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Product Liability and Medical Device Regulation: Proposal for Reform SUSAN BARTLETT FOOTE The revolution in medical device technology in the last two decades has not occulted in a policy vacuum. This paper focuses on two very different and comprehensive public policies product liability and regulation that have emerged in response to the growing availability of medical devices. Congress passed the Medical Device Amendments of 1976 (P.L. 84-295; 90 Stat. 539 [codified at 21 U.S.C. 360cI) to promote the safety of new technological products. Since that time, there has been an increasing number of product liability cases in state courts, including lawsuits against medical device manufacturers. The goals of product liability are broader than those of regulation, and include compensation of individuals, deterrence of unsafe products, and punishment of socially irresponsible firms. Although both systems reflect deeply held American values, neither has fully achieved its goals. Moreover, medical devices are subject to these two regimens simultaneously; serious distortions have occurred as the two interact. Both systems have been controversial and have generated heated debate, and proposals for reform have proliferated in recent years. This paper presents an analytical framework from which the strengths and weaknesses of product liability and regulation, as they affect medical devices, can be appraised. The framework is premised on two observations: First, the values underlying product liability and regu- lation serve both individual and social functions. The primary goal of individuals is to receive compensation for product-related injuries. Plaintiffs initiate lawsuits because they may offer the only source of money to cover expenses related to their injuries. Tort law also has 73

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74 CURRENT TRENDS social functions, which include punishment of irresponsible producers and deterrence of future harmful actions. Regulation benefits society by deterring the production or use of unsafe products, mandating disclosure of information, and punishing irresponsible corporations. Much of the dissatisfaction with product liability and regulation as they relate to medical devices arises from inefficient allocation of these individual and social functions. The second fundamental observation is that medical devices should be distinguished from other consumer products for purposes of policy reform. Medical devices present unique issues, and their special nature led to the passage of medical device legislation. Drugs and devices are the only consumer products subject to intense scrutiny through a federal agency such as the Food and Drug Administration (FDA). (Although there are many similarities between pharmaceuticals and medical devices, it is beyond the scope of this paper to analyze drug issues.) In addition, medical devices are an integral part of the health care system that provides essential services to the American public. All policies that directly or indirectly affect medical devices must acknowl- edge their impact or the health care system as a whole. For example, if product liability suits raise the costs of particular products, this result must be evaluated against the public's demands for widespread access to advanced medical technology and the real cost constraints that government and third-party payers face. Effective policy reform requires an understanding of the individual and social functions underlying product liability and regulation gen- erally, and in relation to medical devices specifically. The framework presented here offers justifications for these fundamental distinctions and sets the stage upon which the specifics of policy reform for medical devices can be debated. INDIVIDUAL AND SOCIAL FUNCTIONS: THE LIMITS OF REGULATION AND PRODUCT LIABILITY The primary purpose of federal safety regulation is to deter behavior that unacceptably imperils the general public (Breyer, 1982; Lowrance, 19761. The Medical Device Amendments of 1976 are a classic example of social regulation. Congress authorized the FDA to regulate all medical devices to ensure that these products were safe and efficacious (21 U.S.C. 360c). The law created a three-tiered classification scheme; only devices that pose the most significant safety risks must meet premarket approval standards equivalent to new drugs. However, all medical devices are subject to general controls during production and

