1. Introduction
The leasing of medical devices is quite common in China.
Over the past decade, Chinese health authorities have endeavored to control the size of public hospitals by prohibiting their expansion through indebtedness1. Faced with constrained governmental funding, many public hospitals opt to lease rather than purchase some types of medical devices, especially expensive medical equipment. We have recently seen a regulatory trend of local governments encouraging public medical institutions to lease medical equipment in an effort to ease financial burdens and enhance medical services2.
By leasing, a medical device/equipment company (“Device Company”) avails its products to public hospitals while avoiding convoluted bidding procedures. Under various governmental procurement programs, these bidding procedures were mandated for hospitals when procuring medical devices in the past.
This article offers a concise legal analysis on the fundamental issues concerning the leasing of medical devices under PRC law and provides preliminary recommendations for risk mitigation.
2. Leasing Arrangements
The leasing of medical devices typically has the following features:
(1) High-Value Equipment: the leased medical devices are typically of high value and/or are large in size, such as imaging products (e.g., CT, MRI, ultrasound), diagnostic equipment (e.g., clinical analyzers), and robotic equipment (e.g., surgical robots).
(2) Closed System: the leased medical devices are often designed as a closed system and are only compatible with the medical consumables provided by the same Device Company or its affiliates. Such exclusivity precludes the use of consumables by other manufacturers.
(3) The leasing of medical devices may be categorized into two different business models: (a) operational leasing, where a Device Company, directly or indirectly through its affiliates or distributors, leases medical devices to end users (e.g., medical institutions), and (b) finance leasing, where a Device Company sells medical devices to qualified finance leasing companies, and such finance leasing companies provide medical devices to end users with additional financing terms.
We will focus primarily on operational leasing in this article.
3. General Analysis of the Major Legal Risks
The legal challenges associated with medical device leasing may be categorized into three primary areas: regulatory requirements of leasing, anti-unfair competition, and anti-monopoly, and our analysis is as follows:
(1) Analysis of general regulatory requirements
Under PRC law, the leasing of medical devices is considered a form of medical device operation. Therefore, operators (including Device Companies and their distributors) must be legally qualified and hold Medical Device Operation Permits and business licenses (with the proper business scope to lease medical devices). They should also adhere to GSP requirements during their operations.
It is advisable that Device Companies pay close attention to legal relationships and contractual arrangements in the course of their operations. This includes relationships between Device Companies and distributors, as well as relationships between distributors and medical institutions, to ensure overall compliance with all legal and regulatory requirements and to minimize legal risks.
(2) Analysis of Medical Device Placement under the PRC Anti-Unfair Competition Law (AUCL)
Leasing diagnostic equipment (such as clinical analyzers) may trigger risks related to “medical device placement” (in Chinese: 医疗设备投放). Although PRC law lacks a clear legal definition of medical device placement, it typically refers to Device Companies donating, selling or leasing medical devices to medical institutions for free or below the fair market value, in exchange for tie-in sales, exclusive sales or a guaranteed minimum purchase of consumables. For instance, if a Device Company donates an analyzer to a hospital, it might incentivize the hospital to procure corresponding In Vitro Diagnostic (IVD) products from the same Device Company, and we’ve seen numerous administrative cases penalizing IVD product manufacturers/distributors for donating analyzer equipment to hospitals in return for tie-in sales.
Unfair competition or bribery constitutes a major legal risk. Pursuant to AUCL, business operators are prohibited from offering bribes to the following organizations or individuals which may affect trading opportunities or competitive advantage: (i) the staff of a transaction counterparty; (ii) the organizations or individuals entrusted by a transaction counterparty; and (iii) the organizations or individuals who may utilize their authority or influence to affect a transaction.
In a typical medical device placement arrangement, as IVD products are essentially passed through by hospitals and their price is ultimately borne by patients, adopting the “see- through” principle of AUCL suggests that the hospital may be considered as an organization using its influence to affect the purchase of consumables by patients (as the ultimate transaction party). Therefore, if a Device Company offers medical devices to a hospital for free or below the fair market value in exchange for a commitment to exclusive or minimum purchases of consumables, fair competition from other consumable manufacturers could be impeded or excluded, thereby triggering the legal risk of violating AUCL and other anti-bribery regulations.
Indirect leasing through distributors does not necessarily insulate a Device Company from the aforementioned risks under AUCL. We recommend that Device Companies set forth compliance requirements for distributors and implement indemnity mechanisms, where appropriate, in any lease/sale agreements between Device Companies and distributors.
