BILL ANALYSIS                                                                                                                                                                                                    






                                 SENATE HEALTH
                               COMMITTEE ANALYSIS
                        Senator Deborah V. Ortiz, Chair


          BILL NO:       AB 2911                                      
          A
          AUTHOR:        Nunez                                        
          B
          AMENDED:       August 28, 2006
          HEARING DATE:  Tuesday, August 29, 2006                     
          2
          FISCAL:        N/A                                          
          9
                                                                      
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          CONSULTANT:                                                 
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          Hansel / ak
                                        
                        ~PURSUANT TO SENATE RULE 29.10~
                                        

                                     SUBJECT
                                         
                 California Discount Prescription Drug Program

                                     SUMMARY  

          This bill establishes the California Discount Prescription  
          Drug Program within the Department of Health Services to  
          provide prescription drug discounts for uninsured  
          California residents with income up to 300 percent of the  
          federal poverty level and other individuals, as specified.

                                     ABSTRACT  

          Existing federal law:  
           1.Requires drug manufacturers, for the purposes of the  
            federal Medicaid program, to enter into rebate agreements  
            with the Secretary of the United States Department of  
            Health and Human Services (HHS) and provide minimum  
            rebates, as specified, to state Medicaid agencies for  
            outpatient prescription drugs provided to Medicaid  
            beneficiaries.

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          2.Defines Medicaid "best price" as the lowest price paid to  
            a manufacturer for a brand name drug, taking into account  
            rebates, chargebacks, discounts or other pricing  
            adjustments, excluding nominal prices.

          3.Excludes the prices charged to certain governmental  
            purchasers from "best price" provisions including prices  
            charged to the Veterans Administration, Department of  
            Defense, Indian tribes, Federal Supply Schedule, state  
            pharmaceutical assistance programs (SPAPs), Medicaid, and  
            340B covered entities.

          4.Permits a state, upon authorization from the Secretary of  
            HHS, to enter directly into agreements with drug  
            manufacturers to negotiate deeper (supplemental)  
            discounts than "best price" for state Medicaid programs.

          5.Specifies that a state may require, as a condition of  
            coverage or payment for a covered outpatient drug, the  
            approval of the drug before its dispensing if the system  
            for providing such approval meets specified criteria.

          Existing state law:
          1.Establishes California's Medicaid program (Medi-Cal) and  
            authorizes the Department of Health Services (DHS) to be  
            the purchaser of prescribed drugs. 

          2.Authorizes DHS to obtain discounts, rebates, or refunds  
            based on the quantities purchased by the program, as  
            permissible by federal law.

          3.Authorizes DHS or the state's fiscal intermediary to  
            impose prior authorization requirements on the drug  
            products of manufacturers for which DHS has not received  
            rebate or interest payments as specified.  Authorizes DHS  
            to use existing administrative mechanisms for any drug  
            for which DHS does not obtain a rebate.

          4.Exempts specified drugs from prior authorization  
            requirements and authorizes the Director of DHS to exempt  
            any drug from prior authorization if it is determined  
            that an essential need exists for that drug and there are  
            no other drugs available without prior authorization that  
            meet that need.
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          This bill:
          1.Establishes the California Discount Prescription Drug  
            Program (Program) with DHS.

          2.Provides definitions for the Program and makes findings  
            and declarations regarding the affordability of  
            prescription drugs and intent of the Program.
           
          Eligibility for Program  
          3.Limits Program eligibility to residents who meet one or  
            more of the following:

             a.   Has total unreimbursed medical expenses equal to at  
               least 10 percent family income and family income does  
               not exceed 100 percent of the median family income in  
               the state.

             b.   To the extent allowed by federal law, is enrolled  
               in the Medicare program, but whose prescription drugs  
               are not covered by the Medicare program.  

             c.   Has a family income that does not exceed 300  
               percent of the federal poverty level (FPL) and does  
               not have outpatient prescription drug coverage paid by  
               the following:
                     In whole by the Medi-Cal program.
                     In whole or part by the Healthy Families  
                 program or other programs funded by the state.
                     In whole or part by a third party payor,  
                 provided that the individual has not reached the  
                 annual limit on their prescription drug coverage. 

          1.Limits the scope of the Program to prescription drugs  
            dispensed to eligible persons on an outpatient basis.

