This, then, is one fallacy of the idea; getting one company to offer a high discount rate, establishing this rate as a plateau, then forcing this discount level by mandate to other companies offering equipment in the same category.

I believe that covers item 3 and I shall not read it.

Item 4 is:

It makes no difference how young the electronics industry is or what level of innovation or creativity must be supported by heavy engineering expenditures; GSA expects to receive the same type of discount buying it experiences with automobiles and aspirin tablets.

We are committed to heavy engineering expenditures; we have to think about what is going to happen to the market at the end of 1968, what we are going to bring out in 1969, and what is going to be new in 1969, 1970, and 1971. What are we going to have on the market to fulfill the applications that will need our equipment 5 years hence? We have to spend engineering dollars, hundreds of thousands of dollars in engineering right now to meet the challenge that is inevitable in the future.

We know we have to support this activity. However, GSA has suggested: "Cut down on your engineering; allow us a 5-percent discount and cut your engineering 5 percent." But a company in this type of business cannot do that and survive. That is as simple a way as I can say it.

Mr. ROBINSON. You are comparing this product with a typical shelf item, like an aspirin tablet?

Mr. WASHBURN. I am showing the contrast to an aspirin tablet. There is no more innovation left in an aspirin tablet.

Mr. ROBINSON. But your product is a recognized shelf item; is it not? Mr. WASHBURN. Yes; and next year there will be one to take its place which is better, more accurate, more precise, and will do a better job for more applications in government and industry.

Mr. ROBINSON. In other words, you find this is perhaps a matter of nomenclature. Actually this is a shelf item, but it is sophisticated shelf item?

Mr. WASHBURN. Yes, sir; very sophisticated. In fact it can really be understood only by the engineers and scientists who use it.

Mr. ROBINSON. For that reason, you feel it doesn't lend itself to this open end Federal Supply Schedule type of procurement?

Mr. WASHBURN. No, sír; I don't believe it does. Continuing with item 5:

It makes no difference what the quality of a particular brand-name product represents or whether it is made by a company that specializes in the manufacture of products that someone else has researched and developed.

Now, we will always have these kinds of companies around, companies that will take a product and try to duplicate it, but not very many are ever successful. Their products are usually always inferior, they do not do what they are intended for, they do not have the specifications that are published on the data sheet for them, and hence they become unusable in the applications in which they are put

to use.

But, you see, such a company without an engineering department can also obtain a GSA Federal supply service contract. The company does not have an engineering department to support and the products

may be inferior, but that makes no difference to GSA. GSA has no way of taking this into account. All that matters, here again, is the discount rate.

No. 6 states:

Regardless of the fact that at least one of our competitors had obtained a GSA contract with a very low discount rate, we would have to offer something much more favorable.

There were a few companies after October 31, 1967, that snuck under the wire, so to speak. They got in with a new contract just before the mandate came down hard from GSA. One of the companies happens to be a competitor, but we couldn't possibly now obtain a GSA contract at the same discount rate this competitor has. We just could not do that. We have been told that was absolutely out of the question.

Mr. ROBINSON. But you could meet him in open competition?

Mr. WASHBURN. Absolutely. We would surely like the chance to do just that.

And item 7:

Eventually, after obtaining sufficient discounts from as many manufacturers and in as many equipment categories as possible, GSA would subrogate the buying activities of large government prime contracts and subcontractors, forcing the use of GSA price lists by as many echelons outside of the government as possible.

Here they definitely have a "blanket" approach in mind. They definitely have plans to expand use of the GSA pricelist, pushing it as far as they possibly can.

For emphasis, I would like to read the last paragraph where it is stated:

I should like to make clear that the approach to buying electronic equipment using the GSA federal supply service technique can be extremely detrimental to the small company. When both large and small companies hold GSA contracts in the same equipment category, sales to a large extent become dependent upon which company has the largest sales force. Large companies typically use saturation techniques with direct sales forces, while the small company uses a thin assignment of manufacturer's representatives.

