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An Economic and Antitrust Analysis of the Distribution of Medical Products
Published online by Cambridge University Press: 24 February 2021
Abstract
The techniques used to distribute medical products are designed to maximize the manufacturers’ profits by charging a relatively low price to hospitals and a relatively high price to other purchasers, such as doctors and nursing homes. This pricing scheme raises complex antitrust problems, including vertical price fixing between the manufacturer and its distributors, price discrimination by the manufacturer, and agreements between the manufacturer and the hospitals restricting the hospitals’ ability to resell. This Article examines these antitrust issues.
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- Copyright © American Society of Law, Medicine and Ethics and Boston University 1990
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1 This Article presumes that market forces work in the health care industry as they are presumed to work in any other industry. During the 1980s, Supreme Court cases dealing with antitrust health care issues implicitly applied the same basic economic model used for all other industries. See, e.g., FTC v. Indiana Fed'n of Dentists, 476 U.S. 447 (1986); Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984); Arizona v. Maricopa County Med. Soc'y, 457 U.S. 332 (1982).
2 Drugs are not within the scope of “medical products” as the term is used in this Article. However, many of the same issues apply to their distribution. See infra note 85 (discussing recent legislation affecting drug distribution and its relevance to issues analyzed in this Article).
3 ERNST & WHINNEY, FROM PRODUCER TO PATIENT: VALUING THE MEDICAL PRODUCTS DISTRIBUTION CHAIN 1-2 (1988) (prepared for the Health Industry Distributors Association).
4 Id.
5 Id. See Twenty Med-Surg Companies Control Half the U.S. Market, HOSP. MATERIALS MGMT., July, 1989, at 1. Small manufacturers may be foreclosed from the broader-based market because of their narrow client base and because they cannot supply the volume required under some of the larger group purchasing organization (GPO) contracts. See Carol, GPOs Set Out To Be The Chosen Ones, HOSP. PURCHASING NEWS, Jan., 1989, at 1, 18; Wagner, Bigger May Not Be Better For Purchasing Groups That Overwhelm Customers, MOD. HEALTHCARE, May 5, 1989, at 36. Moreover, during the last few years, some of the major suppliers have been forming alliances with each other, making it increasingly difficult for the small manufacturer to reach the marketplace. See Litsikas, Groups, Hospitals Cautious About Corporate Partnerships, HOSP. MATERIALS MGMT., Dec, 1989, at 1, 16-17.
6 For example, syringes, rubber gloves, bandages, IV solutions, tapes, crutches and X-ray film are each in different product markets.
7 See ERNST & WHINNEY, supra note 3, at 1-2; Solutions: An Improved Value in a Changing Market, HOSP. PURCHASING MGMT., Sept., 1985, at 8.
8 ERNST & WHINNEY, supra note 3, at iv.
9 Id. at 1-6.
10 The major exception is the former American Hospital Supply Corp., now part of Baxter, which sells nationwide. See Group Purchasing Proliferation: Do Benefits Exceed Costs?, HOSP. PURCHASING MGMT., May, 1984, at 3, 5 [hereinafter Group Purchasing Proliferation].
11 ERNST & WHINNEY, supra note 3, at 1-6.
12 See, e.g.. Hospital Corp. of Am. v. FTC, 807 F.2d 1381, 1389 (7th Cir. 1986) (“[H]ospitals are under great pressure from the federal government and the insurance companies to cut costs.“), cert, denied, 481 U.S. 1038 (1987); J. GOLDSMITH, CAN HOSPITALS SURVIVE? 1 (1981) (“[H]ealth professionals and managers have already entered an era of heightened competition for patients and health resources. To approach this milieu without a competitive strategy will become increasingly foolhardy.“).
13 See, e.g., Hospital Execs Predict More Failures, HOSP. PURCHASING NEWS, Oct., 1988, at 15. Previously, providers were reimbursed based on the actual costs incurred in treating a patient. Under that system, higher cost meant higher reimbursement. Providers under the prospective payment system, however, receive a predetermined, fixed amount based on the patient's diagnosis. Under this system, providers can maximize their profits by minimizing their costs for treating a given patient.
