Unnamed Hospital.

L \IT! D i T ' P T L \ Ot 4 \ i L R r t 8
t E D E R A L TRADE COf\IP\IISbiOb'
0 	D 	:'*-ill
March 31, 1993
Jmes 	D, Miller, 	Esq,
.I 	NaskLns, 	Nugeat 	& Newnhm
1010 Second Avenue, 	Suite 2200
San Diego, 	California 	9210%
I n two letters dated e)astobs 8 , 	1992, you rewerstd dviso-
opinisne from the staff 	sf 	t h e Federal T ~ a d eCsmLasion odL the
application s b t h e Non-Pr~fiLBwstitutione 	A c t , 	05 U.GeCD 8 23,
to purchases of phamaeeuticals 	by a hospital. 	During telephone
conversations that you and % had on N 	r 8 0 , 	1982, 	and
Januam 	11, 	1993, 	you provided some facts in acldition to those
discussed i n your letters, 	In this letter, I will addxess t h e
-eations 	raised in your t w o 	letters,
Pau explained that your client is a company that pmovides
computer semicee 	to hospitals, ineluding ineurance c l a b a
processing and purchasing of drugs. 	The e l l e n t 	s advliee on
whether a hospital may, under the Non-Profit 	Ine
purekaee drugs to h dispensed to certain p r s o n s , 	A s you
describd one situation, a nonprofit hospital entered an
agreement with a nonprofit health maintenance srganixaLt
("NlilQ") 	to provide acute care and preecription alruga &o 	rs
The W O pays the hospital a set 	f- 	p r 	far
and, in axeban-, 	the 	LLa1 purchat3ea 	&nd @mvLde8
gs prescribed for t h e 	rs, 	the h@@glL@X	Thus, 	has
a s s u e d the financial r i s k of providing druge to the W b a
ns. 	The drugs are difipnsed by 	t h e horspltal. to pbm m 8 W r s
r or not 	they are patients of t h e hospital. 	So- 	cJrrage are
dispensed by t h e phamaey 	located 	in the hospiLaL and oehore are
d i s p n s e d 	frm other sites o p r a t e d by 	t h e hospital. 	T
are m t pkamacles 	o w n to t h e publie, 	b u t 	seme only
the W8, 	charge t h e p a t i e n t 	only t h e c o p a p e n t , 	and may sc aray
not be staffed by a phamaeist.
You asked whether t h e hospital" 	purchase sf dmge to b
d i s p n s s d to t h e 	seaers under the agreemnt &L:v-n 	the
hospital 	and the ma, whether from the IrospLtaL" 	ph 	I 0s
from other sites, would be covered by t h e Non-Peofit 	Xn@dk%uLfsne
A c t . 	Zf they are, the hospital" 	ppuchases of dmgs 	Eor %hose
customers at the prices offered to nonprofit institutions would
0 be exempt from section 2 ( a ) 	o f 	the clayton Act, 15 U.S.C. 	13.

You a l s o 	inmired whether d r u g s purchased by 	the hospital for
subscribers of other health plans w i t h w h i s h 	t h e hospital 	has
contracted 	$0 supply drugs would 	be covered by 	t h e A c t ,
In eke second situation that you presented, 	a hospital
proposes 	to establish and operate a program for senior citizens.
