cent of this prescription business was for indigent or partially indigent patients. About 30 percent was for private pay patients and about 20 percent classified as sales to "others." Ten years ago, in 1957, the total number of prescriptions dispensed by hospitals to nonconfined patients amounted to about 32.7 million. NARD believes that under this innocent label of so-called "outpatient dispensing" hospitals and other institutions during the 1960's have in fact become more and more in direct competition with retail druggists in their respective trading areas. An illustration of the shifting manner of institutional drug dispensing practices is found in a recent drug trade journal: ' 1 One of the Nation's largest retail drug discount organizations has arranged to take over the operation of pharmacies in three Los Angeles area hospitals— pharmacies which will be open to the public as well as to patients of the hospitals. Daylin, Inc., of Los Angeles, which owns the MDX chain of 18 discount drug stores *** as well as leased drug and prescription departments in more than 60 discount department stores and supermarkets will own and operate the pharmacies at Doctors Hospital and Westside Hospital, Los Angeles, and at Hawthorne Memorial Hospital in Hawthorne, California *** [The] board chairman [said] *** they will definitely be open to the public provided this is not in violation of any board of pharmacy rules or regulations. Such activity as this, lawful in itself, illustrates the growing "split function" of health-care institutions in the United States, in terms of placing greater commercial emphasis on selling prescription drugs to people who are not confined patients, but who in actuality are capable of purchasing drug needs in the community or trading area. Another illustration of this same trend involves nonprofit and profit hospitals building private physicians' offices on the premises, with the nonhospitalized patient of the physician being free to fill his prescription at the hospital dispensary. American Druggist magazine's most recent survey indicates that the average number of new prescriptions written by one physician per year was 2,440 for 1966.2 This figure, coupled with the practices just discussed, dramatically shows how the commerce of prescription drugs in a community is affected by hospital pharmacies being in competition for this prescription business among nonhospitalized people. I just received a copy of a letter. It is from an anonymous source, as very often my mail is in this area, but it is rather revealing, Mr. Chairman, and I will give a copy to the reporter and pass up two to yourself. I only have the four copies. I will read from the letter. I request that this be admitted as an exhibit and placed in the record. It is a letter on the Commonwealth of Pennsylvania letterhead, Department of Health, dated February 3, 1967. It is addressed to Hospital Administrator, "Dear Sir," and signed by Thomas W. Georges, Jr., M.D. Mr. DINGELL. Without objection that will be inserted in the record at this point. (The letter referred to follows:) HOSPITAL ADMINISTRATOR. COMMONWEALTH OF PENNSYLVANIA, DEAR SIR: Our Division of Drug Control recently investigated a hospital which was selling institution size packages of "Equanil" tablets and other dangerous drugs to pharmacies in the area without sales or receipt records being prepared. "Special price" drug sales of this type have been known to exist for some time. Preferential pricing practices for institutions by certain drug manufacturers makes the resale of institution sized packages a lucrative field with opportunity for the hospital to make a profit. Many hospitals do not know that this practice is a violation of the Drug, Device and Cosmetic Act which defines wholesaling as "the sale or distribution of any drug for resale or redistribution". All persons or institutions contemplating any action of this nature must first register with the Department of Health as a wholesaler; and must comply with all the regulations of the Department requiring keeping of records of sales. These records are necessary to prevent illegal sales and diversion of drugs into non-controlled sources of distribution. Will you please examine the practices now in operation at your hospital to ensure your compliance with the provisions of the Drug, Device and Cosmetic Act. Sincerely, THOMAS W. GEORGES, Jr., M.D., Mr. DINGELL. Perhaps it would be well to inquire, if it won't unduly disturb your testimony, whether or not these Equanil sales referred to were sales of a drug which was promotional in nature rather than a regularly packaged drug for regular sale on the market. Mr. KINTNER. Mr. Chairman, I have no knowledge of this, as to further facts in this connection. I only received this in the mail, and haven't been able to make any kind of an investigation. Perhaps this could be done by the committee. Mr. DINGELL. Counsel has a question to ask. Mr. POTVIN. Mr. Chairman. Mr. Kintner, would not the use of the phrase "institution-size packages" in the second line indicate a package certainly of at least 100 units and more, probably 500 or a thousand, which would be a far cry from samples. Mr. KINTNER. Oh, yes; I think so. I think you are right. This is a fair interpretation of what is said in the letter, and I believe that the letter points up a problem. I don't know how serious it is. I know it does exist in some areas, where certain druggists seek and do buy from hospitals in institutional size packaging of drugs, and then resell. They buy at favorable prices and then resell in competition with their competing retail druggists who have to