Advisory Opinion to Johnson (06-13-94)

June 13, 1994

Clifton E. Johnson, Esq.
Hall, Render, Killian, Heath & Lyman
Suite 2000, Box 82064
One American Square
Indianapolis, IN 46282

Dear Mr. Johnson:

This letter responds to your May 24, 1994 letter requesting an FTC staff advisory opinion on the Application of the NonProfit Institutions Act exemption to the Robinson-Patman Act ("the Act") to sales pharmaceuticals by a non-profit hospital corporation to its home health care program.

According to your letter, your client, Elkhart General Hospital, Inc. ("Elkhart"), is a nonprofit corporation that owns and operates a general acute care hospital in Elkhart, Indiana. Elkhart operates a home health program that provides health care to patients in their homes. The home health program functions as a department of the hospital and is staffed by hospital employees. Patients receiving care from the program are formally admitted to the hospital as outpatients.

You ask whether Elkhart may resell pharmaceuticals and other goods obtained at preferential prices to patients in the home health program. More specifically you ask:

1) Whether intra-firm transfers of pharmaceuticals and other goods from Elkhart's hospital facility its home health department would constitute "resales" for purposes of the Robinson- Patman Act, or if they would, whether they would nevertheless be exempt as resales from one nonprofit institution to another nonprofit institution;

2) whether the use by Elkhart's home health department of pharmaceuticals and other goods purchased at preferential prices would be for Elkhart's "own use," and therefore be exempt from the Robinson-Patman Act;

3) whether Elkhart's home health department must discriminate among home care patients by referral source in the provision of pharmaceuticals and other goods purchased at preferential prices, or whether such uses would be exempt regardless of a patient's referral source; and

4) whether Elkhart may spin off its home health department as a nonprofit affiliate, transfer to that affiliate

pharmaceuticals and other goods purchased at preferential prices, and then cause the affiliate to resell such pharmaceuticals and goods to its home care patients regardless of a patient's referral source, all without violating the Robinson-Patman Act.

Based on the information you provided in your letter, we believe that the acquisition of pharmaceuticals and other therapeutic goods for use by Elkhart's home health program would be exempt under the Non-Profit Institutions Act, because it would be for Elkhart's "own use", as long as the pharmaceuticals and other goods are prescribed by Elkhart medical staff as part of the treatment patients receive in the home health program. In addition, we believe that Elkhart need not discriminate when providing the pharmaceuticals between patients referred to the home health care program from Elkhart and those referred from other hospitals. Because we find that the provision of drugs and other goods to the home health program would be permissible under the "own use" language of the Non-Profit Institutions Act even if it constituted resales under Robinson-Patman, we will not address the question of whether technically it would amount to a resale; similarly, because we find the provision of these goods permissible, we assume Elkhart will not wish to spin off its home health department, and therefore we do not reach the question of whether sales to the spun-off affiliate would be permissible.

The Non-Profit Institutions Act exempts from the Robinson Patman Act "purchases of their supplies for their own use by .. hospitals, and charitable institutions not operated for profit." The leading case on "own use" is Abbott Laboratories.v. Portland Retail Druggists Ass’n Inc., 425 U.S. 1, 96 S.Ct. 1305, 47 L.Ed.2d 537 (1976). In that case, drug manufacturers were selling pharmaceuticals more cheaply to certain private, nonprofit hospitals than to retail pharmacies. The plaintiff, an association of retail pharmacists, complained that these purchases violated the Act because the hospitals were reselling some of the drugs at a Profit to outpatients and others for off-premises use. The Supreme Court suggested that in order to determine what constitutes a hospital's own use, we should focus on the function performed by the institution in its purchase and resale role:

"Their own use" is what reasonably may be regarded as use by the hospital in the sense that such use is a part of and promotes the hospital's intended institutional operation in the care of persons who are its patients. (emphasis in original).