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PRODUCT LIABILITY AND MEDICAL DEVICE REGULATION 75 after the product has entered the stream of commerce. These controls include the federal government's power to order recalls, notification of defects, and repair. Because of the difficulty of uncovering all device-related problems before marketing, the authority to acquire information on medical devices in the marketplace and to respond to newly discovered public health risks is a critical FDA responsibility. The medical device law has been in place for over a decade. Implementation of the law has not been without controversy: Congress expressed dissatisfaction with FDA's commitment to device regulation in 1983 (U.S. Congress, 1983~. Bills to improve the law have been proposed (U.S. Congress, 19861. Although the basic premises of the legislation are sound, problems have arisen because of limited regu- latory tools primarily postmarket surveillance constraints, shifting political philosophies that have led to inconsistent enforcement, in- sufficient financial resources at FDA, and some cumbersome proce- dures, particularly in the area of standard-setting. Unlike the purely social functions of regulation, tort law has a more diverse mandate. Generally defined, tort law encompasses civil wrongs where one person's conduct causes injury to another in violation of a duty imposed by law (Kionka,.19771. The principles of tort law developed within the common law tradition, evolving through state court judicial decisions. In the context of product liability, tort law encompasses both negligence, based on fault, and strict liability, which is premised on no-fault principles (Prosser and Keeton, 19841. It is generally agreed that tort law has three major functions. A primary goal of every product liability suit is to compensate deserving victims of accidents by awarding compensatory damages. These damages can include economic losses such as medical expenses or lost wages, and noneconomic losses such as pain and suffering. This is tort law's response to individuals. In addition, tort law seeks to deter socially undesirable conduct. In the context of medical devices, the goal is to prevent the production of unsafe products that cause harm (Sugarman, 19851. This goal benefits society generally, not injured individuals. Implicit in the concept of deterrence are notions of justice. In some instances, tort law punishes individual corporations for socially unacceptable behavior by seeking redress. In a civil system, such punishment occurs through assessment of punitive damages. Finally, there are traditional economic justifications for tort law; these also benefit society generally. First, resources are allocated efficiently by attributing the social costs of accidents to those who "cause" them for example, irresponsible corporations. Alternatively, tort law may spread the costs of accidents widely to mitigate the rise

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76 CURRENT TRENDS in prices that would occur as the costs of harm are internalized (Calabresi, 19701. If the legal system is efficient, both individual and social goals of tort law will be met. Tort law, however, fails to meet these goals generally, and fails to meet them in relation to medical devices specifically. Admittedly, this conclusion is drawn on what is generally recognized to be limited statistical data (American Bar Association, 19871. Information on product-related injuries is sketchy because injuries may go unreported. Lawsuits may provide additional facts, but over 90 percent of such suits are settled out of court; insurance information on settlements is not public information. Trial court rulings are not generally reported- only appellate opinions are widely available. Although there is some dispute regarding the actual state of affairs in tort law, we do know that insurance rates, the number of cases filed, and the amount of jury awards have all been rising in recent years (Peterson, 19871. Product liability law has had an impact on medical device users and producers. Improvements in FDA's reporting system have led to increases in notifications of potentially hazardous device-related inci- dents, although severe underreporting still exists (General Accounting Office, 19861. Recalls of medical devices have been rising as well. Costs of liability suits have been directly responsible for at least one bankruptcy (A. H. Robins Co., producer of the Dalkon Shield), and some firms have left medical device fields because of liability costs, for example anesthesia device producers and vaccine manufacturers (Rordamor, 19841. Though incomplete, sufficient information exists to draw general conclusions. First, product liability does not compensate victims of accidents fairly or equitably. Studies show that arbitrary factors such as geography (Danzon, 1984), quality of lawyers, and wealth of defendants result in similarly situated plaintiffs receiving very different awards (Fleming and Sugarman, 1980; Sugarman, 1985~. A capricious relationship has been shown to exist between the amount plaintiffs' recover and the seriousness of their injuries (Fleming and Sugarman, 19801. The legal system also exacts a terrible toll on injured people because of long delays between injury and recovery and the risk of no recovery after protracted litigation. Injured people receive lump sums instead of payments as they need them. Sugarman (1985) has argued persua- sively that, when plaintiffs are compensated, tort law compensates them in a whimsical, arbitrary fashion, similar in many respects to a lottery. Compensation of individuals for device-related problems illustrates these general observations. First, similarly situated plaintiffs in mass

