A recent Centers for Medicare & Medicaid Services (CMS) final rule reduces some Medicare reimbursements to hospitals in 2018, paying 28 percent less for certain “specified covered outpatient drugs” (SCODs) purchased at a discount through the 340B Drug Pricing Program (340B). Although hospitals recently lost a challenge to the lower CMS rates in American Hospital Association v. Hargan, they may be able to offset a portion of the losses from a countervailing development in antitrust law. Regardless of 340B changes, the Robinson Patman Act (RPA) continues to apply to sales of discounted pharmaceuticals, while the scope of the Nonprofit Institutions Act (NPIA) exemption to RPA appears to have expanded. This suggests that hospitals may have new opportunities to arbitrage discounted products purchased outside of 340B.

RPA imposes treble damages for different drug prices to different buyers when competitive injury might result. Thus, pharmaceutical manufacturers and the nonprofit hospitals they sell to could be liable for the purchase and sale of discounted drugs. The NPIA, however, exempts qualifying nonprofit institutions’ purchase of supplies for their own use. Two 2017decisions appear to accept broad institutional missions as the basis for an expansive understanding of “own use.” This suggests that pharma companies may continue to sell discounted products to charitable entities with low risk of RPA liability. It also suggests that hospitals may have greater opportunities for arbitrage than in the past.

In Vaccine Center v. GlaxoSmithKline, the Ninth Circuit affirmed a broad interpretation of “own use.” At issue were discounted vaccines sold as add-on items through the 340B prime vendor to the Southern Nevada Health District. The Health District contracted with local employers to provide low-cost vaccines to their employees. The plaintiff, a for-profit medical center, sued under RPA, arguing that these vaccine sales are not for the Health District’s “own use” under the Supreme Court holding in Abbott Labs. v. Portland Retail Druggists, 425 U.S. 1 (1976) (excluding walk in pharmacy sales from a hospital’s “own use”). The district court rejected that argument. It found that nonprofits may have broad institutional functions; the Health District’s function is to maintain public health; the sale of vaccines furthers this institutional purpose no matter who buys the vaccines; all of the fees go into a fund spent for public health purposes; and therefore the Health District’s sales are for its “own use.” The Ninth Circuit affirmed. It held that “even activities that conform to an ‘extraordinar[il]y broad institutional function’ can satisfy the ‘own use’ provision.” Because the Health District is empowered to “take whatever action . . . necessary to control communicable diseases,” its vaccine sales conform to its institutional function and immunize its sales. Although this is an unpublished opinion, a good argument exists that it indicates that a broad mission may present opportunities to expand sales of discounted pharmaceutical products safe from RPA liability.

In an advisory opinion to Crouse Health Hospital, the Federal Trade Commission (FTC) expanded the “own use” exemption to include sales of discounted pharmaceutical products to employees, retirees, and their dependents of the Hospital’s affiliated (but not owned) for-profit 501(c)(3) Medical Practice.

The Hospital also had a broad mission: to “promot[e] community health and provid[e] physician services designed to improve access to quality health care.” Because the Medical Practice provides “vital services” to the Hospital, the FTC concluded that it is an integral part of the Hospital’s ability to provide care and promote community health, and therefore discounted drug sales to these employees would be for its “own use.” Based on this opinion, a good argument exists that the NPIA exemption likely protects hospitals who expand the sale of discounted drugs to employees, retirees and their dependents at for-profit affiliates controlled by an NPIA-eligible non-profit entity.

In looking for revenue opportunities to begin to cover the 340B shortfall, hospitals may want to consider the full scope of what is their “own use” as, increasingly, that is defined by extensive institutional operations.