us-ftc-advisory-opinions-3b3c96a671b12f1f4ba9bfea991fbf48•Louisiana Health Care Association
Louisiana Health Care Association
us-ftc-advisory-opinions-3b3c96a671b12f1f4ba9bfea991fbf48Louisiana Health Care AssociationGuidance
re: Concerning a group purchasing agreement for nursing home association's members.
i%D ~ A O ECOMMISSOGil WLISnlNGTBN. 8. C 20580 w- APR 2 3 !on7 Steven E. A d m s , J.D. Oirector of Governmental Relations L o u i s i a n a R e 9 l t h C a r e Association 7921 P i c a r d y A v e n u e B a t o n R o u g e , LA 1 0 8 0 9 .:-.. Re: Reques.t for Advisory O p i n i o n D e a r MF A d m s :: I T h i s is in response to your letter to Ben S h a r p of August 18, -1981,. eeques.ting an-advisory opinion on a proposed agreement between the Louisiana Health C a r e Association ( t h e * A s s o c i a t i o n n ) and Medi Co-op, Ine. ( t h e "Co-opn) t~ establish a group purchasing arrangement for the Association" mmebers. Pursuant to your telephone conversation with Judith A. Moreland of the Bureau of Competition, w e are treating your request 4s o n e for a staff opinion letter under Section l.l(b) o f the C o m n i s s i o n f s Rules of Practice.- T h i s letter sets out the views of .the staff of the Bureau o f Competition, as authorized by the C ission" rules. I t has not been reviewed or approved by the C o m i s s i o n . The Bureau's advice is rendered without prejudice to the right o f the C o m i s s i o n later to rescind i t and, where appropriate, to c o m e n c e an enforcement p r o c e e d i ~ g . A s we u n d e r s t a n d it, Medi Co-op proposes to administer a buying c o o p e r a t i v e available to members o f the Association, woo are nursing home owners and operators throughout the State o f Louisiana. T h e Co-op would maintain a staff and warehouse facilities in the state. Association officers would sit with the Co-op" General & M n a g e r on a review cornnittee to oversee the Co-op" aectivi ties. F o o d and medical equipment would be available through the Co-op, but m e m b e r s would be free to purchase these products f r o m other sources. Food purchased through the Co-op would be delivered directly to members by existing wholesalers and 0 suppliers. Members would be charged "prevailing pricesn b y Medi Co-op at the time o f purchase. Quantity discounts received by the Co-op would be divlded between the Co-op, the .Association, and the m e m b e r s on a quarterly basis, with 20% retained b y the 3
$.0-op, 5% given to the Association for administrative services, and 15% distributed among the members, pres blg in proportion to their purchases through the C o - o p e o n l y used medical supplies and e q u i p e n t would be s t o c k e d in the C o - o p t s warehouse. Other products could be o b t a i n e d through the Co-op from "regional supply points." S a v i n g s realized from quantity discounts and by "eliminating m i d d l e comnissionsn would be distributed among the garties in the proportions listed above.1 \ G r o u p insurance policies would also be available through the Co-op. The Association would received 25516 of e issions paid to the Co-op, The l a w s a h i n i s t e a e d by t3e C iision do ndt'prahibi t t.he f o e m a t i o n of cooperative buying associations, S u c h organizations s e r v e legitimate purposes, and in most eases can be expected to facilitate rat he^ than to impair competition, H o w e v e r , in s o m e circumstances these organizations may engage in conduct, or a t t a i n a degree of market power, that raises concerns under the anti trust laws. Thr-i-nf orma t i-on-you-.have-pr ov-id 'r..not sufficient to give a definitive o p i n i o x h e legal i ty of the Co-op's intended activities. M a k i n g that judgment would require knowledge of a number of factors, including the types of discounts received by the Co-op,'the prices i t eharged its m e m b e r s , the. distributive functions performed by the Co-op, the market power of its members, the availability of similar discounts to other nursing home operators, and the impact of the Co-op on competition in the market in which its m e m b e r s b u y and sell. However, w e can identify the major issues that are raised under the Robinson-Patman and Federal T r a d e C o m i s s i o n Acts by. buying c o o p e r a t i v e s - l i k e the Co-op. T h e Co-op suggests that Association m e m b e ~ s c a n save money b y reporting as an n e x p e n s e reduction" on Medicaid year-end reports only the percentage of the discounts distributed b y the Co-op that is attributable to supplies purchased for M e d i c a r e patients, and by directly billing M e d i c a r e patients f o ~catheter and ostomy supplies through an arrangement wi th a Co-op contractor. T h e staff of the H e a l t h C a r e Financing Administration has informally advised us that a nursing home that follows these suggestions may violate regulations governing Medicare and Medicaid reimbursement. T h e Association and its m e m b e r s may wish to inquire further before using the reporting and billing methods described above. 1
T h e Robinson-Patman Act S e c t i o n 2(f) of the C l a y t o n Act, as m e n d e d by the Robinson- P a w n Act, u.S.C- l3(f), prohibits knowing i n d u c m e n t or reecipt of price discriminations that violate Section 2(a) of that Act. S e c t i o n 2(a) m a k e s unlawful direct or indirect discriminations in the price of c odi ties of 1 ike grade and quality, where the effect of the discrimination m a y be substantially to lessen competition or to tend to cpeate a monopoly, or to injure competition with any person w h o gran knowingly receives the benefit of the discrimination, or wi their customers. 