On November 7, 2017, the Federal Trade Commission (FTC) released an advisory opinion confirming that a non-profit hospital in New York may sell discounted prescription drugs to the employees of an affiliated medical practice without violating antitrust restrictions on different pricing for the same products under the Robinson-Patman Act (RPA).
The advisory opinion evaluated a plan by Crouse Health Hospital (Crouse Hospital), a not-for-profit corporation, to extend the sale of lower-priced medicines to employees and retirees (and their dependents) of an affiliated medical practice, Crouse Medical Practice (Crouse Medical) – a for-profit corporation with 501(c)(3) tax exempt status. The plan implicated RPA restrictions on price discrimination since Crouse Hospital would be selling drugs at different prices to the general public versus what it would be selling to employees of this affiliate. However, the FTC concluded that the discounts qualified for an exemption under the Non-Profit Institutions Act, or NPIA, and therefore did not violate the RPA.
The RPA prohibits certain forms of price discrimination in sales transactions. 15 U.S.C. § 13 et seq. Congress enacted the statute in the 1930s to address conduct that was perceived as unfair to smaller retail establishments. Under the RPA, discrimination occurs only when there is an actual difference in net prices after taking into account all factors affecting price, such as discounts and rebates. Texaco, Inc. v. Hasbrouck, 496 U.S. 543 (1990). In practice, RPA claims must meet several specific tests: (1) the Act applies to commodities, but not to services; (2) the goods at issue must be of “like grade and quality;” (3) there must be likely injury to competition; and (4) typically, the sales at issue must be generally contemporaneous and across state lines.1
Existence of a RPA defense prevents liability even if the price discrimination injured competition. Defenses include offering a lower price: (1) to meet competition; (2) where the price differential reflects the different costs of dealing with different buyers; (3) where the price differential represents a reasonable reimbursement for the expenses provided by the buyer or for the savings to the seller for no longer needing to supply these services; (4) where lower prices are “functionally” available to all competing customers; and (5) where the price differential is due to imminent deterioration of perishable goods, obsolescence of seasonal goods, or sales as part of a good faith discontinuation of a line of business.
There are also several exemptions to the prohibitions of the RPA, including exemptions for sales to the federal government, for net surplus or earnings of co-operatives, and for sales of supplies to non-profit institutions for their “own use.”
Ordinarily, a seller like Crouse Hospital, charging competing buyers different prices for the same “commodity” – here pharmaceutical products – may violate the RPA. However, the FTC’s advisory opinion found the hospital’s plan to extend sales of discounted prescription drugs to employees of its for-profit affiliate was subject to the NPIA exemption and therefore did not run afoul of the RPA.
The NPIA exemption is limited to certain “eligible” non-profit entities’ purchases of “supplies” for their “own use,” 15 U.S.C. § 13c. The Supreme Court has previously cautioned that the exemption is limited and does not give hospitals a “blank check” for all purchases of supplies.2 Rather, “own use” means “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.”3
Crouse Hospital currently uses the exemption to offer NPIA-discounted pharmaceuticals to its own employees, retirees, and their dependents. The question presented was whether the exemption can apply to for-profit affiliates of a non-profit organization where the non-profit does not technically own the affiliate, but effectively controls it.
The FTC’s analysis focused on whether Crouse Hospital’s provision of discounted drugs to Crouse Medical was for Crouse Hospital’s “own use” and therefore qualified for the NPIA exemption. “Own use” requires that the provision of these discounts is part of and in promotion of Crouse Hospital’s institutional mission. As noted in the advisory opinion, Crouse Hospital’s mission included promoting community health and providing physician services designed to improve access to quality health care, and Crouse Hospital formed Crouse Medical to further this mission. Moreover, Crouse Hospital had ultimate decision-making authority and control over Crouse Medical, and any financial benefits from the extended discount plan would ultimately accrue to Crouse Hospital pursuant to the relationship between the two entities. In turn, the opinion found that Crouse Medical is “an integral” part of Crouse Hospital’s community health mission and, as a result, it was reasonable to treat the two organizations as “one unit” in analyzing the applicability of the NPIA exemption.
In light of the FTC advisory opinion, non-profit organizations seeking to provide discounts to affiliates should pay close attention to the substance of the relationship between the two entities to ensure they fall within the non-profit exemption to the Robinson-Patman Act.
A copy of the advisory opinion can be found here.
1 The RPA also forbids certain discriminatory promotional allowances or services furnished or paid to customers. In general, it requires that a seller treat all competing customers in a proportionately equal manner.
2 Abbott Labs. v. Portland Retail Druggists Ass’n, 425 U.S. 1, 13 (1976).
3 Id. at 14.