget on human resources. This only required IMSS’ Council approval. One of the lessons learned in IMSS’ context is the relevance of securing enough cash flow to pay providers in time. Improvements in continuous cash flow measurement were made to this end. In addition, it became clear the need to revisit some reserves and alternatives to increase their funding, such as the Reserva Fiduciaria (RGFA) which under short term shocks can be used to provide funding for different insurance areas within IMSS (not only health). Looking at the total public budget for health, temporary underspends occurred throughout the year. Figure 19 shows cumulative quarterly differences between the federal budget initially allocated to health and the actual expenditure for 2020 and 2021. As shown, during quarters 2 and 3, there was a large underspent in 2020, while by the end of the year, spent resources went beyond the originally approved budget. This could suggest potential limitations to the reallocation of resources to face the pandemic in the middle of the year, followed by a prompter use of allocated resources by the end of the year (for example through the procurement of vaccines or the contracting of temporary workers). Under normal times, budget modification approvals may take one month at a very minimum. During COVID, there were ad hoc efforts to speed routine approval processes. Figure 19. Evolution of quarterly nominal differences between actual expenditure and initially allocated federal health budget in Mexico, 2020 and 2021 (USD millions - 2021) 2020 2021 2020 2021 2020 2021 2020 2021 Source: Own elaboration with data from SHCP Quarterly reports (Informes sobre la Situación Económica, las Finanzas Públicas y la Deuda Pública) – 2020 and 2021. 36 From the figures shown above, it is clear that a full picture of the financial movements during the pandemic requires a much deeper analysis by budget line. Yet, these analyses suggest that, overall, during 2020 and 2021 there was capacity to provide additional resources to the health system and to actually spend them in spite of regulations and constraints on public finance. From a public finance perspective, the central challenge during the pandemic, especially during its first year was how to face unexpected reductions in government revenue accompanied by increased spending needs. Various constraints were in place: budget and debt ceilings alongside the lack of emergency funds. The strategy in place during the COVID-19 pandemic also made use of some resources available in the Catastrophic Expenditures Fund, but notably it also included the use of resources drawn from countercyclical stabilization funds to compensate for reduced revenues through the Income Budget Stabilization Fund (Fondo de Estabilización de Ingresos Presupuestarios or FEIP by its Spanish acronym) and the Federal Entity Income Stabilization Fund (Fondo de Estabilización de los Ingresos de las Entidades Federativas, or FEIEF by its Spanish acronym), as detailed in the next subsection, and in parallel revise the federal budget and reallocate as much resources as possible across sectors and within sectors. The role of income stabilization funds during the COVID-19 pandemic Reduced governmental revenues potentially affecting budget allocations to various key activities can occur during economic crises but, as the COVID-19 pandemic has shown, they can also occur because of other shocks affecting or disrupting economic activity. Stabilization funds are counter-cyclical mechanisms that allow governments to accumulate resources from different fiscal years and different revenue sources and use them in case revenues fall in the short run. The most relevant funds of this type in Mexico are the FEIP and the FEIEF (CIEP 2023). a) The Income Budget Stabilization Fund The Income Budget Stabilization Fund or FEIP was created in 2001 with the original purpose of mitigating the effects on public finances of changes in public revenue caused by abrupt fluctuations in international oil prices. In 2014, legal modifications were made to expand its funding sources so that additional resources to those included in the Federal Income Law (LIF by its acronym in Spanish - a yearly federal revenue planning and budgeting exercise) would be allocated to the FEIP (up to 65% after several other uses had been covered) to build-up a reserve in case of a decrease in Federal Government revenues or in the Participable Federal Revenue (Recaudación Federal Participable or RFP by its Spanish acronym) (CIEP 2023). b) The Federal Entity Income Stabilization Fund Mexico is a federal republic comprised by 32 federative entities or states. Transfers from the Federal Government to the states play a crucial role in funding as states have limited fiscal autonomy – for example, in 2020 the states generated only 11% of their income, while 82% came from the Federation and an additional 7% was obtained through public debt (IMCO 2022). A major 37 source of states’ income coming from the Federal government are federal participations (participaciones in Spanish) (HR Ratings 2022; Cámara de Diputados SIA 2023). Federal participations to the states are regulated through the Fiscal Coordination Law15 – which surmounts to an agreement between the states and the Federal Government through which the latter collects the most important taxes and in return the states receive a percentage of the collected federal revenue. Federal participations are drawn from the Participable Federal Revenue, which is the global purse of tax revenues collected by the Federal Government on behalf of the states. Federal participations are not earmarked but used freely in the production of any goods and services, as the states consider necessary). Federal participations are dependent on the size of the RFP and thus on federal tax revenues (Cámara de Diputados SIA 2023). The Federal Entity Income Stabilization Fund or FEIEF was created in 2006 to provide more certainty to budgeting and financial planning, in the short term, at the state level via a counter- cyclical compensation mechanism for potential reductions in federal participations (HR Ratings 2022). The distribution of its resources helps to offset budgetary imbalances in subnational public finances generated by a reduction of the RFP and the funds linked to it (SHCP 2020). Additional resources to those included in the LIF can be allocated to the FEIEF (up to 25% after several other uses had been covered) to build reserves (HR Ratings 2022). Overall, both funds react on the expected versus observed behavior of diverse macroeconomic variables and a greater or lesser amount of federal revenue collection (whether tax revenues or oil revenues). The funds cover the differences between the observed federal income or revenue derived from the actual behavior of economic activity and those budgeted (and approved by Congress) at the beginning of the year in the LIF (SHCP 2020). c) The COVID-19 pandemic and stabilization funds: lessons learned. Due to the economic crisis generated by the COVID-19 pandemic, the RFP was 8.8% below what was estimated in the LIF in 2020 - slightly higher than the registered contraction of the national GDP in the same year (-8.1%). Furthermore, this difference in the RFP was the largest recorded since 2006 (HR Ratings 2022). Hence, the Mexican government was forced to use most of both the reserves and the overall balance of both funds, as seen in Figure 20. The balance of both funds went from the highest recorded in 2018, to approximately the lowest in the last decade (2020 in the case of FEIP and 2021 in the case of FEIEF) (CIEP 2023; HR Ratings 2022). Expenditure from the FEIP in 2020 amounted to over 11 billion USD (214,376 million pesos) – close to depleting it as the fund’s balance at the end of the year was only 488 million USD (CIEP 2023). Moreover, the FEIEF was especially relevant during this time, as states faced a limited fiscal capacity to respond at the local level - thus, to guarantee the solvency of the Fund, a securitization process was used, with which 70 million pesos were injected to be paid with the recurring income of the FEIEF until 2035 (HR Ratings 2022; México Evalúa 2022). 15 Other federalized or decentralized budget allocations to the states (and also to municipalities) are the so-called federal contributions (aportaciones in Spanish) which are also regulated by this law. These are allocations transferred due to the decentralization of government functions to states and hence are earmarked for health, educations, and other areas (Cámara de Diputados SIA 2023). 