14 The larger GPOs represent over 800 hospitals. See Wagner, Group Purchasers Want Commitment, MOD. HEALTHCARE, May 5, 1989, at 34, 41. A 1988 survey by a major trade publication showed that essentially all hospitals belong to at least one GPO and more than half belong to more than one. Thill, 1988 Readership Survey (Part II), HOSP. PURCHASING NEWS, Nov., 1988, at 1. See also. Group Purchasing Proliferation, supra note 10, at 3; Wetrich, , Group Purchasing: An Overview, 44 AM. J. HOSP. PHARMACY 1581, 1581-82 (1987)Google Scholar. It is estimated that 40% to 70% of medical products are sold to hospitals through GPOs. See ERNST & WHINNEY, supra note 3, at II-2; Cassak, Compliance Not Enough for Group-Vendor Partnerships, HOSP. PURCHASING NEWS, Dec, 1988, at 18, 20.
15 For purposes of this Article, the author assumes that the GPO is an agent or broker in the distribution chain. If the GPO is an actual purchaser, which then resells to hospitals, it is conceptually similar to a distributor. Accordingly, the legal analysis of distributor transactions presented in Part IV can be amended to analyze the situation where the GPO is a purchaser.
16 See, e.g., AMERICAN HOSP. ASS'N, OFFICE OF LEGAL & REGULATORY AFFAIRS, MEDICAREMEDICAID ANTIFRAUD AND ABUSE AMENDMENTS: APPLICATION TO VENDOR-PAID ADMINISTRATIVE FEES IN HOSPITAL GROUP PURCHASING ORGANIZATIONS 1-2 (No. 3, 1985); Brightbill, Purchasing Groups Report Pricing Uniform IV, HOSP. MATERIALS MGMT., Feb., 1987, at 3; Backgrounder: Fort Howard on Paper, HOSP. PURCHASING MGMT. Mar., 1985, at 6, 7 (interview with Ms. Santoro, Business Dir.); Backgrounder: Price Forecast Cloudy for 1986, HOSP. PURCHASING MGMT. Jan., 1986, at 12, 14 (submission of Donald J. Siegle, Vice Pres., Hosp. Council of W. Penn.); Group Purchasing Proliferation, supra note 10, at 4. Although the size of the discounts received by GPOs is not publicly available, informal discussions between the author and distributors indicate that discounts from 20% to 40% would not be uncommon.
17 Herrick, , Group Purchasing: Evaluating Bundled Contracts, 46 AM. J. Hosp. PHARMACY 246 (1989)Google Scholar; Why Are Group Members Paying Higher Prices for Syringe/Needle Sets?, Hosp. PURCHASING MCMT., May, 1985, at 6.
18 See DAVIS, K., ANDERSON, G., ROWLAND, D. & STEINBERG, E., HEALTH CARE COST CONTAINMENT 1, 9 (1990)Google Scholar; supra notes 12-13 and accompanying text. Recently, Congress has turned its attention to reforming physician payments under Medicare. See PHYSICIAN PAYMENT REV. COMM'N, 1990 ANNUAL REPORT TO CONGRESS; Ginsburg, Physician Payment Policy in the 101st Congress, HEALTH AFFAIRS, Spring, 1989, at 5; Welch, Prospective Payment to Medical Staffs: A Proposal, HEALTH AFFAIRS, Fall, 1990, at 34.
19 The term “price discrimination” is defined differently in economics than it is in law. The Supreme Court explained the difference in Falls City Indus., Inc. v. Vanco Beverage, Inc., 460 U.S. 428, 443 n.10 (1983):
“Economic” price discrimination consists in selling a product to different customers at prices that bear different ratios to the marginal costs of sales to those customers, for example, charging the same price to two customers despite the fact that the seller incurs higher costs to serve one than the other, or charging different prices to two customers despite the fact that the seller's costs of service are the same. Price discrimination under the Robinson-Patman Act, however, “is merely a price difference.“
(citation omitted). An alternative definition of “economic” price discrimination is pricing that yields different net profits on sales to different customers. See PHLIPS, L., THE ECONOMICS OF PRICE DISCRIMINATION 7 (1983)Google Scholar; J. TIROLE, THE THEORY OF INDUSTRIAL ORGANIZATION 133-34 (1988); Celnicker & Seaman, Functional Discounts, Trade Discounts, Economic Price Discrimination and the Robinson-Patman Act, 1989 UTAH L. REV. 813, 816-17. In this Article, the term “price discrimination” is used in its legal sense, unless otherwise indicated.
