Advisory Opinion to Langer (12-20-01)

December 20, 2001

Robert M. Langer
Wiggin & Dana LLP
One CityPlace
185 Asylum Street
Hartford, Connecticut 06103-3402

Dear Mr. Langer:

This letter responds to your request on behalf of the Connecticut Hospital Association (CHA) for an advisory opinion relating to the applicability of the Non-Profit Institutions Act (NPIA or the Act) to sales of pharmaceuticals by CHA member hospitals to their retired employees. 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, it is our opinion that such sales, in the circumstances described in your request, fall within the scope of the Act.

According to your request letter, CHA is a trade association whose membership includes all 31 not-for-profit acute care hospitals and healthcare systems located in Connecticut. The hospitals purchase pharmaceuticals at preferential prices pursuant to the NPIA. Until recently, Connecticut law prohibited hospitals from selling prescription pharmaceuticals at retail except to their employees for use by the employees, their spouses, or their dependent children. In June 2001, the legislature enacted a law that authorizes hospitals to sell pharmaceuticals to "a retiree of such hospital or the retiree's spouse in accordance with the retiree's retirement or pension plan."(2) Also according to your letter, a number of CHA's member hospitals would like to inform their active employees and current retirees that individuals with vested retirement or pension benefits henceforth will be able to purchase pharmaceuticals from the hospital pharmacy at discounted prices. Based on an FTC staff advisory opinion that concluded that hospitals' sales to retired employees were not covered by the NPIA,(3) however, CHA's General Counsel advised the Association's member hospitals that such sales to retirees involved a substantial risk of violation of the Robinson Patman Act. You have asked for an opinion concerning the availability of the Act with respect to the hospitals' dispensing pharmaceuticals to their retired employees in the circumstances discussed in your letter.

The Supreme Court's opinion in Abbott Laboratories v. Portland Retail Druggists Association (Abbott Labs)(4) is the necessary starting point for any analysis of the applicability of the NPIA to nonprofit hospitals' sales of pharmaceuticals. In that case, retail pharmacies sued pharmaceutical manufacturers under the Robinson-Patman Act, challenging the discounted sale of drugs to nonprofit hospitals. The hospitals resold those drugs to patients in a number of different situations. The Court held that the NPIA exemption was a limited one, and did not cover all purchases of pharmaceuticals by the hospital. Rather, purchases were covered only insofar as they were for the hospital's "own use" - that is to say, for the use of 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 concluded that purchases of pharmaceuticals for dispensing to employees of a non-profit hospital and their dependents were for the hospital's "own use" because the employees are necessary for the hospital to function, and providing them with pharmaceuticals enhances the hospital's operation.(6)

The 1996 FTC staff opinion letter concluded, on the facts presented, that pharmaceuticals dispensed to retired employees of a nonprofit hospital were not covered by the NPIA. The requesting hospital in that instance asked whether it could permit retired employees to purchase pharmaceuticals under the exemption at a hospital pharmacy that was open to hospital employees, students, and medical staff. The staff response concluded that the hospital's basic institutional function of caring for its patients was not promoted by providing pharmaceuticals to persons who no longer have a direct relationship to the hospital, and that "purchases for resale to former employees would not constitute purchases for the Medical Center's own use that are exempt under the Act."

As far as can be determined from the letter, the staff in the North Mississippi advisory opinion were not presented with substantial facts upon which to examine the conduct in the context of an established retirement or pension plan, or to consider its relationship to the hospital's overall labor relations policies. With respect to CHA's inquiry, on the other hand, you informed us that the Connecticut hospitals are permitted to dispense medications to retirees only "in accordance with the retiree's retirement or pension plan." In your request letter and other communications with the staff, you state that providing access to discounted pharmaceuticals as a retirement benefit directly promotes the hospitals' intended operation in the care of its patients, within the meaning of Abbott Labs, by helping the hospitals attract and retain qualified employees for sufficient time for them to become eligible for retirement and pension benefits. Moreover, you state that some of CHA's member hospitals believe that extending the benefit to current retirees, rather than offering it only on a prospective basis to active employees, is essential to maintaining a positive relationship with current employees as well as with retirees. These hospitals believe that making the benefit available only to current employees would severely undermine the hospitals' purpose of offering a benefit package that is attractive to current and prospective employees.

We agree that retiree benefits are seemingly an integral part of the package of compensation that is offered to current and prospective employees. You convincingly portray those benefits as having a direct relationship to a hospital's ability to attract and retain qualified employees, and thereby to carry out its essential patient care functions. Moreover, the way an employer treats its current retirees is likely to have a significant impact on current employees' assessment of the desirability of staying with that employer until their own retirement. When dispensing pharmaceuticals to current or future retired employees is part of an established retirement or pension program, therefore, we conclude that the pharmaceuticals thus provided are purchased for the hospital's "own use" within the meaning of the NPIA to the same extent that the Act covers sales to active employees.(7) In its decision in Abbott Labs, the Supreme Court regarded employees and students as "member[s] of the hospital family."(8) In our view, retired employees with vested retirement or pension rights also are members of the hospital family. Please be advised that, to the extent the North Mississippi letter is inconsistent with the opinion expressed here, that letter is hereby superseded.

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) (1994), 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. Conn. Pub. Acts No. 01-65.

3. North Mississippi Health Services (Oct. 3, 1996) (staff opinion letter).

4. 425 U.S. 1 (1976)

5. Id. at 14.

6. Id. at 16.

7. For example, the Court held in Abbott Labs that the NPIA covers drugs dispensed to employees for their personal use or the use of their dependents, but not for use by others, including nondependent family members. 425 U.S. at 16.

8. Id.