EXTPROGRESS REPORT ON CONSULTING TEAM ACIITIMES FOR

PITUGU MANDIRI FEASIBILITY STUDY TO DEVELOP A

HEALTH MAINTENANCE ORGANIZATION PRODUCT LINE OF BUSINESS

20

Author

Dr James G Barnes DPA Elliot R Wolff JD

Jakarta 17 April 1989

Prepared for

Health Sector Financing Project Ministry of Health

Republic of Indonesia

Under USAID Contract No ANE-0354-C-00-8030-00

2repared by

International Science and Technology Institute Inc Suite 800

1129 20th Street NW Washington DC 20036

Tel (202) 765-0831 Telex 272785 ISTI UR

FAX (202) 223-3865

ABIEOF CONTENTS

Page

Exit Report1

Appendix I March 29 1989 Report of Drs Siddharta and Siddharta 8

Appendix IT April 14 1989 Report of Drs Siddharta and Siddharta 15

Appendix III Final Data Request 18

Appendix IV Data Check Lists 22

Appendix V Revised Scope of Work 28

Jakarta 17 April 1989

Drs Rosnirm Djaafar Dr Thomas R DAgnesPresident Director Chief of Party and Technical CoordinatorPT TLgu Mandiri Health Sector Financing ProjectWisma Tugu International Science and Technology1HR Rasuna Said Institute Inc

Ministry of HealthKuningan Jakarta 12910 Bureau of Planning J1 H R Rasuna Said

Kuningan Jakarta 12950 Re Status of Tugu Mandiri HMO Feasibility Assessment Business Plan

Project at Consultants Departure From Indonesia

Dear Drs Djaafar and DAgnes

As the American consultants who undertook to assess the feasibility of a TuguMandiri Health Maintenance Organization (HMO) and if feasible to prepare abusiness plan and an operational plan of action we have completed the allotted fourweeks in Indonesia and submit this status report on our activities accomplishmentsand recommendations

In summary due to fhe lack of sufficient information--demographic costutilization health care provider actuarial and other--we are unable to assess thefeasibility or begin preparation of the business and operational plan however wewill complete the original Scope of Work upon completion of a comprehensive datacollection phase which we outline in this report

Based on our overall observations we have determined that the needed informationis recorded and maintained in various places and formats and is retrievable for ourpurposes The design and implementation of a comprehensive data collection processis vital to the success of this project and is of great importance to the Indonesiangovernments current five-year plan Repelita V and to the other health and medicalservice programs under the overall USAID Health Sector Financing Project We areconfident that the results from the data collection process will result in our ability tomake the feasibility assessment and prepare the business operating plans insupport ofTugu Mandiris goals and objectives as stated in the original Scope ofWork The outcome of our effort~s to date are (a) a cohesive knowledgable team of American expatriots and Indonesian nationals who have favorable relationshipswith the sources of needed information (b) refinement of the specifications for thisinformation and several check lists aids to facilitate collection (c) identification ofthe multiple sources of this information and (d) a Revised Scope of Work thatcontains a comprehensive strategy to collect the needed data from appropriatesources This data when received will permit us to perform a feasibility assessmentcontaining a business plan and an operational plan of action for a Tugu MandiriHMOmanaged health care system fbr the target markets

We think this project (i) implements an Indonesian government policy set forth inRepelita V to encourage new health care financing approaches (ii) offers insight intothe causes of cost increases in health care delivery that are the basic reasons foi theRepelita V policy and that will be useful to select and implement appropriate healthfinancing methods to contain or reverse t-ealth care cost increases being experiencedin health benefits sponsored by employers and the government and (iii) orients andeducates important Indonesian nationals involved in employee health benefits theirfinancing and provision We recommend that this Revised Scope of Work to addnecessary data collection be approved and the original feasibility assessmentbusiness plan operational plan be prepared in support of the target markets andother potential HMO managed care markets upon completion of the proposed datacollection process

1 Background

In early March we participated in a meeting at the ISTI office in Washington DCto review and revise the Scope of Work for a Tugu Mandiri HMO feasibilityassessment and business plan Professor Robert Shouldice of the GeorgeWashington University School of Public Health also participated along with BobFratt and Jennifer Beckett of ISTI The original Scope of Work had been written inlight of Professor Shouldices visit to Tugu Mandiri earlier this year--especially hismeetings with Drs Djaafar and expatriate USAID and ISTI staff The principalrevisions were deletion of the Pertamina active employees and their dependentsfrom the projects target market and expansion for research on tax and legalramifications of the HMO We were also asked to consider appropriate methods offunding Pertamina retiree health benefits during an employees active employmentand to see if employee health benefit costs can be tax deductible under Indonesian corporate income tax regulations

At the conclusion of his meetings in Indonesia Professor Shouldice left a two pagelist of needed Data Elements for HMO Planning and in the Washington DCmeeting we were told to expect all the necessary data to be available for our reviewupon arrival in Jakarta however we received very little usable information duringour four week stay in country

Prior to leaving the United State we individually received subsequent briefings onthe project in meetings and telephone conversations with Professor Shouldice andBob Pratt We received copies of a draft 1986 HMO Market Study and Business Planfor Tugu Mandiri (the REACH Report) however that report was not accepted byUSAID or Tugu Mandiri because its data was not supported and itsrecommendations were not specific or practical for implementation

In light of the inadequacies of the REACH Report we were instructed to prepare areport if the HMO is feasible that clearly explains to Tugu Mandiri staff the factualstatistical and financial basis for our conclusionsrecommendations in a formappropriate for Tugu Mandiri and Pertamina executive staff and Board of Directors purposes

Upon our arrival in Jakarta we established a reporting relationship to Jim MarzolfMD of ISTI with frequent contact with Tom DAgnes who i1ST Chief of Party forthe project We established offices in the Tugu Mandiri office suite and recognizedDrs Djaafar as the principal and Tugu Mandiri as the ultimate

2

client We formed a working task fbrce with Nanang Iskandar MD DirectorUmum of Tugu Mandiri Rochwan Muthalib FLMI Underwriting Manager of TuguMandiri and Soejadi Hospital Resources Development Chief in Pertaminas CentralAdministrative Health Bureau in Jakarta R Pratolo also joined the task force asactiary

In addition Hans Schaefer of PT Nagadi Ekasakti was engaged as the resourcescoordinator for tax and legal matters Through Mr Schaefer Drs Istama TSiddharta President-Director of the Drs Siddharta amp Siddharta independentaccounting firm that is associated with Coopers amp Lybrand undertook the taxresearch and issued two reports which are attached as Appendices I and H Dr LianaS Gunawan of Kantor Notaris Kartini Muljadi undertook the legal research inconjunction with Mr Schaefer and their report is expected

11 Team Activities

Our team or task force activities involved (a) an extensive exchange of informationbetween the expatriate consultants and Indonesian nationals to build mutualunderstanding trust and a united approach to our project (b) refinement of the listof needed information to incorporate specific needs of the actuary and consultants aswell as to accommodate Pertaminaproduction sharing contractor (PSC) actualoperations and administrative processes (c) identification of the sources of thisinformation and (d) planning how to collect this information

Virtually all of the information submitted to the team was collected at Pertamina bySoejadi During our first week in country working from Professor Shouldices listSoejadi presented age data on the Pertamina retirees as well as the total number ofretirees and widows and spouses covered for health benefits He also presented a listof the total number of PSC employees by contractor Soejadi reported that most ofthe required data was unavailable especially with respect to the PSCs and specificfinancial and utilization data

During the first week Drs Djaafar introduced us to Mr Soeranto S Director of PTTambang Timah the Indonesian national tin mining company and a senior memberof his staff because the tin mining company was experiencing similar increases inemployee health benefit costs and Mr Soeranto was interested in the HMO conceptto help control costs and improve health care for Timah beneficiaries

During the second week we met representatives of two PSCs-- Dr Soeprawoto ofMarathon Petroleum Indonesia Ltd and Marijke Salomo of Roy M Huffington IncAlthough not in his official capacity as Marathon Medical Director Dr Soeprawotosupported the Tugu Mandiri HMO project as offering an improvement in the qualityand availability of health benefits for Marathon employees who currently receive acash stipend monthly for most family outpatienL care and who have usually spentthe stipend and are unable to pay when a family member becomes ill Mrs Salomo was responsive to our questions Both confirmed the availability of the information we need but neither could provide information to us without instructions from theirsuperior who probably would refer the matter to their home offices in the UnitedStaLes unless Pertamina requested their cooperation with us

As we discussed the teams limited receipt of data and discouraging efforts to collectthe balance it became clear that a more specific list of needed information wasessential to focus efforts properly We were concerned that the project team was not

3

receiving full cooperation and that additional support was required from Pertamina and the Ministry of Health

Early in the second week we drafted a more specific list of data elements requiredfor analysis and reviewed it line by line with team members That dialog led tomany revisions and in the middle of the revision process Drs Djaafar suggested to us that the Indonesian team members did not understand many of the concepts andterms used in the data list Accordingly we spent the better part of the next dayexplaining the nature of our assignment how HMOs operate in the United Stateswhat our terms mean particularly in the operation ofan HMO and how therequested information will be used in assessing marketing finance and provideraspects of a potential Tugu Mandiri HMO A copy of a feasibility study and business operating plan completed for a US company was utilized to explain to teammembers Drs Djaafar and ISTIjust what is involved in the development of such areport That orientation education process resulted in a significant breakthroughFirst we were able to revise the information specifications so that everyoneunderstood them using many Indonesian concepts instead of American-- egemployment regulations describing employee health benefits instead of theAmerican benefit plan or benefit package A copy of the final data request(excluding Tugu Mandiri organization capabilities resources relevant to the HMOwhich still must be identified) is attached as Appendix III

Having completed the Pertamina and PSC information specification we preparedfive check lists to aid the team and the data gatherers in identifying whatinformation is needed about each data source--Pertamina and non-Pertaminahospitals their hospital based clinics their free-standing clinics PSC beneficiariesand Pertamina retirees Because most Pertamina utilization information has activeemployee and dependent information combined with retiree widow spouse dataand because active employee benefits are not budgeted separately from retireebenefits we added employee data to the data request A set of these check lists isattached as Appendix IV They will indicate if each source has reported necessaryinformation but these check lists are not intended as answer sheets for submittingdata

Finally we concluded that collecting this information for Pertamina retireesrequires contact with the Pertamina Human Resources (including health) or UmumDirekturs department and the Pertamina F -ance Department in theadministrative office for each of Pertaminas seven operating regions (NothSumatra South Sumatra Dumai Kalimantan Cirebon Cilacap and Sorong) and forJakarta This means collecting information from a total of 16 departments locations because of the way Pertamina is organized with decentralized healthfacilities in each region Some but not all of the needed employee and retireeinformation is available in the central administrative and finance departments inJakarta

For the PSC beneficiaries limited information is available in the Pertamina JakartaBKKA Health and Finance Departments Most of the information is maintained atthe 17 PSC offices Some PSCs operate their own hospitals and clinics andtherefore we must determine how to collect and integrate the PSC beneficiaryinformation and PSC health facility operations into Tugu Mandiris business planAt the request of senior executive staff of Pertamina the PSCs will cooperate with our data collection efforts

4

Ill Comprehensive l)ata Collection - Revised Scope of Work

The team has devoted considerable thought to effective approaches for the collectionof needed data from this geographically widespread network of potential data sources We have concluded that the development of a formal information systemand data collection process is required to support the conduct of a comprehensivefeasibility study and if feasible a business plan and operational plan of action asrequired for Tugu Mandiri These actuarial studies will result in projected healthbenefit costs (premiums) as well as expected utilization and reimbursement rates forcovered services Feasibility and required provider arrangements in our finalbusinessoperating plan will be based on those actuarial recommendations It is notpossible to begin the basic actuarial studies for this project without the identified information

It is clear from the work of the consulting team that the information needed tosupport the completion of this project is available in Indonesia and must be obtainedbased on an expanded scope of work to add the data collection component A draft copy of the Revised Scope of Work is attached as Appendix V As agreed in our exitmeeting with USAID we completed the expanded scope of work for data collection upon returning to the United States We think that the new collection process willrequire extensive field work in country and approximately ten months withadditional resources (focusing on data collection for three representative operatingPertamina regions Jakarta and several representative PSCs) subject to a TuguMandiriPertamina decision to focus only on one region as a pilot site which willreduce the costs time and effort substantially or to expand the data collection to allregions and PSCs which would substantially increase all three

In light of feedback from ISTI and USAID on the unanticipated costs and timeinvolved for this data collection effort we propose three alternative approaches fordata collection Those alternatives are

A Collecting needed data from all seven Pertamina regions and Jakarta headquarters as well as from all seventeen PSCs

B Collecting needed data from four representative Pertamina operating regionsfrom Jakarta headquarters and from three to five representative PSCs Fromthis data the actuary and we will be able to extrapolate and prepare actuarialprojections evaluate feasibility and if feasible prepare a business plan andoperational plan of action for the full target market

C Collecting needed data from one Pertamina region and PSCs operating in thatregion from which actuarial projections the feasibility study and if feasible thebusiness plan and operating plan will be completed for that region That regionwill serve as a pilot from which experience can be evaluated If the pilot provessuccessful expansion to other areas can be planned

Of the alternative approaches listed above we recommend alternative B Thesampling methodology used in alternative B will permit the actuary andconsultants to extrapolate from the representative areas to assess overall feasibilityand project the business and operating plan for all target markets throughout thearchipelago Alternative A is less cost effective than alternative B We do notrecommend alternative Cbecause it will not permit evaluation of the alternative

5

health care financing and delivery system for the entire target markets in a timelyfashion because it could result in employeeretiree health benefits in the pilot regionthat differ from those in other regions and because the results of implementationwill not be significant with respect to national cost increase trends

IV P ROJ ECT STATUS - SIGN IFICANT P)OI1CY NIEEllINGS

To discuss the consulting teams progress and recommendations the significantdata problems encountered and proposed solutions three joint meetings were heldwith representatives from USAID the Ministry of Health Health Sector FinancingProject - International Science and Technology Institute Inc (ISTI) Pertamina andTugu Mandiri during our last week in country In each of these meetings the projectconsultants presened the current progress and the scope of the data problemsconfronting the project

It was concluded during the final meeting that the consulting team should developand present to ISTI representatives a Revised Scope of Work to add a comprehensivedata collection component to this project This Revised Scope of Work is attached as Appendix V

Further it was agreed that the Ministry of Health would assume leadership byarranging and chairing high level meetings with Pertaminas top officials theMinistry of Mines USAID and Tugu Mandiri to receive full support for this projectItwas also agreed that the Ministry of Health would seek joint funding for theadditional costs associated with the data collection which became considerably morecomplex and resource intensive than originally anticipated The discussion ofjointfunding requirements should not occur until after Pertamina has agreed to supportthis project

We strongly recommend that Drs Djaafar be closely involved with the Ministry ofHealth in the planning and execution of these meetings including the selection ofparticipants presentations during the meetings and follow-up activities It wassuggested that the consultants Dr Barnes and Mr Wolff be available forpresentaLons during these meetings Further consultant work is suspended untilthese meetngs are favorably concluded

V CONCLUSIONS ANI) RECONMINI)AIIONS

It is most important for all concerned to realize that the most critical component ofthis project and all of the other health sector financing projects is reliable data forsound decision making at the executive and Board levels At the present time thisaspect is missing from this project and is causing a substantial delay

The second aspect of the project that must be accomplished in a timely manner iscomplete support by Pertamina and the Ministry of lealth Therefore it is stronglyrecommended by the project team that the Revised Scope of Work (to add acomprehensive data collection process) be approved Further that the Ministry ofHealth maintain its new leadership position in this project by scheduling andchairing the necessary meetings with Pertamina Tugu Mandiri the other requiredorgatiizaions and us if our participation can be beneficial in these critical discussions

As previously stated this project can be accomplished as outlined in the originalScope of Work with some modifications to (1) the successful collection of required

6

statistical financial and management information and (2) the previous length of time for completion

With respect to this data collection the consultants recommend (and the actuaryconcurs) that we select three representative regions among Pertamina operationsJakarta and three to five representative PSCs operating in or near the Pertaminaregions selected We will extrapolate from data collected from these sources to assessfeasibility and if feasible prepare the businessoperational plan of action for theentire target markets This recommendation will reduce the time effort and cost ofdata collection and permit us to dress all target markets We do not recommendother alternatives because they do not achieve project objectives in a timely manner

We appreciated the opportunity to serve on the Tugu MandiriPertaminaUSAIDISTI team and to further Indonesian efforts to improve health care financingoptions as well as the availability of quality cost effective health care in Indonesia

James G Bjrnes DPA I

te Date

AIPENI)IX I

Drs Siddharta --- low amp Siddharla P 000 In 8 wirsoe

1 n IpoundNM TIA

Coopers 3PWNAMUUA --

iO

DnW ampLybrand Kaw 10 O M - M 7 t OAJAKARTA 1 N AA IVrI10A

29 Mach 198

Dr E3llottWolf International Sciehce and Technology Inst te Inc co Ministry o Health Bureau of Pluming Kay X-5 No 4-9 J1 HR Rasuna Said Jakarta 12950

Dear Dr Wolf

GENERAL TAX MATTERS ON HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on March 21 1989 we set out below tax aspects related to the proposed health insurance scheme based on the current tax laws of Indonea

Background

2 We understand that the International Science and Technology Institute Inc (IST)has been appointed by Tugu Mandiri (wTugu) an insurance company owned by Pertaminato initially identify and appraise the various options available and subsequently describe and justify a recommended course of action for Tugu in developing a heafth maintenance organization and health insurance scheme (wHlsw) which will

a Inlay provde the plan to Pertam and other ol conhrakors retree aW

subsequen ly expad the avaabWiy of the plan to the gwrfl bunsie commwky

fl 1]-9

Drs Siddharta amp Siddharta in aew~ wem

CoopersampLygrand

D EJfot wow GENERAL TAX MATTERS ONIT11 29 Momh 19onHEALTH WSURANCE SCHEME Page 2of 8

It is proposed that the premium will be borne by both the employee and the employer eg PertaminaP0C n heepoeeg

3 Accordingly ISTI isconcerned about the tax aspects of the health insurance schemeand have requested our advice on the general tax aspects of such viewed from both theemployers and employees standpoint

General Aspects

4 The applicable general principles relevant to the HIS sue are set out in the Income Tax Law 1983 at

a Mole 9 (d) - indoainining taxale Income an employer may not deduct cost a bens prNdd by the taxmyer for the needs d enploym

0 tArIcIe 4 (3) (d) - where ervice received I-ind ain not deductible to the employer thenSturnm the beneft not asmssabe to th employe

5 The above genexal principles were clarified for health and insurance costs in Ministryof Finance Cirurs dated 28 May 1984 (ref no SE-19pA2319 84) and 7 June 1984 (ref noS-336PJ231984) As a result as far as the employer is concerned

(i) medIJ costs Includig hwt Insanc premine pa d by an emwpy to an HIS are non deducwbe

ampU)l costs relaed to compn owned heafth Iscikie pMNg kre seampvice n medictio to ermoyees we non deducttl

(ii) company rmbursed m edicexenses are non deductbe to the company

Drs Siddharta amp Siddharta in aweJssf Wt

CoopersampLybrand

Dr Elloft Wolff GENERAL TAX MATTERS ONu1T Inc 29 Marh 1969HEALTH INSURANCE SCHEME 9 Pmge 3of6

(iv) Ahrecet fOr e Medical expense be addres ed to the O kwaad 0 the Compay the relmbursmert isthe deductwbe fo the compay

6 The employee is not assessable for (i) to (iii) above but will be assessable on theincome in (iv) Income from insurance proceeds eg life accident or health are not assessable for the individual

7 Contrary to the initial spirit of the Income Tax Law as explained in paragraph 4 theIndonesian Tax Authorities have decreed that company contributions to the state pension fund(Tunjangan Hari Tua or wFHT) and Astek are considered as a tax deductible expense whilstbeing tax exempted for the employee (MOF Circular dated 28 May 1984) Historically thistreatment results from the Minister of Labors opinion that the non deductability of suchexpenses will strongly hinder the development of the pension fund

8 In accordance with MOF Decree 9470AXt41983 Indonesian citizens are notrequired to file personal tuzreturns if they are employed by only one company with theunderstanding that income isnot derived from other sources The impact of this is considered below

9 The only deductions allowable against an individuals assessable income are

(i) occupalonal allowance I 5 o gross mnnual salry rX xc p380000 (MOFDecrM 9KMK041964 dated 31 Decenombg I93)

(ii) tax fee income loWance Le Rp 9W00O for the idduaj and Rp 480000 for eachdepedent IlnWed to W depenclr (M11le 7 (1) Income Tax Law)

(iii) P contibution to Pension funds approved by the Minister of Finance eg the statePension fund and ASTEK (Artie a (2) Income Toy Law and MOF Circular dated 28 May1984)

Drs Siddharta amp Siddharta Coopers bull ampLybrand

Dr EJUk_ WoM GENERAL TAX MATTERSW11 kX4 29 March 196HEALTH INSURANCE SCHEME Page 4of 5

k1M Severgf Production Sharing Contractors are governed by the old tax laws which in anumber of ways differ from the 1984 Income Tax Law In this context the abovementioned aspects do not necessarily apply

Current tax position

11 From the above paragraphs it is clear that under current Indonesian Tax RegulationsFIS contnbutions by the employer would not be deductible On the other hand theemployees contribution would also not be deductible on his or her individual tax return Thisnon deductibility from an individual viewpoint is further modified by most Indonesiansreluctance to submit tax returns so that in the event of such contribution being allowed it will generally still not represent a benefit for the individual

Alternative options and possibilities

Request for tax treatment equal to THT

T As explained in paragraph 7 and 9 (iii) THT and Astek contributions receive specialconcessional treatmeni We believe that based on your explanations that the Ministers ofFinance Health and Energy have expressed their strong support for the HiS you shouldexplore the possibility of similar tax treatment to THT and Astek being applied to the HIS In our opinion the possibility of success is distant

-12shy

m1A

Drs Siddharta amp Siddharta In ameed~o a

CoopersampLybrand

Dr Eliot Wolff GENERAL TAX MATTERS ON9MT 29 March 196HEALTH INSURANCE SCHEME Page 5 of 6

Incorporatio into employfe salary

13 Another alternative would be to increase the employees Walary in accordance with the HIS contributions amount whereby

a th employer woUd be the nddhkon ampamaartexW Insted of HIScontbtions and therefore obtain tax deducablity for such expena

b the emdegYoees are no beng du vaged ampgtheW ngt take home lSy igUrmffctad

14 Under this approach you should bear in mind that the salary increase should withthe -cepton of employees earning salaries below the tax free bracket exceed the HIScontribution amount T7he excess is the Ngross up amount whereby the contribution is grossedup iu order to account for it being subject to income tax as part of the employees salaryHowever as the employees are mostly under the 25 tax bracket whilst the employer (LePertamina) is in the 35 tax bracket this alternative will carry tax benefits

15 However you should appreciate that Pertamina being a state owned company wouldmost probably require approvals from the Ministers of Energy Finance and Labor to increase employee salaries

Conclusion

16 We beLieve that compared with most other countries the current Indonesian environment could be more conducive to the establishment of an HIS

Lax

7mf -13shy

Drs Siddharta amp SiddhartaCo80o4 W~ Cooy e ampLgrand

Dr EIlI Wolff GENERAL TAX MATTERS ONW8T k 29 lomh 19gHEALTH INSURANCE SCHEME

17 However we also believe that a complex combinaoion of internal and external factorsin addition to iax will influence a companys decision on whether or not to embrxe an HISwhilst tax is not the decisive factor for such a decision

1amp Should you require further information please do not hesitate to contact myself orMr Ross L Gavin Chief Technical Advisor of this office

Yours faithfulyDrs SIDDHARTA amp SIDDHARTA Registered Public Accountants No D-2336

Drs Istama T Siddharta Senior Partner

ITSjs

f-14shy

APPENI)lX 11

Drs Siddharta - ong 2samp Siddharta li IWIMII4SoS

bAwfteW W 6Osanl 1lM6 J 5D1T IAC Oers CM bOP MULIA AUTToNampLbrand Kw oN Ree Said P0 V Ily JAKATA iM JAKRTA 127MA

14 April 1989

Dr Elliot Wolff International Sclence and Technology institute Inc co Wiane Tugu 4th floor J1 HR RasunA Baid Jakarta

0ear Dr Wolff

HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on April 10 1989 we setout below the tax aspects related to the proposed health insurance scheme a they affect Production Sharing Contractors

2 In bur letter of Madr 29 1989 we gt out the ttdon regulatozs affecting yourproposed health insurance scheme as they currenty apply omostta-~~~~~ utaxrvpayersay oAAs noted inparagraph 10 of that letter the currfnt tax regulations do not necessarily apply to Production Sharing Contractors

3 Article 33 (3) of the Income Tax Law 1983 states that entdtes In the oil and gas sectorconnected with Production Sharing Contracts in effect prior to January 11984 will continue to be subject to the Old Tax Laws rather than the Laws which came into effect on that date

4 Under the Old Tax Laws benefits-ln-kind provided to employee will be deductiblefor the purposes of determining the tax of the employer but conversely are assessable in thehands of the employee The amount assessable to the employee is the cost to the employer

S It is our understanding that most Production Sharing Contractors presently operatingin Indonesia are governed by Production Sharing Contracts signed prior to 1984 and thereforemost employees of Production Sharing Contractors would be assessed on the cost of thehealth insurance scheme as it applies to each individual

-16shy

ABIEOF CONTENTS

Page

Exit Report1

Appendix I March 29 1989 Report of Drs Siddharta and Siddharta 8

Appendix IT April 14 1989 Report of Drs Siddharta and Siddharta 15

Appendix III Final Data Request 18

Appendix IV Data Check Lists 22

Appendix V Revised Scope of Work 28

Jakarta 17 April 1989

Drs Rosnirm Djaafar Dr Thomas R DAgnesPresident Director Chief of Party and Technical CoordinatorPT TLgu Mandiri Health Sector Financing ProjectWisma Tugu International Science and Technology1HR Rasuna Said Institute Inc

Ministry of HealthKuningan Jakarta 12910 Bureau of Planning J1 H R Rasuna Said

Kuningan Jakarta 12950 Re Status of Tugu Mandiri HMO Feasibility Assessment Business Plan

Project at Consultants Departure From Indonesia

Dear Drs Djaafar and DAgnes

As the American consultants who undertook to assess the feasibility of a TuguMandiri Health Maintenance Organization (HMO) and if feasible to prepare abusiness plan and an operational plan of action we have completed the allotted fourweeks in Indonesia and submit this status report on our activities accomplishmentsand recommendations

In summary due to fhe lack of sufficient information--demographic costutilization health care provider actuarial and other--we are unable to assess thefeasibility or begin preparation of the business and operational plan however wewill complete the original Scope of Work upon completion of a comprehensive datacollection phase which we outline in this report

Based on our overall observations we have determined that the needed informationis recorded and maintained in various places and formats and is retrievable for ourpurposes The design and implementation of a comprehensive data collection processis vital to the success of this project and is of great importance to the Indonesiangovernments current five-year plan Repelita V and to the other health and medicalservice programs under the overall USAID Health Sector Financing Project We areconfident that the results from the data collection process will result in our ability tomake the feasibility assessment and prepare the business operating plans insupport ofTugu Mandiris goals and objectives as stated in the original Scope ofWork The outcome of our effort~s to date are (a) a cohesive knowledgable team of American expatriots and Indonesian nationals who have favorable relationshipswith the sources of needed information (b) refinement of the specifications for thisinformation and several check lists aids to facilitate collection (c) identification ofthe multiple sources of this information and (d) a Revised Scope of Work thatcontains a comprehensive strategy to collect the needed data from appropriatesources This data when received will permit us to perform a feasibility assessmentcontaining a business plan and an operational plan of action for a Tugu MandiriHMOmanaged health care system fbr the target markets

We think this project (i) implements an Indonesian government policy set forth inRepelita V to encourage new health care financing approaches (ii) offers insight intothe causes of cost increases in health care delivery that are the basic reasons foi theRepelita V policy and that will be useful to select and implement appropriate healthfinancing methods to contain or reverse t-ealth care cost increases being experiencedin health benefits sponsored by employers and the government and (iii) orients andeducates important Indonesian nationals involved in employee health benefits theirfinancing and provision We recommend that this Revised Scope of Work to addnecessary data collection be approved and the original feasibility assessmentbusiness plan operational plan be prepared in support of the target markets andother potential HMO managed care markets upon completion of the proposed datacollection process

1 Background

In early March we participated in a meeting at the ISTI office in Washington DCto review and revise the Scope of Work for a Tugu Mandiri HMO feasibilityassessment and business plan Professor Robert Shouldice of the GeorgeWashington University School of Public Health also participated along with BobFratt and Jennifer Beckett of ISTI The original Scope of Work had been written inlight of Professor Shouldices visit to Tugu Mandiri earlier this year--especially hismeetings with Drs Djaafar and expatriate USAID and ISTI staff The principalrevisions were deletion of the Pertamina active employees and their dependentsfrom the projects target market and expansion for research on tax and legalramifications of the HMO We were also asked to consider appropriate methods offunding Pertamina retiree health benefits during an employees active employmentand to see if employee health benefit costs can be tax deductible under Indonesian corporate income tax regulations

At the conclusion of his meetings in Indonesia Professor Shouldice left a two pagelist of needed Data Elements for HMO Planning and in the Washington DCmeeting we were told to expect all the necessary data to be available for our reviewupon arrival in Jakarta however we received very little usable information duringour four week stay in country

Prior to leaving the United State we individually received subsequent briefings onthe project in meetings and telephone conversations with Professor Shouldice andBob Pratt We received copies of a draft 1986 HMO Market Study and Business Planfor Tugu Mandiri (the REACH Report) however that report was not accepted byUSAID or Tugu Mandiri because its data was not supported and itsrecommendations were not specific or practical for implementation

In light of the inadequacies of the REACH Report we were instructed to prepare areport if the HMO is feasible that clearly explains to Tugu Mandiri staff the factualstatistical and financial basis for our conclusionsrecommendations in a formappropriate for Tugu Mandiri and Pertamina executive staff and Board of Directors purposes

Upon our arrival in Jakarta we established a reporting relationship to Jim MarzolfMD of ISTI with frequent contact with Tom DAgnes who i1ST Chief of Party forthe project We established offices in the Tugu Mandiri office suite and recognizedDrs Djaafar as the principal and Tugu Mandiri as the ultimate

2

client We formed a working task fbrce with Nanang Iskandar MD DirectorUmum of Tugu Mandiri Rochwan Muthalib FLMI Underwriting Manager of TuguMandiri and Soejadi Hospital Resources Development Chief in Pertaminas CentralAdministrative Health Bureau in Jakarta R Pratolo also joined the task force asactiary

In addition Hans Schaefer of PT Nagadi Ekasakti was engaged as the resourcescoordinator for tax and legal matters Through Mr Schaefer Drs Istama TSiddharta President-Director of the Drs Siddharta amp Siddharta independentaccounting firm that is associated with Coopers amp Lybrand undertook the taxresearch and issued two reports which are attached as Appendices I and H Dr LianaS Gunawan of Kantor Notaris Kartini Muljadi undertook the legal research inconjunction with Mr Schaefer and their report is expected

11 Team Activities

Our team or task force activities involved (a) an extensive exchange of informationbetween the expatriate consultants and Indonesian nationals to build mutualunderstanding trust and a united approach to our project (b) refinement of the listof needed information to incorporate specific needs of the actuary and consultants aswell as to accommodate Pertaminaproduction sharing contractor (PSC) actualoperations and administrative processes (c) identification of the sources of thisinformation and (d) planning how to collect this information

Virtually all of the information submitted to the team was collected at Pertamina bySoejadi During our first week in country working from Professor Shouldices listSoejadi presented age data on the Pertamina retirees as well as the total number ofretirees and widows and spouses covered for health benefits He also presented a listof the total number of PSC employees by contractor Soejadi reported that most ofthe required data was unavailable especially with respect to the PSCs and specificfinancial and utilization data

During the first week Drs Djaafar introduced us to Mr Soeranto S Director of PTTambang Timah the Indonesian national tin mining company and a senior memberof his staff because the tin mining company was experiencing similar increases inemployee health benefit costs and Mr Soeranto was interested in the HMO conceptto help control costs and improve health care for Timah beneficiaries

During the second week we met representatives of two PSCs-- Dr Soeprawoto ofMarathon Petroleum Indonesia Ltd and Marijke Salomo of Roy M Huffington IncAlthough not in his official capacity as Marathon Medical Director Dr Soeprawotosupported the Tugu Mandiri HMO project as offering an improvement in the qualityand availability of health benefits for Marathon employees who currently receive acash stipend monthly for most family outpatienL care and who have usually spentthe stipend and are unable to pay when a family member becomes ill Mrs Salomo was responsive to our questions Both confirmed the availability of the information we need but neither could provide information to us without instructions from theirsuperior who probably would refer the matter to their home offices in the UnitedStaLes unless Pertamina requested their cooperation with us

As we discussed the teams limited receipt of data and discouraging efforts to collectthe balance it became clear that a more specific list of needed information wasessential to focus efforts properly We were concerned that the project team was not

3

receiving full cooperation and that additional support was required from Pertamina and the Ministry of Health

Early in the second week we drafted a more specific list of data elements requiredfor analysis and reviewed it line by line with team members That dialog led tomany revisions and in the middle of the revision process Drs Djaafar suggested to us that the Indonesian team members did not understand many of the concepts andterms used in the data list Accordingly we spent the better part of the next dayexplaining the nature of our assignment how HMOs operate in the United Stateswhat our terms mean particularly in the operation ofan HMO and how therequested information will be used in assessing marketing finance and provideraspects of a potential Tugu Mandiri HMO A copy of a feasibility study and business operating plan completed for a US company was utilized to explain to teammembers Drs Djaafar and ISTIjust what is involved in the development of such areport That orientation education process resulted in a significant breakthroughFirst we were able to revise the information specifications so that everyoneunderstood them using many Indonesian concepts instead of American-- egemployment regulations describing employee health benefits instead of theAmerican benefit plan or benefit package A copy of the final data request(excluding Tugu Mandiri organization capabilities resources relevant to the HMOwhich still must be identified) is attached as Appendix III

Having completed the Pertamina and PSC information specification we preparedfive check lists to aid the team and the data gatherers in identifying whatinformation is needed about each data source--Pertamina and non-Pertaminahospitals their hospital based clinics their free-standing clinics PSC beneficiariesand Pertamina retirees Because most Pertamina utilization information has activeemployee and dependent information combined with retiree widow spouse dataand because active employee benefits are not budgeted separately from retireebenefits we added employee data to the data request A set of these check lists isattached as Appendix IV They will indicate if each source has reported necessaryinformation but these check lists are not intended as answer sheets for submittingdata

Finally we concluded that collecting this information for Pertamina retireesrequires contact with the Pertamina Human Resources (including health) or UmumDirekturs department and the Pertamina F -ance Department in theadministrative office for each of Pertaminas seven operating regions (NothSumatra South Sumatra Dumai Kalimantan Cirebon Cilacap and Sorong) and forJakarta This means collecting information from a total of 16 departments locations because of the way Pertamina is organized with decentralized healthfacilities in each region Some but not all of the needed employee and retireeinformation is available in the central administrative and finance departments inJakarta

For the PSC beneficiaries limited information is available in the Pertamina JakartaBKKA Health and Finance Departments Most of the information is maintained atthe 17 PSC offices Some PSCs operate their own hospitals and clinics andtherefore we must determine how to collect and integrate the PSC beneficiaryinformation and PSC health facility operations into Tugu Mandiris business planAt the request of senior executive staff of Pertamina the PSCs will cooperate with our data collection efforts

4

Ill Comprehensive l)ata Collection - Revised Scope of Work

The team has devoted considerable thought to effective approaches for the collectionof needed data from this geographically widespread network of potential data sources We have concluded that the development of a formal information systemand data collection process is required to support the conduct of a comprehensivefeasibility study and if feasible a business plan and operational plan of action asrequired for Tugu Mandiri These actuarial studies will result in projected healthbenefit costs (premiums) as well as expected utilization and reimbursement rates forcovered services Feasibility and required provider arrangements in our finalbusinessoperating plan will be based on those actuarial recommendations It is notpossible to begin the basic actuarial studies for this project without the identified information

It is clear from the work of the consulting team that the information needed tosupport the completion of this project is available in Indonesia and must be obtainedbased on an expanded scope of work to add the data collection component A draft copy of the Revised Scope of Work is attached as Appendix V As agreed in our exitmeeting with USAID we completed the expanded scope of work for data collection upon returning to the United States We think that the new collection process willrequire extensive field work in country and approximately ten months withadditional resources (focusing on data collection for three representative operatingPertamina regions Jakarta and several representative PSCs) subject to a TuguMandiriPertamina decision to focus only on one region as a pilot site which willreduce the costs time and effort substantially or to expand the data collection to allregions and PSCs which would substantially increase all three

In light of feedback from ISTI and USAID on the unanticipated costs and timeinvolved for this data collection effort we propose three alternative approaches fordata collection Those alternatives are

A Collecting needed data from all seven Pertamina regions and Jakarta headquarters as well as from all seventeen PSCs

B Collecting needed data from four representative Pertamina operating regionsfrom Jakarta headquarters and from three to five representative PSCs Fromthis data the actuary and we will be able to extrapolate and prepare actuarialprojections evaluate feasibility and if feasible prepare a business plan andoperational plan of action for the full target market

C Collecting needed data from one Pertamina region and PSCs operating in thatregion from which actuarial projections the feasibility study and if feasible thebusiness plan and operating plan will be completed for that region That regionwill serve as a pilot from which experience can be evaluated If the pilot provessuccessful expansion to other areas can be planned

Of the alternative approaches listed above we recommend alternative B Thesampling methodology used in alternative B will permit the actuary andconsultants to extrapolate from the representative areas to assess overall feasibilityand project the business and operating plan for all target markets throughout thearchipelago Alternative A is less cost effective than alternative B We do notrecommend alternative Cbecause it will not permit evaluation of the alternative

5

health care financing and delivery system for the entire target markets in a timelyfashion because it could result in employeeretiree health benefits in the pilot regionthat differ from those in other regions and because the results of implementationwill not be significant with respect to national cost increase trends

IV P ROJ ECT STATUS - SIGN IFICANT P)OI1CY NIEEllINGS

To discuss the consulting teams progress and recommendations the significantdata problems encountered and proposed solutions three joint meetings were heldwith representatives from USAID the Ministry of Health Health Sector FinancingProject - International Science and Technology Institute Inc (ISTI) Pertamina andTugu Mandiri during our last week in country In each of these meetings the projectconsultants presened the current progress and the scope of the data problemsconfronting the project

It was concluded during the final meeting that the consulting team should developand present to ISTI representatives a Revised Scope of Work to add a comprehensivedata collection component to this project This Revised Scope of Work is attached as Appendix V

Further it was agreed that the Ministry of Health would assume leadership byarranging and chairing high level meetings with Pertaminas top officials theMinistry of Mines USAID and Tugu Mandiri to receive full support for this projectItwas also agreed that the Ministry of Health would seek joint funding for theadditional costs associated with the data collection which became considerably morecomplex and resource intensive than originally anticipated The discussion ofjointfunding requirements should not occur until after Pertamina has agreed to supportthis project

We strongly recommend that Drs Djaafar be closely involved with the Ministry ofHealth in the planning and execution of these meetings including the selection ofparticipants presentations during the meetings and follow-up activities It wassuggested that the consultants Dr Barnes and Mr Wolff be available forpresentaLons during these meetings Further consultant work is suspended untilthese meetngs are favorably concluded

V CONCLUSIONS ANI) RECONMINI)AIIONS

It is most important for all concerned to realize that the most critical component ofthis project and all of the other health sector financing projects is reliable data forsound decision making at the executive and Board levels At the present time thisaspect is missing from this project and is causing a substantial delay

The second aspect of the project that must be accomplished in a timely manner iscomplete support by Pertamina and the Ministry of lealth Therefore it is stronglyrecommended by the project team that the Revised Scope of Work (to add acomprehensive data collection process) be approved Further that the Ministry ofHealth maintain its new leadership position in this project by scheduling andchairing the necessary meetings with Pertamina Tugu Mandiri the other requiredorgatiizaions and us if our participation can be beneficial in these critical discussions

As previously stated this project can be accomplished as outlined in the originalScope of Work with some modifications to (1) the successful collection of required

6

statistical financial and management information and (2) the previous length of time for completion

With respect to this data collection the consultants recommend (and the actuaryconcurs) that we select three representative regions among Pertamina operationsJakarta and three to five representative PSCs operating in or near the Pertaminaregions selected We will extrapolate from data collected from these sources to assessfeasibility and if feasible prepare the businessoperational plan of action for theentire target markets This recommendation will reduce the time effort and cost ofdata collection and permit us to dress all target markets We do not recommendother alternatives because they do not achieve project objectives in a timely manner

We appreciated the opportunity to serve on the Tugu MandiriPertaminaUSAIDISTI team and to further Indonesian efforts to improve health care financingoptions as well as the availability of quality cost effective health care in Indonesia

James G Bjrnes DPA I

te Date

AIPENI)IX I

Drs Siddharta --- low amp Siddharla P 000 In 8 wirsoe

1 n IpoundNM TIA

Coopers 3PWNAMUUA --

iO

DnW ampLybrand Kaw 10 O M - M 7 t OAJAKARTA 1 N AA IVrI10A

29 Mach 198

Dr E3llottWolf International Sciehce and Technology Inst te Inc co Ministry o Health Bureau of Pluming Kay X-5 No 4-9 J1 HR Rasuna Said Jakarta 12950

Dear Dr Wolf

GENERAL TAX MATTERS ON HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on March 21 1989 we set out below tax aspects related to the proposed health insurance scheme based on the current tax laws of Indonea

Background

2 We understand that the International Science and Technology Institute Inc (IST)has been appointed by Tugu Mandiri (wTugu) an insurance company owned by Pertaminato initially identify and appraise the various options available and subsequently describe and justify a recommended course of action for Tugu in developing a heafth maintenance organization and health insurance scheme (wHlsw) which will

a Inlay provde the plan to Pertam and other ol conhrakors retree aW

subsequen ly expad the avaabWiy of the plan to the gwrfl bunsie commwky

fl 1]-9

Drs Siddharta amp Siddharta in aew~ wem

CoopersampLygrand

D EJfot wow GENERAL TAX MATTERS ONIT11 29 Momh 19onHEALTH WSURANCE SCHEME Page 2of 8

It is proposed that the premium will be borne by both the employee and the employer eg PertaminaP0C n heepoeeg

3 Accordingly ISTI isconcerned about the tax aspects of the health insurance schemeand have requested our advice on the general tax aspects of such viewed from both theemployers and employees standpoint

General Aspects

4 The applicable general principles relevant to the HIS sue are set out in the Income Tax Law 1983 at

a Mole 9 (d) - indoainining taxale Income an employer may not deduct cost a bens prNdd by the taxmyer for the needs d enploym

0 tArIcIe 4 (3) (d) - where ervice received I-ind ain not deductible to the employer thenSturnm the beneft not asmssabe to th employe

5 The above genexal principles were clarified for health and insurance costs in Ministryof Finance Cirurs dated 28 May 1984 (ref no SE-19pA2319 84) and 7 June 1984 (ref noS-336PJ231984) As a result as far as the employer is concerned

(i) medIJ costs Includig hwt Insanc premine pa d by an emwpy to an HIS are non deducwbe

ampU)l costs relaed to compn owned heafth Iscikie pMNg kre seampvice n medictio to ermoyees we non deducttl

(ii) company rmbursed m edicexenses are non deductbe to the company

Drs Siddharta amp Siddharta in aweJssf Wt

CoopersampLybrand

Dr Elloft Wolff GENERAL TAX MATTERS ONu1T Inc 29 Marh 1969HEALTH INSURANCE SCHEME 9 Pmge 3of6

(iv) Ahrecet fOr e Medical expense be addres ed to the O kwaad 0 the Compay the relmbursmert isthe deductwbe fo the compay

6 The employee is not assessable for (i) to (iii) above but will be assessable on theincome in (iv) Income from insurance proceeds eg life accident or health are not assessable for the individual

7 Contrary to the initial spirit of the Income Tax Law as explained in paragraph 4 theIndonesian Tax Authorities have decreed that company contributions to the state pension fund(Tunjangan Hari Tua or wFHT) and Astek are considered as a tax deductible expense whilstbeing tax exempted for the employee (MOF Circular dated 28 May 1984) Historically thistreatment results from the Minister of Labors opinion that the non deductability of suchexpenses will strongly hinder the development of the pension fund

8 In accordance with MOF Decree 9470AXt41983 Indonesian citizens are notrequired to file personal tuzreturns if they are employed by only one company with theunderstanding that income isnot derived from other sources The impact of this is considered below

9 The only deductions allowable against an individuals assessable income are

(i) occupalonal allowance I 5 o gross mnnual salry rX xc p380000 (MOFDecrM 9KMK041964 dated 31 Decenombg I93)

(ii) tax fee income loWance Le Rp 9W00O for the idduaj and Rp 480000 for eachdepedent IlnWed to W depenclr (M11le 7 (1) Income Tax Law)

(iii) P contibution to Pension funds approved by the Minister of Finance eg the statePension fund and ASTEK (Artie a (2) Income Toy Law and MOF Circular dated 28 May1984)

Drs Siddharta amp Siddharta Coopers bull ampLybrand

Dr EJUk_ WoM GENERAL TAX MATTERSW11 kX4 29 March 196HEALTH INSURANCE SCHEME Page 4of 5

k1M Severgf Production Sharing Contractors are governed by the old tax laws which in anumber of ways differ from the 1984 Income Tax Law In this context the abovementioned aspects do not necessarily apply

Current tax position

11 From the above paragraphs it is clear that under current Indonesian Tax RegulationsFIS contnbutions by the employer would not be deductible On the other hand theemployees contribution would also not be deductible on his or her individual tax return Thisnon deductibility from an individual viewpoint is further modified by most Indonesiansreluctance to submit tax returns so that in the event of such contribution being allowed it will generally still not represent a benefit for the individual

Alternative options and possibilities

Request for tax treatment equal to THT

T As explained in paragraph 7 and 9 (iii) THT and Astek contributions receive specialconcessional treatmeni We believe that based on your explanations that the Ministers ofFinance Health and Energy have expressed their strong support for the HiS you shouldexplore the possibility of similar tax treatment to THT and Astek being applied to the HIS In our opinion the possibility of success is distant

-12shy

m1A

Drs Siddharta amp Siddharta In ameed~o a

CoopersampLybrand

Dr Eliot Wolff GENERAL TAX MATTERS ON9MT 29 March 196HEALTH INSURANCE SCHEME Page 5 of 6

Incorporatio into employfe salary

13 Another alternative would be to increase the employees Walary in accordance with the HIS contributions amount whereby

a th employer woUd be the nddhkon ampamaartexW Insted of HIScontbtions and therefore obtain tax deducablity for such expena

b the emdegYoees are no beng du vaged ampgtheW ngt take home lSy igUrmffctad

14 Under this approach you should bear in mind that the salary increase should withthe -cepton of employees earning salaries below the tax free bracket exceed the HIScontribution amount T7he excess is the Ngross up amount whereby the contribution is grossedup iu order to account for it being subject to income tax as part of the employees salaryHowever as the employees are mostly under the 25 tax bracket whilst the employer (LePertamina) is in the 35 tax bracket this alternative will carry tax benefits

15 However you should appreciate that Pertamina being a state owned company wouldmost probably require approvals from the Ministers of Energy Finance and Labor to increase employee salaries

Conclusion

16 We beLieve that compared with most other countries the current Indonesian environment could be more conducive to the establishment of an HIS

Lax

7mf -13shy

Drs Siddharta amp SiddhartaCo80o4 W~ Cooy e ampLgrand

Dr EIlI Wolff GENERAL TAX MATTERS ONW8T k 29 lomh 19gHEALTH INSURANCE SCHEME

17 However we also believe that a complex combinaoion of internal and external factorsin addition to iax will influence a companys decision on whether or not to embrxe an HISwhilst tax is not the decisive factor for such a decision

1amp Should you require further information please do not hesitate to contact myself orMr Ross L Gavin Chief Technical Advisor of this office

Yours faithfulyDrs SIDDHARTA amp SIDDHARTA Registered Public Accountants No D-2336

Drs Istama T Siddharta Senior Partner

ITSjs

f-14shy

APPENI)lX 11

Drs Siddharta - ong 2samp Siddharta li IWIMII4SoS

bAwfteW W 6Osanl 1lM6 J 5D1T IAC Oers CM bOP MULIA AUTToNampLbrand Kw oN Ree Said P0 V Ily JAKATA iM JAKRTA 127MA

14 April 1989

Dr Elliot Wolff International Sclence and Technology institute Inc co Wiane Tugu 4th floor J1 HR RasunA Baid Jakarta

