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The Shifting Shape of Medtech Liability Coverage
To protect their companies, medtech leaders should keep an eye on six factors influencing liability coverage and availability.
Kevin M. Quinley
May 1, 2008
12 Min Read
BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT
The financial success of a medical technology company depends in part on how effectively company executives anticipate and budget for the cost of financial protection. One key component of such costs is the expense of liability insurance. Adroit forecasting and appreciation of the key factors that affect coverage costs can boost the odds of getting the best insurance deal at the lowest cost.
Photo by ISTOCK
Medical device companies need financial protection through insurance coverage—particularly product liability insurance coverage. They strive for the broadest coverage at the most reasonable cost. Failure to meet these twin objectives can subject medtech companies to financial ruin through inadequate coverage or budget-busting outlays for overpriced insurance.
Although medical device executives may not be fascinated by the factors and forces that shape the insurance marketplace, the considerations described in this article can help medtech executives anticipate and manage the cost of risk. Understanding the shaping factors that materially affect insurance costs can help savvy medtech execs skirt the perils of inadequate coverage and overpriced financial products.
Venture capital firms also have a keen interest in seeing their portfolio medtech companies adapt to the key factors that drive the insurance marketplace. Such firms have a strong interest in protecting their investments. It is harmful to the pocketbook and reputation of a VC firm if one of its companies goes bankrupt or fails to thrive due to legal liability.
Beyond the incubator stage, other stakeholders will also want to make sure that medical device firms are not only adequately capitalized, but protected through adequate liability insurance. Such stakeholders include investors, employees, suppliers, and the healthcare professionals and patients who rely on the company's medical technologies.
Medtech Insurance Six-Pack
The following sections explore six factors in the legal, insurance, and technology environment that strongly shape the perceptions of insurers and, by extension, the cost and availability of insurance for medtech companies in 2008.
Medtech executives may not immediately appreciate the reasons that insurance companies do not stratify technologies into categories that correspond to medical specialty fields (e.g., internal medicine, oncology, radiology, surgery) or to the technologies being applied (e.g., imaging, minimally invasive surgery, robotics). The following discussion will help to explain why insurers tend to group products into categories such as invasive or noninvasive, critical-care products or low-risk disposables, and so on.
The Fate of Federal Preemption. After hearing oral arguments in December 2007, this February the Supreme Court ruled in the case of Riegel v. Medtronic, which focused on the doctrine of federal preemption as a defense against state tort claims involving allegedly defective products.1
Federal preemption is a doctrine included in the Medical Device Amendments of 1976.2 In effect, the doctrine states that if FDA has granted a medical device market entry via the premarket approval (PMA) route, neither that device nor its manufacturer is subject to state court jury findings that the product is defective in design or labeling. In other words, federal approval trumps both state law and the power of local juries that might award damages to injured patients due to findings of defective design or warning.
In Riegel v. Medtronic, plaintiff Riegel underwent a procedure using a Medtronic cardiac catheter (a PMA device), which burst after the doctor overinflated it. The patient's arteries were heavily calcified and the device's warnings cautioned that use on such patients was contraindicated.
In February, the Supreme Court ruled for Medtronic, boosting the federal preemption defense for PMA products. Insurers should view this decision positively, and it may make them more open to insuring Class III, PMA devices.
But the Supreme Court's ruling may not be the end of the story. Stung by the Court's acknowledgement of the statutory authorization for federal preemption, members of the plaintiffs' bar and some members of Congress are moving to repeal the authorization in favor of preserving the power of state tort claims.3 If support for such legislation gathers momentum, insurance companies in this niche may reason that it is a chancy proposition to insure certain medical devices. It may prompt them to stop writing insurance on perceived 'higher risk' medical device companies, to avoid providing coverage for PMA products, or to charge hefty premiums for such coverage. In short, Congressional action now being considered could significantly impact—for good or ill—the product liability insurance marketplace for certain medical device manufacturers.
Invasive versus Noninvasive Technologies. Insurance carriers' perception of risk varies according to the degree of product invasiveness. For this reason, the price and availability of insurance coverage for medtech firms also hinge on the degree to which their products are invasive or noninvasive.