Each senior citizen participating would be assigned a physician
and a counsellor. 	The senior citizen would be screen& 	for
diseases, 	s e n t notices 	reminding sf recornended follow-up care
and reg~nlari m u n i z a t l s n s , 	and monitored to be sure he or she i s
- * 	taking the dmge prcrscrihd, 	The pxogrm also would 	Lllclude
lectures and infomation on certain diseases and eonclfliorrmr,
financial planrrring, 	and p w e r s o b attorney, 	Theme m u l d b no
cost to t h e senior c i t i z e n for partfcdpation in t h e p ~ 6 c m . The
hospital also would r r d l l l prerrrerLp;ion 	d m g ~to th8 senion
c i t i z e n s t k o u g h 	its phmaey. 	Y m ask& 	whether t l r m PlrSspi%;alas
puxcbasea sf d a g s to be d f s p n s e d to t h e rn 	rs o f the menfor
citizen" 	pprogrm would eom under the Nan-Ptofit 	Xnr~ttftutfons
A c t *
To answer your weations, 	we would have to deternine whether
providing phamaceuticaLe 	to me 	rs of 	an 	or senior c i t i z e n s
engobled i n a hospital 	prcogrm 	i s t h e intended i n s t i t u t i o n a l
opcsration of a nonprofit hospital, 	a d e t e m i n a t i o n that we cannot
make on "the basis of t h e 	facts available to us. 'Thus, 	w I r i I & we
can explain t h e analytical 	f r m e w o r k we would apply to these
q u e s t i o n s , 	w e cannot give you t h e advice you seek,
The Robinson-Patman Act, Section 2a of the C h y t o n k t ,
provides :
That it shall be unlawful for any F r s s n engaged 	in
eometce, 	in the course sf such csmerce, 	c i t h e r directly or
iraciirectly, to discriminate in price heween different
purchasers of e~nunoditiesof like grade and p a l i t y , 	where
either or any of the purchases involved in such
discrimination are in comerce, 	where such eomodities 	are
sold for use, consuption, or resale w i t h i n the Unit&
States or any T e r r i t o q thereof 	or t h e D i s t r i c t of C o n
or any insular pseession or other glace under $he
jurisdiction of the United States, and where the effect of
such discrimination may $6 sub~tantiallyto lessen
c s m p t l t i o n or tend to create a monoply 	in any line of
comeree* 	. . .
The Non-Profit 	Institutions A c t , 	Seetion 13c of the
Robinson-Patman Act, states:
Nothing 	in 	[ t h e Robinson-Patman 	A c t ] 	shall apply to
purchases sf their supplies for 	their own use 	aehooLe,
colleges, universities, public libraries, churches,

hospitals, and c h a r i t a b l e 	institutions not operated 	for
profit,
For t h e purpose sf addressing your i n q m i q , 	we assme that
the hospital is not operated for profit within the meaning of the
Nsn-Profit Institutions Act, that the h o s p i t a l 	is charged 	less
f o r drugs than are retail phamacies, 	and that the hospital is
"selling" drugs to the m e m k r s of t h e m O and the senior citizens
in compticion w i t h retail phamacies 	so as to create a
pseibility of secondaq Line injuq and p ' e e n t i a l 	liability
under the RobLnson-Patman Act. 	(m3 Kdntnen L Bauer, 	Fdexa%
htbtmst 	MW 293 	(1315.3)). 	Undee these aseamptions, 	t h allnnrwez
to pour weetion t u r n s on whethex d i s p n e l n g -9s 	to the 	r~
of the mC)and the senior citizens is t h e hospital" 	use",
as prowid& 	in the Man-Profit Insr%tut%sna k t ,
As we will discuss b l o w , 	t h e concept of *awn uee" i a
nenther 	static nor opn-ended. 	The lead%ng eaae on .own uaem is
manufactmrers w e r e selling phamaceuticals more cheaply to
certain private, non-profit hospfta%s t h a n ta retail pbamaeies.