38 Figure 20. Evolution of FEIP and FEIEF balances, 2016 – 2022 (USD million – 2022) Source: Own elaboration with data from (HR Ratings 2022) and (CIEP 2023). Although there have been recent increases to the Funds, they are still very far from recovering the levels seen before the COVID-19 pandemic. The Funds fulfilled their purpose. During the COVID-19 pandemic, both Funds showed their ability to compensate the federal government and states, for fiscal imbalances and guaranteeing previously approved budgets in the short run, even in spite of a decrease in income and revenue collection (SHCP 2020). Nonetheless, currently the Funds are at their lowest level in years and require replenishing in order to prepare for future economic downturns. Several relevant takeaways were identified during the usage of the Funds in the COVID-19 pandemic which will serve to improve the functioning of these Funds in the future. Some of the most relevant were: • Given the high levels of uncertainty associated with the early stages of the pandemic, the Ministry of Finance established modifications so FEIEF resources could be transferred to the federal entities on a monthly basis, instead of each quarter. This provided a steadier flow of resources to the states and improved the response capacity of the Fund. • Given the depletion of the FEIP, the Ministry of Finance introduced regulatory reforms to expand the sources of recurrent funding it already receives, adding savings derived from debt service or financial assets issued by the Federal Government. These reforms are still awaiting final Congress approval, but they seek to capitalize this fund more quickly in the aftermath of its use during an economic downturn (SHCP 2022). Furthermore, the need to expand the response capacity of the Funds to events beyond fluctuations in Federal income and revenue was perceived as fundamental by the Ministry of 39 Finance. The mechanisms that legally trigger the possibility of using the resources in the Funds, currently do not include sanitary emergencies, pandemics, or other health risks – they only incorporate imbalances in expected vs. observed income or revenue. The Ministry of Finance is exploring new reforms to allow for a more dynamic and specific use of the Funds, including a more proactive (spending once an emergency has been declared) instead of reactive (responding to a fall in income revenue) stance. Some reform options have been explored in more detail in proposals presented by the National Institute of Public Health to the Ministry of Health to support the development of a Pandemic Preparedness and Response Plan (see Box 3). Box 3. A proposal for the creation of a legal vehicle to channel budget for future pandemics – the Program for Preparedness and Response to Pandemic Risks As part of the recent proposal developed within the Mexican National Public Health Institute (in Spanish, Instituto Nacional de Salud Pública – INSP) in the document Proposals to support Mexico's preparation and response to a pandemic health emergency, a section on financing in a pandemic context was included. This proposal acknowledges that financing is an issue that goes beyond the scope of pandemic risk preparedness and response, as it also constitutes a risk to the viability of public finances, as has been recently seen with the COVID-19 pandemic. Furthermore, the proposal distinguishes between the recurrent financing required annually to pursue preparation and the extraordinary financing required to face a pandemic and develops explicit proposals for mechanisms for both financing concepts and timelines. The main components of the proposal from the INSP centre around: • The creation of a budget program – the Program for Preparedness and Response to Pandemic Risks (in Spanish, Programa para la Preparación y Respuesta ante Riesgos Pandémicos - PPRRP) – within the Federal Budget and Fiscal Responsibility Law (in Spanish, Ley Federal de Presupuesto y Responsabilidad Hacendaria - LFPRH) which would allow for recurrent yearly budgetary allocations and recognize the risk of a pandemic as a relevant risk for public finances. The Ministry of Health would be responsible for the design and implementation of the PPRRP , as well as its management, coordinating the federal and local entities involved. • Furthermore, as part of pandemic response extraordinary funding mechanisms , a process to allow the use of FEIP resources is defined. As part of this process, the participation of officials from various government agencies and independent experts, as part of a committee to certify the existence of a pandemic and quantify the expenses to be exercised, is included. This would allow for the emission of a decree for rapid provision of FEIP resources and, at the same time, comply with the criteria of objectivity and transparency. The document Proposals to support Mexico's preparation and response to a pandemic health emergency, including the explicit changes required in different legislations to implement these modifications, has been delivered to the Ministry of Health as a proposal for further review and consideration, in the context of developing and implementing an official federal government response strategy for future pandemics. Sources: Instituto Nacional de Salud Pública. Propuestas para apoyar la preparación y respuesta de México ante una emergencia sanitaria por pandemia . Cuernavaca, México: INSP, 2022. Moreover, from a health system perspective, how did the government managed to provide additional resources despite reduced fiscal revenues? The Ministry of Finance and the Ministry of Health had to identify areas across the federal government and within the health sector from which additional resources could be drawn or be reallocated to fund COVID-19 needs. This included for example channeling revenues from areas less subject to controls for resource 40 reallocation, such as revenues from mining activities and revenues from the sale of confiscated assets of illicit origin, which are administrated by the Instituto para Devolver al Pueblo lo Robado (INDEP by its Spanish acronym), a decentralized public agency of the Federal Public Administration with legal personality and an independent budget. This was particularly relevant in 2020 when the annual budget had already been approved, while in 2021 the Ministry of Finance and Congress had relatively more margin to plan and approve an increase in the health budget. In terms of the capacity to use resources once they became available, during the COVID-19 pandemic, the Mexican government responded through different ad hoc policies and mechanisms, including expediting purchasing and procurement processes through special decrees that enabled the federal government to react and respond despite of some regulatory rigidities. In March 2020, the General Health Council16 (CSG for its acronym in Spanish) officially recognized the epidemic caused by COVID-19, as a serious disease of priority attention, thus enabling Mexican authorities to implement key prevention and control measures (Consejo de Salubridad General 2020a). This was immediately followed by an official health emergency declaration which designated the Secretariat of Health as responsible for determining all the necessary actions to respond to the emergency (Consejo de Salubridad General 2020b). Further administrative decrees enhanced the response, the composition of the CSG and extended the emergency declaration, to enable the Mexican government to respond the pandemic. In line with the latter, in March 2020, the President issued a decree specifying various extraordinary actions relating to sanitary policy. These included, but were not limited to, extraordinary actions enabling: i) the acquisition of all goods and services (nationally or internationally) necessary to deal with to the contingency, without the need to carry out the traditional public bidding procedure; and ii) the importing and authorization of importing goods, without the need to exhaust any administrative procedure (Presidencia de la República 2020). The extraordinary actions described above, relating to the acquisition and importation of goods and services, were established in more detail through an administrative decree issued by the Secretariat of Health in April 2020 (Secretaría de Salud, 2020). It is important to stress that these mechanisms were extraordinary – far from the norm when it comes to purchasing and procurement processes in the public sector in Mexico, as specific and sometimes even cumbersome processes, are usually in place. A limitation of the above mechanisms has been the way in which multiple decrees and administrative measures have been set forth. There is a piecemeal of published agreements and regulations. After entering the third year of the pandemic, there is a clear opportunity to recap and embed in a more orderly and systematic way all the regulations brought about during the pandemic to incorporate rules regarding the availability and allocation and use of resources into the existing regulatory framework and in preparation for future contingencies, such as pandemics or other shocks. Incorporating these flexibilities in exceptional or emergency cases is a clear area of opportunity. Another key aspect raised during the pandemic is the fact that public hospitals had to treat patients regardless of their institutional affiliation. This meant for example that IMSS had to treat non- beneficiaries in their units. During the emergency this was allowed in practice but when the time 16 The General Health Council (CSG) is a Constitutional entity which is the maximum health authority in the country, and is in charge of dictating policies in pandemics, tobacco and other dangerous substances. The CSG is presided by the Secretary of Health and has representation of public health institutions. It is run by a secretary appointed directly by the President. 