20 Under a theoretical model of perfect competition, economic price discrimination could not occur because excess profits made from sales to parties with an inelastic demand could be bid away by rival sellers who want those excess profits. However, “real life firms do have at least some monopoly power and can use marketing techniques to keep their markets separate, so that price discrimination is generally possible.” L. PHLIPS, supra note 19, at 1. Furthermore, Professor Phlips stresses that:
For a long time, [the requirement that the seller have market power] was interpreted in the strong sense of an absolute monopoly (complete control over a market). Today economists gradually begin to realize that duopolists, oligopolists, and small competitors in differentiated markets can price discriminate. The conditions under which a market equilibrium with price discrimination is possible are not yet fully understood. It is clear, however, that price discrimination is possible as soon as there is some monopoly power — as long as the firm's demand curve is not horizontal.
Id. at 16 (footnote omitted). Accord ADELMAN, M., A&P: A STUDY IN PRICE-COST BEHAVIOR AND PUBLIC POLICY 220 (1959)Google Scholar. Although there is no market-by-market analysis of the medical products industry to determine the existing degree of market power, the structures of most markets indicate that many of the manufacturers do not face horizontal demand curves. A firm facing a horizontal demand curve would lose all sales if it raised its price slightly, and would gain 100% of the market if it lowered its price slightly. See supra note 7 and accompanying text.
21 L. PHLIPS, supra note 19, at 7.
22 ERNST & WHINNEY, supra note 3, at 1-6.
23 See infra note 85 and accompanying text. For example, if a hospital paid $100 for a product, and a doctor's office paid $150 for the same product, the hospital might resell the product to the doctor's office for $130. The hospital would make a profit, and the doctor's office would lower its costs. This process, called arbitrage or diversion, would benefit both the hospital and the doctor's office. However, it would destroy the manufacturer's efforts to maximize its profits through price discrimination by eliminating the manufacturer's sale at a relatively high price ($150) to the inelastic, alternate-site segment.
24 See supra note 9 and accompanying text.
25 See ERNST & WHINNEY, supra note 3, at V-9 to V-12. At least one major manufacturer, Becton Dickinson Microbiology Systems (BDMS), “firmly recommends,” but does not contractually require, that its distributors resell at the price BDMS negotiates with the hospital. However, its form distributor contract provides: “If a Distributor charges an end user a price other than the price set forth in the agreement between BDMS and the end user, which price has been furnished to the Distributor, BDMS may set the service fee on future agreements serviced by the Distributor accordingly.” The purpose and effect of this contractual provision is to force the distributor to resell at the negotiated price. Therefore, the contract is effectively an agreement to resell at that price. (BDMS contract on file with American Journal of Law & Medicine). See Newberry v. Washington Post, 438 F. Supp. 470, 480-82 (D.D.C. 1977); see also infra note 58.
26 Not all manufacturers use this approach on all products, and some manufacturers do not engage in price discrimination at all. Others that do may provide distributors a discount negotiated between the manufacturer and the hospital on goods resold to the hospital while allowing the distributor and the hospital to negotiate the distributor's gross margin. The approach discussed in the text is common, however, and the one that raises the most interesting economic and legal issues.
27 Sherman Anti-Trust Act, 15 U.S.C. § 1 (1988). The Act provides that “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations is declared to be illegal.” See Monsanto Co. v. Spray-Rite Corp., 465 U.S. 752, 761 n.7 (1984); Arizona v. Maricopa County Med. Soc'y, 457 U.S. 332, 351 (1982). Although vertical price fixing is per se illegal, the Court might consider a compelling need for its use in particular situations. Cf. Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284, 295 (1985) (in judging the legality of a group boycott by a cooperative purchasing organization, the need to exclude the plaintiff from the cooperative in order for the cooperative to function would be relevant to the legality of the exclusion).
