Advisory Opinion to Marx (12-18-01)

December 18, 2001

David Marx, Jr.
McDermott, Will & Emery
227 West Monroe Street
Chicago, IL 60606-5096

Dear Mr. Marx:

This letter responds to your request on behalf of Harvard Vanguard Medical Associates, Inc. (Harvard Vanguard) for an advisory opinion relating to the applicability of the Non-Profit Institutions Act (NPIA or the Act) to sales of pharmaceuticals to patients treated by Harvard Vanguard physicians by pharmacies located in the clinics where the Harvard Vanguard doctors practice. 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, would be covered by the NPIA.

According to your letter, Harvard Vanguard is a nonprofit multispecialty medical clinic exempt from federal income tax under § 501(c)(3) of the Internal Revenue Code.(2) It also is recognized as a tax exempt charitable organization under Massachusetts law. Harvard Vanguard's stated purposes include providing comprehensive medical services to patients, educating medical students and others, participating in health service research projects, and developing programs to meet the needs of medically underserved and economically disadvantaged individuals.

You state that Harvard Vanguard is composed of the health care practitioners who provide services to patients covered by Harvard Pilgrim Health Care, a non-profit and tax exempt Massachusetts HMO. For many years Harvard Pilgrim was a staff model HMO; that is, it directly employed the physicians and other practitioners who provided services to its enrollees, and it owned the facilities in which those practitioners worked. In 1998, Harvard Pilgrim spun off to Harvard Vanguard all its medical personnel and their supporting staff, and the parties entered into a contract under which Harvard Vanguard provided services to Harvard Pilgrim enrollees and operated the 14 clinics where its doctors practiced. Harvard Pilgrim continued to own the clinics and to operate the pharmacies located in them, which currently dispense pharmaceuticals only to enrollees of Harvard Pilgrim and of a Medicaid HMO that is a Harvard Pilgrim subsidiary. Harvard Vanguard also provides medical services to enrollees of other health plans, and to uninsured patients. About 80% of its patients currently are covered by contracts under which Harvard Vanguard bears full or partial financial risk for pharmaceuticals prescribed for enrollees covered by those contracts.

Harvard Pilgrim has decided to sell some of the real estate on which the clinics are located. In connection with that sale, a further restructuring of the relationship between the parties will take place. Harvard Pilgrim will transfer the clinic licenses, and therefore responsibility for operation of the clinic pharmacies, to Harvard Vanguard. Harvard Vanguard intends to purchase pharmaceuticals directly from manufacturers and dispense them, through the clinic pharmacies, to all patients who are under the care of a physician employed by Harvard Vanguard or under contract to practice at the clinics. The clinic pharmacies are not legally authorized to, and will not, dispense pharmaceuticals to walk-in customers who are not patients of the clinic physicians.(3) Nor will the clinics fill prescriptions written by doctors not affiliated with Harvard Vanguard, even if the patient also is under the care of a clinic physician for another medical condition.

Harvard Vanguard would like to purchase pharmaceuticals for the clinics at discounted prices pursuant to the NPIA, which 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."(4) Analysis of whether the NPIA covers these purchases by Harvard Vanguard involves two issues: (1) is Harvard Vanguard an eligible institution under the Act; and (2) would the pharmaceuticals be purchased from the suppliers for Harvard Vanguard's "own use?"

While Harvard Vanguard is not one of the types of institutions specifically enumerated in the NPIA, we believe that it is entitled to the protection of that statute when it purchases for its own use. In De Modena v. Kaiser Foundation Health Plan,(5) the Ninth Circuit Court of Appeals concluded that a nonprofit, tax exempt HMO was a charitable organization entitled to the protection of the NPIA. Since Congress wanted to protect eleemosynary institutions, the court reasoned, it was appropriate to refer to the tax and charitable trust laws in determining what was a charitable institution for NPIA purposes. The court noted that all nonprofit organizations that promote health are now considered charitable trusts, and that the HMO was exempt from federal income tax as a charitable institution. Accordingly, it concluded that Kaiser was protected by the Act. Under this reasoning Harvard Pilgrim also appears to be an eligible institution, since it provides heath services and is recognized as a charitable institution under both federal and state law.(6)

The principal authority on the meaning and scope of the "own use" test is Abbott Laboratories v. Portland Retail Druggists Association (Abbott Labs).(7) 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 Supreme Court held that the NPIA exemption is a limited one, and does not give hospitals "a blank check" that applies to "whatever new venture the hospital finds attractive."(8) Rather, the Court interpreted the "own use" test to shield only purchases that "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."(9)

Applying this test, the Court found that pharmaceuticals were purchased for the hospital's own use when they were resold to hospital inpatients, emergency room patients, and registered outpatients for consumption on the premises; when they were used to fill limited "take-home" prescriptions given to hospital inpatients, emergency room patients, and registered outpatients upon discharge as a continuation of or supplement to the treatment that was administered at the hospital; and when they were dispensed to a hospital employee, a student, or a non-employee member of the hospital medical staff for his or her own use or the use of a dependent. Pharmaceuticals dispensed to former patients (through refills of the take-home prescriptions), sales to non-hospital patients of staff physicians, and sales to walk-in customers of the hospital pharmacy were deemed insufficiently related to the hospital's institutional function and therefore outside the exemption.