           Prescription drug discounts and rebate agreements  
          2.Limits the amount a Program enrollee pays for a drug to  
            the lower of the participating pharmacy's usual and  
            customary charge or a pharmacy contract rate, minus a  
            program discount for the specific drug or an average  
            discount for a group of drugs or all drugs covered by the  
            Program.

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          3.Requires DHS to negotiate drug discount agreements with  
            drug manufacturers to provide for discounts for  
            prescription drugs purchased through the Program.  

          4.Requires DHS to attempt to negotiate the maximum possible  
            discount for Program participants; further requires DHS  
            to attempt to negotiate, with each manufacturer,  
            discounts to offer single source drugs at a volume  
            weighted average discount that is equal to or below one  
            of the following benchmarks: 

             a.   85 percent of the average manufacturer price, as  
               published by the Centers for Medicaid and Medicare  
               Services.

             b.   The lowest price provided to any nonpublic entity  
               in California by a manufacturer to the extent Medicaid  
               best price exists under federal law.

             c.   The Medicaid best price, as defined, to the extent  
               it exists under federal law.

          5.Defines for purposes of the bill, "volume weighted  
            average discount" as the average discount for the drugs  
            of a manufacturer, weighted by each drug's percentage of  
            the total prescription volume of that manufacturer's  
            drugs, for drugs for which DHS contracts with the  
            manufacturer.

          6.Allows DHS to require drug manufacturers to provide  
            information that is reasonably necessary for the  
            department to carry out its duties.

          7.Requires DHS to pursue manufacturer discount agreements  
            to ensure that the number and type of drugs available  
            through the Program is sufficient to give Program  
            participants a formulary comparable to the Medi-Cal list  
            of contract drugs, or if the information is available to  
            the department, a formulary that is comparable to that  
            provided to CalPERS enrollees.

          8.Allows DHS to limit the number of drugs available to the  
            Program to obtain the most favorable discounts.

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          9.Requires all drug discount agreements negotiated pursuant  
            to this bill to be used to reduce the cost of drugs  
            purchased by Program participants.

          10.   Provides that all information provided by drug  
            manufacturers shall be considered confidential and  
            proprietary information and shall not be subject to  
            disclosure under the Public Records Act; provides that  
            the Bureau of State Audits and the Controller shall have  
            access to pricing information in a manner consistent with  
            their access to such information under the Medi-Cal  
            program and existing law.

          11.   Allows any licensed pharmacy and manufacturer, as  
            defined, to participate in the Program.  Requires DHS to  
            establish a single, basic pharmacy rate, but allows it to  
            contract at different rates with pharmacies in order to  
            provide access throughout the state.

          12.   Requires DHS, on August 1, 2010 and annually  
            thereafter, to determine whether manufacturer  
            participation in the Program has been sufficient to meet  
            both of the following benchmarks:

             a.   The number and type of drugs available through the  
               Program are sufficient to give participants a  
               formulary comparable to the Medi-Cal list of contract  
               drugs or, if the information is available to the  
               department, a formulary comparable to that provided to  
               CalPERS enrollees.

             b.   The volume weighted average discount of single  
               source prescription drugs is equal to or below any of  
               the benchmark prices in (7).

          13.   Effective on August 1, 2010, allows DHS to require  
            prior authorization in the Medi-Cal program for any drug  
            of a manufacturer if the manufacturer fails to agree to a  
            volume weighted average discount for single source drugs  
            that is equal to or lower than any of the benchmark  
            prices described in (7), but only to the extent such  
            authorization does not increase costs to the Medi-Cal  
            program, as specified.

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          14.   Conditions the authority in (16) on a determination  
            that manufacturer participation has been insufficient to  
            meet both of the benchmarks described in (15).

          15.   Provides that prior authorization of any drug shall  
            be implemented only to the extent permitted by federal  
            law, and in a manner consistent with state and federal  
            law. 

          16.   Provides that prior authorization of a manufacturers'  
            drugs may be applied to any manufacturer that has not  
            negotiated with DHS.

          17.   Requires DHS to notify the Speaker and President Pro  
            Tempore that the department is requiring prior  
            authorization no later than five days after making a  
            determination to do so.

          18.   Provides that if prior authorization is required for  
            a drug, a Medi-Cal beneficiary shall not be denied the  
            continued use of a drug that is part of a prescribed  
            therapy until that drug is no longer prescribed for that  
            beneficiary's therapy.