Arguably, a need for vertical price fixing exists when a manufacturer deals with a GPO because the GPO normally includes hospitals in many locations that must buy from different distributors. If the manufacturer could not negotiate and control the price of its product, GPO members might pay different prices depending on location. Price variations could increase the cost of information and uncertainty for the hospital, resulting in the need for each hospital to negotiate with distributors, thereby compromising the efficiency of central negotiations by the GPO. More fundamentally, the GPO's role and bargaining power, which are partly responsible for the more elastic demand and lower prices in the first instance, might be diminished if the GPO could not negotiate a uniform price for all of its hospital members. However, the GPO could preserve its role and bargaining power by negotiating a discount to be given to the distributor on goods resold to hospital members, while at the same time allowing the distributor and hospital to negotiate the hospital's final price. Although this strategy could cause price variations among hospitals and higher negotiating costs, allowing those justifications to vertical price fixing would immunize all vertical price fixing from successful challenge.
28 See Bostick Oil Co. v. Michelin Tire Corp., 702 F.2d 1207 (4th Cir.), cert, denied, 464 U.S. 894 (1983); Greene v. General Foods Corp., 517 F.2d 635 (5th Cir. 1975), cert, denied, 424 U.S. 942 (1976); Rea v. Ford Motor Co., 355 F. Supp. 842 (W.D. Pa. 1973), rev'd on other grounds, 497 F.2d 577 (3d Cir.), cert, denied, 419 U.S. 868 (1974).
29 Greene, 517 F.2d at 658.
30 Id. at 639.
31 Id. at 641.
32 Id. at 656. Accord Bostick Oil Co., 702 F.2d at 1217 (“[P]roof of an illegal resale price maintenance arrangement does not rest upon a showing that the National Accounts program in its structure on paper restricts market pricing if in practical effect the ‘coercive potential of summary termination’ keeps discounting dealers in line.“) (citation omitted); Rea v. Ford Motor Co., 355 F. Supp. 842, 872 (W.D. Pa. 1973) (“It is true that the dealer was not forced to engage in these sales to fleet rental companies but on the other hand he had to use his best efforts to ‘get out the numbers’ (sell as many Fords as possible under his franchise or be charged with dereliction). We can well understand why plaintiff and other dealers would feel that they had to go along with this arrangement.“), rev'd on other grounds, 497 F.2d 577 (3d Cir.), cert, denied, 419 U.S. 868 (1974).
33 Greene, 517 F.2d at 658. The court noted that “the law regarding the degree of control a manufacturer or supplier may lawfully exercise under the antitrust laws over wholesalers and retailers with respect to prices, territories, customers, or other matters is still evolving.” Id. at 654. The trend up to that time (1975) was “increasing antipathy toward vertically imposed controls of manufacturers upon customers, territories, and prices.” Id. However, in 1977 the law began evolving in the opposite direction. See Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 57-59 (1977) (overruling per se rule and applying rule of reason to vertical nonprice restraints).
34 See Ryko Mfg. Co. v. Eden Servs., 823 F.2d 1215, 1224-27 (8th Cir. 1987), cert, denied, 484 U.S. 1026 (1988); Mesirow v. Pepperidge Farm, Inc., 703 F.2d 339, 342-43 (9th Cir.), cert, denied, 464 U.S. 820 (1983).
35 Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373, 411 (1911) (Holmes, J., dissenting).
36 Id.
37 United States v. General Elec. Co., 272 U.S. 476 (1926).
38 Id. at 488.
39 Simpson v. Union Oil Co., 377 U.S. 13 (1964).
40 Id. at 15.
41 But see id. at 29 (Stewart, J., dissenting) (“It is clear, therefore, that the Court today overrules [United States v.] General Electric [Co., 272 U.S. 476 (1926)].“); United States v. General Elec. Co., 358 F. Supp. 731, 735-38 (S.D.N.Y. 1973); VII P. AREEDA, ANTITRUST LAW 308 & n.22 (1986) (even though the Court expressly distinguished Simpson from General Electric, Simpson, in fact, overruled General Electric because the reasoning in General Electric makes the two cases indistinguishable).