0ear Dr Wolff

HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on April 10 1989 we setout below the tax aspects related to the proposed health insurance scheme a they affect Production Sharing Contractors

2 In bur letter of Madr 29 1989 we gt out the ttdon regulatozs affecting yourproposed health insurance scheme as they currenty apply omostta-~~~~~ utaxrvpayersay oAAs noted inparagraph 10 of that letter the currfnt tax regulations do not necessarily apply to Production Sharing Contractors

3 Article 33 (3) of the Income Tax Law 1983 states that entdtes In the oil and gas sectorconnected with Production Sharing Contracts in effect prior to January 11984 will continue to be subject to the Old Tax Laws rather than the Laws which came into effect on that date

4 Under the Old Tax Laws benefits-ln-kind provided to employee will be deductiblefor the purposes of determining the tax of the employer but conversely are assessable in thehands of the employee The amount assessable to the employee is the cost to the employer

S It is our understanding that most Production Sharing Contractors presently operatingin Indonesia are governed by Production Sharing Contracts signed prior to 1984 and thereforemost employees of Production Sharing Contractors would be assessed on the cost of thehealth insurance scheme as it applies to each individual

-16shy

Jakarta 17 April 1989

Drs Rosnirm Djaafar Dr Thomas R DAgnesPresident Director Chief of Party and Technical CoordinatorPT TLgu Mandiri Health Sector Financing ProjectWisma Tugu International Science and Technology1HR Rasuna Said Institute Inc

Ministry of HealthKuningan Jakarta 12910 Bureau of Planning J1 H R Rasuna Said

Kuningan Jakarta 12950 Re Status of Tugu Mandiri HMO Feasibility Assessment Business Plan

Project at Consultants Departure From Indonesia

Dear Drs Djaafar and DAgnes

As the American consultants who undertook to assess the feasibility of a TuguMandiri Health Maintenance Organization (HMO) and if feasible to prepare abusiness plan and an operational plan of action we have completed the allotted fourweeks in Indonesia and submit this status report on our activities accomplishmentsand recommendations

In summary due to fhe lack of sufficient information--demographic costutilization health care provider actuarial and other--we are unable to assess thefeasibility or begin preparation of the business and operational plan however wewill complete the original Scope of Work upon completion of a comprehensive datacollection phase which we outline in this report

Based on our overall observations we have determined that the needed informationis recorded and maintained in various places and formats and is retrievable for ourpurposes The design and implementation of a comprehensive data collection processis vital to the success of this project and is of great importance to the Indonesiangovernments current five-year plan Repelita V and to the other health and medicalservice programs under the overall USAID Health Sector Financing Project We areconfident that the results from the data collection process will result in our ability tomake the feasibility assessment and prepare the business operating plans insupport ofTugu Mandiris goals and objectives as stated in the original Scope ofWork The outcome of our effort~s to date are (a) a cohesive knowledgable team of American expatriots and Indonesian nationals who have favorable relationshipswith the sources of needed information (b) refinement of the specifications for thisinformation and several check lists aids to facilitate collection (c) identification ofthe multiple sources of this information and (d) a Revised Scope of Work thatcontains a comprehensive strategy to collect the needed data from appropriatesources This data when received will permit us to perform a feasibility assessmentcontaining a business plan and an operational plan of action for a Tugu MandiriHMOmanaged health care system fbr the target markets

We think this project (i) implements an Indonesian government policy set forth inRepelita V to encourage new health care financing approaches (ii) offers insight intothe causes of cost increases in health care delivery that are the basic reasons foi theRepelita V policy and that will be useful to select and implement appropriate healthfinancing methods to contain or reverse t-ealth care cost increases being experiencedin health benefits sponsored by employers and the government and (iii) orients andeducates important Indonesian nationals involved in employee health benefits theirfinancing and provision We recommend that this Revised Scope of Work to addnecessary data collection be approved and the original feasibility assessmentbusiness plan operational plan be prepared in support of the target markets andother potential HMO managed care markets upon completion of the proposed datacollection process

1 Background

In early March we participated in a meeting at the ISTI office in Washington DCto review and revise the Scope of Work for a Tugu Mandiri HMO feasibilityassessment and business plan Professor Robert Shouldice of the GeorgeWashington University School of Public Health also participated along with BobFratt and Jennifer Beckett of ISTI The original Scope of Work had been written inlight of Professor Shouldices visit to Tugu Mandiri earlier this year--especially hismeetings with Drs Djaafar and expatriate USAID and ISTI staff The principalrevisions were deletion of the Pertamina active employees and their dependentsfrom the projects target market and expansion for research on tax and legalramifications of the HMO We were also asked to consider appropriate methods offunding Pertamina retiree health benefits during an employees active employmentand to see if employee health benefit costs can be tax deductible under Indonesian corporate income tax regulations

At the conclusion of his meetings in Indonesia Professor Shouldice left a two pagelist of needed Data Elements for HMO Planning and in the Washington DCmeeting we were told to expect all the necessary data to be available for our reviewupon arrival in Jakarta however we received very little usable information duringour four week stay in country

Prior to leaving the United State we individually received subsequent briefings onthe project in meetings and telephone conversations with Professor Shouldice andBob Pratt We received copies of a draft 1986 HMO Market Study and Business Planfor Tugu Mandiri (the REACH Report) however that report was not accepted byUSAID or Tugu Mandiri because its data was not supported and itsrecommendations were not specific or practical for implementation

In light of the inadequacies of the REACH Report we were instructed to prepare areport if the HMO is feasible that clearly explains to Tugu Mandiri staff the factualstatistical and financial basis for our conclusionsrecommendations in a formappropriate for Tugu Mandiri and Pertamina executive staff and Board of Directors purposes

Upon our arrival in Jakarta we established a reporting relationship to Jim MarzolfMD of ISTI with frequent contact with Tom DAgnes who i1ST Chief of Party forthe project We established offices in the Tugu Mandiri office suite and recognizedDrs Djaafar as the principal and Tugu Mandiri as the ultimate

2

client We formed a working task fbrce with Nanang Iskandar MD DirectorUmum of Tugu Mandiri Rochwan Muthalib FLMI Underwriting Manager of TuguMandiri and Soejadi Hospital Resources Development Chief in Pertaminas CentralAdministrative Health Bureau in Jakarta R Pratolo also joined the task force asactiary

In addition Hans Schaefer of PT Nagadi Ekasakti was engaged as the resourcescoordinator for tax and legal matters Through Mr Schaefer Drs Istama TSiddharta President-Director of the Drs Siddharta amp Siddharta independentaccounting firm that is associated with Coopers amp Lybrand undertook the taxresearch and issued two reports which are attached as Appendices I and H Dr LianaS Gunawan of Kantor Notaris Kartini Muljadi undertook the legal research inconjunction with Mr Schaefer and their report is expected

11 Team Activities

Our team or task force activities involved (a) an extensive exchange of informationbetween the expatriate consultants and Indonesian nationals to build mutualunderstanding trust and a united approach to our project (b) refinement of the listof needed information to incorporate specific needs of the actuary and consultants aswell as to accommodate Pertaminaproduction sharing contractor (PSC) actualoperations and administrative processes (c) identification of the sources of thisinformation and (d) planning how to collect this information

Virtually all of the information submitted to the team was collected at Pertamina bySoejadi During our first week in country working from Professor Shouldices listSoejadi presented age data on the Pertamina retirees as well as the total number ofretirees and widows and spouses covered for health benefits He also presented a listof the total number of PSC employees by contractor Soejadi reported that most ofthe required data was unavailable especially with respect to the PSCs and specificfinancial and utilization data

During the first week Drs Djaafar introduced us to Mr Soeranto S Director of PTTambang Timah the Indonesian national tin mining company and a senior memberof his staff because the tin mining company was experiencing similar increases inemployee health benefit costs and Mr Soeranto was interested in the HMO conceptto help control costs and improve health care for Timah beneficiaries

During the second week we met representatives of two PSCs-- Dr Soeprawoto ofMarathon Petroleum Indonesia Ltd and Marijke Salomo of Roy M Huffington IncAlthough not in his official capacity as Marathon Medical Director Dr Soeprawotosupported the Tugu Mandiri HMO project as offering an improvement in the qualityand availability of health benefits for Marathon employees who currently receive acash stipend monthly for most family outpatienL care and who have usually spentthe stipend and are unable to pay when a family member becomes ill Mrs Salomo was responsive to our questions Both confirmed the availability of the information we need but neither could provide information to us without instructions from theirsuperior who probably would refer the matter to their home offices in the UnitedStaLes unless Pertamina requested their cooperation with us

As we discussed the teams limited receipt of data and discouraging efforts to collectthe balance it became clear that a more specific list of needed information wasessential to focus efforts properly We were concerned that the project team was not

3

receiving full cooperation and that additional support was required from Pertamina and the Ministry of Health

Early in the second week we drafted a more specific list of data elements requiredfor analysis and reviewed it line by line with team members That dialog led tomany revisions and in the middle of the revision process Drs Djaafar suggested to us that the Indonesian team members did not understand many of the concepts andterms used in the data list Accordingly we spent the better part of the next dayexplaining the nature of our assignment how HMOs operate in the United Stateswhat our terms mean particularly in the operation ofan HMO and how therequested information will be used in assessing marketing finance and provideraspects of a potential Tugu Mandiri HMO A copy of a feasibility study and business operating plan completed for a US company was utilized to explain to teammembers Drs Djaafar and ISTIjust what is involved in the development of such areport That orientation education process resulted in a significant breakthroughFirst we were able to revise the information specifications so that everyoneunderstood them using many Indonesian concepts instead of American-- egemployment regulations describing employee health benefits instead of theAmerican benefit plan or benefit package A copy of the final data request(excluding Tugu Mandiri organization capabilities resources relevant to the HMOwhich still must be identified) is attached as Appendix III

Having completed the Pertamina and PSC information specification we preparedfive check lists to aid the team and the data gatherers in identifying whatinformation is needed about each data source--Pertamina and non-Pertaminahospitals their hospital based clinics their free-standing clinics PSC beneficiariesand Pertamina retirees Because most Pertamina utilization information has activeemployee and dependent information combined with retiree widow spouse dataand because active employee benefits are not budgeted separately from retireebenefits we added employee data to the data request A set of these check lists isattached as Appendix IV They will indicate if each source has reported necessaryinformation but these check lists are not intended as answer sheets for submittingdata

Finally we concluded that collecting this information for Pertamina retireesrequires contact with the Pertamina Human Resources (including health) or UmumDirekturs department and the Pertamina F -ance Department in theadministrative office for each of Pertaminas seven operating regions (NothSumatra South Sumatra Dumai Kalimantan Cirebon Cilacap and Sorong) and forJakarta This means collecting information from a total of 16 departments locations because of the way Pertamina is organized with decentralized healthfacilities in each region Some but not all of the needed employee and retireeinformation is available in the central administrative and finance departments inJakarta

For the PSC beneficiaries limited information is available in the Pertamina JakartaBKKA Health and Finance Departments Most of the information is maintained atthe 17 PSC offices Some PSCs operate their own hospitals and clinics andtherefore we must determine how to collect and integrate the PSC beneficiaryinformation and PSC health facility operations into Tugu Mandiris business planAt the request of senior executive staff of Pertamina the PSCs will cooperate with our data collection efforts

4

Ill Comprehensive l)ata Collection - Revised Scope of Work

The team has devoted considerable thought to effective approaches for the collectionof needed data from this geographically widespread network of potential data sources We have concluded that the development of a formal information systemand data collection process is required to support the conduct of a comprehensivefeasibility study and if feasible a business plan and operational plan of action asrequired for Tugu Mandiri These actuarial studies will result in projected healthbenefit costs (premiums) as well as expected utilization and reimbursement rates forcovered services Feasibility and required provider arrangements in our finalbusinessoperating plan will be based on those actuarial recommendations It is notpossible to begin the basic actuarial studies for this project without the identified information

It is clear from the work of the consulting team that the information needed tosupport the completion of this project is available in Indonesia and must be obtainedbased on an expanded scope of work to add the data collection component A draft copy of the Revised Scope of Work is attached as Appendix V As agreed in our exitmeeting with USAID we completed the expanded scope of work for data collection upon returning to the United States We think that the new collection process willrequire extensive field work in country and approximately ten months withadditional resources (focusing on data collection for three representative operatingPertamina regions Jakarta and several representative PSCs) subject to a TuguMandiriPertamina decision to focus only on one region as a pilot site which willreduce the costs time and effort substantially or to expand the data collection to allregions and PSCs which would substantially increase all three

In light of feedback from ISTI and USAID on the unanticipated costs and timeinvolved for this data collection effort we propose three alternative approaches fordata collection Those alternatives are

A Collecting needed data from all seven Pertamina regions and Jakarta headquarters as well as from all seventeen PSCs

B Collecting needed data from four representative Pertamina operating regionsfrom Jakarta headquarters and from three to five representative PSCs Fromthis data the actuary and we will be able to extrapolate and prepare actuarialprojections evaluate feasibility and if feasible prepare a business plan andoperational plan of action for the full target market

C Collecting needed data from one Pertamina region and PSCs operating in thatregion from which actuarial projections the feasibility study and if feasible thebusiness plan and operating plan will be completed for that region That regionwill serve as a pilot from which experience can be evaluated If the pilot provessuccessful expansion to other areas can be planned

Of the alternative approaches listed above we recommend alternative B Thesampling methodology used in alternative B will permit the actuary andconsultants to extrapolate from the representative areas to assess overall feasibilityand project the business and operating plan for all target markets throughout thearchipelago Alternative A is less cost effective than alternative B We do notrecommend alternative Cbecause it will not permit evaluation of the alternative

5

health care financing and delivery system for the entire target markets in a timelyfashion because it could result in employeeretiree health benefits in the pilot regionthat differ from those in other regions and because the results of implementationwill not be significant with respect to national cost increase trends

IV P ROJ ECT STATUS - SIGN IFICANT P)OI1CY NIEEllINGS

To discuss the consulting teams progress and recommendations the significantdata problems encountered and proposed solutions three joint meetings were heldwith representatives from USAID the Ministry of Health Health Sector FinancingProject - International Science and Technology Institute Inc (ISTI) Pertamina andTugu Mandiri during our last week in country In each of these meetings the projectconsultants presened the current progress and the scope of the data problemsconfronting the project

It was concluded during the final meeting that the consulting team should developand present to ISTI representatives a Revised Scope of Work to add a comprehensivedata collection component to this project This Revised Scope of Work is attached as Appendix V

Further it was agreed that the Ministry of Health would assume leadership byarranging and chairing high level meetings with Pertaminas top officials theMinistry of Mines USAID and Tugu Mandiri to receive full support for this projectItwas also agreed that the Ministry of Health would seek joint funding for theadditional costs associated with the data collection which became considerably morecomplex and resource intensive than originally anticipated The discussion ofjointfunding requirements should not occur until after Pertamina has agreed to supportthis project

We strongly recommend that Drs Djaafar be closely involved with the Ministry ofHealth in the planning and execution of these meetings including the selection ofparticipants presentations during the meetings and follow-up activities It wassuggested that the consultants Dr Barnes and Mr Wolff be available forpresentaLons during these meetings Further consultant work is suspended untilthese meetngs are favorably concluded

V CONCLUSIONS ANI) RECONMINI)AIIONS

It is most important for all concerned to realize that the most critical component ofthis project and all of the other health sector financing projects is reliable data forsound decision making at the executive and Board levels At the present time thisaspect is missing from this project and is causing a substantial delay

The second aspect of the project that must be accomplished in a timely manner iscomplete support by Pertamina and the Ministry of lealth Therefore it is stronglyrecommended by the project team that the Revised Scope of Work (to add acomprehensive data collection process) be approved Further that the Ministry ofHealth maintain its new leadership position in this project by scheduling andchairing the necessary meetings with Pertamina Tugu Mandiri the other requiredorgatiizaions and us if our participation can be beneficial in these critical discussions

As previously stated this project can be accomplished as outlined in the originalScope of Work with some modifications to (1) the successful collection of required

6

statistical financial and management information and (2) the previous length of time for completion

With respect to this data collection the consultants recommend (and the actuaryconcurs) that we select three representative regions among Pertamina operationsJakarta and three to five representative PSCs operating in or near the Pertaminaregions selected We will extrapolate from data collected from these sources to assessfeasibility and if feasible prepare the businessoperational plan of action for theentire target markets This recommendation will reduce the time effort and cost ofdata collection and permit us to dress all target markets We do not recommendother alternatives because they do not achieve project objectives in a timely manner

We appreciated the opportunity to serve on the Tugu MandiriPertaminaUSAIDISTI team and to further Indonesian efforts to improve health care financingoptions as well as the availability of quality cost effective health care in Indonesia

James G Bjrnes DPA I

te Date

AIPENI)IX I

Drs Siddharta --- low amp Siddharla P 000 In 8 wirsoe

1 n IpoundNM TIA

Coopers 3PWNAMUUA --

iO

DnW ampLybrand Kaw 10 O M - M 7 t OAJAKARTA 1 N AA IVrI10A

29 Mach 198

Dr E3llottWolf International Sciehce and Technology Inst te Inc co Ministry o Health Bureau of Pluming Kay X-5 No 4-9 J1 HR Rasuna Said Jakarta 12950

Dear Dr Wolf

GENERAL TAX MATTERS ON HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on March 21 1989 we set out below tax aspects related to the proposed health insurance scheme based on the current tax laws of Indonea

Background

2 We understand that the International Science and Technology Institute Inc (IST)has been appointed by Tugu Mandiri (wTugu) an insurance company owned by Pertaminato initially identify and appraise the various options available and subsequently describe and justify a recommended course of action for Tugu in developing a heafth maintenance organization and health insurance scheme (wHlsw) which will

a Inlay provde the plan to Pertam and other ol conhrakors retree aW

subsequen ly expad the avaabWiy of the plan to the gwrfl bunsie commwky

fl 1]-9

Drs Siddharta amp Siddharta in aew~ wem

CoopersampLygrand

D EJfot wow GENERAL TAX MATTERS ONIT11 29 Momh 19onHEALTH WSURANCE SCHEME Page 2of 8

It is proposed that the premium will be borne by both the employee and the employer eg PertaminaP0C n heepoeeg

3 Accordingly ISTI isconcerned about the tax aspects of the health insurance schemeand have requested our advice on the general tax aspects of such viewed from both theemployers and employees standpoint

General Aspects

4 The applicable general principles relevant to the HIS sue are set out in the Income Tax Law 1983 at

a Mole 9 (d) - indoainining taxale Income an employer may not deduct cost a bens prNdd by the taxmyer for the needs d enploym

0 tArIcIe 4 (3) (d) - where ervice received I-ind ain not deductible to the employer thenSturnm the beneft not asmssabe to th employe

5 The above genexal principles were clarified for health and insurance costs in Ministryof Finance Cirurs dated 28 May 1984 (ref no SE-19pA2319 84) and 7 June 1984 (ref noS-336PJ231984) As a result as far as the employer is concerned

(i) medIJ costs Includig hwt Insanc premine pa d by an emwpy to an HIS are non deducwbe

ampU)l costs relaed to compn owned heafth Iscikie pMNg kre seampvice n medictio to ermoyees we non deducttl

(ii) company rmbursed m edicexenses are non deductbe to the company

Drs Siddharta amp Siddharta in aweJssf Wt

CoopersampLybrand

Dr Elloft Wolff GENERAL TAX MATTERS ONu1T Inc 29 Marh 1969HEALTH INSURANCE SCHEME 9 Pmge 3of6

(iv) Ahrecet fOr e Medical expense be addres ed to the O kwaad 0 the Compay the relmbursmert isthe deductwbe fo the compay

6 The employee is not assessable for (i) to (iii) above but will be assessable on theincome in (iv) Income from insurance proceeds eg life accident or health are not assessable for the individual

7 Contrary to the initial spirit of the Income Tax Law as explained in paragraph 4 theIndonesian Tax Authorities have decreed that company contributions to the state pension fund(Tunjangan Hari Tua or wFHT) and Astek are considered as a tax deductible expense whilstbeing tax exempted for the employee (MOF Circular dated 28 May 1984) Historically thistreatment results from the Minister of Labors opinion that the non deductability of suchexpenses will strongly hinder the development of the pension fund

8 In accordance with MOF Decree 9470AXt41983 Indonesian citizens are notrequired to file personal tuzreturns if they are employed by only one company with theunderstanding that income isnot derived from other sources The impact of this is considered below

9 The only deductions allowable against an individuals assessable income are

(i) occupalonal allowance I 5 o gross mnnual salry rX xc p380000 (MOFDecrM 9KMK041964 dated 31 Decenombg I93)

(ii) tax fee income loWance Le Rp 9W00O for the idduaj and Rp 480000 for eachdepedent IlnWed to W depenclr (M11le 7 (1) Income Tax Law)

(iii) P contibution to Pension funds approved by the Minister of Finance eg the statePension fund and ASTEK (Artie a (2) Income Toy Law and MOF Circular dated 28 May1984)

Drs Siddharta amp Siddharta Coopers bull ampLybrand

Dr EJUk_ WoM GENERAL TAX MATTERSW11 kX4 29 March 196HEALTH INSURANCE SCHEME Page 4of 5

k1M Severgf Production Sharing Contractors are governed by the old tax laws which in anumber of ways differ from the 1984 Income Tax Law In this context the abovementioned aspects do not necessarily apply

Current tax position

11 From the above paragraphs it is clear that under current Indonesian Tax RegulationsFIS contnbutions by the employer would not be deductible On the other hand theemployees contribution would also not be deductible on his or her individual tax return Thisnon deductibility from an individual viewpoint is further modified by most Indonesiansreluctance to submit tax returns so that in the event of such contribution being allowed it will generally still not represent a benefit for the individual

Alternative options and possibilities

Request for tax treatment equal to THT

T As explained in paragraph 7 and 9 (iii) THT and Astek contributions receive specialconcessional treatmeni We believe that based on your explanations that the Ministers ofFinance Health and Energy have expressed their strong support for the HiS you shouldexplore the possibility of similar tax treatment to THT and Astek being applied to the HIS In our opinion the possibility of success is distant

-12shy

m1A

Drs Siddharta amp Siddharta In ameed~o a

CoopersampLybrand

Dr Eliot Wolff GENERAL TAX MATTERS ON9MT 29 March 196HEALTH INSURANCE SCHEME Page 5 of 6

Incorporatio into employfe salary

13 Another alternative would be to increase the employees Walary in accordance with the HIS contributions amount whereby

a th employer woUd be the nddhkon ampamaartexW Insted of HIScontbtions and therefore obtain tax deducablity for such expena

b the emdegYoees are no beng du vaged ampgtheW ngt take home lSy igUrmffctad

14 Under this approach you should bear in mind that the salary increase should withthe -cepton of employees earning salaries below the tax free bracket exceed the HIScontribution amount T7he excess is the Ngross up amount whereby the contribution is grossedup iu order to account for it being subject to income tax as part of the employees salaryHowever as the employees are mostly under the 25 tax bracket whilst the employer (LePertamina) is in the 35 tax bracket this alternative will carry tax benefits

15 However you should appreciate that Pertamina being a state owned company wouldmost probably require approvals from the Ministers of Energy Finance and Labor to increase employee salaries

Conclusion

16 We beLieve that compared with most other countries the current Indonesian environment could be more conducive to the establishment of an HIS

Lax

7mf -13shy

Drs Siddharta amp SiddhartaCo80o4 W~ Cooy e ampLgrand

Dr EIlI Wolff GENERAL TAX MATTERS ONW8T k 29 lomh 19gHEALTH INSURANCE SCHEME

17 However we also believe that a complex combinaoion of internal and external factorsin addition to iax will influence a companys decision on whether or not to embrxe an HISwhilst tax is not the decisive factor for such a decision

1amp Should you require further information please do not hesitate to contact myself orMr Ross L Gavin Chief Technical Advisor of this office

Yours faithfulyDrs SIDDHARTA amp SIDDHARTA Registered Public Accountants No D-2336

Drs Istama T Siddharta Senior Partner

ITSjs

f-14shy

APPENI)lX 11

Drs Siddharta - ong 2samp Siddharta li IWIMII4SoS

bAwfteW W 6Osanl 1lM6 J 5D1T IAC Oers CM bOP MULIA AUTToNampLbrand Kw oN Ree Said P0 V Ily JAKATA iM JAKRTA 127MA

14 April 1989

Dr Elliot Wolff International Sclence and Technology institute Inc co Wiane Tugu 4th floor J1 HR RasunA Baid Jakarta

0ear Dr Wolff

HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on April 10 1989 we setout below the tax aspects related to the proposed health insurance scheme a they affect Production Sharing Contractors

2 In bur letter of Madr 29 1989 we gt out the ttdon regulatozs affecting yourproposed health insurance scheme as they currenty apply omostta-~~~~~ utaxrvpayersay oAAs noted inparagraph 10 of that letter the currfnt tax regulations do not necessarily apply to Production Sharing Contractors

3 Article 33 (3) of the Income Tax Law 1983 states that entdtes In the oil and gas sectorconnected with Production Sharing Contracts in effect prior to January 11984 will continue to be subject to the Old Tax Laws rather than the Laws which came into effect on that date

4 Under the Old Tax Laws benefits-ln-kind provided to employee will be deductiblefor the purposes of determining the tax of the employer but conversely are assessable in thehands of the employee The amount assessable to the employee is the cost to the employer

S It is our understanding that most Production Sharing Contractors presently operatingin Indonesia are governed by Production Sharing Contracts signed prior to 1984 and thereforemost employees of Production Sharing Contractors would be assessed on the cost of thehealth insurance scheme as it applies to each individual

-16shy

We think this project (i) implements an Indonesian government policy set forth inRepelita V to encourage new health care financing approaches (ii) offers insight intothe causes of cost increases in health care delivery that are the basic reasons foi theRepelita V policy and that will be useful to select and implement appropriate healthfinancing methods to contain or reverse t-ealth care cost increases being experiencedin health benefits sponsored by employers and the government and (iii) orients andeducates important Indonesian nationals involved in employee health benefits theirfinancing and provision We recommend that this Revised Scope of Work to addnecessary data collection be approved and the original feasibility assessmentbusiness plan operational plan be prepared in support of the target markets andother potential HMO managed care markets upon completion of the proposed datacollection process

1 Background

In early March we participated in a meeting at the ISTI office in Washington DCto review and revise the Scope of Work for a Tugu Mandiri HMO feasibilityassessment and business plan Professor Robert Shouldice of the GeorgeWashington University School of Public Health also participated along with BobFratt and Jennifer Beckett of ISTI The original Scope of Work had been written inlight of Professor Shouldices visit to Tugu Mandiri earlier this year--especially hismeetings with Drs Djaafar and expatriate USAID and ISTI staff The principalrevisions were deletion of the Pertamina active employees and their dependentsfrom the projects target market and expansion for research on tax and legalramifications of the HMO We were also asked to consider appropriate methods offunding Pertamina retiree health benefits during an employees active employmentand to see if employee health benefit costs can be tax deductible under Indonesian corporate income tax regulations

At the conclusion of his meetings in Indonesia Professor Shouldice left a two pagelist of needed Data Elements for HMO Planning and in the Washington DCmeeting we were told to expect all the necessary data to be available for our reviewupon arrival in Jakarta however we received very little usable information duringour four week stay in country

Prior to leaving the United State we individually received subsequent briefings onthe project in meetings and telephone conversations with Professor Shouldice andBob Pratt We received copies of a draft 1986 HMO Market Study and Business Planfor Tugu Mandiri (the REACH Report) however that report was not accepted byUSAID or Tugu Mandiri because its data was not supported and itsrecommendations were not specific or practical for implementation

In light of the inadequacies of the REACH Report we were instructed to prepare areport if the HMO is feasible that clearly explains to Tugu Mandiri staff the factualstatistical and financial basis for our conclusionsrecommendations in a formappropriate for Tugu Mandiri and Pertamina executive staff and Board of Directors purposes

Upon our arrival in Jakarta we established a reporting relationship to Jim MarzolfMD of ISTI with frequent contact with Tom DAgnes who i1ST Chief of Party forthe project We established offices in the Tugu Mandiri office suite and recognizedDrs Djaafar as the principal and Tugu Mandiri as the ultimate

2

client We formed a working task fbrce with Nanang Iskandar MD DirectorUmum of Tugu Mandiri Rochwan Muthalib FLMI Underwriting Manager of TuguMandiri and Soejadi Hospital Resources Development Chief in Pertaminas CentralAdministrative Health Bureau in Jakarta R Pratolo also joined the task force asactiary

In addition Hans Schaefer of PT Nagadi Ekasakti was engaged as the resourcescoordinator for tax and legal matters Through Mr Schaefer Drs Istama TSiddharta President-Director of the Drs Siddharta amp Siddharta independentaccounting firm that is associated with Coopers amp Lybrand undertook the taxresearch and issued two reports which are attached as Appendices I and H Dr LianaS Gunawan of Kantor Notaris Kartini Muljadi undertook the legal research inconjunction with Mr Schaefer and their report is expected

11 Team Activities

Our team or task force activities involved (a) an extensive exchange of informationbetween the expatriate consultants and Indonesian nationals to build mutualunderstanding trust and a united approach to our project (b) refinement of the listof needed information to incorporate specific needs of the actuary and consultants aswell as to accommodate Pertaminaproduction sharing contractor (PSC) actualoperations and administrative processes (c) identification of the sources of thisinformation and (d) planning how to collect this information

Virtually all of the information submitted to the team was collected at Pertamina bySoejadi During our first week in country working from Professor Shouldices listSoejadi presented age data on the Pertamina retirees as well as the total number ofretirees and widows and spouses covered for health benefits He also presented a listof the total number of PSC employees by contractor Soejadi reported that most ofthe required data was unavailable especially with respect to the PSCs and specificfinancial and utilization data

During the first week Drs Djaafar introduced us to Mr Soeranto S Director of PTTambang Timah the Indonesian national tin mining company and a senior memberof his staff because the tin mining company was experiencing similar increases inemployee health benefit costs and Mr Soeranto was interested in the HMO conceptto help control costs and improve health care for Timah beneficiaries

During the second week we met representatives of two PSCs-- Dr Soeprawoto ofMarathon Petroleum Indonesia Ltd and Marijke Salomo of Roy M Huffington IncAlthough not in his official capacity as Marathon Medical Director Dr Soeprawotosupported the Tugu Mandiri HMO project as offering an improvement in the qualityand availability of health benefits for Marathon employees who currently receive acash stipend monthly for most family outpatienL care and who have usually spentthe stipend and are unable to pay when a family member becomes ill Mrs Salomo was responsive to our questions Both confirmed the availability of the information we need but neither could provide information to us without instructions from theirsuperior who probably would refer the matter to their home offices in the UnitedStaLes unless Pertamina requested their cooperation with us

As we discussed the teams limited receipt of data and discouraging efforts to collectthe balance it became clear that a more specific list of needed information wasessential to focus efforts properly We were concerned that the project team was not

3

receiving full cooperation and that additional support was required from Pertamina and the Ministry of Health

Early in the second week we drafted a more specific list of data elements requiredfor analysis and reviewed it line by line with team members That dialog led tomany revisions and in the middle of the revision process Drs Djaafar suggested to us that the Indonesian team members did not understand many of the concepts andterms used in the data list Accordingly we spent the better part of the next dayexplaining the nature of our assignment how HMOs operate in the United Stateswhat our terms mean particularly in the operation ofan HMO and how therequested information will be used in assessing marketing finance and provideraspects of a potential Tugu Mandiri HMO A copy of a feasibility study and business operating plan completed for a US company was utilized to explain to teammembers Drs Djaafar and ISTIjust what is involved in the development of such areport That orientation education process resulted in a significant breakthroughFirst we were able to revise the information specifications so that everyoneunderstood them using many Indonesian concepts instead of American-- egemployment regulations describing employee health benefits instead of theAmerican benefit plan or benefit package A copy of the final data request(excluding Tugu Mandiri organization capabilities resources relevant to the HMOwhich still must be identified) is attached as Appendix III

Having completed the Pertamina and PSC information specification we preparedfive check lists to aid the team and the data gatherers in identifying whatinformation is needed about each data source--Pertamina and non-Pertaminahospitals their hospital based clinics their free-standing clinics PSC beneficiariesand Pertamina retirees Because most Pertamina utilization information has activeemployee and dependent information combined with retiree widow spouse dataand because active employee benefits are not budgeted separately from retireebenefits we added employee data to the data request A set of these check lists isattached as Appendix IV They will indicate if each source has reported necessaryinformation but these check lists are not intended as answer sheets for submittingdata

Finally we concluded that collecting this information for Pertamina retireesrequires contact with the Pertamina Human Resources (including health) or UmumDirekturs department and the Pertamina F -ance Department in theadministrative office for each of Pertaminas seven operating regions (NothSumatra South Sumatra Dumai Kalimantan Cirebon Cilacap and Sorong) and forJakarta This means collecting information from a total of 16 departments locations because of the way Pertamina is organized with decentralized healthfacilities in each region Some but not all of the needed employee and retireeinformation is available in the central administrative and finance departments inJakarta

For the PSC beneficiaries limited information is available in the Pertamina JakartaBKKA Health and Finance Departments Most of the information is maintained atthe 17 PSC offices Some PSCs operate their own hospitals and clinics andtherefore we must determine how to collect and integrate the PSC beneficiaryinformation and PSC health facility operations into Tugu Mandiris business planAt the request of senior executive staff of Pertamina the PSCs will cooperate with our data collection efforts

4

Ill Comprehensive l)ata Collection - Revised Scope of Work

The team has devoted considerable thought to effective approaches for the collectionof needed data from this geographically widespread network of potential data sources We have concluded that the development of a formal information systemand data collection process is required to support the conduct of a comprehensivefeasibility study and if feasible a business plan and operational plan of action asrequired for Tugu Mandiri These actuarial studies will result in projected healthbenefit costs (premiums) as well as expected utilization and reimbursement rates forcovered services Feasibility and required provider arrangements in our finalbusinessoperating plan will be based on those actuarial recommendations It is notpossible to begin the basic actuarial studies for this project without the identified information

It is clear from the work of the consulting team that the information needed tosupport the completion of this project is available in Indonesia and must be obtainedbased on an expanded scope of work to add the data collection component A draft copy of the Revised Scope of Work is attached as Appendix V As agreed in our exitmeeting with USAID we completed the expanded scope of work for data collection upon returning to the United States We think that the new collection process willrequire extensive field work in country and approximately ten months withadditional resources (focusing on data collection for three representative operatingPertamina regions Jakarta and several representative PSCs) subject to a TuguMandiriPertamina decision to focus only on one region as a pilot site which willreduce the costs time and effort substantially or to expand the data collection to allregions and PSCs which would substantially increase all three

In light of feedback from ISTI and USAID on the unanticipated costs and timeinvolved for this data collection effort we propose three alternative approaches fordata collection Those alternatives are

A Collecting needed data from all seven Pertamina regions and Jakarta headquarters as well as from all seventeen PSCs

B Collecting needed data from four representative Pertamina operating regionsfrom Jakarta headquarters and from three to five representative PSCs Fromthis data the actuary and we will be able to extrapolate and prepare actuarialprojections evaluate feasibility and if feasible prepare a business plan andoperational plan of action for the full target market

C Collecting needed data from one Pertamina region and PSCs operating in thatregion from which actuarial projections the feasibility study and if feasible thebusiness plan and operating plan will be completed for that region That regionwill serve as a pilot from which experience can be evaluated If the pilot provessuccessful expansion to other areas can be planned

Of the alternative approaches listed above we recommend alternative B Thesampling methodology used in alternative B will permit the actuary andconsultants to extrapolate from the representative areas to assess overall feasibilityand project the business and operating plan for all target markets throughout thearchipelago Alternative A is less cost effective than alternative B We do notrecommend alternative Cbecause it will not permit evaluation of the alternative

5

health care financing and delivery system for the entire target markets in a timelyfashion because it could result in employeeretiree health benefits in the pilot regionthat differ from those in other regions and because the results of implementationwill not be significant with respect to national cost increase trends

IV P ROJ ECT STATUS - SIGN IFICANT P)OI1CY NIEEllINGS

To discuss the consulting teams progress and recommendations the significantdata problems encountered and proposed solutions three joint meetings were heldwith representatives from USAID the Ministry of Health Health Sector FinancingProject - International Science and Technology Institute Inc (ISTI) Pertamina andTugu Mandiri during our last week in country In each of these meetings the projectconsultants presened the current progress and the scope of the data problemsconfronting the project

It was concluded during the final meeting that the consulting team should developand present to ISTI representatives a Revised Scope of Work to add a comprehensivedata collection component to this project This Revised Scope of Work is attached as Appendix V

Further it was agreed that the Ministry of Health would assume leadership byarranging and chairing high level meetings with Pertaminas top officials theMinistry of Mines USAID and Tugu Mandiri to receive full support for this projectItwas also agreed that the Ministry of Health would seek joint funding for theadditional costs associated with the data collection which became considerably morecomplex and resource intensive than originally anticipated The discussion ofjointfunding requirements should not occur until after Pertamina has agreed to supportthis project

We strongly recommend that Drs Djaafar be closely involved with the Ministry ofHealth in the planning and execution of these meetings including the selection ofparticipants presentations during the meetings and follow-up activities It wassuggested that the consultants Dr Barnes and Mr Wolff be available forpresentaLons during these meetings Further consultant work is suspended untilthese meetngs are favorably concluded

V CONCLUSIONS ANI) RECONMINI)AIIONS

It is most important for all concerned to realize that the most critical component ofthis project and all of the other health sector financing projects is reliable data forsound decision making at the executive and Board levels At the present time thisaspect is missing from this project and is causing a substantial delay

The second aspect of the project that must be accomplished in a timely manner iscomplete support by Pertamina and the Ministry of lealth Therefore it is stronglyrecommended by the project team that the Revised Scope of Work (to add acomprehensive data collection process) be approved Further that the Ministry ofHealth maintain its new leadership position in this project by scheduling andchairing the necessary meetings with Pertamina Tugu Mandiri the other requiredorgatiizaions and us if our participation can be beneficial in these critical discussions

As previously stated this project can be accomplished as outlined in the originalScope of Work with some modifications to (1) the successful collection of required

6

statistical financial and management information and (2) the previous length of time for completion

With respect to this data collection the consultants recommend (and the actuaryconcurs) that we select three representative regions among Pertamina operationsJakarta and three to five representative PSCs operating in or near the Pertaminaregions selected We will extrapolate from data collected from these sources to assessfeasibility and if feasible prepare the businessoperational plan of action for theentire target markets This recommendation will reduce the time effort and cost ofdata collection and permit us to dress all target markets We do not recommendother alternatives because they do not achieve project objectives in a timely manner

We appreciated the opportunity to serve on the Tugu MandiriPertaminaUSAIDISTI team and to further Indonesian efforts to improve health care financingoptions as well as the availability of quality cost effective health care in Indonesia

James G Bjrnes DPA I

te Date

AIPENI)IX I

Drs Siddharta --- low amp Siddharla P 000 In 8 wirsoe

1 n IpoundNM TIA

Coopers 3PWNAMUUA --

iO

DnW ampLybrand Kaw 10 O M - M 7 t OAJAKARTA 1 N AA IVrI10A

29 Mach 198

Dr E3llottWolf International Sciehce and Technology Inst te Inc co Ministry o Health Bureau of Pluming Kay X-5 No 4-9 J1 HR Rasuna Said Jakarta 12950

Dear Dr Wolf

GENERAL TAX MATTERS ON HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on March 21 1989 we set out below tax aspects related to the proposed health insurance scheme based on the current tax laws of Indonea

Background

2 We understand that the International Science and Technology Institute Inc (IST)has been appointed by Tugu Mandiri (wTugu) an insurance company owned by Pertaminato initially identify and appraise the various options available and subsequently describe and justify a recommended course of action for Tugu in developing a heafth maintenance organization and health insurance scheme (wHlsw) which will

a Inlay provde the plan to Pertam and other ol conhrakors retree aW

subsequen ly expad the avaabWiy of the plan to the gwrfl bunsie commwky

fl 1]-9

Drs Siddharta amp Siddharta in aew~ wem

CoopersampLygrand

D EJfot wow GENERAL TAX MATTERS ONIT11 29 Momh 19onHEALTH WSURANCE SCHEME Page 2of 8

It is proposed that the premium will be borne by both the employee and the employer eg PertaminaP0C n heepoeeg

3 Accordingly ISTI isconcerned about the tax aspects of the health insurance schemeand have requested our advice on the general tax aspects of such viewed from both theemployers and employees standpoint

General Aspects

4 The applicable general principles relevant to the HIS sue are set out in the Income Tax Law 1983 at

a Mole 9 (d) - indoainining taxale Income an employer may not deduct cost a bens prNdd by the taxmyer for the needs d enploym

0 tArIcIe 4 (3) (d) - where ervice received I-ind ain not deductible to the employer thenSturnm the beneft not asmssabe to th employe

5 The above genexal principles were clarified for health and insurance costs in Ministryof Finance Cirurs dated 28 May 1984 (ref no SE-19pA2319 84) and 7 June 1984 (ref noS-336PJ231984) As a result as far as the employer is concerned

(i) medIJ costs Includig hwt Insanc premine pa d by an emwpy to an HIS are non deducwbe

ampU)l costs relaed to compn owned heafth Iscikie pMNg kre seampvice n medictio to ermoyees we non deducttl

(ii) company rmbursed m edicexenses are non deductbe to the company

Drs Siddharta amp Siddharta in aweJssf Wt

CoopersampLybrand

Dr Elloft Wolff GENERAL TAX MATTERS ONu1T Inc 29 Marh 1969HEALTH INSURANCE SCHEME 9 Pmge 3of6

(iv) Ahrecet fOr e Medical expense be addres ed to the O kwaad 0 the Compay the relmbursmert isthe deductwbe fo the compay

6 The employee is not assessable for (i) to (iii) above but will be assessable on theincome in (iv) Income from insurance proceeds eg life accident or health are not assessable for the individual

7 Contrary to the initial spirit of the Income Tax Law as explained in paragraph 4 theIndonesian Tax Authorities have decreed that company contributions to the state pension fund(Tunjangan Hari Tua or wFHT) and Astek are considered as a tax deductible expense whilstbeing tax exempted for the employee (MOF Circular dated 28 May 1984) Historically thistreatment results from the Minister of Labors opinion that the non deductability of suchexpenses will strongly hinder the development of the pension fund

8 In accordance with MOF Decree 9470AXt41983 Indonesian citizens are notrequired to file personal tuzreturns if they are employed by only one company with theunderstanding that income isnot derived from other sources The impact of this is considered below

9 The only deductions allowable against an individuals assessable income are

(i) occupalonal allowance I 5 o gross mnnual salry rX xc p380000 (MOFDecrM 9KMK041964 dated 31 Decenombg I93)

(ii) tax fee income loWance Le Rp 9W00O for the idduaj and Rp 480000 for eachdepedent IlnWed to W depenclr (M11le 7 (1) Income Tax Law)

(iii) P contibution to Pension funds approved by the Minister of Finance eg the statePension fund and ASTEK (Artie a (2) Income Toy Law and MOF Circular dated 28 May1984)

Drs Siddharta amp Siddharta Coopers bull ampLybrand

Dr EJUk_ WoM GENERAL TAX MATTERSW11 kX4 29 March 196HEALTH INSURANCE SCHEME Page 4of 5

k1M Severgf Production Sharing Contractors are governed by the old tax laws which in anumber of ways differ from the 1984 Income Tax Law In this context the abovementioned aspects do not necessarily apply

Current tax position

11 From the above paragraphs it is clear that under current Indonesian Tax RegulationsFIS contnbutions by the employer would not be deductible On the other hand theemployees contribution would also not be deductible on his or her individual tax return Thisnon deductibility from an individual viewpoint is further modified by most Indonesiansreluctance to submit tax returns so that in the event of such contribution being allowed it will generally still not represent a benefit for the individual

Alternative options and possibilities

Request for tax treatment equal to THT

T As explained in paragraph 7 and 9 (iii) THT and Astek contributions receive specialconcessional treatmeni We believe that based on your explanations that the Ministers ofFinance Health and Energy have expressed their strong support for the HiS you shouldexplore the possibility of similar tax treatment to THT and Astek being applied to the HIS In our opinion the possibility of success is distant

-12shy

m1A

Drs Siddharta amp Siddharta In ameed~o a

CoopersampLybrand

Dr Eliot Wolff GENERAL TAX MATTERS ON9MT 29 March 196HEALTH INSURANCE SCHEME Page 5 of 6

Incorporatio into employfe salary

13 Another alternative would be to increase the employees Walary in accordance with the HIS contributions amount whereby

a th employer woUd be the nddhkon ampamaartexW Insted of HIScontbtions and therefore obtain tax deducablity for such expena

b the emdegYoees are no beng du vaged ampgtheW ngt take home lSy igUrmffctad

14 Under this approach you should bear in mind that the salary increase should withthe -cepton of employees earning salaries below the tax free bracket exceed the HIScontribution amount T7he excess is the Ngross up amount whereby the contribution is grossedup iu order to account for it being subject to income tax as part of the employees salaryHowever as the employees are mostly under the 25 tax bracket whilst the employer (LePertamina) is in the 35 tax bracket this alternative will carry tax benefits

15 However you should appreciate that Pertamina being a state owned company wouldmost probably require approvals from the Ministers of Energy Finance and Labor to increase employee salaries

Conclusion

16 We beLieve that compared with most other countries the current Indonesian environment could be more conducive to the establishment of an HIS

Lax

7mf -13shy

Drs Siddharta amp SiddhartaCo80o4 W~ Cooy e ampLgrand

Dr EIlI Wolff GENERAL TAX MATTERS ONW8T k 29 lomh 19gHEALTH INSURANCE SCHEME

17 However we also believe that a complex combinaoion of internal and external factorsin addition to iax will influence a companys decision on whether or not to embrxe an HISwhilst tax is not the decisive factor for such a decision

1amp Should you require further information please do not hesitate to contact myself orMr Ross L Gavin Chief Technical Advisor of this office

Yours faithfulyDrs SIDDHARTA amp SIDDHARTA Registered Public Accountants No D-2336

Drs Istama T Siddharta Senior Partner

ITSjs

f-14shy

APPENI)lX 11

Drs Siddharta - ong 2samp Siddharta li IWIMII4SoS

bAwfteW W 6Osanl 1lM6 J 5D1T IAC Oers CM bOP MULIA AUTToNampLbrand Kw oN Ree Said P0 V Ily JAKATA iM JAKRTA 127MA

14 April 1989

Dr Elliot Wolff International Sclence and Technology institute Inc co Wiane Tugu 4th floor J1 HR RasunA Baid Jakarta

0ear Dr Wolff

HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on April 10 1989 we setout below the tax aspects related to the proposed health insurance scheme a they affect Production Sharing Contractors

2 In bur letter of Madr 29 1989 we gt out the ttdon regulatozs affecting yourproposed health insurance scheme as they currenty apply omostta-~~~~~ utaxrvpayersay oAAs noted inparagraph 10 of that letter the currfnt tax regulations do not necessarily apply to Production Sharing Contractors

3 Article 33 (3) of the Income Tax Law 1983 states that entdtes In the oil and gas sectorconnected with Production Sharing Contracts in effect prior to January 11984 will continue to be subject to the Old Tax Laws rather than the Laws which came into effect on that date

4 Under the Old Tax Laws benefits-ln-kind provided to employee will be deductiblefor the purposes of determining the tax of the employer but conversely are assessable in thehands of the employee The amount assessable to the employee is the cost to the employer

S It is our understanding that most Production Sharing Contractors presently operatingin Indonesia are governed by Production Sharing Contracts signed prior to 1984 and thereforemost employees of Production Sharing Contractors would be assessed on the cost of thehealth insurance scheme as it applies to each individual

-16shy

client We formed a working task fbrce with Nanang Iskandar MD DirectorUmum of Tugu Mandiri Rochwan Muthalib FLMI Underwriting Manager of TuguMandiri and Soejadi Hospital Resources Development Chief in Pertaminas CentralAdministrative Health Bureau in Jakarta R Pratolo also joined the task force asactiary

In addition Hans Schaefer of PT Nagadi Ekasakti was engaged as the resourcescoordinator for tax and legal matters Through Mr Schaefer Drs Istama TSiddharta President-Director of the Drs Siddharta amp Siddharta independentaccounting firm that is associated with Coopers amp Lybrand undertook the taxresearch and issued two reports which are attached as Appendices I and H Dr LianaS Gunawan of Kantor Notaris Kartini Muljadi undertook the legal research inconjunction with Mr Schaefer and their report is expected

11 Team Activities

Our team or task force activities involved (a) an extensive exchange of informationbetween the expatriate consultants and Indonesian nationals to build mutualunderstanding trust and a united approach to our project (b) refinement of the listof needed information to incorporate specific needs of the actuary and consultants aswell as to accommodate Pertaminaproduction sharing contractor (PSC) actualoperations and administrative processes (c) identification of the sources of thisinformation and (d) planning how to collect this information