41 came to make cross-payments among states and public institutions, there was a lack of agreement on the tariffs to be paid, detailed information on cases treated in medical units to inform and sustain payments, and compliance mechanisms to guarantee payments from the states to federal institutions. Securing operational mechanisms in the future to enable cross-service delivery and financial compensation under emergency cases is another key area of opportunity in contexts of health system fragmentation. Especially considering that under an emergency traditional referral and counter referral mechanisms may not be apt to channel patients across institutions and levels of care. During the COVID-19 pandemic, patients did not arrive to demand care through the ordinary envisaged channels for emergency care, such as the Medical Emergencies Regulation Centers (CRUM), but they just arrived at the emergency door without previous registration of their emergency. The COVID-19 experience also provides insights on the importance of a continuous review of decisions implying resource allocation. Information regarding alternatives to deal with the pandemic changed over time. Initial evidence about the main routes of transmission or treatments’ effectiveness changed significantly as the pandemic evolved. Therefore, any mechanism to finance an unexpected shock, should consider enough flexibility to continuously reassess allocations and resource use. This would allow to incorporate a quicker learning process throughout the unexpected shock. In sum, Mexico managed to allocate more resources to health and use them, despite a lack of mechanisms explicitly designed to face an unexpected shock in health spending. Yet, the need to incorporate an explicit mechanism to facilitate the funding, allocation, and use of resources in health under short term shocks is a clear area of opportunity. Mexico’s experience highlights the relevance of having: • Emergency funds with adequate countercyclical capitalization rules. • A wider scope of risks or contingencies to be funded through funds. • Clear rules for the sufficient and timely use of resources while not risking macroeconomic balances including debt ceilings. 4) Efficiency Efficiency was analyzed mainly through the identification of documented policies that can help or limit resource optimization in the short and medium-term. Budgetary information does not enable to perform a detailed cost analysis between health subsystems or institutions. Efficiency is considered as a mechanism whereby some shocks or threats endogenous to health policies influence expenditure. These are frequently related to strategic pooling and strategic purchasing within the health system. On a wider national economy level, the current administration has stressed the relevance of austerity and fighting corruption as a way to enhance efficiency, and moreover as drivers of fiscal policy. The negative role of corruption in previous public administrations has not only been emphasized but pointed as a relevant inhibitor of economic growth. According to the administration, corruption has severely hampered the ability of Mexican institutions, including those in the health system, to perform their legal roles and meet the needs of the population, and to positively influence the development of the country (Presidencia de la República 2019). Hence, it is claimed that the fight against corruption should yield results in efficiency through savings, although there are no known formal analyses of the outcomes of this overarching policy. A more 42 detailed assessment comparing the outcomes resulting from various policies intended to fulfill this aim would be required to fully assert their impact on efficiency. A specific efficiency-based health policy, currently under development, that has been prioritized during the current administration is a coordinated exchange of health services between public health providers: mainly IMSS, Pemex, ISSSTE, the Ministry of Health through the National Institutes of Health and other Federal and High-Specialty Regional Hospitals, and some State Ministries of Health. This federal government program aims to provide users, regardless of their employment status, medical care based on the optimal use of the installed capacity in the aforementioned institutions, with respect to a specific package of services (Secretaría de Salud 2023). This is in line with some of the National Health Sector Program strategies, including giving priority to the contracting of inter-institutional services, within the public sector, on the basis of mutually accepted rates, and complementing said offer of services with the subrogation of private services when necessary (Secretaría de Salud 2020). Although these efforts are not new, the Ministry of Health has recently set up a National Committee for the Exchange of Health Services to follow-up on high-level agreements regarding the exchange of services, coordinate institutions and through inter-institutional approaches to facilitate and strengthen the availability of information, monitoring and compliance. These efforts have been operationally backed by the emission of a Manual of General Guidelines for the Exchange of Health Services to establish the operational-administrative criteria and standardize the processes between the institutions that allow the exchange of health care services; and a Catalog of Interventions, Treatments, Auxiliary Diagnostic Services and Rates for the exchange of health services, that specifies the health care treatments and interventions that can be the subject of any specific agreement between the institutions and their cost (Secretaría de Salud 2023). During the COVID-19 pandemic, care for patients which were not affiliated to social security institutions (such as IMSS) was allowed for regardless of their institutional affiliation due to the nature of the emergency. These patients were identified through referral procedures to request compensation for the expenses incurred for medical attention afterwards. Nonetheless, the compensation processes have been cumbersome and complicated due to deficient data collection during care, but also due to the difficulties to agree on tariffs to be paid, to have enough detailed information on cases treated in medical units to inform and sustain payments, as well as to the challenge to secure payments from the states to federal institutions. Setting up in the future operational mechanisms to enable cross-service delivery and financial compensation under emergency cases is a key area of opportunity in contexts of health system fragmentation. Other activities related to a more efficient use of resources, are associated to a strict monitoring of budget use and monthly progress – through digital information systems and follow-up with the responsible areas. However, monitoring strictly focuses on avoiding underspent, rearrangements of resources throughout the fiscal year, and reallocation of available monies according to pressing needs. These activities are also more focused on accounting and budget management. Nonetheless, no other specific efficiency-based health policy was identified as part of the current efforts to promote a more efficient use of resources in the health sector. Efficiency is not necessarily formally included in regulations and there are no explicit mechanisms that obligate to seek it. A mechanism to enforce efficiency in the usage of resources and that transcends fiscal years, would be an area of opportunity. There have been other prior examples of specific efficiency-based health policies being implemented in Mexico which could be useful in the future. 43 Box 4 illustrates the case of procurement policies - the experience of single-source price negotiation and collective procurement in medicines and health inputs. However, beyond specific pro-efficiency policies, Mexico’s health financing performance could benefit from a wider effort to reduce the efficiency losses arising from a fragmented health system structure. Fragmentation impinges not only on strategic pooling and strategic purchasing within the health system, but also on resource mobilization. In this regard, fragmentation is not exempted from double coverage. Households often have duplicate coverage through various publicly- funded subsystems which leads to suboptimal use of public resources since budget allocations do not follow beneficiaries. In addition, having fragmented budgets, limits the potential to pool resources and diversify financial risk, especially for high-cost interventions. Fragmentation also limits the optimal use of currently available infrastructure and human resources and hinders investment plans in the medium term. It also limits the potential for strategic purchasing of services and health inputs. Box 4. Procurement policies as a tool to promote efficiency in health spending: the experience of single-source price negotiation and collective procurement in medicines and health inputs. Pharmaceutical spending accounts for about 13% of health spending in the public subsystem. Finding ways to optimise spent in pharmaceuticals and other health inputs can lead to savings, freeing up