          19.   Requires the names of manufacturers of single source  
            drugs that do and do not enter into discount agreements  
            to be posted on the DHS Internet Web site. 

          20.   Requires participating manufacturers to calculate and  
            pay interest on late or unpaid rebates, as specified.

          21.   Requires participating manufacturers to clearly  
            identify all rebates, interest, and other payments for  
            the Program in a manner designated by DHS.

          22.   Requires DHS to generate a monthly report, as  
            specified, as well as an annual report that reports on  
            the number of individuals enrolled, individuals receiving  
            prescriptions under the program, participating  
            pharmacies, and participating manufacturers.

           Application, enrollment, and outreach  
          23.   Specifies that the application fee is $10 annually  
            and allows an application to be completed at any  
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            pharmacy, physician office, or clinic participating in  
            the Program.

          24.   Allows the pharmacy, physician office, clinic, or  
            nonprofit community organization that completes the  
            application to keep the fee as reimbursement for its  
            processing costs, unless the applicant is already  
            enrolled in the Program.

          25.   Requires DHS to utilize a secure electronic  
            application process or a third-party vendor to enroll  
            applicants. 

          26.   Requires DHS to make an eligibility determination  
            within 24 hours of receipt of a completed application,  
            using the income information reported on the application  
            and without requiring additional documentation.  

          27.   Requires applicants to attest that the information  
            provided on the application is accurate to the best  
            knowledge and belief of the applicant or applicant's  
            guardian or custodian.  

          28.   Requires DHS to conduct an outreach program, as  
            specified.

          29.   Allows DHS to accept on behalf of the state any gift,  
            bequest, or donation of outreach services or materials to  
            inform residents about the Program, as specified.

           Patient assistance programs  
          30.   Requires DHS to encourage participating manufacturers  
            to maintain their private discount drug programs at a  
            level comparable to which they were offered prior to the  
            enactment of the Program and, to the extent possible,  
            simplify the application and eligibility processes for  
            those programs.

          31.   Allows DHS, to the extent permitted by state and  
            federal law, to execute agreements with drug  
            manufacturers to provide a single point of entry for  
            eligibility determination and claims processing for drugs  
            available through their patient assistance programs.

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          32.   Requires DHS to develop a system, as specified, to  
            provide a Program participant with the best discounts on  
            prescription drugs that are available to the participant  
            through the Program or through a drug manufacturer  
            patient assistance program.

          33.   Requires drug manufacturers to report annually to DHS  
            regarding the utilization of and total value of drugs  
            provided through manufacturer patient assistance  
            programs.

          34.   Requires the participant's Program card to meet all  
            the legal requirements for a health benefit card and  
            serve as a single point of entry for drugs available  
            through patient assistance programs.

           Administration
           35.   Provides that contracts, contract amendments, change  
            orders under the Program are subject to the same  
            exemptions provided for in the Medi-Cal drug program and  
            are exempt from competitive bidding requirements, as  
            specified.  
           
           36.   Authorizes DHS to contract with a third-party vendor  
            or utilize existing health care service provider  
            enrollment and payment mechanisms, as specified. 

          37.   Requires DHS to deposit all payments received under  
            the Program into the California Prescription Drug Program  
            Fund to be established in the State Treasury.  Requires  
            moneys in this fund be made available to DHS upon  
            appropriation by the Legislature and prohibits  
            expenditure for any other purpose, loan or transfer to  
            any other fund including the General Fund.

          38.   Exempts Program contracts from the Public Records  
            Act.

          39.   Provides that the Director of DHS may adopt  
            regulations as are necessary to implement and administer  
            the program.

          40.   Permits the Director to implement the Program in  
            whole or in part by means of provider bulletin or other  
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            similar instructions, without taking regulatory action,  
            provided that no bulletin shall remain in effect after  
            August 1, 2011.  

          41.   Expresses intent that any regulations necessary to  
            implement the Program be adopted on or before August 1,  
            2011.

          42.   Contains a finding establishing the state's interest  
            in exempting drug trade secrets and pricing information  
            from public disclosure, as provided for in Article I,  
            Section 3 of the California Constitution, as amended by  
            Proposition 59 in November, 2004.

