Cheaper Products Could Cost You More in the Long Run
by Lisa E Smith, Esq.

As you know, Medicare and the state Medicaid programs are looking for ways to save money. Medicare has cut reimbursement and is rolling out competitive bidding, and Medicaid programs are using a variety of methods, including expanding managed care, drug formularies and sole source contracting. In response, suppliers look for ways to cut their costs. Suppliers looking to reduce their cost of goods may renegotiate with their current vendors or join a buying group to obtain a better cost on their current product lines. Suppliers looking to cut costs by buying medical equipment with a significantly lower price than its current vendors need to make sure they know the quality of what they are buying so they do not end up paying more in the long run.

Products Liability Law

Products liability refers to the liability of any or all parties along the chain of manufacture and distribution of any product, for damage caused by the product. This includes the manufacturer, wholesaler and retailer. There is no federal products liability law, rather, products liability cases are governed by state law. To prevail in a products liability case, the plaintiff must usually prove the product that caused the injury was defective, the defect made the product unreasonably dangerous, and the defect caused the plaintiff’s injury.

There are three types of defects: design defects, manufacturing defects and marketing defects. A design defect is a flaw in the intentional design of a product that makes it unreasonably dangerous. A manufacturing defect exists when the product does not conform to the designer’s or manufacturer’s specifications. A marketing defect includes improper labeling of a product, insufficient instructions or the failure to warn consumers of a product’s hidden dangers. Even though a retailer may not be responsible for the defect, or even be aware of it, state law may allow the retailer to be held jointly and severally liable because it sold the defective product to the consumer. This can become particularly troublesome when the manufacturer who bears the responsibility for the defect is located outside the United States and the plaintiff or retailer tries to collect from the manufacturer. Products liability risk of the retailer increases when the retailer is aware of defects concerning the product and still sells the defective product to a consumer.

Medical device suppliers may want to take comfort in the belief that because medical devices are subject to Food and Drug Administration regulation, the FDA has reviewed and approved of the quality of all medical devices marketed in the United States. However, a closer review of FDA requirements demonstrates many devices do not have the level of scrutiny by the FDA.

FDA Regulation of Medical Devices

Domestic establishments involved in the production and distribution of medical devices intended for marketing in the United States are required to register with the FDA, and list the devices they have in commercial distribution with the FDA. Foreign establishments engaged in the manufacture of processing of a device imported into the United States must also register their establishments with the FDA and provide the FDA with a list of the medical devices they are importing.

Medical devices are separated into three classes by the FDA. Class I devices are those which present minimal potential harm, and therefore have the least amount of FDA oversight and control. Class I devices are typically simple in design, manufacture and have a history of safe use.

Class I devices are subject to the FDA’s General Controls, which include 

Establishment Registration
• Medical Device Listing of devices to be marketed
• Manufacturing the devices in accordance with Good
Manufacturing Practices (GMP)
• Adequate labeling
• Reporting of adverse events

Most Class I devices are exempt from pre-market notification application (commonly referred to as a 510(k)) and FDA clearance before marketing the device in the United States, and may also be exempt from GMP requirements. Examples of Class I devices are canes, crutches, walkers and manual wheelchairs.

Class II devices are devices in which the General Controls are not adequate to assure safety and effectiveness. Therefore, Class II devices are also subject to Special Controls that include:
• Special labeling requirements
• Mandatory performance standards
• Post-market surveillance
• FDA medical device specific guidance

While a few Class II devices are exempt, most Class II devices require pre-market notification and FDA 510(k) clearance prior to marketing. The 510(k) submission identifies characteristics of the new or modified medical device as compared to a medical device already legally marketed in the United States with a similar intended use. Examples of Class II devices are power wheelchairs, water circulating hot or cold packs, electric hospital beds, alternating pressure air flotation mattresses and powered patient lifts.

Class III devices usually support or sustain life, are of substantial importance in preventing impairment of human health, or present a potential unreasonable risk of illness or injury to the patient. While a few Class III devices require pre-market notification and 510(k) clearance, most require a more formal Pre-Market Approval (PMA) submission and approval. A PMA is required to approve medical devices that present significant risk to the patient and/or require significant review of the safety and effectiveness of the medical device prior to commercial introduction. Examples of Class III devices are heart pacemakers and implanted prosthesis such as artificial knees and hips.

Medical equipment suppliers that are purchasing equipment categorized as Class I devices significantly cheaper than the competitors’ prices must be aware such devices likely have not been reviewed by the FDA, and may not be subject to GMP requirements. The supplier should carefully review the quality of such products prior to dispensing. If the product is not brand new and has some history of distribution, an Internet search can be a valuable resource to determine the type and frequency of defects or quality issues. Consumers who obtain products that do not perform as expected are quick to post complaints.

Limitation of Choices
In an effort to achieve cost savings, some state Medicaid programs are implementing steps that impact a patient’s choice of products. Some Medicaid programs are looking at sole source contracts to obtain better prices from a single vendor. While most state Medicaid programs have a provision that limits payment to the “least costly alternative,” it looks like this may be taking on a new twist. The “least costly alternative” has traditionally been interpreted as limiting reimbursement to the type of equipment that meets, but does not exceed, the patient’s medical necessity requirements.

However, we have heard at least one state Medicaid program is starting to use the “least costly alternative” as a means to steer patients to a less costly product within a single product category. The legal ability of state Medicaid programs to limit patient choice on brands of medical equipment is dependent on the statutory and regulatory framework of the particular Medicaid program and the Medicaid program waivers obtained from the federal government. However, while the concept is new to medical equipment, patients have dealt with limited access to brand name drugs for some time.

A notable distinction can be made between brand and generic drugs, and different manufacturers of medical equipment. The FDA’s regulation of generic drugs requires the generic drug be essentially identical to the brand drug in all important aspects. Given the lack of review and performance standards for lower classifications of medical devices, the quality of one brand of medical device can vary significantly from that of another, which could be the basis for the cost difference. If a state Medicaid program is comparing the cost of a medical device, it also needs to compare quality. Medicaid patients will not be served well by receiving lower cost equipment that is also lower in quality, and will likely require more frequent repairs or replacement. If a supplier is facing such issues with a state Medicaid program, it should ask what quality comparisons were undertaken by the Medicaid agency. It should also take steps to investigate the quality of the product being promoted and address concerns discovered with the Medicaid agency.

These written materials are not intended to be legal advice or legal opinion any specific facts or circumstances. The contents are intended for general information purposes only. The law pertaining to the issues addressed by these written materials may have changed since these written materials were submitted. The reader should consult his or her own attorney for legal advice.