Virtually all of the information submitted to the team was collected at Pertamina bySoejadi During our first week in country working from Professor Shouldices listSoejadi presented age data on the Pertamina retirees as well as the total number ofretirees and widows and spouses covered for health benefits He also presented a listof the total number of PSC employees by contractor Soejadi reported that most ofthe required data was unavailable especially with respect to the PSCs and specificfinancial and utilization data

During the first week Drs Djaafar introduced us to Mr Soeranto S Director of PTTambang Timah the Indonesian national tin mining company and a senior memberof his staff because the tin mining company was experiencing similar increases inemployee health benefit costs and Mr Soeranto was interested in the HMO conceptto help control costs and improve health care for Timah beneficiaries

During the second week we met representatives of two PSCs-- Dr Soeprawoto ofMarathon Petroleum Indonesia Ltd and Marijke Salomo of Roy M Huffington IncAlthough not in his official capacity as Marathon Medical Director Dr Soeprawotosupported the Tugu Mandiri HMO project as offering an improvement in the qualityand availability of health benefits for Marathon employees who currently receive acash stipend monthly for most family outpatienL care and who have usually spentthe stipend and are unable to pay when a family member becomes ill Mrs Salomo was responsive to our questions Both confirmed the availability of the information we need but neither could provide information to us without instructions from theirsuperior who probably would refer the matter to their home offices in the UnitedStaLes unless Pertamina requested their cooperation with us

As we discussed the teams limited receipt of data and discouraging efforts to collectthe balance it became clear that a more specific list of needed information wasessential to focus efforts properly We were concerned that the project team was not

3

receiving full cooperation and that additional support was required from Pertamina and the Ministry of Health

Early in the second week we drafted a more specific list of data elements requiredfor analysis and reviewed it line by line with team members That dialog led tomany revisions and in the middle of the revision process Drs Djaafar suggested to us that the Indonesian team members did not understand many of the concepts andterms used in the data list Accordingly we spent the better part of the next dayexplaining the nature of our assignment how HMOs operate in the United Stateswhat our terms mean particularly in the operation ofan HMO and how therequested information will be used in assessing marketing finance and provideraspects of a potential Tugu Mandiri HMO A copy of a feasibility study and business operating plan completed for a US company was utilized to explain to teammembers Drs Djaafar and ISTIjust what is involved in the development of such areport That orientation education process resulted in a significant breakthroughFirst we were able to revise the information specifications so that everyoneunderstood them using many Indonesian concepts instead of American-- egemployment regulations describing employee health benefits instead of theAmerican benefit plan or benefit package A copy of the final data request(excluding Tugu Mandiri organization capabilities resources relevant to the HMOwhich still must be identified) is attached as Appendix III

Having completed the Pertamina and PSC information specification we preparedfive check lists to aid the team and the data gatherers in identifying whatinformation is needed about each data source--Pertamina and non-Pertaminahospitals their hospital based clinics their free-standing clinics PSC beneficiariesand Pertamina retirees Because most Pertamina utilization information has activeemployee and dependent information combined with retiree widow spouse dataand because active employee benefits are not budgeted separately from retireebenefits we added employee data to the data request A set of these check lists isattached as Appendix IV They will indicate if each source has reported necessaryinformation but these check lists are not intended as answer sheets for submittingdata

Finally we concluded that collecting this information for Pertamina retireesrequires contact with the Pertamina Human Resources (including health) or UmumDirekturs department and the Pertamina F -ance Department in theadministrative office for each of Pertaminas seven operating regions (NothSumatra South Sumatra Dumai Kalimantan Cirebon Cilacap and Sorong) and forJakarta This means collecting information from a total of 16 departments locations because of the way Pertamina is organized with decentralized healthfacilities in each region Some but not all of the needed employee and retireeinformation is available in the central administrative and finance departments inJakarta

For the PSC beneficiaries limited information is available in the Pertamina JakartaBKKA Health and Finance Departments Most of the information is maintained atthe 17 PSC offices Some PSCs operate their own hospitals and clinics andtherefore we must determine how to collect and integrate the PSC beneficiaryinformation and PSC health facility operations into Tugu Mandiris business planAt the request of senior executive staff of Pertamina the PSCs will cooperate with our data collection efforts

4

Ill Comprehensive l)ata Collection - Revised Scope of Work

The team has devoted considerable thought to effective approaches for the collectionof needed data from this geographically widespread network of potential data sources We have concluded that the development of a formal information systemand data collection process is required to support the conduct of a comprehensivefeasibility study and if feasible a business plan and operational plan of action asrequired for Tugu Mandiri These actuarial studies will result in projected healthbenefit costs (premiums) as well as expected utilization and reimbursement rates forcovered services Feasibility and required provider arrangements in our finalbusinessoperating plan will be based on those actuarial recommendations It is notpossible to begin the basic actuarial studies for this project without the identified information

It is clear from the work of the consulting team that the information needed tosupport the completion of this project is available in Indonesia and must be obtainedbased on an expanded scope of work to add the data collection component A draft copy of the Revised Scope of Work is attached as Appendix V As agreed in our exitmeeting with USAID we completed the expanded scope of work for data collection upon returning to the United States We think that the new collection process willrequire extensive field work in country and approximately ten months withadditional resources (focusing on data collection for three representative operatingPertamina regions Jakarta and several representative PSCs) subject to a TuguMandiriPertamina decision to focus only on one region as a pilot site which willreduce the costs time and effort substantially or to expand the data collection to allregions and PSCs which would substantially increase all three

In light of feedback from ISTI and USAID on the unanticipated costs and timeinvolved for this data collection effort we propose three alternative approaches fordata collection Those alternatives are

A Collecting needed data from all seven Pertamina regions and Jakarta headquarters as well as from all seventeen PSCs

B Collecting needed data from four representative Pertamina operating regionsfrom Jakarta headquarters and from three to five representative PSCs Fromthis data the actuary and we will be able to extrapolate and prepare actuarialprojections evaluate feasibility and if feasible prepare a business plan andoperational plan of action for the full target market

C Collecting needed data from one Pertamina region and PSCs operating in thatregion from which actuarial projections the feasibility study and if feasible thebusiness plan and operating plan will be completed for that region That regionwill serve as a pilot from which experience can be evaluated If the pilot provessuccessful expansion to other areas can be planned

Of the alternative approaches listed above we recommend alternative B Thesampling methodology used in alternative B will permit the actuary andconsultants to extrapolate from the representative areas to assess overall feasibilityand project the business and operating plan for all target markets throughout thearchipelago Alternative A is less cost effective than alternative B We do notrecommend alternative Cbecause it will not permit evaluation of the alternative

5

health care financing and delivery system for the entire target markets in a timelyfashion because it could result in employeeretiree health benefits in the pilot regionthat differ from those in other regions and because the results of implementationwill not be significant with respect to national cost increase trends

IV P ROJ ECT STATUS - SIGN IFICANT P)OI1CY NIEEllINGS

To discuss the consulting teams progress and recommendations the significantdata problems encountered and proposed solutions three joint meetings were heldwith representatives from USAID the Ministry of Health Health Sector FinancingProject - International Science and Technology Institute Inc (ISTI) Pertamina andTugu Mandiri during our last week in country In each of these meetings the projectconsultants presened the current progress and the scope of the data problemsconfronting the project

It was concluded during the final meeting that the consulting team should developand present to ISTI representatives a Revised Scope of Work to add a comprehensivedata collection component to this project This Revised Scope of Work is attached as Appendix V

Further it was agreed that the Ministry of Health would assume leadership byarranging and chairing high level meetings with Pertaminas top officials theMinistry of Mines USAID and Tugu Mandiri to receive full support for this projectItwas also agreed that the Ministry of Health would seek joint funding for theadditional costs associated with the data collection which became considerably morecomplex and resource intensive than originally anticipated The discussion ofjointfunding requirements should not occur until after Pertamina has agreed to supportthis project

We strongly recommend that Drs Djaafar be closely involved with the Ministry ofHealth in the planning and execution of these meetings including the selection ofparticipants presentations during the meetings and follow-up activities It wassuggested that the consultants Dr Barnes and Mr Wolff be available forpresentaLons during these meetings Further consultant work is suspended untilthese meetngs are favorably concluded

V CONCLUSIONS ANI) RECONMINI)AIIONS

It is most important for all concerned to realize that the most critical component ofthis project and all of the other health sector financing projects is reliable data forsound decision making at the executive and Board levels At the present time thisaspect is missing from this project and is causing a substantial delay

The second aspect of the project that must be accomplished in a timely manner iscomplete support by Pertamina and the Ministry of lealth Therefore it is stronglyrecommended by the project team that the Revised Scope of Work (to add acomprehensive data collection process) be approved Further that the Ministry ofHealth maintain its new leadership position in this project by scheduling andchairing the necessary meetings with Pertamina Tugu Mandiri the other requiredorgatiizaions and us if our participation can be beneficial in these critical discussions

As previously stated this project can be accomplished as outlined in the originalScope of Work with some modifications to (1) the successful collection of required

6

statistical financial and management information and (2) the previous length of time for completion

With respect to this data collection the consultants recommend (and the actuaryconcurs) that we select three representative regions among Pertamina operationsJakarta and three to five representative PSCs operating in or near the Pertaminaregions selected We will extrapolate from data collected from these sources to assessfeasibility and if feasible prepare the businessoperational plan of action for theentire target markets This recommendation will reduce the time effort and cost ofdata collection and permit us to dress all target markets We do not recommendother alternatives because they do not achieve project objectives in a timely manner

We appreciated the opportunity to serve on the Tugu MandiriPertaminaUSAIDISTI team and to further Indonesian efforts to improve health care financingoptions as well as the availability of quality cost effective health care in Indonesia

James G Bjrnes DPA I

te Date

AIPENI)IX I

Drs Siddharta --- low amp Siddharla P 000 In 8 wirsoe

1 n IpoundNM TIA

Coopers 3PWNAMUUA --

iO

DnW ampLybrand Kaw 10 O M - M 7 t OAJAKARTA 1 N AA IVrI10A

29 Mach 198

Dr E3llottWolf International Sciehce and Technology Inst te Inc co Ministry o Health Bureau of Pluming Kay X-5 No 4-9 J1 HR Rasuna Said Jakarta 12950

Dear Dr Wolf

GENERAL TAX MATTERS ON HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on March 21 1989 we set out below tax aspects related to the proposed health insurance scheme based on the current tax laws of Indonea

Background

2 We understand that the International Science and Technology Institute Inc (IST)has been appointed by Tugu Mandiri (wTugu) an insurance company owned by Pertaminato initially identify and appraise the various options available and subsequently describe and justify a recommended course of action for Tugu in developing a heafth maintenance organization and health insurance scheme (wHlsw) which will

a Inlay provde the plan to Pertam and other ol conhrakors retree aW

subsequen ly expad the avaabWiy of the plan to the gwrfl bunsie commwky

fl 1]-9

Drs Siddharta amp Siddharta in aew~ wem

CoopersampLygrand

D EJfot wow GENERAL TAX MATTERS ONIT11 29 Momh 19onHEALTH WSURANCE SCHEME Page 2of 8

It is proposed that the premium will be borne by both the employee and the employer eg PertaminaP0C n heepoeeg

3 Accordingly ISTI isconcerned about the tax aspects of the health insurance schemeand have requested our advice on the general tax aspects of such viewed from both theemployers and employees standpoint

General Aspects

4 The applicable general principles relevant to the HIS sue are set out in the Income Tax Law 1983 at

a Mole 9 (d) - indoainining taxale Income an employer may not deduct cost a bens prNdd by the taxmyer for the needs d enploym

0 tArIcIe 4 (3) (d) - where ervice received I-ind ain not deductible to the employer thenSturnm the beneft not asmssabe to th employe

5 The above genexal principles were clarified for health and insurance costs in Ministryof Finance Cirurs dated 28 May 1984 (ref no SE-19pA2319 84) and 7 June 1984 (ref noS-336PJ231984) As a result as far as the employer is concerned

(i) medIJ costs Includig hwt Insanc premine pa d by an emwpy to an HIS are non deducwbe

ampU)l costs relaed to compn owned heafth Iscikie pMNg kre seampvice n medictio to ermoyees we non deducttl

(ii) company rmbursed m edicexenses are non deductbe to the company

Drs Siddharta amp Siddharta in aweJssf Wt

CoopersampLybrand

Dr Elloft Wolff GENERAL TAX MATTERS ONu1T Inc 29 Marh 1969HEALTH INSURANCE SCHEME 9 Pmge 3of6

(iv) Ahrecet fOr e Medical expense be addres ed to the O kwaad 0 the Compay the relmbursmert isthe deductwbe fo the compay

6 The employee is not assessable for (i) to (iii) above but will be assessable on theincome in (iv) Income from insurance proceeds eg life accident or health are not assessable for the individual

7 Contrary to the initial spirit of the Income Tax Law as explained in paragraph 4 theIndonesian Tax Authorities have decreed that company contributions to the state pension fund(Tunjangan Hari Tua or wFHT) and Astek are considered as a tax deductible expense whilstbeing tax exempted for the employee (MOF Circular dated 28 May 1984) Historically thistreatment results from the Minister of Labors opinion that the non deductability of suchexpenses will strongly hinder the development of the pension fund

8 In accordance with MOF Decree 9470AXt41983 Indonesian citizens are notrequired to file personal tuzreturns if they are employed by only one company with theunderstanding that income isnot derived from other sources The impact of this is considered below

9 The only deductions allowable against an individuals assessable income are

(i) occupalonal allowance I 5 o gross mnnual salry rX xc p380000 (MOFDecrM 9KMK041964 dated 31 Decenombg I93)

(ii) tax fee income loWance Le Rp 9W00O for the idduaj and Rp 480000 for eachdepedent IlnWed to W depenclr (M11le 7 (1) Income Tax Law)

(iii) P contibution to Pension funds approved by the Minister of Finance eg the statePension fund and ASTEK (Artie a (2) Income Toy Law and MOF Circular dated 28 May1984)

Drs Siddharta amp Siddharta Coopers bull ampLybrand

Dr EJUk_ WoM GENERAL TAX MATTERSW11 kX4 29 March 196HEALTH INSURANCE SCHEME Page 4of 5

k1M Severgf Production Sharing Contractors are governed by the old tax laws which in anumber of ways differ from the 1984 Income Tax Law In this context the abovementioned aspects do not necessarily apply

Current tax position

11 From the above paragraphs it is clear that under current Indonesian Tax RegulationsFIS contnbutions by the employer would not be deductible On the other hand theemployees contribution would also not be deductible on his or her individual tax return Thisnon deductibility from an individual viewpoint is further modified by most Indonesiansreluctance to submit tax returns so that in the event of such contribution being allowed it will generally still not represent a benefit for the individual

Alternative options and possibilities

Request for tax treatment equal to THT

T As explained in paragraph 7 and 9 (iii) THT and Astek contributions receive specialconcessional treatmeni We believe that based on your explanations that the Ministers ofFinance Health and Energy have expressed their strong support for the HiS you shouldexplore the possibility of similar tax treatment to THT and Astek being applied to the HIS In our opinion the possibility of success is distant

-12shy

m1A

Drs Siddharta amp Siddharta In ameed~o a

CoopersampLybrand

Dr Eliot Wolff GENERAL TAX MATTERS ON9MT 29 March 196HEALTH INSURANCE SCHEME Page 5 of 6

Incorporatio into employfe salary

13 Another alternative would be to increase the employees Walary in accordance with the HIS contributions amount whereby

a th employer woUd be the nddhkon ampamaartexW Insted of HIScontbtions and therefore obtain tax deducablity for such expena

b the emdegYoees are no beng du vaged ampgtheW ngt take home lSy igUrmffctad

14 Under this approach you should bear in mind that the salary increase should withthe -cepton of employees earning salaries below the tax free bracket exceed the HIScontribution amount T7he excess is the Ngross up amount whereby the contribution is grossedup iu order to account for it being subject to income tax as part of the employees salaryHowever as the employees are mostly under the 25 tax bracket whilst the employer (LePertamina) is in the 35 tax bracket this alternative will carry tax benefits

15 However you should appreciate that Pertamina being a state owned company wouldmost probably require approvals from the Ministers of Energy Finance and Labor to increase employee salaries

Conclusion

16 We beLieve that compared with most other countries the current Indonesian environment could be more conducive to the establishment of an HIS

Lax

7mf -13shy

Drs Siddharta amp SiddhartaCo80o4 W~ Cooy e ampLgrand

Dr EIlI Wolff GENERAL TAX MATTERS ONW8T k 29 lomh 19gHEALTH INSURANCE SCHEME

17 However we also believe that a complex combinaoion of internal and external factorsin addition to iax will influence a companys decision on whether or not to embrxe an HISwhilst tax is not the decisive factor for such a decision

1amp Should you require further information please do not hesitate to contact myself orMr Ross L Gavin Chief Technical Advisor of this office

Yours faithfulyDrs SIDDHARTA amp SIDDHARTA Registered Public Accountants No D-2336

Drs Istama T Siddharta Senior Partner

ITSjs

f-14shy

APPENI)lX 11

Drs Siddharta - ong 2samp Siddharta li IWIMII4SoS

bAwfteW W 6Osanl 1lM6 J 5D1T IAC Oers CM bOP MULIA AUTToNampLbrand Kw oN Ree Said P0 V Ily JAKATA iM JAKRTA 127MA

14 April 1989

Dr Elliot Wolff International Sclence and Technology institute Inc co Wiane Tugu 4th floor J1 HR RasunA Baid Jakarta

0ear Dr Wolff

HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on April 10 1989 we setout below the tax aspects related to the proposed health insurance scheme a they affect Production Sharing Contractors

2 In bur letter of Madr 29 1989 we gt out the ttdon regulatozs affecting yourproposed health insurance scheme as they currenty apply omostta-~~~~~ utaxrvpayersay oAAs noted inparagraph 10 of that letter the currfnt tax regulations do not necessarily apply to Production Sharing Contractors

3 Article 33 (3) of the Income Tax Law 1983 states that entdtes In the oil and gas sectorconnected with Production Sharing Contracts in effect prior to January 11984 will continue to be subject to the Old Tax Laws rather than the Laws which came into effect on that date

4 Under the Old Tax Laws benefits-ln-kind provided to employee will be deductiblefor the purposes of determining the tax of the employer but conversely are assessable in thehands of the employee The amount assessable to the employee is the cost to the employer

S It is our understanding that most Production Sharing Contractors presently operatingin Indonesia are governed by Production Sharing Contracts signed prior to 1984 and thereforemost employees of Production Sharing Contractors would be assessed on the cost of thehealth insurance scheme as it applies to each individual

-16shy

receiving full cooperation and that additional support was required from Pertamina and the Ministry of Health

Early in the second week we drafted a more specific list of data elements requiredfor analysis and reviewed it line by line with team members That dialog led tomany revisions and in the middle of the revision process Drs Djaafar suggested to us that the Indonesian team members did not understand many of the concepts andterms used in the data list Accordingly we spent the better part of the next dayexplaining the nature of our assignment how HMOs operate in the United Stateswhat our terms mean particularly in the operation ofan HMO and how therequested information will be used in assessing marketing finance and provideraspects of a potential Tugu Mandiri HMO A copy of a feasibility study and business operating plan completed for a US company was utilized to explain to teammembers Drs Djaafar and ISTIjust what is involved in the development of such areport That orientation education process resulted in a significant breakthroughFirst we were able to revise the information specifications so that everyoneunderstood them using many Indonesian concepts instead of American-- egemployment regulations describing employee health benefits instead of theAmerican benefit plan or benefit package A copy of the final data request(excluding Tugu Mandiri organization capabilities resources relevant to the HMOwhich still must be identified) is attached as Appendix III

Having completed the Pertamina and PSC information specification we preparedfive check lists to aid the team and the data gatherers in identifying whatinformation is needed about each data source--Pertamina and non-Pertaminahospitals their hospital based clinics their free-standing clinics PSC beneficiariesand Pertamina retirees Because most Pertamina utilization information has activeemployee and dependent information combined with retiree widow spouse dataand because active employee benefits are not budgeted separately from retireebenefits we added employee data to the data request A set of these check lists isattached as Appendix IV They will indicate if each source has reported necessaryinformation but these check lists are not intended as answer sheets for submittingdata

Finally we concluded that collecting this information for Pertamina retireesrequires contact with the Pertamina Human Resources (including health) or UmumDirekturs department and the Pertamina F -ance Department in theadministrative office for each of Pertaminas seven operating regions (NothSumatra South Sumatra Dumai Kalimantan Cirebon Cilacap and Sorong) and forJakarta This means collecting information from a total of 16 departments locations because of the way Pertamina is organized with decentralized healthfacilities in each region Some but not all of the needed employee and retireeinformation is available in the central administrative and finance departments inJakarta

For the PSC beneficiaries limited information is available in the Pertamina JakartaBKKA Health and Finance Departments Most of the information is maintained atthe 17 PSC offices Some PSCs operate their own hospitals and clinics andtherefore we must determine how to collect and integrate the PSC beneficiaryinformation and PSC health facility operations into Tugu Mandiris business planAt the request of senior executive staff of Pertamina the PSCs will cooperate with our data collection efforts

4

Ill Comprehensive l)ata Collection - Revised Scope of Work

The team has devoted considerable thought to effective approaches for the collectionof needed data from this geographically widespread network of potential data sources We have concluded that the development of a formal information systemand data collection process is required to support the conduct of a comprehensivefeasibility study and if feasible a business plan and operational plan of action asrequired for Tugu Mandiri These actuarial studies will result in projected healthbenefit costs (premiums) as well as expected utilization and reimbursement rates forcovered services Feasibility and required provider arrangements in our finalbusinessoperating plan will be based on those actuarial recommendations It is notpossible to begin the basic actuarial studies for this project without the identified information

It is clear from the work of the consulting team that the information needed tosupport the completion of this project is available in Indonesia and must be obtainedbased on an expanded scope of work to add the data collection component A draft copy of the Revised Scope of Work is attached as Appendix V As agreed in our exitmeeting with USAID we completed the expanded scope of work for data collection upon returning to the United States We think that the new collection process willrequire extensive field work in country and approximately ten months withadditional resources (focusing on data collection for three representative operatingPertamina regions Jakarta and several representative PSCs) subject to a TuguMandiriPertamina decision to focus only on one region as a pilot site which willreduce the costs time and effort substantially or to expand the data collection to allregions and PSCs which would substantially increase all three

In light of feedback from ISTI and USAID on the unanticipated costs and timeinvolved for this data collection effort we propose three alternative approaches fordata collection Those alternatives are

A Collecting needed data from all seven Pertamina regions and Jakarta headquarters as well as from all seventeen PSCs

B Collecting needed data from four representative Pertamina operating regionsfrom Jakarta headquarters and from three to five representative PSCs Fromthis data the actuary and we will be able to extrapolate and prepare actuarialprojections evaluate feasibility and if feasible prepare a business plan andoperational plan of action for the full target market

C Collecting needed data from one Pertamina region and PSCs operating in thatregion from which actuarial projections the feasibility study and if feasible thebusiness plan and operating plan will be completed for that region That regionwill serve as a pilot from which experience can be evaluated If the pilot provessuccessful expansion to other areas can be planned

Of the alternative approaches listed above we recommend alternative B Thesampling methodology used in alternative B will permit the actuary andconsultants to extrapolate from the representative areas to assess overall feasibilityand project the business and operating plan for all target markets throughout thearchipelago Alternative A is less cost effective than alternative B We do notrecommend alternative Cbecause it will not permit evaluation of the alternative

5

health care financing and delivery system for the entire target markets in a timelyfashion because it could result in employeeretiree health benefits in the pilot regionthat differ from those in other regions and because the results of implementationwill not be significant with respect to national cost increase trends

IV P ROJ ECT STATUS - SIGN IFICANT P)OI1CY NIEEllINGS

To discuss the consulting teams progress and recommendations the significantdata problems encountered and proposed solutions three joint meetings were heldwith representatives from USAID the Ministry of Health Health Sector FinancingProject - International Science and Technology Institute Inc (ISTI) Pertamina andTugu Mandiri during our last week in country In each of these meetings the projectconsultants presened the current progress and the scope of the data problemsconfronting the project

It was concluded during the final meeting that the consulting team should developand present to ISTI representatives a Revised Scope of Work to add a comprehensivedata collection component to this project This Revised Scope of Work is attached as Appendix V

Further it was agreed that the Ministry of Health would assume leadership byarranging and chairing high level meetings with Pertaminas top officials theMinistry of Mines USAID and Tugu Mandiri to receive full support for this projectItwas also agreed that the Ministry of Health would seek joint funding for theadditional costs associated with the data collection which became considerably morecomplex and resource intensive than originally anticipated The discussion ofjointfunding requirements should not occur until after Pertamina has agreed to supportthis project

We strongly recommend that Drs Djaafar be closely involved with the Ministry ofHealth in the planning and execution of these meetings including the selection ofparticipants presentations during the meetings and follow-up activities It wassuggested that the consultants Dr Barnes and Mr Wolff be available forpresentaLons during these meetings Further consultant work is suspended untilthese meetngs are favorably concluded

V CONCLUSIONS ANI) RECONMINI)AIIONS

It is most important for all concerned to realize that the most critical component ofthis project and all of the other health sector financing projects is reliable data forsound decision making at the executive and Board levels At the present time thisaspect is missing from this project and is causing a substantial delay

The second aspect of the project that must be accomplished in a timely manner iscomplete support by Pertamina and the Ministry of lealth Therefore it is stronglyrecommended by the project team that the Revised Scope of Work (to add acomprehensive data collection process) be approved Further that the Ministry ofHealth maintain its new leadership position in this project by scheduling andchairing the necessary meetings with Pertamina Tugu Mandiri the other requiredorgatiizaions and us if our participation can be beneficial in these critical discussions

As previously stated this project can be accomplished as outlined in the originalScope of Work with some modifications to (1) the successful collection of required

6

statistical financial and management information and (2) the previous length of time for completion

With respect to this data collection the consultants recommend (and the actuaryconcurs) that we select three representative regions among Pertamina operationsJakarta and three to five representative PSCs operating in or near the Pertaminaregions selected We will extrapolate from data collected from these sources to assessfeasibility and if feasible prepare the businessoperational plan of action for theentire target markets This recommendation will reduce the time effort and cost ofdata collection and permit us to dress all target markets We do not recommendother alternatives because they do not achieve project objectives in a timely manner

We appreciated the opportunity to serve on the Tugu MandiriPertaminaUSAIDISTI team and to further Indonesian efforts to improve health care financingoptions as well as the availability of quality cost effective health care in Indonesia

James G Bjrnes DPA I

te Date

AIPENI)IX I

Drs Siddharta --- low amp Siddharla P 000 In 8 wirsoe

1 n IpoundNM TIA

Coopers 3PWNAMUUA --

iO

DnW ampLybrand Kaw 10 O M - M 7 t OAJAKARTA 1 N AA IVrI10A

29 Mach 198

Dr E3llottWolf International Sciehce and Technology Inst te Inc co Ministry o Health Bureau of Pluming Kay X-5 No 4-9 J1 HR Rasuna Said Jakarta 12950

Dear Dr Wolf

GENERAL TAX MATTERS ON HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on March 21 1989 we set out below tax aspects related to the proposed health insurance scheme based on the current tax laws of Indonea

Background

2 We understand that the International Science and Technology Institute Inc (IST)has been appointed by Tugu Mandiri (wTugu) an insurance company owned by Pertaminato initially identify and appraise the various options available and subsequently describe and justify a recommended course of action for Tugu in developing a heafth maintenance organization and health insurance scheme (wHlsw) which will

a Inlay provde the plan to Pertam and other ol conhrakors retree aW

subsequen ly expad the avaabWiy of the plan to the gwrfl bunsie commwky

fl 1]-9

Drs Siddharta amp Siddharta in aew~ wem

CoopersampLygrand

D EJfot wow GENERAL TAX MATTERS ONIT11 29 Momh 19onHEALTH WSURANCE SCHEME Page 2of 8

It is proposed that the premium will be borne by both the employee and the employer eg PertaminaP0C n heepoeeg

3 Accordingly ISTI isconcerned about the tax aspects of the health insurance schemeand have requested our advice on the general tax aspects of such viewed from both theemployers and employees standpoint

General Aspects

4 The applicable general principles relevant to the HIS sue are set out in the Income Tax Law 1983 at

a Mole 9 (d) - indoainining taxale Income an employer may not deduct cost a bens prNdd by the taxmyer for the needs d enploym

0 tArIcIe 4 (3) (d) - where ervice received I-ind ain not deductible to the employer thenSturnm the beneft not asmssabe to th employe

5 The above genexal principles were clarified for health and insurance costs in Ministryof Finance Cirurs dated 28 May 1984 (ref no SE-19pA2319 84) and 7 June 1984 (ref noS-336PJ231984) As a result as far as the employer is concerned

(i) medIJ costs Includig hwt Insanc premine pa d by an emwpy to an HIS are non deducwbe

ampU)l costs relaed to compn owned heafth Iscikie pMNg kre seampvice n medictio to ermoyees we non deducttl

(ii) company rmbursed m edicexenses are non deductbe to the company

Drs Siddharta amp Siddharta in aweJssf Wt

CoopersampLybrand

Dr Elloft Wolff GENERAL TAX MATTERS ONu1T Inc 29 Marh 1969HEALTH INSURANCE SCHEME 9 Pmge 3of6

(iv) Ahrecet fOr e Medical expense be addres ed to the O kwaad 0 the Compay the relmbursmert isthe deductwbe fo the compay

6 The employee is not assessable for (i) to (iii) above but will be assessable on theincome in (iv) Income from insurance proceeds eg life accident or health are not assessable for the individual

7 Contrary to the initial spirit of the Income Tax Law as explained in paragraph 4 theIndonesian Tax Authorities have decreed that company contributions to the state pension fund(Tunjangan Hari Tua or wFHT) and Astek are considered as a tax deductible expense whilstbeing tax exempted for the employee (MOF Circular dated 28 May 1984) Historically thistreatment results from the Minister of Labors opinion that the non deductability of suchexpenses will strongly hinder the development of the pension fund

8 In accordance with MOF Decree 9470AXt41983 Indonesian citizens are notrequired to file personal tuzreturns if they are employed by only one company with theunderstanding that income isnot derived from other sources The impact of this is considered below

9 The only deductions allowable against an individuals assessable income are

(i) occupalonal allowance I 5 o gross mnnual salry rX xc p380000 (MOFDecrM 9KMK041964 dated 31 Decenombg I93)

(ii) tax fee income loWance Le Rp 9W00O for the idduaj and Rp 480000 for eachdepedent IlnWed to W depenclr (M11le 7 (1) Income Tax Law)

(iii) P contibution to Pension funds approved by the Minister of Finance eg the statePension fund and ASTEK (Artie a (2) Income Toy Law and MOF Circular dated 28 May1984)

Drs Siddharta amp Siddharta Coopers bull ampLybrand

Dr EJUk_ WoM GENERAL TAX MATTERSW11 kX4 29 March 196HEALTH INSURANCE SCHEME Page 4of 5

k1M Severgf Production Sharing Contractors are governed by the old tax laws which in anumber of ways differ from the 1984 Income Tax Law In this context the abovementioned aspects do not necessarily apply

Current tax position

11 From the above paragraphs it is clear that under current Indonesian Tax RegulationsFIS contnbutions by the employer would not be deductible On the other hand theemployees contribution would also not be deductible on his or her individual tax return Thisnon deductibility from an individual viewpoint is further modified by most Indonesiansreluctance to submit tax returns so that in the event of such contribution being allowed it will generally still not represent a benefit for the individual

Alternative options and possibilities

Request for tax treatment equal to THT

T As explained in paragraph 7 and 9 (iii) THT and Astek contributions receive specialconcessional treatmeni We believe that based on your explanations that the Ministers ofFinance Health and Energy have expressed their strong support for the HiS you shouldexplore the possibility of similar tax treatment to THT and Astek being applied to the HIS In our opinion the possibility of success is distant

-12shy

m1A

Drs Siddharta amp Siddharta In ameed~o a

CoopersampLybrand

Dr Eliot Wolff GENERAL TAX MATTERS ON9MT 29 March 196HEALTH INSURANCE SCHEME Page 5 of 6

Incorporatio into employfe salary

13 Another alternative would be to increase the employees Walary in accordance with the HIS contributions amount whereby

a th employer woUd be the nddhkon ampamaartexW Insted of HIScontbtions and therefore obtain tax deducablity for such expena

b the emdegYoees are no beng du vaged ampgtheW ngt take home lSy igUrmffctad

14 Under this approach you should bear in mind that the salary increase should withthe -cepton of employees earning salaries below the tax free bracket exceed the HIScontribution amount T7he excess is the Ngross up amount whereby the contribution is grossedup iu order to account for it being subject to income tax as part of the employees salaryHowever as the employees are mostly under the 25 tax bracket whilst the employer (LePertamina) is in the 35 tax bracket this alternative will carry tax benefits

15 However you should appreciate that Pertamina being a state owned company wouldmost probably require approvals from the Ministers of Energy Finance and Labor to increase employee salaries

Conclusion

16 We beLieve that compared with most other countries the current Indonesian environment could be more conducive to the establishment of an HIS

Lax

7mf -13shy

Drs Siddharta amp SiddhartaCo80o4 W~ Cooy e ampLgrand

Dr EIlI Wolff GENERAL TAX MATTERS ONW8T k 29 lomh 19gHEALTH INSURANCE SCHEME

17 However we also believe that a complex combinaoion of internal and external factorsin addition to iax will influence a companys decision on whether or not to embrxe an HISwhilst tax is not the decisive factor for such a decision

1amp Should you require further information please do not hesitate to contact myself orMr Ross L Gavin Chief Technical Advisor of this office

Yours faithfulyDrs SIDDHARTA amp SIDDHARTA Registered Public Accountants No D-2336

Drs Istama T Siddharta Senior Partner

ITSjs

f-14shy

APPENI)lX 11

Drs Siddharta - ong 2samp Siddharta li IWIMII4SoS

bAwfteW W 6Osanl 1lM6 J 5D1T IAC Oers CM bOP MULIA AUTToNampLbrand Kw oN Ree Said P0 V Ily JAKATA iM JAKRTA 127MA

14 April 1989

Dr Elliot Wolff International Sclence and Technology institute Inc co Wiane Tugu 4th floor J1 HR RasunA Baid Jakarta

0ear Dr Wolff

HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on April 10 1989 we setout below the tax aspects related to the proposed health insurance scheme a they affect Production Sharing Contractors

2 In bur letter of Madr 29 1989 we gt out the ttdon regulatozs affecting yourproposed health insurance scheme as they currenty apply omostta-~~~~~ utaxrvpayersay oAAs noted inparagraph 10 of that letter the currfnt tax regulations do not necessarily apply to Production Sharing Contractors

3 Article 33 (3) of the Income Tax Law 1983 states that entdtes In the oil and gas sectorconnected with Production Sharing Contracts in effect prior to January 11984 will continue to be subject to the Old Tax Laws rather than the Laws which came into effect on that date

4 Under the Old Tax Laws benefits-ln-kind provided to employee will be deductiblefor the purposes of determining the tax of the employer but conversely are assessable in thehands of the employee The amount assessable to the employee is the cost to the employer

S It is our understanding that most Production Sharing Contractors presently operatingin Indonesia are governed by Production Sharing Contracts signed prior to 1984 and thereforemost employees of Production Sharing Contractors would be assessed on the cost of thehealth insurance scheme as it applies to each individual

-16shy

Ill Comprehensive l)ata Collection - Revised Scope of Work

The team has devoted considerable thought to effective approaches for the collectionof needed data from this geographically widespread network of potential data sources We have concluded that the development of a formal information systemand data collection process is required to support the conduct of a comprehensivefeasibility study and if feasible a business plan and operational plan of action asrequired for Tugu Mandiri These actuarial studies will result in projected healthbenefit costs (premiums) as well as expected utilization and reimbursement rates forcovered services Feasibility and required provider arrangements in our finalbusinessoperating plan will be based on those actuarial recommendations It is notpossible to begin the basic actuarial studies for this project without the identified information

It is clear from the work of the consulting team that the information needed tosupport the completion of this project is available in Indonesia and must be obtainedbased on an expanded scope of work to add the data collection component A draft copy of the Revised Scope of Work is attached as Appendix V As agreed in our exitmeeting with USAID we completed the expanded scope of work for data collection upon returning to the United States We think that the new collection process willrequire extensive field work in country and approximately ten months withadditional resources (focusing on data collection for three representative operatingPertamina regions Jakarta and several representative PSCs) subject to a TuguMandiriPertamina decision to focus only on one region as a pilot site which willreduce the costs time and effort substantially or to expand the data collection to allregions and PSCs which would substantially increase all three

In light of feedback from ISTI and USAID on the unanticipated costs and timeinvolved for this data collection effort we propose three alternative approaches fordata collection Those alternatives are

A Collecting needed data from all seven Pertamina regions and Jakarta headquarters as well as from all seventeen PSCs

B Collecting needed data from four representative Pertamina operating regionsfrom Jakarta headquarters and from three to five representative PSCs Fromthis data the actuary and we will be able to extrapolate and prepare actuarialprojections evaluate feasibility and if feasible prepare a business plan andoperational plan of action for the full target market

C Collecting needed data from one Pertamina region and PSCs operating in thatregion from which actuarial projections the feasibility study and if feasible thebusiness plan and operating plan will be completed for that region That regionwill serve as a pilot from which experience can be evaluated If the pilot provessuccessful expansion to other areas can be planned

Of the alternative approaches listed above we recommend alternative B Thesampling methodology used in alternative B will permit the actuary andconsultants to extrapolate from the representative areas to assess overall feasibilityand project the business and operating plan for all target markets throughout thearchipelago Alternative A is less cost effective than alternative B We do notrecommend alternative Cbecause it will not permit evaluation of the alternative

5

health care financing and delivery system for the entire target markets in a timelyfashion because it could result in employeeretiree health benefits in the pilot regionthat differ from those in other regions and because the results of implementationwill not be significant with respect to national cost increase trends

IV P ROJ ECT STATUS - SIGN IFICANT P)OI1CY NIEEllINGS

To discuss the consulting teams progress and recommendations the significantdata problems encountered and proposed solutions three joint meetings were heldwith representatives from USAID the Ministry of Health Health Sector FinancingProject - International Science and Technology Institute Inc (ISTI) Pertamina andTugu Mandiri during our last week in country In each of these meetings the projectconsultants presened the current progress and the scope of the data problemsconfronting the project

It was concluded during the final meeting that the consulting team should developand present to ISTI representatives a Revised Scope of Work to add a comprehensivedata collection component to this project This Revised Scope of Work is attached as Appendix V

Further it was agreed that the Ministry of Health would assume leadership byarranging and chairing high level meetings with Pertaminas top officials theMinistry of Mines USAID and Tugu Mandiri to receive full support for this projectItwas also agreed that the Ministry of Health would seek joint funding for theadditional costs associated with the data collection which became considerably morecomplex and resource intensive than originally anticipated The discussion ofjointfunding requirements should not occur until after Pertamina has agreed to supportthis project

We strongly recommend that Drs Djaafar be closely involved with the Ministry ofHealth in the planning and execution of these meetings including the selection ofparticipants presentations during the meetings and follow-up activities It wassuggested that the consultants Dr Barnes and Mr Wolff be available forpresentaLons during these meetings Further consultant work is suspended untilthese meetngs are favorably concluded

V CONCLUSIONS ANI) RECONMINI)AIIONS

It is most important for all concerned to realize that the most critical component ofthis project and all of the other health sector financing projects is reliable data forsound decision making at the executive and Board levels At the present time thisaspect is missing from this project and is causing a substantial delay

The second aspect of the project that must be accomplished in a timely manner iscomplete support by Pertamina and the Ministry of lealth Therefore it is stronglyrecommended by the project team that the Revised Scope of Work (to add acomprehensive data collection process) be approved Further that the Ministry ofHealth maintain its new leadership position in this project by scheduling andchairing the necessary meetings with Pertamina Tugu Mandiri the other requiredorgatiizaions and us if our participation can be beneficial in these critical discussions

As previously stated this project can be accomplished as outlined in the originalScope of Work with some modifications to (1) the successful collection of required

6

statistical financial and management information and (2) the previous length of time for completion

With respect to this data collection the consultants recommend (and the actuaryconcurs) that we select three representative regions among Pertamina operationsJakarta and three to five representative PSCs operating in or near the Pertaminaregions selected We will extrapolate from data collected from these sources to assessfeasibility and if feasible prepare the businessoperational plan of action for theentire target markets This recommendation will reduce the time effort and cost ofdata collection and permit us to dress all target markets We do not recommendother alternatives because they do not achieve project objectives in a timely manner

We appreciated the opportunity to serve on the Tugu MandiriPertaminaUSAIDISTI team and to further Indonesian efforts to improve health care financingoptions as well as the availability of quality cost effective health care in Indonesia

James G Bjrnes DPA I

te Date

AIPENI)IX I

Drs Siddharta --- low amp Siddharla P 000 In 8 wirsoe

1 n IpoundNM TIA

Coopers 3PWNAMUUA --

iO

DnW ampLybrand Kaw 10 O M - M 7 t OAJAKARTA 1 N AA IVrI10A

29 Mach 198

Dr E3llottWolf International Sciehce and Technology Inst te Inc co Ministry o Health Bureau of Pluming Kay X-5 No 4-9 J1 HR Rasuna Said Jakarta 12950

Dear Dr Wolf

GENERAL TAX MATTERS ON HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on March 21 1989 we set out below tax aspects related to the proposed health insurance scheme based on the current tax laws of Indonea

Background

2 We understand that the International Science and Technology Institute Inc (IST)has been appointed by Tugu Mandiri (wTugu) an insurance company owned by Pertaminato initially identify and appraise the various options available and subsequently describe and justify a recommended course of action for Tugu in developing a heafth maintenance organization and health insurance scheme (wHlsw) which will

a Inlay provde the plan to Pertam and other ol conhrakors retree aW

subsequen ly expad the avaabWiy of the plan to the gwrfl bunsie commwky

fl 1]-9

Drs Siddharta amp Siddharta in aew~ wem

CoopersampLygrand

D EJfot wow GENERAL TAX MATTERS ONIT11 29 Momh 19onHEALTH WSURANCE SCHEME Page 2of 8

It is proposed that the premium will be borne by both the employee and the employer eg PertaminaP0C n heepoeeg

3 Accordingly ISTI isconcerned about the tax aspects of the health insurance schemeand have requested our advice on the general tax aspects of such viewed from both theemployers and employees standpoint

General Aspects

4 The applicable general principles relevant to the HIS sue are set out in the Income Tax Law 1983 at

a Mole 9 (d) - indoainining taxale Income an employer may not deduct cost a bens prNdd by the taxmyer for the needs d enploym

0 tArIcIe 4 (3) (d) - where ervice received I-ind ain not deductible to the employer thenSturnm the beneft not asmssabe to th employe

5 The above genexal principles were clarified for health and insurance costs in Ministryof Finance Cirurs dated 28 May 1984 (ref no SE-19pA2319 84) and 7 June 1984 (ref noS-336PJ231984) As a result as far as the employer is concerned

(i) medIJ costs Includig hwt Insanc premine pa d by an emwpy to an HIS are non deducwbe

ampU)l costs relaed to compn owned heafth Iscikie pMNg kre seampvice n medictio to ermoyees we non deducttl

(ii) company rmbursed m edicexenses are non deductbe to the company

Drs Siddharta amp Siddharta in aweJssf Wt

CoopersampLybrand

Dr Elloft Wolff GENERAL TAX MATTERS ONu1T Inc 29 Marh 1969HEALTH INSURANCE SCHEME 9 Pmge 3of6

(iv) Ahrecet fOr e Medical expense be addres ed to the O kwaad 0 the Compay the relmbursmert isthe deductwbe fo the compay

6 The employee is not assessable for (i) to (iii) above but will be assessable on theincome in (iv) Income from insurance proceeds eg life accident or health are not assessable for the individual

7 Contrary to the initial spirit of the Income Tax Law as explained in paragraph 4 theIndonesian Tax Authorities have decreed that company contributions to the state pension fund(Tunjangan Hari Tua or wFHT) and Astek are considered as a tax deductible expense whilstbeing tax exempted for the employee (MOF Circular dated 28 May 1984) Historically thistreatment results from the Minister of Labors opinion that the non deductability of suchexpenses will strongly hinder the development of the pension fund

8 In accordance with MOF Decree 9470AXt41983 Indonesian citizens are notrequired to file personal tuzreturns if they are employed by only one company with theunderstanding that income isnot derived from other sources The impact of this is considered below

9 The only deductions allowable against an individuals assessable income are

(i) occupalonal allowance I 5 o gross mnnual salry rX xc p380000 (MOFDecrM 9KMK041964 dated 31 Decenombg I93)

(ii) tax fee income loWance Le Rp 9W00O for the idduaj and Rp 480000 for eachdepedent IlnWed to W depenclr (M11le 7 (1) Income Tax Law)

(iii) P contibution to Pension funds approved by the Minister of Finance eg the statePension fund and ASTEK (Artie a (2) Income Toy Law and MOF Circular dated 28 May1984)

Drs Siddharta amp Siddharta Coopers bull ampLybrand

Dr EJUk_ WoM GENERAL TAX MATTERSW11 kX4 29 March 196HEALTH INSURANCE SCHEME Page 4of 5

k1M Severgf Production Sharing Contractors are governed by the old tax laws which in anumber of ways differ from the 1984 Income Tax Law In this context the abovementioned aspects do not necessarily apply

Current tax position

11 From the above paragraphs it is clear that under current Indonesian Tax RegulationsFIS contnbutions by the employer would not be deductible On the other hand theemployees contribution would also not be deductible on his or her individual tax return Thisnon deductibility from an individual viewpoint is further modified by most Indonesiansreluctance to submit tax returns so that in the event of such contribution being allowed it will generally still not represent a benefit for the individual

Alternative options and possibilities

Request for tax treatment equal to THT

T As explained in paragraph 7 and 9 (iii) THT and Astek contributions receive specialconcessional treatmeni We believe that based on your explanations that the Ministers ofFinance Health and Energy have expressed their strong support for the HiS you shouldexplore the possibility of similar tax treatment to THT and Astek being applied to the HIS In our opinion the possibility of success is distant

-12shy

m1A

Drs Siddharta amp Siddharta In ameed~o a

CoopersampLybrand

Dr Eliot Wolff GENERAL TAX MATTERS ON9MT 29 March 196HEALTH INSURANCE SCHEME Page 5 of 6

Incorporatio into employfe salary

13 Another alternative would be to increase the employees Walary in accordance with the HIS contributions amount whereby

a th employer woUd be the nddhkon ampamaartexW Insted of HIScontbtions and therefore obtain tax deducablity for such expena

b the emdegYoees are no beng du vaged ampgtheW ngt take home lSy igUrmffctad

14 Under this approach you should bear in mind that the salary increase should withthe -cepton of employees earning salaries below the tax free bracket exceed the HIScontribution amount T7he excess is the Ngross up amount whereby the contribution is grossedup iu order to account for it being subject to income tax as part of the employees salaryHowever as the employees are mostly under the 25 tax bracket whilst the employer (LePertamina) is in the 35 tax bracket this alternative will carry tax benefits

15 However you should appreciate that Pertamina being a state owned company wouldmost probably require approvals from the Ministers of Energy Finance and Labor to increase employee salaries

Conclusion

16 We beLieve that compared with most other countries the current Indonesian environment could be more conducive to the establishment of an HIS

Lax

7mf -13shy

Drs Siddharta amp SiddhartaCo80o4 W~ Cooy e ampLgrand

Dr EIlI Wolff GENERAL TAX MATTERS ONW8T k 29 lomh 19gHEALTH INSURANCE SCHEME

17 However we also believe that a complex combinaoion of internal and external factorsin addition to iax will influence a companys decision on whether or not to embrxe an HISwhilst tax is not the decisive factor for such a decision

1amp Should you require further information please do not hesitate to contact myself orMr Ross L Gavin Chief Technical Advisor of this office

Yours faithfulyDrs SIDDHARTA amp SIDDHARTA Registered Public Accountants No D-2336

Drs Istama T Siddharta Senior Partner

ITSjs

f-14shy

APPENI)lX 11

Drs Siddharta - ong 2samp Siddharta li IWIMII4SoS

bAwfteW W 6Osanl 1lM6 J 5D1T IAC Oers CM bOP MULIA AUTToNampLbrand Kw oN Ree Said P0 V Ily JAKATA iM JAKRTA 127MA

14 April 1989

Dr Elliot Wolff International Sclence and Technology institute Inc co Wiane Tugu 4th floor J1 HR RasunA Baid Jakarta

0ear Dr Wolff

HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on April 10 1989 we setout below the tax aspects related to the proposed health insurance scheme a they affect Production Sharing Contractors

