Advisory Opinion to Joy (03-13-03)

March 13, 2003

Louise M. Joy
Joy & Young, L.L.P.
1801 South Mopac
Suite 300
Austin, TX 78746

Dear Ms Joy:

This letter responds to your request on behalf of Valley Baptist Medical Center (VBMC) for an advisory opinion relating to the applicability of the Non-Profit Institutions Act (NPIA or the Act) to sales of pharmaceuticals by VBMC to contracted workers who provide services at the hospital. The Act exempts from the Robinson-Patman Act "purchases of their supplies for their own use by schools, colleges, universities, public libraries, churches, hospitals, and charitable institutions not operated for profit."(1) For the reasons explained below, our opinion is that pharmaceuticals purchased by VBMC for resale to contracted workers in the circumstances found here would be purchased for the hospital's "own use" within the meaning of the NPIA.

According to your request letter, Valley Baptist Medical Center is a not-for-profit corporation exempt from federal income taxation. It has about 200 contracted workers who provide food and laundry services on hospital premises.(2) The workers assigned to Valley Baptist work exclusively at the hospital, and some work there over long periods of time. They are not, however, employees of Valley Baptist, but of an intermediary contracting firm, and are not covered by the hospital's health benefits plan. The contracting firm, rather than the hospital, hires, fires, and supervises the employees, pays unemployment and workers compensation premiums, and provides any health or retirement benefits to which the workers are entitled.

VBMC would like to provide reduced-price prescription drugs to these workers. According to your letter, the hospital regards these contract workers, like its employees, as necessary to the operation of the hospital. Further, VBMC notes that these workers have a direct relationship to the hospital, as it is their regular place of work. The hospital asserts that providing pharmaceuticals to the contracted workers will promote the hospital's efficient operation by making medicine more affordable and accessible to these workers, thereby improving their health and providing incentives for reduced employee turnover.

Our analysis of the applicability of the NPIA to nonprofit hospitals' sales of pharmaceuticals must begin with the Supreme Court's opinion in Abbott Laboratories v. Portland Retail Druggists Association (Abbott Labs).(3) In that case, retail pharmacies sued pharmaceutical manufacturers under the Robinson-Patman Act, challenging the discounted sale to nonprofit hospitals of drugs that the hospitals resold to patients and others in a number of different situations. The Court held that the NPIA exemption is a limited one that does not cover all purchases of pharmaceuticals by the hospital.(4) Rather, purchases are covered only insofar as they are for the hospital's "own use" - that is to say, for "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."(5) The Court held that drugs dispensed to hospital patients for use on the premises or on a take-home basis for a limited amount of time and to employees, students, and medical staff members for their personal use were covered by the exemption. On the other hand, it held that the connection between the hospital and drugs dispensed to walk-in patients, to non-hospital patients of medical staff members, or to former patients to refill take-home prescriptions was too tenuous to support application of the exemption.

The Court's holding that pharmaceuticals purchased for resale to hospital employees are covered by the Act was based on its conclusions that employees are necessary for the hospital to function and that providing them with pharmaceuticals enhances the hospital's operation.(6) In keeping with this analysis, prior FTC staff opinion letters have concluded that the Act also covers pharmaceuticals purchased by nonprofit institutions for dispensing to retired employees pursuant to an established retirement program and to volunteers who participate in the programs and activities of a non-profit nursing home "to a significant extent and on an on-going basis." In the first instance, our reasoning was that retiree benefits appear to be an integral part of current employees' compensation package, and that the promise that retirees would have access to pharmaceuticals from the hospital has a direct relationship to the hospital's ability to attract and retain qualified employees. Connecticut Hospital Association (December 20, 2001) (staff opinion letter). In the second instance, the nursing home represented that its 225 volunteers provided services vital to operation of the nursing home, and the significance of the volunteers was attested to by the fact that the institution had a full-time staff volunteer coordinator. In those circumstances, we concluded that the volunteers contributed to the nursing home's institutional functions in the treatment of its patients in a way that was analogous to the contributions made by the hospital employees in Abbott LabsWesley Health Care Center (April 29, 1999) (staff opinion letter).

The Court's Abbott Labs analysis requires us to draw lines between exempt and non-exempt uses based upon the nature of the relationship between the nonprofit hospital and the pharmaceutical consumer.(7) In determining the scope of the Act in that case, the Supreme Court focused on the strength and proximity of the relationship between the dispensing of the drugs and the hospital's core patient care functions. Its finding that the Act applied to drugs dispensed to employees, students, and medical staff members was premised on the "obvious and institutionally intimate" relationship between those individuals and the hospital's purposes and activities.(8) Its determination to include drugs sold to medical staff members within the scope of the NPIA, although the doctors are not hospital employees, was based on the recognition that their services are vital to the hospital's existence.(9) Moreover, the Court indicated that other professionals who are not employees, such as chaplains or special duty nurses, may be treated the same as employees and students for purposes of the analysis.(10)

In this instance, we conclude that our interpretation of the exemption should be guided by the role that VBMC's contract workers play in the hospital's provision of care to its patients and the stability of the workers' relationship to the hospital. In cases involving hospital agents who perform occasional or intermittent work for a nonprofit hospital, or of transient workers hired by a contracting intermediary, the NPIA likely would not apply. In this case, however, the contract workers are assigned to Valley Baptist exclusively, they work on hospital premises, and many of them work at the hospital over a long period of time. They perform services that are integral to the hospital's care of its patients, and VBMC has articulated plausible reasons why providing pharmaceuticals to these workers may increase workers' productivity, to the direct benefit of the hospital. The fact that the hospital has chosen to obtain these workers' services through contract rather than directly should not be determinative in our construction of the Act. The business considerations that led the hospital to contract for these workers rather than employing them do not appear to have any significance for the policies underlying either the Robinson-Patman Act or the NPIA. For these reasons, we conclude that pharmaceuticals purchased by VBMC for resale to contracted workers, in the circumstances disclosed here, would be purchased for the hospital's "own use" within the meaning of the NPIA.

This letter sets out the views of the staff of the Bureau of Competition, as authorized by the Commission's Rules of Practice. Under Commission Rule § 1.3(c), 16 C.F.R. § 1.3(c), the Commission is not bound by this staff opinion and reserves the right to rescind it at a later time. In addition, this office retains the right to reconsider the questions involved and, with notice to the requesting party, to rescind or revoke the opinion if implementation of the proposed program results in substantial anticompetitive effects, if the program is used for improper purposes, if facts change significantly, or if it otherwise would be in the public interest to do so.

Sincerely yours,

Jeffrey W. Brennan
Assistant Director

Endnotes:

1. 15 U.S.C. § 13c.

2. An additional 2300 workers are directly employed by VBMC.

3. Abbott Laboratories v. Portland Retail Druggists Association, 425 U.S. 1 (1976).

4. Id. at 13-14.

5. Id. at 14 (emphasis in original).

6. Id. at 16.

7. See id. at 10.

8. Id. at 16.

9. Id. at 17.

10. Id. at 10 n.7.