Regulatory Showdown: ISOs, OEMs and the FDA

By Matt Skoufalos

showdown

In the medical device market, independent service organizations (ISOs) have weathered allegations for years that their general craft is dangerous to patient safety almost exclusively by virtue of existing outside of the scope of the business structure established by original equipment manufacturers (OEMs). The same criticisms that have dogged the third-party device, parts, sales, and service industry frequently neglect to mention that so many of the largest ISOs – Aramark, Sodexo, Crothall, et al. – routinely maintain OEM equipment under long-term partnerships with large OEM customers (as do the in-house service teams at many health care systems), or that OEMs have increasingly consolidated the most successful such organizations within their corporate structures, either buying them outright or forming exclusive channel partnerships for the distribution of OEM products in key markets.

In recent years, those criticisms have softened, in part to account for the increasing frequency of these vertical integrations, and also as very little statistical evidence has been uncovered to substantiate the breadth of allegations that ISOs are prima facie more dangerous than OEMs that are also involved in the after-market sales, service, repair, and refurbishment of medical devices. At its most charitable, the rhetoric has been couched in tired pronouncements focused on driving a wedge in the market on the basis of quality. It’s not a measuring stick to which most ISOs specifically object; after all, many seek to distinguish themselves from their competitors on the basis of quality and service after the sale rather than on pure price comparison. But with dollars and cents still being both the biggest differentiators among companies in the business and the fundamental reason for all parties to be involved in the conversation, it’s competition and not patient safety, that seem to be at the root of the latest round of questioning.

In October, the U.S. Food and Drug Administration (FDA) convened a workshop entitled, “Refurbishing, Reconditioning, Rebuilding, Remarketing, Remanufacturing, and Servicing of Medical Devices Performed by Third-Party Entities and Original Equipment Manufacturers.” For two days, representatives from trade groups, ISOs, and OEMs batted around the issues at the heart of the pre-owned medical equipment market: namely, whether patient safety is compromised if non-OEM technicians are permitted to service, repair, and maintain OEM equipment.

quote

Peter Weems, Director of Policy and Strategy for the Medical Imaging Technology Alliance (MITA), testified that the concerns of the companies represented by his organization are rooted in problems exacerbated by unskilled or uncertified device maintenance. These can include improper servicing or alterations to the device, interference with future preventive maintenance, firmware or software upgrades, field corrections, a lack of required regulatory reporting, voided certifications, and other liability concerns.

“Because our member companies and their service departments regularly encounter these challenges, we have raised these issues with the FDA several times over the past few years,” Weems testified. “It is not our goal to limit competition or drive anyone out of the business. We recognize that many third parties, including in-house teams, ISOs and others, are currently performing quality service. There is the problem that only service activities performed by the OEM are regulated by the FDA.”

In support of his position, Weems offered a number of unattributed images of the ill effects of improper equipment servicing, which he claimed was the work of third-party service providers. But if patient safety and device performance are the exclusive domain of OEMs, argued Robert Kerwin, general counsel for the International Association of Medical Equipment Remarketers and Servicers (IAMERS), then an awful lot of them are soliciting help from ISOs when it’s time to get the job done.

“It is common for an OEM to contract with IAMERS members for the supply of parts, as well as service, as well as assisting in the installing, uninstalling, transporting, and storing of equipment,” Kerwin testified. He went on to claim that “the greatest outlet for equipment taken in trade by the OEMs appears to us to be IAMERS members,” many of whom, he pointed out, are themselves alumni of the OEM business.

“Pre-owned doesn’t mean safety concerns,” Kerwin said. “It may prove convenient for some to show pictures of equipment without attribution … and to suggest that certain levels of uneven performance are being implemented, and to claim that minimum requirements are not being met.

“In a market that demands exactitude and quantification, we find such supposed evidence less than helpful,” Kerwin said. “We are confident the FDA will not regulate by anecdote.”

To Tom Green, president of Paragon Service, of Saline, Michigan, the workshop was an excuse for OEMs to argue for regulatory endorsement of business practices that he said are anti-competitive.

tom-green

“The only reason that we were there in Silver Spring, Maryland, was the desire by OEMs to put ISOs out of business by restricting their operations,” he said. “It was an anti-competitive move by the OEMs to increase their bottom lines and put their competition out of business so they can charge higher rates.”

Green said the lack of alignment among many ISOs into trade groups or associations undercuts any efforts from a fairly diverse collection of businesses to participate in the conversation to the same degree as its OEM counterparts. While that absence of structure may make for a scattershot arrangement of stakeholders on the ISO side of the equation, it also speaks to the variety of business models affected by any potential increase in the stringency of regulations aimed at the third-party medical equipment industry. Instead of foisting new restrictions upon the segments of the business that most drive price competition by offering alternatives to monolithic institutions, Green suggested that the FDA could pursue patient safety and performance improvement by simply requiring broader access to OEM device training and service information.

“Imposing more regulation, therefore increasing the costs to ISOs and refurbishers, simply eliminates competition for the OEMs, which is good for them, but drives up costs to the patient, and could reduce the quality of patient care by eliminating competition,” Green said.

Green testified that OEMs can eliminate competition simply by charging exorbitant fees to third-party service organizations for equipment training, by limiting access to device update information, or by refusing to support their equipment outside of manufacturer-exclusive service contracts. Refusing to sell parts at list price to an ISO can also drive up costs and wait times for their replacements. Software updates that ISOs require in order to calibrate, service, or upgrade OEM equipment may be password-protected or otherwise controlled by the manufacturers themselves. These controls are not put in place for patient safety, Green argued, but to protect corporate interests.