So who is going to get the most business? It is naturally going to be the large company. The small company is going to suffer, almost by definition.

Mr. ROBINSON. Well, even when you have a large company offering discounts, do you find they are passing some of the discount burden on to their representatives who are, in effect, small firms?

Mr. WASHBURN. Yes, the discount usually will be split. I don't know the details of other companies' operations that well, but I suppose they are splitting the discount 50-50 or 40-60, or in some other manner with the people that represent them in the field.

The discount has to be shared in some manner, or it is going to hurt the small manufacturer too much. In that respect, it is also hurting the manufacturer's representatives, and they certainly have monetary troubles. They go out of business at a possibly faster rate than do small business manufacturers.

Mr. ROBINSON. In other words, you think this GSA policy unfairly imposes an undue burden particularly on small business, whether manufacturers or sales representatives? How about dealers?

Mr. WASHBURN. Dealers represent more echelons of sales activity between the manufacturer and consumer and are uncommon in our

portion of the electronics industry. There exists more room for discount activity, I suppose.

We are a company that manufactures products and ships direct to the customer in Government or industry. The sale has been promoted by the engineering representatives out in the field. For their services they receive just a commission on the sale, and that is all. They are not employees, and they do not receive any direct remuneration from the company at all. Their lifeblood is the commission on the equipment they sell.

And near the end of the statement it is said:

Of course, the effects of only the large company holding a GSA contract, while the small company does not, are self-evident. The small company would be completely excluded from this source of business.

Mr. CORMAN. Thank you, sir. Mr. Ward, do you have another statement to present?

Mr. WARD. Mr. Simpson, sitting across the table from me.

PHYSIO-CONTROL CORP.

TESTIMONY OF W. HUNTER SIMPSON, PHYSIO-CONTROL CORP., SEATTLE, WASH.

Mr. SIMPSON. Thank you. I am president of a very small company, and we are talking about small businesses, from Seattle, Wash., PhysioControl Corp. We manufacture medical electronic instrumentations and systems. I believe the subcommittee, you gentlemen have a copy of my statement and therefore, in the interest of time I shall just generally highlight our concern about GSA practices.

Mr. CORMAN. Without objection the full statement will be made a part of the record at this point.

(The statement referred to follows:)

TESTIMONY OF W. HUNTER SIMPSON, PRESIDENT, PHYSIO-CONTROL CORP.

My name is W. Hunter Simpson and I am president of Physio-Control Corporation of Seattle, Washington. The company was incorporated in 1955 by Dr. K. W. Edmark. Up until February of 1966, the company was completely research and development oriented, employing two technicians and the part-time efforts of Dr. Edmark, a practicing cardiovascular surgeon. The single source of revenue until January of 1966 consisted of royalty payments under a licensing agreement with American Optical Corporation.

Today, the company employs 31 people and its gross sales revenue in fiscal 1967 was $511,000.

In 1967, two major four-bed coronary care systems were sold and installed in two Army hospitals, one in the Pacific Northwest and one in Honolulu, resulting in $60,000 revenue. These two systems, plus continuing requirements for supplies and accessories necessary to support the systems, resulted in approximately 12% of our 1967 revenue coming from federal agency purchases.

The major product effort in Physio-Control Corporation is directed towards the design, manufacture, sale and installation of medical electronic instrumentation and coronary and intensive care monitoring systems. The second area of endeavor is in the vascular implant field, the major product here being an artificial heart valve which is just now entering its clinical stage.

Our monitoring systems and instrumentation represent a sophisticated configuration of bedside instruments which monitor heart rate, pulse, blood pressure, temperature, respiration rate, etc., and transmit this data to instruments at a central nursing station where qualified personnel observe the trends of the patients on the system.

When the system alerts them to a possible catastrophic incident, alarms go off, memory units look back and timing devices are triggered. Qualified nursing and medical personnel then take the immediate resuscitative steps. It should be noted that, for example. in the case of coronary arrest, there is approximately a 31⁄2 minute period to save the patient before irreparable brain damage occurs. Our federal government market consists of military and civilian government hospitals, as well as, of course, all civilian public and private hospitals—of which the overwhelming majority are, of course, nonprofit institutions.