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PRODUCT LIABILI7'Y AND MEDICAL DEVICE REGULATION 77 tort casesfor example, the Dalkon Shield, pacemaker, and toxic shock/tampon suits received vastly disparate awards. The awards often depended upon when the action was filed and where the case was brought. Second, producers view the product liability system as unpredictable; it can as easily deter the production of desirable products as discourage undesirable ones (Eads and Renter, 19831. In the area of health-related products, valuable innovations have been lost or delayed. Critics point to areas of contraceptive research, vaccine development, and anes- thesia devices as having been particularly affected by unpredictable liability consequences (Galen, 1986; Rordamor, 19841. Additionally, conflicting rules among the 50 states exacerbate the uncertainty of the liability system. It is no wonder that firms treat liability as "random noise" (Eads and Reuter, 19834. This is a particular problem under strict liability, which holds a manufacturer liable even in the absence of fault. In Greenman v. Yuba Power Products, Inc.~i the California Supreme Court extended strict liability to product-related injuries for the first time. Applying the principles in a later case, Barker v. Lull Engineering,2 courts found products defective if they fail to perform as safely as the user would expect, or if the defendant cannot prove that the benefits of the design outweigh the risks. The Restatement of Torts, a compendium of the views of leading legal scholars, recommends limiting application of these principles to products that pose generic risks so-called "una- voidably unsafe" products3 and cites vaccines and drugs as examples of such products. Some state courts have consistently upheld this exception to strict liability; others have not. In Beshada v. Johns- Manville Products Corp.,4 the New Jersey Supreme Court held that a state-of-the-art defense is irrelevant for strict liability; manufacturers are responsible for failure to warn of dangers that were undiscoverable at the time of manufacture. While there continues to be uncertainty among the jurisdictions on this issue (Page, 1983; Schwartz, 1985), there is also uncertainty within certain states. For example, the California appellate courts have been inconsistent in regard to medical devices. In the most recent case involving the drug diethylstilbestrol (DES), Brown v. Superior Court,5 the appellate court held that strict liability does not apply to drugs with unexpected side effects. Thus, plaintiffs could only use a theory of negligence to sue the producer. However, in West v. Johnson & Johnson,6 a case involving toxic shock syndrome related to the use of tampons, the court allowed the victim to use the "consumer expec- tation" test derived from the Barker v. Lull Engineering2 principles of strict liability. The court did not address the question of whether it

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78 CURRENT TRENDS is proper to use this test when the danger was unknowable at the time, as the defendant company argued. Nor is there discussion of whether the recommendations of the Restatement of Torts might be restricted to drugs and vaccines, and therefore be inapplicable to medical devices. The point, however, is clear: There is uncertainty for medical device producers in the liability system. In addition to compensating individuals for device-related problems, product liability suits may also seek to punish corporations for egregious behavior through the imposition of punitive damages (Mallor and Roberts, 19801. Studies document a growing tendency to award punitive damages in product liability cases (Peterson, 1987; but see Daniels, 19861. An interesting anomaly occurs, however, because of the mingling of individual and social goals in tort. Litigation involves disputes between an individual and a producer. Traditionally, court awards simply transfer damages, including any punitive damages, from the defendant to the plaintiff. Thus, some plaintiffs receive windfall awards in addition to the monetary damages intended to compensate them fully for their injuries. Critics question the merits of a system that "punishes" a company by conferring these monetary judgments on fully compensated individuals. Punitive damages have been awarded in a number of highly visible device cases: $3 million against an anesthesia device producer (Airco v. Simmons First National Bank),7 $1.35 million against a tampon producer (O'Gilvie v. International Playtex)8 and several million dollars against A. H. Robins, the producer of the controversial Dalkon Shield (Schwadel, 19851. One can argue that there should be mechanisms to chastise certain producers, yet can question whether this particular tool is efficient or rational. Finally, there is little dispute that tort law is inefficient. Transaction costs have been described as "fabulously expensive" (Sugarman, 19851. Generally, less than half of the premiums paid for liability insurance go to compensation. The Inter-Agency Task Force on Products Liability estimated that 40 percent of premiums go for underwriting expenses and profit and 20 percent of premiums go for loss-adjustment expenses; this leaves only 40 cents of every premium dollar available to compensate victims (cited in Fleming and Sugarman, [19801~. Economists have argued that these costs should be internalized, and the cost of accidents should be reflected in the price of a product or activity. Products or activities with higher accident rates will therefore be less attractive in the marketplace. But medical devices are part of the health care system and are not part of a free market system. Much of the costs of medical devices will be borne by public payers, private insurers, of- employers. Moreover, it is frequently impossible to assign, and therefore internalize, accident costs to a specific product. It has been noted that:

