Advisory Opinion to Klein (10-22-96)

October 22, 1996

Sheldon Klein, Esq. 
Butzel Long 
Suite 900 
150 West Jefferson 
Detroit, MI 48226-4430

Dear Mr. Klein:

This letter responds to your request for an advisory opinion dated April 4, 1996, and supplemented by information provided by letter dated June 22, 1996 and in subsequent discussions by telephone.

According to your correspondence, your client, North Ottawa Community Hospital ("NOCH"), a non-profit hospital in Holland, Michigan, purchases pharmaceuticals at preferential rates under the Non-Profit Institutions Act, 15 U.S.C. 13c ("Act"). NOCH wishes to sell a portion of these pharmaceuticals to Hospice of North Ottawa County ("Hospice"), an unaffiliated, non-profit organization located in Holland, Michigan. NOCH proposes to sell these pharmaceuticals to Hospice at NOCH's acquisition cost plus a fee of $60 per patient, per month, a fee at which Noch claims it will not make any profit, but will be made whole for the additional costs it would incur in providing the drugs to Hospice patients.

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." Although the phrase "for their own use" limits the categories of individuals to whom the supplies can be resold, see Abbott Laboratories v. Portland Retail Druggists Ass'n, 425 U.S. 1 (1976), in an earlier opinion letter the Commission said that the "own use" limitation is not "intended to apply to resales of supplies, at cost, by one charitable institution to another that are limited, in turn, to the latter charitable institution's own use." St. Peter's Hospital of the City of Albany, 89 F.T.C. 689 (1977), modified at 92 F.T.C. 1037 (1978).

NOCH wishes to know whether the arrangement it proposes would constitute a permissible transfer "at cost" under St. Peter's Hospital. Specifically NOCH asks: 1) whether it may recover the costs of the labor associated with servicing the Hospice patients; and 2) if so, whether it may recover its costs through a monthly per patient fee based on its assessment of the labor costs that it will incur.

Based on the Commission's holding in St. Peter's Hospital, a non-profit entity would forfeit its protections under the Act if it realized profit from a sale to another non-profit entity of supplies purchased at preferential prices. On the other hand, under St. Peter's Hospital, there is no reason to demand that the transferring institution lose money in this endeavor. We conclude, therefore, that transferring pharmaceuticals "at cost" should be interpreted to mean at a figure comprised of the acquisition cost of the drugs plus any incremental costs associated with providing the drugs. Thus, it would be permissible under the Act, and in keeping with the Commission's opinion in St. Peter's Hospital, for NOCH to receive from Hospice the price NOCH paid for the drugs it dispenses to Hospice patients, plus reimbursement for any costs NOCH incurs as a direct result of providing the drugs to Hospice patients. In your proposal as you describe it, these incremental costs would include labor charges for pharmacists and a driver delivering the drugs to the Hospice; mileage; and the cost of vials and labels. Any overhead expenses of the hospital are, by definition, not recoverable, as they would be incurred by NOCH whether or not it were providing drugs to the Hospice.

In answer to your second question, whether NOCH may charge a monthly per patient fee to recover its costs, we believe this would be acceptable provided that the fees collected on this basis accurately reflect NOCH's direct expenses incurred in servicing Hospice's patients. As you can surely appreciate, we are in no position to make a judgment on the appropriateness of the $60/patient/month fee as an accurate reflection of NOCH's direct monthly expenditures on behalf of Hospice patients.

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 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