Recent Developments Concerning the Non-Profit Institutions Act

June 1, 1997 Published Work
Health Care Antitrust Manual Volume 4, No. 4

Non-profit hospitals and
other non-profit or charitable health care organizations may be able to claim a limited exemption from the antitrust laws for the purchase and resale of supplies for their own use under the Non-Profit Institutions Act (15 U.S.C. § 13c.).

In general, the Robinson-Patman Act prohibits the contemporaneous sale in interstate commerce of commodies of like grade and quality for use or resale within the United States and its territories at different prices to different purchasers, if the effect of such discrimination may be to harm competition substantially. However, Congress enacted the Non-Profit Institutions Act to exempt from this prohibition the purchase of supplies by certain non-profit and charitable institutions for their own use.

The effect of this exemption has been to allow non-profit hospitals to purchase pharmaceutical products and other supplies at lower prices than are available to other purchasers. Much of the case law and commentary regarding the Act has focused on the latter issue, i.e., when a purchase is for the "own use" of an institution. However, equally important is the type of institution that qualifies for the exemption. Both issues are discussed below.

'Own Use'
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, retail druggists brought suit against drug manufacturers, alleging that their sales to hospitals violated the Robinson - Patman Act because the hospitals resold the drugs to outpatients, employees, and others. The Supreme Court held that the following sales were exempt: to inpatients, emergency room patients, and outpatients for use on hospital premises; inpatients and outpatients for take-home use; sales to 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 part of the hospital's basic institutional function. On the other hand, the 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 Act.

Since Abbott Laboratories, courts and the federal antitrust agencies have further interpreted "own use" to include the filling of prescriptions by a health maintenance organization (HMO) for its members [see DeModena v. Kaiser Health Plan, Inc., 743 F.2d 1388 (9th Cir. 1988)], the provision of services to patients at home through a home health care department of a hospital (FTC Staff Advisory Opinion from Michael McNeely to Clifton E. Johnson for Elkhart General Hospital, dated June 13, 19941 and the filling of prescriptions by a family practice clinic for patients at the clinic (FTC Staff Advisory Opinion from Michael McNeely to Valley Baptist Medical Center, dated Sept. 19, 1996.)

In Kaiser, the court found that the basic institutional function of an HMO was to provide the full panoply of health care services to its members. Therefore, the HMO could resell preferentially priced pharmaceuticals to its members (although not to non-member walk-ins). In the staff advisory opinion to Elkhart General Hospital, the FTC reasoned that a home health care program is "simply an extension of the hospital's basic services beyond its four walls" and therefore the pharmaceuticals resold to patients within the context of the program would be for the hospital's "own use."

In Valley Baptist Medical Center, the FTC staff deemed resales of pharmaceutical products to patients of a hospital's clinic to be for the "own use" of the hospital regardless of whether the drugs were prescribed by clinic physicians or by specialists to whom the clinic physicians had referred the patients. Medical services provided by a family practice clinic are within the evolving basic institutional function of a hospital, according to the FTC staff.

However, in an advisory opinion issued by the FTC to the Foundation for Later Life Enrichment, the resale of phannaceutical products to the elderly was not a "function integral to the operation, institutionally, of a gerontological research foundation" [92 F.T.C. 1019 (1978)]. More recently, the FTC staff declined to permit a health care delivery system and its medical center to resell preferentially priced pharmaceutical products to retired employee. (FTC Staff Advisory Opinion from Michael McNeely to North Mississippi Health Services, dated Oct. 3, 1996). The advisory opinion states, "[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."

The guidance provided by the opinions from the courts and the agencies, while limited, indicates that the definition of "own use" is closely connected to an institution's basic function. As health care systems adapt to the changing demands and needs of their communities, the definition of "own use" will likely be modified over time.

Type of Institution
Although only a handful of decisions have interpreted the meaning of "own use" in the Act, even fewer decisions have addressed the question of what type of institution qualifies for the Act's exemption. Most significantly, Kaiser analyzed whether an HMO was an eligible institution. The court looked to the federal tax code and the law of charitable trusts for assistance in defining "charitable" for purposes of the Act. It found that the meaning of "charitable" has become broader and that a non-profit HMO has been recognized by tax courts and the law of charitable trusts to be "charitable."

The FTC has also considered the types of institutions that are eligible to take advantage of the exemption in the Act. In an advisory opinion issued to St. Peter's Hospital of the City of Albany, the FTC permitted an exempt, non-profit hospital to transfer pharmaceuticals, at cost, to another exempt institution, a not-for-profit nursing home [89 F.T.C. 689 (1977)]. Because both institutions were eligible under the Act to avail themselves of the exemption, a transfer between the institutions for the "own use" of transferee would not destroy the exemption. In a later opinion, the FTC stated that a transfer of preferentially priced pharmaceuticals from a hospital to an affiliated long-term care facility for its "own use" would also be exempt under the Act (FTC Advisory Opinion to Presentation Health System, dated Dec. 21, 1993). The FTC stated, "Where the hospital and long-term care facilities are affiliated, the FTC believes that there is a further basis for exemption under the Non-Profit Institutions Act. The Presentation Organization may be regarded as a unit . . . "

Finally, the FTC staff recently stated that it would look to an organization as a whole in determining eligibility for the Act's exemption, even where one of the affiliated institutions would not, by itself, qualify for the exemption (FTC Staff Advisory Opinion from Michael McNeely to Robert M. Langer for William W. Backus Hospital, dated June 11, 1996).

In Backus, one affiliated entity, CONNCare - which operates two licensed clinics for occupational health services and walk-in outpatient services - was a non-profit, taxable corporation that would not be considered charitable under federal tax law or under the law of charitable trusts. The William W. Backus Hospital is a non-profit, tax-exempt, charitable acute care hospital. The hospital and CONNCare are both ultimately owned and operated by Backus Corporation, a non-profit, tax-exempt, charitable institution. Nevertheless, the FTC staff deemed it appropriate to look to the Backus Corporation organization "as a whole:"

Based on the information you have provided, we believe that the sales you describe would be exempt under the Act. We believe that purchases by Backus for resale to CONNCare would be permissible because they would be considered purchases for the "own use" of the Backus Corporation organization as a whole. In order for the sales to be exempt, however, the pharmaceuticals must be acquired for CONNCare's "own use" as that language was interpreted in Abbott Laboratories and other decisions interpreting the Act. We agree that your description of CONNCare's intended use for the supplies, administration to patients undergoing medical treatment on premises at the clinics, would qualify as CONNCare's "own use."

In light of the Backus opinion, exempt entities under the Non-Profit Institutions Act, such as hospitals, may find it useful to investigate whether it is possible for them to transfer supplies and pharmaceutical products to affiliates that they heretofore may not have considered eligible for such treatment. The cost savings associated with such lawful transfers may in some cases be quite substantial.