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PRODUCT LIABILITY AND MEDICAL DEVICE REGULATIO1Y 79 [I]n the case of a dangerous drug, not only would the drug in all likelihood be totally withdrawn from the market after its risks have been discovered but the cost of compensation would in any event probably be spread among all or most other products of the particular manufacturer, with the result that the consumers of the safe drugs would in eject be bearing the accident costs of the dangerous drug. In a theoretical free market, this "externalizing" of the cost might be blocked, but often and prescription drugs is a good example- such a hypothesis is wholly unrealistic (Fleming and Sugarman, 19801. Finally, uncertainty costs are a fundamental element of inefficiency. The tort system carries great uncertainty for producers. As Fleming and Sugarman persuasively wrote, tort encourages investment in litigation rather than investment in safety. DISTORTIONS CAUSED BY INCONSISTENCIES BETWEEN REGULATION AND PRODUCT LIABILITY Supporters of the present product liability system may argue that, in the absence of alternatives, a flawed compensation system is better than none at all. Justifications for retaining the present liability system, however, weaken in the face of distortions caused by interactions between regulation and product liability. In theory, there is no conflict between the goals of product liability and regulation generally, or in relationship to medical devices specifically. Although their institutional structures and mandates are quite different, both tort and regulation seek to deter the production or use of unsafe products. Tort law has the additional goals of compensation and punishment. In practice, however, the interplay between these two institutional regimens creates tensions that can undermine the success of each. Every well-intentioned producer wants to make a "safe" product. The conclusion that a particular product is "safe" is a value judgment (Lowrance, 19761. Once the risks of a product are measured, it will be considered "safe" only if the risks are found to be "acceptable" when weighed against the benefits. The problem facing producers is that a regulatory evaluation of safety is very different from a judicial one. The FDA, as regulator, is concerned with public health; its focus is on broad social policy. Scientists on the agency staff aided by advisory panels of independent expertsevaluate products prospectively. The agency does have some postmarketing remedies if defects are later uncovered, but these remedies do not involve compensation for harm. Product liability cases are initiated by individuals whose primary interest is compensation for their injuries. This view is retrospective; the harm already has been incurred. The opportunity for compensation is contingent on a finding that the product is unsafe, and there is

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80 CURRENT TRENDS enormous pressure for the court to make a finding in order to compensate. It has been noted that "in demanding such explanations, tort lawyers may press scientists beyond their capacity to provide answers" (Abraham and Merrill, 19861. The intensely individual func- tion of product liability is reflected in the nature of the jury system: a jury of one's peers, confronted with an injured individual and a faceless corporation, may press for a conclusion of liability in order to compensate. Product liability law also requires that the allegedly unsafe product cause the harm. The pressure to compensate an individual encourages judicial decision makers to link the harm and the product, resulting in rules of evidence that substitute "legal sufficiency" for scientific certainty. This was recently illustrated in Wells v. Ortho Pharmaceu- tical Co.,9 in which the court held: A cause-effect relationship need not be clearly established by animal or epidemiolog~cal studies before a doctor can testify that, in his opinion, such a relationship exists. As long as the methodology employed to reach such a conclusion is sound, . . . products liability law does not preclude recovery until a "statistically significant" number of people have been injured or until science has had the time and resources to complete sophisticated laboratory studies of the chemical. Law turns scientific method on its head. As the New York Times editorialized: These "decisions are of great concern to the medical community because they indicate that the courts will not be bound by reasonable scientific standards of proof" (New York Times, December 27, 1986~. Deviation from scientific principles also occurs because decisions are made by laypersons the judge or jurors. Differences between concepts of regulatory and legal safety are acknowledged by the treatment of regulatory conclusions in court. It is well accepted in most jurisdictions that "mere" compliance with federal or state regulations does not preclude a jury from concluding that the product is unsafe, either because the design is defective or the warnings inadequate (Ferebee v. Chevron).~ Courts may draw these conclusions even if the FDA has mandated the precise language in the warning labels and has determined that the product is safe and effective. Even where states have interpreted case law to mean that a medical product that meets FDA requirements is not defective for purposes of strict liability, one trial lawyer asserted that "an effective presentation can be made in court that the FDA's standards for medical devices do not preclude recovery since they are so ineffectual as to be virtually meaningless" (Ramsey, 19861. Many jurisdictions treat the failure to comply with any FDA requirements as per se negligence. In

