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The battle between the Finance Ministry's accountant general, Yaron Zelekha, and the health system is coming to a head. Yesterday, Zelekha notified the Ministry of Health and the four largest government hospitals that he is canceling the tender exemption that had been previously granted to Sarel.

Sarel is a company that has a monopoly over purchasing drugs for government hospitals. The firm has been awarded the NIS 700 million annual business without a tender until now. Practically, Zelekha's decision means that the hospitals may no longer buy their drugs from Sarel.

The hospitals are now expected to respond to Zelekha's steps with a media campaign attacking him. The dispute between the accountant general and Sarel has been going on for years, and has even reached the courts.

At the heart of the dispute is Sarel's unusual organizational structure: it is a private company, controlled by a semi-private association. Yet it controls one of the most sensitive and important public responsibilities: purchasing drugs for all government hospitals. The original intention was for Sarel to provide lower prices for the drugs by centrally purchasing drugs in large quantities.

To allow Sarel to concentrate its purchasing power, it was given an exemption from the government's tender requirements, and the hospitals were allowed to buy their drugs only through Sarel with no competitive bidding. Today's NIS 700 million in drug purchases through Sarel is all public money, funded by the state health system.

In spite of the sensitive nature of Sarel's activities, and in spite of its huge turnover, Sarel's exceptional legal structure has allowed it to operate with almost no public supervision. The Health Ministry barely supervises Sarel, and it makes almost no reports to the Finance Ministry.

Among other complaints, Sarel refused to give the treasury information about the salaries it pays its workers.

The hospitals and the Health Ministry have accused Sarel for years of inflated prices, in spite of its large-scale purchasing.

The ministry has accused Sarel of charging hospitals a 7 percent fee on all drugs it sells them. The commission is intended to pay for Sarel's expenses but the treasury insists that this is an excessive amount, and seems to be intended to finance the extraordinary salary payments of the company.The treasury estimates that in recent years Sarel accumulated large surpluses, some NIS 80 million.

As a result of these surpluses, Sarel has started lending money to the hospitals by selling them drugs on credit. In doing so Sarel has turned itself into a form of private bank for the hospitals, and the treasury claims that Sarel charges usurious interest rates on these loans.

The Finance Ministry's attempts to supervise Sarel have all failed, in particular because the management of the government hospitals has objected, worried that restraints would lead to higher drug prices.

The treasury claims that the hospitals are defending Sarel since Zelekha's decision will require the hospitals to publish tenders themselves, and thereby lose their easy credit from Sarel.

In recent months a compromise was proposed in which the treasury would appoint its own representatives to various committees within Sarel: the finance, tenders and audit committees. But Sarel refused the request to name a treasury representative as chairman of the audit committee, claiming that this would allow the treasury to gain control of the company's operations without the state taking any responsibility for any damage done.

Having failed to reach a compromise, Zelekha announced yesterday he would immediately cancel Sarel's exemption from the Tenders Law for buying drugs for the four largest state hospitals: Sheba, Ichilov, Rambam and Asaf Harofeh - as well as for the Health Ministry.

In the next stage Zelekha intends to examine how to cancel the tender exemption for seven smaller government hospitals, to allow them to continue to take advantage of centralized purchasing even if not through Sarel.

Asked about this report, the CEO of Sarel, Dr. Moshe Modai, responded: "The treasury's proposal will have three serious ramifications. First, the price of drugs for small hospitals, which are on the confrontation lines, will rise greatly since they will need to buy drugs without the advantage of large purchases which we offer them. Second, the large hospitals will need to establish huge purchasing operations, that will each employ dozens of workers, and that will load them down with high and unnecessary costs. Even on the level of inventories there will be significant price increases, as each hospital will have to keep its own inventory instead of the drug inventory which we keep."

He added, "I do not understand why the accountant general has taken this step, especially as he himself appointed a committee half a year ago to study Sarel and to bring recommendations on how to deal with it. And here, he does not have the patience to wait for the results of the committee, and he is already taking actions before the committee has finished its work."