St. John's Health System

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Bureau of Competition
Health Care Division
September 13, 2006
Michael Merrigan
General Counsel
St. John’s Health System
1235 East Cherokee Street
Springfield, Missouri 65804
Re: 	St. John’s Health System Advisory Opinion
Dear Mr. Merrigan:
This letter responds to your request on behalf of St. John’s Health System (“St. John’s”) for an
advisory opinion on whether St. John’s Regional Health Center (“Hospital”) may provide
pharmaceuticals to its Hospital outpatients and to patients of St. John’s Clinic (“Clinic”), through
three Hospital-owned pharmacy sites, under the Non-Profit Institutions Act (“NPIA”). 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.”1 For the reasons explained below, we have concluded that the NPIA would
apply to pharmaceuticals provided by the Hospital through its three Hospital-owned pharmacies
to both the Hospital’s outpatients and the Clinic’s patients, because it would be for St. John’s
“own use,” so long as the pharmaceuticals are prescribed in connection with ongoing treatment
that patients receive at the Hospital or the Clinic.
Based on information you provided, St. John’s is a non-profit Missouri corporation currently
receiving preferential price treatment in its purchase of pharmaceuticals for treatment of Hospital
inpatients as permitted under the NPIA. St. John’s would like to extend the use of NPIA
discounted pharmaceuticals for use by Hospital outpatients and by Clinic patients filling
prescriptions at the three Hospital-owned pharmacies.
St. John’s is an integrated health services delivery system, and manages the care of approx-
imately 280,000 covered lives through various arrangements it has with third-party payers. The
Hospital, a fully-owned subsidiary of St. John’s, is a Missouri non-profit corporation that has
provided services in the Southwest Missouri area for over 100 years. It is a full-service tertiary-
care hospital, and is the only Level 1 trauma center in Southwest Missouri. The Clinic, which is
also a fully-owned subsidiary of St. John’s and a Missouri non-profit corporation, has a number
of office locations both on the Hospital’s grounds and in other buildings owned by St. John’s.
Approximately 465 Clinic-employed physicians of various specialties treat the Clinic’s patients.
1 15 U.S.C. § 13c.

St. John’s Health System Advisory Opinion
September 13, 2006
Page 2
As explained in your letter, the Hospital offers pharmacy services to its outpatients and to Clinic
patients. Those patients can fill Hospital and Clinic prescriptions in the main Hospital facility,
or at three pharmacies that are 100 percent owned by the Hospital: the Fremont Pharmacy, the
Smith-Glynn Pharmacy, and the Nixa Medical Building pharmacy. The Fremont Pharmacy is
located on the Hospital’s grounds. Both the Smith-Glynn Pharmacy and the Nixa Medical
Building pharmacy are located in medical office complexes occupied by Clinic physicians and
Hospital departments. The three Hospital-owned pharmacies are also open to the public.
The NPIA applies to pharmaceuticals purchased by a hospital or other eligible institution for its
“own use.”2 Though not explicitly enumerated as eligible institutions in the NPIA’s statutory
language, non-profit integrated health delivery systems, such as St. John’s, appear to be a type of
non-profit charitable institution that Congress intended to exempt in the statute. Specifically, in
De Modena v. Kaiser Foundation Health Plan, Inc., a United States court of appeals treated a
similarly structured organization as an eligible entity under the NPIA.3 We believe the same
treatment is warranted for St. John’s, the Hospital, and the Clinic.
The NPIA requires, however, that even an institution eligible for the NPIA exemption must
purchase the discounted pharmaceuticals for its “own use.” The starting point for analysis of the
“own use” requirement is the Supreme Court’s opinion in Abbott Laboratories v. Portland Retail
Druggists Association.4 In Abbott, the Court suggested that to determine what constitutes an
eligible institution’s own use, one should focus on the function performed by the institution in its
purchase and resale role. The Court stated, “‘their own use’ is what reasonably may be regarded
as use [by the eligible institution] in the sense that such use is a part of and promotes [its]
intended institutional operation.”5 The treatment of its own patients through the Hospital and the
Clinic is clearly part of St John’s institutional mission as a non-profit provider of integrated
health services. Whether that treatment requires the dispensation of pharmaceuticals on an
inpatient basis or the filling of a prescription written in connection with the Hospital’s or the
Clinic’s ongoing care of an outpatient at one of the three Hospital-owned pharmacies does not
change the analysis. One may justifiably regard the St. John’s organization as a whole as having
purchased pharmaceuticals for its “own use,” which includes treatment of patients of both the
2 Abbott Laboratories v. Portland Retail Druggists Ass’n, 425 U.S. 1, 14 (1976).
3 See De Modena v. Kaiser Foundation Health Plan, Inc., 743 F.2d 1388, 1391-92 (9th
Cir. 1984) (treating for analytical purposes a number of hospitals and health plans as one eligible
organization).
4 See Abbott at 14.
5 Id.

St. John’s Health System Advisory Opinion
September 13, 2006
Page 3
Hospital (whether inpatient or outpatient) and the Clinic.6 This is what the Commission
previously concluded in an advisory opinion letter it issued in response to a similar request for
advice.7
Further, we do not believe that the use of the three Hospital-owned pharmacies, whose profit
accrues solely to the Hospital to be used in the furtherance of St. John’s mission, changes the
analysis, provided that proper safeguards are taken to ensure that the pharmaceuticals purchased
at NPIA pricing are not dispensed to patients who are not patients of the St. John’s system. If
these pharmacies, for example, were to sell the discounted pharmaceuticals to walk-in customers,
such activity would not qualify as being for St. John’s “own use,” and the NPIA exemption for
purchasing those pharmaceuticals at a discount would not apply.
Based on the information you have provided, “over 90% of the prescriptions filled and dispensed
at [the three Hospital-owned pharmacies] are written by Clinic physicians for the benefit of their
patients.” The remainder of the prescriptions filled at the three Hospital-owned pharmacies are
for non-St. John’s patients. To avoid any improper sales of the discounted pharmaceuticals to a
non-exempt entity or for a non-exempt use, St. John’s will establish a separate accounting
mechanism of the type mentioned in Abbott to track these transactions.8 Thus, with these
caveats, we conclude that the pharmaceutical purchase and distribution program proposed by St.
John’s would fall within the NPIA exemption to the Robinson-Patman Act.
This letter sets out the views of the staff of the Bureau of Competition, as authorized by the
Federal Trade Commission’s Rules of Practice. Under Rule § 1.3(c), the Commission is not
bound by this staff opinion and reserves the right to rescind it at a later time.9 In addition, this
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 it would be in the public interest to do so.
Sincerely,
Markus H. Meier
Assistant Director
6 See De Modena at 1392.
7 Presentation Health System, 16 F.T.C. 1526 (1993).
8 See 425 U.S. at 19.
9 16 C.F.R. § 1.3(c).