resources for other uses and thus contributing to financial sufficiency. There are different policy options to attain efficiencies in public procurement ranging from national formularies and prescription controls to procurement mechanisms. In the Mexican public sector, prices paid for health inputs by public payers are defined through procurement processes, either bidding for multiple-source or direct price negotiation for single-source pharmaceutical products. Each public institution is responsible for purchasing/procuring medicines and health inputs to provide health care to their population of responsibility. Some social security institutions like IMSS and ISSSTE have their own institutional formularies which are used to guide medicines’ procurement and prescription. These are subsets of medicines listed in the National Compendium of Health Supplies, an explicit list of pharmaceutical and health inputs applicable throughout the public sector. Essentially, the Compendium serves as a reference and “coverage ceiling� for each public subsystem. In 2008, the Mexican government created the National Commission for the Price Negotiation of Patented Medicines and other Health Inputs (CCNPMIS for its acronym in Spanish). The Commission was in charge of carrying out the annual price negotiation process for medicines and other health supplies contained in what is currently known as the National Compendium, that had a valid patent or were considered single-source and that are subject of the direct awarding of contracts procedure (i.e. not a public tender procedure). From 2008 to 2021, it was the sole instance empowered to negotiate directly with the pharmaceutical and health inputs industry the prices of single-source medicines and other health supplies applicable for public purchasing. Figure I. Evolution of single-source price negotiation in Mexico, 2008 – 2018 44 On the other hand, the Mexican government also undertakes consolidated purchases or public tenders of pharmaceutical goods through a bidding process (traditional competitive tendering) – mostly for multiple-source products involving most publicly funded health institutions. This strategy gathers different public health providers that need to acquire the same good or input, integrating their needs into a single tendering procedure to obtain the best purchase conditions possible for the government. The responsibility for implementing the consolidated purchase procedure was originally assigned to the IMSS. According to IMSS estimates, consolidated purchases from 2013 to 2018, amounting to around 12.7 billion USD (256,719 million pesos) generated savings for approximately 1.02 billion USD (20,646 million pesos). After 2018, this responsibility has rested on several institutions, including the Ministry of Finance, the INSABI and the United Nations Office for Project Services (UNOPS), as part of a broader strategy to overhaul pre-existing procurement arrangements. Consolidated purchases brought about greater transparency and more efficiency in the public purchasing of these products. This particular example is relevant as in a context of limited public resources, mechanisms that promote efficiency in public spending are crucial to support efforts to attain sufficiency in health financing. Sources: CIEP. Eficiencia del gasto en salud: Compra consolidada de medicamentos. https://ciep.mx/eficiencia-del-gasto-en-salud-compra-consolidada-de- medicamentos/#:~:text=En%20promedio%2C%20de%202013%20a,de%207.2%25%20respecto%20a%202020 González Pier E, Barraza Lloréns M. Trabajando por la salud de la población: Propuestas de política para el sector farmacéutico. Versión para el diálogo. Ciudad de México: Funsalud. 2011. IMSS. Compra consolidada 2018-19. https://www.imss.gob.mx/compraconsolidada OECD (2018), Segundo Estudio de la OCDE sobre Contratación Pública en el Instituto Mexicano del Seguro Social (IMSS): Rediseñando las Estrategias para Mejorar el Cuidado de la Salud, Estudios de la OCDE sobre Gobernanza Pública, OECD Publishing, Paris. https://www.oecd-ilibrary.org/governance/segundo-estudio-de-la-ocde-sobre-contratacion-publica-en-el- instituto-mexicano-del-seguro-social-imss_9789264288300-es Presidencia de la República. (2008). Acuerdo por el que se crea la Comisión Coordinadora para la Negociación de Precios de Medicamentos y otros Insumos para la Salud. DOF: 26/02/2008. https://dof.gob.mx/nota_detalle.php?codigo=5030450&fecha=26/02/2008#gsc.tab=0 Public Official Reports to the Executive branch. CCNPMIS (2008-2018). https://www.gob.mx/salud/acciones-y- programas/comision-coordinadora-para-la-negociacion-de-precios-de-medicamentos-e-insumos-para-la-salud-91422 45 4. Conclusions and lessons learned. The main conclusion of this case study is that Mexico’s health system faces important challenges in relation to financial sufficiency and sustainability. In terms of resilience, Mexico has the capacity to provide and use additional resources to face unexpected short-term shocks, as the COVID-19 pandemic illustrated, yet some areas of opportunity are identified in this regard. Similarly, developing a broad pro-efficiency policy could represent an opportunity to support financial sufficiency. Given the relevance placed by the current Federal administration to provide free health services to the entire Mexican population (Presidencia de la República 2019), addressing the financial performance of the health system could support such endeavor, both in the short and medium terms. The accumulated expected gap in health financing between those with access to social security (using IMSS as a benchmark) and those uninsured amounts to 113,605 million or 123,930 million dollars between 2019 and 2050, depending on the number of uninsured individuals. Yet, this gap does not consider the potential effect of short-term shocks or medium threats to health financing such as: technological change, major shifts in the dynamic of labor markets -notably potential increases in informality-, among other potential threats. Moreover, if benefits are to be expanded over time to better address the population health needs, the financial cost of bridging the gap between the insured and the uninsured would be even larger. This study has adapted the HFSRA framework to the local context. Drawing on the results of this analysis, some recommendations/areas of opportunity to improve Mexico’s health system financing performance are summarized in Table 4. Table 4. Areas of opportunity to improve Mexico’s health system financing performance. Core concept Recommendations / Areas of opportunity Sufficiency and Analyse the potential to mobilize additional resources to close the current financial gap and sustainability address the potential effect of other threats to health financing in a more systematic and comprehensive way. The analysis of resource mobilization could consider alternatives to increase income sources such as taxation, as well as alternatives to reduce health system fragmentation and establish a uniform basis for funding the health system from general taxes. Resilience Expand the scope of existing countercyclical funds to stabilize federal and local income in face of short-term shocks and develop a national pandemic preparedness and response plan that considers explicit financial mechanisms to mobilize additional resources and secure their expedient use, including cross-delivery of health interventions under an emergency. Efficiency Develop a health sector wide strategy to explicitly exploit sources of efficiency including: • Service integration or exchange of health services between the main public health care providers. • Optimization of supply chains and procurement. • Early prevention and detection of diseases driving the increased burden of diseases and financial cost to the system (NCDs). • Strengthening primary care and improving efficiency in the hospital sector. • Improved planning of human resources and deployment of the health workforce across the health system. • Develop a long-term care policy that enables appropriate and efficient health care treatment of population groups in greatest need. 46 In line with IMF and WB notions of sustainability, this study supports the idea that in order to close the financial gap today and in the future, it will be necessary to address the prospects of raising funds. This would require the analysis of the potential mobilization of additional resources to the health sector. Even if there are conditions to start developing this analysis in the near term, putting in place measures to increase resources available for the health system and fully attaining sustainability will take longer. Yet, potential shorter-term steps that could be developed to strengthen health financing include devising a mechanism to analyze potential threats in a more systematic and comprehensive way, as well as alternatives to reduce the health system financial fragmentation. Also, exploring the use strengthening of counter-cyclical funds to support the resilience of health financing could be a more immediate action, capitalizing on the recent experience of the financial strategies to cope with the COVID-19 shock to health financing. Regarding efficiency, there are some areas where