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PRODUCT LIABILITY AND MEDICAL DEVICE REGULATION 81 essence, there are no positive incentives for producers to comply fully with FDA requirements. Compliance provides no protection in a court of law. In addition, the unpredictable judicial climate undermines the FDA's goal of disclosure of information, particularly once the product has entered the stream of commerce. Although manufacturers are required to report adverse reactions, health care providers report such reactions on a voluntary basis. And information submitted to the FDA is never rewarded; the company faces enormous risks upon reporting. For example, plaintiffs' attorneys often can acquire reported information. Rather than encouraging a free and frequent flow of information, including information that may ultimately prove that a product is not defective, the opposite occurs (General Accounting Office, 1986~. While the public should not be foreclosed from access to information on risks, this must be balanced against the need to encourage a free flow of information that can be used to make effective public health policy. Scientific improvements and protection of public health depend upon information; yet, providing such information in a volatile liability environment may be more threatening to producers than would non- compliance with FDA reporting requirements. This problem is exacerbated by the fact that product liability law does more than merely compensate. In the name of deterrence and punishment, individual plaintiffs may receive windfalls in the form of punitive damages that are intended to serve a social function. But the social goal of information gathering is threatened by pressure from individuals and their lawyers for compensation. These inconsistencies could be reduced if the compensation function now served by tort law were separated from the broader social functions poorly served by inconsistent tort and regulatory principles. In the process, we might develop more efficient mechanisms for meeting both individual and social goals. MEDICAL DEVICES AS A SPECIAL KIND OF CONSUMER PRODUCT: A FRAMEWORK FOR APPROACHING REFORM At present, medical device regulation and product liability rules have inefficiently and ineffectively addressed both the individual goal of compensation and the social goals of deterrence and punishment. Realignment of the responsibilities of regulation and product liability will lead to a better fit between the desired goals and the processes by which they can be achieved. But to accomplish this, medical devices first must be distinguished from other consumer products. There are two compelling reasons to

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82 CURRENT TRENDS make this distinction. First, medical devices are an integral part of the health care system. Any policies that affect devices ultimately affect health care. As we have seen, imposition of costs on particular products, especially in the inefficient manner provided for by the court system, will raise the prices of these products, classes of products, or products produced by particular firms. Because 40 percent of all medical technology is paid for by the government, higher product prices may convict with federal efforts at cost-containment. Higher prices also may reduce the availability of desired products and impede their diffusion to all who need them. Ignoring the interface between medical devices and medical care is short-sighted and, in the long run, may reduce innovation and be destructive to values of access and equity. A second justification for realignment is the presence of the FDA. The regulatory authority of the FDA is clear testimony to the fact that, as a society, we consider devices qualitatively different from other consumer products. For decades, the FDA has played a crucial role in protecting the public health through regulation of drugs and devices. Given its size, expertise, and jurisdiction, reform proposals should take advantage of the FDA's unique potential to protect health and safety. A number of proposals to change various aspects of regulation and tort have been presented. While some contain interesting features, none address the unique problems of medical devices or acknowledge the importance of both social and individual values inherent in regu- lation and tort, and the tensions between them. Although deregulation has been a rallying cry in recent years, no one has seriously called for dismantling FDA regulation and substituting exclusive reliance on tort. If anything, there has been pressure for more and better regulation. FDA received a scathing review of its performance in a congressional report in 1983; the House Report accused FDA of "cavalier disregard for potential consequences" and "bureaucratic neglect for public health and safety that shocks the conscience" (U.S. Congress, 19831. However, there has been significant activity at both the federal level and among the states to alter product liability rules. Congress has held many hearings on the issue, and a number of bills have been introduced during the 1980s (Foote, 19861. In these proposals, manufacturers of all types of products have sought to limit their liability exposure. Consumer groups have generally opposed these efforts. Pharmaceutical and medical device manufacturers, however, are subject to FDA requirements designed to protect public health. The Pharmaceutical Manufacturers Association (PMA) and the Health Industry Manufacturers Association have lobbied for provisions that

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PRODUCT LIABILITY AND MEDICAL DEVICE REGULATION 83 recognize the conflict between regulatory policy and tort. PMA pro- posed a government standards defense, arguing that the process of premarket approval for new prescription drugs and other regulated products should be an acceptable defense for both compensatory and punitive damages in a tort case (Health Industry Manufacturers Association, 1985; Pharmaceutical Manufacturers Association, 19861. However, these proposals overlook the widely held public belief that people are entitled to compensation for harm, particularly harm caused by negligence. Individual citizens may oppose the trends in tort law without compromising a belief in some form of compensation. And, unlike all other industrialized societies (many of which have more restrictive tort rules), the United States has no comprehensive social insurance net for injured victims other than for workers injured on the job. In the absence of alternative mechanisms to compensate, proposals to limit compensation through the tort system appear self-serving and are politically unrealistic. Some reformers, recognizing the general limitations of product liability, have proposed comprehensive accident compensation plans similar to those in New Zealand and other Western countries (Sugar- man, 19851. These proposals would protect the value of compensation for individual harms and may be feasible. Given the federal deficit, however, the uncertain costs of new widespread compensation pro- grams of this magnitude make them politically impractical. Yet it can be argued that more limited alternatives addressing health care issues may be essential to protect health care delivery, even if only as interim solutions. Other reformers have proposed substituting private sector initiatives for public solutions, such as trading contract rights to sue (O'Connell, 19841. While these proposals may be intrinsically interesting, there appears to be no significant support for eliminating the government's role as guardian of public health and safety. It is my view that we need new, creative approaches to medical device policy. The following proposal incorporates the fundamental principle essential to rational reform: Individual and social functions need to be decoupled in a framework that treats medical devices as a special kind of product. Within this boundary, the discussion will identify the areas in which further debate must take place. Overview of Reform Proposal Figure 1 illustrates the broad contours of a proposed institutional realignment. First, three stages are described that provide a road map

