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FTC Clarifies 'Own Use' by Nonprofit Hospitals

Cheryl A. Thompson

An advisory opinion letter from the staff of the Federal Trade Commission (FTC) Bureau of Competition offers nonprofit hospitals guidance on the legality of dispensing pharmaceuticals to a facility's retired employees. The guidance supersedes some of the information in a 1996 FTC staff opinion letter on discounted pharmaceuticals, "own use," and nonprofit hospitals' retirement and pension programs.

According to the December 2001 letter, a nonprofit hospital may include the institution's retired employees who are part of the established retirement or pension plan among the people who can obtain discounted pharmaceuticals from the facility. This opinion was based on the view that retired hospital employees with vested retirement or pension rights are "members of the hospital family." Thus, a nonprofit hospital that dispenses discounted pharmaceuticals to its retired employees does so for its "own use" and, therefore, is a legal activity because of the Non-Profit Institutions Act of 1938 (NPIA).

The NPIA is the law that exempts certain transactions from the Robinson-Patman Price Discrimination Act, enacted in 1936. FTC bears the responsibility for enforcing and administering both of these laws.

As the advisory letter explained, the Supreme Court determined in 1976 that the pharmaceuticals purchased by a nonprofit hospital at prices lower than those offered to community pharmacies may be used for certain purposes only, including prescriptions for employees and students—"member[s] of the hospital family." The court made this decision in its opinion on Abbott Laboratories v. Portland Retail Druggists Association.

About 20 years later, North Mississippi Health Services asked whether its nonprofit hospital could legally dispense pharmaceuticals to its retired employees. FTC's staff responded no, because retired employees no longer have a direct relationship with the hospital.

The Connecticut Hospital Association raised the issue again in 2001, but in a different context. A recently enacted state law permits a hospital to sell pharmaceuticals to the institution's retirees and their spouses pursuant to the retirement or pension plan. According to the FTC’s staff, the hospital association argued that attractive retirement and pension benefits, such as access to discounted pharmaceuticals, help nonprofit hospitals to attract and retain qualified employees. FTC's staff agreed with the argument, stipulating that the dispensing activity must be part of an established retirement or pension program.