By Bruce D. Armon, Esq.
The clinical practice of medicine is constantly being refined and advanced through technological advances brought about by new medical devices. Many of these devices, not surprisingly, are designed by the physicians who foresaw the potential benefits the new device would have on their own practice and that of their colleagues.
Bringing a medical device to the marketplace can be a long and winding road. A physician with an idea for a new medical device would be well-served to think ahead and carefully plan an implementation strategy which considers the following issues.
The physician’s employment agreement. One of the physician’s first issues to consider is his/her employment agreement. Many employment agreements include seemingly innocuous language like, “Any remuneration earned by employee while in the employ of employer shall be forwarded to employer.” This language could result in the conclusion that any remuneration earned by the physician-employee for the new medical device shall be the property of employer. This is likely not the outcome sought by the physician-entrepreneur, and the employment agreement should be amended accordingly.
Other employers, including universities and academic hospitals, usually have specific intellectual property right provisions in their physician employment agreements or reference these provisions as part of their policies and procedures manual. Entrepreneurial physician practices may also have specific intellectual property policies and procedures. These provisions could provide that any work, invention or discovery that is authored, conceived, created or made by the employee during the period of employment and related to the business of the employer, are the property of the employer. An employer’s policies should be carefully reviewed by the employee because a violation of any of these provisions is often grounds for termination of the employment agreement for cause.
Once the physician’s employment contract issues have been reviewed and amended, if appropriate and agreed to by the employer, the physician entrepreneur can move forward with the business of bringing their new medical device to market.
Protecting your idea. Protecting and licensing commercial rights for a new medical device could mean the difference between success or failure. These commercial rights are protected through patents, trademarks, copyrights and trade secrets. As a general matter, a patent protects against the unauthorized use of an idea, a trademark protects the name or logo associated with a product or the good will of the business, a copyright protects the expansion of the idea, and a trade secret protects against an unauthorized disclosure of an idea. Collectively, these four concepts are referred to as intellectual property. The inventor of a medical device should take advantage of the available intellectual property rights to protect and defend against the unlawful infringement or theft of valuable intellectual property associated with a new medical device.
Developing a strategic business plan and business model. In conjunction with protecting the idea, a physician entrepreneur needs to develop a strategic business plan. The strategic business plan has several purposes.
First, it will help a physician identify a “roadmap” for how the medical device can be successfully marketed and define benchmark objectives and realistic dates to achieve those goals.
Second, the strategic business plan is imperative if the physician will need to raise equity or borrow money to fund the business venture. Most small businesses fail because of insufficient capital. A physician entrepreneur needs to identify the realistic capital needs of the business and understand the ways that new businesses are typically capitalized. The first round of financing rarely comes from institutional investors. Instead, a physician will likely have to rely on personal resources and the generosity of family and friends.
Third, the strategic business plan will permit the physician to articulate in a cogent manner the proposal’s vision and objectives for potential investors, lenders and, as importantly, potential customers for the medical device. What makes this medical device different from what is already in the marketplace? Who are the key constituencies which have been targeted? What are the prospective costs and timeline before the medical device is ready to enter the marketplace?
Developing a strategic business plan is often a critical self-assessment tool. No one enjoys highlighting for a wide audience their shortcomings or potential deficiencies. The strategic business plan allows the physician entrepreneur to demonstrate the vision for successfully marketing the medical device and the resources which will be necessary to accomplish that goal. A well-conceived, comprehensive strategic business plan is a key to ensuring short and long-term success for the medical device.
In addition to the developing a strategic business plan, the physician entrepreneur should consider establishing the appropriate legal entity for his business. There are a variety of different options to consider: sole proprietorship, general partnership, limited liability partnership, limited liability company or corporation. The primary objective in selecting a form of business organization is to choose a form that limits the liability of the business owner(s) and, at the same time, minimizes federal and state income taxes.
