In recent years, the retail price of prescription drugs in the United States has more than held the line against increasing health-care costs.1

1

The price of prescription drugs is probably the biggest bargain for the consumer's health which exists in America today, and in no small measure is due to the tremendous strides in health research made by the pharmaceutical manufacturers, and the admirable distribution scheme for prescription drugs which is fostered and maintained by prevention of discriminatory pricing practices.

III. In this area of prescription drug competition with retail druggists by nonprofit institutions, there is another aspect of "fairness" which deserves brief mention. Our Federal income tax laws are generally drafted with a view to providing equal taxation of competing entities, so that one competitor derives no pricing advantage through exemption from Federal income taxation.

Many nonprofit hospitals have secured an exemption from Federal income taxation2 by meeting the following general requirements: 3

The hospital is organized as a nonprofit charitable organization to operate for the care of the sick. It must be operated to the extent of its financial ability for those not able to pay for the medical services rendered, and not exclusively for those who are able and expected to pay. It is normal to charge those able to pay for the services rendered in order to meet operating expenses, without denying medical care or treatment to others unable to pay. The hospital must not restrict the use of its facilities to a particular group of physicians and surgeons to the exclusion of all other qualified doctors, and net earnings do not inure, directly or indirectly, to the benefit of any shareholders or individuals.

However, assuming that the hospital is an exempt organization, this does not necessarily mean that all of its income will be exempt from Federal taxation. The significant factor in this context is the requirement that an exempt hospital pay Federal income taxes on income earned in an "unrelated trade or business"; that is, a business which is not conducted "primarily for the convenience" of its patients.*

The question of whether hospital drug services are "primarily for the convenience" of patients is a factual determination which would take into account such factors as the location of competing pharmacies, prices charged, relative percentage of sales to nonpatients, the amount of profit derived from the pharmacy in proportion to total hospital revenue, the extent of advertising or other promotions, the relative number of personnel used to staff the pharmacy.

Where the facts in a particular case show that the exempt institution does not operate its pharmacy "primarily for the convenience" of its patients, the institution must pay Federal income taxes on its pharmacy sales, just like the retail druggist.5

This tax consideration is thus an indirect regulation of tax-exempt institutions' drug sales to nonpatients. It follows that vigilant en force

1 See "Medical Care Prices, A Report to the President" released by the Department of Health, Education and Welfare, March 2, 1967. Table 1, Table 3; at p. 32: "There was no appreciable change in the drug component of the CPI during the 6-year period ending December 1966. The prices of prescription drugs in the CPI *** actually declined by 11.7 percent between 1960 and 1966."

2 Sec. 501 (c) (3), IRC 1954.

3 Rev. Bul. 56-185, 1956-1 Cum. Bull. 202.

4 Secs. 511, 513, IRC 1954.

5 Sec. 1.513-1(a) (2), Income Tax Regs.

ment of applicable tax laws and regulations by the Internal Revenue Service promotes competitive fairness by institutional competitors enjoying exemption from Federal income taxation. NARD encourages renewed vigilance by the IRS in this area of Federal regulation.1

IV. In summary, NARD believes that short of enlarging the commerce sweep of the Robinson-Patman Act to transactions "affecting commerce," existing legislation is otherwise adequate to cope with the substantive problem of discriminatory institutional pricing by drug suppliers.

In this connection, Mr. Chairman, I am speaking only of the problem, the Robinson-Patman problem, which is the main thrust of my testimony, and not in connection with the below-cost selling problem which has been the subject of previous attempts to amend the Robinson-Patman Act.

In that connection, with regard to S. 995 of the last Congress, I believe that the NARD supported this legislation in hearings before the Senate Antitrust Subcommittee.

Mr. DINGELL. It is not related to your last comment, Mr. Kintner, but perhaps at this point it would be useful for the committee to have your thoughts with regard to enforcement by the Internal Revenue Service of the tax laws insofar as they deal with the tax-exempt status and exemption from Federal income tax of these hospital-operated pharmacies. Are you satisfied this is being adequately handled and enforced, or do you have reason to feel that it is not being adequately handled and enforced?

Mr. KINTNER. We have had some situations called to our attention, and have recommended that the parties in the community bring the matter to the attention of the Internal Revenue Service. I am not aware of what was done in those instances.

I am sure that it is an area in which the Internal Revenue Service is well aware of the problem, and I hope that they will continue to give attention to that problem as these matters are brought to their attention.

