Advisory Opinion to Senner (11-09-99)

November 9, 1999


Gary Senner
Sonnenshein Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606-6404

Dear Mr. Senner:

This letter responds to your request on behalf of BJC Health System ("BJCHS") for an advisory opinion concerning the applicability of the Non-Profit Institutions Act ("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."(1) For the reasons explained below, we have concluded that the transactions proposed by BJCHS fall within the scope of the NPIA exemption.

Background

According to your letter dated July 26, 1999, BJCHS is a nonprofit, integrated health system that owns a number of nonprofit hospitals and affiliated entities. You state that BJCHS' mission is to "improve the health of the communities" it serves, and in order to do so, it has decided that it needs to deliver the full spectrum of health care services in a coordinated, cost-effective manner. BJCHS owns and operates Barnes-Jewish Hospital, located in St. Louis; that hospital, in turns, owns BJC Home Care Services, Inc. BJCHS also has a 67% interest in and exercises day to day control over Physician Group, L.C. ("PGLC"), which operates nine clinics in the St. Louis area that provide medical services through employed primary care doctors. BJCHS, Barnes-Jewish Hospital, and BJC Home Care Services all are exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code, which applies to "Corporations . . . organized and operated exclusively for religious, charitable, scientific, testing for public safety, literacy, or educational purposes . . . ."(2)PGLC is "operating as a nonprofit entity," and any net income is passed directly to BJCHS and Washington University School of Medicine, which owns the other 33% interest in PGLC.

Barnes-Jewish Hospital purchases pharmaceuticals at discounted prices pursuant to the NPIA. Your letter requests an opinion whether these pharmaceuticals can be transferred, at cost, to other entities owned by BJCHS and dispensed to patients in the three situations described below.

Dispensing to BJCHS Employees

All employees of BJCHS are permitted to purchase drugs at cost from the pharmacies at BJCHS-owned hospitals for their own use or that of their immediate families. Many of the drugs are purchased at discounts granted under the NPIA to Barnes-Jewish Hospital. In order to make access to these drugs easier for the employees, BJCHS wants to transfer pharmaceuticals, at cost, from the Barnes-Jewish Hospital pharmacy to pharmacies that already are located at the PGLC clinics for dispensing to employees of all components of BJCHS.

In Abbott Laboratories v. Portland Retail Druggists Association ("Abbott Labs"),(3) the Supreme Court held that purchases of pharmaceuticals for dispensing to employees of a non-profit hospital and their dependents(4) were for the hospital's "own use" within the meaning of the NPIA. 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) Dispensing to employees met this test, in the Court's view, because employees are necessary for the hospital to function, and providing them with pharmaceuticals enhances the hospital's operation.(6)

BJCHS, however, dispenses pharmaceuticals to all its employees, not just those employed by Barnes-Jewish Hospital, the purchasing entity, or those employed by one of its other nonprofit hospitals. These purchases cannot be deemed to be for Barnes-Jewish Hospital's "own use," or for the use of the other hospitals.(7) The questions thus presented, accordingly, are whether BJCHS itself is an exempt entity under the NPIA, apart from its individual health service affiliates, and, if so, whether providing pharaceuticals to its employees is a permissible use under Abbott Labs.

The applicability of the NPIA to types of nonprofit institutions other than those specifically enumerated in the Act was discussed inDeModena v. Kaiser Foundation Health Plan.(8) In that case, the Ninth Circuit Court of Appeals held that a nonprofit HMO was entitled to the protections afforded by the NPIA. The court interpreted "charitable" in light of developing tax and charitable trust laws, and noted that "all non-profit organizations that promote health are considered charitable under the law of charitable trusts."(9) It also noted that some HMOs, including Kaiser, were exempt from federal income taxes as charitable institutions. Accordingly, it held that the Kaiser plan was a protected charitable institutions under the Act.

In Presentation Health System the Commission expressed the opinion that the NPIA covered a hospital's transfer of drugs it purchased to affiliated nonprofit long-term care facilities. The Commission stated that, in light of the common ownership of the hospital and the long-term care facilities, "[t]he Presentation organization may be regarded as a unit having purchased the pharmaceuticals for its 'own use,' comprised of the use by its hospital and its long-term care facilities."(10) Thus, resale of the pharmaceuticals to the long-term care facilities would be exempt so long as they were for the long-term care facilities' own use. That opinion, however, did not directly address the question raised here: whether supplies purchased for dispensing to the health system's employees, rather than for use in a core institutional function of one of the system's subsidiary health service entities, are covered by the NPIA.

BJCHS is a non-profit entity that brings together a variety of health service providers, including hospitals, under common ownership and management. It is classified as a charitable organization for purposes of federal income taxation. Under these circumstances, we conclude that BJCHS itself, in addition to various of its owned hospitals and other health service providers, is entitled to the protection of the NPIA when it purchases supplies for its own use. We conclude further, based on Abbott Labs, that the purchase of pharmaceuticals for resale to its employees is for BJCHS' "own use" within the meaning of the statute. BJCHS' employees, as a group, like the hospital employees in Abbott Labs, are directly related to the accomplishment of their employer's core functions in the delivery of patient care. We find no basis in Abbott Labs for concluding that the test used by the Court with respect to a single hospital should not apply, in this context, to a health care system.