2 In bur letter of Madr 29 1989 we gt out the ttdon regulatozs affecting yourproposed health insurance scheme as they currenty apply omostta-~~~~~ utaxrvpayersay oAAs noted inparagraph 10 of that letter the currfnt tax regulations do not necessarily apply to Production Sharing Contractors

3 Article 33 (3) of the Income Tax Law 1983 states that entdtes In the oil and gas sectorconnected with Production Sharing Contracts in effect prior to January 11984 will continue to be subject to the Old Tax Laws rather than the Laws which came into effect on that date

4 Under the Old Tax Laws benefits-ln-kind provided to employee will be deductiblefor the purposes of determining the tax of the employer but conversely are assessable in thehands of the employee The amount assessable to the employee is the cost to the employer

S It is our understanding that most Production Sharing Contractors presently operatingin Indonesia are governed by Production Sharing Contracts signed prior to 1984 and thereforemost employees of Production Sharing Contractors would be assessed on the cost of thehealth insurance scheme as it applies to each individual

-16shy

health care financing and delivery system for the entire target markets in a timelyfashion because it could result in employeeretiree health benefits in the pilot regionthat differ from those in other regions and because the results of implementationwill not be significant with respect to national cost increase trends

IV P ROJ ECT STATUS - SIGN IFICANT P)OI1CY NIEEllINGS

To discuss the consulting teams progress and recommendations the significantdata problems encountered and proposed solutions three joint meetings were heldwith representatives from USAID the Ministry of Health Health Sector FinancingProject - International Science and Technology Institute Inc (ISTI) Pertamina andTugu Mandiri during our last week in country In each of these meetings the projectconsultants presened the current progress and the scope of the data problemsconfronting the project

It was concluded during the final meeting that the consulting team should developand present to ISTI representatives a Revised Scope of Work to add a comprehensivedata collection component to this project This Revised Scope of Work is attached as Appendix V

Further it was agreed that the Ministry of Health would assume leadership byarranging and chairing high level meetings with Pertaminas top officials theMinistry of Mines USAID and Tugu Mandiri to receive full support for this projectItwas also agreed that the Ministry of Health would seek joint funding for theadditional costs associated with the data collection which became considerably morecomplex and resource intensive than originally anticipated The discussion ofjointfunding requirements should not occur until after Pertamina has agreed to supportthis project

We strongly recommend that Drs Djaafar be closely involved with the Ministry ofHealth in the planning and execution of these meetings including the selection ofparticipants presentations during the meetings and follow-up activities It wassuggested that the consultants Dr Barnes and Mr Wolff be available forpresentaLons during these meetings Further consultant work is suspended untilthese meetngs are favorably concluded

V CONCLUSIONS ANI) RECONMINI)AIIONS

It is most important for all concerned to realize that the most critical component ofthis project and all of the other health sector financing projects is reliable data forsound decision making at the executive and Board levels At the present time thisaspect is missing from this project and is causing a substantial delay

The second aspect of the project that must be accomplished in a timely manner iscomplete support by Pertamina and the Ministry of lealth Therefore it is stronglyrecommended by the project team that the Revised Scope of Work (to add acomprehensive data collection process) be approved Further that the Ministry ofHealth maintain its new leadership position in this project by scheduling andchairing the necessary meetings with Pertamina Tugu Mandiri the other requiredorgatiizaions and us if our participation can be beneficial in these critical discussions

As previously stated this project can be accomplished as outlined in the originalScope of Work with some modifications to (1) the successful collection of required

6

statistical financial and management information and (2) the previous length of time for completion

With respect to this data collection the consultants recommend (and the actuaryconcurs) that we select three representative regions among Pertamina operationsJakarta and three to five representative PSCs operating in or near the Pertaminaregions selected We will extrapolate from data collected from these sources to assessfeasibility and if feasible prepare the businessoperational plan of action for theentire target markets This recommendation will reduce the time effort and cost ofdata collection and permit us to dress all target markets We do not recommendother alternatives because they do not achieve project objectives in a timely manner

We appreciated the opportunity to serve on the Tugu MandiriPertaminaUSAIDISTI team and to further Indonesian efforts to improve health care financingoptions as well as the availability of quality cost effective health care in Indonesia

James G Bjrnes DPA I

te Date

AIPENI)IX I

Drs Siddharta --- low amp Siddharla P 000 In 8 wirsoe

1 n IpoundNM TIA

Coopers 3PWNAMUUA --

iO

DnW ampLybrand Kaw 10 O M - M 7 t OAJAKARTA 1 N AA IVrI10A

29 Mach 198

Dr E3llottWolf International Sciehce and Technology Inst te Inc co Ministry o Health Bureau of Pluming Kay X-5 No 4-9 J1 HR Rasuna Said Jakarta 12950

Dear Dr Wolf

GENERAL TAX MATTERS ON HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on March 21 1989 we set out below tax aspects related to the proposed health insurance scheme based on the current tax laws of Indonea

Background

2 We understand that the International Science and Technology Institute Inc (IST)has been appointed by Tugu Mandiri (wTugu) an insurance company owned by Pertaminato initially identify and appraise the various options available and subsequently describe and justify a recommended course of action for Tugu in developing a heafth maintenance organization and health insurance scheme (wHlsw) which will

a Inlay provde the plan to Pertam and other ol conhrakors retree aW

subsequen ly expad the avaabWiy of the plan to the gwrfl bunsie commwky

fl 1]-9

Drs Siddharta amp Siddharta in aew~ wem

CoopersampLygrand

D EJfot wow GENERAL TAX MATTERS ONIT11 29 Momh 19onHEALTH WSURANCE SCHEME Page 2of 8

It is proposed that the premium will be borne by both the employee and the employer eg PertaminaP0C n heepoeeg

3 Accordingly ISTI isconcerned about the tax aspects of the health insurance schemeand have requested our advice on the general tax aspects of such viewed from both theemployers and employees standpoint

General Aspects

4 The applicable general principles relevant to the HIS sue are set out in the Income Tax Law 1983 at

a Mole 9 (d) - indoainining taxale Income an employer may not deduct cost a bens prNdd by the taxmyer for the needs d enploym

0 tArIcIe 4 (3) (d) - where ervice received I-ind ain not deductible to the employer thenSturnm the beneft not asmssabe to th employe

5 The above genexal principles were clarified for health and insurance costs in Ministryof Finance Cirurs dated 28 May 1984 (ref no SE-19pA2319 84) and 7 June 1984 (ref noS-336PJ231984) As a result as far as the employer is concerned

(i) medIJ costs Includig hwt Insanc premine pa d by an emwpy to an HIS are non deducwbe

ampU)l costs relaed to compn owned heafth Iscikie pMNg kre seampvice n medictio to ermoyees we non deducttl

(ii) company rmbursed m edicexenses are non deductbe to the company

Drs Siddharta amp Siddharta in aweJssf Wt

CoopersampLybrand

Dr Elloft Wolff GENERAL TAX MATTERS ONu1T Inc 29 Marh 1969HEALTH INSURANCE SCHEME 9 Pmge 3of6

(iv) Ahrecet fOr e Medical expense be addres ed to the O kwaad 0 the Compay the relmbursmert isthe deductwbe fo the compay

6 The employee is not assessable for (i) to (iii) above but will be assessable on theincome in (iv) Income from insurance proceeds eg life accident or health are not assessable for the individual

7 Contrary to the initial spirit of the Income Tax Law as explained in paragraph 4 theIndonesian Tax Authorities have decreed that company contributions to the state pension fund(Tunjangan Hari Tua or wFHT) and Astek are considered as a tax deductible expense whilstbeing tax exempted for the employee (MOF Circular dated 28 May 1984) Historically thistreatment results from the Minister of Labors opinion that the non deductability of suchexpenses will strongly hinder the development of the pension fund

8 In accordance with MOF Decree 9470AXt41983 Indonesian citizens are notrequired to file personal tuzreturns if they are employed by only one company with theunderstanding that income isnot derived from other sources The impact of this is considered below

9 The only deductions allowable against an individuals assessable income are

(i) occupalonal allowance I 5 o gross mnnual salry rX xc p380000 (MOFDecrM 9KMK041964 dated 31 Decenombg I93)

(ii) tax fee income loWance Le Rp 9W00O for the idduaj and Rp 480000 for eachdepedent IlnWed to W depenclr (M11le 7 (1) Income Tax Law)

(iii) P contibution to Pension funds approved by the Minister of Finance eg the statePension fund and ASTEK (Artie a (2) Income Toy Law and MOF Circular dated 28 May1984)

Drs Siddharta amp Siddharta Coopers bull ampLybrand

Dr EJUk_ WoM GENERAL TAX MATTERSW11 kX4 29 March 196HEALTH INSURANCE SCHEME Page 4of 5

k1M Severgf Production Sharing Contractors are governed by the old tax laws which in anumber of ways differ from the 1984 Income Tax Law In this context the abovementioned aspects do not necessarily apply

Current tax position

11 From the above paragraphs it is clear that under current Indonesian Tax RegulationsFIS contnbutions by the employer would not be deductible On the other hand theemployees contribution would also not be deductible on his or her individual tax return Thisnon deductibility from an individual viewpoint is further modified by most Indonesiansreluctance to submit tax returns so that in the event of such contribution being allowed it will generally still not represent a benefit for the individual

Alternative options and possibilities

Request for tax treatment equal to THT

T As explained in paragraph 7 and 9 (iii) THT and Astek contributions receive specialconcessional treatmeni We believe that based on your explanations that the Ministers ofFinance Health and Energy have expressed their strong support for the HiS you shouldexplore the possibility of similar tax treatment to THT and Astek being applied to the HIS In our opinion the possibility of success is distant

-12shy

m1A

Drs Siddharta amp Siddharta In ameed~o a

CoopersampLybrand

Dr Eliot Wolff GENERAL TAX MATTERS ON9MT 29 March 196HEALTH INSURANCE SCHEME Page 5 of 6

Incorporatio into employfe salary

13 Another alternative would be to increase the employees Walary in accordance with the HIS contributions amount whereby

a th employer woUd be the nddhkon ampamaartexW Insted of HIScontbtions and therefore obtain tax deducablity for such expena

b the emdegYoees are no beng du vaged ampgtheW ngt take home lSy igUrmffctad

14 Under this approach you should bear in mind that the salary increase should withthe -cepton of employees earning salaries below the tax free bracket exceed the HIScontribution amount T7he excess is the Ngross up amount whereby the contribution is grossedup iu order to account for it being subject to income tax as part of the employees salaryHowever as the employees are mostly under the 25 tax bracket whilst the employer (LePertamina) is in the 35 tax bracket this alternative will carry tax benefits

15 However you should appreciate that Pertamina being a state owned company wouldmost probably require approvals from the Ministers of Energy Finance and Labor to increase employee salaries

Conclusion

16 We beLieve that compared with most other countries the current Indonesian environment could be more conducive to the establishment of an HIS

Lax

7mf -13shy

Drs Siddharta amp SiddhartaCo80o4 W~ Cooy e ampLgrand

Dr EIlI Wolff GENERAL TAX MATTERS ONW8T k 29 lomh 19gHEALTH INSURANCE SCHEME

17 However we also believe that a complex combinaoion of internal and external factorsin addition to iax will influence a companys decision on whether or not to embrxe an HISwhilst tax is not the decisive factor for such a decision

1amp Should you require further information please do not hesitate to contact myself orMr Ross L Gavin Chief Technical Advisor of this office

Yours faithfulyDrs SIDDHARTA amp SIDDHARTA Registered Public Accountants No D-2336

Drs Istama T Siddharta Senior Partner

ITSjs

f-14shy

APPENI)lX 11

Drs Siddharta - ong 2samp Siddharta li IWIMII4SoS

bAwfteW W 6Osanl 1lM6 J 5D1T IAC Oers CM bOP MULIA AUTToNampLbrand Kw oN Ree Said P0 V Ily JAKATA iM JAKRTA 127MA

14 April 1989

Dr Elliot Wolff International Sclence and Technology institute Inc co Wiane Tugu 4th floor J1 HR RasunA Baid Jakarta

0ear Dr Wolff

HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on April 10 1989 we setout below the tax aspects related to the proposed health insurance scheme a they affect Production Sharing Contractors

2 In bur letter of Madr 29 1989 we gt out the ttdon regulatozs affecting yourproposed health insurance scheme as they currenty apply omostta-~~~~~ utaxrvpayersay oAAs noted inparagraph 10 of that letter the currfnt tax regulations do not necessarily apply to Production Sharing Contractors

3 Article 33 (3) of the Income Tax Law 1983 states that entdtes In the oil and gas sectorconnected with Production Sharing Contracts in effect prior to January 11984 will continue to be subject to the Old Tax Laws rather than the Laws which came into effect on that date

4 Under the Old Tax Laws benefits-ln-kind provided to employee will be deductiblefor the purposes of determining the tax of the employer but conversely are assessable in thehands of the employee The amount assessable to the employee is the cost to the employer

S It is our understanding that most Production Sharing Contractors presently operatingin Indonesia are governed by Production Sharing Contracts signed prior to 1984 and thereforemost employees of Production Sharing Contractors would be assessed on the cost of thehealth insurance scheme as it applies to each individual

-16shy

statistical financial and management information and (2) the previous length of time for completion

With respect to this data collection the consultants recommend (and the actuaryconcurs) that we select three representative regions among Pertamina operationsJakarta and three to five representative PSCs operating in or near the Pertaminaregions selected We will extrapolate from data collected from these sources to assessfeasibility and if feasible prepare the businessoperational plan of action for theentire target markets This recommendation will reduce the time effort and cost ofdata collection and permit us to dress all target markets We do not recommendother alternatives because they do not achieve project objectives in a timely manner

We appreciated the opportunity to serve on the Tugu MandiriPertaminaUSAIDISTI team and to further Indonesian efforts to improve health care financingoptions as well as the availability of quality cost effective health care in Indonesia

James G Bjrnes DPA I

te Date

AIPENI)IX I

Drs Siddharta --- low amp Siddharla P 000 In 8 wirsoe

1 n IpoundNM TIA

Coopers 3PWNAMUUA --

iO

DnW ampLybrand Kaw 10 O M - M 7 t OAJAKARTA 1 N AA IVrI10A

29 Mach 198

Dr E3llottWolf International Sciehce and Technology Inst te Inc co Ministry o Health Bureau of Pluming Kay X-5 No 4-9 J1 HR Rasuna Said Jakarta 12950

Dear Dr Wolf

GENERAL TAX MATTERS ON HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on March 21 1989 we set out below tax aspects related to the proposed health insurance scheme based on the current tax laws of Indonea

Background

2 We understand that the International Science and Technology Institute Inc (IST)has been appointed by Tugu Mandiri (wTugu) an insurance company owned by Pertaminato initially identify and appraise the various options available and subsequently describe and justify a recommended course of action for Tugu in developing a heafth maintenance organization and health insurance scheme (wHlsw) which will

a Inlay provde the plan to Pertam and other ol conhrakors retree aW

subsequen ly expad the avaabWiy of the plan to the gwrfl bunsie commwky

fl 1]-9

Drs Siddharta amp Siddharta in aew~ wem

CoopersampLygrand

D EJfot wow GENERAL TAX MATTERS ONIT11 29 Momh 19onHEALTH WSURANCE SCHEME Page 2of 8

It is proposed that the premium will be borne by both the employee and the employer eg PertaminaP0C n heepoeeg

3 Accordingly ISTI isconcerned about the tax aspects of the health insurance schemeand have requested our advice on the general tax aspects of such viewed from both theemployers and employees standpoint

General Aspects

4 The applicable general principles relevant to the HIS sue are set out in the Income Tax Law 1983 at

a Mole 9 (d) - indoainining taxale Income an employer may not deduct cost a bens prNdd by the taxmyer for the needs d enploym

0 tArIcIe 4 (3) (d) - where ervice received I-ind ain not deductible to the employer thenSturnm the beneft not asmssabe to th employe

5 The above genexal principles were clarified for health and insurance costs in Ministryof Finance Cirurs dated 28 May 1984 (ref no SE-19pA2319 84) and 7 June 1984 (ref noS-336PJ231984) As a result as far as the employer is concerned

(i) medIJ costs Includig hwt Insanc premine pa d by an emwpy to an HIS are non deducwbe

ampU)l costs relaed to compn owned heafth Iscikie pMNg kre seampvice n medictio to ermoyees we non deducttl

(ii) company rmbursed m edicexenses are non deductbe to the company

Drs Siddharta amp Siddharta in aweJssf Wt

CoopersampLybrand

Dr Elloft Wolff GENERAL TAX MATTERS ONu1T Inc 29 Marh 1969HEALTH INSURANCE SCHEME 9 Pmge 3of6

(iv) Ahrecet fOr e Medical expense be addres ed to the O kwaad 0 the Compay the relmbursmert isthe deductwbe fo the compay

6 The employee is not assessable for (i) to (iii) above but will be assessable on theincome in (iv) Income from insurance proceeds eg life accident or health are not assessable for the individual

7 Contrary to the initial spirit of the Income Tax Law as explained in paragraph 4 theIndonesian Tax Authorities have decreed that company contributions to the state pension fund(Tunjangan Hari Tua or wFHT) and Astek are considered as a tax deductible expense whilstbeing tax exempted for the employee (MOF Circular dated 28 May 1984) Historically thistreatment results from the Minister of Labors opinion that the non deductability of suchexpenses will strongly hinder the development of the pension fund

8 In accordance with MOF Decree 9470AXt41983 Indonesian citizens are notrequired to file personal tuzreturns if they are employed by only one company with theunderstanding that income isnot derived from other sources The impact of this is considered below

9 The only deductions allowable against an individuals assessable income are

(i) occupalonal allowance I 5 o gross mnnual salry rX xc p380000 (MOFDecrM 9KMK041964 dated 31 Decenombg I93)

(ii) tax fee income loWance Le Rp 9W00O for the idduaj and Rp 480000 for eachdepedent IlnWed to W depenclr (M11le 7 (1) Income Tax Law)

(iii) P contibution to Pension funds approved by the Minister of Finance eg the statePension fund and ASTEK (Artie a (2) Income Toy Law and MOF Circular dated 28 May1984)

Drs Siddharta amp Siddharta Coopers bull ampLybrand

Dr EJUk_ WoM GENERAL TAX MATTERSW11 kX4 29 March 196HEALTH INSURANCE SCHEME Page 4of 5

k1M Severgf Production Sharing Contractors are governed by the old tax laws which in anumber of ways differ from the 1984 Income Tax Law In this context the abovementioned aspects do not necessarily apply

Current tax position

11 From the above paragraphs it is clear that under current Indonesian Tax RegulationsFIS contnbutions by the employer would not be deductible On the other hand theemployees contribution would also not be deductible on his or her individual tax return Thisnon deductibility from an individual viewpoint is further modified by most Indonesiansreluctance to submit tax returns so that in the event of such contribution being allowed it will generally still not represent a benefit for the individual

Alternative options and possibilities

Request for tax treatment equal to THT

T As explained in paragraph 7 and 9 (iii) THT and Astek contributions receive specialconcessional treatmeni We believe that based on your explanations that the Ministers ofFinance Health and Energy have expressed their strong support for the HiS you shouldexplore the possibility of similar tax treatment to THT and Astek being applied to the HIS In our opinion the possibility of success is distant

-12shy

m1A

Drs Siddharta amp Siddharta In ameed~o a

CoopersampLybrand

Dr Eliot Wolff GENERAL TAX MATTERS ON9MT 29 March 196HEALTH INSURANCE SCHEME Page 5 of 6

Incorporatio into employfe salary

13 Another alternative would be to increase the employees Walary in accordance with the HIS contributions amount whereby

a th employer woUd be the nddhkon ampamaartexW Insted of HIScontbtions and therefore obtain tax deducablity for such expena

b the emdegYoees are no beng du vaged ampgtheW ngt take home lSy igUrmffctad

14 Under this approach you should bear in mind that the salary increase should withthe -cepton of employees earning salaries below the tax free bracket exceed the HIScontribution amount T7he excess is the Ngross up amount whereby the contribution is grossedup iu order to account for it being subject to income tax as part of the employees salaryHowever as the employees are mostly under the 25 tax bracket whilst the employer (LePertamina) is in the 35 tax bracket this alternative will carry tax benefits

15 However you should appreciate that Pertamina being a state owned company wouldmost probably require approvals from the Ministers of Energy Finance and Labor to increase employee salaries

Conclusion

16 We beLieve that compared with most other countries the current Indonesian environment could be more conducive to the establishment of an HIS

Lax

7mf -13shy

Drs Siddharta amp SiddhartaCo80o4 W~ Cooy e ampLgrand

Dr EIlI Wolff GENERAL TAX MATTERS ONW8T k 29 lomh 19gHEALTH INSURANCE SCHEME

17 However we also believe that a complex combinaoion of internal and external factorsin addition to iax will influence a companys decision on whether or not to embrxe an HISwhilst tax is not the decisive factor for such a decision

1amp Should you require further information please do not hesitate to contact myself orMr Ross L Gavin Chief Technical Advisor of this office

Yours faithfulyDrs SIDDHARTA amp SIDDHARTA Registered Public Accountants No D-2336

Drs Istama T Siddharta Senior Partner

ITSjs

f-14shy

APPENI)lX 11

Drs Siddharta - ong 2samp Siddharta li IWIMII4SoS

bAwfteW W 6Osanl 1lM6 J 5D1T IAC Oers CM bOP MULIA AUTToNampLbrand Kw oN Ree Said P0 V Ily JAKATA iM JAKRTA 127MA

14 April 1989

Dr Elliot Wolff International Sclence and Technology institute Inc co Wiane Tugu 4th floor J1 HR RasunA Baid Jakarta

0ear Dr Wolff

HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on April 10 1989 we setout below the tax aspects related to the proposed health insurance scheme a they affect Production Sharing Contractors

2 In bur letter of Madr 29 1989 we gt out the ttdon regulatozs affecting yourproposed health insurance scheme as they currenty apply omostta-~~~~~ utaxrvpayersay oAAs noted inparagraph 10 of that letter the currfnt tax regulations do not necessarily apply to Production Sharing Contractors

3 Article 33 (3) of the Income Tax Law 1983 states that entdtes In the oil and gas sectorconnected with Production Sharing Contracts in effect prior to January 11984 will continue to be subject to the Old Tax Laws rather than the Laws which came into effect on that date

4 Under the Old Tax Laws benefits-ln-kind provided to employee will be deductiblefor the purposes of determining the tax of the employer but conversely are assessable in thehands of the employee The amount assessable to the employee is the cost to the employer

S It is our understanding that most Production Sharing Contractors presently operatingin Indonesia are governed by Production Sharing Contracts signed prior to 1984 and thereforemost employees of Production Sharing Contractors would be assessed on the cost of thehealth insurance scheme as it applies to each individual

-16shy

AIPENI)IX I

Drs Siddharta --- low amp Siddharla P 000 In 8 wirsoe

1 n IpoundNM TIA

Coopers 3PWNAMUUA --

iO

DnW ampLybrand Kaw 10 O M - M 7 t OAJAKARTA 1 N AA IVrI10A

29 Mach 198

Dr E3llottWolf International Sciehce and Technology Inst te Inc co Ministry o Health Bureau of Pluming Kay X-5 No 4-9 J1 HR Rasuna Said Jakarta 12950

Dear Dr Wolf

GENERAL TAX MATTERS ON HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on March 21 1989 we set out below tax aspects related to the proposed health insurance scheme based on the current tax laws of Indonea

Background

2 We understand that the International Science and Technology Institute Inc (IST)has been appointed by Tugu Mandiri (wTugu) an insurance company owned by Pertaminato initially identify and appraise the various options available and subsequently describe and justify a recommended course of action for Tugu in developing a heafth maintenance organization and health insurance scheme (wHlsw) which will

a Inlay provde the plan to Pertam and other ol conhrakors retree aW

subsequen ly expad the avaabWiy of the plan to the gwrfl bunsie commwky

fl 1]-9

Drs Siddharta amp Siddharta in aew~ wem

CoopersampLygrand

D EJfot wow GENERAL TAX MATTERS ONIT11 29 Momh 19onHEALTH WSURANCE SCHEME Page 2of 8

It is proposed that the premium will be borne by both the employee and the employer eg PertaminaP0C n heepoeeg

3 Accordingly ISTI isconcerned about the tax aspects of the health insurance schemeand have requested our advice on the general tax aspects of such viewed from both theemployers and employees standpoint

General Aspects

4 The applicable general principles relevant to the HIS sue are set out in the Income Tax Law 1983 at

a Mole 9 (d) - indoainining taxale Income an employer may not deduct cost a bens prNdd by the taxmyer for the needs d enploym

0 tArIcIe 4 (3) (d) - where ervice received I-ind ain not deductible to the employer thenSturnm the beneft not asmssabe to th employe

5 The above genexal principles were clarified for health and insurance costs in Ministryof Finance Cirurs dated 28 May 1984 (ref no SE-19pA2319 84) and 7 June 1984 (ref noS-336PJ231984) As a result as far as the employer is concerned

(i) medIJ costs Includig hwt Insanc premine pa d by an emwpy to an HIS are non deducwbe

ampU)l costs relaed to compn owned heafth Iscikie pMNg kre seampvice n medictio to ermoyees we non deducttl

(ii) company rmbursed m edicexenses are non deductbe to the company

Drs Siddharta amp Siddharta in aweJssf Wt

CoopersampLybrand

Dr Elloft Wolff GENERAL TAX MATTERS ONu1T Inc 29 Marh 1969HEALTH INSURANCE SCHEME 9 Pmge 3of6

(iv) Ahrecet fOr e Medical expense be addres ed to the O kwaad 0 the Compay the relmbursmert isthe deductwbe fo the compay

6 The employee is not assessable for (i) to (iii) above but will be assessable on theincome in (iv) Income from insurance proceeds eg life accident or health are not assessable for the individual

7 Contrary to the initial spirit of the Income Tax Law as explained in paragraph 4 theIndonesian Tax Authorities have decreed that company contributions to the state pension fund(Tunjangan Hari Tua or wFHT) and Astek are considered as a tax deductible expense whilstbeing tax exempted for the employee (MOF Circular dated 28 May 1984) Historically thistreatment results from the Minister of Labors opinion that the non deductability of suchexpenses will strongly hinder the development of the pension fund

8 In accordance with MOF Decree 9470AXt41983 Indonesian citizens are notrequired to file personal tuzreturns if they are employed by only one company with theunderstanding that income isnot derived from other sources The impact of this is considered below

9 The only deductions allowable against an individuals assessable income are

(i) occupalonal allowance I 5 o gross mnnual salry rX xc p380000 (MOFDecrM 9KMK041964 dated 31 Decenombg I93)

(ii) tax fee income loWance Le Rp 9W00O for the idduaj and Rp 480000 for eachdepedent IlnWed to W depenclr (M11le 7 (1) Income Tax Law)

(iii) P contibution to Pension funds approved by the Minister of Finance eg the statePension fund and ASTEK (Artie a (2) Income Toy Law and MOF Circular dated 28 May1984)

Drs Siddharta amp Siddharta Coopers bull ampLybrand

Dr EJUk_ WoM GENERAL TAX MATTERSW11 kX4 29 March 196HEALTH INSURANCE SCHEME Page 4of 5

k1M Severgf Production Sharing Contractors are governed by the old tax laws which in anumber of ways differ from the 1984 Income Tax Law In this context the abovementioned aspects do not necessarily apply

Current tax position

11 From the above paragraphs it is clear that under current Indonesian Tax RegulationsFIS contnbutions by the employer would not be deductible On the other hand theemployees contribution would also not be deductible on his or her individual tax return Thisnon deductibility from an individual viewpoint is further modified by most Indonesiansreluctance to submit tax returns so that in the event of such contribution being allowed it will generally still not represent a benefit for the individual

Alternative options and possibilities

Request for tax treatment equal to THT

T As explained in paragraph 7 and 9 (iii) THT and Astek contributions receive specialconcessional treatmeni We believe that based on your explanations that the Ministers ofFinance Health and Energy have expressed their strong support for the HiS you shouldexplore the possibility of similar tax treatment to THT and Astek being applied to the HIS In our opinion the possibility of success is distant

-12shy

m1A

Drs Siddharta amp Siddharta In ameed~o a

CoopersampLybrand

Dr Eliot Wolff GENERAL TAX MATTERS ON9MT 29 March 196HEALTH INSURANCE SCHEME Page 5 of 6

Incorporatio into employfe salary

13 Another alternative would be to increase the employees Walary in accordance with the HIS contributions amount whereby

a th employer woUd be the nddhkon ampamaartexW Insted of HIScontbtions and therefore obtain tax deducablity for such expena

b the emdegYoees are no beng du vaged ampgtheW ngt take home lSy igUrmffctad

14 Under this approach you should bear in mind that the salary increase should withthe -cepton of employees earning salaries below the tax free bracket exceed the HIScontribution amount T7he excess is the Ngross up amount whereby the contribution is grossedup iu order to account for it being subject to income tax as part of the employees salaryHowever as the employees are mostly under the 25 tax bracket whilst the employer (LePertamina) is in the 35 tax bracket this alternative will carry tax benefits

15 However you should appreciate that Pertamina being a state owned company wouldmost probably require approvals from the Ministers of Energy Finance and Labor to increase employee salaries

Conclusion

16 We beLieve that compared with most other countries the current Indonesian environment could be more conducive to the establishment of an HIS

Lax

7mf -13shy

Drs Siddharta amp SiddhartaCo80o4 W~ Cooy e ampLgrand

Dr EIlI Wolff GENERAL TAX MATTERS ONW8T k 29 lomh 19gHEALTH INSURANCE SCHEME

17 However we also believe that a complex combinaoion of internal and external factorsin addition to iax will influence a companys decision on whether or not to embrxe an HISwhilst tax is not the decisive factor for such a decision

1amp Should you require further information please do not hesitate to contact myself orMr Ross L Gavin Chief Technical Advisor of this office

Yours faithfulyDrs SIDDHARTA amp SIDDHARTA Registered Public Accountants No D-2336

Drs Istama T Siddharta Senior Partner

ITSjs

f-14shy

APPENI)lX 11

Drs Siddharta - ong 2samp Siddharta li IWIMII4SoS

bAwfteW W 6Osanl 1lM6 J 5D1T IAC Oers CM bOP MULIA AUTToNampLbrand Kw oN Ree Said P0 V Ily JAKATA iM JAKRTA 127MA

14 April 1989

Dr Elliot Wolff International Sclence and Technology institute Inc co Wiane Tugu 4th floor J1 HR RasunA Baid Jakarta

0ear Dr Wolff

HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on April 10 1989 we setout below the tax aspects related to the proposed health insurance scheme a they affect Production Sharing Contractors

2 In bur letter of Madr 29 1989 we gt out the ttdon regulatozs affecting yourproposed health insurance scheme as they currenty apply omostta-~~~~~ utaxrvpayersay oAAs noted inparagraph 10 of that letter the currfnt tax regulations do not necessarily apply to Production Sharing Contractors

3 Article 33 (3) of the Income Tax Law 1983 states that entdtes In the oil and gas sectorconnected with Production Sharing Contracts in effect prior to January 11984 will continue to be subject to the Old Tax Laws rather than the Laws which came into effect on that date

4 Under the Old Tax Laws benefits-ln-kind provided to employee will be deductiblefor the purposes of determining the tax of the employer but conversely are assessable in thehands of the employee The amount assessable to the employee is the cost to the employer

S It is our understanding that most Production Sharing Contractors presently operatingin Indonesia are governed by Production Sharing Contracts signed prior to 1984 and thereforemost employees of Production Sharing Contractors would be assessed on the cost of thehealth insurance scheme as it applies to each individual

-16shy

Drs Siddharta --- low amp Siddharla P 000 In 8 wirsoe

1 n IpoundNM TIA

Coopers 3PWNAMUUA --

iO

DnW ampLybrand Kaw 10 O M - M 7 t OAJAKARTA 1 N AA IVrI10A

29 Mach 198

Dr E3llottWolf International Sciehce and Technology Inst te Inc co Ministry o Health Bureau of Pluming Kay X-5 No 4-9 J1 HR Rasuna Said Jakarta 12950

Dear Dr Wolf

GENERAL TAX MATTERS ON HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on March 21 1989 we set out below tax aspects related to the proposed health insurance scheme based on the current tax laws of Indonea

Background

2 We understand that the International Science and Technology Institute Inc (IST)has been appointed by Tugu Mandiri (wTugu) an insurance company owned by Pertaminato initially identify and appraise the various options available and subsequently describe and justify a recommended course of action for Tugu in developing a heafth maintenance organization and health insurance scheme (wHlsw) which will

a Inlay provde the plan to Pertam and other ol conhrakors retree aW

subsequen ly expad the avaabWiy of the plan to the gwrfl bunsie commwky

fl 1]-9

Drs Siddharta amp Siddharta in aew~ wem

CoopersampLygrand

D EJfot wow GENERAL TAX MATTERS ONIT11 29 Momh 19onHEALTH WSURANCE SCHEME Page 2of 8

It is proposed that the premium will be borne by both the employee and the employer eg PertaminaP0C n heepoeeg

3 Accordingly ISTI isconcerned about the tax aspects of the health insurance schemeand have requested our advice on the general tax aspects of such viewed from both theemployers and employees standpoint

General Aspects

4 The applicable general principles relevant to the HIS sue are set out in the Income Tax Law 1983 at

a Mole 9 (d) - indoainining taxale Income an employer may not deduct cost a bens prNdd by the taxmyer for the needs d enploym

0 tArIcIe 4 (3) (d) - where ervice received I-ind ain not deductible to the employer thenSturnm the beneft not asmssabe to th employe

5 The above genexal principles were clarified for health and insurance costs in Ministryof Finance Cirurs dated 28 May 1984 (ref no SE-19pA2319 84) and 7 June 1984 (ref noS-336PJ231984) As a result as far as the employer is concerned

(i) medIJ costs Includig hwt Insanc premine pa d by an emwpy to an HIS are non deducwbe

ampU)l costs relaed to compn owned heafth Iscikie pMNg kre seampvice n medictio to ermoyees we non deducttl

(ii) company rmbursed m edicexenses are non deductbe to the company

Drs Siddharta amp Siddharta in aweJssf Wt

CoopersampLybrand

Dr Elloft Wolff GENERAL TAX MATTERS ONu1T Inc 29 Marh 1969HEALTH INSURANCE SCHEME 9 Pmge 3of6

(iv) Ahrecet fOr e Medical expense be addres ed to the O kwaad 0 the Compay the relmbursmert isthe deductwbe fo the compay

6 The employee is not assessable for (i) to (iii) above but will be assessable on theincome in (iv) Income from insurance proceeds eg life accident or health are not assessable for the individual

7 Contrary to the initial spirit of the Income Tax Law as explained in paragraph 4 theIndonesian Tax Authorities have decreed that company contributions to the state pension fund(Tunjangan Hari Tua or wFHT) and Astek are considered as a tax deductible expense whilstbeing tax exempted for the employee (MOF Circular dated 28 May 1984) Historically thistreatment results from the Minister of Labors opinion that the non deductability of suchexpenses will strongly hinder the development of the pension fund

8 In accordance with MOF Decree 9470AXt41983 Indonesian citizens are notrequired to file personal tuzreturns if they are employed by only one company with theunderstanding that income isnot derived from other sources The impact of this is considered below

9 The only deductions allowable against an individuals assessable income are

(i) occupalonal allowance I 5 o gross mnnual salry rX xc p380000 (MOFDecrM 9KMK041964 dated 31 Decenombg I93)

(ii) tax fee income loWance Le Rp 9W00O for the idduaj and Rp 480000 for eachdepedent IlnWed to W depenclr (M11le 7 (1) Income Tax Law)

(iii) P contibution to Pension funds approved by the Minister of Finance eg the statePension fund and ASTEK (Artie a (2) Income Toy Law and MOF Circular dated 28 May1984)

Drs Siddharta amp Siddharta Coopers bull ampLybrand

Dr EJUk_ WoM GENERAL TAX MATTERSW11 kX4 29 March 196HEALTH INSURANCE SCHEME Page 4of 5

k1M Severgf Production Sharing Contractors are governed by the old tax laws which in anumber of ways differ from the 1984 Income Tax Law In this context the abovementioned aspects do not necessarily apply

Current tax position

11 From the above paragraphs it is clear that under current Indonesian Tax RegulationsFIS contnbutions by the employer would not be deductible On the other hand theemployees contribution would also not be deductible on his or her individual tax return Thisnon deductibility from an individual viewpoint is further modified by most Indonesiansreluctance to submit tax returns so that in the event of such contribution being allowed it will generally still not represent a benefit for the individual

Alternative options and possibilities

Request for tax treatment equal to THT

T As explained in paragraph 7 and 9 (iii) THT and Astek contributions receive specialconcessional treatmeni We believe that based on your explanations that the Ministers ofFinance Health and Energy have expressed their strong support for the HiS you shouldexplore the possibility of similar tax treatment to THT and Astek being applied to the HIS In our opinion the possibility of success is distant

-12shy

m1A

Drs Siddharta amp Siddharta In ameed~o a

CoopersampLybrand

Dr Eliot Wolff GENERAL TAX MATTERS ON9MT 29 March 196HEALTH INSURANCE SCHEME Page 5 of 6

Incorporatio into employfe salary

13 Another alternative would be to increase the employees Walary in accordance with the HIS contributions amount whereby

a th employer woUd be the nddhkon ampamaartexW Insted of HIScontbtions and therefore obtain tax deducablity for such expena

b the emdegYoees are no beng du vaged ampgtheW ngt take home lSy igUrmffctad

14 Under this approach you should bear in mind that the salary increase should withthe -cepton of employees earning salaries below the tax free bracket exceed the HIScontribution amount T7he excess is the Ngross up amount whereby the contribution is grossedup iu order to account for it being subject to income tax as part of the employees salaryHowever as the employees are mostly under the 25 tax bracket whilst the employer (LePertamina) is in the 35 tax bracket this alternative will carry tax benefits

15 However you should appreciate that Pertamina being a state owned company wouldmost probably require approvals from the Ministers of Energy Finance and Labor to increase employee salaries

Conclusion

16 We beLieve that compared with most other countries the current Indonesian environment could be more conducive to the establishment of an HIS

Lax

7mf -13shy

Drs Siddharta amp SiddhartaCo80o4 W~ Cooy e ampLgrand

Dr EIlI Wolff GENERAL TAX MATTERS ONW8T k 29 lomh 19gHEALTH INSURANCE SCHEME

17 However we also believe that a complex combinaoion of internal and external factorsin addition to iax will influence a companys decision on whether or not to embrxe an HISwhilst tax is not the decisive factor for such a decision

1amp Should you require further information please do not hesitate to contact myself orMr Ross L Gavin Chief Technical Advisor of this office

Yours faithfulyDrs SIDDHARTA amp SIDDHARTA Registered Public Accountants No D-2336

Drs Istama T Siddharta Senior Partner

ITSjs

f-14shy

APPENI)lX 11

Drs Siddharta - ong 2samp Siddharta li IWIMII4SoS

bAwfteW W 6Osanl 1lM6 J 5D1T IAC Oers CM bOP MULIA AUTToNampLbrand Kw oN Ree Said P0 V Ily JAKATA iM JAKRTA 127MA

14 April 1989

Dr Elliot Wolff International Sclence and Technology institute Inc co Wiane Tugu 4th floor J1 HR RasunA Baid Jakarta

0ear Dr Wolff

HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on April 10 1989 we setout below the tax aspects related to the proposed health insurance scheme a they affect Production Sharing Contractors

2 In bur letter of Madr 29 1989 we gt out the ttdon regulatozs affecting yourproposed health insurance scheme as they currenty apply omostta-~~~~~ utaxrvpayersay oAAs noted inparagraph 10 of that letter the currfnt tax regulations do not necessarily apply to Production Sharing Contractors

3 Article 33 (3) of the Income Tax Law 1983 states that entdtes In the oil and gas sectorconnected with Production Sharing Contracts in effect prior to January 11984 will continue to be subject to the Old Tax Laws rather than the Laws which came into effect on that date

4 Under the Old Tax Laws benefits-ln-kind provided to employee will be deductiblefor the purposes of determining the tax of the employer but conversely are assessable in thehands of the employee The amount assessable to the employee is the cost to the employer

S It is our understanding that most Production Sharing Contractors presently operatingin Indonesia are governed by Production Sharing Contracts signed prior to 1984 and thereforemost employees of Production Sharing Contractors would be assessed on the cost of thehealth insurance scheme as it applies to each individual

-16shy

Drs Siddharta amp Siddharta in aew~ wem

CoopersampLygrand

D EJfot wow GENERAL TAX MATTERS ONIT11 29 Momh 19onHEALTH WSURANCE SCHEME Page 2of 8

It is proposed that the premium will be borne by both the employee and the employer eg PertaminaP0C n heepoeeg

3 Accordingly ISTI isconcerned about the tax aspects of the health insurance schemeand have requested our advice on the general tax aspects of such viewed from both theemployers and employees standpoint

General Aspects

4 The applicable general principles relevant to the HIS sue are set out in the Income Tax Law 1983 at

a Mole 9 (d) - indoainining taxale Income an employer may not deduct cost a bens prNdd by the taxmyer for the needs d enploym

0 tArIcIe 4 (3) (d) - where ervice received I-ind ain not deductible to the employer thenSturnm the beneft not asmssabe to th employe

5 The above genexal principles were clarified for health and insurance costs in Ministryof Finance Cirurs dated 28 May 1984 (ref no SE-19pA2319 84) and 7 June 1984 (ref noS-336PJ231984) As a result as far as the employer is concerned

(i) medIJ costs Includig hwt Insanc premine pa d by an emwpy to an HIS are non deducwbe

ampU)l costs relaed to compn owned heafth Iscikie pMNg kre seampvice n medictio to ermoyees we non deducttl

(ii) company rmbursed m edicexenses are non deductbe to the company

Drs Siddharta amp Siddharta in aweJssf Wt

CoopersampLybrand

Dr Elloft Wolff GENERAL TAX MATTERS ONu1T Inc 29 Marh 1969HEALTH INSURANCE SCHEME 9 Pmge 3of6

(iv) Ahrecet fOr e Medical expense be addres ed to the O kwaad 0 the Compay the relmbursmert isthe deductwbe fo the compay

6 The employee is not assessable for (i) to (iii) above but will be assessable on theincome in (iv) Income from insurance proceeds eg life accident or health are not assessable for the individual

7 Contrary to the initial spirit of the Income Tax Law as explained in paragraph 4 theIndonesian Tax Authorities have decreed that company contributions to the state pension fund(Tunjangan Hari Tua or wFHT) and Astek are considered as a tax deductible expense whilstbeing tax exempted for the employee (MOF Circular dated 28 May 1984) Historically thistreatment results from the Minister of Labors opinion that the non deductability of suchexpenses will strongly hinder the development of the pension fund

8 In accordance with MOF Decree 9470AXt41983 Indonesian citizens are notrequired to file personal tuzreturns if they are employed by only one company with theunderstanding that income isnot derived from other sources The impact of this is considered below

9 The only deductions allowable against an individuals assessable income are

(i) occupalonal allowance I 5 o gross mnnual salry rX xc p380000 (MOFDecrM 9KMK041964 dated 31 Decenombg I93)

(ii) tax fee income loWance Le Rp 9W00O for the idduaj and Rp 480000 for eachdepedent IlnWed to W depenclr (M11le 7 (1) Income Tax Law)

(iii) P contibution to Pension funds approved by the Minister of Finance eg the statePension fund and ASTEK (Artie a (2) Income Toy Law and MOF Circular dated 28 May1984)

Drs Siddharta amp Siddharta Coopers bull ampLybrand

Dr EJUk_ WoM GENERAL TAX MATTERSW11 kX4 29 March 196HEALTH INSURANCE SCHEME Page 4of 5

k1M Severgf Production Sharing Contractors are governed by the old tax laws which in anumber of ways differ from the 1984 Income Tax Law In this context the abovementioned aspects do not necessarily apply

Current tax position

11 From the above paragraphs it is clear that under current Indonesian Tax RegulationsFIS contnbutions by the employer would not be deductible On the other hand theemployees contribution would also not be deductible on his or her individual tax return Thisnon deductibility from an individual viewpoint is further modified by most Indonesiansreluctance to submit tax returns so that in the event of such contribution being allowed it will generally still not represent a benefit for the individual

Alternative options and possibilities

Request for tax treatment equal to THT

T As explained in paragraph 7 and 9 (iii) THT and Astek contributions receive specialconcessional treatmeni We believe that based on your explanations that the Ministers ofFinance Health and Energy have expressed their strong support for the HiS you shouldexplore the possibility of similar tax treatment to THT and Astek being applied to the HIS In our opinion the possibility of success is distant

-12shy

m1A

Drs Siddharta amp Siddharta In ameed~o a

CoopersampLybrand

Dr Eliot Wolff GENERAL TAX MATTERS ON9MT 29 March 196HEALTH INSURANCE SCHEME Page 5 of 6

Incorporatio into employfe salary

13 Another alternative would be to increase the employees Walary in accordance with the HIS contributions amount whereby

a th employer woUd be the nddhkon ampamaartexW Insted of HIScontbtions and therefore obtain tax deducablity for such expena

b the emdegYoees are no beng du vaged ampgtheW ngt take home lSy igUrmffctad

14 Under this approach you should bear in mind that the salary increase should withthe -cepton of employees earning salaries below the tax free bracket exceed the HIScontribution amount T7he excess is the Ngross up amount whereby the contribution is grossedup iu order to account for it being subject to income tax as part of the employees salaryHowever as the employees are mostly under the 25 tax bracket whilst the employer (LePertamina) is in the 35 tax bracket this alternative will carry tax benefits

15 However you should appreciate that Pertamina being a state owned company wouldmost probably require approvals from the Ministers of Energy Finance and Labor to increase employee salaries

Conclusion

16 We beLieve that compared with most other countries the current Indonesian environment could be more conducive to the establishment of an HIS

Lax

7mf -13shy

Drs Siddharta amp SiddhartaCo80o4 W~ Cooy e ampLgrand

Dr EIlI Wolff GENERAL TAX MATTERS ONW8T k 29 lomh 19gHEALTH INSURANCE SCHEME

17 However we also believe that a complex combinaoion of internal and external factorsin addition to iax will influence a companys decision on whether or not to embrxe an HISwhilst tax is not the decisive factor for such a decision

1amp Should you require further information please do not hesitate to contact myself orMr Ross L Gavin Chief Technical Advisor of this office

Yours faithfulyDrs SIDDHARTA amp SIDDHARTA Registered Public Accountants No D-2336

Drs Istama T Siddharta Senior Partner

ITSjs

f-14shy

APPENI)lX 11

Drs Siddharta - ong 2samp Siddharta li IWIMII4SoS

bAwfteW W 6Osanl 1lM6 J 5D1T IAC Oers CM bOP MULIA AUTToNampLbrand Kw oN Ree Said P0 V Ily JAKATA iM JAKRTA 127MA

14 April 1989

Dr Elliot Wolff International Sclence and Technology institute Inc co Wiane Tugu 4th floor J1 HR RasunA Baid Jakarta

0ear Dr Wolff

HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on April 10 1989 we setout below the tax aspects related to the proposed health insurance scheme a they affect Production Sharing Contractors

2 In bur letter of Madr 29 1989 we gt out the ttdon regulatozs affecting yourproposed health insurance scheme as they currenty apply omostta-~~~~~ utaxrvpayersay oAAs noted inparagraph 10 of that letter the currfnt tax regulations do not necessarily apply to Production Sharing Contractors

3 Article 33 (3) of the Income Tax Law 1983 states that entdtes In the oil and gas sectorconnected with Production Sharing Contracts in effect prior to January 11984 will continue to be subject to the Old Tax Laws rather than the Laws which came into effect on that date

4 Under the Old Tax Laws benefits-ln-kind provided to employee will be deductiblefor the purposes of determining the tax of the employer but conversely are assessable in thehands of the employee The amount assessable to the employee is the cost to the employer

S It is our understanding that most Production Sharing Contractors presently operatingin Indonesia are governed by Production Sharing Contracts signed prior to 1984 and thereforemost employees of Production Sharing Contractors would be assessed on the cost of thehealth insurance scheme as it applies to each individual

-16shy

Drs Siddharta amp Siddharta in aweJssf Wt

CoopersampLybrand

Dr Elloft Wolff GENERAL TAX MATTERS ONu1T Inc 29 Marh 1969HEALTH INSURANCE SCHEME 9 Pmge 3of6

(iv) Ahrecet fOr e Medical expense be addres ed to the O kwaad 0 the Compay the relmbursmert isthe deductwbe fo the compay

6 The employee is not assessable for (i) to (iii) above but will be assessable on theincome in (iv) Income from insurance proceeds eg life accident or health are not assessable for the individual