Competition for patient monitoring systems is extremely keen, inasmuch as there are approximately 28 companies manufacturing some type of electronic monitoring equipment. Companies such as General Electric, Hewlett-Packard, Smith, Kline & French, Beckton-Dickinson, International Rectifier, American Optical, the Birtcher Corporation, the Burdick Corporation, Mennon-Greatbach, and Tektronix are perhaps the best known. There is, however, no one industry

leader nationally but, instead, companies tend to be strong in certain geographic areas, depending upon their ability to service and support systems that they install.

Our negotiations for inclusion in the GSA contract have been drawn out over a period of two years. However, in May of 1967, when I asked the aid of Senator Warren Magnuson, we entered into more or less a direct communication with Commissioner Abersfeller of General Services Administration and ourselves.

During the months between May of 1967 and January and February, 1968, above and beyond a voluminous exchange of correspondence, there were a number of phone calls between both myself and our marketing manager, Mr. Noel Mhyre, and Mr. Kogon and Mr. Abersfeller in regard to GSA's requirement of more and more favored treatment.

Initially, our proposal was modest but still favorable over terms with our customers in the private sector. Nevertheless, it became apparent to us that, in all practicality, the federal government would have to be given slightly more consideration and it was at this time, in late December, that we proposed to them a sliding discount scale based on the magnitude of a given system order. We were directly advised that even this was not sufficient enough to allow us to receive a contract, inasmuch as a number of our competitors had offered considerably more, and that we would have to reconsider or be excluded. We were then advised by a subsequent telephone call that perhaps if we were to offer an across-the-board discount of 5%, that this would put us in the running. GSA felt we could reduce the commissions paid to our marketing group for the sale and service of these systems by that much.

It became quite obvious that the officials of GSA were totally unknowledgeable about the marketing facts of life, particularly when it involves sophisticated systems which require a significant level of installation support, education and training. However, after a good deal of financial review, we acquiesced to this demand only to be told that 5% really was not sufficient but that, in fact, a 10% discount across the board would obviously solve the problem and allow us to have a contract.

After further consideration, it was determined that the level of support and service required in installing systems and educating personnel was not finan、 cially possible or responsible when quoting a 10% discount. When Mr. Kogon was informed of this decision by phone, he suggested that perhaps we exclude the normal kind of support and assistance which we offer our commercial institutions. This kind of suggestion made it even more obvious that General Services Administration does not understand the support requirements involved in educating nursing and medical personnel on the use of these systems.

It should be quite obvious that you do not deliver a $10,000 to $50,000 multibed system to the loading dock of a government hospital and expect it to be correctly installed and expect the personnel to be able to operate it without any education or direction. Nevertheless, this was the recommendation of GSA in order to be able to say that they leveraged a 10% discount from a small company.

Because of our need to be approved as a supplier to federal institutions, it was my decision to submit a final offer excluding any educational, installation or architectural support but making it optional on the basis of $125 per day plus round trip transportation costs of the technical personnel required. This was our final offer to GSA. In fact, in my opinion it is discriminatory against the federal government, but it is evidently what the GSA will accept because they seem to be interested only in establishing a scoreboard of discounts, rather than negotiating a realistic contractual agreement.

Now the question can be asked as to why my company is so interested in receiving a GSA contract, in spite of what I would consider unreasonable discount pressures. The answer is very simple. It has been our experience in the last eight months that if a manufacturer of this type of equipment and systems does not have a GSA contract, the equipment selection committee, normally made up of doctors assigned to a hospital, will not consider him.

Putting a system of this order out to bid, and taking the time to analyze all the bids is something that doctors cannot afford to do from the standpoint of time. As long as there are several companies with contracts, regardless of the quality of their equipment, they will exclude any other company even though features, price and quality may be superior but a GSA contract is lacking. At our stage of growth and development, it is essential that we have at least the