                                  FISCAL IMPACT  

          According to the Senate Appropriations Committee analysis  
          of a previous version of the bill, General Fund costs in  
          the range of $3 million annually for administration,  
          staffing, and information technology related costs.   
          Unknown one-time General Fund costs to advance funds to  
          pharmacies for manufacturer discounts for rebates during  
          first quarter of implementation of the program.
                            BACKGROUND AND DISCUSSION

           Prices for prescription drugs have risen sharply in recent  
          years, resulting in access problems for many Californians.   
          A 2004 study by Families USA found that the prices of the  
          top 30 brand-name drugs dispensed to seniors have increased  
          by nearly 22 percent in just three years.  Between 2001 and  
          2004 the prices of these 30 drugs rose by 3.6 times the  
          rate of inflation.  A recent AARP study showed that prices  
          for the 197 brand-name drugs most commonly used by seniors  
          continued to rise at a rate more than three times greater  
          than inflation in 2004. 

          As a result of these trends, the amount that United States  
          (U.S.) residents spend out-of-pocket on prescription drugs  
          has risen dramatically in recent years:  in 2002, U.S.  
          consumers paid $48.6 billion in out-of-pocket costs for  
          prescription drugs, an increase of 15.3 percent over the  
          previous year.  In 2002, the annual increase in  
          out-of-pocket spending for U.S. residents was greater than  
          the total increase in out-of-pocket spending for all other  
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          kinds of health care combined.  A recent survey found that  
          37 percent of the uninsured said they did not fill a  
          prescription because of cost, compared to 13 percent of the  
          insured.  A study by the RAND Corporation found that when  
          out-of-pocket payments for prescription drugs doubled,  
          patients with diabetes and asthma cut back on their use of  
          drugs by over 20 percent and experienced higher rates of  
          emergency room visits and hospital stays.

          Nationally, the percentage of cash payers (versus Medi-Cal  
          and third party payors) of prescription drugs have  
          significantly decreased over the last decade, but one out  
          of every four prescriptions is still paid out-of-pocket.

          The Medicare Part D drug benefit, enacted in 2003 and which  
          commenced drug coverage under competing plans in January,  
          2006, provides drug coverage to Medicare beneficiaries.   
          However, a recent analysis by the California Health Care  
          Foundation in March, 2006 found that the competing plans  
          differ considerably in their coverage of drugs.  In  
          addition, many plans pay no share of costs for drug  
          expenditures between $2,250 and $5,100 (the so-called  
          "donut hole").

          Other states
          A number of states have responded to these trends by  
          enacting prescription drug assistance programs.  Most of  
          the older programs provide subsidized drug coverage while  
          newer programs focus on providing discounts to enrollees  
          through negotiated discounts with drug manufacturers and  
          pharmacies.

          Maine's Act to Establish Fairer Prices for Prescription  
          Drugs was enacted in 2000 (known as the MaineRx program) is  
          open to all residents who do not have prescription drug  
          coverage.  Under MaineRx, pharmacy participation is  
          voluntary, but compulsory for manufacturers with Medicaid  
          contracts in the state.  MaineRx provides disincentives for  
          nonparticipating manufacturers, such as subjecting their  
          drugs to prior authorization requirements in the state  
          Medicaid program and advertising their refusal to  
          participate to health care providers and the public. 
          
          MaineRx was immediately challenged by the pharmaceutical  
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          industry.  On May 19, 2003, the U.S. Supreme Court ruled  
          that the MaineRx Program was not preempted because the  
          Medicaid Act "gives the states substantial discretion to  
          choose the proper mix of amount, scope and duration  
          limitations on coverage, as long as care and services are  
          provided in the best interest of the recipients."  The  
          Court also ruled that the MaineRx statute on its face did  
          not violate the Interstate Commerce Clause.

          The legislature revised MaineRx soon after the Supreme  
          Court acted by creating the MaineRx Plus program.  The new  
          program requires participating pharmacies to provide drugs  
          that are on Maine's Medicaid preferred drug list to state  
          residents whose family income is 350 percent or less of the  
          FPL or whose family incurs unreimbursed prescription drug  
          expenses equal to 5 percent or more of family income or  
          unreimbursed medical expenses of 15 percent or more of  
          family income.