pay more for the same drug product. We had a complaint of this sort involving a little town in Texas brought to our attention, and also brought to the attention of Congressman Wright Patman, where a druggist was buying from the county hospital, and reselling-buying at very favorable prices, presumably what the hospital had purchased at very favorable pricesand then reselling these prescription drugs at a price at which the other pharmacists could not compete, and this I believe was eventually, after the facts were secured, and we did help to secure the facts, brought to the attention of the Houston Office of the Federal Trade Commission, and they as I understood it took an affidavit or letter of discontinuance from the hospital in question. But as I have advised your counsel, in checking up with the local druggists in this same area of Texas, I was advised that the same druggists had set up shop in another county and probably according to the best information and belief of these pharmacists, was buying again from the local hospital. This is something that I am sure the agency would want to examine into. Mr. DINGELL. Technically, this is a violation of what law? Mr. KINTNER. Well, in the first place, it probably is a violation of the FDA regulations, if the hospital is not acting as a lawful wholesaler. Mr. DINGELL. Would it also be a violation of Robinson-Patman? Mr. KINTNER. I think it could be, yes, sir; and that is why we looked in and sought the facts, and why Congressman Patman, as we understand it, also is seeking the facts, and I believe why the Federal Trade Commission acted in this instance. Mr. DINGELL. The committee would very much like to have whatever information you have available on this matter. Mr. KINTNER. We have made all our correspondence on RobinsonPatman problems available to the counsel of this subcommittee, as we assured him months ago we would do. Mr. DINGELL. These matters will be brought quite forcefully to the attention of the appropriate agencies by the subcommittee at the appropriate time. Mr. KINTNER. Thank you, sir. Mr. DINGELL. And the committee would greatly appreciate any help that you can give it in providing information that we can bring to the attention of these agencies concerning possible violations of either Robinson-Patman or any of the other antitrust laws, and also appropriate violations of the Food and Drug regulations and the several statutes authorizing that agency to act. Mr. KINTNER. I find the evidence is very hard to come by, as undoubtedly your counsel will also discover. Mr. DINGELL. We will be happy to receive what you have and see whether or not we can generate some interest on the part of the agency to take appropriate action. it Mr. KINTNER. Thank you. may II. In order to formulate a general understanding of how the Robinson-Patman Act operates in the field of institutional drug sales, be helpful to review first the circumstances in which a drug supplier, otherwise meeting jurisdictional requirements, may sell to institutions without regard to the requirements of the Robinson-Patman Act, and second, how such institutional sales may violate the mandate of the Robinson-Patman Act not to engage in price discrimination giving rise to adverse competitive effects. I have, in connection with this testimony on this particular problem, made various speeches as a part of my assignment with the NARD, not only to make sure that the druggists, the members of the NARD, understand and comply with the antitrust laws, but that they understand how those laws may benefit them, and these speeches which I at least am personally confident reflect the law, at least the law as best I know it, have been widely circulated and in many instances I have sent them to various drug suppliers and their counsel, and asked that they review their policies in the light of these statements, provided they believe these statements reflect the law. I think I have had one response in that connection. When a drug supplier sells drugs to Federal, State, or municipal government institutions, the price charged by the supplier may be without regard to the Robinson-Patman Act, because such sales are probably exempt from the Robinson-Patman Act.1 I cite here in footnotes the legal citations for the various statements and conclusions that I draw therefrom. To the extent that these governmental purchasers resell or redistribute the drugs to confined patients, there would probably be no adverse competitive effects in any event because the community pharmacies are not functionally in competition with such institutions for such drug sales, under settled Robinson-Patman precedent.2 A second category of institutional purchasers would be private nonprofit institutions, most commonly hospitals, clinics, sanitariums, and nursing homes. The Nonprofit Institutions Act of 1938 exempts such sales to nonprofit institutions when such products are for the institution's "own use."3 NARD regards it, and when I speak of NARD I speak as its Washington counsel and express my views, as a reasonable construction of the "own use" limitation to mean not only sales for research-type purposes, but also sales for inpatients, hospitalized patients who are not capable of shopping for drugs. The third category of institutional purchaser would be private hospitals, clinics, nursing homes, physicians which are operating for profit and hence not under the exemption of the Nonprofit Institutions Act. Although the Robinson-Patman Act applies to such sales, price differences are probably allowable to the same extent as with sales to nonprofit institutions. This is because sales for the profit