The plaintifg, 	an aseoeiatbon of retail phamaciste, 	compbairred
that these purchases v i o l a t d t h e Robinson-Patsan A c t 	beause the
PIospitals 	were reselling some of the d n g s at a prodit to out-
patients and others for off-premises use, 	The Supreme Court
suggested that in order to deternine what constitutee a
hospital's own use, we should focus on the f u n c t i o n performed by
the inetieution in its purchase and resale role8
" T h e i r own use" i s what 	reasonably may be regarded as
use 	in the s e n s e that suck use is a
part of and promotes the hospital" 	intended
institutional opration in the case of persons who are
its patients, 	(emphasis in t h e original),
425 U.S. 	at 14, 	The Court proceeded to eonelude tkat certain
categories of sales sf drugs mounted 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 depndents, and sales to the Inoepilal" 	sdlcal staff for
their p r s s n a 1 use or use by t h e i r depadents, 	The C o u r t
declined to exempt 	sales oh prescription reflLLs, sales to t h e
hospital" 	medical staff for resale in private practice, 	and
sales to walk-in customers who w e r e n o t 	k i n g treated at the
hospital. 	The purchaae and resale of drugs ts out-patfents 	and
to hospital preonnel for their personal use were emmpt beauee
these transactions were a continuation of the hospital" 	bade
institutional function. 	On the other hand, the mere refilling of
prescriptions for former patients, sales to walk-in customers, or

t h e 	sale to employees of drugs 	to be used by 	non-dependent 	third
persons, were held 	to be beyond 	t h e protection 	of the statute,
In detemining the Limits of 	"own use'' in 	t h e
Supreme Court recognized that t h e 	intended institutional
owration of c h a r i t i e s changes over time but refused to p e r n i t
each charity to define t h e l i m i t s of 	its operation under the Non-
Profit Institutions Act, 	The court e x m i n e d the f u n c t i o n of
hospitals at the time of 	its decision, rather than relying
rigidly on t h e definition sf a hospital at the time 0% paseage sf
t h e A c t and noted t h a t 	t h e concept of a nonprofit hospital and
its a c t i v i t y had chang& 	since 1938. 	The court, 	however, 	found
nathLng 	Lw t h e A c t indicating that i t e exmption should b
applied to "whatever new venture t h e 	f i t hospital finds
attractive i n these changing days,* 	425 U , S . 	at 	13. 	The
Supram Court" 	opinion $hum 	suggests that 990np~08%t
ins%%tutlons""swn 	use* i s 	not 	a a t a t i c concept, 	but that t h e A c t
Q-8 	not cover e v e q enterprise in which a eingBe hospital
chooees to engage,
fw 	p 	743
F - 2 d 1388 (9th Clr, 19831, t h e Kaiser Health Plane 	("Kaiser*],
which 	included hospitals and WOa, 	were nonprofit Lnst$tutfans
that contmacted with consmers 	to provide them medical caEe bn
r e t u r n 	for monthly dues, 	Raiser also offered a drug plan under
which, 	lor an additional monthly charge, memrs could obtain t h e
right to purchase drugs at 	little or no cost, 	Retail phamacies
brought an antitrust suit against Raiser alleging that Raiser
h u g h t phamaceutieals 	at discriminatsrilg low prlcea 	in
violation of the Robinson-Patman Act. 	The Ninth C i r c u i t 	first
deeemined 	the basic 	institutional f u n c t i o n of t h e Raiser Health
plans and then decided wkich 	sales were i n keeping w i t h thBs
function. 	are designed to provide a	The court noted that ~ 	O 	S
f u l l range of health care to t h e i r meders, 	including preventive
care, and distingtlished 	hospitals which provide health care on a
t e m p r a q 	and remedial basis, 	The c o u r t held that, bcause o f
t h e v e q broad 	institutional 	function of 	an W O , any sale of
drugs to a aeonber falls within the basic 	f u n c t i o n sf 	t h e mC) and
t h e n e f o r e 	the purchase of drugs by an mQ for Qispnsing to Its
mearbers 	is f o r 	its 	"own use" and within the Non-Profit
Institutions Act.
In the instance you presented of t h e purchase of drugs to be
dispensed by the hospital to members of 	an m O , 	there is no
definite answer to whether t h e purchase f a l l s w i t h i n t h e %an-
Profit 	Institutions A c t , 	The hospital 	is not an W O , 	aror is it
elear whether 	it 	is acting as the agent of the mOe 	Rather, 	the
hospital 	is paid 	a fixed fee per a 8 memher p r month and assues
t h e 	financial risk of supplying the members~hharmaceutical
needs.

