Advisory Opinion to Langer (06-11-96)

June 11, 1996

Robert M. Langer, Esq. 
Wiggin & Dana 
One City Place 
Hartford, Connecticut 06103-3403

Dear Mr. Langer:

This letter responds to your May 17, 1996 request for a staff advisory opinion regarding whether your client, William W. Backus Hospital ("Backus"), may sell pharmaceuticals and supplies it purchases at preferential prices to its affiliate, CONNCare, at cost. According to your letter, Backus is a non-profit, tax-exempt, charitable acute care hospital; CONNCare is a non-profit, taxable corporation that operates two licensed clinics for occupational health services and walk-in outpatient services. Backus and CONNCare are both ultimately owned and controlled by Backus Corporation, a non-profit, tax-exempt, charitable institution. Backus purchases supplies and pharmaceuticals for its own use at preferential prices, and wishes to transfer a portion of these supplies, at cost, to CONNCare for CONNCare's own use. CONNCare has no plans to operate a pharmacy or fill prescriptions; the pharmaceuticals it will purchase from Backus are to be used in conjunction with patient treatment in its clinics.

Specifically, you ask: 1) If CONNCare is not considered charitable, will Backus and CONNCare, nevertheless, be considered a "unit," because of their affiliation, that together would be exempt under the Non-Profit Institutions Act for purchases for their own use; and 2) If not, would the resale by Backus of pharmaceuticals and supplies to CONNCare at preferential prices be likely substantially to lessen competition in violation of the Robinson-Patman Act? Because we believe that the proposed sales by Backus to CONNCare for the use of CONNCare's patients on premises would be permissible under the Non-Profit Institutions Act, we will not address the question of whether the resale would likely substantially lessen competition.

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." We do not read the Act to require that hospitals not operated for profit also be charitable institutions in order to qualify for the exemption. The Commission, in its opinion in St. Peter's Hospital of the City of Albany, said that, although the phrase "for their own use" limits the categories of individuals to whom the supplies can be resold, see Abbott Laboratories v. Portland Retail Druggists Ass'n, 425 U.S. 1 (1976), the "own use" limitation is not "intended to apply to resales of supplies, at cost, by one charitable institution to another that are limited, in turn, to the latter charitable institution's own use." While this statement taken alone may appear to allow resales only between charitable institutions, the sentences that follow indicate the Commission was approving of sales between non-profit institutions generally:

A resale of this nature would constitute a not-for-profit transfer of supplies from one institution, eligible under the exemption, to another such institution, also eligible under the exemption. In the Commission's view, the exemption was intended to insulate from Robinson-Patman application all purchases of supplies (for their own use) by the designated classes of institutions not operated for profit.(Emphasis added)

Commission Opinion Letter, 89 F.T.C. 689 (1977). In fact, neither St. Peter's Hospital of Albany, which received the Commission's permission to sell pharmaceuticals, nor the nursing home which was the proposed recipient of the pharmaceuticals, claimed to be a charitable institution. They qualified for the exemption by virtue of their non-profit status alone.

In 1993 the Federal Trade Commission issued an opinion letter in response to a request for advice from Presentation Health System. (See Presentation Health System, ____ F.T.C ___ (1993)). The requester described a situation very similar to yours, where a non-profit hospital receiving preferential price treatment under the Act wished to resell pharmaceuticals, at cost, to affiliated non-profit nursing homes that were purchasing their drugs at retail from local drug stores. The Commission concluded that the sales were covered by the Act, on the basis that "one may justifiably regard the Presentation organization as a whole as having purchased the pharmaceuticals for its 'own use,' comprised of the use of its hospitals and its long-term care facilities."

Based on the information you have provided, we believe that the sales you describe would be exempt under the Act. We believe that purchases by Backus for resale to CONNCare would be permissible because they would be considered purchases for the "own use" of the Backus Corporation organization as a whole. In order for the sales to be exempt, however, the pharmaceuticals must be acquired for CONNCare's "own use" as that language was interpreted in Abbott Laboratories and other decisions interpreting the Act. We agree that your description of CONNCare's intended use for the supplies, administration to patients undergoing medical treatment on premises at the clinics, would qualify as CONNCare's "own use."

We hope this opinion letter is helpful to you. It is limited to the request described above, as explained in your letter of May 17, 1996. 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 the 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,

Michael D. McNeely 
Assistant Director 
Bureau of Competition