Many North Carolina hospital systems have separate business corporations or limited liability companies to house the physician component of their integrated health care delivery systems. Hospitals may take this step for any number of reasons, including protecting the hospital from potential liability, avoiding the need to pay unrelated business income tax, or complying with the “group practice” definition in the Stark physician self-referral law.

Late last year, the Federal Trade Commission (FTC) issued a staff advisory opinion indicating that a for-profit company providing physician services affiliated with a non-profit hospital may, under certain facts, participate in the benefits of the hospital’s tax-exempt status and resell drugs purchased by the hospital at a discount to the company’s employees under the non-profit exception to federal antitrust laws prohibiting anti-competitive price discrimination.

Federal Antitrust Law. First enacted in 1936, the Robinson-Patman Act prohibits price discrimination in the purchase and sale of certain commodities if the effect of the discrimination may be to substantially lessen, injure or destroy competition. The legislation’s primary goal at the time was to protect small independent retailers and their suppliers from unfair competition by vertically integrated chain stores, which could use their greater market power to obtain more favorable pricing from manufacturers and other sellers, but the law has much wider application. In 1938, Congress adopted the Non-Profit Institutions Act (NPIA), which 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.” 15 U.S.C. § 13c. Without such an exemption, the resale of discounted drugs and supplies purchased by a non-profit hospital could be challenged by retail pharmacies or others as a violation of the Robinson-Patman Act.

Facts Behind Opinion. The FTC’s recent opinion involves Crouse Health Hospital (the “Hospital”), a not-for-profit corporation based in Syracuse, New York, that provides a variety of health care services to patients in a fifteen county region. Through an on-site pharmacy separate from the pharmacy serving the Hospital, the Hospital provides NPIA-discounted prescription drugs as a benefit to its employees, retirees and their dependents. In its request to the FTC for an advisory opinion, the Hospital proposed to also sell NPIA-discounted drugs to employees, retirees and dependents of its affiliate, Crouse Medical Practice, PLLC, through the on-site employee pharmacy.

The Hospital had previously formed Crouse Medical Practice, PLLC (the “Practice”), as the physician component of its integrated health care delivery system serving the region. The Practice provides physician services to the Hospital, to others at offices close to the Hospital, and to patients in communities within the Hospital’s service area. The medical practice was formed as a for-profit professional limited liability company in order to comply with New York law prohibiting the corporate practice of medicine, which provides that only a physician can own a corporation employing physicians in an outpatient, non-hospital setting. However, the Hospital put various requirements in place to exercise control over the Practice, including ownership of the Practice by a physician Hospital employee and the Hospital’s appointment of the Practice’s administrator and executive director. The Practice is also required to be managed “consistent with an organization operated exclusively to promote and support the charitable purposes of the Hospital.” Any profits from the Practice are assigned to the Hospital. Consequently, the Hospital has ultimate control over the Practice, and the Hospital has obtained 501(c)(3) tax-exempt status for the Practice based on its affiliation with and control by the Hospital.

Advisory Opinion. On November 7, 2017, the FTC staff issued an advisory opinion permitting the Hospital to sell discounted pharmaceutical products to employees, retirees and their dependents of the Practice, concluding that this resale of discounted drugs was within the scope of the NPIA.

First, the FTC acknowledged that the Hospital qualified as a non-profit entity eligible for exemption under the NPIA, and the Hospital currently used the exemption to offer NPIA-discounted drugs to its own employees, retirees and their dependents.

Second, the FTC examined the U.S. Supreme Court’s opinion in Abbott Laboratories et al. v. Portland Retail Druggists Assn., Inc., 425 U.S. 1 (1976). In that case, the Supreme Court interpreted the “own use” requirement to protect only purchases that “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 ultimately determined that on the particular facts before it, the NPIA exempted the non-profit hospital’s purchase of drugs at favored prices if dispensed to any of the following: inpatients, outpatients or patients admitted to the emergency department for use on the premises; drugs dispensed to those classes of patients upon discharge for off premises personal use, provided the drugs are for a limited and reasonable time to continue or supplement hospital treatment; hospital employees or student trainees for their personal use or for use by their dependents; and physician staff members for their personal use or the use of their dependents.

In its advisory opinion, the FTC noted that based on all the facts outlined above, the Practice was an integral part of the Hospital’s ability to fulfill its institutional function of providing care and promoting community health. Although the Hospital had no actual ownership interest in the Practice, it clearly exercised control over the Practice and would receive the benefits of the exemption. Based on the relationship between the Hospital and the Practice, the FTC found that the two entities could be treated as one unit for purposes of the NPIA.

Significance of Opinion for Hospitals. In a previous advisory opinion issued to Yakima Valley Memorial Hospital in 2010, FTC staff approved that hospital’s resale of pharmaceutical products to the employees of a professional limited liability company (PLLC) that operated a group of hospital-owned outpatient medical clinics. The FTC found that the PLLC was not independently eligible for NPIA exemption, but the hospital could provide discounted drugs to the PLLC because the hospital owned the PLLC as its sole member, effectively controlled its operations, and would receive any financial benefit from the arrangement.

In approving the request of Crouse Health Hospital, FTC staff has gone further than its advisory opinion to Yakima Valley and approved a “friendly professional corporation” owned by a hospital employee. Its conclusion that the Practice fell within the NPIA exemption was largely based on the assignment of any profits to the Hospital, the Hospital’s appointment of leadership of the Practice, and the Practice’s exclusive purpose to support the Hospital’s charitable mission.

In North Carolina, the N.C. Medical Board recognizes an exception to the corporate practice of medicine doctrine permitting nonprofit hospitals to own and operate medical practices. This exception presumably applies not only to the direct employment of physicians by hospitals, but also where they are indirectly employed through a subsidiary or controlled affiliate, and regardless of the location where the services are provided. However, the FTC’s recent advisory opinion provides flexibility to hospitals in structuring their hospital-owned physician practices while still being able to provide a valuable benefit to employees of physician practices within the hospital’s delivery system.

By Wilson Hayman of Poyner Spruill