BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 749|
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THIRD READING
Bill No: SB 749
Author: Escutia (D), et al
Amended: 5/13/03
Vote: 21
SENATE JUDICIARY COMMITTEE : 5-1, 5/6/03
AYES: Escutia, Cedillo, Ducheny, Kuehl, Sher
NOES: Ackerman
SUBJECT : Hospital: group purchasing organizations
SOURCE : Author
DIGEST : This bill defines a group purchasing
organization as a medical supply purchasing agent and would
impose certain restrictions on a group purchasing
organization when acting as an agent. Codifies the
industry's existing code conduct and require group
purchasing organizations to adhere to certain code of
conduct principles such as (a) prohibiting all employees
from accepting gifts, (b) requiring employees to divest in
suppliers' stocks, (c) prohibiting the bundling of clinical
preference goods or services, (d) requiring hospital
officials to disclose ties with vendors, (e) requiring
agents to disclose to hospital members payments received
from vendors, (f) prohibiting the extraction of fees from
any vendor in excess of three percent of the total
purchases, and (g) prohibiting a group purchasing
organization from requiring its members to purchase goods
or services from any single vendor.
CONTINUED
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ANALYSIS :
Existing law :
1. On agency generally defines the authority,
responsibility, and obligations of an agent with respect
to a principal.
2. Does not regulate hospital group purchasing
organizations, but it does impose certain fiduciary
responsibilities upon purchasing agents.
This bill :
1. Defines a group purchasing organization (GPO) as a
purchasing agent that negotiates contracts with vendors
on behalf of its member health care service providers by
using the combined purchasing power of its members to
obtain the best prices for medical supplies.
2. Prohibits management employees, or other employees in a
position to influence contracting decisions to accept
any gifts, honoraria, favors or personal services from
any vendor that contracts with a GPO.
3. Requires a GPO or any of its employees, officers,
directors, and advisory board members to disclose any
corporate equity interest in any of its vendors to its
member hospitals.
4. Prohibits GPOs with corporate equity interest in a
vendor to obligate, require, or commit a member hospital
to purchase goods or services from that vendor.
5. Prohibits a GPO from engaging in bundling of clinical
preference goods or services.
6. Requires GPOs to disclose payments received from vendors
to its member hospitals.
7. Prohibits a GPO from extracting fees or any remuneration
from any vendor in excess of three percent of total
purchases from the vendor.
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8. Prohibits a GPO from requiring its members to purchase
goods or services from any single vendor, or to purchase
from any single vendor in excess of 90 percent of its
total purchases.
9. Defines "bundling" as the practice of packaging items in
to a single contract and requiring a member to buy the
entire package in order to obtain the lowest price for
the entire package.
10.Makes legislative findings and declarations that the
industry has not successfully self-regulated and that
the provisions in the code of conduct must be codified
into statute to enforce the industry standards
established pursuant to federal investigations.
Other healthcare areas under investigation. Suppliers and
purchasers in other areas of the healthcare industry have
also attracted attention, and are being investigated by
both state and federal officials. Pharmaceutical
companies, such as Merck-Medco and Tenet are currently
under intense scrutiny for their symbiotic relationship
with physicians, fraudulently billing Medi-Cal and Medicaid
for prescriptions at inflated rates, and a number of
allegations of misconduct similar to the actions this bill
is seeking to address.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 5/15/03)
Applied Medical
California Advocates for Nursing Home Reform
Congress of California Seniors
Electrical Engineering Department, San Diego State
University
Gibbons Surgical Corporation
Impact Worldwide, LLC
Masimo Corporation
Medical Device Manufacturers Association
Pevco Systems International, Inc.
OPPOSITION : (Verified 5/15/03)
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Novation
VHA West Coast
National Oncology Alliance
ARGUMENTS IN SUPPORT : According to the author's office,
rising healthcare costs are one of the underlying causes of
the nation's healthcare crisis. Medical supplies account
for a quarter of a hospital's costs and are the second
largest expense, following labor. Control of the medical
supply market by hospital buying groups is one reason why
the cost of medical supplies continues to rise sharply.
These buying groups, the author's office argues, are not
sufficiently complying with their own industry's code of
conduct and therefore need regulation enforced by statute
to prevent further abuses.
Transparency is crucial because GPOs are using public funds
to buy supplies for hospitals that charge for their
services under Medi-Cal and Medicaid claims. Full
disclosure of the relationships between the suppliers, the
middlemen (the GPOs), and the hospital owners will give
regulators and consumers a better idea of whether or not
these companies operate in the interest of their clients or
profit at the expense of these struggling hospitals and
their patients and, ultimately, the taxpayers.
ARGUMENTS IN OPPOSITION : Novation argues that "Supplies
represent one of the largest expense categories for
hospitals, second only to labor costs, and anything that
increases supply costs for hospitals places a significant
burden on already financially strapped health care
organizations. In that light, I'm writing to express
Novation's opposition to S.B. 749. Our research indicates
it would increase supply costs for California hospitals,
perhaps by as much as $75 million to $100 million annually.
"Novation is one of the leading supply services companies
in health care, representing 1,400 hospitals nationwide,
including Presbyterian Intercommunity Hospital in your home
district and more than 140 hospitals across California.
During the last year, we have worked with other
organizations, federal officials and representatives from
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the manufacturing community to modify business practices
and enhance opportunities for small companies to work with
health care organizations that voluntarily access our
contracts. The industry has demonstrated significant
progress in implementing these changes and has successfully
addressed many of the stated objectives addressed in your
legislation.
"Industry studies have shown that by using group
purchasing, hospitals are able to reduce their supply costs
by up to 15 percent. These savings have an immediate
impact on a hospital's financial health, enabling them to
stretch their limited resources to better serve their
communities. We have data to indicate S.B. 749 would
eliminate these savings and complicate the purchasing
activities at California hospitals, and we have conveyed
this information to the hospitals we serve.
"We share your goal of making the California health care
system better and lowering costs. But the only benefactors
of passage of the current legislation would be medical
product manufacturers, who would find it much easier to
raise prices on their products, since the individual
hospitals would not be able to take full advantage of the
volume discounts we offer. We think the interests of the
health care community and the community at large should be
placed above the special interests of the medical product
manufacturers."
RJG:mel 5/15/03 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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