progress could be made sooner such as promoting service integration or the exchange of health services between the main public health care providers, and the optimization of supply chains and procurement. Other areas of opportunity, such as reaping the benefits of an effective strategy on early prevention and detection of NCDs, a more efficient delivery platform through strengthened primary care and efficient hospital care, and improved human resources planning and deployment, will take longer to be achieved, since these require constant actions in the medium run. In terms of the exercise of adapting the WB framework to a local context, the approach used in this case study has the following advantages: by being pragmatic, it can be more meaningful and potentially useful to authorities; in addition, it makes use of already existing information, and the analysis can be produced in a shorter time. Its main limitation is that it is only a starting point that will require further development of measurement and analysis tools, as well as institutionalization within the Ministry of Finance. Some general lessons regarding the adaptation and implementation of the framework are: 1. The four core concepts of the framework are not independent. A way to articulate them is by pivoting around sufficiency, while resilience and sustainability provide a time dimension to the analysis. The role of efficiency is instrumental to optimize resource use and thus contribute to sufficiency. This rationale provided a structure that was clearer to stakeholders and more practical to guide the analysis. 2. In a context of publicly provided health services funded through annual budgets, the analysis of sufficiency and threats needs to consider the overall government budgetary capacity. In this context, sufficiency is automatically determined by annually defined budgets and regulations limiting public sector spending capacity. Also, social security income is legally defined, thus a clearer analysis of sufficiency can be made. From the analysis of the four core concepts, the following specific lessons are identified: 1. Annual budgeting tends to be inertial and responsive to immediate or pressing health needs but does not necessarily follow a medium to long-term vision. Linking current allocations to forecasted health needs in the medium-term to achieve sustainability would require a major shift in the way in which health budgets are perceived within overall public finances. 47 2. Sufficiency targets can vary, but what is relevant is that they resonate with the country context and constraints. Moreover, targets or benchmarks should also be feasible and realistic in terms of acknowledging the country fiscal capacity (fiscal space) and the potential/feasibility of undertaking a fiscal reform. Countries could use other benchmarks depending on their priorities, health system structure, etc. 3. Different institutions have their own way to identify or consider/assess risks but there would be significant gains from a public finance perspective in developing an overarching general risk assessment across all sectors, not only health, and linking such assessment with a wider financial structure to protect public finances under unexpected reductions in revenues and increased expenditure in the short-term. 4. Linking preparedness and response plans to sanitary emergencies, including pandemics, to financial mechanisms to allow for additional resources and their timely use/allocation, as well as mechanisms to allow for flexibility in the use of existing or pre-allocated resources/budgets, is paramount to improve resilience. 5. Stabilization or counter cyclical funds are an effective mechanism to deal with unexpected shocks, but it is relevant to consider a sufficiently wide scope for risks and flexibility in their response. 48 Bibliography Abuja Declaration on HIV/AIDS, Tuberculosis, and other related Infectious Diseases. (2001). Organization of African Unity (OAU). Baum, M. A., Hodge, A., Mineshima, M. A., Badia, M. M. M., & Tapsoba, R. (2017). Can they do it all? Fiscal space in low-income countries. International Monetary Fund. Block, M. �. G., Morales, H. R., Hurtado, L. C., Balandrán, A., Méndez, E., & World Health Organization. (2020). Mexico: health system review. Cámara de Diputados. Servicio de Investigación y Análisis (SIA) – División de Economía y Comercio. Accessed on February 2023 (2023). https://www.diputados.gob.mx/sia/intranet/sia- dec-iss-07-05/anualizado/intro.htm CIEP. Los Fondos de Estabilización en México: Evolución de los recursos del FEIP. (2023). https://ciep.mx/los-fondos-de-estabilizacion-en-mexico-evolucion-de-los-recursos-del-feip/ Comisión Nacional de Protección Social en Salud. Informe de resultados 2009. Available at: http://www.transparencia.seguro- popular.gob.mx/contenidos/archivos/transparencia/planesprogramaseinformes/informes/informe _resultados_2009_v3.pdf Consejo de Salubridad General. Acuerdo por el que el Consejo de Salubridad General reconoce la epidemia de enfermedad por el virus SARS-CoV-2 (Covid-19) en México, como una enfermedad grave de atención prioritaria, así como se establecen las actividades de preparación y respuesta ante dicha epidemia. DOF 23/03/2020 (2020a). https://www.dof.gob.mx/nota_detalle.php?codigo=5590161&fecha=23/03/2020#gsc.tab=0 Consejo de Salubridad General. Acuerdo por el que se declara como emergencia sanitaria por causa de fuerza mayor, a la epidemia de enfermedad generada por el virus SARS-CoV2 (COVID-19). DOF: 30/03/2020 (2020b). https://www.dof.gob.mx/nota_detalle.php?codigo=5590745&fecha=30/03/2020#gsc.tab=0 Cylus J., Papanicolas I., Smith P.C. (2017). How to make sense of health system efficiency comparisons? Policy Brief 27. Health systems and policy analysis. European Observatory on Heath Systems and Policies/World Health Organization. Gaspar, V., Amaglobeli, M. D., Garcia-Escribano, M. M., Prady, D., & Soto, M. (2019). Fiscal policy and development: Human, social, and physical investments for the SDGs. International Monetary Fund. Giedion, U., Bitrán, R., & Tristao, I. (2014). Health benefit plans in Latin America. Spanish: planes de beneficios en salud de América Latina. Banco Interamericano de Desarrollo. HR Ratings. Credit Rating Agency. FEIEF: mecanismo de compensación de los ingresos de las entidades federativas en México. Reporte Sectorial (2022). 49 Instituto Mexicano del Seguro Social (IMSS). Comunicado de Prensa No. 378/2022. Opera en su totalidad programa IMSS-Bienestar en unidades médicas de Nayarit, Tlaxcala y Colima. Available from: https://www.imss.gob.mx/prensa/archivo/202207/378#:~:text=El%20director%20general%20del %20Instituto,este%20modelo%20de%20atenci%C3%B3n%20m%C3%A9dica Instituto Mexicano del Seguro Social (IMSS). Informe al Ejecutivo Federal y al Congreso de la Unión Sobre la Situación Financiera y los Riesgos del Instituto Mexicano del Seguro Social 2019-2020. (2020). https://www.imss.gob.mx/sites/all/statics/pdf/informes/20192020/21- InformeCompleto.pdf Instituto Mexicano del Seguro Social (IMSS). Informe al Ejecutivo Federal y al Congreso de la Unión Sobre la Situación Financiera y los Riesgos del Instituto Mexicano del Seguro Social 2021-2022. (2022). http://www.imss.gob.mx/conoce-al-imss/informe-2021-2022 Instituto Mexicano del Seguro Social (IMSS). Memoria Estadística del IMSS, 2021. http://www.imss.gob.mx/conoce-al-imss/memoria-estadistica-2021 IMCO. 82% de los ingresos estatales provienen de las transferencias federales. (2022) https://imco.org.mx/82-de-los-ingresos-estatales-provienen-de-las-transferencias-federales/ México Evalúa. Los fondos de previsión o la tragedia de Los tres cochinitos. (2022). https://www.mexicoevalua.org/los-fondos-de-prevision-o-la-tragedia-de-los-tres-cochinitos/ Organisation for Economic Co-operation and Development (2022). Health expenditure and financing indicators. Available from: https://stats.oecd.org/Index.aspx?ThemeTreeId=9 Organisation for Economic Co-operation and Development (2021), Health at a Glance 2021: OECD Indicators, OECD Publishing, Paris, https://doi.org/10.1787/ae3016b9-en. Organisation for Economic Co-operation and Development (2023), Tax revenue (indicator). doi: 10.1787/d98b8cf5-en (Accessed on 06 March 2023) Presidencia de la República. Decreto por el que se declaran acciones extraordinarias en las regiones afectadas de todo el territorio nacional en materia de salubridad general para combatir la enfermedad grave de atención prioritaria generada por el virus SARS-CoV2 (COVID-19). DOF: 27/03/2020. (2020). https://www.dof.gob.mx/nota_detalle.php?codigo=5590673&fecha=27/03/2020#gsc.tab=0 Presidencia de la República. Ley General de Salud (LGS). Última reforma publicada DOF 16- 05-2022. (2022). https://www.diputados.gob.mx/LeyesBiblio/pdf/LGS.pdf Presidencia de la República. Plan Nacional de Desarrollo (PND) 2019-2024. DOF: 12/07/2019. (2019). https://www.dof.gob.mx/nota_detalle.php?codigo=5565599&fecha=12/07/2019#gsc.tab=0 Secretaría de Hacienda y Crédito Público (SHCP). Comunicado No. 59 Hacienda transfirió a entidades federativas recursos de Fondo de Estabilización de Ingresos de las Entidades Federativas. (2020). https://www.gob.mx/shcp/prensa/comunicado-no-59-hacienda-transfirio-a- entidades-federativas-recursos-de-fondo-de-estabilizacion-de-ingresos-de-las-entidades- federativas 50 Secretaría de Hacienda y Crédito Público (SHCP). Comunicado No. 76 Precisiones sobre los cambios a la Ley para capitalizar al FEIP. (2022). https://www.gob.mx/shcp/prensa/comunicado- no-76-precisiones-sobre-los-cambios-a-la-ley-para-capitalizar-al-feip Secretaría de Salud. Acuerdo por el que se establecen acciones extraordinarias que se deberán de realizar para la adquisición e importación de los bienes y servicios a que se refieren las fracciones II y III del artículo Segundo del Decreto por el que se declaran acciones extraordinarias en las regiones afectadas de todo el territorio nacional en materia de salubridad general para combatir la enfermedad grave de atención prioritaria generada por el virus SARS- CoV2 (COVID-19), publicado el 27 de marzo de 2020. DOF: 03/04/2020. (2020). https://www.dof.gob.mx/nota_detalle.php?codigo=5591156&fecha=03/04/2020#gsc.tab=0 Secretaría de Salud. Intercambio de Servicios. 