Although there are many exceptions to the rule, there is generally a direct but rough correlation between the degree of product invasiveness and the price of product liability coverage. Other factors being equal, noninvasive products tend to enjoy moderate coverage rates. Insurance for medical devices that only temporarily invade the body (for example, catheters or drainage tubes used only for short-term placement) is often priced at a higher rate. Devices that are implanted and reside inside the body tend to require insurance rated at an even higher level.
Implant technologies falling within this highest-priced coverage level include orthopedic implants, prosthetic implants, cardiac pacemakers, implantable cardioverter-defibrillators, left ventricular assist devices (LVADs), stents, and shunts. Such implants pose issues of long-term biocompatibility, potential failure, breakage, leakage, or migration. Since such devices require surgical procedures to deliver them to their intended locations, the doctor's skill and technique represent a related risk and, for medtech firms, a relatively uncontrollable factor in potential adverse outcomes.
Life-Critical and Life-Support Technologies. Another factor shaping insurance coverage, cost, and availability is the degree to which a company's device is life-supporting or life-critical. This method of classifying devices can overlap with the invasive-noninvasive continuum; some life-support products are invasive (e.g., artificial hearts and heart valves) and some are not (e.g., external respirators and ventilators). In the eyes of many insurers, the greater degree to which a device is life-supporting or life-sustaining, the higher its perceived risk and pricing category.
Insurers recognize that life-critical devices offer a small margin for error. In terms of safety and effectiveness, such equipment is not typically permitted a range of tolerances that might allow for near-misses. When life-critical devices fail to perform perfectly, their malfunction may cause catastrophic injury or death.
If an external defibrillator fails to deliver a charge when emergency medical technicians are treating a patient in cardiac arrest, that failure may result in a fatality (and, most likely, a lawsuit). If an internal defibrillator fails to shock the heart back to rhythm in response to a bout of cardiac tachycardia, a serious injury or death may follow. If a sleep apnea monitor fails to respond when a baby stops breathing, a caregiver may not be alerted to the infant's distress, possibly leading to death or permanent brain damage. Such scenarios are grist for the claims mill, leading to expensive settlements, jury awards, and legal defense fees.
Use of Direct-to-Consumer (DTC) Advertising. Nowadays, DTC advertising is no longer used only for marketing pharmaceutical products. Device firms are also jumping onto this marketing bandwagon. Renowned golfer Jack Nicklaus is on TV endorsing hip implants. Ethicon Endo-Surgery has print ads and stadium seat cushions promoting a device for prolapse and hemorrhoids. St. Jude Medical is conducting a print ad campaign for annuloplasty repair products. Siemens advertises its imaging systems. And on Thanksgiving Day 2007, during one of the heaviest TV-viewing periods of the year, viewers watching NFL games also saw ads for the Cypher drug-eluting stent by Cordis Corp., a Johnson & Johnson company.
Such marketing gestures may capture market share. However, insurance companies may be wary of underwriting medtech companies that use this marketing technique, since such ads may come with a product liability price tag. The reason: a key legal defense in medical product liability cases is the 'learned intermediary' doctrine. This doctrine holds that when a device firm warns healthcare professionals about potential side effects, complications, or contraindications related to the use of its device, it may not also be required to warn patients directly. Thus, this doctrine makes it the responsibility of doctors—who are presumed to be 'learned intermediaries'—to thoroughly warn and advise patients as part of the informed-consent process.
Direct-to-consumer advertising remains more common for prescription drugs than for medical devices. Nowadays, however, it is increasingly common for device companies to leapfrog over their learned intermediaries and aim their advertising directly at lay consumers.
But DTC ads create new concerns and legal pitfalls for both medtech firms and the insurers who might consider underwriting them. Many personal injury attorneys argue that if firms advertise directly to consumers, they cannot use the 'learned intermediary' defense. In fact, in a June 2007 case that some attorneys have cited as the worst drug and device liability ruling of the year, a West Virginia court rejected the defense in a Johnson & Johnson case over the nighttime heartburn medication, Propulsid, ruling that,
It is illogical that requiring manufacturers to provide direct warnings to a consumer will undermine the patient-physician relationship when, by its very nature, consumer-directed advertising encroaches on that relationship by encouraging consumers to ask for advertised products by name.4
Such obstacles and pitfalls do not suggest that medtech firms should eschew DTC advertising, nor that firms using this strategy stand no chance of procuring liability coverage. However, the frequent expression of such concerns does suggest that some insurers view DTC advertising in a negative light, and are therefore wary of underwriting such risks. In turn, those insurers may price coverage terms higher than might be the case in the absence of DTC ads.