In considering the "own use" test with respect to the HMO, the De Modena court refused to simply apply to the HMO the conclusion that was reached in Abbott Labs with respect to each category of hospital patients. Rather, it looked at the basic function of the HMO, and found that all drugs dispensed to enrollees were purchased for the HMO's "own use" because providing continuing care to members was part of the broad institutional function of an HMO (as opposed to a hospital's core function of providing temporary and episodic care).

With respect to Harvard Vanguard's dispensing of pharmaceuticals, therefore, the central question is whether that activity is part of, or furthers, Harvard Vanguard's core institutional functions in the care of its patients. A large percentage of Harvard Vanguard's current patients are covered by contracts under which Harvard Vanguard bears full financial risk for pharmaceuticals prescribed for those patients. To that extent, its activities would be covered under our analysis in BJC Health System.(10) That matter involved drugs that were purchased by a nonprofit hospital, and transferred to affiliated clinics staffed by physicians employed by the hospital's parent health system. The medications were then dispensed to patients enrolled in an HMO who were treated at the clinics. The health system had assumed full financial risk for all medical care, including pharmaceuticals, required by these patients. The staff opinion letter determined that because of the risk contract with the HMO, the patients it covered were, for purposes of the Abbott Labs test, the patients of the health system for all their needs.

This is not the end of the inquiry, however, because Harvard Vanguard seeks to dispense to all of its patients, including those who are not covered by risk contracts. We conclude, based on the facts you present, that Harvard Vanguard's central institutional function, within the meaning of Abbott Labs, is to deliver comprehensive and continuing health care services, including pharmaceuticals, to all its patients. Having the clinics' pharmacies dispense to clinic patients contributes directly to the ability of the clinics to deliver comprehensive care. Prescriptions can be transmitted electronically from the doctors to the pharmacy, thereby minimizing errors due to handwritten orders; the pharmacy's electronic dispensing system is connected to the patient's medical record, which improves the quality of the medical record and allows the professional staff to check the accuracy of the prescription more easily; and the close proximity of the pharmacy to the staff enhances the ability of doctors and pharmacists to communicate easily with one another about appropriate treatment.

Based on the factors discussed above, it is our opinion that the clinic pharmacies may dispense products purchased under the NPIA to all patients who are treated at clinics staffed by employed physicians or physicians under contract with Harvard Vanguard, and who are under the continuing care of such a physician. Harvard Vanguard is a nonprofit and tax-exempt health services provider and thus is eligible to purchase supplies under the NPIA. One of its central institutional purposes is to provide comprehensive and continuing care to enrollees of health plans with which it contracts, and to other patients. Having prescribed medications dispensed by pharmacies located in the clinics contributes directly to fulfillment of that function. Thus, the pharmaceuticals dispensed by those clinic pharmacies, under the conditions described in this letter are, in our opinion, purchased for Harvard Vanguard's own use within the meaning of the NPIA.

According to your letter, Harvard Vanguard also would like to dispense pharmaceuticals from the clinic pharmacies to its staff members and their dependents for their personal use. Having concluded that Harvard Vanguard is an eligible institution under the NPIA, we believe that the Act would cover Harvard Vanguard's purchase of those medications, in accordance with the Supreme Court's holding in Abbott Labs that pharmaceuticals dispensed to hospital employees were purchased for the hospital's "own use."

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. Section 501(c)(3) applies to entities organized and operated "exclusively for religious, charitable, scientific, testing for public safety, literary, or education purposes."

3. State law permits the pharmacies to dispense only to patients or employees of the clinics. 105 CMR 140.340.

4. 15 U.S.C. § 13c.

5. 743 F.2d 1388 (9th Cir. 1984), cert. denied, 469 U.S. 1229 (1985).

6. Commission and staff advisory opinions have found that nonprofit nursing homes, home health agencies, hospices, and health systems that operate a variety of health care providers, in addition to hospitals, are eligible entities. See, e.g., Presentation Health System, 116 F.T.C. 1526 (1993) (hospitals and affiliated long-term care facilities); St. Peter's Hospital of the City of Albany, 92 F.T.C. 1037 (1978) (nursing home); BJC Health System (Nov. 9, 1999) (staff opinion) (integrated health system and home health care agency); North Ottawa Community Hospital (Oct. 22, 1996) (staff opinion) (hospice); William H. Backus Hospital (June 11, 1996) (staff opinion) (occupational health services clinic). FTC staff opinions can be accessed online at www.ftc.gov.

7. 425 U.S. 1 (1976).

8. 425 U.S. at 13.

9. Id. at 14 (emphasis in original).

10. (Nov. 9, 1999) (staff opinion).