08 de febrero de 2023 (2023). https://www.gob.mx/salud/acciones-y-programas/intercambio-de-servicios-313554 Secretaría de Salud. Programa Sectorial de Salud 2020-2024. DOF: 17/08/2020 (2020). https://dof.gob.mx/nota_detalle.php?codigo=5598474&fecha=17/08/2020#gsc.tab=0 World Health Organization (WHO). (2022) Global spending on health: rising to the pandemic’s challenges. Available from: https://www.who.int/publications/i/item/9789240064911 World Health Organization (WHO). (2010). Exploring the thresholds of health expenditure for protection against financial risk. 2010 World Health Report Background Paper, No 19. 51 Annex 1. Methodology This annex describes the approach to analyze the Mexican health system financing from a public finances perspective considering the identification of key threats and the four HFSRA core concepts. a) Identification and nature of threats The first step in the assessment is the identification and characterization of threats based on their attributes. This is helpful to better understand their potential implications. The identification of relevant threats draws on the HFSRA framework as well as on interviews with government officers. For the purposes of this assessment a list of key threats is identified for the Mexican context. This list is not necessarily exhaustive of all potential threats but is intended to provide an illustration of the relevance of profiling threats and illustrate their implications in terms of the health system financing. Threats vary depending on their nature; therefore, their effects on the HFSRA core concepts will also vary. The nature of threats can be described in terms of the following attributes:17 Duration: Depending on their duration, the effect and/or the policy response to threats may be different. Threats with long-lasting effects (5 years or more) may need to be incorporated into the inherent health financing medium and long-term planning. Frequency: Threats frequently materialising may have profound detrimental cumulative effects on resources available and how resource use is optimised. Frequency can also indicate the need to incorporate a threat as a more predictable event within health financing medium term planning. Predictability: If the threat is unpredictable or unexpected in the short run (within less than 5 years) it will be referred to as a shock, whereas threats reflecting events somewhat more predictable can be accounted for in the medium-term, that is between 5 to 10 years. Following this rationale, in this case study, threats will be linked to sustainability, while shocks will be more relevant when discussing resilience. Severity: How severe is a threat’s effect has implications on the number of financial resources and the size of the policy response required to mitigate the effect. Severity can be an indicator of the need and value of intervention to prevent or mitigate the impact of the threat; and Source: whether a particular event affects the system’s capacity to respond (supply side threat) or the need for additional health spending (demand side threat) is pivotal to understanding the nature of the threat and the best way to prepare for it and mitigating any negative effect. In the assessment, this characterization will be used to set a context for the analysis and have a more structured way to review the HFSRA core concepts through examples relevant to the Mexican case. 17 The list of attributes is not necessarily exhaustive of all potential attributes that characterize threats, yet they provide an example of the most distinct features relevant for this assessment. 52 b) Sufficiency For the purposes of this case study, financial resources are defined as sufficient if they meet the spending levels needed to attain coverage with health services of good quality and financial protection commensurate with national health targets. The guiding notion of health financing as an instrument to achieve an objective - namely the SDG3 targets, including UHC - is relevant to assess the concept of sufficiency. This can be expressed in terms of a target expenditure. The analysis of sufficiency in the short-term is particularly relevant in the face of unexpected shocks. From a public finance and health systems’ perspectives it is useful to define a target spending level to assess sufficiency in the light, not only of its accounting implications, but also of its significance for policymaking. A national target can be defined in multiple ways (see Approaches to define a sufficiency target for health spending below). Approaches to define a sufficiency target for health spending Alternative approaches to define a sufficiency target for health spending include the following: 1) Bottom-up costing aimed at determining how much would it cost to reach SDG targets Bottom-up costing consists on estimating the spending amount needed to upscale health interventions to reach a health (or coverage) target. Using SDG3 (of which UHC is included as target 3.8) to set spending targets would be ideal. However, most of SDG3 goals involve impact indicators related to mortality rates and it is difficult to link the associated costs to each one of the targets. It is even more difficult to try to generalize for lower- and middle-income countries. Using any hypothetical cost of reaching the SDG3 goals as a benchmark for policy design in the case of Mexico could be challenging, particularly when considering that, for example, we have an estimated low level of progress in reaching goal 3.4 – averting one-third premature mortality for NCDs by 2030, which is one of the most specific and easily measurable SDG3 targets. Although there is emerging literature documenting estimated costs to attain SDGs for low and middle-income countries, there are few projections of how much it would cost to attain the SDG3 -including universal health coverage. Nonetheless, there is consensus that fiscal space available is likely to be insufficient to achieve the SDGs in general (Baum et al. 2017). Some estimations have found that it would take around US$2.1 trillion for emerging market economies (including Mexico) to achieve the SDG agenda (including SDG3) or an average additional spending of about 4 percentage points of Gross Domestic Product (GDP) (IMF 2019). 2) Top-down spending benchmark approach Under this approach an international benchmark of total or public health expenditure from domestic sources, either through share of GDP or in PPP per capita comparisons - or public health expenditure as a share of budget space are used. This approach has often been used to document through international comparisons the low levels of investment in health in Mexico and push for increases in public health spending. International comparisons often imply targets that are difficult to attain. Two relevant international benchmarks often used as reference of what a reasonable level of public spending on health would look like, are setting “…allocating at least 15% of…annual budget to the improvement of the health sector� (Abuja Declaration 2001; WHO 2010) or reaching a pu blic expenditure on health of 5-6% of GDP (WHO 2010). A limitation with the first benchmark is that, if attained, public per capita spending would be mostly driven by the capacity of governments to raise revenues rather than from health needs of the 53 population. The second benchmark might be more connected to overall population needs but might be seen as highly aspirational, especially for LMICs given that less revenue as a share of GDP is observed at lower levels of development. Despite Mexico being an upper middle-income country its revenue collection capacity for all levels of government stands at 17% of GDP compared to an OECD country average of 34% of GDP (OECD 2023). Nevertheless, these benchmarks are valuable in the sense that they are easy to measure, comparable across countries, and useful to broadly assess and advocate sufficiency gaps in a first instance. 