teaches 	t h a t 	d i s p e n s i n g drugs to mehers 	is t h e
basic 	institutional f u n c t i o n of a n NLa30, 	b u t 	that spinion does not
answer the qiuestion 	spitals independent sf t h e sfl?lIO. 	I n
fact, 	t h e court in 	d i s t i n v i s h e d &he f u m t d o n of a
hospital, which 	is 	temporaq and remedial care, from
t h e broader f u n c t i o n o f 	an N O , 	which 	is to f u r n i s h continuing
and 	n t i v e care, 	F u r t h e m o r e , 	the Supreme Court" 	lbanwage
in 	exeluding t h e supply o f 	pharmaceuticals to walk-in
pataents might be read to answer the p e s t i o n , 	but 	L& d w s not
really address the issue of customers who are
s u b s c r i h r group, 	I 	no 	solves t h e
issue you 	raised, 	arrd 	furnish only pLdeprets
for detemining a hospital" 	-intended Lnelltutional c3wratAan."
Without an inveetbgation that would b b a r more exten8Lve than 	Is
appropriate f o r a ~taffa d v i s o . ~spini 	w 	-mot 	~ @ & F B I " I B I & R ~
whether providing phamaceuticals 	Lo 	rs of an W O may now be
regarded as part of t h e intended inetitut%oaaal aapratiorr, o f
hospitals and therefore t h e purchase o f 	such pRamsceutica1~3i s
for the hospital" 	-"own use". 	W 	16 @,P,R, 	S l,l(2)[b)[2j.
You ran80 	asked a b u t t h e purchase 0 E el~uqsto be dlswneed
rs of other health plans, 	Since you p r o v l d d no 	further
infomation a h u t those plans or the relationship h t ~ ~ r a e n	the
plans and the hospital, w e have no basis on which to provide an
opinion,
Also, 	as to the senior ci%izene>rogsm 	operaeed by the
hospital, it is unclear whether drugs purchased to d i s p n s e to
t h e senior citizens are f o r t h e hospital" 	*own ~ 8 . 8 " ~The
hospital's propaaed progrm 	for senior citizen. 	would 	include
persons 	in the local cornunity who are not patients 	o f %he
hospital, either as outpatients or patients aceupyfng hospital
beds- 	It would provide financial and legal i n f o m a t i o n as well
as health-related indomalion. 	We "o a Lhae enough infomation
to deternine whether operation 06 	pxograms incsrwratbng
education, screening, monitoring, and drug d i s p n s l n g la so
comsn to nonprofit hospitals today that it would be regarded 	as
their intended inslftutio~~~l 	for the	operation, 	Consewently,
same reasons 	applicable to your first gcleatlon, 	we cannot say
whether or not purchases of drugs by a hospital 	for such a
progrm 	are covered by t h e Non-Profit nnetitueions A c t .
W e h o p t h i s opinion Better, 	by explaining Gasw we would
analyze such weetione, 	is helpful to you. 	Lt is limited to the
requests d e a c r i b d a h v e and is based on t h e 	facts as you
presented them 	In your Wtober 	8 	letters and our Hove
J a n u a q 	II phone e o n v e r s a t i s n s ,

The above advice is an informal staff o p i n i o n . 	Under
C o m i s s l o n b Rule 06 	Practice S 	L , 3 ( e ) , t h e Comission 	is n o t
bound by t h i s advice and 	reserves t h e right to rescind 	it at a
later time. 	In addition, t h i s office retains 	t h e right to
reconsider t h e question involved and, 	w i t h 	notice 	to t h e
r e q e e t i n g pasty, 	to rescind or revoke i t s opinion if t h e request
is used 	f o r b p r s p e r purposes, or if it would be in t h e public
i n t e r e s t to do s o ,
S i n c e r e l y yours,
Karen G. Wkat
S e n i o r Eltigator