Advisory Opinion to Toppin (10-03-96)

October 3, 1996

Bruce J. Toppin, Esq. 
North Mississippi Health Services 
830 South Gloster Street 
Tupelo, MS 38801

Dear Mr. Toppin:

This letter responds to your request for a staff advisory opinion on behalf of North Mississippi Health Services ("NMHS"). NMHS is a non-profit health delivery system, and its Medical Center purchases pharmaceuticals at preferential prices under the Non-Profit Institutions Act, 15 U.S.C. 13c ("Act"). NMHS employees, students, medical staff and their dependents purchase pharmaceuticals from the Medical Center's pharmacy at discounted prices. NMHS wishes to extend the ability to purchase pharmaceuticals at the Center's pharmacy to its retired employees.

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." The leading case on "own use" is Abbott Laboratories v. Portland Retail Druggists Ass'n. Inc., 425 U.S. 1, 96 S.Ct. 1305, 47 L.Ed.2d 537 (1976). In that case, drug manufacturers were selling pharmaceuticals more cheaply to certain private, non-profit hospitals than to retail pharmacies. The plaintiff, an association of retail pharmacists, complained that these purchases violated the Robinson-Patman Act because the hospitals were reselling some of the drugs at a profit to out-patients and others for off-premises use. The Supreme Court suggested that in order to determine what constitutes a hospital's own use, we should focus on the function performed by the institution in its purchase and resale role:

"Their own use" is what 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. (emphasis in the original).

425 U.S. at 14. The Court proceeded to conclude that certain categories of sales of drugs amounted to sales for the hospital's "own use" and were exempt. These were sales to in-patients, emergency room patients, out-patients for use on hospital premises, in-patients and out-patients for take home use, hospital employees and medical students for their use or use by their dependents, and sales to the hospital's medical staff for their personal use or use by their dependents. The Court declined to exempt sales of prescription refills, sales to the hospital's medical staff for resale in private practice, and sales to walk-in customers who were not being treated at the hospital. The purchase and resale of drugs to out-patients and to hospital personnel for their personal use were exempt because these transactions were a continuation of the hospital's basic institutional function. On the other hand, the mere refilling of prescriptions for former patients, or the sale to employees of drugs to be used by non-dependent third persons, was held to be beyond the protection of the statute.(1)

We know of no authority that more specifically addresses the issue of "own use" as it applies to a non-profit institution's employees. However, it may be useful to look at decisions that deal with sales to other persons who have a particular connection with the institution in question. In Foundation for Later Life Enrichment Fund, 92 FTC 1019, an FTC advisory opinion dated July 19, 1978, the Commission advised a gerontology foundation that its proposed course of action would not qualify for Non-Profit Institutions Act exemption from Robinson-Patman. The question before the Commission was whether the Foundation for Later Life Enrichment, a non-profit foundation created to fund gerontology research and to provide goods and services to the aged at low cost, could resell donated products and products obtained at wholesale prices to the elderly. In its advisory opinion, the Commission interpreted the Portland Retail Druggistsdecision to say that "own use" meant "[t]he dispensation or sale of drugs to patients under the hospital's care, or to persons essential to the hospital's function". (emphasis added). The Commission went on to state that it did not view the purchase of products for resale to the elderly "as in any manner a function integral to the operation, institutionally, of a gerontological research foundation."(2)

When we consider the Supreme Court's exclusion of former patients from "own use" in Portland Retail Druggists, together with the Commission's interpretation of that case to limit "own use" to "persons essential to the hospital's function" in Foundation for Later Life Enrichment Fund, we conclude that the sale of discounted pharmaceuticals to former employees of NMSH cannot meet the "own use" test. The basic institutional function of the Medical Center is not composed of, or promoted by the provision of pharmaceuticals to persons who no longer have a direct relationship with the Center, and consequently, purchases for resale to former employees would not constitute purchases for the Medical Center's own use that are exempt under the Act.

We hope this opinion letter is helpful to you. It is limited to the request described above, as explained in your letter of August 5, 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 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 yours,

Michael D. McNeely 
Assistant Director 
Bureau of Competition

1. 3 E. Kintner & J. Bauer, Federal Antitrust Law, § 25.9, p. 468 (1983).

2. 92 FTC 1019, 1020.