Company Life Cycle Status. Medical device companies typically go through a number of distinct phases along their paths to becoming revenue-producing firms with approved products on the market. Correspondingly, some insurance companies may have a greater appetite for companies whose products are still undergoing clinical trials than for companies that have already brought their medtech products to market.
A number of factors mold this perspective. First, a clinical-trial-stage company has not yet gone to market with its product. Accordingly, the insurer may harbor a perception of lower risk from claims. Patients participating in clinical trials realize that they are trials, and may not have the same expectations as patients in more-conventional treatment settings. Such reduced expectations can restrain the impulse to sue when treatments prove ineffective or produce adverse outcomes.
Additionally, the process of designing and conducting clinical trials involves informed-consent procedures that tend to be thorough and exhaustive, thereby reducing the likelihood of litigation and boosting defensibility against any claims.
In addition, clinical-trial-stage companies tend not to have the same deep pockets or high visibility as companies that are more fully capitalized and entrenched in the medtech marketplace. In the eyes of many insurers, such reduced visibility further lowers a company's risk profile as a target of product liability litigation.
A company that has successfully completed its clinical trials and received FDA clearance or approval for its product may soon be acquired by a larger company--and then typically folded into the acquiring company's insurance program. Hence, the carrier insuring the clinical-trial-stage firm garners premiums during the relatively safe period of the firm's infancy, sidestepping the risks that may emerge once such a firm has matured and gone to market.
The Insurance Marketplace. The overall condition of the insurance marketplace also influences the cost and availability of liability coverage for medtech companies. Historically, the insurance market has been cyclical, alternating between so-called hard and soft phases. A hard market is characterized by high prices, restrictive coverage terms, and few insurers offering coverage. Soft markets are distinguished by price-cutting, stiff price competition, relatively generous coverage terms, and many players in the niche offering coverage proposals.
Clearly, medtech companies prefer soft markets, which heighten their bargaining leverage. To get a read on the current state of the market—whether it is relatively hard or soft and whether it is turning one way or the other—medtech executives can check with a seasoned insurance broker. Insurance brokers represent insurance buyers. By contrast, insurance agents represent insurance sellers (that is, insurance companies).
The insurance market for medtech companies can be affected by a variety of events, some external to the life sciences realm. For example, major natural disasters such as Hurricane Katrina can result in across-the-board increases in the price of reinsurance, which is the coverage that insurers buy in order to cap their losses at a specified level. The events of 9/11 caused a similar constriction in the market for reinsurance. Such seismic developments can have a domino effect on the cost and availability of reinsurance; in turn affecting the cost and availability of primary insurance.
Insurer pricing can also be affected by well-publicized public health incidents. During the 1970s, for example, litigation involving the Dalkon Shield intrauterine device triggered a tight insurance market for medical device firms. Many underwriters assumed medical devices as a class were too risky, so coverage dried up and prices skyrocketed.
The influence of such events and market trends is no less strong today than in the past. Insurance markets continue to react (or, some might say, overreact) to legal and regulatory developments that mold the perceptions of insurers who might consider underwriting medtech risks.
It is one thing to understand the factors shaping the liability insurance marketplace for medtech firms. It is another thing altogether to be able to change them.
Knowing what is ahead and what factors influence upcoming developments can aid medtech executives in adapting to the changing insurance climate. Anticipating and planning for storm fronts or high cost pressures can position management teams to more successfully navigate the challenges of the perilous liability marketplace.
1. Riegel v. Medtronic Inc. (no. 06-179) 451 F. 3d 104, affirmed (February 20, 2008).
2. Medical Device Amendments of 1976, 21 USC 360c et seq.
3. Medical Device Safety Act of 2008, unintroduced draft of House legislation (March 5, 2008 [cited 22 April 2008]); available from Internet: www.fdalawblog.net/fda_law_blog_hyman_phelps/files/pallone_draft_antipreemption_bill.pdf
4. Johnson & Johnson v. Karl, 2007 WL 1888777 (WV, June 27, 2007).
Kevin M. Quinley is a claims expert and business writer in Fairfax, VA.
Copyright ©2008 MX
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