7 Contrary to the initial spirit of the Income Tax Law as explained in paragraph 4 theIndonesian Tax Authorities have decreed that company contributions to the state pension fund(Tunjangan Hari Tua or wFHT) and Astek are considered as a tax deductible expense whilstbeing tax exempted for the employee (MOF Circular dated 28 May 1984) Historically thistreatment results from the Minister of Labors opinion that the non deductability of suchexpenses will strongly hinder the development of the pension fund

8 In accordance with MOF Decree 9470AXt41983 Indonesian citizens are notrequired to file personal tuzreturns if they are employed by only one company with theunderstanding that income isnot derived from other sources The impact of this is considered below

9 The only deductions allowable against an individuals assessable income are

(i) occupalonal allowance I 5 o gross mnnual salry rX xc p380000 (MOFDecrM 9KMK041964 dated 31 Decenombg I93)

(ii) tax fee income loWance Le Rp 9W00O for the idduaj and Rp 480000 for eachdepedent IlnWed to W depenclr (M11le 7 (1) Income Tax Law)

(iii) P contibution to Pension funds approved by the Minister of Finance eg the statePension fund and ASTEK (Artie a (2) Income Toy Law and MOF Circular dated 28 May1984)

Drs Siddharta amp Siddharta Coopers bull ampLybrand

Dr EJUk_ WoM GENERAL TAX MATTERSW11 kX4 29 March 196HEALTH INSURANCE SCHEME Page 4of 5

k1M Severgf Production Sharing Contractors are governed by the old tax laws which in anumber of ways differ from the 1984 Income Tax Law In this context the abovementioned aspects do not necessarily apply

Current tax position

11 From the above paragraphs it is clear that under current Indonesian Tax RegulationsFIS contnbutions by the employer would not be deductible On the other hand theemployees contribution would also not be deductible on his or her individual tax return Thisnon deductibility from an individual viewpoint is further modified by most Indonesiansreluctance to submit tax returns so that in the event of such contribution being allowed it will generally still not represent a benefit for the individual

Alternative options and possibilities

Request for tax treatment equal to THT

T As explained in paragraph 7 and 9 (iii) THT and Astek contributions receive specialconcessional treatmeni We believe that based on your explanations that the Ministers ofFinance Health and Energy have expressed their strong support for the HiS you shouldexplore the possibility of similar tax treatment to THT and Astek being applied to the HIS In our opinion the possibility of success is distant

-12shy

m1A

Drs Siddharta amp Siddharta In ameed~o a

CoopersampLybrand

Dr Eliot Wolff GENERAL TAX MATTERS ON9MT 29 March 196HEALTH INSURANCE SCHEME Page 5 of 6

Incorporatio into employfe salary

13 Another alternative would be to increase the employees Walary in accordance with the HIS contributions amount whereby

a th employer woUd be the nddhkon ampamaartexW Insted of HIScontbtions and therefore obtain tax deducablity for such expena

b the emdegYoees are no beng du vaged ampgtheW ngt take home lSy igUrmffctad

14 Under this approach you should bear in mind that the salary increase should withthe -cepton of employees earning salaries below the tax free bracket exceed the HIScontribution amount T7he excess is the Ngross up amount whereby the contribution is grossedup iu order to account for it being subject to income tax as part of the employees salaryHowever as the employees are mostly under the 25 tax bracket whilst the employer (LePertamina) is in the 35 tax bracket this alternative will carry tax benefits

15 However you should appreciate that Pertamina being a state owned company wouldmost probably require approvals from the Ministers of Energy Finance and Labor to increase employee salaries

Conclusion

16 We beLieve that compared with most other countries the current Indonesian environment could be more conducive to the establishment of an HIS

Lax

7mf -13shy

Drs Siddharta amp SiddhartaCo80o4 W~ Cooy e ampLgrand

Dr EIlI Wolff GENERAL TAX MATTERS ONW8T k 29 lomh 19gHEALTH INSURANCE SCHEME

17 However we also believe that a complex combinaoion of internal and external factorsin addition to iax will influence a companys decision on whether or not to embrxe an HISwhilst tax is not the decisive factor for such a decision

1amp Should you require further information please do not hesitate to contact myself orMr Ross L Gavin Chief Technical Advisor of this office

Yours faithfulyDrs SIDDHARTA amp SIDDHARTA Registered Public Accountants No D-2336

Drs Istama T Siddharta Senior Partner

ITSjs

f-14shy

APPENI)lX 11

Drs Siddharta - ong 2samp Siddharta li IWIMII4SoS

bAwfteW W 6Osanl 1lM6 J 5D1T IAC Oers CM bOP MULIA AUTToNampLbrand Kw oN Ree Said P0 V Ily JAKATA iM JAKRTA 127MA

14 April 1989

Dr Elliot Wolff International Sclence and Technology institute Inc co Wiane Tugu 4th floor J1 HR RasunA Baid Jakarta

0ear Dr Wolff

HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on April 10 1989 we setout below the tax aspects related to the proposed health insurance scheme a they affect Production Sharing Contractors

2 In bur letter of Madr 29 1989 we gt out the ttdon regulatozs affecting yourproposed health insurance scheme as they currenty apply omostta-~~~~~ utaxrvpayersay oAAs noted inparagraph 10 of that letter the currfnt tax regulations do not necessarily apply to Production Sharing Contractors

3 Article 33 (3) of the Income Tax Law 1983 states that entdtes In the oil and gas sectorconnected with Production Sharing Contracts in effect prior to January 11984 will continue to be subject to the Old Tax Laws rather than the Laws which came into effect on that date

4 Under the Old Tax Laws benefits-ln-kind provided to employee will be deductiblefor the purposes of determining the tax of the employer but conversely are assessable in thehands of the employee The amount assessable to the employee is the cost to the employer

S It is our understanding that most Production Sharing Contractors presently operatingin Indonesia are governed by Production Sharing Contracts signed prior to 1984 and thereforemost employees of Production Sharing Contractors would be assessed on the cost of thehealth insurance scheme as it applies to each individual

-16shy

Drs Siddharta amp Siddharta Coopers bull ampLybrand

Dr EJUk_ WoM GENERAL TAX MATTERSW11 kX4 29 March 196HEALTH INSURANCE SCHEME Page 4of 5

k1M Severgf Production Sharing Contractors are governed by the old tax laws which in anumber of ways differ from the 1984 Income Tax Law In this context the abovementioned aspects do not necessarily apply

Current tax position

11 From the above paragraphs it is clear that under current Indonesian Tax RegulationsFIS contnbutions by the employer would not be deductible On the other hand theemployees contribution would also not be deductible on his or her individual tax return Thisnon deductibility from an individual viewpoint is further modified by most Indonesiansreluctance to submit tax returns so that in the event of such contribution being allowed it will generally still not represent a benefit for the individual

Alternative options and possibilities

Request for tax treatment equal to THT

T As explained in paragraph 7 and 9 (iii) THT and Astek contributions receive specialconcessional treatmeni We believe that based on your explanations that the Ministers ofFinance Health and Energy have expressed their strong support for the HiS you shouldexplore the possibility of similar tax treatment to THT and Astek being applied to the HIS In our opinion the possibility of success is distant

-12shy

m1A

Drs Siddharta amp Siddharta In ameed~o a

CoopersampLybrand

Dr Eliot Wolff GENERAL TAX MATTERS ON9MT 29 March 196HEALTH INSURANCE SCHEME Page 5 of 6

Incorporatio into employfe salary

13 Another alternative would be to increase the employees Walary in accordance with the HIS contributions amount whereby

a th employer woUd be the nddhkon ampamaartexW Insted of HIScontbtions and therefore obtain tax deducablity for such expena

b the emdegYoees are no beng du vaged ampgtheW ngt take home lSy igUrmffctad

14 Under this approach you should bear in mind that the salary increase should withthe -cepton of employees earning salaries below the tax free bracket exceed the HIScontribution amount T7he excess is the Ngross up amount whereby the contribution is grossedup iu order to account for it being subject to income tax as part of the employees salaryHowever as the employees are mostly under the 25 tax bracket whilst the employer (LePertamina) is in the 35 tax bracket this alternative will carry tax benefits

15 However you should appreciate that Pertamina being a state owned company wouldmost probably require approvals from the Ministers of Energy Finance and Labor to increase employee salaries

Conclusion

16 We beLieve that compared with most other countries the current Indonesian environment could be more conducive to the establishment of an HIS

Lax

7mf -13shy

Drs Siddharta amp SiddhartaCo80o4 W~ Cooy e ampLgrand

Dr EIlI Wolff GENERAL TAX MATTERS ONW8T k 29 lomh 19gHEALTH INSURANCE SCHEME

17 However we also believe that a complex combinaoion of internal and external factorsin addition to iax will influence a companys decision on whether or not to embrxe an HISwhilst tax is not the decisive factor for such a decision

1amp Should you require further information please do not hesitate to contact myself orMr Ross L Gavin Chief Technical Advisor of this office

Yours faithfulyDrs SIDDHARTA amp SIDDHARTA Registered Public Accountants No D-2336

Drs Istama T Siddharta Senior Partner

ITSjs

f-14shy

APPENI)lX 11

Drs Siddharta - ong 2samp Siddharta li IWIMII4SoS

bAwfteW W 6Osanl 1lM6 J 5D1T IAC Oers CM bOP MULIA AUTToNampLbrand Kw oN Ree Said P0 V Ily JAKATA iM JAKRTA 127MA

14 April 1989

Dr Elliot Wolff International Sclence and Technology institute Inc co Wiane Tugu 4th floor J1 HR RasunA Baid Jakarta

0ear Dr Wolff

HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on April 10 1989 we setout below the tax aspects related to the proposed health insurance scheme a they affect Production Sharing Contractors

2 In bur letter of Madr 29 1989 we gt out the ttdon regulatozs affecting yourproposed health insurance scheme as they currenty apply omostta-~~~~~ utaxrvpayersay oAAs noted inparagraph 10 of that letter the currfnt tax regulations do not necessarily apply to Production Sharing Contractors

3 Article 33 (3) of the Income Tax Law 1983 states that entdtes In the oil and gas sectorconnected with Production Sharing Contracts in effect prior to January 11984 will continue to be subject to the Old Tax Laws rather than the Laws which came into effect on that date

4 Under the Old Tax Laws benefits-ln-kind provided to employee will be deductiblefor the purposes of determining the tax of the employer but conversely are assessable in thehands of the employee The amount assessable to the employee is the cost to the employer

S It is our understanding that most Production Sharing Contractors presently operatingin Indonesia are governed by Production Sharing Contracts signed prior to 1984 and thereforemost employees of Production Sharing Contractors would be assessed on the cost of thehealth insurance scheme as it applies to each individual

-16shy

Drs Siddharta amp Siddharta In ameed~o a

CoopersampLybrand

Dr Eliot Wolff GENERAL TAX MATTERS ON9MT 29 March 196HEALTH INSURANCE SCHEME Page 5 of 6

Incorporatio into employfe salary

13 Another alternative would be to increase the employees Walary in accordance with the HIS contributions amount whereby

a th employer woUd be the nddhkon ampamaartexW Insted of HIScontbtions and therefore obtain tax deducablity for such expena

b the emdegYoees are no beng du vaged ampgtheW ngt take home lSy igUrmffctad

14 Under this approach you should bear in mind that the salary increase should withthe -cepton of employees earning salaries below the tax free bracket exceed the HIScontribution amount T7he excess is the Ngross up amount whereby the contribution is grossedup iu order to account for it being subject to income tax as part of the employees salaryHowever as the employees are mostly under the 25 tax bracket whilst the employer (LePertamina) is in the 35 tax bracket this alternative will carry tax benefits

15 However you should appreciate that Pertamina being a state owned company wouldmost probably require approvals from the Ministers of Energy Finance and Labor to increase employee salaries

Conclusion

16 We beLieve that compared with most other countries the current Indonesian environment could be more conducive to the establishment of an HIS

Lax

7mf -13shy

Drs Siddharta amp SiddhartaCo80o4 W~ Cooy e ampLgrand

Dr EIlI Wolff GENERAL TAX MATTERS ONW8T k 29 lomh 19gHEALTH INSURANCE SCHEME

17 However we also believe that a complex combinaoion of internal and external factorsin addition to iax will influence a companys decision on whether or not to embrxe an HISwhilst tax is not the decisive factor for such a decision

1amp Should you require further information please do not hesitate to contact myself orMr Ross L Gavin Chief Technical Advisor of this office

Yours faithfulyDrs SIDDHARTA amp SIDDHARTA Registered Public Accountants No D-2336

Drs Istama T Siddharta Senior Partner

ITSjs

f-14shy

APPENI)lX 11

Drs Siddharta - ong 2samp Siddharta li IWIMII4SoS

bAwfteW W 6Osanl 1lM6 J 5D1T IAC Oers CM bOP MULIA AUTToNampLbrand Kw oN Ree Said P0 V Ily JAKATA iM JAKRTA 127MA

14 April 1989

Dr Elliot Wolff International Sclence and Technology institute Inc co Wiane Tugu 4th floor J1 HR RasunA Baid Jakarta

0ear Dr Wolff

HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on April 10 1989 we setout below the tax aspects related to the proposed health insurance scheme a they affect Production Sharing Contractors

2 In bur letter of Madr 29 1989 we gt out the ttdon regulatozs affecting yourproposed health insurance scheme as they currenty apply omostta-~~~~~ utaxrvpayersay oAAs noted inparagraph 10 of that letter the currfnt tax regulations do not necessarily apply to Production Sharing Contractors

3 Article 33 (3) of the Income Tax Law 1983 states that entdtes In the oil and gas sectorconnected with Production Sharing Contracts in effect prior to January 11984 will continue to be subject to the Old Tax Laws rather than the Laws which came into effect on that date

4 Under the Old Tax Laws benefits-ln-kind provided to employee will be deductiblefor the purposes of determining the tax of the employer but conversely are assessable in thehands of the employee The amount assessable to the employee is the cost to the employer

S It is our understanding that most Production Sharing Contractors presently operatingin Indonesia are governed by Production Sharing Contracts signed prior to 1984 and thereforemost employees of Production Sharing Contractors would be assessed on the cost of thehealth insurance scheme as it applies to each individual

-16shy

Drs Siddharta amp SiddhartaCo80o4 W~ Cooy e ampLgrand

Dr EIlI Wolff GENERAL TAX MATTERS ONW8T k 29 lomh 19gHEALTH INSURANCE SCHEME

17 However we also believe that a complex combinaoion of internal and external factorsin addition to iax will influence a companys decision on whether or not to embrxe an HISwhilst tax is not the decisive factor for such a decision

1amp Should you require further information please do not hesitate to contact myself orMr Ross L Gavin Chief Technical Advisor of this office

Yours faithfulyDrs SIDDHARTA amp SIDDHARTA Registered Public Accountants No D-2336

Drs Istama T Siddharta Senior Partner

ITSjs

f-14shy

APPENI)lX 11

Drs Siddharta - ong 2samp Siddharta li IWIMII4SoS

bAwfteW W 6Osanl 1lM6 J 5D1T IAC Oers CM bOP MULIA AUTToNampLbrand Kw oN Ree Said P0 V Ily JAKATA iM JAKRTA 127MA

14 April 1989

Dr Elliot Wolff International Sclence and Technology institute Inc co Wiane Tugu 4th floor J1 HR RasunA Baid Jakarta

0ear Dr Wolff

HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on April 10 1989 we setout below the tax aspects related to the proposed health insurance scheme a they affect Production Sharing Contractors

2 In bur letter of Madr 29 1989 we gt out the ttdon regulatozs affecting yourproposed health insurance scheme as they currenty apply omostta-~~~~~ utaxrvpayersay oAAs noted inparagraph 10 of that letter the currfnt tax regulations do not necessarily apply to Production Sharing Contractors

3 Article 33 (3) of the Income Tax Law 1983 states that entdtes In the oil and gas sectorconnected with Production Sharing Contracts in effect prior to January 11984 will continue to be subject to the Old Tax Laws rather than the Laws which came into effect on that date

4 Under the Old Tax Laws benefits-ln-kind provided to employee will be deductiblefor the purposes of determining the tax of the employer but conversely are assessable in thehands of the employee The amount assessable to the employee is the cost to the employer

S It is our understanding that most Production Sharing Contractors presently operatingin Indonesia are governed by Production Sharing Contracts signed prior to 1984 and thereforemost employees of Production Sharing Contractors would be assessed on the cost of thehealth insurance scheme as it applies to each individual

-16shy

APPENI)lX 11

Drs Siddharta - ong 2samp Siddharta li IWIMII4SoS

bAwfteW W 6Osanl 1lM6 J 5D1T IAC Oers CM bOP MULIA AUTToNampLbrand Kw oN Ree Said P0 V Ily JAKATA iM JAKRTA 127MA

14 April 1989

Dr Elliot Wolff International Sclence and Technology institute Inc co Wiane Tugu 4th floor J1 HR RasunA Baid Jakarta

0ear Dr Wolff

HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on April 10 1989 we setout below the tax aspects related to the proposed health insurance scheme a they affect Production Sharing Contractors

2 In bur letter of Madr 29 1989 we gt out the ttdon regulatozs affecting yourproposed health insurance scheme as they currenty apply omostta-~~~~~ utaxrvpayersay oAAs noted inparagraph 10 of that letter the currfnt tax regulations do not necessarily apply to Production Sharing Contractors

3 Article 33 (3) of the Income Tax Law 1983 states that entdtes In the oil and gas sectorconnected with Production Sharing Contracts in effect prior to January 11984 will continue to be subject to the Old Tax Laws rather than the Laws which came into effect on that date

4 Under the Old Tax Laws benefits-ln-kind provided to employee will be deductiblefor the purposes of determining the tax of the employer but conversely are assessable in thehands of the employee The amount assessable to the employee is the cost to the employer

S It is our understanding that most Production Sharing Contractors presently operatingin Indonesia are governed by Production Sharing Contracts signed prior to 1984 and thereforemost employees of Production Sharing Contractors would be assessed on the cost of thehealth insurance scheme as it applies to each individual

-16shy

Drs Siddharta - ong 2samp Siddharta li IWIMII4SoS

bAwfteW W 6Osanl 1lM6 J 5D1T IAC Oers CM bOP MULIA AUTToNampLbrand Kw oN Ree Said P0 V Ily JAKATA iM JAKRTA 127MA

14 April 1989

Dr Elliot Wolff International Sclence and Technology institute Inc co Wiane Tugu 4th floor J1 HR RasunA Baid Jakarta

0ear Dr Wolff

HEALTH INSURANCE SCHEME

Following your request during our meeting in our offices on April 10 1989 we setout below the tax aspects related to the proposed health insurance scheme a they affect Production Sharing Contractors

2 In bur letter of Madr 29 1989 we gt out the ttdon regulatozs affecting yourproposed health insurance scheme as they currenty apply omostta-~~~~~ utaxrvpayersay oAAs noted inparagraph 10 of that letter the currfnt tax regulations do not necessarily apply to Production Sharing Contractors

3 Article 33 (3) of the Income Tax Law 1983 states that entdtes In the oil and gas sectorconnected with Production Sharing Contracts in effect prior to January 11984 will continue to be subject to the Old Tax Laws rather than the Laws which came into effect on that date

4 Under the Old Tax Laws benefits-ln-kind provided to employee will be deductiblefor the purposes of determining the tax of the employer but conversely are assessable in thehands of the employee The amount assessable to the employee is the cost to the employer

S It is our understanding that most Production Sharing Contractors presently operatingin Indonesia are governed by Production Sharing Contracts signed prior to 1984 and thereforemost employees of Production Sharing Contractors would be assessed on the cost of thehealth insurance scheme as it applies to each individual

-16shy

Drs Siddharta ampSlddharta 1A~ msWeianfogers w4UM

ampy rand

El W M Mni INSUK SCMW pag 2 o 2DM 114AprlB1g

6 If you require any furtber information plase do not hesitate to contact either myself or our Partner Advisor Mr Ross L Gavin

Yours faithfully Drs SIDDHARTA amp SIDDHARTA Registered Public Accountant

Drs Istorn T Slgdhnrta Senior Pertner

RLa-

APPENDIX III

DTTUCLI MANDIQ1 kktlrl[ i4161lt l h 4 IL II10 001111-1IIlANCE1IN- CONav C 8 q- Kijjwi Aikiiih 12910

DA[A CLJLL CIIUI UIREVIL-w OF I I71 I AIII IA ANI) II l)UCT I UN SI IAP I NGCUIII ANY I ILEAL III ILIJII- I U AND HEALIH CARE DELIVENY SYSTEMSFor e c -n ai-nart at1 Por Lam i 41F2 Pro JuCtion roL i raDr tlisr1 I- i r0e neecd slhr- inL lHi Ci0HSSPoLIthe fel C0ipiargy -j andoHing (I1UCinforniation ) bonoInforination ri i i usfor We also need theactive Parta11ina follopingoQployOesd QP11Cn Ls and theirPertarn i na in orer eligibletotals t o UJrlVarici 0 CILItai forn orcle- the rot ireato teLst fromPSCreasonbibleness data for

1 L hl- nlt(j U A L iij I I CCI y oyo aesilor

cint rut I reeho ILIli bono f ts 1 py Iing ollint ru 1esrequ i I-f11n0s i nc 1udshyfor e1pPl eeretireeCOP|LyIIIrj 1 s illU d xc 1l 9 UI9U7_19UUig IOiorls

0 9 healtth bonefitrulechanges for employeesretireesCPlan anniversary cateeffective) I it ie ci daterIOc s foro rJ or0rol llmontol i shyb I iLyU Por- t shlS-0 of preuiujsC0 Lr Ic ir L i o1

or benefit Iir I rsfj COtulpny ShareuY For catagories i I () ircc0j11 trough -i U ut I onHhere all V111 bloHhealth locationcare means anof for bereficiaries areaovned and contracted is provided bytorti 11Ee Ith a networkary rofo rll prey i Crs-ec

health AI I 1(Fici-i for rarecare oatIIProvilers utilI5houll ionbe anelocationby Irouped fordata SatherinG thicare Provider shul be grue by loato forthis

A 19 d7- 198-1 9 U 9 number ofretirees employees andby location age and sex byboiiorif rl-llnU 1 C)U-I ()LjU - I )U riuliborPericlents o r -iby location age

b I e deshysexJI kLbaij ar0d byL benofit_[iL( l2 rulesL~ L ___ L_ i~j

A L i- o nouri hospitalsa by(ilscl L111 locationI 055rs

~ iF Possible)

LiL ~ iuuilu -L ui L LlUressI i Cs by IcICIL ion ( i ncif Possible) Iuc-C List NonPertatilina

hospitals Hith1 Provider reimbursement 2 arrangementsI -Cltig t L(ILl is0I -hly ruilIlsursement

to 3 Numbor of bocis by servicervir v i 3s itv - IIabIe

ie o6 Loczition tO1ir by poc icaI tyC inc u LI 9 -qsL-ouL adcressif Possiblo)

3L19l Wllco l Ii ] tj) h4j r I w~uwe0 r

APPENDIX III

DTTUCLI MANDIQ1 kktlrl[ i4161lt l h 4 IL II10 001111-1IIlANCE1IN- CONav C 8 q- Kijjwi Aikiiih 12910

DA[A CLJLL CIIUI UIREVIL-w OF I I71 I AIII IA ANI) II l)UCT I UN SI IAP I NGCUIII ANY I ILEAL III ILIJII- I U AND HEALIH CARE DELIVENY SYSTEMSFor e c -n ai-nart at1 Por Lam i 41F2 Pro JuCtion roL i raDr tlisr1 I- i r0e neecd slhr- inL lHi Ci0HSSPoLIthe fel C0ipiargy -j andoHing (I1UCinforniation ) bonoInforination ri i i usfor We also need theactive Parta11ina follopingoQployOesd QP11Cn Ls and theirPertarn i na in orer eligibletotals t o UJrlVarici 0 CILItai forn orcle- the rot ireato teLst fromPSCreasonbibleness data for

1 L hl- nlt(j U A L iij I I CCI y oyo aesilor

cint rut I reeho ILIli bono f ts 1 py Iing ollint ru 1esrequ i I-f11n0s i nc 1udshyfor e1pPl eeretireeCOP|LyIIIrj 1 s illU d xc 1l 9 UI9U7_19UUig IOiorls

0 9 healtth bonefitrulechanges for employeesretireesCPlan anniversary cateeffective) I it ie ci daterIOc s foro rJ or0rol llmontol i shyb I iLyU Por- t shlS-0 of preuiujsC0 Lr Ic ir L i o1

or benefit Iir I rsfj COtulpny ShareuY For catagories i I () ircc0j11 trough -i U ut I onHhere all V111 bloHhealth locationcare means anof for bereficiaries areaovned and contracted is provided bytorti 11Ee Ith a networkary rofo rll prey i Crs-ec

health AI I 1(Fici-i for rarecare oatIIProvilers utilI5houll ionbe anelocationby Irouped fordata SatherinG thicare Provider shul be grue by loato forthis

A 19 d7- 198-1 9 U 9 number ofretirees employees andby location age and sex byboiiorif rl-llnU 1 C)U-I ()LjU - I )U riuliborPericlents o r -iby location age

b I e deshysexJI kLbaij ar0d byL benofit_[iL( l2 rulesL~ L ___ L_ i~j

A L i- o nouri hospitalsa by(ilscl L111 locationI 055rs

~ iF Possible)

LiL ~ iuuilu -L ui L LlUressI i Cs by IcICIL ion ( i ncif Possible) Iuc-C List NonPertatilina

hospitals Hith1 Provider reimbursement 2 arrangementsI -Cltig t L(ILl is0I -hly ruilIlsursement

to 3 Numbor of bocis by servicervir v i 3s itv - IIabIe

ie o6 Loczition tO1ir by poc icaI tyC inc u LI 9 -qsL-ouL adcressif Possiblo)

3L19l Wllco l Ii ] tj) h4j r I w~uwe0 r

DTTUCLI MANDIQ1 kktlrl[ i4161lt l h 4 IL II10 001111-1IIlANCE1IN- CONav C 8 q- Kijjwi Aikiiih 12910

DA[A CLJLL CIIUI UIREVIL-w OF I I71 I AIII IA ANI) II l)UCT I UN SI IAP I NGCUIII ANY I ILEAL III ILIJII- I U AND HEALIH CARE DELIVENY SYSTEMSFor e c -n ai-nart at1 Por Lam i 41F2 Pro JuCtion roL i raDr tlisr1 I- i r0e neecd slhr- inL lHi Ci0HSSPoLIthe fel C0ipiargy -j andoHing (I1UCinforniation ) bonoInforination ri i i usfor We also need theactive Parta11ina follopingoQployOesd QP11Cn Ls and theirPertarn i na in orer eligibletotals t o UJrlVarici 0 CILItai forn orcle- the rot ireato teLst fromPSCreasonbibleness data for

1 L hl- nlt(j U A L iij I I CCI y oyo aesilor

cint rut I reeho ILIli bono f ts 1 py Iing ollint ru 1esrequ i I-f11n0s i nc 1udshyfor e1pPl eeretireeCOP|LyIIIrj 1 s illU d xc 1l 9 UI9U7_19UUig IOiorls

0 9 healtth bonefitrulechanges for employeesretireesCPlan anniversary cateeffective) I it ie ci daterIOc s foro rJ or0rol llmontol i shyb I iLyU Por- t shlS-0 of preuiujsC0 Lr Ic ir L i o1

or benefit Iir I rsfj COtulpny ShareuY For catagories i I () ircc0j11 trough -i U ut I onHhere all V111 bloHhealth locationcare means anof for bereficiaries areaovned and contracted is provided bytorti 11Ee Ith a networkary rofo rll prey i Crs-ec

health AI I 1(Fici-i for rarecare oatIIProvilers utilI5houll ionbe anelocationby Irouped fordata SatherinG thicare Provider shul be grue by loato forthis

A 19 d7- 198-1 9 U 9 number ofretirees employees andby location age and sex byboiiorif rl-llnU 1 C)U-I ()LjU - I )U riuliborPericlents o r -iby location age

b I e deshysexJI kLbaij ar0d byL benofit_[iL( l2 rulesL~ L ___ L_ i~j

A L i- o nouri hospitalsa by(ilscl L111 locationI 055rs

~ iF Possible)

LiL ~ iuuilu -L ui L LlUressI i Cs by IcICIL ion ( i ncif Possible) Iuc-C List NonPertatilina

hospitals Hith1 Provider reimbursement 2 arrangementsI -Cltig t L(ILl is0I -hly ruilIlsursement

to 3 Numbor of bocis by servicervir v i 3s itv - IIabIe

ie o6 Loczition tO1ir by poc icaI tyC inc u LI 9 -qsL-ouL adcressif Possiblo)

3L19l Wllco l Ii ] tj) h4j r I w~uwe0 r

IPT TUC UMANDIQILIE INampSJQANCE CO l IIIIAk 4IU6 i5II i _ __ K JCkLai 12910

List NLPniliI0 cl inicsluiiLt i s oI)LLI E

1 Physicians otlor t L s PharIllcisLsIrUi o r I-r-0Vh andleal sery ices andPfOcducts i LhtI Sorv i C-0 a i b 1(3

3 kI c o n L o tl montl i bu so gIIlrgbull Nunber of examining5 Location rooms(including

Street address if Possibl)

I V A I 9U-_icU_1

9 UU totalCosts healthUy benefittarqyt

market totalB For location anoeach targot marL-oiIC tvu andJlQ PertaminaI onyr-2 Fo-

S and the i rd g(I I e igibeel (IL I1 NLIIIUIr 6l- 1907- 1900o Ilosp i t1 00) bonoF ic iar

I 1 M i ss i ons Per porIo(-zi centir-q iII(I

ies year byLot-j]Il -i1U of I l bod Jaysbirori used perci airiszLti Per-Q YeGarId i byJ Avcaat totoalI c)1l or 1ospi LalIOc aL ion slay bytAvcrare and totalcost Per d isCharoe byI zatLion ancj total

NLmbiO Mw

of (m~1it ri~~Lph-ysiuijjli Ifl iiIy an visitsby locjLiu1 CIrald totalC 1zvolraEoaid outpatient services cost ofagnosUS for inpatient

and frequent dishyfru[cluontly Prescribedby I ocrit ior drugs11d totalmlIp O y for PeIl~amnina5 a rid theDr CICPrafldorits

dJeporcjrtts forPorid roiiu fog-anie PSCandbeneficiariesthoir eliible

PWIrr3UJ9 2

I lUlkCr [L IlA8 l la

PT TUCU MANDIQI 1111 INampiIQANCi CO

WV41li Iii Aiiil-iiU li1 ip I4 oL lv C 8A Kiiii mll Uli I290

DATA COLLECTION FORIlV tIEw o UWJIIJ) II1I AlI NA All1 IIUUUCI I O-iNSIARING COiPANY ilEALIII FACILIFIESV Onqned Hospi IoIs A Locnalion ( inclUcdin str-aut acidress Ifp Or-- i 1I1 C

B NLIIIIbOI- 0 bOU by sorv ice C Servicos availablo D Number of physicians on staff by

op ec i a lt yE ScheuU10 of chlarges (tariffs) for each serv i ceprodLIc LF 190L monthly cost of operation

VI Owned CI inics A LocatioLm (irlcluli no street address i f Poss i U I )

U NLIIlbor or suiro FootC JL1II111iV- WIr OXCJii ii li lI19 rOOill

U irvi ccit oi1 i I Lu I a ( physpec il i ci ins byy phi-lnacy denal I aborashytory X-ray vLc)E Scl IlCCILI o f c1r-hlt-)ros ( Lc r i r r3 ) for oach

F SLiff-rnulber or CllployeesclIa s i F icat i n each jobi oil

G So ) oll-y I- a11 I ) rorr1 orichclSficatioll cl inic job

includirti borilaFi s andperCUi si Los ( functional faci 1 ities)-VII Map of Indonesia S1IoNirl- a I1 PERTAMI NAshar i n and Productioncompainy hop i tIafac I ities I nd cl irlics shoHinqare ovnecd hichand kqhich zire contracted VIII Adin is trat Ion

A DVsci-ilLio i of m1ethLIod no in uso forqual iLy assuralncefaci I ity monitoringcenti-al reviep of Faci I ities andorClro V i U1 l copy of foriis iiid for on i tor i n9B Doscript ioon or method no in Iseropo1- t touilization of Sol-vices

i- CCIL It I iculi L reCi-i i y Uslt~iiil FroimI il U I ual I i U p r i i urali o Comparillfor ssorv icoproclucts

to centralof Fic- HiLtl copy of forms usedI Co i i -- 1 i - L i I i t j

C Dscri i oi-i o fC _1LI ici - o L lo s ancd proshycodur-es nov in uso for adllinrist -ationii licil clii-oCLor revie o O -1llova1Ll i jvi (or IhuioILh

of af IF-1 P-orl~cl cr0 SIrv icesarI PrLJc L

W e i-oo t-iu 5~Il e in fOI-mL- U (n lI o 1 1I - iriL i a I t s9cccl-I

1 3 U 9 3 2

APPENI)IX IV

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__ __ __ __ __ _ _ ___

_______ ____

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DATA COLLECTION FOR

REVIEW OF PERTAMINA AND PRODUCTION SHARING

COMPANY HEALTH BENEFITS AND

HEALTH CARE DELIVERY SYSTEMS

BENEFIT BENEFICIARY AND GENERAL INFORMATION NEEDED

I BENIEFIT AND BEfJEFICIARY I-rOFMATION

COT SHARECONTR IZTIOtt LIST OF HEALTH CHANGE-

I EENEFIT CHANGEDESCRIPTIOrNIampEIEFIT PSC I EMPLOYEE19931 EFFECTIVE DATE FERTAMINA IIENEFIT SFOrSOR I IN EtIGLISH 199 Ilq7 1989 FT IA

____________ L I I

FEFTAM1A FETIFEES I I I

iFOuSE- 4IDOWS I I I I I

IIFERTA 1A EMPLOEES

SEF-ErJDETS ___

I IIFFODIJCTICN SHF ING I I COMF AN 2EriEF ICIARIES I

II IEIEFIT COST I4FOFMATIOII

TGTAL HEALTH EEl EFIT COSTS AVEAGE IJLIEER OF EEtEFICIARIES P( A-E ArID SE)(

FERTAMINAFER - ItA

ErIEFICI-RFi-- SFSES DEFEDENT3 E--EFCIA-RIEFI I SF[_-ES IErFL0EES FEDE I

II I a

7 1z38 189 17i17Ia31987It1-= 17 T 1__ 119a 1I37 =FE--OOT 19T7

___ i IUH IAF i

_MATRA_ IIRTH

____I

I II b ALIi1A-rJ -I I I _ 4shy

______ _____bull ___I ____ ______

IvJV JMA I __ __

I-V CIREPON

I IVI ICILACAP

I IVI IS0FOIIG

VlIII IJAVAJC RTA -

I_ _IXITOTAL

III OTHER and cliricsand contrcacted hospitalsA map c Indonesia showin all owned

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OATA COLLECTION FOR REVIEW OF PERTAMIrJA AND FRODUCTICiJ SHARI3COMPANY HEALTH EEN - )TS AND HEALTH CARE DELIVERY SvSTEl-IS

HOSPITAL F 41LIAL Is-4rA ELEMENTS NEEDED

MONTHLY AVG ADMISSIONS ED DAYS AVERAGE AVERAGE COST AEAGE AERAGE

REGION OPERATING COSTS

PAYMENTS

I000 1000 LENGTHSTA OF DISCHARGE OUT PATIENT

V IS ITSENEFICIARYYEAR TOTAL COST

FEOUIENTDIAGNOSEZ

1IOTUAFI JOPTH SUMATFA I ERTAM FSC FERTAm PSC FERTAMl PSCj PERTAm FSC IFER TAt- FSC F ERTAMI

SC P TAZ- PSC

TOTAL EACH OWNEO -SFITAL EACH CCJTRATED HOSPITAL

OTHER RELE-IT INFORMATIONJS

I SOUTH SI_ATF-TOTAL -

EACH OW~NED 3PITAL

EACH CONTFAZTED HOSPITAL OTHER FRELEv-T INrFORMAT IONS8iI

I -

TOTAL

EACH OWJED - -FITALEACH ______COtITRTED

H3SPITAL

OTHER FELE-T IFaFMATIONSa

V CIREEO-EACH LwtED rSP=FT-L EACH CONT-TD-3F ITAL

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APPENDIX V

REVISED SCOPE OF WORK AND BUI)GETI

This Revised Scope of Work differs from the original Scope of Work in that it adds adata collection component which is essential in order for the subsequent FeasibilityStudy and BusinessOperational Plan to be based on reliable facts The stepsinherent in the data collection pohase are further elaborated in the Addition to Scopeof Work to Gather Needed Information which is attached to this Appendix

Assigrnment

The consultant team will assist PT Tugu Mandiri to assemble necessaryinformation conduct a feasibility assessment and if feasible prepare a businessplan and nn operational plan of action for Tugu Mandiri to establish a healthmaintenance organizatiuJdmanaged health care product line of business

Expacted Outputs

1 Data Collection

This essential first phase should provide orientation education and retrievalassistance to the regional and headquarters Finance and Umum Departments ofPertamina and the administrative and field offices of the Production SharingContractors (PSCs) so that the information needed for actuarial projections andbusinessoperational planning is available to the project team as soon as possibleThis information is listed in Appendix III to the 17 April 1989 Consultants ExitProgress Report

Activities

a Prepare a presentation including written materials and data output formatsto orient and educate departmental staff responsible for needed information

b Assist in computer software development to facilitate extraction of neededinformation available in computer databases through Indonesian national programmer assigned to team part-time

c Answer questions and work with departmental staff in regions and PertaminaheadquartersPSC administrative offices to retrieve needed information

d Assemble information received from all sources and compile it for actuarialand planning purposes including computer software programming and datainput to facilitate those efforts

2 Feasibility Assessment and Business Plan

This document should present the organizational arrangements and afinancialbusiness analysis for the two options which Tugu Mandiri will pursue to develop an HMO health insurance product The two options are

To establish an HMO wih Pertaminas Production Sharing Contractors (i-Cs) Pertamina retirees and veterans as the primary markets

28

To establish an HMO with Pertaminas 50000 active employees and theirdependents as a second market Because most available health careutilization and cost data for retirees is not separated from the correspondingdata for active employees and because health services are not budgeted foreach group separately the effects of separating the two groups should beshown side by side

Activities

a Review the existing business plan developed by REACH and assess theorganizational model which has been proposed in that report for the HMOwith Pertamina employees as the primary market

b Work with domestic consultants to establish the legal feasibility for TuguMandiri to offer an HMOmanaged health care product for the target markets of this feasibility study

c Work with domestic consultants to ascertain the tax consequences ofestablishing an HMOmanaged health care product for both Tugu Mandiriand its prospective clients

d If feasible develop a persuasive convincing justification for Tugu Mandiri todevelop an HMOmanaged health care programand identify the capitalrequirements which the HMO will contain To the extent advisable theconsultants will use Option ll-E in the REACH report as a model

e Develop an HMOmanaged health care model and persuasive justification forchoosing that model for Tugu Mandiri to offer to Pertaininas PSCsPertamina retirees and active employees The model should includeorganizational arrangements between Tugu Mandiri providers and membersidentify the source of providers and specify the types of contractural arrangements that Tugu Mandiri will need to establish with those providers

f Do a financial analysis for the model developed in activities d and e above Thefinancial analysis should

Create the actuarial assumptions upon which the premium will be calculated

Create the financial assumptions upon which all financial projections willbe based

Use these assumptions to create expense revenue and profitloss statements

Relate these to levels of enrollment in the process of doing a breakeven analysis

Develop a capital budget

Do a breakeven analysis

29

Create a financial model (funds flow analysis) which tracks sources and

uses of funds

3 Operational Plan of Action

Develop a network chart for the pre-operational and operational phases of themodels proposed in Section 2 The network chart should use a PERTGantt orsimilar networking technique to plan activities over time in critical sequence andcontain clear instructions for clarification and interpretation

Activities

a Recommend an appropriate organizational structure for the proposed HMOmanaged health care model

b Develop a recruitment and staffing plan which identifies the numbers and types of personnel that must be hired and job specifications for each managerial position

c Develop a training and manpower development plan This plan should bebased upon the management arrangements that Tugu Mandiri will use tooperate the HMO during the pre-operations and start-up phases If thedecision is made to subcontract management to a third party training can bedone on site If Tugu Mandiri decides to operate the HMO itself the trainingplan should identify the types of personnel to be trained areas of training and the format and sites of training

d Design a detailed benefit package with service units

e Design a structure and configuration for the health service delivery system tobe used in the HMO including the contractural arrangements which must bemade with the providers

f Identify the management systems which must be developed e MISutilization finance personnel etc and suggest components of the different systems

g Determine the hardware and software requirements which will be needed to support the management systems

h Suggest the technical assistance requirements which will be needed to operationalize the HMO

30

AI)DITION TO SCO13E OF WORKTO GATHER NEEDED INFORMATION AND BUDGET FOR DATA COLLECTION PHASE

Assignment and Statement of the Problem

The development of a formal information system and data collection process isrequired to support the conduct of a comprehensive feasibility study which ifpossible will contain a business plan and operational plan of action for thedevelopment of a Tugu Mandiri Health Maintenance Organization (HMO)managedhealth care financing and delivery system It is clear from the work of the consultingteam--including meetings review of available documents and other observations-shythat the information needed for completion of the original Scope of Work is not yetavailable to us or usable for this project Adding this process to the original Scope ofWork will generate the required utilization data financial data provider and otherinformation needed to accomplish the original Scope of Work Therefore we arecompelled to recommend to the management of this project--USAID the Ministry ofHealth and Tugu Mandiri--that a formal data collection process be added andcompleted prior to preparation of a feasibility study report and if feasible a businessplan and operational plan of action pursuant to the original Scope of Work

We recognize that this data collection process was not budgeted in the original Scopeof Work and that it will substantially increase the cost of this project In feedback onour draft exit report ISTI and USAID expressed concern over this increased costAccordingly we submit three proposals for the data collection effort--

A Collecting needed data from all seven Pertamina regions and Jakartaheadquarters as well as from all seventeen PSCs

B Collecting needed data from four representative Pertamina operating regionsfrom Jakarta headquarters and from three to five representative PSCs Fromthis data the actuary and we will be able to extrapolate and prepare actuarialprojections evaluate feasibility and if feasible prepare a business plan andoperational plan of action for the full target market

C Collecting needed data from one Pertamina region and PSC operating in thatregion from which actuarial projections the feasibility study and if feasible thebusiness plan and operating plan will be completed for that region That regionwill serve as a pilot from which experience can be evaluated If the pilot provessuccessful expansion to other areas can be planned

Of the alternative approaches listed above we recommend alternative B Thesampling methodology used in alternative B will permit the actuary andconsultants to extrapolate from the representative areas to assess overall feasibilityand project the business and operating plan for all target markets throughout thearchipelago Alternative A is less cost effective than alternative B We do notrecommend alternative C because it will not permit evaluation of the alternativehealth care financing and delivery system for the entire target markets in a timelyfashion because it could result in employeeretiree health benefits in the pilot regionthat differ from those in other regions and because the results of implementationwill not be significant with respect to national cost increase trends The following outlines suggested additions to the original Scope of Work which wewill complete within six working weeks in Indonesia after completion of the data collection and actuarys report

31

I Work Required

A Obtain support of Ministry of Health and Pertamina (BKKAUmumDirector and Finance in regions and headquarters)

B Identify sources of needed information and staff resources for data orientation sessions

C Authorizedirect gathering and provision of information

D Format data for collection

E Processassemble data

F Consolidatecompile data for actuary and other consultant reports

G Review health facilities and data systems

Ii Resources Required

A Core team -Tugu Mandiri Nanang Iskandar MD Rochwan Muthalib

Pertamina Soejadi

ISTI Elliot Wolff James Barnes

Actuary R Pratolo

Tax Istama Siddharta

Legal Lione Gunawan Hans Schaefer

B Additional Staff

1 Two financial datasystems managers -USA

2 Computer programmer- Indonesia (loan)

3 Translator - Indonesia (loan)

C Other resources

1 Lap computer for word processing and financial analysisspread sheets

2 Second PC for data consolidation and statementreport writing

3 Expeuses for visits to Jakarta and the regions for meetings with theteam Pertamina and the production sharing contractors ($1000 fromJakarta per person per visit to country)

4 Expenses for travel to Indonesia from USA ($3000)

32

Three trips each for Wolff Barnes and four trips for two financialsystems managers

5 Expenses for orientation programs (bring 6 P -tamina healthfinancestaff from three regions to Jakarta for one we and meet PSCrepresentatives in Jakarta)

6 Expenses for actuarys assistance in data gathering as well as

actuarial report and business plan

7 Expenses for translator - approximately 20 days

8 Additional minor participation by attorney tax advisor and their coordinator

D Timing

1 Orientationformatting data by Wolff Barnes two financialsystems managers (2 months each) actuary translator and computer programmer

2 Follow-up by Wolff and Barnes - 2 months each Two financialsystems managers actuary and computer programmer -3 months each

3 Completion - 10 months

BUI)GET FOR DATA COLLECTION PHASE

The fees and other budget items reflected here are based on a comprehensive datacollection process of approximately ten months duration which we expect to berequired in light of our progress with the project team during our MarchApril visitThe costs reflected and the suggested time frame are based on accomplishing thedata collection for alternative B previously cited The expatriate consulting teamconsists of Dr James G Barnes Mr Elliot Wolff and two information systemsdataspecialists We anticipate that over the ten month period there will be three tripseach to Indonesia by Dr Barnes and Mr Wolff and four trips by the informationsystemsdata specialists In an effort to accomplish as much of the front endrequirements as possible the first trip by Dr Barnes and Mr Wolff is based onthirty-six (36) days with the remaining two trips at twenty-four (24) days each for atotal of eighty-four (84) days The information systemsdata specialists time incountry is based on four trips of thrity-six days each for a total of 144 days The chart on the following page reflects these costs

33

Budget for Data Collection Phase

Consultant Non-Govt AUSAIDISTI Amount to be Total

Fees 1

Barnes

Wolff

Data Analyst

Data Analyst

Computer Programmer Interpreter

Total

84

84

144

144

40

20

396

Days Daily Rate 2

$61423

$61423

$35422

$35522

-------------

NA

Paid by Client 3

$5159500

$5159500

$5100800

$5100800

--------------

$20520600

DailyPaid

$28578

$28578

$28578

$28578

$ 4000

$ 2000

NA

byUSAID

$ 2400552

$ 2400552

$ 4115232

$ 4115232

$ 160000

$ 40000

$13231568

Compensashytion

7560052

$ 7560052

$ 9216032

$ 9216032

$ 160000

$ 40000

$33752168

Budget for Data Collection Phase Cont

Per Trip Costs Aont Travel

Expenses Number of

Trips Non-govtdaily Rate

Amount to bePaid by Client

P IncludingpInter-island

Amounttbe Paid by

TotalTravelCosts

Travel Barnes 3 NA ------------------- $400000 $1200000 $1200000 Wolff 3 NA ------------------- $400000 $1200000 $1200000 Data Analyst 4 NA ------------------- $400000 $1600000 $1600000

Ln Data Analyst 4 Computer ----------------Programmer

NA NA

--------------------------------------

$400000 $200000

$1600000 $ 200000

$1600000 $ 200000

Interpreter Total

----------------14

NA

NA -------------------

-------------------

$400000 NA

$ 400000 $6200000

$ 400000 $6200000

Budget for Data Collection Phase Cont

Per Diem Non-govt Amount to be Amount to be Total PerRates Days Daily Rate Paid by Client Rate Paid by Diem CostsUSAID

Barnes 84 NA --------------- $10800 $ 907200 $ 907200 Wolff 84 NA --------------- $10800 $ 907200 $ 907200 Data Analyst 144 NA --------------- $10800 $1555200 $1555200 Data Analyst 144 NA -------------- $10800 $1555200 $1555200 Computer 40 NA -------------- NAProgrammer

Interpreter 20 NA NA Total Per NA NA $4924800 $4924800

0 Diem

Total Costs -DataCollection $20520600 $24356368 $44876968 Phase

1 Actuarys assistance in the data collection effort is und an existing contract between R Pratolo and ISTI the details of which we are not aware

2 The amount listed in this column shows the daily consultng rate that Pertamina Tugu Mandiri and the Ministry of Health will need topay in excess of the rate paid by USAIDISTI in order for the consultants to complete this project

3 The amount listed in this column shows the total amount to be paid by Pertamina Tugu Mandiri and the Ministry ofHealth per listedconsultant for the stated number of consulting days

PT TUCU MANDIQI 1111 INampiIQANCi CO

WV41li Iii Aiiil-iiU li1 ip I4 oL lv C 8A Kiiii mll Uli I290

DATA COLLECTION FORIlV tIEw o UWJIIJ) II1I AlI NA All1 IIUUUCI I O-iNSIARING COiPANY ilEALIII FACILIFIESV Onqned Hospi IoIs A Locnalion ( inclUcdin str-aut acidress Ifp Or-- i 1I1 C