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84 FOOD AND DRUG ADMINISTRATION Premarket Postmarket Safety/ Update safety efficacy data review Remedies Develop incentives .... Expand jurisdiction .. to foster compliance . .. and incentives for reporting.. Injury claims 1 1' Theory of compensation Awards Source of $ Procedures FIGURE 1 Proposed institutional realignment. CURRENT TRENDS :::::::::::; ~::~:::' Compensation Board Actions against companies (redress / deterrence) Administrative or judicial Civil penalities or criminal penalties $ Judgments Fines Imprisonment for reform. Issues that will need to be resolved in each stage also are identified. At stage 1, FDA would retain its present premarket and postmarket authority over medical devices. In addition, incentive systems would be developed to foster compliance with FDA regulations and to improve the flow of information to the agency. FDA would thereby retain its important social function of protecting the public health by regulating all medical devices.

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PRODUCT LIABILITY AND MEDICAL DEVICE REGULATION 85 Stage 2 creates a new administrative mechanism for compensating individuals harmed by medical devices. A Compensation Board would receive injury claims from individuals. This board would have access to the FDA data and expertise. The purpose of this compensation scheme would be to provide uniform, expeditious, and equitable awards for individuals injured by medical products and to separate compen- sation of individuals from other social goals. Stage 3 creates new mechanisms for meeting the social goals of redress and deterrence. Individuals would no longer have the right or the responsibility to redress social grievances through the product liability process. The FDA, the agency entrusted with protecting public health, would bring claims against corporations for corporate behavior determined by law to be socially irresponsible. Like the Securities and Exchange Commission, the FDA would become the watchdog for society at large. The Stages Described: Issues for Debate Stage 1 During stage 1, FDA would retain the general contours of its present mandate. However, several reforms could resolve some of the existing tensions within the liability and regulatory systems. New rules would be designed that provide positive incentives (in addition to the negative sanctions) for complying with FDA procedures, both before marketing and after approval. Thus, companies would benefit from fully coop- erating with FDA. The public also would benefit from more timely and complete information on medical device hazards. The positive incentive for compliance with FDA during stage 1 would be the creation of a defense to, or a bar against, actions for redress at stage 3. Thus, companies would know that no punitive damage awards or other civil or criminal penalties would be assessed if they comply with the FDA. However, compliance would not prevent injured parties from receiving compensation at stage 2, if all the requirements of that process were met. In summary, rules would be drafted that provide greater certainty to producers, better information, and increased compliance (more safety), with little increased regulatory costs. With greater certainty, liability insurance may be cheaper to purchase, and some companies with conscientious compliance systems might even be willing to self- insure, knowing that their liability would be limited to compensation claims. One issue to consider at stage 1 is the possibility of extending FDA mandatory reporting requirements to health care providers. While