Dispensing to Patients For Whom BJCHS Bears Financial Risk

Second, BJCHS wants to transfer pharmaceuticals to the PGLC clinics for dispensing to patients covered by a risk contract between the System and Group Health Plan ("GHP"), a for-profit HMO. BJCHS acquired the clinics from GHP, and one of the conditions of the sale was that it contract to assume financial risk for all covered health care services, including pharmaceuticals, provided to GHP enrollees who chose a PGLC doctor (or one otherwise affiliated with BJCHS) as their primary care doctor. The clinics serve primarily this GHP population, and the pharmacies would use the transferred pharmaceuticals to fill all prescriptions for this population, whether they were written by a clinic doctor or a non-clinic specialist to whom the patient was referred by a clinic doctor. BJCHS relies on DeModena to support its argument that this use is protected by the Act, because it, like the Kaiser HMO, would use the drugs in the course of fulfilling its contractual obligation to provide complete continuing care to the patients covered by the contract.(11)

In an FTC staff opinion letter concerning Henry County Memorial Hospital, it was concluded that a hospital's purchase of drugs for dispensing to enrollees in a PPO jointly owned by the hospital and its staff doctors was not covered by the NPIA, even though under the PPO's contracts with health plans the hospital was financially responsible for the cost of all prescription drugs prescribed for those patients.(12) That opinion took the position that a hospital's permissible use under the Act extended only to the care of its patients, and that despite the hospital's contractual obligation to provide pharmaceuticals to them, the PHO patients were not hospital patients in any real sense, but instead were patients of the PHO doctors.

In the circumstances present in this case, however, we conclude that the NPIA should protect the purchases in question. By virtue of the global risk contract with GHP, which obligates BJCHS to provide or pay for all covered medical services and pharmaceuticals, the patients covered under that contract are in a very direct sense the patients of the health system for all their needs. Like the hospital's purchase of pharmaceuticals for dispensing to its registered inpatients, outpatients, and emergency room patients in Abbott Labs, BJCHS's purchases for dispensing to the GHP risk patients are for the systems's own use "in the sense that such use is a part of and promotes the [BJCHS's] intended institutional operation in the care of persons who are its patients."(13)

This conclusion does not mean, however, that all purchases by a nonprofit health system will be deemed to be for the system's "own use." While the NPIA is not, as the Supreme Court observed in Abbott Labs, restricted to nonprofit hospitals that operate in a manner similar to those in existence at the time the Act was passed, neither was it intended to give nonprofit hospitals a "blank check" to undertake "whatever new venture the nonprofit hospital finds attractive."(14)

Transfers to Barnes-Jewish Hospital's Home Care Subsidiary

Barnes-Jewish Hospital has a tax-exempt subsidiary, BJC Home Care, Inc., that provides home care services, including home infusion and hospice care, either on hospital premises or in the patient's home. BJC Home Care has a pharmacy that dispenses only pharmaceuticals that must be administered by BJC Home Care employees. It currently purchases some of its pharmaceuticals at non-discounted prices, and would like to purchase all of these products through the Barnes-Jewish Hospital's pharmacy, which would transfer them at cost to the Home Care pharmacy.

BJC Home Care is not formally a part of the hospital, and its patients are not considered hospital outpatients. Thus, the purchase of these pharmaceuticals is not for the hospital's use under Abbott Labs; but is clearly for the use of the Home Care subsidiary, because all drugs will be administered by Home Care employees in the course of the treatment it provides to its patients. The transfer at cost of pharmaceuticals from a nonprofit hospital to an affiliated nonprofit health care services provider does not eliminate the protection afforded by the NPIA.(15)

Conclusion

For the reasons discussed above, we conclude that the NPIA protects the proposed purchases of pharmaceuticals by Barnes-Jewish Hospital for transfer to affiliated non-profit institutions. 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 would be in the public interest to do so.

Sincerely yours,

Richard A. Feinstein
Assistant Director

1. 15 U.S.C. § 13c.

2. 26 U.S.C. § 501(c)(3).

3. 425 U.S. 1 (1976).

4. The Court distinguished between dispensing for the use of an employee's dependent family members, which was held to be covered by the NPIA, and dispensing for use by nondependent family members or others, which was held to fall outside the Act. 425 U.S. at 18.

5. Id.. at 14.

6. Id.. at 16.

7. In an advisory opinion issued to St. Peter's Hospital of the City of Albany, 92 F.T.C. 1037 (1978) (revised letter), the Commission held that the NPIA covered resale of supplies, at cost, from one institution covered by the Act to another eligible institution, so long as the supplies were for the receiving institution's own use.

8. 743 F.2d 1388 (9th Cir. 1984).

9. Id. at 1392.

10. Presentation Health System, 116 F.T.C. 1526, 1527 (1993) (advisory opinion).

11. 743 F.2d at 1393. The court held that any sale of drugs by the HMO to one of its members was within its basic function in light of the HMO's broad obligation to provide continuing medical care for its members, and thus the purchase of those drugs was for the HMO's "own use".

12. Letter to Clifton E. Johnson (April 10, 1997) (staff opinion letter). The opinion letter expressly declined to express an opinion on what result would obtain if the PHO itself were a charitable nonprofit corporation, or if both the hospital and the PHO were owned by a parent company that was a charitable nonprofit corporation.

13. Abbott Labs, 425 U.S. at 14.

14. Id. at 13. This letter does not address dispensing of pharmaceuticals to patients of doctors employed by a hospital or health system in circumstances other than those described in this letter. We express no opinion, for example, on whether the NPIA covers pharmaceuticals dispensed by a nonprofit hospital pharmacy to patients of doctors who are employed by the hospital (or an affiliated university or medical school) in cases where the patients are either self-pay or are covered by a health plan unrelated to the doctor's employer.

15. St. Peter's Hospital of the City of Albany, 92 F.T.C. 1037 (1978) (revised Commission Advisory Opinion) (NPIA covered resale of supplies, at cost, from one institution covered by the Act to another eligible institution, so long as the supplies were for the receiving institution's own use). See also North Ottawa Community Hospital (Oct. 22, 1996) (staff opinion letter) (transfer of drugs by a nonprofit hospital to an unaffiliated nonprofit hospice was covered by the NPIA).