The FDA regulatory scheme. Protecting the intellectual property rights and developing a sound and strategic business plan for a physician’s medical device still is not a guarantee of success for a new medical device. The device must be approved by the U.S. Food and Drug Administration, the sole federal agency charged by Congress with regulating medical devices to ensure their safety and effectiveness.
The Federal Food, Drug, and Cosmetic Act includes a specific definition for a medical device. If the product is not included within the definition of a medical device, the FDA does not have regulatory oversight. Assuming the physician’s new device is actually a medical device and regulated by the FDA, there is a three-tiered medical device classification system.
Class I devices (e.g., elastic bandages and examination gloves) are subject to the least regulatory scrutiny through FDA’s general controls. FDA has exempted almost all Class I devices from its premarket notification requirements.
Class II devices must comply with all of the Class I general controls and special controls to provide assurances that the medical device is safe and effective. Examples of Class II devices include powered wheelchairs and some pregnancy test kits. According to the FDA, approximately 43 percent of medical devices are Class II devices.
Class III devices are those that are purported or represented to be for a use in supporting or sustaining human life, for a use that is of substantial importance in preventing impairment of human health, or presents a potential unreasonable risk of illness or injury. Generally, Class III devices are those devices for which insufficient information exists to ensure safety and effectiveness through Class I general controls and Class II special controls. According to the FDA, approximately 10 percent of medical devices are Class III devices.
Physician entrepreneurs should work with FDA proactively throughout this process. The key determinant for the FDA for approving a medical device to be marketed in the United States is that it be safe and effective. There are a variety of mechanisms to prove a medical device is safe and effective. These include the so-called 510(k) process, the premarket approval (PMA) process and product development protocol. If a physician is interested in using a new medical device solely for investigational use on human subjects (clinical evaluation) and not for commercial distribution, a person may seek an investigational device exemption (IDE) from the FDA.
Getting paid by the payors. Even after getting FDA approval to market a medical device, there is no guarantee that the payors will reimburse the providers for using the medical device. There are two payments involved: paying for the device itself and paying the physician for undertaking the procedure for which the device is used. If a payor does not reimburse the provider for using the medical device, the physician entrepreneur will have to convince their provider colleagues that the cost of purchasing the device is still a worthwhile endeavor for the practitioner—a difficult proposition in this era of diminished payments from payors and increasing expenses of running a medical practice.
A physician entrepreneur needs to focus upon coverage decisions and payor reimbursement issues while still seeking FDA approval. Waiting to start the process for payor reimbursement until after final FDA approval has been achieved wastes valuable time and momentum associated with the introduction to the marketplace of the new medical device.
Depending upon the prospective payor, Medicare, Medicaid and/or private non-government payors, the physician entrepreneur will need to pursue slightly different strategies to attain the goal of having that payor pay (hopefully, a reasonable amount!) a provider to use the new medical device. For instance, if the device is to be used for a procedure that is not listed in the AMA’s common procedural terminology (CPT) listing, then the physician cannot bill for that procedure except for using an “unlisted” category code. It is preferable to have CPT codes specific to the procedure that generally will be recognized by payors as appropriate and paid at levels that are recognized by physicians as acceptable.
Continuing compliance with the law. Once a medical device has entered the marketplace, the physician entrepreneur’s legal responsibilities do not end. The FDA regulates the device manufacturer’s labeling and advertising of the device, its good manufacturing practices, and imposes medical device tracking and reporting requirements upon the manufacturer. When a device is marketed to health care providers who may receive payment from a federal or state health care program, the Anti-Kickback Statute applies. Depending upon the facts, the Stark Statute may be an issue to consider as well.
Bringing a new medical device to market is a fun and exhilarating process. A physician entrepreneur must be sure, however, to take the necessary steps to protect his or her employment and intellectual property rights, develop a sound strategic business plan and work proactively with the FDA and payors to help ensure the medical device is positioned property to make an impact in the marketplace.
Bruce D. Armon, Esq., is an associate who practices health care law in the Business Department of Saul Ewing LLP, and is assistant editor of a book published by the Food and Drug Law Institute entitled, Bringing Your Medical Device to Market.