Staff Advisory to BJC Health System

Staff of the Federal Trade Commission's Bureau of Competition has advised counsel for BJC Health System ("BJCHS") that the Non-Profit Institutions Act ("NPIA") protects the proposed purchase of pharmaceuticals by one of its hospitals and their transfer to other affiliated nonprofit institutions in three situations described in BJCHS' request for an advisory opinion. The NPIA exempts from the Robinson-Patman Act "purchases of their supplies for their own use by schools, colleges, universities, public libraries, churches, hospitals, and charitable institutions not operated for profit."

BJCHS is a nonprofit and tax-exempt integrated health system that owns a number of nonprofit hospitals and other health care service entities, including Barnes-Jewish Hospital, located in St. Louis, Missouri. It requested an advisory opinion concerning whether the NPIA would protect Barnes-Jewish Hospital's purchases of pharmaceuticals for dispensing to BJCHS employees, for dispensing to HMO patients for whom BJCHS bears financial risk, and for dispensing by Barnes-Jewish Hospital's home care subsidiary to its home care and hospice patients.

First, BJCHS proposed to transfer pharmaceuticals purchased by Barnes-Jewish Hospital to other hospitals owned by the System for dispensing to employees of BJCHS and their dependents. The staff opinion, signed by Richard A. Feinstein, Assistant Director for Health Care Services and Products at the FTC, notes that in Abbott Laboratories v. Portland Retail Druggists Asociation ("Abbott Labs"), the Supreme Court held that a nonprofit hospital's purchase of pharmaceuticals for dispensing to its employees and their dependents was for the hospital's "own use" within the meaning of the NPIA. Because BJCHS dispenses pharmaceuticals to all its employees, not just those employed by Barnes-Jewish Hospital or one of its other nonprofit hospitals, the letter said, the questions presented are "whether BJCHS itself is an exempt entity under the NPIA, apart from its individual health service affiliates, and, if so, whether providing pharmaceuticals to its employees is a permissible use under Abbott Labs."

Noting that BJCHS is nonprofit entity that brings together a variety of health service providers, including hospitals, under common ownership and management, and that it is classified as a charitable organization for purposes of federal income taxation, the staff opinion concludes that "BJCHS itself, in addition to various of its owned hospitals and other health service providers, is entitled to the protection of the NPIA when it purchases supplies for its own use." The letter also concludes that the purchases in question were for BJCHS's own use. "We find no basis in Abbott Labs for concluding that the test used by the Court with respect to a single hospital should not apply, in this context, to a health care system."

Second, the staff opinion addresses BJCHS' proposed transfer of pharmaceuticals to affiliated physician clinics for dispensing to patients covered by a contract under which BJCHS assumed financial risk for all covered health care services, including pharmaceuticals, provided to certain HMO enrollees who selected one of the clinic-employed doctors as their primary care doctor. In the circumstances presented, the staff letter concludes that the NPIA should protect the purchases in question. "By virtue of the global risk contract with [the HMO], which obligates BJCHS to provide or pay for all covered medical services and pharmaceuticals, the patients covered under that contract are in a very direct sense the patients of the health system for all their needs." Thus, under the test established in Abbott Labs, the pharmaceuticals dispensed to these patients would be purchased for BJCHS' own use.

"This conclusion does not mean, however, that all purchases by a nonprofit health system will be deemed to be for the system's 'own use,'" the staff advised. "While the NPIA is not, as the Supreme Court observed in Abbott Labs, restricted to nonprofit hospitals that operate in a manner similar to those in existence at the time the Act was passed, neither was it intended to give nonprofit hospitals a blank check to undertake whatever new venture the nonprofit hospital finds attractive.'" In particular, the staff letter notes that it did not address dispensing of pharmaceuticals to patients of doctors employed by a hospital or health system in other circumstances, such as when pharmaceuticals are dispensed by a nonprofit hospital pharmacy to hospital-employed doctors' patients who are either self-pay or are covered by a health plan unrelated to the doctor's employer.

Third, the staff letter addresses pharmaceuticals dispensed to its patients by a tax-exempt home care subsidiary of Barnes-Jewish Hospital, BJC Home Care, Inc. BJC Home Care has a pharmacy that dispenses only pharmaceuticals that must be administered by BJC Home Care employees. It currently purchases some of its pharmaceuticals at non-discounted prices, and would like to purchase all of these products through the Barnes-Jewish Hospital's pharmacy, which would transfer them at cost to the Home Care pharmacy.

The staff letter notes that BJC Home Care is not formally a part of the hospital, and its patients are not considered hospital outpatients. "Thus, the purchase of these pharmaceuticals is not for the hospital's use under Abbott Labs; but is clearly for the use of the Home Care subsidiary, because all drugs will be administered by Home Care employees in the course of the treatment it provides to its patients," staff said. "The transfer at cost of pharmaceuticals from a nonprofit hospital to an affiliated nonprofit health care services provider does not eliminate the protection afforded by the NPIA."

NOTE: This letter sets out the views of the staff of the FTC's Bureau of Competition, as authorized by the Commission's Rules of Practice. It has not been reviewed or approved by the Commission. As the Commission's rules explain, the staff's advice is rendered "without prejudice to the right of the Commission later to rescind the advice and, where appropriate, to commence an enforcement proceeding."

Copies of the staff advisory are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580; 877-FTC-HELP (877-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.