3) Financial protection (FP) approach A third and more novel option would be to target public spending level as to significantly reduce or eliminate catastrophic out-of-pocket expenditure at a specific threshold level, for example 10% or 25% of household income or expenditure – both of which are both used to track SDG 3.8.2 target related to financial risk protection. This approach implies two underlying assumptions regarding the substitution effect of public health spending on private health spending patterns: that an additional dollar spent from public sources would substitute close to one dollar spent in out-of-pocket health spending, and, in turn, that a reduction in out-of-pocket spending would translate in less catastrophic expenditure. This pass-through effect of public health spending on the incidence of catastrophic health spending is highly dependent on how additional public spending is being targeted to specific population groups and the choice of interventions being upscaled. This kind of target can reflect a clear FP policy aim, one which is highly relevant in countries like Mexico -characterised by pervasive underfunding and equity concerns, - and be relatively more acceptable as the fiscal effort may be more attainable in the short or medium terms. In this case study two of the three approaches described above are used (top-down benchmark approach and the FP approach): Top-down spending benchmark approach As a first step to grasp the degree of sufficiency, international standards such as the World Health Organization (WHO) target of a public health spending at 5-6% of Gross Domestic Product (GDP) and the Abuja Declaration target of allocating at least 15% of public spending to the health sector are used (WHO 2010 and Abuja Declaration 2001), in addition to a direct comparison with OECD countries’ average total spending and public and private health spending. To further supplement this approach, a more pragmatic health expenditure target in the Mexican case is to use as a benchmark the expenditure level of the health subsystem representing the best close alternative. In this case, the Mexican Institute of Social Security (IMSS) per capita spending could be used as a benchmark to assess sufficiency, both in the short and in the medium terms. Although IMSS’ budget was reduced during the past federal administration (2012-2018) and despite 2019 budget cuts that affected the entire health system, IMSS per capita spending represents a more stable budget and reflects the delivery capacity of the largest health care provider in Mexico. 54 In a fragmented health system like Mexico’s, universal coverage frequently implies the pursuit of homogeneity in benefits among several subsystems. Because of the share of the population covered and the comprehensiveness of its covered medical interventions, the implicit benefits package offered by IMSS is regarded as a sought after-package. And because it is not politically, or even legally feasible to reduce IMSS’s benefits package, it can be also considered as a pragmatic minimal level of benefits for any health system reform looking to uniform health benefits for the whole Mexican population. Financial protection approach In this case study, a target health expenditure defined as the amount required to reduce or eliminate catastrophic spending is considered. Both the 10 and 25% threshold set forth in SDG indicator 3.8.2 are considered. This approach implies a need for more targeted pro-poor spending through pooled resources, a policy aim that resonates more clearly with equity concerns in Mexico over the last decades. In addition, this approach may provide more attainable health financing sufficiency aims since it would entail fewer fiscal pressures compared to the previous approach. It is worth noting that one additional dollar of public health expenditure will reduce catastrophic spending by up to one dollar (the net effect on additional total spending will be low but gains would accrue from a more equitable and efficient substitution of out-of-pocket expenditures into pooled resources). The National Social Development Policy Evaluation Council (in Spanish, Consejo Nacional de Evaluación de la Política de Desarrollo Social, CONEVAL) has recurrently measured the percentage of households which incurred in catastrophic health expenditures every two years through the National Household Income and Expenditure Survey (in Spanish, Encuesta Nacional de Ingresos y Gastos de los Hogares, ENIGH). The threshold used for this indicator is 30% of disposable income as previously defined by the WHO.18 To put in practice this approach in this case study, a new time series of the incidence of catastrophic health expenditure using internationally comparable thresholds in line with SDG targets (10% or 25%) and the local threshold used in official estimates are produced using the same method applied periodically by CONEVAL. c) Sustainability In this case study, sustainability is defined as the medium-term perspective of sufficiency considering a meaningful target as described above for sufficiency. Sustainability is analyzed considering the expected changes in target spending over a 10-year period, resulting from threats such as ageing. The target spending benchmark considered is IMSS’ per capita spending. The outcome of this analysis is the expected financing gap. The analysis of revenues ideally should be done by looking at the expected evolution of governmental revenues under inertial trends and the potential effect of threats. Considering raising revenues is relevant as part of the analysis, especially in terms of the current fiscal space 18 https://apps.who.int/iris/handle/10665/85626 55 in a country like Mexico, and the feasibility to embark on future fiscal reforms to increase government’s margin to attain the health system sustainability in the medium-term. An assessment of the revenue raising capacity of the government would capture not only the threats to social security contributions, but also to general taxation. This issue is mentioned, but a detailed analysis of government revenues is not part of this case study. The proposed time frame to analyze sustainability in the medium term is of 10 years, as suggested by the HFSRA and aligned with the timeframe used in many medium-term revenue strategies. However, since this is an initial exercise, it may be worth considering more years depending on the data available. d) Resilience The WB HFSRA defines resilience as the ability to absorb and respond to the less predictable shocks in both spending and revenue generation. In this context, and along this notion, resilience is conceived as an immediate response to a short-run unexpected shock impacting health revenues or expenditures. It is assumed that all momentaneous deficits/surpluses are the result of unexpected shocks and not the result of poor budgeting. More than a concept of its own, resilience can be considered as a lens to analyze sufficiency in the short run/immediate term because of an unexpected shock. Therefore, when analyzing resilience, the focus will be on the recent COVID-19 experience to illustrate the relevance of the nature of the shock (supply or demand), the factors enabling or limiting an appropriate immediate response, and the existing or missing mechanisms in place to mitigate the financial shock and secure appropriate health service delivery. The analysis considers zooming in figures on public budget during 2020 and 2021, to assess the degree of flexibility to allocate public resources to support the management of the pandemic in the health sector. e) Efficiency Efficiency is relevant in the context of the adaptation of the HFSRA to the Mexican case (and most probably to many low and middle-income countries) because savings from an efficiency agenda can generate resources to attain sufficiency. Vice versa, some policies can have negative implications on efficiency leading to waste and budget shortfalls. This indirect effect of efficiency on sufficiency is highly relevant to the proposed analysis. In addition, from a broad perspective, allocative inefficiencies can be associated to large shares of out-of-pocket spending, for example. Technically efficient mechanisms in place can help ameliorate the short-term impact of unexpected shocks as well as reduce spending needs across the whole system. The analysis of efficiency in this study focuses on identifying policies intended to promote efficiency. There are two concepts of efficiency relevant to consider in this case: allocative and technical efficiency. Both notions are particularly relevant to assess how resources are pooled and used in the health system to produce the intended outputs; thus, in terms of health financing functions, they are closely linked to the resource pooling (albeit to a less extent) and strategic purchasing or resource allocation. Allocative efficiency refers to the optimal allocation of resources across different outputs. In this case it relates to the allocation of resources that maximizes health gains. This notion is relevant to guide broad decisions relating to the financial coverage of one intervention or an alternative. For example, when deciding whether to fund treatment for lung cancer versus pancreatic cancer or when deciding how to allocate budget resources between primary care and hospital care considering a societal perspective. 