Hospital’s Prescription Program Exempt from Robinson-Patman Act
Background
Crouse Hospital is an Internal Revenue Code (“IRC”) §501(c)(3) tax-exempt hospital organization located in Onondaga County, New York. The organization has 506 acute-care beds, 57 bassinets and serves more than 22,000 discharges, over 82,000 emergency services visits, and more than 365,000 outpatient visits each year from a 15-county area in Central and Northern New York. The hospital has been caring for patients since 1887. Its mission is “to provide the best in patient care by exceeding the expectations of our patients and to promote community health”.
In 2010, Crouse Hospital formed Crouse Medical Practice, PLLC (“Crouse Medical”) in an effort to develop an integrated healthcare delivery system. The two organizations work together to improve access to care and provide consistent, quality healthcare services to their patients. Crouse Medical is an IRC §501(c)(3) tax-exempt organization. However, the organization was formed as a for-profit entity in the State of New York. In accordance with the State of New York Corporate Practice of Medicine, Crouse Medical must be owned by an individual through a physician nominee agreement for the benefit of the hospital and must operate in compliance with the hospital’s charitable purposes.
Crouse Hospital currently provides a benefits package which includes a prescription-drug benefit to its employees, retirees and their dependents. The hospital owns and operates two on-site pharmacies: one that offers pharmaceuticals under the Non-Profit Institutions Act (“NPIA”) to Crouse Hospital employees, retirees and their dependents and one that provides pharmaceuticals to its patients.
In its proposal to the FTC, Crouse Hospital asserted that selling discounted pharmaceutical products to Crouse Medical employees, retirees and their dependents would fall within the scope of the NPIA and protect the affiliated medical practice from antitrust liability under the Robinson-Patman Act.
Robinson-Patman Act & NPIA
The Robinson-Patman Act of 1936 is a United States Federal law that prohibits producers from engaging in anticompetitive practices. Although the law was enacted and designed primarily to protect small retail shops against competition from larger chain stores, it forbids discrimination with respect to the sale of many like-kind products, including pharmaceuticals, to different buyers.
Typically, a seller charging different prices for the same product or commodity would be a violation of the Robinson-Patman Act. However, under the NPIA, non-profit hospitals and other non-profit or charitable healthcare organizations may be eligible to claim a limited exemption from the antitrust laws for the purchase and resale of supplies for their “own use”.
In the 1976 Supreme Court case Abbott Laboratories vs. Portland Retail Drug Association, the Court defined “own use” to mean “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”. The Court concluded that the resale of discounted drugs to a hospital’s employees and their dependents would also qualify as the hospital’s “own use”.
FTC Advisory Opinion
In its Advisory Opinion, the FTC concluded that the NPIA should apply to the resale of discounted prescriptions sold to the employees, retirees and dependents of Crouse Medical. This decision was unique for two reasons: 1) Crouse Medical, while an IRC §501(c)(3) tax-exempt organization, is technically a for-profit entity and therefore would not qualify or be eligible for protection on its own under the NPIA; and 2) Crouse Medical is not directly owned by Crouse Hospital, due to the State of New York Corporate Practice of Medicine rules and regulations, and therefore, resale of the discounted pharmaceuticals may not qualify as the hospital’s “own use”.
Despite the factors mentioned above, the FTC concluded that the NPIA would protect the sale of discounted pharmaceutical products from Crouse Hospital to Crouse Medical employees, retirees and dependents in light of the reasons outlined in the Advisory Opinion as follows:
- In furtherance of is tax-exempt mission, Crouse Hospital was responsible for the formation of Crouse Medical. The two organizations work together to improve care and promote the charitable purposes of the hospital. Additionally, “Crouse Medical Practice physicians and other employees provide vital services to Crouse Hospital and its patients necessary to help Crouse Hospital fulfill its intended institutional function”;
- Despite not having a technical ownership interest, Crouse Hospital has ultimate decision making control and authority for Crouse Medical as outlined in the organization’s Operating Agreement; and
- The Crouse Medical nominee owner assigns any profits to Crouse Hospital and neither the nominee owner nor the organization’s employees are entitled to any net earnings of Crouse Medical.
The Advisory Opinion states “it is reasonable to conclude that Crouse Medical Practice is an integral part of Crouse Hospital’s ability to fulfill its intended institutional function of providing care and promoting community health. And, accordingly, it is reasonable to treat Crouse Hospital and Crouse Medical Practice as one unit in analyzing the applicability of the NPIA exemption”.
In its conclusion, the Advisory Opinion notes that “Under Commission Rule §1.3(c), 16 C.F.R. §1.3(c), the Commission is not bound by this staff opinion and reserves the right to rescind it at a later time. In addition, the office retains the right to reconsider the questions involved and, with notice to the requesting party, to rescind or revoke the opinion if implementation of the proposed program results in substantial anticompetitive effects, if the program is used for improper purposes, if facts change significantly, or if would be in the public interest to do so.”
Conclusion
This Advisory Opinion decision was surprising and unique. The result creates a great opportunity for hospitals and integrated healthcare delivery systems to take a deeper look into the relationships that exist between their hospitals and affiliated for-profit medical practices to determine if they, similar to Crouse Hospital and Crouse Medical, may be eligible for a similar exemption under the NPIA.
A copy of the Federal Trade Commission Advisory Opinion may be accessed here.
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Hayley Shulman, CPA, Manager 973-532-8885 [email protected]
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