425 U.S. at 14. The Court proceeded to conclude that certain categories of sales of drugs amounted to sales for the hospital's "own use" and were exempt. These were sales to inpatients, emergency room patients, outpatients for use on hospital premises, inpatients and outpatients for take home use, hospital employees and medical students for their use or use by their dependents, and sales to the hospital's medical staff for their personal use or use by their dependents. The Court declined to exempt sales of prescription refills, sales to the hospital's medical staff for resale in private practice, and sales to walk-in customers who were not being treated at the hospital. The purchase and resale of drugs to outpatients and to hospital personnel for their personal use were exempt because these transactions were a continuation of the hospital's basic institutional function. On the other hand, the mere refilling of prescriptions for former patients, or the sale to employees of drugs for use by non-dependent third persons, was held to be beyond the protection of the statute.1

In determining the limits of "own use" in Abbott, the Supreme Court recognized that the intended institutional operation of charities changes over time but refused to permit each charity to define the limits of its operation under the NonProfit Institutions Act. The Court examined the function of hospitals at the time of its decision, rather than relying rigidly on the definition of a hospital at the time of passage of the Act and noted that the concept of a nonprofit hospital and its activity had changed since 1938. The Court, however, found nothing in the Act indicating that its exemption should be applied to "whatever new venture the nonprofit hospital finds attractive in these changing days." Abbott, 425 U.S. at 13. The Supreme Court's opinion thus suggests that while nonprofit institutions' "own use" is not a static concept, the Act does not cover every enterprise in which a single hospital chooses to engage.

We believe that Elkhart's provision of services under its home health program would be considered simply an extension of the hospitals basic services beyond its four walls and that therefore pharmaceuticals and other goods purchased for distribution within the context of the program would be purchased for Elkhart's own use as contemplated by the Court in Abbott. In addition, Elkhart's home health patients, while not receiving treatment on hospital premises, are nevertheless current patients receiving continuing care from Elkhart's staff. In this respect Elkhart's home health program patients are not unlike the HMO members in De-Modena v. Kaiser Foundation Health Plan, Inc., 743 F.2d 1388 (9th Cir. 1983) In De Modena the ninth circuit held that a nonprofit HMO's sales of pharmaceuticals to its plan members was permissible under the Act because the HMO was designed to provide a full range of health care to its members, going beyond traditional fee-for-service hospital care which is provided on a temporary and remedial basis. The court held that, because of the very broad institutional function of an HMO, any sale of drugs to a member falls within the basic function of the HMO and therefore the purchase of drugs by an HMO for dispensing to its members is for its "own use" and within the Non-Profit Institutions Act. Our reading of Abbott and De Modena leads us to conclude that the provision of pharmaceuticals and other medical supplies to any current Elkhart patient is "part of and promotes the hospital's intended institutional operation in the care of ... its patients."

Elkhart's proposed resales to its home health care department could also be considered a "not-for-profit transfer of supplies from one institution, eligible under the exemption, to another such institution, also eligible under the exemption", which was allowed by the Commission in St. Peter's Hospital of the City of Albany, 89 FTC 689 (1977), and again more recently in Presentation Health System Inc., FTC (1993). In Presentation Health, a situation factually similar to yours, the Commission allowed non-profit hospitals to sell pharmaceuticals at cost to their affiliated long-term care facilities as long as the long-term care facilities purchased the pharmaceuticals for their own use.

However, we would advise that Elkhart limit the pharmaceuticals it provides program patients at preferential prices to those prescribed as part of the treatment they receive under the program. Because care in a home health program can last for an indefinite period of time, a concern arises that patients may come to treat Elkhart's pharmacy as their all purpose pharmacy, utilizing it to fill prescriptions for conditions unrelated to their admission into the home health program, e.g., for obtaining products that are essentially elective or used for cosmetic purposes. We would not regard sales of this type of pharmaceutical to home health patients to be sufficiently closely related to Elkhart's institutional function to be permissible under the Act.

Finally, we do not believe it is necessary for Elkhart to discriminate between patients referred from other hospitals and former Elkhart inpatients, outpatients or emergency room patients with respect to the sale of pharmaceuticals. Under the program as you describe it, referral patients are admitted to Elkhart as outpatients, and once they become Elkhart patients, Elkhart fulfills the same basic institutional role in treating them as it does in treating other Elkhart patients.

We hope this opinion letter is helpful to you. It is limited to the request described above, as explained in your letter of May 24, 1994. It does not constitute approval for actions that are different from those described, or that are not specified in your letter.

The above advice is an informal staff opinion. under Commission's Rule of Practice § 1-3(c), the Commission is not bound by this advice and reserves the right to rescind it at a later time. In addition, this office retains the right to reconsider the question involved and, with notice to the requesting party, to rescind or revoke its opinion if the request is used for improper purposes, or if it would be in the public interest to do so.

Sincerely yours,

Michael D. McNeely

Assistant Director

Bureau of Competition

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1 3 E. Kintner & J. Bauer, Federal Antitrust Law, §25.9, p.468 (1983).