56 Technical efficiency refers to the optimal production of a given level of health outcomes by minimizing costs. Once a decision is made to fund a certain intervention or service, how can this be delivered at the lowest cost or at an optimal mix of inputs. Given the health system fragmentation, the high degree of heterogeneity in resource availability and allocation, as well as differences in services delivered across health subsystems/institutions, exploiting opportunities to reduce sources of inefficiency across the health system could serve to ensure sufficiency both in the short and medium term. 57 Annex 2. List of interviews Relevant actors with broad knowledge about health systems, health financing and institutional response from the public sector were interviewed as part of the HFRSA framework case study in Mexico. This list was reviewed and agreed together with the Ministry of Finance (SHCP) and the World Bank – Mexico Office (see table below). Interviews held between February 2nd and April 3rd, 2023. The Interview Guide used is included as Annex 3. No. Institution Area (Date of interview) 1. Ministry of Finance (SHCP) Insurance, Pensions and Social Security Unit (02/02/2023) 2. Ministry of Finance (SHCP) Public Treasury Economic Planning Unit (20/02/2023) 3. Ministry of Finance (SHCP) State Government Coordination Unit (10/02/2023) 4. Ministry of Health (SS) General Directorate of Programming and Budget (09/03/23) 5. Mexican Institute of Social Security (IMSS) Finance Directorate (08/02/2023) 6. Institute for Social Security and Services for Administration and Finance Directorate State Workers (ISSSTE) (03/04/2023) 58 Annex 3. Interview guide Interviews were semi-structured and highly flexible, as the main aim was to promote a flowing conversation and feedback from the policy makers. Hence, only several general questions were used as an interview guide, instead of a full questionnaire. Interviewees were explained about the background, objective, and scope of the HFRSA framework case study in Mexico and were asked some questions included below to prompt a conversation. Guiding questions were drawn based on the HFSRA Framework, as well as on the WB COVID- 19 Health Financing Resilience Monitoring Questionnaire. Note: Some questions were limited to certain actors, depending on their attributions and competencies in the health financing landscape in Mexico (see suggestions in [ ] at the end of each question). Sufficiency and sustainability • Is there a financing gap between health spending needs (specially in-light of the SDG commitments) and the current levels of resources allocated to the health sector? (Consider both the perspective of the health sector as a whole and the perspective of the institution in particular) [SS, IMSS o ISSSTE]. • Are there current initiatives or strategies, from a public finance perspective, for a medium-term strategy to promote health financing sufficiency (10 years)? Potential to raise and spend more • Is there fiscal space to collect more and allocate a larger public budget to the health sector (for example, increase the efficiency of revenue generation, increase the range or rates of taxes, among others)? [SHCP: 1, 2, 3, 4; IMSS: 8, ISSSTE: 9] • Are there mechanisms for possible prioritization of health spending to guide budget decisions? Emerging threats to revenue generation, health costs and expenditures • Does the government routinely identify and assess any emerging threats and strengthening opportunities to… [SHCP: 1,3,5; IMSS:8, ISSSTE: 9] a. revenue generation? b. health spending? • If so, how is this incorporated into government revenue collection, spending needs projections and budgetary allocations, respectively? Whole of government approach • Does the Ministry of Finance and Health coordinate and review tax policies that affect the efficiency of spending in health as well as the capacity to raise revenue? [SHCP: 1, 2, 3, 4, 5; SS: 6/7] 59 Reconciling sustainability and health needs • What are the most relevant threats to revenue generation and to respond to health sector needs in the next 10 years and what are their impact? [SHCP: 1,3,5; IMSS:8, ISSSTE: 9] • How do current levels and projections (under current policies and implementation) of government spending on health (including obligatory health insurance contributions) compared to projected spending needs for health (sufficiency analysis) in the next 10 years? Resilience Expenditure shocks • Are the any factors emanating from within or outside the health sector that could drastically alter spending needs in the short-term? • Are there contingency funding mechanisms in place to finance responses to expenditure shocks – for example, is there a contingency fund for specific health sector specific spending shocks or do shocks affecting the health sector can trigger the release of general emergency funds under current legislation? If so, how rapidly does the political and administrative system allow the MoF and the MoH to get access to emergency funding? • Are there any obstacles to the timely use of additional resources allocated to address shocks in health spending in the short term? Revenue shocks • What is the likelihood of shocks that might suddenly reduce the capacity to raise revenues – e.g., disease outbreaks, civil unrest, natural disasters and health emergencies, financial and economic crises? [SHCP: 1,2,3,4; IMSS:8, ISSSTE:9] • Are there any health financing policies that would help to be better prepared or better respond to revenue shocks? [SHCP: 1,2,3,4; IMSS:8, ISSSTE:9] • In particular, regarding the recent COVID-19 pandemic, are there any examples or experiences (shocks on expenditure and revenue collection, aspects related to timely absorption and resource mobilization capacity)? • Have there been changes as a result of the COVID-19 pandemic regarding the management of health financing? • Does the country have a pandemic response financial plan? If so: a. Was the COVID-19 pandemic response plan costed? If so, what is the estimated total cost of the response plan (USD)? b. Are there funding gaps (i.e., the amount budgeted is less than the estimated need in the response plan)? • What steps have been taken to mobilize incremental funds for the response, beyond the original budget allocations at the national/federal level? Efficiency • Are there any policies currently in place that are likely to increase spending efficiency in health expenditure? • What is the priority given to efficiency in the context of financial sufficiency in health? 60 Capacities • What is the current capacity of the government to continually assess financing resilience and sustainability? • What is the current capacity to respond to these assessments? • What are the plans to strengthen the capacity to assess and respond to threats to health financing sustainability and resilience? 61 Annex 4. Preliminary characterization of identified threats. Threats Source Predictability Duration Severity Frequency 1. Economic crisis and Supply-side More or less Medium High Low to recession predictable Medium 2. Epidemiological Demand-side More predictable Long High High transition 3. Natural disasters Supply-side Highly unpredictable Individual High High and climate change / unpredictable in the events: short short run duration Predictable in the Climate medium run change: long duration 4. Labor market Supply-side More predictable Medium Medium High dynamics 5. Population ageing Demand-side Predictable Long High High 6. Pandemics and Supply-side and Less predictable Medium High Low other biological Demand-side threats 7. Technological Supply-side and More predictable Long Medium Medium change Demand-side 8. Violence/war/political Supple-side and Less predictable Medium to High Medium instability Demand-side long 62 Annex 5. Composition of out-of-pocket payments and catastrophic health expenditures by income quintile in Mexico, 2016 – 2020* Composition of Income quintile Total OOP I II III IV V All households with OOP Medicines 66.0% 73.5% 70.4% 67.1% 63.9% 56.1% Ambulatory 22.2% 17.3% 19.8% 21.6% 23.4% 27.1% Hospitalization 2.3% 1.8% 1.8% 2.2% 2.4% 3.1% Maternity 2.7% 2.0% 2.7% 3.0% 2.9% 2.6% Other** 6.8% 5.3% 5.3% 6.1% 7.4% 11.0% % of households with expenditures on health greater than 10% of total income Medicines 46.2% 57.7% 49.8% 42.5% 39.9% 35.5% Ambulatory 29.6% 26.4% 29.0% 31.4% 31.1% 31.6% Hospitalization 7.9% 4.9% 6.1% 8.2% 9.6% 12.4% Maternity 6.7% 4.1% 6.5% 7.7% 8.2% 7.8% Other** 9.7% 6.8% 8.6% 10.2% 11.3% 12.7% % of households with expenditures on health greater than 25% of total income Medicines 40.4% 53.2% 42.3% 33.7% 31.9% 28.7% Ambulatory 26.8% 27.4% 30.2% 26.4% 24.9% 23.7% Hospitalization 16.4% 8.1% 12.3% 19.9% 23.9% 26.6% Maternity 8.6% 4.6% 7.6% 11.7% 12.5% 11.0% Other** 7.8% 6.8% 7.7% 8.3% 6.9% 10.0% % of households with expenditures on health greater than 30% of total income Medicines 39.2% 52.0% 42.2% 32.0% 28.7% 26.6% Ambulatory 25.3% 27.2% 27.7% 24.1% 23.2% 21.5% Hospitalization 19.4% 9.7% 15.1% 24.0% 28.4% 31.3% Maternity 9.1% 4.5% 7.8% 13.0% 14.0% 11.4% Other** 7.0% 6.5% 7.1% 7.0% 5.7% 9.2% *Average weighted by total households in the 2016, 2018 and 2020 surveys. ** Expenses on orthopedic devices and alternative medicine. Source: Own calculations with ENIGH data using the same conceptual framework as WHO (2005) and CONEVAL. 63