Advisory Opinion to Johnson (04-10-97)

April 10, 1997

Clifton E. Johnson, Esq. 
Hall, Render, Killian, Heath & Lyman 
Suite 2000, Box 82064 
One American Square 
Indianapolis, IN 46282

Dear Mr. Johnson:

This letter responds to your request for an advisory opinion on behalf of your client, Henry County Memorial Hospital ("Hospital"), on the application of the Non-Profit Institutions Act, 15 U.S.C. §13a ("NPIA"), to proposed sales of pharmaceuticals by Hospital to persons eligible for prescription benefits provided by a physician hospital organization ("PHO") organized by the Hospital. According to your letter, Hospital is a non-profit acute care hospital that is exempt from federal taxation by the Internal Revenue Service. The corporate members of PHO are Hospital and various physicians with privileges on the active medical staff of Hospital. You have asked whether the NPIA's exemption of purchases made for a charitable institution's "own use" will be available if Hospital resells pharmaceuticals purchased at preferential prices to persons eligible for benefits provided by managed care plans that contract with PHO. You have explained that Hospital is the designated provider of the pharmacy benefit offered by PHO, but that the persons to whom the pharmaceuticals would be sold may not have been admitted as inpatients or outpatients of Hospital. Because we conclude that, under Abbott Laboratories v. Portland Retail Druggists Association, Inc., 425 U.S. 1 (1976), and Commission precedent, the purchase by Hospital of drugs for resale to PHO patients would not qualify as "own use," we conclude that the NPIA would not apply to the proposed conduct.

Our response is limited to this assessment of whether a transfer of pharmaceuticals is properly for the Hospital's own use. We do not reach other questions that were not presented to us. Thus we express no view on the proper treatment of a case in which the Hospital transfers the lower-cost pharmaceuticals to a PHO which is itself a charitable nonprofit corporation.(1) Nor do we express a view on the proper treatment of a case in which the Hospital and the PHO are both subsidiaries of a parent company that is itself a charitable nonprofit corporation.(2)

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." In Abbott Laboratories, the leading case on the interpretation of "own use", drug manufacturers were selling pharmaceuticals at lower prices 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, one 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 pharmaceutical sales were 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.(3)

The Supreme Court, in explaining the meaning of "own use," stated that the proper focus is on whether the use is "a part of and promotes the hospital's intended institutional operation in the care of persons who are its patients." 425 U.S. at 14 (emphasis added). The Supreme Court's opinion thus focuses the inquiry into the coverage of the "own use" exception on the primary intended institutional function of the nonprofit in question. For example, in DeModena v. Kaiser Foundation Health Plan, Inc., 743 F.2d 1388 (9th Cir. 1984), a case you cite, the Ninth Circuit held that a nonprofit HMO's sales of pharmaceuticals to its plan members was permissible under the Act. The court focused on the fact that the nonprofit HMO in that matter was created as an institution solely to provide the "complete panoply" of health care to the HMO's members. Id. at 1393. The court contrasted this broad institutional mandate with the normal hospital function of providing care on a "temporary and usually remedial basis to their patients." Id. The court held that, because of the very broad institutional function of the HMO, any sale of drugs to a member falls within the basic function of the HMO and therefore the purchase of drugs by an HMO for dispensing to its members is for its "own use" and within NPIA.

The sales to PHO patients you describe do not meet the "own use" test set out in Abbott Labs. In contrast to the situation in De Modena, where the nonprofit facility was primarily devoted to providing a broad range of care for subscribers to the HMO, the Hospital's primary institutional function remains providing traditional, acute care to the public, including both PHO and non-PHO individuals. We assume that Hospital receives preferentially priced pharmaceuticals for its own use as an acute care, fee-for-service hospital whose clinical and therapeutic efforts are directed toward patients under the hospital's direct care. We therefore cannot accept the proposition that providing pharmaceuticals procured by Hospital as a hospital, even on a capitated basis,(4) to patients who are not being cared for by Hospital as a hospital is part of Hospital's intended institutional operation. The PHO patients you describe are not Hospital patients in any real sense. They may be patients of the PHO practitioners who also are on staff at Hospital, but they have no ongoing patient-provider relationship with Hospital.(5) Consequently, we see little substantive difference between the proposed sales to PHO patients and sales to a hospital's medical staff for resale in private practice or sales to walk-in customers not being treated at the hospital, both of which were specifically excluded from coverage in Abbott Labs.

We hope this opinion letter is helpful to you. It is limited to the request described above. It does not constitute approval for actions that are different from those described, or that are not specified in your letters.

The above advice is an informal staff opinion. Under § 1.3(c) of the Commission's Rule of Practice, 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, 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.


Michael D. McNeely 
Assistant Director

Bureau of Competition

1. Cf. St. Peter's Hospital of the City of Albany, 89 F.T.C. 689 (1977) (Commission advisory opinion) ("own use" limitation does not preclude transfer, at cost, from one eligible institution to another institution that would have been independently eligible to make purchases at preferential prices under the Act).

2. Cf. Presentation Health System, 116 F.T.C. 1526, 1527 (Dec. 21, 1993) (Commission advisory opinion) (independent, "further basis" for exemption under Non-Profit Institutions Act exists where parent, transferring and receiving entities may be regarded as a single unit, which purchased pharmaceuticals for its own use in both the hospital and the affiliated facilities).

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

4. The specific arrangement you propose in your letter would provide PHO patients with a package of pharmaceutical benefit management services on a capitated basis: a formulary; a drug utilization program that monitors compliance, medical outcomes, adverse effects and therapeutic interchanges; education programs; and the provision of more cost-effective drugs.

5. By contrast, the home health program at issue in Elkhart General Hospital (June 13, 1994), a FTC staff letter cited by you, was an extension of the nonprofit hospital's basic services beyond its four walls, since employees of the hospital treated participants in the program on a regular, outpatient basis for a wide array of health care needs.