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86 CURRENT TRENDS providers are most likely to know of defects in, or problems related to, medical devices, they now are not required to report them to the FDA. The threatening liability environment discussed in relation to manufacturers also applies to physicians and other providers. The absence of good provider data is a weak link in the FDA information bank and is illogical if accurate information is the goal. However, this proposition would involve the federal government even more deeply in decisions of health care providers, and could prove excessively burdensome. Stage 2 Stage 2 makes a major change in the present compensation process, shifting compensation decisions from the courts where it is inappro- priately imbedded in social policy and burdened with inefficient processes to an administrative federal agency. The challenge is to create a system that is faster, fairer, and more efficient than the present one. Several major issues need to be resolved. First, who decides? The Compensation Board must be an expert, independent, and diverse body that would administer the rules credibly. There are many possible models. For example, the Federal Trade Commission (FTC) has established an autonomous body of adminis- trative law judges that have expertise in FTC policy but are independent of FTC policymakers. A similar semi-independent board could be established with access to FDA data and FDA expertise. The individuals on the Compensation Board could develop expertise over time, as do hearing officers for the Social Security Administration and the FTC, and could be assisted by an advisory board established to review decisions (see Figure 21. There are a number of models for such an advisory board, including the Prospective Payment Assessment Commission, which is a 15-person permanent independent commission with members representing various sectors of the health care industry. FDA itself has significant experience in the management of technical advisory panels that assist in FDA decisions. The second issue to be resolved is what the Compensation Board's operative theories of compensation will be. Elements of the compen- sation theory include principles for compensation, types of awards, and sources of funds for these awards. The goal would be to provide some monetary recompense for injuries caused by medical devices. Debate will center on whether the system should be no-fault, like workers compensation, or fault-based, like negligence law. There could be a blending of the principles of compensation with the nature of the awards. For example, if the injury were generic to the product and

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PRODUCT LIABILITY AND MEDICAL DEVICE REGULATION - Compensation Board Structural issues Independent Expert Diverse Individual claims Compensation Claims Process 1. Theory of compensation - Fault/no-fault Compensation \ Redress/ ice \ - Awards/economic noneconomic - Source of funds industry-wide individual companies public funds 2. Procedures - Written claims - Open hearings - Health advocates - Lawyers - Appeals Actions to Redress or Deter 1. Who initiates 2. Theories of redress 3. Procedures - Administrative - Judicial 4. Remedies FIGURE 2 Proposed Compensation Board, shifting compensation decisions from the Courts to an administrative federal agency. not based on fault, the award could be for economic losses only (i.e., medical costs, lost wages, etc.), with reductions for medical payments covered by insurance. Under a fault principle, the award could be higher and could include other losses such as pain and suffering. At no point would there be awards for punitive damages in stage 2, because these awards serve a purely social, not an individual, function. It is important to remember that the entire theoretical structure can be designed to balance the goals of compensation with the competing values of access and cost-containment for all individuals. Development of appropriate theories of compensation and the 87

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88 CURRENT TRENDS procedures to implement these theories would be the most challenging tasks. If the system is fault-based, the language and processes of law inevitably would enter the system. At worst, the tort system would simply be replicated in a new forum. On the other hand, a no-fault system raises the spectre of excessive claims, possibly including efforts to transfer injuries caused by user error (still subject to the tort system) to the product in order to take advantage of the cheaper and more streamlined administrative process. Further work is clearly necessary to resolve these concerns. The success or failure of proposals of this type depends, to a large extent, on careful articulation of the theory of compensation for harm. The third issue to be resolved concerns the source of funds. There are several alternatives. For example, no-fault awards could be paid from general industry contributions based on assessed fees (size of company, dollar amount of sales, etc.~. This would spread the costs of unexpected adverse reactions as widely as possible across the medical devices industry. An alternative would be to establish a public fund, perhaps supplemented with private money, for unintended, unexpected adverse reactions (in effect, a public-private partnership). In either case, individual firms would be responsible for any injuries that are determined by the Compensation Board to be the firm's fault; the board could bill them for awards assessed against them during a given calendar year. Proceeds from any civil liability assessed at stage 3 could be added to the fund and used to defray administrative costs. The Compensation Board would administer the medical device com- pensation fund, paying successful claimants on a continuing basis rather than with a lump sum, when appropriate. The final issue to be resolved in stage 2 is the procedures that will be used by the Compensation Board. Claims could be in the form of written petitions or hearings. Written petitions would be cheaper to process than public hearings and may be sufficient for most, if not all, claims. The important point would be to reduce or eliminate legal aspects of the compensation process and concentrate on medical issues. This would be a medical, not a legal, inquiry. Primary data would include the facts of the case; medical records; and sworn affidavits of injured individuals, witnesses, and medical device man- ufacturers. One could argue that judgments should be based only on scientific principles of cause, but such a requirement may preclude recovery for significant numbers of individuals. Once again, policy trade-offs would be crucial; how much money can or should we commit to these claimants, given the overall impact on the costs and concom- itant availability of health care? A system that limited compensation too narrowly would be opposed by consumers; a system that paralleled