42 Simpson, 377 U.S. at 21.
43 Id. at 22.
44 See, e.g., AREEDA, P., supra note 41, at ¶ 1473; Handler, Recent Antitrust Developments, 63 MICH. L. REV. 59, 59-67 (1964)Google Scholar; Rahl, , Control of an Agent's Prices: The Simpson Case — A Study in Antitrust Analysis, 61 Nw. U.L. REV. 1 (1966)Google Scholar; Note, The Supreme Court 1963 Term: Resale Price Maintenance Through Consignment Agreement, 78 HARV. L. REV. 279 (1964).
45 Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717 (1988).
46 Business Elecs. Corp., 485 U.S. at 724.
47 Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).
48 Business Elecs. Corp., 485 U.S. at 733 (citing United States v. General Elec. Co., 272 U.S. 476, 486-88 (1926)).
49 Ryko Mfg. Co. v. Eden Servs., 823 F.2d 1215 (8th Cir. 1987), cert, denied, 484 U.S. 1026 (1988).
50 Ryko Mfg. Co., 823 F.2d at 1219-20.
51 Id.
52 Id. at 1223 (citations omitted).
53 Id. at 1225-26.
54 Id. (citations omitted).
55 Students Book Co. v. Washington Law Book Co., 232 F.2d 49, 53 (D.C. Cir. 1955) (footnote omitted), cert, denied, 350 U.S. 988 (1956). The Federal Trade Commission has described a consignment relationship as follows:
In addition to retention of title by the consignor, a bona fide consignment relationship will normally contain several of the following elements — deferral of payment on the part of the consignee until after the products have been sold, the privilege of return of all unsold products, receipt of a commission by the consignee for his efforts in selling the products, insurance coverage by the consignor of the goods while on the premises of the consignee, payment by the consignor of property taxes levied on goods while in the hands of the consignee, periodic accounting by the consignee for sales and inventory on hand, liability of the consignor for the consignee's misrepresentation and negligence in selling the products to consumers, and segregation of the consignor's products from those of other manufacturers or suppliers.
In re Ace Books, Inc., 67 F.T.C. 1073, 1119 (1965) (footnote omitted).
56 For example, the form contract between Becton Dickinson Vacutainer Systems (BDVS) and its distributors states: “In addition to the Distributor Agreement, you have been identified to serve as our agent for contracts BDVS has negotiated and entered into with hospitals and other health care institutions.” Provisions to Service Negotiated Agreements, para. 1 (on file with American Journal of Law & Medicine).
57 See Kowalski v. Chicago Tribune Co., 854 F.2d 168, 172 (7th Cir. 1988) (Posner, J.) (“[Simpson v. Union Oil Co., 377 U.S. 13 (1964)] teaches that a manufacturer cannot circumvent the rule against price fixing just by calling independent distributors ‘agents’ … .“).
58 Although medical products manufacturers try to avoid vertical price fixing by creating agency relationships, the problem can also be avoided by allowing the independent distributor the freedom to sell to the hospital at prices other than those negotiated by the manufacturer. See Ohio-Sealy Mattress Mfg. Co. v. Sealy, Inc., 585 F.2d 821, 837 (7th Cir. 1978) (“Any licensee was free not to participate, and to negotiate directly with the customer in an attempt to supply all or any part of the customer's needs.“), cert, denied, 440 U.S. 930 (1979); Mesirow v. Pepperidge Farm, Inc., 703 F.2d 339, 343 (9th Cir.) (In addition to the fact that Pepperidge Farm bore the greater burden of risk, the distributors “were free to solicit the product's customers to be their own. They were not necessarily bound, therefore, to sell to retailers at prices specified by Pepperidge.“), cert, denied, 464 U.S. 820 (1983); Overhead Door Corp. v. Nordpal Corp., 1979-1 Trade Cas. (CCH) ¶ 62,595 (D. Minn. 1978).