“The problems continue to fall on the lack of training and the lack of parts,” Green said. “Require OEMs to provide service schools at a reasonable cost to any entity that wants to go to the school and be properly trained. Require that companies have access to the service codes to properly service and calibrate a piece of equipment in the name of patient safety.”

“I think the biggest issues are due to a lack of availability of parts and service training,” he said.

Daniel Giesberg has been in the medical imaging equipment business as a broker since 1981. His company, AMD Technologies of Los Angeles, California, sells pre-owned medical equipment as-is, and although Giesberg is not in the repair business, he has followed the FDA proceedings with more than the interest of a casual observer. If the body were to take any action regarding the regulation of non-OEM treatment, sale, or service of medical devices, he fears that his operations could come under the same umbrella as those of other ISOs.

Like Green, Giesberg said he’s wary of the pretenses for the investigation into third-party practices as being competition-driven by a “quasi-monopolistic” group of OEMs. He shares Green’s perspective that software licenses and technical access to devices need not come at the expense of jeopardizing intellectual property in order to provide for patient safety and device functionality.

“If you’re a reputable ISO, if you’re a reputable refurbisher, and the FDA requires certain criteria, we should have an open market and we should be able to compete,” Giesberg said. “[Otherwise], on the ownership side, what do you really own? GE sent out a letter six months ago, which reminded owners and resellers that the owners of the equipment don’t necessarily own the software. The OEMs are not 100 percent wrong, but they should be open to having a relationship with the owners of their equipment to allow owners to minimize the cost of ownership.”

Giesberg noted that it’s not much of a slippery slope from regulatory officials granting OEMs technical exclusivity in the name of patient safety or device performance to providing them with parts exclusivity, which will only balloon the costs for customers. Naturally, he wonders whether the next logical extension would be to regulate equipment dealers similarly.

“There’s the X-ray dealer who buys CR and the software doesn’t work, but then he puts on new software for it,” Giesberg said. “That’s not the original equipment anymore, is it? How does the FDA govern that? You’d think it would be OK because the acquisition software is FDA-registered, but it’s not necessarily the same. It may be better, but it’s different. It’s all about revenues, and for OEMs, they see software as their entry into that.”

Giesberg said that even after following the meeting closely, he’s not sure what direction the FDA will take subsequently, including possibly backing out of the issue entirely and letting the courts decide. If hospitals, for example, no longer have the right to service OEM equipment they purchase with their in-house staff of biomedical technicians, “that opens up a different type of competitive advantage, from one OEM over another,” he said.

“You’re starting to really potentially be very disruptive into a much larger part of the industry,” Giesberg said. “The inquiry is very broad. Nobody knows where it’s going. I think [the FDA have] bitten off a huge issue, and they haven’t yet clearly defined what area it is they need to address. Looking at that food chain, from the OEMs to the distributor level, the dealer level, the broker level; all these different types of people are servicing equipment in hospitals and medical groups. [The FDA] haven’t really yet defined who they want to address, and I think they’re going to have to address those different groups individually.”

david-anbari

David Anbari, Vice-President and General Manager of Mobile Instrument Service and Repair of Bellefontaine, Ohio, said his general takeaway from the workshop is that the FDA is still considering its role in terms of improving the marketplace for medical device performance, safety, and reliability.

“The complaint from OEMs is that once they are not the servicing entity on a device, how can we be sure that all critical failures are being reported consistently? Beyond reporting, if they were to hold many of the companies involved to the same standard, it’s going to send prices up, reduce the number of players in the market, and hospitals are not going to benefit,” Anbari said.

Fundamentally, ISOs have existed in a market niche that allows hospitals and health care providers to save money by offering a significant reduction in fees for medical equipment, parts, and service; sometimes as much as one-third to one-half the cost of OEM pricing. In general, Anbari said, that value adds a second or a third lifespan for equipment that many health care facilities don’t have the operating capital to replace. Extending the useful life of medical devices by extending the support for them doesn’t mean compromising on quality, he said; however, subjecting the ISO market to the same regulations as the OEM market wouldn’t solve all the problems OEMs claim are a failure of regulation.

“What is often missed is the local support at the provider location that is delivered by ISOs because OEMs do not have the field resources to meet customer needs,” Anbari said. “Even if I’m following the quality systems reporting, it’s not like that data we collect and the OEMs collect will be synchronized.”

“I think the case to regulate is too weak and the framework is not applicable for the FDA to apply existing OEM rules to independent service organizations,” he said. “I think it’s essential that if they’re going to hold companies like mine to FDA quality regulations, they must compel manufacturers to sell parts and share technical details with ISOs. The complexities are going to mean that the FDA is going to have to get some people at the table to help design the solution as opposed to getting it on their own.

“I agree fully with the comments from the Federal Trade Commission,” Anbari said. “There has to be a really well-defined problem, and the solution being proposed by the rules has to solve the problem; the net gain needs to be meaningful and measureable. I honestly believe the FDA is open to finding the right answer. I think if somebody could magically bring them the answer, they’d accept it in a minute.”

In a request for comment on the outcome of the workshop, the FDA only offered a brief, generic reply, indicating, as Anbari guessed, that any answers will not be soon in coming:

“The FDA is in the process of evaluating the information presented during the workshop and has not decided on next steps,” the statement read. “The Agency appreciates all of the input provided by the workshop participants.”