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PRODUCT LIABILITY AND MEDICAL DEVICE REGULATION 89 too closely the tort system would not be an improvement. Unlike the uncertainty of the tort system, however, rules of procedure for the Compensation Board could be carefully developed in advance, bal- ancing the needs of the individual against the impact on corporations and the health care system as a whole. In developing institutional structures, several critically important issues must be kept in mind. First, the goal is equitable, efficient, fast, and fair compensation. Elimination of unnecessary procedures, de- velopment of rules of compensation and schedules for multiple claims, and streamlining and simplifying the process are all important. The overall need is to develop a compensation system that can satisfy the public's need for compensation for harm without compromising the important values of medical device innovation and health care access and distributional equity. Stage 3 Redress of grievances fulfills a social function. The criminal law system illustrates this point. Victims of crime cannot punish the perpetrators; prosecution and punishment are public functions. Simi- larly, it can be argued that the FDA, as guardian of the public health, should have an exclusive right of action against companies that deserve additional sanctions beyond compensating injured individuals. This proposal raises several issues: Can the FDA be trusted to bring cases against regulated industries? Agency inaction when action is appro- priate would undermine the important goals of deterrence and redress. Although the FDA has not demonstrated such tendencies, implemen- tation of new regulatory tools is always somewhat unpredictable. Various mechanisms could be created to encourage the FDA to take appropriate action. For example, a unanimous Compensation Board recommendation to pursue stage 3 sanctions could automatically trigger them. The commissioner of the FDA, or the secretary of the Department of Health and Human Services, could have the discretion to bring sanctions. Individuals and public interest groups could petition the agency to act; however, they would have no individual right of action. If a decision were made to pursue redress in a particular case, what actions would be available? Although the FDA has no civil remedies now, several reform proposals in the past have considered conferring this power on the agency. A civil action could be based on allegations that the company had engaged in fraud, misrepresentation, or willful endangerment of the public health. Such an action could generate large monetary fines that could be transferred to the Medical Device Trust Fund and used to defray compensation costs. In addition, the FDA

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To CURRENT TRENDS could expand its present criminal sanctions so that individuals within corporations might also receive criminal punishment for wrongful actions, including imprisonment or fines. (There is a significant body of literature that discusses the difficulties in deterring corporate malfeasance and punishing corporate bad actors [Metzger, 19841.) In general, the FDA would act to defend public health and safety much as the Securities and Exchange Commission acts in the public interest. The social goals of deterrence and redress are most appro- pr~ately protected by a public, not a private, entity. CONCLUSION There are several important values that undergird the tort system and medical device regulation. The appropriate test for evaluating existing systems is not whether they achieve one goal, such as compensation, but whether they best achieve a combination of goals, including deterrence and redress, compensation, and efficiency. These goals must be achieved within the context of the health care system as a whole, recognizing the additional values of widespread access to care at reasonable cost and support for innovative technology. The framework developed here distinguishes the individual and the social functions of these two systems, realigning them to achieve an efficient process and to facilitate the attainment of the defined goals. This can only be accomplished if medical devices are considered separate from other consumer products and are viewed as an integral part of the health care system. If we do not address the significant limitations of the present tort and regulatory policies in the near future, we may find ourselves making health care compromises that obstruct the values that we intend to protect. NOTES ~59 Cal. 2d 57 (1963). 220 Cal. ad 413 (1978). 3Restatement of the Law, Second, Torts American Law Institute. 4447 A. 2d 539 (1982). 5227 Cal. Rptr. 768 (1986). 6220 Cal. Rptr. 437 (1985). 7638 S.W. 2d 600 (1982). 8609 F. Supp. 817 (1985). 9788 F.2d 741 (11 Cir.) (1986). ~736 F.2d 1529 (1984).

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92 CURRENT TRENDS Schwartz, V. E. 1985. Unavoidably unsafe products: Clarifying the meaning and policy behind comment K. Washington and Lee Law Review 42:1139-1148. Sugarman, S. D. 1985. Doing away with tort law. California Law Review 73:555~64. U.S. Congress. House of Representatives. 1983. Medical Device Regulation: The FDA's Neglected Child. Report of the Subcommittee on Oversight and Investigations of the Committee on Energy and Commerce, 98th Cong. 1st sess. U.S. Congress. House of Representatives. H.R. 5516, Introduced September 12, 1986. 99th Cong. 2d sess.