B NLIIIIbOI- 0 bOU by sorv ice C Servicos availablo D Number of physicians on staff by

op ec i a lt yE ScheuU10 of chlarges (tariffs) for each serv i ceprodLIc LF 190L monthly cost of operation

VI Owned CI inics A LocatioLm (irlcluli no street address i f Poss i U I )

U NLIIlbor or suiro FootC JL1II111iV- WIr OXCJii ii li lI19 rOOill

U irvi ccit oi1 i I Lu I a ( physpec il i ci ins byy phi-lnacy denal I aborashytory X-ray vLc)E Scl IlCCILI o f c1r-hlt-)ros ( Lc r i r r3 ) for oach

F SLiff-rnulber or CllployeesclIa s i F icat i n each jobi oil

G So ) oll-y I- a11 I ) rorr1 orichclSficatioll cl inic job

includirti borilaFi s andperCUi si Los ( functional faci 1 ities)-VII Map of Indonesia S1IoNirl- a I1 PERTAMI NAshar i n and Productioncompainy hop i tIafac I ities I nd cl irlics shoHinqare ovnecd hichand kqhich zire contracted VIII Adin is trat Ion

A DVsci-ilLio i of m1ethLIod no in uso forqual iLy assuralncefaci I ity monitoringcenti-al reviep of Faci I ities andorClro V i U1 l copy of foriis iiid for on i tor i n9B Doscript ioon or method no in Iseropo1- t touilization of Sol-vices

i- CCIL It I iculi L reCi-i i y Uslt~iiil FroimI il U I ual I i U p r i i urali o Comparillfor ssorv icoproclucts

to centralof Fic- HiLtl copy of forms usedI Co i i -- 1 i - L i I i t j

C Dscri i oi-i o fC _1LI ici - o L lo s ancd proshycodur-es nov in uso for adllinrist -ationii licil clii-oCLor revie o O -1llova1Ll i jvi (or IhuioILh

of af IF-1 P-orl~cl cr0 SIrv icesarI PrLJc L

W e i-oo t-iu 5~Il e in fOI-mL- U (n lI o 1 1I - iriL i a I t s9cccl-I

1 3 U 9 3 2

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DATA COLLECTION FOR

REVIEW OF PERTAMINA AND PRODUCTION SHARING

COMPANY HEALTH BENEFITS AND

HEALTH CARE DELIVERY SYSTEMS

BENEFIT BENEFICIARY AND GENERAL INFORMATION NEEDED

I BENIEFIT AND BEfJEFICIARY I-rOFMATION

COT SHARECONTR IZTIOtt LIST OF HEALTH CHANGE-

I EENEFIT CHANGEDESCRIPTIOrNIampEIEFIT PSC I EMPLOYEE19931 EFFECTIVE DATE FERTAMINA IIENEFIT SFOrSOR I IN EtIGLISH 199 Ilq7 1989 FT IA

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FERTAMINAFER - ItA

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HOSPITAL F 41LIAL Is-4rA ELEMENTS NEEDED

MONTHLY AVG ADMISSIONS ED DAYS AVERAGE AVERAGE COST AEAGE AERAGE

REGION OPERATING COSTS

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V IS ITSENEFICIARYYEAR TOTAL COST

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APPENDIX V

REVISED SCOPE OF WORK AND BUI)GETI

This Revised Scope of Work differs from the original Scope of Work in that it adds adata collection component which is essential in order for the subsequent FeasibilityStudy and BusinessOperational Plan to be based on reliable facts The stepsinherent in the data collection pohase are further elaborated in the Addition to Scopeof Work to Gather Needed Information which is attached to this Appendix

Assigrnment

The consultant team will assist PT Tugu Mandiri to assemble necessaryinformation conduct a feasibility assessment and if feasible prepare a businessplan and nn operational plan of action for Tugu Mandiri to establish a healthmaintenance organizatiuJdmanaged health care product line of business

Expacted Outputs

1 Data Collection

This essential first phase should provide orientation education and retrievalassistance to the regional and headquarters Finance and Umum Departments ofPertamina and the administrative and field offices of the Production SharingContractors (PSCs) so that the information needed for actuarial projections andbusinessoperational planning is available to the project team as soon as possibleThis information is listed in Appendix III to the 17 April 1989 Consultants ExitProgress Report

Activities

a Prepare a presentation including written materials and data output formatsto orient and educate departmental staff responsible for needed information

b Assist in computer software development to facilitate extraction of neededinformation available in computer databases through Indonesian national programmer assigned to team part-time

c Answer questions and work with departmental staff in regions and PertaminaheadquartersPSC administrative offices to retrieve needed information

d Assemble information received from all sources and compile it for actuarialand planning purposes including computer software programming and datainput to facilitate those efforts

2 Feasibility Assessment and Business Plan

This document should present the organizational arrangements and afinancialbusiness analysis for the two options which Tugu Mandiri will pursue to develop an HMO health insurance product The two options are

To establish an HMO wih Pertaminas Production Sharing Contractors (i-Cs) Pertamina retirees and veterans as the primary markets

28

To establish an HMO with Pertaminas 50000 active employees and theirdependents as a second market Because most available health careutilization and cost data for retirees is not separated from the correspondingdata for active employees and because health services are not budgeted foreach group separately the effects of separating the two groups should beshown side by side

Activities

a Review the existing business plan developed by REACH and assess theorganizational model which has been proposed in that report for the HMOwith Pertamina employees as the primary market

b Work with domestic consultants to establish the legal feasibility for TuguMandiri to offer an HMOmanaged health care product for the target markets of this feasibility study

c Work with domestic consultants to ascertain the tax consequences ofestablishing an HMOmanaged health care product for both Tugu Mandiriand its prospective clients

d If feasible develop a persuasive convincing justification for Tugu Mandiri todevelop an HMOmanaged health care programand identify the capitalrequirements which the HMO will contain To the extent advisable theconsultants will use Option ll-E in the REACH report as a model

e Develop an HMOmanaged health care model and persuasive justification forchoosing that model for Tugu Mandiri to offer to Pertaininas PSCsPertamina retirees and active employees The model should includeorganizational arrangements between Tugu Mandiri providers and membersidentify the source of providers and specify the types of contractural arrangements that Tugu Mandiri will need to establish with those providers

f Do a financial analysis for the model developed in activities d and e above Thefinancial analysis should

Create the actuarial assumptions upon which the premium will be calculated

Create the financial assumptions upon which all financial projections willbe based

Use these assumptions to create expense revenue and profitloss statements

Relate these to levels of enrollment in the process of doing a breakeven analysis

Develop a capital budget

Do a breakeven analysis

29

Create a financial model (funds flow analysis) which tracks sources and

uses of funds

3 Operational Plan of Action

Develop a network chart for the pre-operational and operational phases of themodels proposed in Section 2 The network chart should use a PERTGantt orsimilar networking technique to plan activities over time in critical sequence andcontain clear instructions for clarification and interpretation

Activities

a Recommend an appropriate organizational structure for the proposed HMOmanaged health care model

b Develop a recruitment and staffing plan which identifies the numbers and types of personnel that must be hired and job specifications for each managerial position

c Develop a training and manpower development plan This plan should bebased upon the management arrangements that Tugu Mandiri will use tooperate the HMO during the pre-operations and start-up phases If thedecision is made to subcontract management to a third party training can bedone on site If Tugu Mandiri decides to operate the HMO itself the trainingplan should identify the types of personnel to be trained areas of training and the format and sites of training

d Design a detailed benefit package with service units

e Design a structure and configuration for the health service delivery system tobe used in the HMO including the contractural arrangements which must bemade with the providers

f Identify the management systems which must be developed e MISutilization finance personnel etc and suggest components of the different systems

g Determine the hardware and software requirements which will be needed to support the management systems

h Suggest the technical assistance requirements which will be needed to operationalize the HMO

30

AI)DITION TO SCO13E OF WORKTO GATHER NEEDED INFORMATION AND BUDGET FOR DATA COLLECTION PHASE

Assignment and Statement of the Problem

The development of a formal information system and data collection process isrequired to support the conduct of a comprehensive feasibility study which ifpossible will contain a business plan and operational plan of action for thedevelopment of a Tugu Mandiri Health Maintenance Organization (HMO)managedhealth care financing and delivery system It is clear from the work of the consultingteam--including meetings review of available documents and other observations-shythat the information needed for completion of the original Scope of Work is not yetavailable to us or usable for this project Adding this process to the original Scope ofWork will generate the required utilization data financial data provider and otherinformation needed to accomplish the original Scope of Work Therefore we arecompelled to recommend to the management of this project--USAID the Ministry ofHealth and Tugu Mandiri--that a formal data collection process be added andcompleted prior to preparation of a feasibility study report and if feasible a businessplan and operational plan of action pursuant to the original Scope of Work

We recognize that this data collection process was not budgeted in the original Scopeof Work and that it will substantially increase the cost of this project In feedback onour draft exit report ISTI and USAID expressed concern over this increased costAccordingly we submit three proposals for the data collection effort--

A Collecting needed data from all seven Pertamina regions and Jakartaheadquarters as well as from all seventeen PSCs

B Collecting needed data from four representative Pertamina operating regionsfrom Jakarta headquarters and from three to five representative PSCs Fromthis data the actuary and we will be able to extrapolate and prepare actuarialprojections evaluate feasibility and if feasible prepare a business plan andoperational plan of action for the full target market

C Collecting needed data from one Pertamina region and PSC operating in thatregion from which actuarial projections the feasibility study and if feasible thebusiness plan and operating plan will be completed for that region That regionwill serve as a pilot from which experience can be evaluated If the pilot provessuccessful expansion to other areas can be planned

Of the alternative approaches listed above we recommend alternative B Thesampling methodology used in alternative B will permit the actuary andconsultants to extrapolate from the representative areas to assess overall feasibilityand project the business and operating plan for all target markets throughout thearchipelago Alternative A is less cost effective than alternative B We do notrecommend alternative C because it will not permit evaluation of the alternativehealth care financing and delivery system for the entire target markets in a timelyfashion because it could result in employeeretiree health benefits in the pilot regionthat differ from those in other regions and because the results of implementationwill not be significant with respect to national cost increase trends The following outlines suggested additions to the original Scope of Work which wewill complete within six working weeks in Indonesia after completion of the data collection and actuarys report

31

I Work Required

A Obtain support of Ministry of Health and Pertamina (BKKAUmumDirector and Finance in regions and headquarters)

B Identify sources of needed information and staff resources for data orientation sessions

C Authorizedirect gathering and provision of information

D Format data for collection

E Processassemble data

F Consolidatecompile data for actuary and other consultant reports

G Review health facilities and data systems

Ii Resources Required

A Core team -Tugu Mandiri Nanang Iskandar MD Rochwan Muthalib

Pertamina Soejadi

ISTI Elliot Wolff James Barnes

Actuary R Pratolo

Tax Istama Siddharta

Legal Lione Gunawan Hans Schaefer

B Additional Staff

1 Two financial datasystems managers -USA

2 Computer programmer- Indonesia (loan)

3 Translator - Indonesia (loan)

C Other resources

1 Lap computer for word processing and financial analysisspread sheets

2 Second PC for data consolidation and statementreport writing

3 Expeuses for visits to Jakarta and the regions for meetings with theteam Pertamina and the production sharing contractors ($1000 fromJakarta per person per visit to country)

4 Expenses for travel to Indonesia from USA ($3000)

32

Three trips each for Wolff Barnes and four trips for two financialsystems managers

5 Expenses for orientation programs (bring 6 P -tamina healthfinancestaff from three regions to Jakarta for one we and meet PSCrepresentatives in Jakarta)

6 Expenses for actuarys assistance in data gathering as well as

actuarial report and business plan

7 Expenses for translator - approximately 20 days

8 Additional minor participation by attorney tax advisor and their coordinator

D Timing

1 Orientationformatting data by Wolff Barnes two financialsystems managers (2 months each) actuary translator and computer programmer

2 Follow-up by Wolff and Barnes - 2 months each Two financialsystems managers actuary and computer programmer -3 months each

3 Completion - 10 months

BUI)GET FOR DATA COLLECTION PHASE

The fees and other budget items reflected here are based on a comprehensive datacollection process of approximately ten months duration which we expect to berequired in light of our progress with the project team during our MarchApril visitThe costs reflected and the suggested time frame are based on accomplishing thedata collection for alternative B previously cited The expatriate consulting teamconsists of Dr James G Barnes Mr Elliot Wolff and two information systemsdataspecialists We anticipate that over the ten month period there will be three tripseach to Indonesia by Dr Barnes and Mr Wolff and four trips by the informationsystemsdata specialists In an effort to accomplish as much of the front endrequirements as possible the first trip by Dr Barnes and Mr Wolff is based onthirty-six (36) days with the remaining two trips at twenty-four (24) days each for atotal of eighty-four (84) days The information systemsdata specialists time incountry is based on four trips of thrity-six days each for a total of 144 days The chart on the following page reflects these costs

33

Budget for Data Collection Phase

Consultant Non-Govt AUSAIDISTI Amount to be Total

Fees 1

Barnes

Wolff

Data Analyst

Data Analyst

Computer Programmer Interpreter

Total

84

84

144

144

40

20

396

Days Daily Rate 2

$61423

$61423

$35422

$35522

-------------

NA

Paid by Client 3

$5159500

$5159500

$5100800

$5100800

--------------

$20520600

DailyPaid

$28578

$28578

$28578

$28578

$ 4000

$ 2000

NA

byUSAID

$ 2400552

$ 2400552

$ 4115232

$ 4115232

$ 160000

$ 40000

$13231568

Compensashytion

7560052

$ 7560052

$ 9216032

$ 9216032

$ 160000

$ 40000

$33752168

Budget for Data Collection Phase Cont

Per Trip Costs Aont Travel

Expenses Number of

Trips Non-govtdaily Rate

Amount to bePaid by Client

P IncludingpInter-island

Amounttbe Paid by

TotalTravelCosts

Travel Barnes 3 NA ------------------- $400000 $1200000 $1200000 Wolff 3 NA ------------------- $400000 $1200000 $1200000 Data Analyst 4 NA ------------------- $400000 $1600000 $1600000

Ln Data Analyst 4 Computer ----------------Programmer

NA NA

--------------------------------------

$400000 $200000

$1600000 $ 200000

$1600000 $ 200000

Interpreter Total

----------------14

NA

NA -------------------

-------------------

$400000 NA

$ 400000 $6200000

$ 400000 $6200000

Budget for Data Collection Phase Cont

Per Diem Non-govt Amount to be Amount to be Total PerRates Days Daily Rate Paid by Client Rate Paid by Diem CostsUSAID

Barnes 84 NA --------------- $10800 $ 907200 $ 907200 Wolff 84 NA --------------- $10800 $ 907200 $ 907200 Data Analyst 144 NA --------------- $10800 $1555200 $1555200 Data Analyst 144 NA -------------- $10800 $1555200 $1555200 Computer 40 NA -------------- NAProgrammer

Interpreter 20 NA NA Total Per NA NA $4924800 $4924800

0 Diem

Total Costs -DataCollection $20520600 $24356368 $44876968 Phase

1 Actuarys assistance in the data collection effort is und an existing contract between R Pratolo and ISTI the details of which we are not aware

2 The amount listed in this column shows the daily consultng rate that Pertamina Tugu Mandiri and the Ministry of Health will need topay in excess of the rate paid by USAIDISTI in order for the consultants to complete this project

3 The amount listed in this column shows the total amount to be paid by Pertamina Tugu Mandiri and the Ministry ofHealth per listedconsultant for the stated number of consulting days

APPENI)IX IV

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DATA COLLECTION FOR

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BENEFIT BENEFICIARY AND GENERAL INFORMATION NEEDED

I BENIEFIT AND BEfJEFICIARY I-rOFMATION

COT SHARECONTR IZTIOtt LIST OF HEALTH CHANGE-

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APPENDIX V

REVISED SCOPE OF WORK AND BUI)GETI

This Revised Scope of Work differs from the original Scope of Work in that it adds adata collection component which is essential in order for the subsequent FeasibilityStudy and BusinessOperational Plan to be based on reliable facts The stepsinherent in the data collection pohase are further elaborated in the Addition to Scopeof Work to Gather Needed Information which is attached to this Appendix

Assigrnment

The consultant team will assist PT Tugu Mandiri to assemble necessaryinformation conduct a feasibility assessment and if feasible prepare a businessplan and nn operational plan of action for Tugu Mandiri to establish a healthmaintenance organizatiuJdmanaged health care product line of business

Expacted Outputs

1 Data Collection

This essential first phase should provide orientation education and retrievalassistance to the regional and headquarters Finance and Umum Departments ofPertamina and the administrative and field offices of the Production SharingContractors (PSCs) so that the information needed for actuarial projections andbusinessoperational planning is available to the project team as soon as possibleThis information is listed in Appendix III to the 17 April 1989 Consultants ExitProgress Report

Activities

a Prepare a presentation including written materials and data output formatsto orient and educate departmental staff responsible for needed information

b Assist in computer software development to facilitate extraction of neededinformation available in computer databases through Indonesian national programmer assigned to team part-time

c Answer questions and work with departmental staff in regions and PertaminaheadquartersPSC administrative offices to retrieve needed information

d Assemble information received from all sources and compile it for actuarialand planning purposes including computer software programming and datainput to facilitate those efforts

2 Feasibility Assessment and Business Plan

This document should present the organizational arrangements and afinancialbusiness analysis for the two options which Tugu Mandiri will pursue to develop an HMO health insurance product The two options are

To establish an HMO wih Pertaminas Production Sharing Contractors (i-Cs) Pertamina retirees and veterans as the primary markets

28

To establish an HMO with Pertaminas 50000 active employees and theirdependents as a second market Because most available health careutilization and cost data for retirees is not separated from the correspondingdata for active employees and because health services are not budgeted foreach group separately the effects of separating the two groups should beshown side by side

Activities

a Review the existing business plan developed by REACH and assess theorganizational model which has been proposed in that report for the HMOwith Pertamina employees as the primary market

b Work with domestic consultants to establish the legal feasibility for TuguMandiri to offer an HMOmanaged health care product for the target markets of this feasibility study

c Work with domestic consultants to ascertain the tax consequences ofestablishing an HMOmanaged health care product for both Tugu Mandiriand its prospective clients

d If feasible develop a persuasive convincing justification for Tugu Mandiri todevelop an HMOmanaged health care programand identify the capitalrequirements which the HMO will contain To the extent advisable theconsultants will use Option ll-E in the REACH report as a model

e Develop an HMOmanaged health care model and persuasive justification forchoosing that model for Tugu Mandiri to offer to Pertaininas PSCsPertamina retirees and active employees The model should includeorganizational arrangements between Tugu Mandiri providers and membersidentify the source of providers and specify the types of contractural arrangements that Tugu Mandiri will need to establish with those providers

f Do a financial analysis for the model developed in activities d and e above Thefinancial analysis should

Create the actuarial assumptions upon which the premium will be calculated

Create the financial assumptions upon which all financial projections willbe based

Use these assumptions to create expense revenue and profitloss statements

Relate these to levels of enrollment in the process of doing a breakeven analysis

Develop a capital budget

Do a breakeven analysis

29

Create a financial model (funds flow analysis) which tracks sources and

uses of funds

3 Operational Plan of Action

Develop a network chart for the pre-operational and operational phases of themodels proposed in Section 2 The network chart should use a PERTGantt orsimilar networking technique to plan activities over time in critical sequence andcontain clear instructions for clarification and interpretation

Activities

a Recommend an appropriate organizational structure for the proposed HMOmanaged health care model

b Develop a recruitment and staffing plan which identifies the numbers and types of personnel that must be hired and job specifications for each managerial position

c Develop a training and manpower development plan This plan should bebased upon the management arrangements that Tugu Mandiri will use tooperate the HMO during the pre-operations and start-up phases If thedecision is made to subcontract management to a third party training can bedone on site If Tugu Mandiri decides to operate the HMO itself the trainingplan should identify the types of personnel to be trained areas of training and the format and sites of training

d Design a detailed benefit package with service units

e Design a structure and configuration for the health service delivery system tobe used in the HMO including the contractural arrangements which must bemade with the providers

f Identify the management systems which must be developed e MISutilization finance personnel etc and suggest components of the different systems

g Determine the hardware and software requirements which will be needed to support the management systems

h Suggest the technical assistance requirements which will be needed to operationalize the HMO

30

AI)DITION TO SCO13E OF WORKTO GATHER NEEDED INFORMATION AND BUDGET FOR DATA COLLECTION PHASE

Assignment and Statement of the Problem

The development of a formal information system and data collection process isrequired to support the conduct of a comprehensive feasibility study which ifpossible will contain a business plan and operational plan of action for thedevelopment of a Tugu Mandiri Health Maintenance Organization (HMO)managedhealth care financing and delivery system It is clear from the work of the consultingteam--including meetings review of available documents and other observations-shythat the information needed for completion of the original Scope of Work is not yetavailable to us or usable for this project Adding this process to the original Scope ofWork will generate the required utilization data financial data provider and otherinformation needed to accomplish the original Scope of Work Therefore we arecompelled to recommend to the management of this project--USAID the Ministry ofHealth and Tugu Mandiri--that a formal data collection process be added andcompleted prior to preparation of a feasibility study report and if feasible a businessplan and operational plan of action pursuant to the original Scope of Work

We recognize that this data collection process was not budgeted in the original Scopeof Work and that it will substantially increase the cost of this project In feedback onour draft exit report ISTI and USAID expressed concern over this increased costAccordingly we submit three proposals for the data collection effort--

A Collecting needed data from all seven Pertamina regions and Jakartaheadquarters as well as from all seventeen PSCs

B Collecting needed data from four representative Pertamina operating regionsfrom Jakarta headquarters and from three to five representative PSCs Fromthis data the actuary and we will be able to extrapolate and prepare actuarialprojections evaluate feasibility and if feasible prepare a business plan andoperational plan of action for the full target market

C Collecting needed data from one Pertamina region and PSC operating in thatregion from which actuarial projections the feasibility study and if feasible thebusiness plan and operating plan will be completed for that region That regionwill serve as a pilot from which experience can be evaluated If the pilot provessuccessful expansion to other areas can be planned

Of the alternative approaches listed above we recommend alternative B Thesampling methodology used in alternative B will permit the actuary andconsultants to extrapolate from the representative areas to assess overall feasibilityand project the business and operating plan for all target markets throughout thearchipelago Alternative A is less cost effective than alternative B We do notrecommend alternative C because it will not permit evaluation of the alternativehealth care financing and delivery system for the entire target markets in a timelyfashion because it could result in employeeretiree health benefits in the pilot regionthat differ from those in other regions and because the results of implementationwill not be significant with respect to national cost increase trends The following outlines suggested additions to the original Scope of Work which wewill complete within six working weeks in Indonesia after completion of the data collection and actuarys report

31

I Work Required

A Obtain support of Ministry of Health and Pertamina (BKKAUmumDirector and Finance in regions and headquarters)

B Identify sources of needed information and staff resources for data orientation sessions

C Authorizedirect gathering and provision of information

D Format data for collection

E Processassemble data

F Consolidatecompile data for actuary and other consultant reports

G Review health facilities and data systems

Ii Resources Required

A Core team -Tugu Mandiri Nanang Iskandar MD Rochwan Muthalib

Pertamina Soejadi

ISTI Elliot Wolff James Barnes

Actuary R Pratolo

Tax Istama Siddharta

Legal Lione Gunawan Hans Schaefer

B Additional Staff

1 Two financial datasystems managers -USA

2 Computer programmer- Indonesia (loan)

3 Translator - Indonesia (loan)

C Other resources

1 Lap computer for word processing and financial analysisspread sheets

2 Second PC for data consolidation and statementreport writing

3 Expeuses for visits to Jakarta and the regions for meetings with theteam Pertamina and the production sharing contractors ($1000 fromJakarta per person per visit to country)

4 Expenses for travel to Indonesia from USA ($3000)

32

Three trips each for Wolff Barnes and four trips for two financialsystems managers

5 Expenses for orientation programs (bring 6 P -tamina healthfinancestaff from three regions to Jakarta for one we and meet PSCrepresentatives in Jakarta)

6 Expenses for actuarys assistance in data gathering as well as

actuarial report and business plan

7 Expenses for translator - approximately 20 days

8 Additional minor participation by attorney tax advisor and their coordinator

D Timing

1 Orientationformatting data by Wolff Barnes two financialsystems managers (2 months each) actuary translator and computer programmer

2 Follow-up by Wolff and Barnes - 2 months each Two financialsystems managers actuary and computer programmer -3 months each

3 Completion - 10 months

BUI)GET FOR DATA COLLECTION PHASE

The fees and other budget items reflected here are based on a comprehensive datacollection process of approximately ten months duration which we expect to berequired in light of our progress with the project team during our MarchApril visitThe costs reflected and the suggested time frame are based on accomplishing thedata collection for alternative B previously cited The expatriate consulting teamconsists of Dr James G Barnes Mr Elliot Wolff and two information systemsdataspecialists We anticipate that over the ten month period there will be three tripseach to Indonesia by Dr Barnes and Mr Wolff and four trips by the informationsystemsdata specialists In an effort to accomplish as much of the front endrequirements as possible the first trip by Dr Barnes and Mr Wolff is based onthirty-six (36) days with the remaining two trips at twenty-four (24) days each for atotal of eighty-four (84) days The information systemsdata specialists time incountry is based on four trips of thrity-six days each for a total of 144 days The chart on the following page reflects these costs

33

Budget for Data Collection Phase

Consultant Non-Govt AUSAIDISTI Amount to be Total

Fees 1

Barnes

Wolff

Data Analyst

Data Analyst

Computer Programmer Interpreter

Total

84

84

144

144

40

20

396

Days Daily Rate 2

$61423

$61423

$35422

$35522

-------------

NA

Paid by Client 3

$5159500

$5159500

$5100800

$5100800

--------------

$20520600

DailyPaid

$28578

$28578

$28578

$28578

$ 4000

$ 2000

NA

byUSAID

$ 2400552

$ 2400552

$ 4115232

$ 4115232

$ 160000

$ 40000

$13231568

Compensashytion

7560052

$ 7560052

$ 9216032

$ 9216032

$ 160000

$ 40000

$33752168

Budget for Data Collection Phase Cont

Per Trip Costs Aont Travel

Expenses Number of

Trips Non-govtdaily Rate

Amount to bePaid by Client

P IncludingpInter-island

Amounttbe Paid by

TotalTravelCosts

Travel Barnes 3 NA ------------------- $400000 $1200000 $1200000 Wolff 3 NA ------------------- $400000 $1200000 $1200000 Data Analyst 4 NA ------------------- $400000 $1600000 $1600000

Ln Data Analyst 4 Computer ----------------Programmer

NA NA

--------------------------------------

$400000 $200000

$1600000 $ 200000

$1600000 $ 200000

Interpreter Total

----------------14

NA

NA -------------------

-------------------

$400000 NA

$ 400000 $6200000

$ 400000 $6200000

Budget for Data Collection Phase Cont

Per Diem Non-govt Amount to be Amount to be Total PerRates Days Daily Rate Paid by Client Rate Paid by Diem CostsUSAID

Barnes 84 NA --------------- $10800 $ 907200 $ 907200 Wolff 84 NA --------------- $10800 $ 907200 $ 907200 Data Analyst 144 NA --------------- $10800 $1555200 $1555200 Data Analyst 144 NA -------------- $10800 $1555200 $1555200 Computer 40 NA -------------- NAProgrammer

Interpreter 20 NA NA Total Per NA NA $4924800 $4924800

0 Diem

Total Costs -DataCollection $20520600 $24356368 $44876968 Phase

1 Actuarys assistance in the data collection effort is und an existing contract between R Pratolo and ISTI the details of which we are not aware

2 The amount listed in this column shows the daily consultng rate that Pertamina Tugu Mandiri and the Ministry of Health will need topay in excess of the rate paid by USAIDISTI in order for the consultants to complete this project

3 The amount listed in this column shows the total amount to be paid by Pertamina Tugu Mandiri and the Ministry ofHealth per listedconsultant for the stated number of consulting days

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DATA COLLECTION FOR

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APPENDIX V

REVISED SCOPE OF WORK AND BUI)GETI

This Revised Scope of Work differs from the original Scope of Work in that it adds adata collection component which is essential in order for the subsequent FeasibilityStudy and BusinessOperational Plan to be based on reliable facts The stepsinherent in the data collection pohase are further elaborated in the Addition to Scopeof Work to Gather Needed Information which is attached to this Appendix

Assigrnment

The consultant team will assist PT Tugu Mandiri to assemble necessaryinformation conduct a feasibility assessment and if feasible prepare a businessplan and nn operational plan of action for Tugu Mandiri to establish a healthmaintenance organizatiuJdmanaged health care product line of business

Expacted Outputs

1 Data Collection

This essential first phase should provide orientation education and retrievalassistance to the regional and headquarters Finance and Umum Departments ofPertamina and the administrative and field offices of the Production SharingContractors (PSCs) so that the information needed for actuarial projections andbusinessoperational planning is available to the project team as soon as possibleThis information is listed in Appendix III to the 17 April 1989 Consultants ExitProgress Report

Activities

a Prepare a presentation including written materials and data output formatsto orient and educate departmental staff responsible for needed information

b Assist in computer software development to facilitate extraction of neededinformation available in computer databases through Indonesian national programmer assigned to team part-time

c Answer questions and work with departmental staff in regions and PertaminaheadquartersPSC administrative offices to retrieve needed information

d Assemble information received from all sources and compile it for actuarialand planning purposes including computer software programming and datainput to facilitate those efforts

2 Feasibility Assessment and Business Plan

This document should present the organizational arrangements and afinancialbusiness analysis for the two options which Tugu Mandiri will pursue to develop an HMO health insurance product The two options are

To establish an HMO wih Pertaminas Production Sharing Contractors (i-Cs) Pertamina retirees and veterans as the primary markets

28

To establish an HMO with Pertaminas 50000 active employees and theirdependents as a second market Because most available health careutilization and cost data for retirees is not separated from the correspondingdata for active employees and because health services are not budgeted foreach group separately the effects of separating the two groups should beshown side by side

Activities

a Review the existing business plan developed by REACH and assess theorganizational model which has been proposed in that report for the HMOwith Pertamina employees as the primary market

b Work with domestic consultants to establish the legal feasibility for TuguMandiri to offer an HMOmanaged health care product for the target markets of this feasibility study

c Work with domestic consultants to ascertain the tax consequences ofestablishing an HMOmanaged health care product for both Tugu Mandiriand its prospective clients

d If feasible develop a persuasive convincing justification for Tugu Mandiri todevelop an HMOmanaged health care programand identify the capitalrequirements which the HMO will contain To the extent advisable theconsultants will use Option ll-E in the REACH report as a model

e Develop an HMOmanaged health care model and persuasive justification forchoosing that model for Tugu Mandiri to offer to Pertaininas PSCsPertamina retirees and active employees The model should includeorganizational arrangements between Tugu Mandiri providers and membersidentify the source of providers and specify the types of contractural arrangements that Tugu Mandiri will need to establish with those providers

f Do a financial analysis for the model developed in activities d and e above Thefinancial analysis should

Create the actuarial assumptions upon which the premium will be calculated

Create the financial assumptions upon which all financial projections willbe based

Use these assumptions to create expense revenue and profitloss statements

Relate these to levels of enrollment in the process of doing a breakeven analysis

Develop a capital budget

Do a breakeven analysis

29

Create a financial model (funds flow analysis) which tracks sources and

uses of funds

3 Operational Plan of Action

Develop a network chart for the pre-operational and operational phases of themodels proposed in Section 2 The network chart should use a PERTGantt orsimilar networking technique to plan activities over time in critical sequence andcontain clear instructions for clarification and interpretation

Activities

a Recommend an appropriate organizational structure for the proposed HMOmanaged health care model

b Develop a recruitment and staffing plan which identifies the numbers and types of personnel that must be hired and job specifications for each managerial position

c Develop a training and manpower development plan This plan should bebased upon the management arrangements that Tugu Mandiri will use tooperate the HMO during the pre-operations and start-up phases If thedecision is made to subcontract management to a third party training can bedone on site If Tugu Mandiri decides to operate the HMO itself the trainingplan should identify the types of personnel to be trained areas of training and the format and sites of training

d Design a detailed benefit package with service units

e Design a structure and configuration for the health service delivery system tobe used in the HMO including the contractural arrangements which must bemade with the providers

f Identify the management systems which must be developed e MISutilization finance personnel etc and suggest components of the different systems

g Determine the hardware and software requirements which will be needed to support the management systems

h Suggest the technical assistance requirements which will be needed to operationalize the HMO

30

AI)DITION TO SCO13E OF WORKTO GATHER NEEDED INFORMATION AND BUDGET FOR DATA COLLECTION PHASE

Assignment and Statement of the Problem

The development of a formal information system and data collection process isrequired to support the conduct of a comprehensive feasibility study which ifpossible will contain a business plan and operational plan of action for thedevelopment of a Tugu Mandiri Health Maintenance Organization (HMO)managedhealth care financing and delivery system It is clear from the work of the consultingteam--including meetings review of available documents and other observations-shythat the information needed for completion of the original Scope of Work is not yetavailable to us or usable for this project Adding this process to the original Scope ofWork will generate the required utilization data financial data provider and otherinformation needed to accomplish the original Scope of Work Therefore we arecompelled to recommend to the management of this project--USAID the Ministry ofHealth and Tugu Mandiri--that a formal data collection process be added andcompleted prior to preparation of a feasibility study report and if feasible a businessplan and operational plan of action pursuant to the original Scope of Work

We recognize that this data collection process was not budgeted in the original Scopeof Work and that it will substantially increase the cost of this project In feedback onour draft exit report ISTI and USAID expressed concern over this increased costAccordingly we submit three proposals for the data collection effort--

A Collecting needed data from all seven Pertamina regions and Jakartaheadquarters as well as from all seventeen PSCs

B Collecting needed data from four representative Pertamina operating regionsfrom Jakarta headquarters and from three to five representative PSCs Fromthis data the actuary and we will be able to extrapolate and prepare actuarialprojections evaluate feasibility and if feasible prepare a business plan andoperational plan of action for the full target market

C Collecting needed data from one Pertamina region and PSC operating in thatregion from which actuarial projections the feasibility study and if feasible thebusiness plan and operating plan will be completed for that region That regionwill serve as a pilot from which experience can be evaluated If the pilot provessuccessful expansion to other areas can be planned

Of the alternative approaches listed above we recommend alternative B Thesampling methodology used in alternative B will permit the actuary andconsultants to extrapolate from the representative areas to assess overall feasibilityand project the business and operating plan for all target markets throughout thearchipelago Alternative A is less cost effective than alternative B We do notrecommend alternative C because it will not permit evaluation of the alternativehealth care financing and delivery system for the entire target markets in a timelyfashion because it could result in employeeretiree health benefits in the pilot regionthat differ from those in other regions and because the results of implementationwill not be significant with respect to national cost increase trends The following outlines suggested additions to the original Scope of Work which wewill complete within six working weeks in Indonesia after completion of the data collection and actuarys report

31

I Work Required

A Obtain support of Ministry of Health and Pertamina (BKKAUmumDirector and Finance in regions and headquarters)

B Identify sources of needed information and staff resources for data orientation sessions

C Authorizedirect gathering and provision of information

D Format data for collection

E Processassemble data

F Consolidatecompile data for actuary and other consultant reports

G Review health facilities and data systems

Ii Resources Required

A Core team -Tugu Mandiri Nanang Iskandar MD Rochwan Muthalib

Pertamina Soejadi

ISTI Elliot Wolff James Barnes

Actuary R Pratolo

Tax Istama Siddharta

Legal Lione Gunawan Hans Schaefer

B Additional Staff

1 Two financial datasystems managers -USA

2 Computer programmer- Indonesia (loan)

3 Translator - Indonesia (loan)

C Other resources

1 Lap computer for word processing and financial analysisspread sheets

2 Second PC for data consolidation and statementreport writing

3 Expeuses for visits to Jakarta and the regions for meetings with theteam Pertamina and the production sharing contractors ($1000 fromJakarta per person per visit to country)

4 Expenses for travel to Indonesia from USA ($3000)

32

Three trips each for Wolff Barnes and four trips for two financialsystems managers

5 Expenses for orientation programs (bring 6 P -tamina healthfinancestaff from three regions to Jakarta for one we and meet PSCrepresentatives in Jakarta)

6 Expenses for actuarys assistance in data gathering as well as

actuarial report and business plan

7 Expenses for translator - approximately 20 days

8 Additional minor participation by attorney tax advisor and their coordinator

D Timing

1 Orientationformatting data by Wolff Barnes two financialsystems managers (2 months each) actuary translator and computer programmer

2 Follow-up by Wolff and Barnes - 2 months each Two financialsystems managers actuary and computer programmer -3 months each

3 Completion - 10 months

BUI)GET FOR DATA COLLECTION PHASE

The fees and other budget items reflected here are based on a comprehensive datacollection process of approximately ten months duration which we expect to berequired in light of our progress with the project team during our MarchApril visitThe costs reflected and the suggested time frame are based on accomplishing thedata collection for alternative B previously cited The expatriate consulting teamconsists of Dr James G Barnes Mr Elliot Wolff and two information systemsdataspecialists We anticipate that over the ten month period there will be three tripseach to Indonesia by Dr Barnes and Mr Wolff and four trips by the informationsystemsdata specialists In an effort to accomplish as much of the front endrequirements as possible the first trip by Dr Barnes and Mr Wolff is based onthirty-six (36) days with the remaining two trips at twenty-four (24) days each for atotal of eighty-four (84) days The information systemsdata specialists time incountry is based on four trips of thrity-six days each for a total of 144 days The chart on the following page reflects these costs

33

Budget for Data Collection Phase

Consultant Non-Govt AUSAIDISTI Amount to be Total

Fees 1

Barnes

Wolff

Data Analyst

Data Analyst

Computer Programmer Interpreter

Total

84

84

144

144

40

20

396

Days Daily Rate 2

$61423

$61423

$35422

$35522

-------------

NA

Paid by Client 3

$5159500

$5159500

$5100800

$5100800

--------------

$20520600

DailyPaid

$28578

$28578

$28578

$28578

$ 4000

$ 2000

NA

byUSAID

$ 2400552

$ 2400552

$ 4115232

$ 4115232

$ 160000

$ 40000

$13231568

Compensashytion

7560052

$ 7560052

$ 9216032

$ 9216032

$ 160000

$ 40000

$33752168

Budget for Data Collection Phase Cont

Per Trip Costs Aont Travel

Expenses Number of

Trips Non-govtdaily Rate

Amount to bePaid by Client

P IncludingpInter-island

Amounttbe Paid by

TotalTravelCosts

Travel Barnes 3 NA ------------------- $400000 $1200000 $1200000 Wolff 3 NA ------------------- $400000 $1200000 $1200000 Data Analyst 4 NA ------------------- $400000 $1600000 $1600000

Ln Data Analyst 4 Computer ----------------Programmer

NA NA

--------------------------------------

$400000 $200000

$1600000 $ 200000

$1600000 $ 200000

Interpreter Total

----------------14

NA

NA -------------------

-------------------

$400000 NA

$ 400000 $6200000

$ 400000 $6200000

Budget for Data Collection Phase Cont

Per Diem Non-govt Amount to be Amount to be Total PerRates Days Daily Rate Paid by Client Rate Paid by Diem CostsUSAID

Barnes 84 NA --------------- $10800 $ 907200 $ 907200 Wolff 84 NA --------------- $10800 $ 907200 $ 907200 Data Analyst 144 NA --------------- $10800 $1555200 $1555200 Data Analyst 144 NA -------------- $10800 $1555200 $1555200 Computer 40 NA -------------- NAProgrammer

Interpreter 20 NA NA Total Per NA NA $4924800 $4924800

0 Diem

Total Costs -DataCollection $20520600 $24356368 $44876968 Phase

1 Actuarys assistance in the data collection effort is und an existing contract between R Pratolo and ISTI the details of which we are not aware

2 The amount listed in this column shows the daily consultng rate that Pertamina Tugu Mandiri and the Ministry of Health will need topay in excess of the rate paid by USAIDISTI in order for the consultants to complete this project

3 The amount listed in this column shows the total amount to be paid by Pertamina Tugu Mandiri and the Ministry ofHealth per listedconsultant for the stated number of consulting days

__ __ __ __ __ _ _ ___

_______ ____

__

DATA COLLECTION FOR

REVIEW OF PERTAMINA AND PRODUCTION SHARING

COMPANY HEALTH BENEFITS AND

HEALTH CARE DELIVERY SYSTEMS

BENEFIT BENEFICIARY AND GENERAL INFORMATION NEEDED

I BENIEFIT AND BEfJEFICIARY I-rOFMATION

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HOSPITAL F 41LIAL Is-4rA ELEMENTS NEEDED

MONTHLY AVG ADMISSIONS ED DAYS AVERAGE AVERAGE COST AEAGE AERAGE

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APPENDIX V

REVISED SCOPE OF WORK AND BUI)GETI

This Revised Scope of Work differs from the original Scope of Work in that it adds adata collection component which is essential in order for the subsequent FeasibilityStudy and BusinessOperational Plan to be based on reliable facts The stepsinherent in the data collection pohase are further elaborated in the Addition to Scopeof Work to Gather Needed Information which is attached to this Appendix

Assigrnment

The consultant team will assist PT Tugu Mandiri to assemble necessaryinformation conduct a feasibility assessment and if feasible prepare a businessplan and nn operational plan of action for Tugu Mandiri to establish a healthmaintenance organizatiuJdmanaged health care product line of business

Expacted Outputs

1 Data Collection

This essential first phase should provide orientation education and retrievalassistance to the regional and headquarters Finance and Umum Departments ofPertamina and the administrative and field offices of the Production SharingContractors (PSCs) so that the information needed for actuarial projections andbusinessoperational planning is available to the project team as soon as possibleThis information is listed in Appendix III to the 17 April 1989 Consultants ExitProgress Report

Activities

a Prepare a presentation including written materials and data output formatsto orient and educate departmental staff responsible for needed information

b Assist in computer software development to facilitate extraction of neededinformation available in computer databases through Indonesian national programmer assigned to team part-time

c Answer questions and work with departmental staff in regions and PertaminaheadquartersPSC administrative offices to retrieve needed information

d Assemble information received from all sources and compile it for actuarialand planning purposes including computer software programming and datainput to facilitate those efforts

2 Feasibility Assessment and Business Plan

This document should present the organizational arrangements and afinancialbusiness analysis for the two options which Tugu Mandiri will pursue to develop an HMO health insurance product The two options are

To establish an HMO wih Pertaminas Production Sharing Contractors (i-Cs) Pertamina retirees and veterans as the primary markets

28

To establish an HMO with Pertaminas 50000 active employees and theirdependents as a second market Because most available health careutilization and cost data for retirees is not separated from the correspondingdata for active employees and because health services are not budgeted foreach group separately the effects of separating the two groups should beshown side by side

Activities

a Review the existing business plan developed by REACH and assess theorganizational model which has been proposed in that report for the HMOwith Pertamina employees as the primary market

b Work with domestic consultants to establish the legal feasibility for TuguMandiri to offer an HMOmanaged health care product for the target markets of this feasibility study

c Work with domestic consultants to ascertain the tax consequences ofestablishing an HMOmanaged health care product for both Tugu Mandiriand its prospective clients

d If feasible develop a persuasive convincing justification for Tugu Mandiri todevelop an HMOmanaged health care programand identify the capitalrequirements which the HMO will contain To the extent advisable theconsultants will use Option ll-E in the REACH report as a model

e Develop an HMOmanaged health care model and persuasive justification forchoosing that model for Tugu Mandiri to offer to Pertaininas PSCsPertamina retirees and active employees The model should includeorganizational arrangements between Tugu Mandiri providers and membersidentify the source of providers and specify the types of contractural arrangements that Tugu Mandiri will need to establish with those providers

f Do a financial analysis for the model developed in activities d and e above Thefinancial analysis should

Create the actuarial assumptions upon which the premium will be calculated

Create the financial assumptions upon which all financial projections willbe based

Use these assumptions to create expense revenue and profitloss statements

Relate these to levels of enrollment in the process of doing a breakeven analysis

Develop a capital budget

Do a breakeven analysis

29

Create a financial model (funds flow analysis) which tracks sources and

uses of funds

3 Operational Plan of Action

Develop a network chart for the pre-operational and operational phases of themodels proposed in Section 2 The network chart should use a PERTGantt orsimilar networking technique to plan activities over time in critical sequence andcontain clear instructions for clarification and interpretation

Activities

a Recommend an appropriate organizational structure for the proposed HMOmanaged health care model

b Develop a recruitment and staffing plan which identifies the numbers and types of personnel that must be hired and job specifications for each managerial position

c Develop a training and manpower development plan This plan should bebased upon the management arrangements that Tugu Mandiri will use tooperate the HMO during the pre-operations and start-up phases If thedecision is made to subcontract management to a third party training can bedone on site If Tugu Mandiri decides to operate the HMO itself the trainingplan should identify the types of personnel to be trained areas of training and the format and sites of training

d Design a detailed benefit package with service units

e Design a structure and configuration for the health service delivery system tobe used in the HMO including the contractural arrangements which must bemade with the providers

f Identify the management systems which must be developed e MISutilization finance personnel etc and suggest components of the different systems

g Determine the hardware and software requirements which will be needed to support the management systems

h Suggest the technical assistance requirements which will be needed to operationalize the HMO

30

AI)DITION TO SCO13E OF WORKTO GATHER NEEDED INFORMATION AND BUDGET FOR DATA COLLECTION PHASE

Assignment and Statement of the Problem

The development of a formal information system and data collection process isrequired to support the conduct of a comprehensive feasibility study which ifpossible will contain a business plan and operational plan of action for thedevelopment of a Tugu Mandiri Health Maintenance Organization (HMO)managedhealth care financing and delivery system It is clear from the work of the consultingteam--including meetings review of available documents and other observations-shythat the information needed for completion of the original Scope of Work is not yetavailable to us or usable for this project Adding this process to the original Scope ofWork will generate the required utilization data financial data provider and otherinformation needed to accomplish the original Scope of Work Therefore we arecompelled to recommend to the management of this project--USAID the Ministry ofHealth and Tugu Mandiri--that a formal data collection process be added andcompleted prior to preparation of a feasibility study report and if feasible a businessplan and operational plan of action pursuant to the original Scope of Work

We recognize that this data collection process was not budgeted in the original Scopeof Work and that it will substantially increase the cost of this project In feedback onour draft exit report ISTI and USAID expressed concern over this increased costAccordingly we submit three proposals for the data collection effort--

A Collecting needed data from all seven Pertamina regions and Jakartaheadquarters as well as from all seventeen PSCs

B Collecting needed data from four representative Pertamina operating regionsfrom Jakarta headquarters and from three to five representative PSCs Fromthis data the actuary and we will be able to extrapolate and prepare actuarialprojections evaluate feasibility and if feasible prepare a business plan andoperational plan of action for the full target market

C Collecting needed data from one Pertamina region and PSC operating in thatregion from which actuarial projections the feasibility study and if feasible thebusiness plan and operating plan will be completed for that region That regionwill serve as a pilot from which experience can be evaluated If the pilot provessuccessful expansion to other areas can be planned

Of the alternative approaches listed above we recommend alternative B Thesampling methodology used in alternative B will permit the actuary andconsultants to extrapolate from the representative areas to assess overall feasibilityand project the business and operating plan for all target markets throughout thearchipelago Alternative A is less cost effective than alternative B We do notrecommend alternative C because it will not permit evaluation of the alternativehealth care financing and delivery system for the entire target markets in a timelyfashion because it could result in employeeretiree health benefits in the pilot regionthat differ from those in other regions and because the results of implementationwill not be significant with respect to national cost increase trends The following outlines suggested additions to the original Scope of Work which wewill complete within six working weeks in Indonesia after completion of the data collection and actuarys report

31

I Work Required

A Obtain support of Ministry of Health and Pertamina (BKKAUmumDirector and Finance in regions and headquarters)

B Identify sources of needed information and staff resources for data orientation sessions

C Authorizedirect gathering and provision of information

D Format data for collection

E Processassemble data

F Consolidatecompile data for actuary and other consultant reports

G Review health facilities and data systems

Ii Resources Required

A Core team -Tugu Mandiri Nanang Iskandar MD Rochwan Muthalib

Pertamina Soejadi

ISTI Elliot Wolff James Barnes

Actuary R Pratolo

Tax Istama Siddharta

Legal Lione Gunawan Hans Schaefer

B Additional Staff

1 Two financial datasystems managers -USA

2 Computer programmer- Indonesia (loan)

3 Translator - Indonesia (loan)

C Other resources

1 Lap computer for word processing and financial analysisspread sheets

2 Second PC for data consolidation and statementreport writing

3 Expeuses for visits to Jakarta and the regions for meetings with theteam Pertamina and the production sharing contractors ($1000 fromJakarta per person per visit to country)

4 Expenses for travel to Indonesia from USA ($3000)

32

Three trips each for Wolff Barnes and four trips for two financialsystems managers