As a practical matter, however, the use of the rebate system prevents the distributor from altering the contract price. See supra text accompanying note 24. In effect, the distributor must sell on the manufacturer's terms, or not at all.
59 Robinson-Patman Act § 2(a), 15 U.S.C. § 13(a) (1988).
60 Id. at § 2(f), 15 U.S.C. § 13(f).
61 See supra notes 34-58 and accompanying text.
62 See Texaco, Inc. v. Hasbrouck, 110 S. Ct. 2535 (1990).
63 If the hospital resells only to an alternate-site provider that it owns, then any competitive impact on D2 would be limited to competition for the business of the hospitalowned alternate-site provider. Such an insubstantial reduction in competition probably would not violate the Robinson-Patman Act.
If the hospital's wholly-owned alternate-site provider bought directly from the manufacturer under the hospital's contract (or was viewed by the law as doing so) while competing alternate-site entities paid significantly more to distributors for the same products, the distributor's customers might claim injury. See Krug v. International Tel. & Tel. Corp., 142 F. Supp. 230 (D.N.J. 1956). However, when neither alternate-site entity is reselling the medical product itself, but is using it to provide medical care for its patients, injury is more difficult to prove. See Minneapolis-Honeywell Regulator Co. v. FTC, 191 F.2d 786 (7th Cir. 1951), cert, dismissed, 344 U.S. 206 (1952).
64 See Universal Lite Distrib. v. Northwest Indus., 452 F. Supp. 1206, 1215 (D. Md. 1978), aff'd per curiam on other grounds, 602 F.2d 1173 (4th Cir. 1979); Diehl & Sons, Inc. v. Int'l Harvester Co., 426 F. Supp. 110, 123 n.22 (E.D.N.Y. 1976); Guyott Co. v. Texaco, Inc., 261 F. Supp. 942, 950 (D. Conn. 1966). But see Comment, The Robinson-Patman Act and Vertical Conflicts in Distribution, 26 OHIO ST. L.J. 109 (1965) (the Act should protect distributors from the manufacturers’ selling to end-users at lower prices than they sell to distributors).
65 Of course, the hospital is buying through or from the distributor (Dl). Because of the rebate system, however, distributors pay the manufacturer more for products that the distributors resell to alternate-site users than the hospital pays the distributor. Therefore, the hospital may be able to resell profitably to distributors.
66 See Hasbrouck, 110 S. Ct. at 2535.
67 Nonprofit Institutions Act, 15 U.S.C. § 13c (1988) (NIA) (amending Robinson-Patman Act, 15 U.S.C. § 13 (1988)).
68 S. REP. NO. 1769, 75th Cong., 2d Sess. 1 (1938); H.R. REP. NO. 2161, 75th Cong., 2d Sess. 1 (1938). Accord Logan Lanes, Inc. v. Brunswick Corp., 378 F.2d 212, 216 (9th Cir.), cert, denied, 389 U.S. 898 (1967).
69 Nonprofit Institutions Act, 15 U.S.C. § 13c (1988).
70 The nonprofit exemption is not limited to nonprofit hospitals, but also applies to any nonprofit, charitable institution. For example, in De Modena v. Kaiser Foundation Health Plan, Inc., the court applied the exemption to drugs sold at discriminatory low prices to a nonprofit health maintenance organization (HMO), which resold the drugs to its members. Drugs sold to the HMO at lower prices than to pharmacies and then resold to non-members would not be covered by the exemption. De Modena v. Kaiser Found. Health Plan, Inc., 743 F.2d 1388, 1393 (9th Cir. 1984), cert, denied, 469 U.S. 1229 (1985).
71 Abbott Laboratories v. Portland Retail Druggists Ass'n, 425 U.S. 1, 14 (1976).
72 Id. at 14 (emphasis in original).
73 Id. at 14-18. The Court responded to the argument that segregating drugs based on purchaser or use creates an unworkable standard for hospitals and their suppliers. To the extent that the hospital's sales are outside the scope of the exemption, the hospital could:
establish a recordkeeping procedure that segregates the nonexempt use from the exempt use. This would be supplemented by the hospital's submission to its supplier of an appropriate accounting followed by the price adjustment that is indicated. This, to be sure, is cumbersome, but it obviously is the price the Congress has exacted for the benefits bestowed by the controlling legislation, and it should be no more cumbersome than the accounting demands that are made on commercial enterprises of all kinds in our complex society of today.
