By Joe Shrawder
This report originally appeared in the August 2010 issue of DOTmed Business News

The U.S. Department of Commerce's catalog of global trade practices for used medical equipment sums up China's import rules with a single, melancholy sentence: "Refurbished medical devices are not allowed into China."

It wasn't always this way. Until 1998, there were few controls on used medical goods coming into China. But the Chinese still remember, 12 years later, that there were a number of unscrupulous players in our industry. Either directly or through intermediaries, people were selling and importing used medical devices into China that were of poor or shoddy quality - sometimes they didn't work at all.

After a number of consumer complaints, China adopted the ban, and has been quite clear that it doesn't want any such goods coming in.

But while there's no immediate Nixon-in-China moment to thaw the frigid relationship between China and U.S. medical device refurbishers, there are steps businesses can take to make a relaxation of the ban more likely: one of which is to create space for a tough, completely voluntary industry standard that will help China and other countries wary of bringing in used equipment warm up to imports.

China's health care investment

China is undergoing continuous evolution of their policy and priority positions on health care. We've seen over the last two or three years significant commitment to investment in rural health care - health care for the non-urban, non-wealthy population, below the burgeoning middle class. According to recent reports, China's 859-billion-yuan health care stimulus plan (about $127 billion) will fuel a construction boom. China expects to build about 30,000 new clinics and 2,000 county-level hospitals over the next decade.

China will be looking for effective equipment to fill those clinics, and it will also be looking for bargains. Pretty soon, the country will decide it needs heavy private sector participation in order to remake the nation's health care.

Now, when they come to that conclusion, they have three options: one is to encourage the support of multinational companies like GE, Siemens or Philips to more aggressively develop the right new value product at the right prices. A second option is to support or favor domestic manufacturers who already have a low-cost position relative to the multinationals. Generally, that's coming with some compromises in safety, reliability, user interface, quality and overall desirability as well as functionality.

The third option will be open up their market to used medical equipment.

Book mentality

Lest it be forgotten, the import ban isn't the only obstacle in the way of creating a lively, active market for used medical equipment in China. Even if the ban were overturned tomorrow night, there could be problems. For instance, the sale of domestically recycled, reused products is permitted. But it's not a particularly big activity.

That's partly because of how the Chinese look at their assets. They're more inclined to really attribute a book valuation rather than a market value: trading in a system, reselling a system for market value, for below their book value, is still difficult in their accounting approach in most cases.

For example, if a hospital buys a million-dollar piece of equipment, and it has a book value of $300,000, and the hospital wants to turn around and resell it a few years later, nobody's willing to pay for the real market value of say $100,000 or $150,000. In fact, the hospital is not legally permitted to sell it at that price, because it's an asset of the state government of China. They have to declare it obsolete or unusable. This is all part of safeguarding the state assets from corruption. For instance, if an official sells the equipment for under the book value, for, say, $150,000, they could get a kickback from somebody for $50,000 - and that's ultimately government money going into somebody's pocket.

The consequence of all of this is fewer systems in China are trade-in eligible, and the mechanism for selling used systems isn't as mature as elsewhere in the world.

Petitioning for change

Setting these structural problems aside, could the medical equipment industry convince China to drop its import ban?

Other industries have challenged China's refusal to import certain used products-and won. For instance, refurbished heavy equipment imports were forbidden, but Caterpillar fought them. They went to the World Trade Organization and went to the U.S. Department of Commerce, and enlisted some help overturning China's restrictive trade barriers against refurbished parts.

Accordingly, Caterpillar has some importation of used or remanufactured heavy equipment and they do some local remanufacturing.

But there's a difference between that and medical devices, because people will always throw up the safety flag on medical devices. For bulldozers, there may potentially be a risk to the operator, but the risks are obviously much lower than for a medical device.

The WTO requires open markets and absence of trade barriers. But nothing in the WTO charter prevents countries from regulating import and movement of goods for safety reasons.

What China will say is: we're generally open to the import of medical devices, and we don't impose high duties on new devices from GE, Siemens, Toshiba or Philips. We're restricting used or refurbished products, not because we're protecting a market, but because we're concerned about quality or safety. It's a much longer, tougher argument for the WTO to prove conclusively China is wrong on safety.

Helping China change import controls

Where it stands right now: in China, they have nothing in place for their import controls to distinguish between an untested used medical device, and one that's refurbished or remanufactured, and proven to be either at a minimum quality standard, or equivalent to new.

That's where a voluntary industry standard could come in.

COCIR, the European Coordination Committee of the Radiological, Electromedical and Healthcare IT Industry, an industry group made up of OEMs, has put forth a good refurbishing practices document. In essence, it's a pledge to follow rigorous quality management measures. It's not an industry standard, but it should lead to the creation of one.

Independent, non-OEM players tend to disfavor it: they feel it is in some respects difficult to comply with. And it is. But that's the point. China and some other countries are looking for something that's difficult to comply with, to sort out the good from the bad. If it's easy to take a piece of used medical equipment and turn around and have it considered "refurbished," it probably isn't good enough and hasn't been through rigorous quality control. [pull-quote]

And it's not just China. Brazil's concerned. Indonesia, Vietnam, Thailand, Egypt, Morocco, South Korea, Turkey and Algeria are concerned. There are a handful of countries that are advanced enough to have some regulation around medical devices and have decided to somehow restrict or prohibit import of some used goods, but are not sophisticated enough to discern used from refurbished or remanufactured.

A regulation to hang your hat on

On a global basis, COCIR's industry standard wouldn't be obligatory at all. But in markets that are otherwise closed, it gives their politicians a way to say: "OK, at least for starters, I'm going to open it for a limited extent. I'm going to use this standard as a guideline."

A big part of this is there are regulators in China who do see refurbished, remanufactured goods as a good thing - they're forward-thinking people, they know the rest of the world is taking advantage of this and saving money, but they're not. They have millions of poor people having to pay too much for health care because they have this key segment not represented there.

But politically, nobody wants to be the one to suggest opening the market, and have something bad happen again. But having a standard may give a lawmaker the will to stand up and say: we're not talking about casual opening of the border to whatever might come in, but rather a very thoughtful standard followed by respected companies. It gives them something to hang their hat on, and show they're not bending to the wishes of foreigners who want to come in and take over part of the market with what local competitors might try to portray as just foreign junk.

Tough, but voluntary

COCIR's proposal calls for a thorough quality management system, which is not the same as a quality control and inspection system. It would result in remanufactured products that must be as good as new, with thorough documentation and for the seller, responsibility, perhaps, of postmarket surveillance, in case there's a recall or a needed update. Most importantly, performance of the system has to be indistinguishable from one coming off the production line.

While that's not something that only the OEMs can do, it does require some scale in order to justify the investment in it.

This could be hard if your participation in the used equipment market is one of opportunity. It won't work if your thinking is, I can pick up one or two of this type of system and tomorrow it's one or two of that type of system. If the rules are that for each one of those, you have to have a quality-validated process for how each of those types of systems gets reprocessed, it might not be feasible.

But if you're a bigger player - not GE-sized, but if you're doing several of the same types of systems, and have some flow, or if you specialize in a certain device, brand or model, then you'll cover the cost of the investment. And quite possibly, have access to some international markets that, for now, remain shut.

Joe Shrawder is the general manager for GE Healthcare Systems Services. He has been with GE for almost 25 years, and with GE Healthcare since 2001.