institution's "own use" would not generally give rise to adverse competitive effects in any event. With this background, we can now focus on situations where the Robinson-Patman Act does apply, and where community pharmacies are subjected to competitive injury arising from preferred price concessions. This would minimally include the situation where institutional purchasers, either profit or nonprofit, secure favored price concessions from drug suppliers and then turn around and resell the drugs to private citizens who are nonpatients of the institution, and which are capable of shopping in the trading area and purchasing from the disfavored retail druggists. To the extent that such resales are not for the institutional purchaser's "own use," they give rise to adverse competitive effects among the disfavored druggists in the trading area. Section 2(a) of the Robinson-Patman Act generally operates to prohibit drug suppliers (satisfying jurisdictional requirements) from charging competing purchasers of the same products in the same trad 1 See Sachs v. Brown-Forman Distillers Corp., 134 F. Supp. 9, 16 (S.D. N.Y. 1955); affirmed, 234 F. 2d 959 (2d Cir. 1956); cert. denied, 352 U.S. 925 (1956). For a discussion of the Robinson-Patman exemption accorded to government institutional purchasers, see Rowe, "Price Discrimination Under the Robinson-Patman Act," pp. 84-85 (1962). 2 Shell Oil Co., 54 FTC 1274, 1279 (1958); cf. Secatore's Inc. v. Esso Standard Oil Co., 171 F. Supp. 665 (D. Mass. 1959); Sano Petroleum Corp. v. American Oil Co., 187 F. Supp. 345 (E.D. N.Y. 1960). 315 U.S.C. sec. 13(c). The "own_use" exemption minimally would not reach drugs sold to nonpatients. In Students Book Co. v. Washington Law Book Co., 232 F. 2d 49, 50 n. 5 (D.C. Cir. 1955), cert. denied, 350 U.S. 988 (1956), the court indicated that sales of books to a college for use by the college library are for the college's "own use," but college bookstores which purchase books and resell them for profit are not sales for the college's "own use.' E.g. American Oil Co., 29 FTC 857 (1939); Shell Oil Co., 54 FTC 1274 (1958); FTC Advisory Opinion Digest No. 67, CCH Trade Reg. par. 17,587 (June 28, 1966). ing area a price "difference" where that price difference may give rise to adverse competitive effects. The law is settled that the requisite showing for secondary-line or buyer-level competitive effects is not so great that a supplier can grant drug price concessions to the institutional class of competitors with any degree of impunity.1 Statutory defenses to a section 2(a) violation include meeting competition in good faith, cost justification of the price concession, and distress merchandise sales. Section 2(f) operates to prohibit a buyer, in this situation a profit or nonprofit institutional buyer meeting "commerce" requirements, from "knowingly inducing" a price concession violative of section 2(a). It is, of course, a basic proposition of Robinson-Patman philosophy that competitors should, without regard to economic power, at least be entitled to start off on the same competitive footing in terms of the purchase price they pay from their common supplier, the only statutory exceptions being in reference to the affirmative defenses just mentioned. There is no established Robinson-Patman precedent which has squarely dealt with this issue of institutional drug-price discrimination, although there was recently instituted a Robinson-Patman private treble damage suit in California against Ciba Pharmaceutical Co., of Summit, N.J., which we understand raises this issue." NARD has no additional knowledge of the merits of this specific litigation. In recent years, NARD has been engaged in an extensive program of antitrust education of retail druggists. This educational program has centered on the areas of compliance with the law, such as in the area of price-fixing prohibitions of the Sherman Act, and the areas of benefits provided by the law, such as the rights of retail druggists assured to them by the Robinson-Patman Act. Disillusionment necessarily arises among the rank and file members, however, when they are told on the one hand what the law requires of their suppliers, and they believe the law is being ignored with impunity. In this connection, it is generally a defficult, if not impossible, chore for retail druggists themselves to document specific instances of institutional price discriminations in their own trading areas. As I have previously added, it is very difficult for counsel as well. This is due in no small measure to the fact that drug manufacturers' institutional pricing policies and practices are seldom publicly available. While, superficially, it might appear that the public benefits from such price discrimination on the rationale that the public sometimes may be able to buy drugs cheaper from the institutional purchaser, we need only be reminded that the vice of price discrimination is the adverse effects on competition, which Congress desired to prevent when it enacted the Robinson-Patman Act in 1936. The relative sales price of the favored buyers is not determinative of the issue of competitive effects among disfavored buyers.3 1Cf. Federal Trade Commission v. Morton Salt Co., 334 U.S. 37 (1948); see William H. Rorer, Inc., FTC Dkt. 8599, initial decision, June 15, 1965), afirmed by the Commission (May 9, 1966); modified and affirmed, F. 2d (2d Cir., Mar. 20, 1967). Contra Costa Ph. Ass'n. v. Ciba Pharmaceutical Products, Inc., Civ. No. 46218 (N.D. Calif., filed Dec. 28, 1966). E. Edelmann & Co. v. Federal Trade Commission, 239 F. 2d 152 (7th Cir. 1956), cert. denied, 335 U.S. 941 (1958). |