(3) Analysis of Anti-Monopoly under the PRC Anti-Monopoly Law (AML)
The majority of medical devices operate within a closed operational system, i.e., such devices are only compatible with consumables (e.g., disposables, reagents, implants) made by the same Device Company or its affiliates. Consequently, the end users are technically compelled to use the consumables from the same Device Company or its affiliates, instead of choosing other brands.
If a Device Company holds a dominant position in the relevant market, the closed medical device system may be considered as constituting tie-in sales (in Chinese: 搭售) or imposing unreasonable trading conditions (in Chinese: 附加不合理的交易条件) for consumables under Anti- Monopoly Law (AML). There is a legal risk of potentially abusing a market dominance position, thereby violating the AML.
However, defining the “relevant market” (in Chinese:相关市场) is a highly technical issue, involving economic analysis. In general, the smaller the relevant market, the higher market share a market player could possess, and the easier a dominant position could be established.
Along with the widespread use of different types of medical devices in the evolving market in China, a foreseeable trend is that divided and smaller markets would eventually constitute the “relevant market” for anti-monopoly analysis under AML. With a narrower scope, it would be easier for each Device Company to gain a higher market share or even a dominant position in its specific market, increasing its risk exposure under AML. Therefore, a company’s anti-monopoly analysis should be regularly updated and be based on market dynamics.
4. Summary and Suggestions
We recommend that Device Companies consider the following when leasing medical devices to minimize legal risks:
(1) Verify the nature of the different entities (including the Device Company and its distributors, etc.) involved in the medical device leasing model and ensure all required licenses, permits, qualifications, and the proper business scope are obtained for each entity, before initiating the business model.
(2) Design and draft the commercial contracts between the different entities (e.g., the Device Company, distributors, and end users) in alignment with the specific business model, so as meet the mandatory legal requirements and provide maximum contractual protection.
(3) Establish the rent structure and security deposit (if necessary) in a commercially reasonable manner based on the fair market value of the medical device, as well as its maintenance cost and depreciation rate and then keep the relevant supporting documents/information to prove the pricing mechanism.
(4) Examine the impact of restrictions in the lease agreement or otherwise that may impede hospitals from using competing products, particularly in terms of bundle sales, tie-in sales, exclusive sales, or minimum purchase amounts for the Device Company’s consumables. Companies should consider the overall contractual dynamics rather than any individual contract clauses.
(5) Be alert to any technical incompatibility with the consumables of other manufacturers and monitor the Device Company’s growing market share in the relevant market for the purpose of anti-monopoly analysis; and explore the technical feasibility and economic cost of transitioning the medical device from a closed operating system to an open system in case such an alteration is necessary to mitigate anti-monopoly risk exposure.
5. Conclusion
The leasing of medical devices requires a comprehensive analysis of the potential legal risks. This article provides a brief outline of the most fundamental legal issues in terms of general regulatory requirements, anti-unfair competition and anti-monopoly. For any specific business models, a more comprehensive and tailor-made analysis is essential to strike a balance between business interests and legal risk control. For example, how do you treat used medical devices post-lease? Are there any restrictions on selling used medical devices? Would the legal implications under the AUCL and AML change if we alternate the current lease model?
Device Companies that are exploring the business models of medical device leasing are advised to engage legal counsel in the early stages of model design and risk management.
For further information, please contact:
CAI, Jing (Cathy), Partner, JunHe
caij@junhe.com
1 In 2014, the National Health and Family Planning Commission issued the Urgent Notice on Controlling the Rapid Expansion of Public Hospitals (in Chinese: 《关于控制公立医院规模过快扩张的紧急通知》), and in 2017, the State Council General Office issued the Guiding Opinions on Establishing a Modern Hospital Management System (in Chinese: 《国务院办公厅关于建立现代医院管理制度的指导意见》).
2 In 2023, the provincial government of Guangdong Province issued the Work Plan on Pilot Projects for Equipment Leasing in the Education, Science and Technology, and Health Sectors (in Chinese: 《在我省教育、科技、卫生健康等领域开展设备租赁试点工作方案》). It specified that in 2023, pilot projects will be initially launched in hospitals affiliated to relevant public universities, and in 2024, this project will be expanded to all levels of medical institutions in Guangdong Province.