5 Expenses for orientation programs (bring 6 P -tamina healthfinancestaff from three regions to Jakarta for one we and meet PSCrepresentatives in Jakarta)

6 Expenses for actuarys assistance in data gathering as well as

actuarial report and business plan

7 Expenses for translator - approximately 20 days

8 Additional minor participation by attorney tax advisor and their coordinator

D Timing

1 Orientationformatting data by Wolff Barnes two financialsystems managers (2 months each) actuary translator and computer programmer

2 Follow-up by Wolff and Barnes - 2 months each Two financialsystems managers actuary and computer programmer -3 months each

3 Completion - 10 months

BUI)GET FOR DATA COLLECTION PHASE

The fees and other budget items reflected here are based on a comprehensive datacollection process of approximately ten months duration which we expect to berequired in light of our progress with the project team during our MarchApril visitThe costs reflected and the suggested time frame are based on accomplishing thedata collection for alternative B previously cited The expatriate consulting teamconsists of Dr James G Barnes Mr Elliot Wolff and two information systemsdataspecialists We anticipate that over the ten month period there will be three tripseach to Indonesia by Dr Barnes and Mr Wolff and four trips by the informationsystemsdata specialists In an effort to accomplish as much of the front endrequirements as possible the first trip by Dr Barnes and Mr Wolff is based onthirty-six (36) days with the remaining two trips at twenty-four (24) days each for atotal of eighty-four (84) days The information systemsdata specialists time incountry is based on four trips of thrity-six days each for a total of 144 days The chart on the following page reflects these costs

33

Budget for Data Collection Phase

Consultant Non-Govt AUSAIDISTI Amount to be Total

Fees 1

Barnes

Wolff

Data Analyst

Data Analyst

Computer Programmer Interpreter

Total

84

84

144

144

40

20

396

Days Daily Rate 2

$61423

$61423

$35422

$35522

-------------

NA

Paid by Client 3

$5159500

$5159500

$5100800

$5100800

--------------

$20520600

DailyPaid

$28578

$28578

$28578

$28578

$ 4000

$ 2000

NA

byUSAID

$ 2400552

$ 2400552

$ 4115232

$ 4115232

$ 160000

$ 40000

$13231568

Compensashytion

7560052

$ 7560052

$ 9216032

$ 9216032

$ 160000

$ 40000

$33752168

Budget for Data Collection Phase Cont

Per Trip Costs Aont Travel

Expenses Number of

Trips Non-govtdaily Rate

Amount to bePaid by Client

P IncludingpInter-island

Amounttbe Paid by

TotalTravelCosts

Travel Barnes 3 NA ------------------- $400000 $1200000 $1200000 Wolff 3 NA ------------------- $400000 $1200000 $1200000 Data Analyst 4 NA ------------------- $400000 $1600000 $1600000

Ln Data Analyst 4 Computer ----------------Programmer

NA NA

--------------------------------------

$400000 $200000

$1600000 $ 200000

$1600000 $ 200000

Interpreter Total

----------------14

NA

NA -------------------

-------------------

$400000 NA

$ 400000 $6200000

$ 400000 $6200000

Budget for Data Collection Phase Cont

Per Diem Non-govt Amount to be Amount to be Total PerRates Days Daily Rate Paid by Client Rate Paid by Diem CostsUSAID

Barnes 84 NA --------------- $10800 $ 907200 $ 907200 Wolff 84 NA --------------- $10800 $ 907200 $ 907200 Data Analyst 144 NA --------------- $10800 $1555200 $1555200 Data Analyst 144 NA -------------- $10800 $1555200 $1555200 Computer 40 NA -------------- NAProgrammer

Interpreter 20 NA NA Total Per NA NA $4924800 $4924800

0 Diem

Total Costs -DataCollection $20520600 $24356368 $44876968 Phase

1 Actuarys assistance in the data collection effort is und an existing contract between R Pratolo and ISTI the details of which we are not aware

2 The amount listed in this column shows the daily consultng rate that Pertamina Tugu Mandiri and the Ministry of Health will need topay in excess of the rate paid by USAIDISTI in order for the consultants to complete this project

3 The amount listed in this column shows the total amount to be paid by Pertamina Tugu Mandiri and the Ministry ofHealth per listedconsultant for the stated number of consulting days

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MONTHLY AVG ADMISSIONS ED DAYS AVERAGE AVERAGE COST AEAGE AERAGE

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PAYMENTS

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OTHER RELE-IT INFORMATIONJS

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APPENDIX V

REVISED SCOPE OF WORK AND BUI)GETI

This Revised Scope of Work differs from the original Scope of Work in that it adds adata collection component which is essential in order for the subsequent FeasibilityStudy and BusinessOperational Plan to be based on reliable facts The stepsinherent in the data collection pohase are further elaborated in the Addition to Scopeof Work to Gather Needed Information which is attached to this Appendix

Assigrnment

The consultant team will assist PT Tugu Mandiri to assemble necessaryinformation conduct a feasibility assessment and if feasible prepare a businessplan and nn operational plan of action for Tugu Mandiri to establish a healthmaintenance organizatiuJdmanaged health care product line of business

Expacted Outputs

1 Data Collection

This essential first phase should provide orientation education and retrievalassistance to the regional and headquarters Finance and Umum Departments ofPertamina and the administrative and field offices of the Production SharingContractors (PSCs) so that the information needed for actuarial projections andbusinessoperational planning is available to the project team as soon as possibleThis information is listed in Appendix III to the 17 April 1989 Consultants ExitProgress Report

Activities

a Prepare a presentation including written materials and data output formatsto orient and educate departmental staff responsible for needed information

b Assist in computer software development to facilitate extraction of neededinformation available in computer databases through Indonesian national programmer assigned to team part-time

c Answer questions and work with departmental staff in regions and PertaminaheadquartersPSC administrative offices to retrieve needed information

d Assemble information received from all sources and compile it for actuarialand planning purposes including computer software programming and datainput to facilitate those efforts

2 Feasibility Assessment and Business Plan

This document should present the organizational arrangements and afinancialbusiness analysis for the two options which Tugu Mandiri will pursue to develop an HMO health insurance product The two options are

To establish an HMO wih Pertaminas Production Sharing Contractors (i-Cs) Pertamina retirees and veterans as the primary markets

28

To establish an HMO with Pertaminas 50000 active employees and theirdependents as a second market Because most available health careutilization and cost data for retirees is not separated from the correspondingdata for active employees and because health services are not budgeted foreach group separately the effects of separating the two groups should beshown side by side

Activities

a Review the existing business plan developed by REACH and assess theorganizational model which has been proposed in that report for the HMOwith Pertamina employees as the primary market

b Work with domestic consultants to establish the legal feasibility for TuguMandiri to offer an HMOmanaged health care product for the target markets of this feasibility study

c Work with domestic consultants to ascertain the tax consequences ofestablishing an HMOmanaged health care product for both Tugu Mandiriand its prospective clients

d If feasible develop a persuasive convincing justification for Tugu Mandiri todevelop an HMOmanaged health care programand identify the capitalrequirements which the HMO will contain To the extent advisable theconsultants will use Option ll-E in the REACH report as a model

e Develop an HMOmanaged health care model and persuasive justification forchoosing that model for Tugu Mandiri to offer to Pertaininas PSCsPertamina retirees and active employees The model should includeorganizational arrangements between Tugu Mandiri providers and membersidentify the source of providers and specify the types of contractural arrangements that Tugu Mandiri will need to establish with those providers

f Do a financial analysis for the model developed in activities d and e above Thefinancial analysis should

Create the actuarial assumptions upon which the premium will be calculated

Create the financial assumptions upon which all financial projections willbe based

Use these assumptions to create expense revenue and profitloss statements

Relate these to levels of enrollment in the process of doing a breakeven analysis

Develop a capital budget

Do a breakeven analysis

29

Create a financial model (funds flow analysis) which tracks sources and

uses of funds

3 Operational Plan of Action

Develop a network chart for the pre-operational and operational phases of themodels proposed in Section 2 The network chart should use a PERTGantt orsimilar networking technique to plan activities over time in critical sequence andcontain clear instructions for clarification and interpretation

Activities

a Recommend an appropriate organizational structure for the proposed HMOmanaged health care model

b Develop a recruitment and staffing plan which identifies the numbers and types of personnel that must be hired and job specifications for each managerial position

c Develop a training and manpower development plan This plan should bebased upon the management arrangements that Tugu Mandiri will use tooperate the HMO during the pre-operations and start-up phases If thedecision is made to subcontract management to a third party training can bedone on site If Tugu Mandiri decides to operate the HMO itself the trainingplan should identify the types of personnel to be trained areas of training and the format and sites of training

d Design a detailed benefit package with service units

e Design a structure and configuration for the health service delivery system tobe used in the HMO including the contractural arrangements which must bemade with the providers

f Identify the management systems which must be developed e MISutilization finance personnel etc and suggest components of the different systems

g Determine the hardware and software requirements which will be needed to support the management systems

h Suggest the technical assistance requirements which will be needed to operationalize the HMO

30

AI)DITION TO SCO13E OF WORKTO GATHER NEEDED INFORMATION AND BUDGET FOR DATA COLLECTION PHASE

Assignment and Statement of the Problem

The development of a formal information system and data collection process isrequired to support the conduct of a comprehensive feasibility study which ifpossible will contain a business plan and operational plan of action for thedevelopment of a Tugu Mandiri Health Maintenance Organization (HMO)managedhealth care financing and delivery system It is clear from the work of the consultingteam--including meetings review of available documents and other observations-shythat the information needed for completion of the original Scope of Work is not yetavailable to us or usable for this project Adding this process to the original Scope ofWork will generate the required utilization data financial data provider and otherinformation needed to accomplish the original Scope of Work Therefore we arecompelled to recommend to the management of this project--USAID the Ministry ofHealth and Tugu Mandiri--that a formal data collection process be added andcompleted prior to preparation of a feasibility study report and if feasible a businessplan and operational plan of action pursuant to the original Scope of Work

We recognize that this data collection process was not budgeted in the original Scopeof Work and that it will substantially increase the cost of this project In feedback onour draft exit report ISTI and USAID expressed concern over this increased costAccordingly we submit three proposals for the data collection effort--

A Collecting needed data from all seven Pertamina regions and Jakartaheadquarters as well as from all seventeen PSCs

B Collecting needed data from four representative Pertamina operating regionsfrom Jakarta headquarters and from three to five representative PSCs Fromthis data the actuary and we will be able to extrapolate and prepare actuarialprojections evaluate feasibility and if feasible prepare a business plan andoperational plan of action for the full target market

C Collecting needed data from one Pertamina region and PSC operating in thatregion from which actuarial projections the feasibility study and if feasible thebusiness plan and operating plan will be completed for that region That regionwill serve as a pilot from which experience can be evaluated If the pilot provessuccessful expansion to other areas can be planned

Of the alternative approaches listed above we recommend alternative B Thesampling methodology used in alternative B will permit the actuary andconsultants to extrapolate from the representative areas to assess overall feasibilityand project the business and operating plan for all target markets throughout thearchipelago Alternative A is less cost effective than alternative B We do notrecommend alternative C because it will not permit evaluation of the alternativehealth care financing and delivery system for the entire target markets in a timelyfashion because it could result in employeeretiree health benefits in the pilot regionthat differ from those in other regions and because the results of implementationwill not be significant with respect to national cost increase trends The following outlines suggested additions to the original Scope of Work which wewill complete within six working weeks in Indonesia after completion of the data collection and actuarys report

31

I Work Required

A Obtain support of Ministry of Health and Pertamina (BKKAUmumDirector and Finance in regions and headquarters)

B Identify sources of needed information and staff resources for data orientation sessions

C Authorizedirect gathering and provision of information

D Format data for collection

E Processassemble data

F Consolidatecompile data for actuary and other consultant reports

G Review health facilities and data systems

Ii Resources Required

A Core team -Tugu Mandiri Nanang Iskandar MD Rochwan Muthalib

Pertamina Soejadi

ISTI Elliot Wolff James Barnes

Actuary R Pratolo

Tax Istama Siddharta

Legal Lione Gunawan Hans Schaefer

B Additional Staff

1 Two financial datasystems managers -USA

2 Computer programmer- Indonesia (loan)

3 Translator - Indonesia (loan)

C Other resources

1 Lap computer for word processing and financial analysisspread sheets

2 Second PC for data consolidation and statementreport writing

3 Expeuses for visits to Jakarta and the regions for meetings with theteam Pertamina and the production sharing contractors ($1000 fromJakarta per person per visit to country)

4 Expenses for travel to Indonesia from USA ($3000)

32

Three trips each for Wolff Barnes and four trips for two financialsystems managers

5 Expenses for orientation programs (bring 6 P -tamina healthfinancestaff from three regions to Jakarta for one we and meet PSCrepresentatives in Jakarta)

6 Expenses for actuarys assistance in data gathering as well as

actuarial report and business plan

7 Expenses for translator - approximately 20 days

8 Additional minor participation by attorney tax advisor and their coordinator

D Timing

1 Orientationformatting data by Wolff Barnes two financialsystems managers (2 months each) actuary translator and computer programmer

2 Follow-up by Wolff and Barnes - 2 months each Two financialsystems managers actuary and computer programmer -3 months each

3 Completion - 10 months

BUI)GET FOR DATA COLLECTION PHASE

The fees and other budget items reflected here are based on a comprehensive datacollection process of approximately ten months duration which we expect to berequired in light of our progress with the project team during our MarchApril visitThe costs reflected and the suggested time frame are based on accomplishing thedata collection for alternative B previously cited The expatriate consulting teamconsists of Dr James G Barnes Mr Elliot Wolff and two information systemsdataspecialists We anticipate that over the ten month period there will be three tripseach to Indonesia by Dr Barnes and Mr Wolff and four trips by the informationsystemsdata specialists In an effort to accomplish as much of the front endrequirements as possible the first trip by Dr Barnes and Mr Wolff is based onthirty-six (36) days with the remaining two trips at twenty-four (24) days each for atotal of eighty-four (84) days The information systemsdata specialists time incountry is based on four trips of thrity-six days each for a total of 144 days The chart on the following page reflects these costs

33

Budget for Data Collection Phase

Consultant Non-Govt AUSAIDISTI Amount to be Total

Fees 1

Barnes

Wolff

Data Analyst

Data Analyst

Computer Programmer Interpreter

Total

84

84

144

144

40

20

396

Days Daily Rate 2

$61423

$61423

$35422

$35522

-------------

NA

Paid by Client 3

$5159500

$5159500

$5100800

$5100800

--------------

$20520600

DailyPaid

$28578

$28578

$28578

$28578

$ 4000

$ 2000

NA

byUSAID

$ 2400552

$ 2400552

$ 4115232

$ 4115232

$ 160000

$ 40000

$13231568

Compensashytion

7560052

$ 7560052

$ 9216032

$ 9216032

$ 160000

$ 40000

$33752168

Budget for Data Collection Phase Cont

Per Trip Costs Aont Travel

Expenses Number of

Trips Non-govtdaily Rate

Amount to bePaid by Client

P IncludingpInter-island

Amounttbe Paid by

TotalTravelCosts

Travel Barnes 3 NA ------------------- $400000 $1200000 $1200000 Wolff 3 NA ------------------- $400000 $1200000 $1200000 Data Analyst 4 NA ------------------- $400000 $1600000 $1600000

Ln Data Analyst 4 Computer ----------------Programmer

NA NA

--------------------------------------

$400000 $200000

$1600000 $ 200000

$1600000 $ 200000

Interpreter Total

----------------14

NA

NA -------------------

-------------------

$400000 NA

$ 400000 $6200000

$ 400000 $6200000

Budget for Data Collection Phase Cont

Per Diem Non-govt Amount to be Amount to be Total PerRates Days Daily Rate Paid by Client Rate Paid by Diem CostsUSAID

Barnes 84 NA --------------- $10800 $ 907200 $ 907200 Wolff 84 NA --------------- $10800 $ 907200 $ 907200 Data Analyst 144 NA --------------- $10800 $1555200 $1555200 Data Analyst 144 NA -------------- $10800 $1555200 $1555200 Computer 40 NA -------------- NAProgrammer

Interpreter 20 NA NA Total Per NA NA $4924800 $4924800

0 Diem

Total Costs -DataCollection $20520600 $24356368 $44876968 Phase

1 Actuarys assistance in the data collection effort is und an existing contract between R Pratolo and ISTI the details of which we are not aware

2 The amount listed in this column shows the daily consultng rate that Pertamina Tugu Mandiri and the Ministry of Health will need topay in excess of the rate paid by USAIDISTI in order for the consultants to complete this project

3 The amount listed in this column shows the total amount to be paid by Pertamina Tugu Mandiri and the Ministry ofHealth per listedconsultant for the stated number of consulting days

OATA COLLECTION FOR REVIEW OF PERTAMIrJA AND FRODUCTICiJ SHARI3COMPANY HEALTH EEN - )TS AND HEALTH CARE DELIVERY SvSTEl-IS

HOSPITAL F 41LIAL Is-4rA ELEMENTS NEEDED

MONTHLY AVG ADMISSIONS ED DAYS AVERAGE AVERAGE COST AEAGE AERAGE

REGION OPERATING COSTS

PAYMENTS

I000 1000 LENGTHSTA OF DISCHARGE OUT PATIENT

V IS ITSENEFICIARYYEAR TOTAL COST

FEOUIENTDIAGNOSEZ

1IOTUAFI JOPTH SUMATFA I ERTAM FSC FERTAm PSC FERTAMl PSCj PERTAm FSC IFER TAt- FSC F ERTAMI

SC P TAZ- PSC

TOTAL EACH OWNEO -SFITAL EACH CCJTRATED HOSPITAL

OTHER RELE-IT INFORMATIONJS

I SOUTH SI_ATF-TOTAL -

EACH OW~NED 3PITAL

EACH CONTFAZTED HOSPITAL OTHER FRELEv-T INrFORMAT IONS8iI

I -

TOTAL

EACH OWJED - -FITALEACH ______COtITRTED

H3SPITAL

OTHER FELE-T IFaFMATIONSa

V CIREEO-EACH LwtED rSP=FT-L EACH CONT-TD-3F ITAL

OTHER FELE-jT 1IFORMATIOrJsV CILACAP I TA O = ITAL_____________TAT 40SPD~3

OTHER FELELNT INFORMATIONS I

TOT AL VII SOFONG

EACH OwJED -)SPITALEACH CONTFPTED t-iOSPITAL OTHER FELE- jT IlrFORMATIONS

JVIII JAAIJAIART ITOTAL I

EACH OwNREDEACH HOSPITALCOtNTF4TEDOTHER HOSPITALPELEV-NT INFORMATIONi

IX AOwJEDTOTAL HOSPITALS EO AC OT F-TALEDtED HOSPITAL

OTHER RELEANT ItIFORMATIONSCONIFTEDHOSPITALSO

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APPENDIX V

REVISED SCOPE OF WORK AND BUI)GETI

This Revised Scope of Work differs from the original Scope of Work in that it adds adata collection component which is essential in order for the subsequent FeasibilityStudy and BusinessOperational Plan to be based on reliable facts The stepsinherent in the data collection pohase are further elaborated in the Addition to Scopeof Work to Gather Needed Information which is attached to this Appendix

Assigrnment

The consultant team will assist PT Tugu Mandiri to assemble necessaryinformation conduct a feasibility assessment and if feasible prepare a businessplan and nn operational plan of action for Tugu Mandiri to establish a healthmaintenance organizatiuJdmanaged health care product line of business

Expacted Outputs

1 Data Collection

This essential first phase should provide orientation education and retrievalassistance to the regional and headquarters Finance and Umum Departments ofPertamina and the administrative and field offices of the Production SharingContractors (PSCs) so that the information needed for actuarial projections andbusinessoperational planning is available to the project team as soon as possibleThis information is listed in Appendix III to the 17 April 1989 Consultants ExitProgress Report

Activities

a Prepare a presentation including written materials and data output formatsto orient and educate departmental staff responsible for needed information

b Assist in computer software development to facilitate extraction of neededinformation available in computer databases through Indonesian national programmer assigned to team part-time

c Answer questions and work with departmental staff in regions and PertaminaheadquartersPSC administrative offices to retrieve needed information

d Assemble information received from all sources and compile it for actuarialand planning purposes including computer software programming and datainput to facilitate those efforts

2 Feasibility Assessment and Business Plan

This document should present the organizational arrangements and afinancialbusiness analysis for the two options which Tugu Mandiri will pursue to develop an HMO health insurance product The two options are

To establish an HMO wih Pertaminas Production Sharing Contractors (i-Cs) Pertamina retirees and veterans as the primary markets

28

To establish an HMO with Pertaminas 50000 active employees and theirdependents as a second market Because most available health careutilization and cost data for retirees is not separated from the correspondingdata for active employees and because health services are not budgeted foreach group separately the effects of separating the two groups should beshown side by side

Activities

a Review the existing business plan developed by REACH and assess theorganizational model which has been proposed in that report for the HMOwith Pertamina employees as the primary market

b Work with domestic consultants to establish the legal feasibility for TuguMandiri to offer an HMOmanaged health care product for the target markets of this feasibility study

c Work with domestic consultants to ascertain the tax consequences ofestablishing an HMOmanaged health care product for both Tugu Mandiriand its prospective clients

d If feasible develop a persuasive convincing justification for Tugu Mandiri todevelop an HMOmanaged health care programand identify the capitalrequirements which the HMO will contain To the extent advisable theconsultants will use Option ll-E in the REACH report as a model

e Develop an HMOmanaged health care model and persuasive justification forchoosing that model for Tugu Mandiri to offer to Pertaininas PSCsPertamina retirees and active employees The model should includeorganizational arrangements between Tugu Mandiri providers and membersidentify the source of providers and specify the types of contractural arrangements that Tugu Mandiri will need to establish with those providers

f Do a financial analysis for the model developed in activities d and e above Thefinancial analysis should

Create the actuarial assumptions upon which the premium will be calculated

Create the financial assumptions upon which all financial projections willbe based

Use these assumptions to create expense revenue and profitloss statements

Relate these to levels of enrollment in the process of doing a breakeven analysis

Develop a capital budget

Do a breakeven analysis

29

Create a financial model (funds flow analysis) which tracks sources and

uses of funds

3 Operational Plan of Action

Develop a network chart for the pre-operational and operational phases of themodels proposed in Section 2 The network chart should use a PERTGantt orsimilar networking technique to plan activities over time in critical sequence andcontain clear instructions for clarification and interpretation

Activities

a Recommend an appropriate organizational structure for the proposed HMOmanaged health care model

b Develop a recruitment and staffing plan which identifies the numbers and types of personnel that must be hired and job specifications for each managerial position

c Develop a training and manpower development plan This plan should bebased upon the management arrangements that Tugu Mandiri will use tooperate the HMO during the pre-operations and start-up phases If thedecision is made to subcontract management to a third party training can bedone on site If Tugu Mandiri decides to operate the HMO itself the trainingplan should identify the types of personnel to be trained areas of training and the format and sites of training

d Design a detailed benefit package with service units

e Design a structure and configuration for the health service delivery system tobe used in the HMO including the contractural arrangements which must bemade with the providers

f Identify the management systems which must be developed e MISutilization finance personnel etc and suggest components of the different systems

g Determine the hardware and software requirements which will be needed to support the management systems

h Suggest the technical assistance requirements which will be needed to operationalize the HMO

30

AI)DITION TO SCO13E OF WORKTO GATHER NEEDED INFORMATION AND BUDGET FOR DATA COLLECTION PHASE

Assignment and Statement of the Problem

The development of a formal information system and data collection process isrequired to support the conduct of a comprehensive feasibility study which ifpossible will contain a business plan and operational plan of action for thedevelopment of a Tugu Mandiri Health Maintenance Organization (HMO)managedhealth care financing and delivery system It is clear from the work of the consultingteam--including meetings review of available documents and other observations-shythat the information needed for completion of the original Scope of Work is not yetavailable to us or usable for this project Adding this process to the original Scope ofWork will generate the required utilization data financial data provider and otherinformation needed to accomplish the original Scope of Work Therefore we arecompelled to recommend to the management of this project--USAID the Ministry ofHealth and Tugu Mandiri--that a formal data collection process be added andcompleted prior to preparation of a feasibility study report and if feasible a businessplan and operational plan of action pursuant to the original Scope of Work

We recognize that this data collection process was not budgeted in the original Scopeof Work and that it will substantially increase the cost of this project In feedback onour draft exit report ISTI and USAID expressed concern over this increased costAccordingly we submit three proposals for the data collection effort--

A Collecting needed data from all seven Pertamina regions and Jakartaheadquarters as well as from all seventeen PSCs

B Collecting needed data from four representative Pertamina operating regionsfrom Jakarta headquarters and from three to five representative PSCs Fromthis data the actuary and we will be able to extrapolate and prepare actuarialprojections evaluate feasibility and if feasible prepare a business plan andoperational plan of action for the full target market

C Collecting needed data from one Pertamina region and PSC operating in thatregion from which actuarial projections the feasibility study and if feasible thebusiness plan and operating plan will be completed for that region That regionwill serve as a pilot from which experience can be evaluated If the pilot provessuccessful expansion to other areas can be planned

Of the alternative approaches listed above we recommend alternative B Thesampling methodology used in alternative B will permit the actuary andconsultants to extrapolate from the representative areas to assess overall feasibilityand project the business and operating plan for all target markets throughout thearchipelago Alternative A is less cost effective than alternative B We do notrecommend alternative C because it will not permit evaluation of the alternativehealth care financing and delivery system for the entire target markets in a timelyfashion because it could result in employeeretiree health benefits in the pilot regionthat differ from those in other regions and because the results of implementationwill not be significant with respect to national cost increase trends The following outlines suggested additions to the original Scope of Work which wewill complete within six working weeks in Indonesia after completion of the data collection and actuarys report

31

I Work Required

A Obtain support of Ministry of Health and Pertamina (BKKAUmumDirector and Finance in regions and headquarters)

B Identify sources of needed information and staff resources for data orientation sessions

C Authorizedirect gathering and provision of information

D Format data for collection

E Processassemble data

F Consolidatecompile data for actuary and other consultant reports

G Review health facilities and data systems

Ii Resources Required

A Core team -Tugu Mandiri Nanang Iskandar MD Rochwan Muthalib

Pertamina Soejadi

ISTI Elliot Wolff James Barnes

Actuary R Pratolo

Tax Istama Siddharta

Legal Lione Gunawan Hans Schaefer

B Additional Staff

1 Two financial datasystems managers -USA

2 Computer programmer- Indonesia (loan)

3 Translator - Indonesia (loan)

C Other resources

1 Lap computer for word processing and financial analysisspread sheets

2 Second PC for data consolidation and statementreport writing

3 Expeuses for visits to Jakarta and the regions for meetings with theteam Pertamina and the production sharing contractors ($1000 fromJakarta per person per visit to country)

4 Expenses for travel to Indonesia from USA ($3000)

32

Three trips each for Wolff Barnes and four trips for two financialsystems managers

5 Expenses for orientation programs (bring 6 P -tamina healthfinancestaff from three regions to Jakarta for one we and meet PSCrepresentatives in Jakarta)

6 Expenses for actuarys assistance in data gathering as well as

actuarial report and business plan

7 Expenses for translator - approximately 20 days

8 Additional minor participation by attorney tax advisor and their coordinator

D Timing

1 Orientationformatting data by Wolff Barnes two financialsystems managers (2 months each) actuary translator and computer programmer

2 Follow-up by Wolff and Barnes - 2 months each Two financialsystems managers actuary and computer programmer -3 months each

3 Completion - 10 months

BUI)GET FOR DATA COLLECTION PHASE

The fees and other budget items reflected here are based on a comprehensive datacollection process of approximately ten months duration which we expect to berequired in light of our progress with the project team during our MarchApril visitThe costs reflected and the suggested time frame are based on accomplishing thedata collection for alternative B previously cited The expatriate consulting teamconsists of Dr James G Barnes Mr Elliot Wolff and two information systemsdataspecialists We anticipate that over the ten month period there will be three tripseach to Indonesia by Dr Barnes and Mr Wolff and four trips by the informationsystemsdata specialists In an effort to accomplish as much of the front endrequirements as possible the first trip by Dr Barnes and Mr Wolff is based onthirty-six (36) days with the remaining two trips at twenty-four (24) days each for atotal of eighty-four (84) days The information systemsdata specialists time incountry is based on four trips of thrity-six days each for a total of 144 days The chart on the following page reflects these costs

33

Budget for Data Collection Phase

Consultant Non-Govt AUSAIDISTI Amount to be Total

Fees 1

Barnes

Wolff

Data Analyst

Data Analyst

Computer Programmer Interpreter

Total

84

84

144

144

40

20

396

Days Daily Rate 2

$61423

$61423

$35422

$35522

-------------

NA

Paid by Client 3

$5159500

$5159500

$5100800

$5100800

--------------

$20520600

DailyPaid

$28578

$28578

$28578

$28578

$ 4000

$ 2000

NA

byUSAID

$ 2400552

$ 2400552

$ 4115232

$ 4115232

$ 160000

$ 40000

$13231568

Compensashytion

7560052

$ 7560052

$ 9216032

$ 9216032

$ 160000

$ 40000

$33752168

Budget for Data Collection Phase Cont

Per Trip Costs Aont Travel

Expenses Number of

Trips Non-govtdaily Rate

Amount to bePaid by Client

P IncludingpInter-island

Amounttbe Paid by

TotalTravelCosts

Travel Barnes 3 NA ------------------- $400000 $1200000 $1200000 Wolff 3 NA ------------------- $400000 $1200000 $1200000 Data Analyst 4 NA ------------------- $400000 $1600000 $1600000

Ln Data Analyst 4 Computer ----------------Programmer

NA NA

--------------------------------------

$400000 $200000

$1600000 $ 200000

$1600000 $ 200000

Interpreter Total

----------------14

NA

NA -------------------

-------------------

$400000 NA

$ 400000 $6200000

$ 400000 $6200000

Budget for Data Collection Phase Cont

Per Diem Non-govt Amount to be Amount to be Total PerRates Days Daily Rate Paid by Client Rate Paid by Diem CostsUSAID

Barnes 84 NA --------------- $10800 $ 907200 $ 907200 Wolff 84 NA --------------- $10800 $ 907200 $ 907200 Data Analyst 144 NA --------------- $10800 $1555200 $1555200 Data Analyst 144 NA -------------- $10800 $1555200 $1555200 Computer 40 NA -------------- NAProgrammer

Interpreter 20 NA NA Total Per NA NA $4924800 $4924800

0 Diem

Total Costs -DataCollection $20520600 $24356368 $44876968 Phase

1 Actuarys assistance in the data collection effort is und an existing contract between R Pratolo and ISTI the details of which we are not aware

2 The amount listed in this column shows the daily consultng rate that Pertamina Tugu Mandiri and the Ministry of Health will need topay in excess of the rate paid by USAIDISTI in order for the consultants to complete this project

3 The amount listed in this column shows the total amount to be paid by Pertamina Tugu Mandiri and the Ministry ofHealth per listedconsultant for the stated number of consulting days

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APPENDIX V

REVISED SCOPE OF WORK AND BUI)GETI

This Revised Scope of Work differs from the original Scope of Work in that it adds adata collection component which is essential in order for the subsequent FeasibilityStudy and BusinessOperational Plan to be based on reliable facts The stepsinherent in the data collection pohase are further elaborated in the Addition to Scopeof Work to Gather Needed Information which is attached to this Appendix

Assigrnment

The consultant team will assist PT Tugu Mandiri to assemble necessaryinformation conduct a feasibility assessment and if feasible prepare a businessplan and nn operational plan of action for Tugu Mandiri to establish a healthmaintenance organizatiuJdmanaged health care product line of business

Expacted Outputs

1 Data Collection

This essential first phase should provide orientation education and retrievalassistance to the regional and headquarters Finance and Umum Departments ofPertamina and the administrative and field offices of the Production SharingContractors (PSCs) so that the information needed for actuarial projections andbusinessoperational planning is available to the project team as soon as possibleThis information is listed in Appendix III to the 17 April 1989 Consultants ExitProgress Report

Activities

a Prepare a presentation including written materials and data output formatsto orient and educate departmental staff responsible for needed information

b Assist in computer software development to facilitate extraction of neededinformation available in computer databases through Indonesian national programmer assigned to team part-time

c Answer questions and work with departmental staff in regions and PertaminaheadquartersPSC administrative offices to retrieve needed information

d Assemble information received from all sources and compile it for actuarialand planning purposes including computer software programming and datainput to facilitate those efforts

2 Feasibility Assessment and Business Plan

This document should present the organizational arrangements and afinancialbusiness analysis for the two options which Tugu Mandiri will pursue to develop an HMO health insurance product The two options are

To establish an HMO wih Pertaminas Production Sharing Contractors (i-Cs) Pertamina retirees and veterans as the primary markets

28

To establish an HMO with Pertaminas 50000 active employees and theirdependents as a second market Because most available health careutilization and cost data for retirees is not separated from the correspondingdata for active employees and because health services are not budgeted foreach group separately the effects of separating the two groups should beshown side by side

Activities

a Review the existing business plan developed by REACH and assess theorganizational model which has been proposed in that report for the HMOwith Pertamina employees as the primary market

b Work with domestic consultants to establish the legal feasibility for TuguMandiri to offer an HMOmanaged health care product for the target markets of this feasibility study

c Work with domestic consultants to ascertain the tax consequences ofestablishing an HMOmanaged health care product for both Tugu Mandiriand its prospective clients

d If feasible develop a persuasive convincing justification for Tugu Mandiri todevelop an HMOmanaged health care programand identify the capitalrequirements which the HMO will contain To the extent advisable theconsultants will use Option ll-E in the REACH report as a model

e Develop an HMOmanaged health care model and persuasive justification forchoosing that model for Tugu Mandiri to offer to Pertaininas PSCsPertamina retirees and active employees The model should includeorganizational arrangements between Tugu Mandiri providers and membersidentify the source of providers and specify the types of contractural arrangements that Tugu Mandiri will need to establish with those providers

f Do a financial analysis for the model developed in activities d and e above Thefinancial analysis should

Create the actuarial assumptions upon which the premium will be calculated

Create the financial assumptions upon which all financial projections willbe based

Use these assumptions to create expense revenue and profitloss statements

Relate these to levels of enrollment in the process of doing a breakeven analysis

Develop a capital budget

Do a breakeven analysis

29

Create a financial model (funds flow analysis) which tracks sources and

uses of funds

3 Operational Plan of Action

Develop a network chart for the pre-operational and operational phases of themodels proposed in Section 2 The network chart should use a PERTGantt orsimilar networking technique to plan activities over time in critical sequence andcontain clear instructions for clarification and interpretation

Activities

a Recommend an appropriate organizational structure for the proposed HMOmanaged health care model

b Develop a recruitment and staffing plan which identifies the numbers and types of personnel that must be hired and job specifications for each managerial position

c Develop a training and manpower development plan This plan should bebased upon the management arrangements that Tugu Mandiri will use tooperate the HMO during the pre-operations and start-up phases If thedecision is made to subcontract management to a third party training can bedone on site If Tugu Mandiri decides to operate the HMO itself the trainingplan should identify the types of personnel to be trained areas of training and the format and sites of training

d Design a detailed benefit package with service units

e Design a structure and configuration for the health service delivery system tobe used in the HMO including the contractural arrangements which must bemade with the providers

f Identify the management systems which must be developed e MISutilization finance personnel etc and suggest components of the different systems

g Determine the hardware and software requirements which will be needed to support the management systems

h Suggest the technical assistance requirements which will be needed to operationalize the HMO

30

AI)DITION TO SCO13E OF WORKTO GATHER NEEDED INFORMATION AND BUDGET FOR DATA COLLECTION PHASE

Assignment and Statement of the Problem

The development of a formal information system and data collection process isrequired to support the conduct of a comprehensive feasibility study which ifpossible will contain a business plan and operational plan of action for thedevelopment of a Tugu Mandiri Health Maintenance Organization (HMO)managedhealth care financing and delivery system It is clear from the work of the consultingteam--including meetings review of available documents and other observations-shythat the information needed for completion of the original Scope of Work is not yetavailable to us or usable for this project Adding this process to the original Scope ofWork will generate the required utilization data financial data provider and otherinformation needed to accomplish the original Scope of Work Therefore we arecompelled to recommend to the management of this project--USAID the Ministry ofHealth and Tugu Mandiri--that a formal data collection process be added andcompleted prior to preparation of a feasibility study report and if feasible a businessplan and operational plan of action pursuant to the original Scope of Work

We recognize that this data collection process was not budgeted in the original Scopeof Work and that it will substantially increase the cost of this project In feedback onour draft exit report ISTI and USAID expressed concern over this increased costAccordingly we submit three proposals for the data collection effort--

A Collecting needed data from all seven Pertamina regions and Jakartaheadquarters as well as from all seventeen PSCs

B Collecting needed data from four representative Pertamina operating regionsfrom Jakarta headquarters and from three to five representative PSCs Fromthis data the actuary and we will be able to extrapolate and prepare actuarialprojections evaluate feasibility and if feasible prepare a business plan andoperational plan of action for the full target market

C Collecting needed data from one Pertamina region and PSC operating in thatregion from which actuarial projections the feasibility study and if feasible thebusiness plan and operating plan will be completed for that region That regionwill serve as a pilot from which experience can be evaluated If the pilot provessuccessful expansion to other areas can be planned

Of the alternative approaches listed above we recommend alternative B Thesampling methodology used in alternative B will permit the actuary andconsultants to extrapolate from the representative areas to assess overall feasibilityand project the business and operating plan for all target markets throughout thearchipelago Alternative A is less cost effective than alternative B We do notrecommend alternative C because it will not permit evaluation of the alternativehealth care financing and delivery system for the entire target markets in a timelyfashion because it could result in employeeretiree health benefits in the pilot regionthat differ from those in other regions and because the results of implementationwill not be significant with respect to national cost increase trends The following outlines suggested additions to the original Scope of Work which wewill complete within six working weeks in Indonesia after completion of the data collection and actuarys report

31

I Work Required

A Obtain support of Ministry of Health and Pertamina (BKKAUmumDirector and Finance in regions and headquarters)

B Identify sources of needed information and staff resources for data orientation sessions

C Authorizedirect gathering and provision of information

D Format data for collection

E Processassemble data

F Consolidatecompile data for actuary and other consultant reports

G Review health facilities and data systems

Ii Resources Required

A Core team -Tugu Mandiri Nanang Iskandar MD Rochwan Muthalib

Pertamina Soejadi

ISTI Elliot Wolff James Barnes

Actuary R Pratolo

Tax Istama Siddharta

Legal Lione Gunawan Hans Schaefer

B Additional Staff

1 Two financial datasystems managers -USA

2 Computer programmer- Indonesia (loan)

3 Translator - Indonesia (loan)

C Other resources

1 Lap computer for word processing and financial analysisspread sheets

2 Second PC for data consolidation and statementreport writing

3 Expeuses for visits to Jakarta and the regions for meetings with theteam Pertamina and the production sharing contractors ($1000 fromJakarta per person per visit to country)

4 Expenses for travel to Indonesia from USA ($3000)

32

Three trips each for Wolff Barnes and four trips for two financialsystems managers

5 Expenses for orientation programs (bring 6 P -tamina healthfinancestaff from three regions to Jakarta for one we and meet PSCrepresentatives in Jakarta)

6 Expenses for actuarys assistance in data gathering as well as

actuarial report and business plan

7 Expenses for translator - approximately 20 days

8 Additional minor participation by attorney tax advisor and their coordinator

D Timing

1 Orientationformatting data by Wolff Barnes two financialsystems managers (2 months each) actuary translator and computer programmer

2 Follow-up by Wolff and Barnes - 2 months each Two financialsystems managers actuary and computer programmer -3 months each

3 Completion - 10 months

BUI)GET FOR DATA COLLECTION PHASE

The fees and other budget items reflected here are based on a comprehensive datacollection process of approximately ten months duration which we expect to berequired in light of our progress with the project team during our MarchApril visitThe costs reflected and the suggested time frame are based on accomplishing thedata collection for alternative B previously cited The expatriate consulting teamconsists of Dr James G Barnes Mr Elliot Wolff and two information systemsdataspecialists We anticipate that over the ten month period there will be three tripseach to Indonesia by Dr Barnes and Mr Wolff and four trips by the informationsystemsdata specialists In an effort to accomplish as much of the front endrequirements as possible the first trip by Dr Barnes and Mr Wolff is based onthirty-six (36) days with the remaining two trips at twenty-four (24) days each for atotal of eighty-four (84) days The information systemsdata specialists time incountry is based on four trips of thrity-six days each for a total of 144 days The chart on the following page reflects these costs

33

Budget for Data Collection Phase

Consultant Non-Govt AUSAIDISTI Amount to be Total

Fees 1

Barnes

Wolff

Data Analyst

Data Analyst

Computer Programmer Interpreter

Total

84

84

144

144

40

20

396

Days Daily Rate 2

$61423

$61423

$35422

$35522

-------------

NA

Paid by Client 3

$5159500

$5159500

$5100800

$5100800

--------------

$20520600

DailyPaid

$28578

$28578

$28578

$28578

$ 4000

$ 2000

NA

byUSAID

$ 2400552

$ 2400552

$ 4115232

$ 4115232

$ 160000

$ 40000

$13231568

Compensashytion

7560052

$ 7560052

$ 9216032

$ 9216032

$ 160000

$ 40000

$33752168

Budget for Data Collection Phase Cont

Per Trip Costs Aont Travel

Expenses Number of

Trips Non-govtdaily Rate

Amount to bePaid by Client

P IncludingpInter-island

Amounttbe Paid by

TotalTravelCosts

Travel Barnes 3 NA ------------------- $400000 $1200000 $1200000 Wolff 3 NA ------------------- $400000 $1200000 $1200000 Data Analyst 4 NA ------------------- $400000 $1600000 $1600000

Ln Data Analyst 4 Computer ----------------Programmer

NA NA

--------------------------------------

$400000 $200000

$1600000 $ 200000

$1600000 $ 200000

Interpreter Total

----------------14

NA

NA -------------------

-------------------

$400000 NA

$ 400000 $6200000

$ 400000 $6200000

Budget for Data Collection Phase Cont

Per Diem Non-govt Amount to be Amount to be Total PerRates Days Daily Rate Paid by Client Rate Paid by Diem CostsUSAID

Barnes 84 NA --------------- $10800 $ 907200 $ 907200 Wolff 84 NA --------------- $10800 $ 907200 $ 907200 Data Analyst 144 NA --------------- $10800 $1555200 $1555200 Data Analyst 144 NA -------------- $10800 $1555200 $1555200 Computer 40 NA -------------- NAProgrammer

Interpreter 20 NA NA Total Per NA NA $4924800 $4924800

0 Diem

Total Costs -DataCollection $20520600 $24356368 $44876968 Phase

1 Actuarys assistance in the data collection effort is und an existing contract between R Pratolo and ISTI the details of which we are not aware

2 The amount listed in this column shows the daily consultng rate that Pertamina Tugu Mandiri and the Ministry of Health will need topay in excess of the rate paid by USAIDISTI in order for the consultants to complete this project

3 The amount listed in this column shows the total amount to be paid by Pertamina Tugu Mandiri and the Ministry ofHealth per listedconsultant for the stated number of consulting days

APPENDIX V

REVISED SCOPE OF WORK AND BUI)GETI

This Revised Scope of Work differs from the original Scope of Work in that it adds adata collection component which is essential in order for the subsequent FeasibilityStudy and BusinessOperational Plan to be based on reliable facts The stepsinherent in the data collection pohase are further elaborated in the Addition to Scopeof Work to Gather Needed Information which is attached to this Appendix

Assigrnment

The consultant team will assist PT Tugu Mandiri to assemble necessaryinformation conduct a feasibility assessment and if feasible prepare a businessplan and nn operational plan of action for Tugu Mandiri to establish a healthmaintenance organizatiuJdmanaged health care product line of business

Expacted Outputs

1 Data Collection

This essential first phase should provide orientation education and retrievalassistance to the regional and headquarters Finance and Umum Departments ofPertamina and the administrative and field offices of the Production SharingContractors (PSCs) so that the information needed for actuarial projections andbusinessoperational planning is available to the project team as soon as possibleThis information is listed in Appendix III to the 17 April 1989 Consultants ExitProgress Report

Activities

a Prepare a presentation including written materials and data output formatsto orient and educate departmental staff responsible for needed information

b Assist in computer software development to facilitate extraction of neededinformation available in computer databases through Indonesian national programmer assigned to team part-time

c Answer questions and work with departmental staff in regions and PertaminaheadquartersPSC administrative offices to retrieve needed information

d Assemble information received from all sources and compile it for actuarialand planning purposes including computer software programming and datainput to facilitate those efforts

2 Feasibility Assessment and Business Plan

This document should present the organizational arrangements and afinancialbusiness analysis for the two options which Tugu Mandiri will pursue to develop an HMO health insurance product The two options are

To establish an HMO wih Pertaminas Production Sharing Contractors (i-Cs) Pertamina retirees and veterans as the primary markets

28

To establish an HMO with Pertaminas 50000 active employees and theirdependents as a second market Because most available health careutilization and cost data for retirees is not separated from the correspondingdata for active employees and because health services are not budgeted foreach group separately the effects of separating the two groups should beshown side by side

Activities

a Review the existing business plan developed by REACH and assess theorganizational model which has been proposed in that report for the HMOwith Pertamina employees as the primary market

b Work with domestic consultants to establish the legal feasibility for TuguMandiri to offer an HMOmanaged health care product for the target markets of this feasibility study

c Work with domestic consultants to ascertain the tax consequences ofestablishing an HMOmanaged health care product for both Tugu Mandiriand its prospective clients

d If feasible develop a persuasive convincing justification for Tugu Mandiri todevelop an HMOmanaged health care programand identify the capitalrequirements which the HMO will contain To the extent advisable theconsultants will use Option ll-E in the REACH report as a model

e Develop an HMOmanaged health care model and persuasive justification forchoosing that model for Tugu Mandiri to offer to Pertaininas PSCsPertamina retirees and active employees The model should includeorganizational arrangements between Tugu Mandiri providers and membersidentify the source of providers and specify the types of contractural arrangements that Tugu Mandiri will need to establish with those providers

f Do a financial analysis for the model developed in activities d and e above Thefinancial analysis should

Create the actuarial assumptions upon which the premium will be calculated

Create the financial assumptions upon which all financial projections willbe based

Use these assumptions to create expense revenue and profitloss statements

Relate these to levels of enrollment in the process of doing a breakeven analysis

Develop a capital budget

Do a breakeven analysis

29

Create a financial model (funds flow analysis) which tracks sources and

uses of funds

3 Operational Plan of Action

Develop a network chart for the pre-operational and operational phases of themodels proposed in Section 2 The network chart should use a PERTGantt orsimilar networking technique to plan activities over time in critical sequence andcontain clear instructions for clarification and interpretation

Activities

a Recommend an appropriate organizational structure for the proposed HMOmanaged health care model

b Develop a recruitment and staffing plan which identifies the numbers and types of personnel that must be hired and job specifications for each managerial position

c Develop a training and manpower development plan This plan should bebased upon the management arrangements that Tugu Mandiri will use tooperate the HMO during the pre-operations and start-up phases If thedecision is made to subcontract management to a third party training can bedone on site If Tugu Mandiri decides to operate the HMO itself the trainingplan should identify the types of personnel to be trained areas of training and the format and sites of training

d Design a detailed benefit package with service units

e Design a structure and configuration for the health service delivery system tobe used in the HMO including the contractural arrangements which must bemade with the providers

f Identify the management systems which must be developed e MISutilization finance personnel etc and suggest components of the different systems

g Determine the hardware and software requirements which will be needed to support the management systems

h Suggest the technical assistance requirements which will be needed to operationalize the HMO

30

AI)DITION TO SCO13E OF WORKTO GATHER NEEDED INFORMATION AND BUDGET FOR DATA COLLECTION PHASE

Assignment and Statement of the Problem

The development of a formal information system and data collection process isrequired to support the conduct of a comprehensive feasibility study which ifpossible will contain a business plan and operational plan of action for thedevelopment of a Tugu Mandiri Health Maintenance Organization (HMO)managedhealth care financing and delivery system It is clear from the work of the consultingteam--including meetings review of available documents and other observations-shythat the information needed for completion of the original Scope of Work is not yetavailable to us or usable for this project Adding this process to the original Scope ofWork will generate the required utilization data financial data provider and otherinformation needed to accomplish the original Scope of Work Therefore we arecompelled to recommend to the management of this project--USAID the Ministry ofHealth and Tugu Mandiri--that a formal data collection process be added andcompleted prior to preparation of a feasibility study report and if feasible a businessplan and operational plan of action pursuant to the original Scope of Work

We recognize that this data collection process was not budgeted in the original Scopeof Work and that it will substantially increase the cost of this project In feedback onour draft exit report ISTI and USAID expressed concern over this increased costAccordingly we submit three proposals for the data collection effort--