          In January 2005, the Federal District Court in Maine ruled  
          that under the legal doctrine of "ripeness," it would be  
          premature to conclude that the permissive prior  
          authorization scheme in MaineRx Plus in any way violates  
          federal Medicaid law.  The court stated that since the  
          Maine statute explicitly requires prior authorization be  
          implemented only "as permitted by law" and "in a manner  
          consistent with the goals of the MaineCare program and the  
          requirements of the Social Security Act," it is possible  
          for Maine to implement its prior authorization without  
          violating the law.  The court concluded that while the  
          Maine program was not reviewable at this time, due to lack  
          of ripeness, it remains subject to review by the Secretary  
          of HHS at the appropriate time.

          A September 2005 evaluation by Prescription Policy Changes  
          found that average savings off cash prices for pharmacy  
          purchases under MaineRx were on the order of 25 percent for  
          brand name drugs and 50 percent for generics.

          Ohio's Best Rx
          Ohio's Best Rx is a voluntarily program that has been in  
          place since January 2005.  There is no prior authorization  
          provision.  Ohio's income eligibility is 250 percent of  
          FPL, which is waived for people age 60 and over.
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          Prior efforts in California
          SB 19 (Ortiz), also known as the Governor's California Rx  
          proposal, and AB 75 (Frommer) were introduced early in the  
          2005 - 06 Session to establish state pharmaceutical  
          discount programs based on discounts from drug  
          manufacturers that are passed on to individuals who did not  
          have access to affordable prescription drugs.

          SB 19 as introduced relied on voluntary participation from  
          manufacturers to provide discounts, while AB 75 sought to  
          compel discounts from drug manufacturers by leveraging the  
          state's large purchasing power through the Medi-Cal  
          program.  Under AB 75, drug manufacturers who did not  
          provide discounts for specified drugs under the new program  
          would have those drugs be subject to prior approval within  
          Medi-Cal.

          Neither bill was successful and the issue moved to the  
          ballot in November, when Propositions 78 and 79 (similar to  
          SB 19 and AB 75, respectively) went before voters.  Both  
          initiatives were defeated.

          In a February 2005 evaluation of the Governor's CalRx  
          program (SB 19), the Legislative Analyst Office (LAO)  
          recommended that the Legislature try the SB 19 approach for  
          voluntary rebates first, but direct DHS in advance to move  
          forward with the type of approach included in AB 75  
          (leveraging the Medi-Cal program) if the Governor's program  
          should fail to achieve its goals.  AB 2911 embodies the  
          LAO's recommendation.

          Arguments in support
          Supporters write that prescription drugs continue to rise,  
          driving up the cost of medical care and placing needed  
          medicine out of reach for too many Californians.   
          Supporters state that hardest hit are millions of people  
          who have no health insurance or inadequate coverage.   
          Supporters state that when consumers cannot afford the  
          drugs prescribed, this results in worse outcomes. 

          Supporters write that experiences in other states, as well  
          as that of the Golden Bear Pharmacy Assistance Program  
          established by AB 696 in 2001, demonstrate that voluntary  
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          discount programs work poorly, if at all.  Consumers Union  
          points out that California has used prior authorization for  
          years in Medi-Cal and is widely regarded as having lower  
          Medicaid drug prices than states that do not use prior  
          authorization to negotiate supplemental rebates from drug  
          companies.  The bill extends the benefit of these  
          negotiations to uninsured and underinsured Californians.   
          Supporters believe that this bill reflects a thoughtful  
          compromise between the initiatives on the ballot last year.

          Arguments in opposition
          The Western Center on Law and Poverty (Western Center) and  
          National Health Law Program oppose provisions of the bill  
          authorizing DHS to use prior authorization in the Medi-Cal  
          program to impede access to care for the state's poorest  
          and sickest population.  The groups state that while they  
          support efforts to find a solution to provide discount  
          prescription drugs for the uninsured, they cannot support  
          an effort that would deny health coverage to one class of  
          individuals for the benefit of another class of  
          individuals.  Western Center further states that obtaining  
          prior authorization is not a simple process and  
          beneficiaries frequently face a lengthy and cumbersome  
          process obtaining drugs subject to prior authorization.   
          The Western Center contends that while provisions of this  
          bill providing for continuity of care seek to lessen the  
          blow of the Medi-Cal hammer, there is no escaping the basic  
          premise of the bill which renders one population's access  
          to drugs more important than the other population's access.  
           