15 O.S.C, S l3(a). M e m b e r s of buying cooperatives have been found to violate S e e t i o a 2(f) when they indirectly received certain quantity and functional discounts g r a n t e d to the cooperatives. In three eases brought by the C ission, a u t o parts jobbers who established buying eoaperatives order to take advantage o f - -- manufacturers' quantity discounfs w e r e found to have violated Section 2(f). , 309 F.2d 213 ( 9 t h their orders in the name o f the cooperative, but the goods were drop-shipped directly to each buyer by the supplier. T h e suppliers were paid by the cooperatives, w h i c h in turn billed the individual members, T h e diseounts received by the cooperatives were based on all m e m b e r s 1 aggregate purchases, and were distributed to the membe.rs at the end o f the year in proportion to their purchases through the cooperative. In each case courts upheld the C ission" findings that individual members rather thap the cooperatives w e r e the real purchasers, that they received discounts not available to their competitor$, and that the discounts caused competitive injury. Because the members received larger diseounts on supplies purchased in the same manner and m o u n t s as before they became members of' the eooperatives, i t was held that they knew or should have known that the discounts could not be legally justified. Members of buying cooperatives were a l s o found to have violated Section 2(f) w h e n they received * f u n c t i o n a l w or wholesale diseounts not available to their competitors, where the effect of the discrimination was to injure competition, Alhambra 8 Motor Parts, 6 8 FeTeCe 1038 (1965); National Parts Warehouse, 6 3 F.T.C, 1692 (1963), a f f l d sub. nom. G e n e r a l A u t o Supplies, Inc. v. F X , 346 F.2d 311'- Cir. 19651, cert. dimissed, 382 U.S. 9 2 5 m 9 6 5 ) , In those cases, groups of a u t o m o t i v e parts jobbers formed buying cooperatives to act as w a r e h o u s e distributors. G o o d s were purchased b y the cooperatives in their own name and ) stored in their warehouses, and then shipped to jobber members as orders were received. In some cases, g o o d s w e r e ordered through
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t m o s t products sold by the Co-op are not purchased f o r resale ers, but are used in producing a service sold by the es. In at least two cases i t has been held that no m p o t i t i o n resulted f r o m price d i f f e r e n c e s on sold t s m n u f a e t u r e r s f o r incorporation into another product, beeause the price o f t o f the cost of the finished pro o n g the Co-op's s a b e r s would also b e relevant, I D should be noted that the C i s s i o n f s orders relating to Punctiowal discounts granted t a c o satives have been the subject of substantial criticism, and t h e C reconsider the legality of s o m e types o f f u p e n d i n g a-inistrative litig a e c m p a n y i ng issuanee of the complaint in ., F T G Docket No, 9 1 3 3 (complaint issued Ap Chat "evidence concerning services and functions performed by respondent [buyer] on goods I t purchases for resale at the retail leveln was to be admissible at trial, so that i t could decide iminatory discounts could be justified by 1- services _performed b vd - the-fevored - - -- . . buyer that are b y compe t i ng buyers. Comoar e ' . t l ~ i l - f e - ~ - % o . , b 1 J - - 06-%bra-f*-&-323-F.ld 4 4 c i r . 19631, , 377 U.S. 9 2 3 ( 1 9 6 4 ) , - with Doubleday & C o - , 52 1955). W e cannot, however, predict the outcome of the litigation. Under most circumstances, eooperative buying associations perform a legitimate and procompetitive function. In limited unusual c i r c m s t a n c e s , -however, the activities of sueh organizations may raise issues under Section 5 of the Federal T r a d e C o m i s s i o n Act. T h r e e sueh circumstances will be noted. First, eooperative assoeiations normally are free to limi their membership. However, antitrust issues are raised when businessmen jointly exclude their competitors from membership an- - oraanization which c o n f e r s on its members a significant compeiitive advantage that is not reasonably obtain able elsewhe re. S e e SilGer v . New Y o r k S t o c k Exchange, 3 7 3 U . S . 31 -(1963); Associated Press v. U n i t e d States, 326 U.S. 1 (1945); States v. Terminal R a i l r o a d Ass'n, 224.U.S. 383 (1912). d be concerned i f the Co-op unreasonably exclluded some ng nursing homes, and i f exclusion severely handicapped nstitutions' ability to compete. According to your membership in the Co-op would be available only to
*embers of the Association. I t is not clear whether any nursing e s that Compete in a significant way with Assoeiation members uld in fact be excluded. Nor do we have enough information to determine whether membership in the Co-op would be of sufficient competitive benefit to any excluded nursing h m e s to raise antitrust issues. This determination would depend p r i m r i l y on the m g n i t u d e of the discounts available to Co-op members, the p m p o r t i o n of nursing homesQeosts accounted for by goods available through the Co-op, tho significance of the cost savlngs to nursing homes' ability to compete .effectively, and the availability of similar purchasing ar'rangements ta any excluded etitors of Co-op m Second, a eo0perativ.e buying arrangement raises antitrust eoneerns if i t represents..& sufficient proportion of buyers in sl nasarket so that el l e f s -&re unreesonablq degr ived 0.f. e m p e l i l i o n other e joint purehasing ageneies are formed by buyers who do not possess any significant degree of market power, no antitrust concerns are likely to be present. While i t seems unlikely that the Co-op would possess significant market Dower, w e do not have enough information to make &*definitive : 'udgmen t on that quest ion.- Finally, of course, serious antitrust issues would be raissd 8' i f the Co-op were to become a forum for anticompetitive agreements -&ong its members. However, w e do not assume that the Co-op will be used far this purpose. Conclusion . . T h e antit-rust laws do n6-t prohibit the establishment of a cooperative buying assaciation such as that proposed by Medi Co-op. However, as w e have. discussed in this letter, the C o - o p ' s activities, or its exercise o f significant market power, could in some circumstances violate laws administered b y the C o m i s s i o n . W e lack information sufficient to allow us fully to evaluate these issues. Nonetheless, we hope.that this discussion w i l l assist you in assessing Medi Co-op's proposal. Sincerely, Thomas J. Campbell Director Bureau of Competition
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