Id. at 20. Regarding possible liability of suppliers who relied on the hospital's accounting, the Court stated:
The supplier, on the other hand, properly may expect to be protected from antitrust liability for reasonable and noncollusive reliance upon its hospital customer's certification as to its dispensation of the products it purchases from the supplier. But it is not unreasonable to expect the supplier to assume the burden of obtaining the certification when it seeks to enjoy, with the institutional purchaser, the benefits provided by [15 U.S.C.] section 13c.
Id. at 20-21.
74 Id. at 14.
75 A possible exception exists when the non-selected distributor competes with the selected distributor for sales to the hospital. A colorable prima facie violation exists although the hospital does not resell. See supra Figure 2, p. 514 and accompanying text. Even in this case, however, application of the NIA is problematic because the price discrimination is between competing distributors. The nonprofit hospital is simply the ultimate consumer.
76 See infra notes 86-97 and accompanying text (discussing the attempt by manufacturers to legitimize restraints on hospital resales through the NIA).
77 Robinson-Patman Act § 2(a), 15 U.S.C. § 13(a) (1988).
78 See Wooldridge, Rebate Debate Must Address All Viewpoints, HEALTH INDUS. TODAY, NOV., 1989, at 4-5.
79 See P. AREEDA & L. KAPLOW, ANTITRUST ANALYSIS ¶ 120, at 33-36 (4th ed. 1988); W. BALDWIN, MARKET POWER, COMPETITION, AND ANTITRUST POLICY 164-70 (1987).
80 See supra notes 8-9 and accompanying text.
81 Robinson-Patman Act § 2(b), 15 U.S.C. § 13(b) (1988).
82 Falls City Indus, v. Vanco Beverages, Inc., 460 U.S. 428 (1983).
83 Id. at 439.
84 See Alan's of Atlanta, Inc. v. Minolta Corp., 903 F.2d 1414, 1425 (11th Cir. 1990).
85 Boise Cascade Corp. v. FTC, 837 F.2d 1127, 1149-50 (D.C. Cir. 1988) (Williams, J., concurring). Judge Williams also notes that “[t]he law itself may obstruct arbitrage.” Id. at 1150. Recent legislation concerning the distribution of drugs provides an example. Hospitals receive substantial discounts from drug manufacturers, as they do from medical products manufacturers. Drug Concerns Seek to Block Medicaid Curbs, Wall St. J., Aug. 8, 1990, at Bl, col. 6. Thus, drug manufacturers faced the same need as medical products manufacturers to prevent arbitrage, so they could maintain their profit-maximizing price discrimination. The legislative process obliged by enacting the Prescription Drug Marketing Act of 1987, Pub. L. No. 100-293, 102 Stat. 95 (amending the Federal Food, Drug and Cosmetic Act, 21 U.S.C. § 301 (1982)). Purportedly to protect the public's health, section 4 of the Prescription Drug Marketing Act generally prohibits hospitals from reselling drugs purchased at a reduced price. See generally Greenberg, The Prescription Drug Marketing Act of 1987,45 AM. J. HOSP. PHARMACY 2118 (1988) (describing the Act and its implications for health care providers).
The Senate's Special Committee on Aging held a hearing in 1989 regarding drug pricing and found that: “[t]here are two markets in the United States for most big-selling prescription drugs: a price-competitive market characterized by deep discounts off the published list price, and a high-priced market, where retail customers, Medicare and Medicaid purchase their prescription drugs.” S. REP. NO. 49, 101st Cong., 1st Sess. 10 (1989). Unfortunately, the Report fails to recognize the economic factors leading to the market segmentation and price discrimination, and the role that the Prescription Drug Marketing Act plays in maintaining high prices to certain groups of customers.