           
           The Pharmaceutical Research and Manufacturers of America  
          (PhRMA) and a number of biotechnology companies state  
          concerns about the system of price controls that would be  
          created by the bill.  These groups write that while  
          government intervention in the market for prescription  
          drugs may produce some short-term savings for patients, the  
          long-term effects of price regulation on the biomedical  
          industry would be substantial.  Limiting the returns that  
          manufacturers receive on their investments has a direct  
          effect on new investments into the research and development  
          of innovative therapies.  The groups note that California  
          voters defeated a measure similar to AB 2911 in last year's  
          special election and that, like Maine Rx, the hammer  
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          provisions in AB 2911 will be subject to extensive  
          litigation.

          Aside from their fundamental concerns about the hammer  
          provisions of AB 2911, opponents have proposed a number of  
          changes to the bill:

           Lengthening the time period before DHS must consider  
            whether to impose the Medi-Cal hammer to three full years  
            from the time the program is implemented;

           Requiring DHS to issue regulations before they must  
            consider whether to impose the hammer, to allow further  
            public participation in the implementation of the program  
            (the bill currently allows implementation through  
            provider bulletins and do not require regulations to be  
            issued until August, 2011);

           Providing greater assistance to Medi-Cal beneficiaries  
            who lose access to drugs through implementation of the  
            hammer.

          Related legislation
           SB 1702 (Perata, 2006) is an identical measure to AB  
            2911.  This measure is on the Assembly floor.

           SB 19 (Ortiz, 2005) would have established the California  
            State Pharmacy Assistance Program (Cal Rx), a state  
            pharmacy assistance program under the authority of DHS,  
            to provide prescription drug discounts for California  
            residents with income up to 300 percent of FPL.  This  
            measure failed in the Senate Health Committee.

           AB 75 (Frommer, 2005) establishes a state pharmacy  
            assistance program for Californians with income up to 400  
            percent of FPL.  This measure is in the Senate Health  
            Committee.

          Prior legislation
           SB 393 (Speier, Chapter 946, Statutes of 1999) requires  
            retail pharmacies that participate in the Medi-Cal  
            program to sell drugs to elderly and disabled persons on  
            Medicare at a discount price that is just above the  
            Medi-Cal price.
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           SB 696 (Speier, Chapter 693, Statutes of 2001)  
            establishes the Golden Bear Pharmacy Assistance Program  
            to provide deeper discounts to Medicare recipients  
            through negotiated voluntary rebates with drug  
            manufacturers.  However, in 2004 DHS ended its efforts to  
            implement the program because of administrative problems  
            passing rebates along to consumers and because few  
            manufacturers had been willing to provide these rebates.



































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                                  PRIOR ACTIONS

           Senate Appropriations:  8 - 5   Do Pass 
          Senate Health:        5 - 4   Do Pass 
          Assembly Floor:     48 - 32 Pass
          Assembly Appropriations:12 - 5   Do Pass 
          Assembly Health:      8 - 4   Do Pass as Amended


                                    POSITIONS  
                                        
          Support:     (Verified 8/18/06) (prior version except where  
          indicated)
                       OuRx Coalition (source)
                       AARP California
                       AIDS Healthcare Foundation
                       American Federation of State, County and  
          Municipal Employees 
                       California Alliance for Retired Americans
                       California Consumers United
                       California Labor Federation, AFL-CIO
                       California Mental Health directors Association  
          (current version)
                       California National Organization for Women
                       California Pharmacists Association (if  
          amended)
                       California Public Interest Research Group
                       Congress of California Seniors
                       Consumers Union
                       Health Access California
                       Greenlining Institute
                       Insurance Commissioner John Garamendi
                       Latino Coalition for a Healthy California 
                       Mexican American Legal Defense and Educational  
          Fund
                       Senior Action Network
                       Service Employees International Union

          Oppose:     Alpha Behavioral Health Services (unless  
          amended)
                      California Council of Community Mental Health  
          Agencies
                       California Healthcare Institute (unless  
          amended) (prior version)
                       Mental Health Association in California 
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                       National Health Law Program
                       Pharmaceutical Research and Manufacturers of  
          America
                       Protection and Advocacy, Inc. (unless amended)  

                      Western Center on Law and Poverty





                                   -- END --