Violating Manufacturer’s Property Rights Does Not Promote Healthy Competition

Violating Manufacturer’s Property Rights Does Not Promote Healthy Competition

Too often, regulations undermine the competitive process in the name of promoting competition. The ill-conceived Right to Repair legislation exemplify the problems and risks.

Under the pretense of promoting competition, states as diverse as Texas and CaliforniaArkansas and Hawaii have all considered bills that would violate medical device companies’ intellectual property rights. While many have been defeated, some legislators seem intent on advancing one businesses interest over another, which undermines competitive efficiency and, in the case of medical devices, creates risks to patient care.

At issue are the rules and regulations for servicing medical devices such as MRIs, ultrasound machines, CT scanners, and PET systems. According to the aftermarket repair advocates, medical device manufacturers are withholding the necessary resources and information that inhibit them from properly repairing these complicated systems. Allegedly, withholding this information is part of a grand scheme to stifle competition.

Consequently, the maintenance and repair costs for the device owners (e.g., hospitals) could be lower if these repair businesses had broader access to manuals and service tools. Ultimately, the proponents claim that patients are at risk of not receiving the necessarily care unless the so-called Right to Repair bills are implemented.

Their diagnoses of the problem and cure are off base.

So-called Right to Repair bills are predicated on violating the intellectual property rights of innovators by forcing them to turn over proprietary information to their competitors. If implemented, these policies would create unnecessary risks for patient safety, jeopardize the security of medical devices, and discourage continued innovation.

Due to the potential risks to patient safety, Terry Wilcox, President of Patients Rising Now, a 100,000-member patient organization organized 23 other patient groups to oppose the legislation. As Wilcox and the groups wrote: “Compelling original equipment manufacturers to share proprietary servicing information with independent repair organizations that are not required to adhere to the same strict FDA requirements as device manufacturers makes medical devices more vulnerable to malfunction and cyber hacks, which in turn can lead to harm to the patient, device user, and technician or increase the likelihood of inaccuracies and missed diagnoses.”

Speaking to the cyber security risks, my PRI colleague Dr. Henry Miller noted that “the cybersecurity consequences of even a slightly imprecise or careless maintenance job have become increasingly stark.” Unfortunately, third-party servicers are held to lower service standards, therefore allowing these entities inappropriate access to device software “creates unnecessary risks that may undermine the security and functionality of a medical device. Moreover, the risks are multiplied by the fact that complex devices are frequently connected to other devices, databases, and hospital networks.”

Since many repair businesses have failed to comprehend the importance of approaching cyber security as a process rather than an outcome, devices repaired by aftermarket repair advocates contain an unknown security risk.

Perhaps most important from a broader regulatory perspective, the competition allegations are spurious. Policies that violate one business’ property rights to benefit its competitors do not create efficient competitive environments. In fact, when regulations violate the property rights of businesses these policies undermine the foundations of efficient markets and create unintended, but deleterious, consequences.

For instance, this legislation chills the incentives for investing in future innovation because invention, particularly medical invention, is a long and risky process with high capital costs. Companies can better meet these financial obligations when their property rights are secure.

Forcing the medical device manufacturers to give their proprietary information to competitors encroaches upon their property rights, which undermines their ability to cover the costs of capital. A reduced ability to cover their costs of capital is a large disincentive for investors and jeopardizes new potential investments. The result will be diminished innovation in the complicated medical device market, to the detriment of improving patient health in the future.

Despite these problems, it is likely that Right to Repair legislation will continue to be proposed across the states. Consequently, it is important to recognize that these bills do not improve the medical device market’s competitive landscape. If adopted, these policies will impose adverse impacts on patients, innovation, and security that will make things worse, not better.

There are important lessons for broader regulatory policy as well. Regulators must recognize that rules do not promote healthy competition when they disadvantage one company to advantage its competitor. Regulators can best promote market competition by establishing fair “rules of the game” and then empowering companies to compete over how to best serve customers.

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.