86 The following language was suggested by the manufacturers’ trade association for inclusion in contracts with hospitals or their purchasing groups:
The products being offered as part of this proposal/agreement are intended solely for the use by (name of group/hospital), who certifies that the products will be used exclusively for their own use. (See Portland Retail Druggists [510 F.2d 486 (9th Cir. 1975)] and related cases). The resale, by (name of group/hospital), of products purchased at the contract price shall be grounds for termination of the agreement, to the extent the resale is not for the institution's own use. The (name of group/hospital) agrees to inform appropriate members of its staff that the products purchased at the contract price are not for resale. The manufacturer reserves the right to conduct audits, at reasonable times, of the purchasing records pertaining to this contract. Both (name of group/hospital) and any selected dealer shall be subject to audits. It is understood that this contract is contingent upon dealer acceptance of reasonable audits. Should a selected dealer fail, at any time during the term of this agreement, to allow a reasonable audit, the manufacturer may request that a new dealer be appointed. Should (name of group/hospital) fail to appoint a new dealer when so requested, the manufacturer shall have the right to terminate the agreement.
HEALTH INDUS. MFRS. ASS'N, MEDICAL DEVICE DIVERSION: AN EDUCATIONAL MEMORANDUM FOR MANUFACTURERS OF MEDICAL DEVICES AND DIAGNOSTIC PRODUCTS 9-10 (Draft Feb. 2, 1988).
87 The Johnson & Johnson contract is on file with the American Journal of Law & Medicine.
88 The Becton Dickinson Vacutainer Systems contract is on file with the American Journal of Law & Medicine.
89 See ROWE, F., PRICE DISCRIMINATION UNDER THE ROBINSON-PATMAN ACT 29-31 (1962); Dam, The Economics and Law of Price Discrimination: Herein of Three Regulatory Schemes, 31 U. CHI. L. REV. 1 (1963)Google Scholar.
90 See FTC v. Sun Oil Co., 371 U.S. 505, 520 (1963); FTC v. Morton Salt Co., 334 U.S. 37, 46 (1948); Boise Cascade Corp. v. FTC, 837 F.2d 1127, 1146-47, 1149 (1988) (Williams, J., concurring); id. at 1159 (Mikva, J., dissenting); Silcox, & Maclntyre, , The Robinson-Patman Act and Competitive Fairness: Balancing the Economic and Social Dimensions of Antitrust, 31 ANTITRUST BULL. 611 (1986)Google Scholar.
91 Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 730 (1988).
92 See Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977).
93 Automatic Canteen Co. v. FTC, 346 U.S. 61, 63 (1953). Accord Great Atl. & Pac. Tea Co., Inc. v. FTC, 440 U.S. 69, 80-81 (1979). Cf. United States v. United States Gypsum Co., 438 U.S. 422, 458 (1978) (Robinson-Patman Act compliance does not justify price fixing).
94 Abbott Laboratories v. Portland Retail Druggists Ass'n, 425 U.S. 1 (1976).
95 Id. at 11. See supra note 73 and accompanying text.
96 See Abbott Laboratories, 425 U.S. at 20; see also id. at 24 (Stewart, J., dissenting) (” ‘The question is not whether the hospitals can continue to provide this useful community service [by reselling outside of the hospital's own use]. The question is whether in providing it they may acquire the drugs for such resale at an acquisition price that discriminates against local retail druggists.’ “) (quoting Portland Retail Druggists Ass'n, Inc. v. Abbott Laboratories, 510 F.2d 486, 489 (9th Cir. 1975)).
97 See Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752 (1984); United States v. Colgate & Co., 250 U.S. 300 (1919).
98 An argument can be made that price discrimination is, under certain conditions, economically desirable because it may increase total output. However, under other economic assumptions it reduces total output. The frequency of each result is indeterminate. Moreover, the degree to which potential increases in output counterbalance the anticompetitive effects of price discrimination and of preventing hospital resales is purely subjective. Thus, an argument that price discrimination, even where illegal, is procompetitive and should be viewed as outweighing the anticompetitive effects of manufacturers’ preventing hospital resales is not viable. See generally, Celnicker & Seaman, supra note 19, at 820 n.31.