Mr. DINGELL. The Internal Revenue Service has directed a great deal of attention to veterans' and fraternal organizations conducting bingo games for charitable purposes, and they should treat hospitals equally. Any information you have on this would be appreciated by the committee.

Mr. KINTNER. Thank you. The issue really becomes one of enforcement policy by the Federal Trade Commission. These hearings hopefully will serve to bring Robinson-Patman abuses out in the open and will focus the public interest on the need for remedial action. NARD expresses the hope that in large measure the need for vigorous enforcement of the Robinson-Patman Act in this area will be balanced by enlightened self-appraisal of pricing practices by responsible drug suppliers to insure compliance with the requirements of the RobinsonPatman Act.

And I know from some conversations with lawyers representing certain drug suppliers who have expressed an interest in my views on

1 As to whether a nonprofit institution could lose its exempt status under sec. 501 (c) (3) for improper operation of its pharmacy, see, e.g., Better Business Bureau v. United States, 326 U.S. 279 (1945); Sonora Community Hospital, 46 TC 519 (1966): Kenner v. Commissioner, 318 F. 2d 632 (7th Cir. 1963); Robert C. Olney, 17 T.C.M., 982, 991 (1958); Rev. Bul. 56-185, 1956-1, Cum. Bull. 202.

the law, particularly in this Robinson-Patman area, that they are concerned, and I am sure that many of the large drug suppliers have engaged in review, legal review of their pricing policies with the idea of better complying with the Robinson-Patman Act. I only wish that all would do this, and that all would make a good faith effort to really comply with the Robinson-Patman Act. I regret that I feel that some do not.

But the stick as well as the carrot are required for effective regulation. I have expressed my views that the Trade Commission should be highly commended for certain of its policies, and I believe that these carrots are very much in order, that they represent very fine policies on the part of the Federal Trade Commission, but they are apt to become ineffectual, these voluntary compliance and educational programs, unless they are backed up with a strong enforcement program with respect to the minority who will never comply voluntarily with the law, unless they feel they have to.

We commend this committee for its interest in the distribution problems of this highly important segment of the small business community of America, and I commend you, Mr. Chairman, and the counsel of this committee, for your vigor and for your courage in this area. It is too seldom that voices are raised in support of the RobinsonPatman Act, and it is too seldom that courageous stands are taken to preserve small business in this country.

Thank you, sir.

Mr. DINGELL. Thank you very much for a very fine statement, Mr. Kintner. Counsel?

Mr. WILLIAMS. No questions, thank you.

Mr. DINGELL. Mr. Potvin.

Mr. POTVIN. Mr. Chairman.

Mr. Kintner, on page 5 of your statement, footnote 8, you mentioned the newly formed relationship between Daylin, Inc., of Los Angeles and Doctors Hospital and the Westside Hospital in that city, and also Hawthorne Memorial Hospital in Hawthorne, Calif. Do you know whether the Daylin firm conducting the in-house pharmacies at these hospitals will have access to these institutionally priced drugs?

Mr. KINTNER. I have no first-hand knowledge. I believe that most hospitals do secure or have access to special institutional prices from many drug suppliers, and in this instance, I cannot say that these particular institutions receive those special prices.

Mr. POTVIN. It would be highly unusual, however, for there to be a special purchasing program in behalf of the in-house pharmacy?

Mr. KINTNER. It would be highly unusual, but in many other areas of American business, where a buyer purchases in more than one capacity, say as a retailer and as a wholesaler, that proportion of his business which is wholesale usually receives a better price than that portion of his business which is retail. This is a common way of complying with the Robinson-Patman Act, and it is understood by American businessmen generally.

Mr. POTVIN. In fact, sir, are there not many industries, such as the automotive parts industry, in which the credit-memo, debit-memo manner of handling the split functioning has been a part of the landscape for several decades?

Mr. KINTNER. You are quite correct, Mr. Counsel. This is to my knowledge technically true in the automotive parts industry and in the gasoline refining business.

Mr. DINGELL. If you would yield, Counsel, this is a situation that is much fraught with possibilities of Robinson-Patman Act violations, is it not: to purchase something as a wholesaler and to sell it as a retailer in competition with other retailers, receiving the special advantage that you would receive as a wholesaler? Isn't this a violation of RobinsonPatman?