A Collecting needed data from all seven Pertamina regions and Jakartaheadquarters as well as from all seventeen PSCs

B Collecting needed data from four representative Pertamina operating regionsfrom Jakarta headquarters and from three to five representative PSCs Fromthis data the actuary and we will be able to extrapolate and prepare actuarialprojections evaluate feasibility and if feasible prepare a business plan andoperational plan of action for the full target market

C Collecting needed data from one Pertamina region and PSC operating in thatregion from which actuarial projections the feasibility study and if feasible thebusiness plan and operating plan will be completed for that region That regionwill serve as a pilot from which experience can be evaluated If the pilot provessuccessful expansion to other areas can be planned

Of the alternative approaches listed above we recommend alternative B Thesampling methodology used in alternative B will permit the actuary andconsultants to extrapolate from the representative areas to assess overall feasibilityand project the business and operating plan for all target markets throughout thearchipelago Alternative A is less cost effective than alternative B We do notrecommend alternative C because it will not permit evaluation of the alternativehealth care financing and delivery system for the entire target markets in a timelyfashion because it could result in employeeretiree health benefits in the pilot regionthat differ from those in other regions and because the results of implementationwill not be significant with respect to national cost increase trends The following outlines suggested additions to the original Scope of Work which wewill complete within six working weeks in Indonesia after completion of the data collection and actuarys report

31

I Work Required

A Obtain support of Ministry of Health and Pertamina (BKKAUmumDirector and Finance in regions and headquarters)

B Identify sources of needed information and staff resources for data orientation sessions

C Authorizedirect gathering and provision of information

D Format data for collection

E Processassemble data

F Consolidatecompile data for actuary and other consultant reports

G Review health facilities and data systems

Ii Resources Required

A Core team -Tugu Mandiri Nanang Iskandar MD Rochwan Muthalib

Pertamina Soejadi

ISTI Elliot Wolff James Barnes

Actuary R Pratolo

Tax Istama Siddharta

Legal Lione Gunawan Hans Schaefer

B Additional Staff

1 Two financial datasystems managers -USA

2 Computer programmer- Indonesia (loan)

3 Translator - Indonesia (loan)

C Other resources

1 Lap computer for word processing and financial analysisspread sheets

2 Second PC for data consolidation and statementreport writing

3 Expeuses for visits to Jakarta and the regions for meetings with theteam Pertamina and the production sharing contractors ($1000 fromJakarta per person per visit to country)

4 Expenses for travel to Indonesia from USA ($3000)

32

Three trips each for Wolff Barnes and four trips for two financialsystems managers

5 Expenses for orientation programs (bring 6 P -tamina healthfinancestaff from three regions to Jakarta for one we and meet PSCrepresentatives in Jakarta)

6 Expenses for actuarys assistance in data gathering as well as

actuarial report and business plan

7 Expenses for translator - approximately 20 days

8 Additional minor participation by attorney tax advisor and their coordinator

D Timing

1 Orientationformatting data by Wolff Barnes two financialsystems managers (2 months each) actuary translator and computer programmer

2 Follow-up by Wolff and Barnes - 2 months each Two financialsystems managers actuary and computer programmer -3 months each

3 Completion - 10 months

BUI)GET FOR DATA COLLECTION PHASE

The fees and other budget items reflected here are based on a comprehensive datacollection process of approximately ten months duration which we expect to berequired in light of our progress with the project team during our MarchApril visitThe costs reflected and the suggested time frame are based on accomplishing thedata collection for alternative B previously cited The expatriate consulting teamconsists of Dr James G Barnes Mr Elliot Wolff and two information systemsdataspecialists We anticipate that over the ten month period there will be three tripseach to Indonesia by Dr Barnes and Mr Wolff and four trips by the informationsystemsdata specialists In an effort to accomplish as much of the front endrequirements as possible the first trip by Dr Barnes and Mr Wolff is based onthirty-six (36) days with the remaining two trips at twenty-four (24) days each for atotal of eighty-four (84) days The information systemsdata specialists time incountry is based on four trips of thrity-six days each for a total of 144 days The chart on the following page reflects these costs

33

Budget for Data Collection Phase

Consultant Non-Govt AUSAIDISTI Amount to be Total

Fees 1

Barnes

Wolff

Data Analyst

Data Analyst

Computer Programmer Interpreter

Total

84

84

144

144

40

20

396

Days Daily Rate 2

$61423

$61423

$35422

$35522

-------------

NA

Paid by Client 3

$5159500

$5159500

$5100800

$5100800

--------------

$20520600

DailyPaid

$28578

$28578

$28578

$28578

$ 4000

$ 2000

NA

byUSAID

$ 2400552

$ 2400552

$ 4115232

$ 4115232

$ 160000

$ 40000

$13231568

Compensashytion

7560052

$ 7560052

$ 9216032

$ 9216032

$ 160000

$ 40000

$33752168

Budget for Data Collection Phase Cont

Per Trip Costs Aont Travel

Expenses Number of

Trips Non-govtdaily Rate

Amount to bePaid by Client

P IncludingpInter-island

Amounttbe Paid by

TotalTravelCosts

Travel Barnes 3 NA ------------------- $400000 $1200000 $1200000 Wolff 3 NA ------------------- $400000 $1200000 $1200000 Data Analyst 4 NA ------------------- $400000 $1600000 $1600000

Ln Data Analyst 4 Computer ----------------Programmer

NA NA

--------------------------------------

$400000 $200000

$1600000 $ 200000

$1600000 $ 200000

Interpreter Total

----------------14

NA

NA -------------------

-------------------

$400000 NA

$ 400000 $6200000

$ 400000 $6200000

Budget for Data Collection Phase Cont

Per Diem Non-govt Amount to be Amount to be Total PerRates Days Daily Rate Paid by Client Rate Paid by Diem CostsUSAID

Barnes 84 NA --------------- $10800 $ 907200 $ 907200 Wolff 84 NA --------------- $10800 $ 907200 $ 907200 Data Analyst 144 NA --------------- $10800 $1555200 $1555200 Data Analyst 144 NA -------------- $10800 $1555200 $1555200 Computer 40 NA -------------- NAProgrammer

Interpreter 20 NA NA Total Per NA NA $4924800 $4924800

0 Diem

Total Costs -DataCollection $20520600 $24356368 $44876968 Phase

1 Actuarys assistance in the data collection effort is und an existing contract between R Pratolo and ISTI the details of which we are not aware

2 The amount listed in this column shows the daily consultng rate that Pertamina Tugu Mandiri and the Ministry of Health will need topay in excess of the rate paid by USAIDISTI in order for the consultants to complete this project

3 The amount listed in this column shows the total amount to be paid by Pertamina Tugu Mandiri and the Ministry ofHealth per listedconsultant for the stated number of consulting days

To establish an HMO with Pertaminas 50000 active employees and theirdependents as a second market Because most available health careutilization and cost data for retirees is not separated from the correspondingdata for active employees and because health services are not budgeted foreach group separately the effects of separating the two groups should beshown side by side

Activities

a Review the existing business plan developed by REACH and assess theorganizational model which has been proposed in that report for the HMOwith Pertamina employees as the primary market

b Work with domestic consultants to establish the legal feasibility for TuguMandiri to offer an HMOmanaged health care product for the target markets of this feasibility study

c Work with domestic consultants to ascertain the tax consequences ofestablishing an HMOmanaged health care product for both Tugu Mandiriand its prospective clients

d If feasible develop a persuasive convincing justification for Tugu Mandiri todevelop an HMOmanaged health care programand identify the capitalrequirements which the HMO will contain To the extent advisable theconsultants will use Option ll-E in the REACH report as a model

e Develop an HMOmanaged health care model and persuasive justification forchoosing that model for Tugu Mandiri to offer to Pertaininas PSCsPertamina retirees and active employees The model should includeorganizational arrangements between Tugu Mandiri providers and membersidentify the source of providers and specify the types of contractural arrangements that Tugu Mandiri will need to establish with those providers

f Do a financial analysis for the model developed in activities d and e above Thefinancial analysis should

Create the actuarial assumptions upon which the premium will be calculated

Create the financial assumptions upon which all financial projections willbe based

Use these assumptions to create expense revenue and profitloss statements

Relate these to levels of enrollment in the process of doing a breakeven analysis

Develop a capital budget

Do a breakeven analysis

29

Create a financial model (funds flow analysis) which tracks sources and

uses of funds

3 Operational Plan of Action

Develop a network chart for the pre-operational and operational phases of themodels proposed in Section 2 The network chart should use a PERTGantt orsimilar networking technique to plan activities over time in critical sequence andcontain clear instructions for clarification and interpretation

Activities

a Recommend an appropriate organizational structure for the proposed HMOmanaged health care model

b Develop a recruitment and staffing plan which identifies the numbers and types of personnel that must be hired and job specifications for each managerial position

c Develop a training and manpower development plan This plan should bebased upon the management arrangements that Tugu Mandiri will use tooperate the HMO during the pre-operations and start-up phases If thedecision is made to subcontract management to a third party training can bedone on site If Tugu Mandiri decides to operate the HMO itself the trainingplan should identify the types of personnel to be trained areas of training and the format and sites of training

d Design a detailed benefit package with service units

e Design a structure and configuration for the health service delivery system tobe used in the HMO including the contractural arrangements which must bemade with the providers

f Identify the management systems which must be developed e MISutilization finance personnel etc and suggest components of the different systems

g Determine the hardware and software requirements which will be needed to support the management systems

h Suggest the technical assistance requirements which will be needed to operationalize the HMO

30

AI)DITION TO SCO13E OF WORKTO GATHER NEEDED INFORMATION AND BUDGET FOR DATA COLLECTION PHASE

Assignment and Statement of the Problem

The development of a formal information system and data collection process isrequired to support the conduct of a comprehensive feasibility study which ifpossible will contain a business plan and operational plan of action for thedevelopment of a Tugu Mandiri Health Maintenance Organization (HMO)managedhealth care financing and delivery system It is clear from the work of the consultingteam--including meetings review of available documents and other observations-shythat the information needed for completion of the original Scope of Work is not yetavailable to us or usable for this project Adding this process to the original Scope ofWork will generate the required utilization data financial data provider and otherinformation needed to accomplish the original Scope of Work Therefore we arecompelled to recommend to the management of this project--USAID the Ministry ofHealth and Tugu Mandiri--that a formal data collection process be added andcompleted prior to preparation of a feasibility study report and if feasible a businessplan and operational plan of action pursuant to the original Scope of Work

We recognize that this data collection process was not budgeted in the original Scopeof Work and that it will substantially increase the cost of this project In feedback onour draft exit report ISTI and USAID expressed concern over this increased costAccordingly we submit three proposals for the data collection effort--

A Collecting needed data from all seven Pertamina regions and Jakartaheadquarters as well as from all seventeen PSCs

B Collecting needed data from four representative Pertamina operating regionsfrom Jakarta headquarters and from three to five representative PSCs Fromthis data the actuary and we will be able to extrapolate and prepare actuarialprojections evaluate feasibility and if feasible prepare a business plan andoperational plan of action for the full target market

C Collecting needed data from one Pertamina region and PSC operating in thatregion from which actuarial projections the feasibility study and if feasible thebusiness plan and operating plan will be completed for that region That regionwill serve as a pilot from which experience can be evaluated If the pilot provessuccessful expansion to other areas can be planned

Of the alternative approaches listed above we recommend alternative B Thesampling methodology used in alternative B will permit the actuary andconsultants to extrapolate from the representative areas to assess overall feasibilityand project the business and operating plan for all target markets throughout thearchipelago Alternative A is less cost effective than alternative B We do notrecommend alternative C because it will not permit evaluation of the alternativehealth care financing and delivery system for the entire target markets in a timelyfashion because it could result in employeeretiree health benefits in the pilot regionthat differ from those in other regions and because the results of implementationwill not be significant with respect to national cost increase trends The following outlines suggested additions to the original Scope of Work which wewill complete within six working weeks in Indonesia after completion of the data collection and actuarys report

31

I Work Required

A Obtain support of Ministry of Health and Pertamina (BKKAUmumDirector and Finance in regions and headquarters)

B Identify sources of needed information and staff resources for data orientation sessions

C Authorizedirect gathering and provision of information

D Format data for collection

E Processassemble data

F Consolidatecompile data for actuary and other consultant reports

G Review health facilities and data systems

Ii Resources Required

A Core team -Tugu Mandiri Nanang Iskandar MD Rochwan Muthalib

Pertamina Soejadi

ISTI Elliot Wolff James Barnes

Actuary R Pratolo

Tax Istama Siddharta

Legal Lione Gunawan Hans Schaefer

B Additional Staff

1 Two financial datasystems managers -USA

2 Computer programmer- Indonesia (loan)

3 Translator - Indonesia (loan)

C Other resources

1 Lap computer for word processing and financial analysisspread sheets

2 Second PC for data consolidation and statementreport writing

3 Expeuses for visits to Jakarta and the regions for meetings with theteam Pertamina and the production sharing contractors ($1000 fromJakarta per person per visit to country)

4 Expenses for travel to Indonesia from USA ($3000)

32

Three trips each for Wolff Barnes and four trips for two financialsystems managers

5 Expenses for orientation programs (bring 6 P -tamina healthfinancestaff from three regions to Jakarta for one we and meet PSCrepresentatives in Jakarta)

6 Expenses for actuarys assistance in data gathering as well as

actuarial report and business plan

7 Expenses for translator - approximately 20 days

8 Additional minor participation by attorney tax advisor and their coordinator

D Timing

1 Orientationformatting data by Wolff Barnes two financialsystems managers (2 months each) actuary translator and computer programmer

2 Follow-up by Wolff and Barnes - 2 months each Two financialsystems managers actuary and computer programmer -3 months each

3 Completion - 10 months

BUI)GET FOR DATA COLLECTION PHASE

The fees and other budget items reflected here are based on a comprehensive datacollection process of approximately ten months duration which we expect to berequired in light of our progress with the project team during our MarchApril visitThe costs reflected and the suggested time frame are based on accomplishing thedata collection for alternative B previously cited The expatriate consulting teamconsists of Dr James G Barnes Mr Elliot Wolff and two information systemsdataspecialists We anticipate that over the ten month period there will be three tripseach to Indonesia by Dr Barnes and Mr Wolff and four trips by the informationsystemsdata specialists In an effort to accomplish as much of the front endrequirements as possible the first trip by Dr Barnes and Mr Wolff is based onthirty-six (36) days with the remaining two trips at twenty-four (24) days each for atotal of eighty-four (84) days The information systemsdata specialists time incountry is based on four trips of thrity-six days each for a total of 144 days The chart on the following page reflects these costs

33

Budget for Data Collection Phase

Consultant Non-Govt AUSAIDISTI Amount to be Total

Fees 1

Barnes

Wolff

Data Analyst

Data Analyst

Computer Programmer Interpreter

Total

84

84

144

144

40

20

396

Days Daily Rate 2

$61423

$61423

$35422

$35522

-------------

NA

Paid by Client 3

$5159500

$5159500

$5100800

$5100800

--------------

$20520600

DailyPaid

$28578

$28578

$28578

$28578

$ 4000

$ 2000

NA

byUSAID

$ 2400552

$ 2400552

$ 4115232

$ 4115232

$ 160000

$ 40000

$13231568

Compensashytion

7560052

$ 7560052

$ 9216032

$ 9216032

$ 160000

$ 40000

$33752168

Budget for Data Collection Phase Cont

Per Trip Costs Aont Travel

Expenses Number of

Trips Non-govtdaily Rate

Amount to bePaid by Client

P IncludingpInter-island

Amounttbe Paid by

TotalTravelCosts

Travel Barnes 3 NA ------------------- $400000 $1200000 $1200000 Wolff 3 NA ------------------- $400000 $1200000 $1200000 Data Analyst 4 NA ------------------- $400000 $1600000 $1600000

Ln Data Analyst 4 Computer ----------------Programmer

NA NA

--------------------------------------

$400000 $200000

$1600000 $ 200000

$1600000 $ 200000

Interpreter Total

----------------14

NA

NA -------------------

-------------------

$400000 NA

$ 400000 $6200000

$ 400000 $6200000

Budget for Data Collection Phase Cont

Per Diem Non-govt Amount to be Amount to be Total PerRates Days Daily Rate Paid by Client Rate Paid by Diem CostsUSAID

Barnes 84 NA --------------- $10800 $ 907200 $ 907200 Wolff 84 NA --------------- $10800 $ 907200 $ 907200 Data Analyst 144 NA --------------- $10800 $1555200 $1555200 Data Analyst 144 NA -------------- $10800 $1555200 $1555200 Computer 40 NA -------------- NAProgrammer

Interpreter 20 NA NA Total Per NA NA $4924800 $4924800

0 Diem

Total Costs -DataCollection $20520600 $24356368 $44876968 Phase

1 Actuarys assistance in the data collection effort is und an existing contract between R Pratolo and ISTI the details of which we are not aware

2 The amount listed in this column shows the daily consultng rate that Pertamina Tugu Mandiri and the Ministry of Health will need topay in excess of the rate paid by USAIDISTI in order for the consultants to complete this project

3 The amount listed in this column shows the total amount to be paid by Pertamina Tugu Mandiri and the Ministry ofHealth per listedconsultant for the stated number of consulting days

Create a financial model (funds flow analysis) which tracks sources and

uses of funds

3 Operational Plan of Action

Develop a network chart for the pre-operational and operational phases of themodels proposed in Section 2 The network chart should use a PERTGantt orsimilar networking technique to plan activities over time in critical sequence andcontain clear instructions for clarification and interpretation

Activities

a Recommend an appropriate organizational structure for the proposed HMOmanaged health care model

b Develop a recruitment and staffing plan which identifies the numbers and types of personnel that must be hired and job specifications for each managerial position

c Develop a training and manpower development plan This plan should bebased upon the management arrangements that Tugu Mandiri will use tooperate the HMO during the pre-operations and start-up phases If thedecision is made to subcontract management to a third party training can bedone on site If Tugu Mandiri decides to operate the HMO itself the trainingplan should identify the types of personnel to be trained areas of training and the format and sites of training

d Design a detailed benefit package with service units

e Design a structure and configuration for the health service delivery system tobe used in the HMO including the contractural arrangements which must bemade with the providers

f Identify the management systems which must be developed e MISutilization finance personnel etc and suggest components of the different systems

g Determine the hardware and software requirements which will be needed to support the management systems

h Suggest the technical assistance requirements which will be needed to operationalize the HMO

30

AI)DITION TO SCO13E OF WORKTO GATHER NEEDED INFORMATION AND BUDGET FOR DATA COLLECTION PHASE

Assignment and Statement of the Problem

The development of a formal information system and data collection process isrequired to support the conduct of a comprehensive feasibility study which ifpossible will contain a business plan and operational plan of action for thedevelopment of a Tugu Mandiri Health Maintenance Organization (HMO)managedhealth care financing and delivery system It is clear from the work of the consultingteam--including meetings review of available documents and other observations-shythat the information needed for completion of the original Scope of Work is not yetavailable to us or usable for this project Adding this process to the original Scope ofWork will generate the required utilization data financial data provider and otherinformation needed to accomplish the original Scope of Work Therefore we arecompelled to recommend to the management of this project--USAID the Ministry ofHealth and Tugu Mandiri--that a formal data collection process be added andcompleted prior to preparation of a feasibility study report and if feasible a businessplan and operational plan of action pursuant to the original Scope of Work

We recognize that this data collection process was not budgeted in the original Scopeof Work and that it will substantially increase the cost of this project In feedback onour draft exit report ISTI and USAID expressed concern over this increased costAccordingly we submit three proposals for the data collection effort--

A Collecting needed data from all seven Pertamina regions and Jakartaheadquarters as well as from all seventeen PSCs

B Collecting needed data from four representative Pertamina operating regionsfrom Jakarta headquarters and from three to five representative PSCs Fromthis data the actuary and we will be able to extrapolate and prepare actuarialprojections evaluate feasibility and if feasible prepare a business plan andoperational plan of action for the full target market

C Collecting needed data from one Pertamina region and PSC operating in thatregion from which actuarial projections the feasibility study and if feasible thebusiness plan and operating plan will be completed for that region That regionwill serve as a pilot from which experience can be evaluated If the pilot provessuccessful expansion to other areas can be planned

Of the alternative approaches listed above we recommend alternative B Thesampling methodology used in alternative B will permit the actuary andconsultants to extrapolate from the representative areas to assess overall feasibilityand project the business and operating plan for all target markets throughout thearchipelago Alternative A is less cost effective than alternative B We do notrecommend alternative C because it will not permit evaluation of the alternativehealth care financing and delivery system for the entire target markets in a timelyfashion because it could result in employeeretiree health benefits in the pilot regionthat differ from those in other regions and because the results of implementationwill not be significant with respect to national cost increase trends The following outlines suggested additions to the original Scope of Work which wewill complete within six working weeks in Indonesia after completion of the data collection and actuarys report

31

I Work Required

A Obtain support of Ministry of Health and Pertamina (BKKAUmumDirector and Finance in regions and headquarters)

B Identify sources of needed information and staff resources for data orientation sessions

C Authorizedirect gathering and provision of information

D Format data for collection

E Processassemble data

F Consolidatecompile data for actuary and other consultant reports

G Review health facilities and data systems

Ii Resources Required

A Core team -Tugu Mandiri Nanang Iskandar MD Rochwan Muthalib

Pertamina Soejadi

ISTI Elliot Wolff James Barnes

Actuary R Pratolo

Tax Istama Siddharta

Legal Lione Gunawan Hans Schaefer

B Additional Staff

1 Two financial datasystems managers -USA

2 Computer programmer- Indonesia (loan)

3 Translator - Indonesia (loan)

C Other resources

1 Lap computer for word processing and financial analysisspread sheets

2 Second PC for data consolidation and statementreport writing

3 Expeuses for visits to Jakarta and the regions for meetings with theteam Pertamina and the production sharing contractors ($1000 fromJakarta per person per visit to country)

4 Expenses for travel to Indonesia from USA ($3000)

32

Three trips each for Wolff Barnes and four trips for two financialsystems managers

5 Expenses for orientation programs (bring 6 P -tamina healthfinancestaff from three regions to Jakarta for one we and meet PSCrepresentatives in Jakarta)

6 Expenses for actuarys assistance in data gathering as well as

actuarial report and business plan

7 Expenses for translator - approximately 20 days

8 Additional minor participation by attorney tax advisor and their coordinator

D Timing

1 Orientationformatting data by Wolff Barnes two financialsystems managers (2 months each) actuary translator and computer programmer

2 Follow-up by Wolff and Barnes - 2 months each Two financialsystems managers actuary and computer programmer -3 months each

3 Completion - 10 months

BUI)GET FOR DATA COLLECTION PHASE

The fees and other budget items reflected here are based on a comprehensive datacollection process of approximately ten months duration which we expect to berequired in light of our progress with the project team during our MarchApril visitThe costs reflected and the suggested time frame are based on accomplishing thedata collection for alternative B previously cited The expatriate consulting teamconsists of Dr James G Barnes Mr Elliot Wolff and two information systemsdataspecialists We anticipate that over the ten month period there will be three tripseach to Indonesia by Dr Barnes and Mr Wolff and four trips by the informationsystemsdata specialists In an effort to accomplish as much of the front endrequirements as possible the first trip by Dr Barnes and Mr Wolff is based onthirty-six (36) days with the remaining two trips at twenty-four (24) days each for atotal of eighty-four (84) days The information systemsdata specialists time incountry is based on four trips of thrity-six days each for a total of 144 days The chart on the following page reflects these costs

33

Budget for Data Collection Phase

Consultant Non-Govt AUSAIDISTI Amount to be Total

Fees 1

Barnes

Wolff

Data Analyst

Data Analyst

Computer Programmer Interpreter

Total

84

84

144

144

40

20

396

Days Daily Rate 2

$61423

$61423

$35422

$35522

-------------

NA

Paid by Client 3

$5159500

$5159500

$5100800

$5100800

--------------

$20520600

DailyPaid

$28578

$28578

$28578

$28578

$ 4000

$ 2000

NA

byUSAID

$ 2400552

$ 2400552

$ 4115232

$ 4115232

$ 160000

$ 40000

$13231568

Compensashytion

7560052

$ 7560052

$ 9216032

$ 9216032

$ 160000

$ 40000

$33752168

Budget for Data Collection Phase Cont

Per Trip Costs Aont Travel

Expenses Number of

Trips Non-govtdaily Rate

Amount to bePaid by Client

P IncludingpInter-island

Amounttbe Paid by

TotalTravelCosts

Travel Barnes 3 NA ------------------- $400000 $1200000 $1200000 Wolff 3 NA ------------------- $400000 $1200000 $1200000 Data Analyst 4 NA ------------------- $400000 $1600000 $1600000

Ln Data Analyst 4 Computer ----------------Programmer

NA NA

--------------------------------------

$400000 $200000

$1600000 $ 200000

$1600000 $ 200000

Interpreter Total

----------------14

NA

NA -------------------

-------------------

$400000 NA

$ 400000 $6200000

$ 400000 $6200000

Budget for Data Collection Phase Cont

Per Diem Non-govt Amount to be Amount to be Total PerRates Days Daily Rate Paid by Client Rate Paid by Diem CostsUSAID

Barnes 84 NA --------------- $10800 $ 907200 $ 907200 Wolff 84 NA --------------- $10800 $ 907200 $ 907200 Data Analyst 144 NA --------------- $10800 $1555200 $1555200 Data Analyst 144 NA -------------- $10800 $1555200 $1555200 Computer 40 NA -------------- NAProgrammer

Interpreter 20 NA NA Total Per NA NA $4924800 $4924800

0 Diem

Total Costs -DataCollection $20520600 $24356368 $44876968 Phase

1 Actuarys assistance in the data collection effort is und an existing contract between R Pratolo and ISTI the details of which we are not aware

2 The amount listed in this column shows the daily consultng rate that Pertamina Tugu Mandiri and the Ministry of Health will need topay in excess of the rate paid by USAIDISTI in order for the consultants to complete this project

3 The amount listed in this column shows the total amount to be paid by Pertamina Tugu Mandiri and the Ministry ofHealth per listedconsultant for the stated number of consulting days

AI)DITION TO SCO13E OF WORKTO GATHER NEEDED INFORMATION AND BUDGET FOR DATA COLLECTION PHASE

Assignment and Statement of the Problem

The development of a formal information system and data collection process isrequired to support the conduct of a comprehensive feasibility study which ifpossible will contain a business plan and operational plan of action for thedevelopment of a Tugu Mandiri Health Maintenance Organization (HMO)managedhealth care financing and delivery system It is clear from the work of the consultingteam--including meetings review of available documents and other observations-shythat the information needed for completion of the original Scope of Work is not yetavailable to us or usable for this project Adding this process to the original Scope ofWork will generate the required utilization data financial data provider and otherinformation needed to accomplish the original Scope of Work Therefore we arecompelled to recommend to the management of this project--USAID the Ministry ofHealth and Tugu Mandiri--that a formal data collection process be added andcompleted prior to preparation of a feasibility study report and if feasible a businessplan and operational plan of action pursuant to the original Scope of Work

We recognize that this data collection process was not budgeted in the original Scopeof Work and that it will substantially increase the cost of this project In feedback onour draft exit report ISTI and USAID expressed concern over this increased costAccordingly we submit three proposals for the data collection effort--

A Collecting needed data from all seven Pertamina regions and Jakartaheadquarters as well as from all seventeen PSCs

B Collecting needed data from four representative Pertamina operating regionsfrom Jakarta headquarters and from three to five representative PSCs Fromthis data the actuary and we will be able to extrapolate and prepare actuarialprojections evaluate feasibility and if feasible prepare a business plan andoperational plan of action for the full target market

C Collecting needed data from one Pertamina region and PSC operating in thatregion from which actuarial projections the feasibility study and if feasible thebusiness plan and operating plan will be completed for that region That regionwill serve as a pilot from which experience can be evaluated If the pilot provessuccessful expansion to other areas can be planned

Of the alternative approaches listed above we recommend alternative B Thesampling methodology used in alternative B will permit the actuary andconsultants to extrapolate from the representative areas to assess overall feasibilityand project the business and operating plan for all target markets throughout thearchipelago Alternative A is less cost effective than alternative B We do notrecommend alternative C because it will not permit evaluation of the alternativehealth care financing and delivery system for the entire target markets in a timelyfashion because it could result in employeeretiree health benefits in the pilot regionthat differ from those in other regions and because the results of implementationwill not be significant with respect to national cost increase trends The following outlines suggested additions to the original Scope of Work which wewill complete within six working weeks in Indonesia after completion of the data collection and actuarys report

31

I Work Required

A Obtain support of Ministry of Health and Pertamina (BKKAUmumDirector and Finance in regions and headquarters)

B Identify sources of needed information and staff resources for data orientation sessions

C Authorizedirect gathering and provision of information

D Format data for collection

E Processassemble data

F Consolidatecompile data for actuary and other consultant reports

G Review health facilities and data systems

Ii Resources Required

A Core team -Tugu Mandiri Nanang Iskandar MD Rochwan Muthalib

Pertamina Soejadi

ISTI Elliot Wolff James Barnes

Actuary R Pratolo

Tax Istama Siddharta

Legal Lione Gunawan Hans Schaefer

B Additional Staff

1 Two financial datasystems managers -USA

2 Computer programmer- Indonesia (loan)

3 Translator - Indonesia (loan)

C Other resources

1 Lap computer for word processing and financial analysisspread sheets

2 Second PC for data consolidation and statementreport writing

3 Expeuses for visits to Jakarta and the regions for meetings with theteam Pertamina and the production sharing contractors ($1000 fromJakarta per person per visit to country)

4 Expenses for travel to Indonesia from USA ($3000)

32

Three trips each for Wolff Barnes and four trips for two financialsystems managers

5 Expenses for orientation programs (bring 6 P -tamina healthfinancestaff from three regions to Jakarta for one we and meet PSCrepresentatives in Jakarta)

6 Expenses for actuarys assistance in data gathering as well as

actuarial report and business plan

7 Expenses for translator - approximately 20 days

8 Additional minor participation by attorney tax advisor and their coordinator

D Timing

1 Orientationformatting data by Wolff Barnes two financialsystems managers (2 months each) actuary translator and computer programmer

2 Follow-up by Wolff and Barnes - 2 months each Two financialsystems managers actuary and computer programmer -3 months each

3 Completion - 10 months

BUI)GET FOR DATA COLLECTION PHASE

The fees and other budget items reflected here are based on a comprehensive datacollection process of approximately ten months duration which we expect to berequired in light of our progress with the project team during our MarchApril visitThe costs reflected and the suggested time frame are based on accomplishing thedata collection for alternative B previously cited The expatriate consulting teamconsists of Dr James G Barnes Mr Elliot Wolff and two information systemsdataspecialists We anticipate that over the ten month period there will be three tripseach to Indonesia by Dr Barnes and Mr Wolff and four trips by the informationsystemsdata specialists In an effort to accomplish as much of the front endrequirements as possible the first trip by Dr Barnes and Mr Wolff is based onthirty-six (36) days with the remaining two trips at twenty-four (24) days each for atotal of eighty-four (84) days The information systemsdata specialists time incountry is based on four trips of thrity-six days each for a total of 144 days The chart on the following page reflects these costs

33

Budget for Data Collection Phase

Consultant Non-Govt AUSAIDISTI Amount to be Total

Fees 1

Barnes

Wolff

Data Analyst

Data Analyst

Computer Programmer Interpreter

Total

84

84

144

144

40

20

396

Days Daily Rate 2

$61423

$61423

$35422

$35522

-------------

NA

Paid by Client 3

$5159500

$5159500

$5100800

$5100800

--------------

$20520600

DailyPaid

$28578

$28578

$28578

$28578

$ 4000

$ 2000

NA

byUSAID

$ 2400552

$ 2400552

$ 4115232

$ 4115232

$ 160000

$ 40000

$13231568

Compensashytion

7560052

$ 7560052

$ 9216032

$ 9216032

$ 160000

$ 40000

$33752168

Budget for Data Collection Phase Cont

Per Trip Costs Aont Travel

Expenses Number of

Trips Non-govtdaily Rate

Amount to bePaid by Client

P IncludingpInter-island

Amounttbe Paid by

TotalTravelCosts

Travel Barnes 3 NA ------------------- $400000 $1200000 $1200000 Wolff 3 NA ------------------- $400000 $1200000 $1200000 Data Analyst 4 NA ------------------- $400000 $1600000 $1600000

Ln Data Analyst 4 Computer ----------------Programmer

NA NA

--------------------------------------

$400000 $200000

$1600000 $ 200000

$1600000 $ 200000

Interpreter Total

----------------14

NA

NA -------------------

-------------------

$400000 NA

$ 400000 $6200000

$ 400000 $6200000

Budget for Data Collection Phase Cont

Per Diem Non-govt Amount to be Amount to be Total PerRates Days Daily Rate Paid by Client Rate Paid by Diem CostsUSAID

Barnes 84 NA --------------- $10800 $ 907200 $ 907200 Wolff 84 NA --------------- $10800 $ 907200 $ 907200 Data Analyst 144 NA --------------- $10800 $1555200 $1555200 Data Analyst 144 NA -------------- $10800 $1555200 $1555200 Computer 40 NA -------------- NAProgrammer

Interpreter 20 NA NA Total Per NA NA $4924800 $4924800

0 Diem

Total Costs -DataCollection $20520600 $24356368 $44876968 Phase

1 Actuarys assistance in the data collection effort is und an existing contract between R Pratolo and ISTI the details of which we are not aware

2 The amount listed in this column shows the daily consultng rate that Pertamina Tugu Mandiri and the Ministry of Health will need topay in excess of the rate paid by USAIDISTI in order for the consultants to complete this project

3 The amount listed in this column shows the total amount to be paid by Pertamina Tugu Mandiri and the Ministry ofHealth per listedconsultant for the stated number of consulting days

I Work Required

A Obtain support of Ministry of Health and Pertamina (BKKAUmumDirector and Finance in regions and headquarters)

B Identify sources of needed information and staff resources for data orientation sessions

C Authorizedirect gathering and provision of information

D Format data for collection

E Processassemble data

F Consolidatecompile data for actuary and other consultant reports

G Review health facilities and data systems

Ii Resources Required

A Core team -Tugu Mandiri Nanang Iskandar MD Rochwan Muthalib

Pertamina Soejadi

ISTI Elliot Wolff James Barnes

Actuary R Pratolo

Tax Istama Siddharta

Legal Lione Gunawan Hans Schaefer

B Additional Staff

1 Two financial datasystems managers -USA

2 Computer programmer- Indonesia (loan)

3 Translator - Indonesia (loan)

C Other resources

1 Lap computer for word processing and financial analysisspread sheets

2 Second PC for data consolidation and statementreport writing

3 Expeuses for visits to Jakarta and the regions for meetings with theteam Pertamina and the production sharing contractors ($1000 fromJakarta per person per visit to country)

4 Expenses for travel to Indonesia from USA ($3000)

32

Three trips each for Wolff Barnes and four trips for two financialsystems managers

5 Expenses for orientation programs (bring 6 P -tamina healthfinancestaff from three regions to Jakarta for one we and meet PSCrepresentatives in Jakarta)

6 Expenses for actuarys assistance in data gathering as well as

actuarial report and business plan

7 Expenses for translator - approximately 20 days

8 Additional minor participation by attorney tax advisor and their coordinator

D Timing

1 Orientationformatting data by Wolff Barnes two financialsystems managers (2 months each) actuary translator and computer programmer

2 Follow-up by Wolff and Barnes - 2 months each Two financialsystems managers actuary and computer programmer -3 months each

3 Completion - 10 months

BUI)GET FOR DATA COLLECTION PHASE

The fees and other budget items reflected here are based on a comprehensive datacollection process of approximately ten months duration which we expect to berequired in light of our progress with the project team during our MarchApril visitThe costs reflected and the suggested time frame are based on accomplishing thedata collection for alternative B previously cited The expatriate consulting teamconsists of Dr James G Barnes Mr Elliot Wolff and two information systemsdataspecialists We anticipate that over the ten month period there will be three tripseach to Indonesia by Dr Barnes and Mr Wolff and four trips by the informationsystemsdata specialists In an effort to accomplish as much of the front endrequirements as possible the first trip by Dr Barnes and Mr Wolff is based onthirty-six (36) days with the remaining two trips at twenty-four (24) days each for atotal of eighty-four (84) days The information systemsdata specialists time incountry is based on four trips of thrity-six days each for a total of 144 days The chart on the following page reflects these costs

33

Budget for Data Collection Phase

Consultant Non-Govt AUSAIDISTI Amount to be Total

Fees 1

Barnes

Wolff

Data Analyst

Data Analyst

Computer Programmer Interpreter

Total

84

84

144

144

40

20

396

Days Daily Rate 2

$61423

$61423

$35422

$35522

-------------

NA

Paid by Client 3

$5159500

$5159500

$5100800

$5100800

--------------

$20520600

DailyPaid

$28578

$28578

$28578

$28578

$ 4000

$ 2000

NA

byUSAID

$ 2400552

$ 2400552

$ 4115232

$ 4115232

$ 160000

$ 40000

$13231568

Compensashytion

7560052

$ 7560052

$ 9216032

$ 9216032

$ 160000

$ 40000

$33752168

Budget for Data Collection Phase Cont

Per Trip Costs Aont Travel

Expenses Number of

Trips Non-govtdaily Rate

Amount to bePaid by Client

P IncludingpInter-island

Amounttbe Paid by

TotalTravelCosts

Travel Barnes 3 NA ------------------- $400000 $1200000 $1200000 Wolff 3 NA ------------------- $400000 $1200000 $1200000 Data Analyst 4 NA ------------------- $400000 $1600000 $1600000

Ln Data Analyst 4 Computer ----------------Programmer

NA NA

--------------------------------------

$400000 $200000

$1600000 $ 200000

$1600000 $ 200000

Interpreter Total

----------------14

NA

NA -------------------

-------------------

$400000 NA

$ 400000 $6200000

$ 400000 $6200000

Budget for Data Collection Phase Cont

Per Diem Non-govt Amount to be Amount to be Total PerRates Days Daily Rate Paid by Client Rate Paid by Diem CostsUSAID

Barnes 84 NA --------------- $10800 $ 907200 $ 907200 Wolff 84 NA --------------- $10800 $ 907200 $ 907200 Data Analyst 144 NA --------------- $10800 $1555200 $1555200 Data Analyst 144 NA -------------- $10800 $1555200 $1555200 Computer 40 NA -------------- NAProgrammer

Interpreter 20 NA NA Total Per NA NA $4924800 $4924800

0 Diem

Total Costs -DataCollection $20520600 $24356368 $44876968 Phase

1 Actuarys assistance in the data collection effort is und an existing contract between R Pratolo and ISTI the details of which we are not aware

2 The amount listed in this column shows the daily consultng rate that Pertamina Tugu Mandiri and the Ministry of Health will need topay in excess of the rate paid by USAIDISTI in order for the consultants to complete this project

3 The amount listed in this column shows the total amount to be paid by Pertamina Tugu Mandiri and the Ministry ofHealth per listedconsultant for the stated number of consulting days

Three trips each for Wolff Barnes and four trips for two financialsystems managers

5 Expenses for orientation programs (bring 6 P -tamina healthfinancestaff from three regions to Jakarta for one we and meet PSCrepresentatives in Jakarta)

6 Expenses for actuarys assistance in data gathering as well as

actuarial report and business plan

7 Expenses for translator - approximately 20 days

8 Additional minor participation by attorney tax advisor and their coordinator

D Timing

1 Orientationformatting data by Wolff Barnes two financialsystems managers (2 months each) actuary translator and computer programmer

2 Follow-up by Wolff and Barnes - 2 months each Two financialsystems managers actuary and computer programmer -3 months each

3 Completion - 10 months

BUI)GET FOR DATA COLLECTION PHASE

The fees and other budget items reflected here are based on a comprehensive datacollection process of approximately ten months duration which we expect to berequired in light of our progress with the project team during our MarchApril visitThe costs reflected and the suggested time frame are based on accomplishing thedata collection for alternative B previously cited The expatriate consulting teamconsists of Dr James G Barnes Mr Elliot Wolff and two information systemsdataspecialists We anticipate that over the ten month period there will be three tripseach to Indonesia by Dr Barnes and Mr Wolff and four trips by the informationsystemsdata specialists In an effort to accomplish as much of the front endrequirements as possible the first trip by Dr Barnes and Mr Wolff is based onthirty-six (36) days with the remaining two trips at twenty-four (24) days each for atotal of eighty-four (84) days The information systemsdata specialists time incountry is based on four trips of thrity-six days each for a total of 144 days The chart on the following page reflects these costs

33

Budget for Data Collection Phase

Consultant Non-Govt AUSAIDISTI Amount to be Total

Fees 1

Barnes

Wolff

Data Analyst

Data Analyst

Computer Programmer Interpreter

Total

84

84

144

144

40

20

396

Days Daily Rate 2

$61423

$61423

$35422

$35522

-------------

NA

Paid by Client 3

$5159500

$5159500

$5100800

$5100800

--------------

$20520600

DailyPaid

$28578

$28578

$28578

$28578

$ 4000

$ 2000

NA

byUSAID

$ 2400552

$ 2400552

$ 4115232

$ 4115232

$ 160000

$ 40000

$13231568

Compensashytion

7560052

$ 7560052

$ 9216032

$ 9216032

$ 160000

$ 40000

$33752168

Budget for Data Collection Phase Cont

Per Trip Costs Aont Travel

Expenses Number of

Trips Non-govtdaily Rate

Amount to bePaid by Client

P IncludingpInter-island

Amounttbe Paid by

TotalTravelCosts

Travel Barnes 3 NA ------------------- $400000 $1200000 $1200000 Wolff 3 NA ------------------- $400000 $1200000 $1200000 Data Analyst 4 NA ------------------- $400000 $1600000 $1600000

Ln Data Analyst 4 Computer ----------------Programmer

NA NA

--------------------------------------

$400000 $200000

$1600000 $ 200000

$1600000 $ 200000

Interpreter Total

----------------14

NA

NA -------------------

-------------------

$400000 NA

$ 400000 $6200000

$ 400000 $6200000

Budget for Data Collection Phase Cont

Per Diem Non-govt Amount to be Amount to be Total PerRates Days Daily Rate Paid by Client Rate Paid by Diem CostsUSAID

Barnes 84 NA --------------- $10800 $ 907200 $ 907200 Wolff 84 NA --------------- $10800 $ 907200 $ 907200 Data Analyst 144 NA --------------- $10800 $1555200 $1555200 Data Analyst 144 NA -------------- $10800 $1555200 $1555200 Computer 40 NA -------------- NAProgrammer

Interpreter 20 NA NA Total Per NA NA $4924800 $4924800

0 Diem

Total Costs -DataCollection $20520600 $24356368 $44876968 Phase

1 Actuarys assistance in the data collection effort is und an existing contract between R Pratolo and ISTI the details of which we are not aware

2 The amount listed in this column shows the daily consultng rate that Pertamina Tugu Mandiri and the Ministry of Health will need topay in excess of the rate paid by USAIDISTI in order for the consultants to complete this project

3 The amount listed in this column shows the total amount to be paid by Pertamina Tugu Mandiri and the Ministry ofHealth per listedconsultant for the stated number of consulting days

Budget for Data Collection Phase

Consultant Non-Govt AUSAIDISTI Amount to be Total

Fees 1

Barnes

Wolff

Data Analyst

Data Analyst

Computer Programmer Interpreter

Total

84

84

144

144

40

20

396

Days Daily Rate 2

$61423

$61423

$35422

$35522

-------------

NA

Paid by Client 3

$5159500

$5159500

$5100800

$5100800

--------------

$20520600

DailyPaid

$28578

$28578

$28578

$28578

$ 4000

$ 2000

NA

byUSAID

$ 2400552

$ 2400552

$ 4115232

$ 4115232

$ 160000

$ 40000

$13231568

Compensashytion

7560052

$ 7560052

$ 9216032

$ 9216032

$ 160000

$ 40000

$33752168

Budget for Data Collection Phase Cont

Per Trip Costs Aont Travel

Expenses Number of

Trips Non-govtdaily Rate

Amount to bePaid by Client

P IncludingpInter-island

Amounttbe Paid by

TotalTravelCosts

Travel Barnes 3 NA ------------------- $400000 $1200000 $1200000 Wolff 3 NA ------------------- $400000 $1200000 $1200000 Data Analyst 4 NA ------------------- $400000 $1600000 $1600000

Ln Data Analyst 4 Computer ----------------Programmer

NA NA

--------------------------------------

$400000 $200000

$1600000 $ 200000

$1600000 $ 200000

Interpreter Total

----------------14

NA

NA -------------------

-------------------

$400000 NA

$ 400000 $6200000

$ 400000 $6200000

Budget for Data Collection Phase Cont

Per Diem Non-govt Amount to be Amount to be Total PerRates Days Daily Rate Paid by Client Rate Paid by Diem CostsUSAID

Barnes 84 NA --------------- $10800 $ 907200 $ 907200 Wolff 84 NA --------------- $10800 $ 907200 $ 907200 Data Analyst 144 NA --------------- $10800 $1555200 $1555200 Data Analyst 144 NA -------------- $10800 $1555200 $1555200 Computer 40 NA -------------- NAProgrammer

Interpreter 20 NA NA Total Per NA NA $4924800 $4924800

0 Diem

Total Costs -DataCollection $20520600 $24356368 $44876968 Phase

1 Actuarys assistance in the data collection effort is und an existing contract between R Pratolo and ISTI the details of which we are not aware

2 The amount listed in this column shows the daily consultng rate that Pertamina Tugu Mandiri and the Ministry of Health will need topay in excess of the rate paid by USAIDISTI in order for the consultants to complete this project

3 The amount listed in this column shows the total amount to be paid by Pertamina Tugu Mandiri and the Ministry ofHealth per listedconsultant for the stated number of consulting days

Budget for Data Collection Phase Cont

Per Trip Costs Aont Travel

Expenses Number of

Trips Non-govtdaily Rate

Amount to bePaid by Client

P IncludingpInter-island

Amounttbe Paid by

TotalTravelCosts

Travel Barnes 3 NA ------------------- $400000 $1200000 $1200000 Wolff 3 NA ------------------- $400000 $1200000 $1200000 Data Analyst 4 NA ------------------- $400000 $1600000 $1600000

Ln Data Analyst 4 Computer ----------------Programmer

NA NA

--------------------------------------

$400000 $200000

$1600000 $ 200000

$1600000 $ 200000

Interpreter Total

----------------14

NA

NA -------------------

-------------------

$400000 NA

$ 400000 $6200000

$ 400000 $6200000

Budget for Data Collection Phase Cont

Per Diem Non-govt Amount to be Amount to be Total PerRates Days Daily Rate Paid by Client Rate Paid by Diem CostsUSAID

Barnes 84 NA --------------- $10800 $ 907200 $ 907200 Wolff 84 NA --------------- $10800 $ 907200 $ 907200 Data Analyst 144 NA --------------- $10800 $1555200 $1555200 Data Analyst 144 NA -------------- $10800 $1555200 $1555200 Computer 40 NA -------------- NAProgrammer

Interpreter 20 NA NA Total Per NA NA $4924800 $4924800

0 Diem

Total Costs -DataCollection $20520600 $24356368 $44876968 Phase

1 Actuarys assistance in the data collection effort is und an existing contract between R Pratolo and ISTI the details of which we are not aware

2 The amount listed in this column shows the daily consultng rate that Pertamina Tugu Mandiri and the Ministry of Health will need topay in excess of the rate paid by USAIDISTI in order for the consultants to complete this project

3 The amount listed in this column shows the total amount to be paid by Pertamina Tugu Mandiri and the Ministry ofHealth per listedconsultant for the stated number of consulting days

Budget for Data Collection Phase Cont

Per Diem Non-govt Amount to be Amount to be Total PerRates Days Daily Rate Paid by Client Rate Paid by Diem CostsUSAID

Barnes 84 NA --------------- $10800 $ 907200 $ 907200 Wolff 84 NA --------------- $10800 $ 907200 $ 907200 Data Analyst 144 NA --------------- $10800 $1555200 $1555200 Data Analyst 144 NA -------------- $10800 $1555200 $1555200 Computer 40 NA -------------- NAProgrammer

Interpreter 20 NA NA Total Per NA NA $4924800 $4924800

0 Diem

Total Costs -DataCollection $20520600 $24356368 $44876968 Phase

1 Actuarys assistance in the data collection effort is und an existing contract between R Pratolo and ISTI the details of which we are not aware

2 The amount listed in this column shows the daily consultng rate that Pertamina Tugu Mandiri and the Ministry of Health will need topay in excess of the rate paid by USAIDISTI in order for the consultants to complete this project

3 The amount listed in this column shows the total amount to be paid by Pertamina Tugu Mandiri and the Ministry ofHealth per listedconsultant for the stated number of consulting days