Advisory Opinion to Wellington (09-19-96)

September 19, 1996

Daniel L. Wellington, Esq. 
Fulbright & Jaworski 
801 Pennsylvania Avenue, NW 
Washington, DC 20004-2604

Dear Mr. Wellington:

This letter responds to your request dated August 29, 1996, for an advisory opinion regarding the application of the Non-Profit Institutions Act, 15 USC 13, to proposed sales of pharmaceuticals by your client, Valley Baptist Medical Center ("Valley Baptist"), to patients of Valley Baptist's Family Practice Residency Clinic and Center ("Clinic").

According to your letter, Valley Baptist is a non-profit medical center located in Harlingen, Texas. It recently established a family practice clinic staffed by hospital residents to help meet the chronic shortage of primary care physicians in the Rio Grande Valley. Many of the Clinic's patients are low-income and indigent patients. The Clinic is organized as a department of Valley Baptist, and the Clinic's patients are admitted as outpatients of the hospital. The Clinic's medical staff are residents and faculty members of Valley Baptist.

Valley Baptist anticipates that the residents and faculty who staff the Clinic, in addition to treating Clinic patients themselves, sometimes will refer patients to various specialists. In such cases, the referring primary care physicians will continue to have responsibility for the overall management and coordination of the patient's care while the specialist will be responsible for recommending treatment and diagnosing the particular conditions which give rise to the specialist referral.

Valley Baptist wishes to share with its patients any cost savings that it receives based on its non-profit status. Accordingly, Valley Baptist wishes to know whether it may fill prescriptions at its hospital pharmacy for patients of its Clinic. Specifically, the hospital wishes to fill prescriptions of two types for Clinic patients: (1) prescriptions written by Clinic physicians for Clinic patients; and (2) prescriptions written for Clinic patients by specialists to whom the patients have been referred by Clinic physicians.

Based on the information you provided in your letter, we believe that Valley Baptist's acquisition of pharmaceuticals and other therapeutic goods for use by the Clinic would be exempt under the Non-Profit Institutions Act, because it would be for Valley Baptist's "own use", as long as the pharmaceuticals and other goods are prescribed either by Clinic staff or by referred specialists as part of the treatment patients receive in the Clinic.

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 Act because the hospitals were reselling some of the drugs at a profit to outpatients 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 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 inpatients, emergency room patients, outpatients for use on hospital premises, inpatients and outpatients 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 outpatients 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 for use by non-dependent third persons, was held to be beyond the protection of the statute.(1)

In determining the limits of "own use" in Abbott, the Supreme Court recognized that the intended institutional operation of charities changes over time but refused to permit each charity to define the limits of its operation under the Non-Profit Institutions Act. The Court examined the function of hospitals at the time of its decision, rather than relying rigidly on the definition of a hospital at the time of passage of the Act and noted that the concept of a nonprofit hospital and its activity had changed since 1938. The Court, however, found nothing in the Act indicating that its exemption should be applied to "whatever new venture the nonprofit hospital finds attractive in these changing days." Abbott, 425 U.S. at 13. The Supreme Court's opinion thus suggests that while non-profit institutions' "own use" is not a static concept, the Act does not cover every enterprise in which a single hospital chooses to engage.

We believe that Valley Baptist's provision of medical services through its family practice clinic would be considered simply an extension of the hospital's basic services beyond its four walls and into a setting more accessible to the community and that therefore pharmaceuticals and other goods purchased for distribution as part of treatment provided by the Clinic would be purchased for Valley Baptist's own use as contemplated by the Court in Abbott. In addition, Clinic patients, while not receiving treatment on hospital premises, are nevertheless current, admitted patients receiving care from Valley Baptist staff. In this respect, Valley Baptist's Clinic patients are not unlike the HMO members in De Modena v. Kaiser Foundation Health Plan, Inc., 743 F.2d 1388 (9th Cir. 1983). In De Modena the ninth circuit held that a nonprofit HMO's sales of pharmaceuticals to its plan members was permissible under the Act because the HMO was designed to provide a full range of health care to its members, going beyond traditional fee-for-service hospital care which is provided on a temporary and remedial basis. The court held that, because of the very broad institutional function of an 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 the Non-Profit Institutions Act. Our reading of Abbott and De Modena leads us to conclude that the provision of pharmaceuticals and other medical supplies to any current Valley Baptist patient is "part of and promotes the hospital's intended institutional operation in the care of... its patients."

Similarly, we would consider drugs dispensed to Clinic patients by Valley Baptist to have been purchased for Valley Baptist's own use even when the prescriptions were written by specialists unaffiliated with the hospital, as long as the patient remains under the continuing and primary care of Clinic medical staff. The exemption applies to Valley Baptist purchases distributed to patients of the hospital because treating its patients is obviously part of the intended institutional operation of a hospital. In this case we can extend the exemption to patients of the Clinic who are effectively hospital out-patients; however, in the event a patient who is referred by Clinic medical staff to a specialist becomes a regular patient of the specialist and no longer sees the Clinic staff for primary care, we would consider him no longer a Valley Baptist patient, and the exemption would be lost. We note this simply by way of caution because the scenario you describe in your letter should preserve the exemption: you claim that typically the specialist will refer the patient back to the primary care physician to carry out the recommended treatment, including the writing of prescriptions for pharmaceuticals, or the specialist will contact the primary care physician to discuss the treatment that will be carried out, including the writing of the prescriptions. According to your letter, in this manner the primary care physician remains in control of the patient's overall treatment, including monitoring the various prescription drugs the patient may be taking. This conduct we would consider to be in keeping with "own use."

We hope this opinion letter is helpful to you. It is limited to the request described above, as explained in your letter of August 29, 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).