Mr. KINTNER. Yes, sir; it is, and the Federal Trade Commission has a great deal of settled law in this area, holding that it is a violation, and as I have pointed out, American businessmen who have compliance programs with respect to the Robinson-Patman Act, and I think that many businesses do have good compliance programs, are well aware of this, and they tend to treat the split-function businessman so that as they sell to him at different prices, depending upon his function, so that he doesn't have a headstart in the competitive struggle with his competitors. This is basically the objective of the Robinson-Patman Act, that competitors start on an equal footing.

Split function procedures are not at all new on the American scene. This is "old hat," and so are the principles for complying with these decisions.

Mr. POTVIN. Mr. Kintner, may we have your comment on one additional point. Would it not seem both appropriate and, indeed, necessary, in view of the fact that Daylin owns the MDX chain of 18 discount drugstores, to make sure that there was some procedure to prevent the flowing out from the hospital to these other branches of the same firm those drugs obtained at the radically lower institutional price?

Mr. KINTNER. Absolutely, and you can't justify this discrimination on the basis, in my opinion, of the fact that some consumers may be getting lower prices for drugs. I think that any investigation of this area will show that the people who buy from some of these institutional pharmacies may be paying as much or even higher prices than the community pharmacist will sell the drugs. Now, I can't prove this with facts. It is my belief based upon a great many conversations with people who are knowledgeable. But it does warrant investigation. Mr. POTVIN. To this point, sir, you have couched your testimony in language primarily concerned with the low price to the hospital. The other side of that coin is the relatively high price to the wholesaler and, ergo, to the independent druggist. If you had lower prices, you could pass these on to your customers as well, is that not correct?

Mr. KINTNER. That is correct. The great vice here is where the institutional pharmarcy buys at a much lower price than the community pharmacy, and then sells at a much lower price to the same customers of the community pharmacy. It is able to do that because of this lower purchasing price, but in other instances, as I have pointed out, the other side of the coin, they may not pass along the savings to the

consumer.

While I think all of us, being consumers, approve of the proposition that the consumer should buy as low as possible, there is also a principle of equity where the consumers are concerned.

Why should one consumer have a much better bargain simply because he lives near an institutional pharmacy than another consumer in another nearby neighborhood, where there isn't an institutional pharmacy? The second consumer is subsidizing the first, and I don't think that is right either.

Mr. POTVIN. In your testimony, sir, you depicted the thinning ranks of the independent retail druggists and also their loss as far as shared market and, surprisingly enough, even absolute dollar volume. Now, in the March 13, 1967, issue of American Druggist, Secretary John Gardner of the Department of Health, Education, and Welfare called upon druggists to become "more competitive in their prescription business."

I would like to ask you this. As long as your people occupy a disfavored position, have to pay a much higher price, how can they do this?

Mr. KINTNER. They can't, Mr. Potvin, and I have had many druggists approach me at State meetings where I have addressed them, and at national conventions of the NARD, and tell me:

"How can we sell for less when we are paying more than some of our competitors for the same prescription drugs?"

It is a fact of life, I think, beyond too much question, that the prescription department in many, many thousands of community drugstores is being subsidized by the up-front sundries and allied health aids departments, and unless these druggists had this range of business, which is also a service to the community, they couldn't afford to keep open this prescription department, and to pay the high wages which they have to pay to employ a registered pharmacist.

Mr. POTVIN. Sir, as the various witnesses appear and the testimony comes in, would you not share the opinion that the evidence will show that we are not talking about a slightly lower price to institutions? We are talking in terms of what might be denominated as a radically lower price; is that correct?

Mr. KINTNER. I think that is true, Mr. Potvin.

Mr. POTVIN. Now, that being the case, would it not be fair to say that the customers of your clients, the neighborhood druggists, are subsidizing these lower prices?

Mr. KINTNER. I think so.

Mr. POTVIN. Because certainly the drug companies simply must show a profit. They surely must carry on research and development. That money just must come from somewhere. Would it be fair in your opinion, sir, to say that one of the apparent prime sources of these funds is the pockets of the customers who buy from the druggists, since they do, without any choice of their own, occupy a disfavored position?

Mr. KINTNER. That is correct, and apart from the hospital and other institutional pharmacies who may receive favorable prices, I have had druggists tell me that M.D.'s who actually are dispensing drugs, commonly receive a much more favorable price.

I don't know the extent to which this problem exists. I believe that there has been some testimony in the Senate Antitrust Subcommittee, holding legislative hearings, which would tend to point to certain of these conclusions.

I have myself testified before that subcommittee, the Hart subcommittee. But it is a problem. If the dispensing M.D. is going to dispense