How Much Control Do Device Manufacturers Have Over Servicing?

In December, my colleague Aaron Josephson and I described our observations after attending FDA’s public workshop on Medical Device Servicing and Remanufacturing Activities. In this post, I want to share some additional thoughts about medical device servicing based on conversations I had with other workshop attendees about changing the device distribution and ownership paradigm to avoid issues about third party servicing and remanufacturing.  This is a prominent consideration for original equipment manufacturers (OEMs) given FDA’s evident reluctance to regulate third-party servicers directly, meaning that there are no quality or safety requirements for third party repairs.  My conversations with workshop attendees centered around ideas to compel user facilities to send devices in need of repair or servicing to the OEM, whose servicing operations are regulated by FDA, rather than a third-party servicer.

Below, I describe why making OEM servicing mandatory is essentially impossible under the typical model of device sales to and ownership by health care professionals and institutions, as well as some alternative commercial models that might allow OEMs to cut third-party servicers out of the picture.

As a note, the subject matter of this post relates to reusable medical devices that require service and maintenance throughout their lifecycle.

The Typical Model of Device Sales and Why it Limits Control of Servicing Options

Medical devices are typically developed by OEM in highly regulated environments where the facilities, manufacturing processes, quality controls, and device labeling, storage, and handling are all subject to requirements imposed by FDA. Servicing and repairs performed at the OEM facility are likewise governed by FDA regulations and must employ the same quality system processes as the device production lines. Obviously, an OEM would prefer to see its devices returned to its facilities for servicing because (1) the OEM servicing personnel and engineers have the best knowledge and experience to investigate any problems with a device and restore it to the original safety and performance specifications and (2) servicing devices provides a separate revenue stream.

However, OEMs are typically unable to direct customers to send devices back to its facilities for servicing because once a device is sold to a user facility, the rights of the OEM to control that device terminate. This concept is referred to in patent law as the “exhaustion doctrine” (or “first sale doctrine”) which states that the patent-holder’s rights to control an individual article of patented art expire as soon as the article is sold and transferred to a customer. So, in a commercial model where devices are sold to a hospital or physician practice, the OEM loses the right to control whether and how that device is serviced, except through incentives such as warranties, preferential pricing, or customer service benefits.

Arrangements to Give OEMs Greater Control Over Servicing

After attending the FDA workshop, it appears that preventing third parties from servicing devices is an attractive prospect to many medical device OEMs. There are multiple alternative commercial models that could provide increased incentives for user facilities to return devices to the OEM or to give the OEM greater control of devices in the field, such as:

1. Offer customers extended warranty periods and reduced cost servicing. Many user facilities justify using third-party servicers by citing the difference in cost between OEM and third party device servicing. One way for OEMs to address this issue would be to offer longer terms of free servicing under warranty and then reduced cost servicing plans. Although this could reduce revenue from servicing, user facilities would have greater incentive to use the OEM for servicing because the main advantage of third parties—lower cost—would be neutralized. A higher rate of device returns to the OEM may also balance the cost of repairing devices that are incorrectly serviced by third parties and greater ability to report malfunctions and adverse events.

2. Use proprietary fasteners to secure devices and void warranty upon breach. The use of proprietary fasteners on device cases can prevent third parties from accessing the functional components that need to be repaired and force user facilities to use the OEM for servicing. Typically, OEMs also include a warning to the user that forcing or breaking the fasteners will void the warranty on the device. Although proprietary fasteners provide a method to determine whether the user facility or a third party attempted to service the device, employing them is a negative incentive that can create frustration and bitterness on the part of user facilities.

3. Lease devices rather than sell them. One way for OEMs to retain control of finished devices is to offer device lease agreements rather than sell the devices outright. Leasing avoids the exhaustion doctrine because the OEM retains title to the device and can direct the customer to return it to the OEM whenever it needs servicing or repair.

4. Device subscription service. As with many modern commercial subscription services, OEMs could offer user facilities a full-service package that would include a specific number of new or like-new devices, replacement devices at any time when one in the field requires servicing or repair, supplies of required disposables (e.g., administration sets for infusion pumps), and upgrades to new device models when they become available, for a monthly or annual fee. This option could benefit both OEMs and user facilities since the OEM receives a constant revenue stream from devices in the field, while user facilities get a constant stock of well-maintained devices without the unpredictable costs of intermittent repairs and upgrades.

Although these alternative commercial models are permissible under FDA regulations, they may trigger other legal requirements under health care fraud and abuse, such as meeting an applicable safe harbor under federal and state anti-kickback statutes. OEMs should be sure to consult a health care regulatory attorney before considering a change to any of the commercial and device distribution models described above, or any similar model, to determine the potential legal ramifications.

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