Strategies for Managing Liability Risks of Outsourcing
Quality assurance is key to limiting potential liability when parts are imported or production is exported.
Patty Nichols, John Cavallo and Dawn Atchison
In late 2007, electronic infusion pumps were recalled because occluder springs were not properly installed during the device assembly process. The resulting potential for inaccurate flow and over-infusion could have resulted in patient injury or death, leading the FDA to issue a Class I recall.
In early 2008, imported balloon catheters became the subject of a Class I recall. The catheters were slow to deflate or did not deflate at all, resulting in complete blockage of critical vessels to the heart.
When medical devices are defective, serious consequences may occur. The FDA’s Center for Devices and Radiological Health received more than 325,000 reports of injuries, deaths and malfunctions related to medical devices during 2006. While this is a large number that has grown dramatically (the reports for 2005 were only about 185,000), the number is small compared to the millions of devices produced each year. In 2006, the number of recalls was 616, a 5% increase from 589 recalls in the previous year, according to a report in the February 2007 issue of The Silver Sheet. The article identified two factors for the increase in recalls: the greater number of foreign products and the increasing complexity of the devices.
When a medical product manufacturer or distributor has an overseas connection, the issues surrounding liability can become more complex and more difficult to control. The product importer may take on the same liability as a manufacturer, with both needing to understand and consider how to manage quality from a long distance. With careful strategies, it is possible for any company that outsources its manufacturing to manage risks and potential liabilities.
The Overseas Connection
Medical device manufacturers increasingly are turning to sources outside of the United States to help them produce their products. The most recent available FDA data show that 40% of approved medical device firms had manufacturing facilities overseas in 2003. The FDA’s list of “registered foreign establishments exporting medical devices to the United States” was close to 7,800 in 2002, led by companies in Taiwan, Germany and China. Anecdotal evidence suggests those numbers will continue to grow.
Many of the reasons that medical device companies look abroad for manufacturing assistance echo those of other US corporations. Labor and materials often are cheaper outside of the United States, offsetting any increased cost in transportation. Outsourcing also becomes desirable because certain countries are well known for their expertise with some products or manufacturing processes. Furthermore, other countries have reputations for the quality of their imaging equipment, electronic components, gloves, flexible tubing and catheter products.
Customer specification also can factor into the outsourcing equation, as some producers may have relationships or prior experience with the overseas company, or may rely on the reputation the overseas company has for producing an outstanding component.
Other medical device companies may turn to overseas suppliers for parts they once were able to obtain in the United States, because many domestic manufacturing companies have closed or taken their operations offshore.
As medical device manufacturers become more dependent on outsourcing to foreign countries, however, they become exposed to new liabilities and quality control issues that must be addressed.
Product Quality Control Issues
As demonstrated by recent recalls, problems can arise in the manufacturing process. Quality control is extremely important in any situation—but the issue of control becomes complex when the manufacturing site is not owned by the medical device company or is far away from the primary location or headquarters of the company.
Cleanliness standards and the sterilization process are two areas that may be affected. The ability to sterilize may not meet the expectations of the medical device company if local resources—such as clean water—are not sufficient to make meeting standards possible. Spot checks of production quality and other precautionary steps may be ignored, falsified or carried out incorrectly.
Without careful controls in place, lower-quality materials may be substituted without the medical device company’s knowledge or concurrence. While some substitutions may be the result of misunderstandings about product specifications, other substitutions may be the result of deliberate attempts to reduce costs.
A company may find it has less control to manage its exposures when it becomes involved with overseas partners. In addition to the quality of the products being manufactured, additional exposures to be considered include US employees traveling in foreign countries, driving cars overseas and taking equipment offsite—as well as the more subtle issues of business continuity if the overseas partner is no longer able to deliver what it has promised, and the possible requirements of the foreign country for local insurance coverage.
Strategies to Limit Risk and Maintain Quality Controls
The following strategies can help a medical device company that has products manufactured in foreign countries position itself to address liability concerns, maintain product quality controls and be better prepared to defend against product liability claims.
1. Understand product regulations and standards. Knowing the US requirements that affect a product is required for any medical device company that intends to stay in business long term. But importing supplies from abroad or manufacturing components from overseas may bring into play new or different regulations of which a company must be aware, including added steps for certification or other types of approval. In addition, it is important for the overseas partners to have a thorough understanding of the standards and specifications that must be met when a product is destined for the US market.
2. Know your suppliers and contract manufacturers. The overseas partner must understand the needs of the US medical device company—and the medical device company needs to understand the capability of the overseas partner. That means due diligence before beginning a long-term overseas relationship is critical. Switching overseas suppliers frequently, especially if the change is simply to pursue a new, lower price, works against the trust and stability that underlie a partnership commitment to quality assurance. A number of considerations come into play:
• Foreign country profile and safety level. A country’s political, economic and legal stability, as well as the level of business sophistication and maturity, may have an impact on any partnership. Among the issues that should be taken into account is the threat of labor market uncertainty or the existence of political volatility that leads to business disruptions. One factor to consider is that foreign countries with established standards and methods of product safety enforcement are more likely to understand the importance of complying with safety measures to meet US requirements. Another factor to consider is the potential liability of US companies for health, safety and environmental exposures that become public.
• Reputation of manufacturer or supplier. Good references, especially from peer medical device companies, are an important indicator of the ability of an overseas partner to deliver on expectations. This would include resolving problems as they arise, meeting commitments in a timely manner and communicating openly about any necessary changes in supplies or manufacturing conditions.
• Transparency in partnering. US employees should travel to the overseas site and spend enough time with the potential partnering company (including any potential subcontractors) to thoroughly understand the operations, practices and challenges that may become factors in the relationship. They should be able to tour all parts of an overseas facility and/or subcontractors’ facilities, inspect all records and establish a solid working relationship with key people.
3. Document quality control steps. Documentation serves many purposes. In addition to creating the required regulatory file, it provides a paper trail that can be followed when something goes wrong to determine the source of problems so corrective action can be taken. It positions the company to defend against a liability claim by demonstrating that appropriate quality control measures were in place and were followed.
It is critical to have a clear understanding between the medical device company and the partner of the required quality control process, as well as clear records of what has transpired. Ideally, translation of records maintained in the original language of the partner company should be undertaken by a certified translator to help maximize clarity.
In the case of large pieces of sophisticated equipment, it is advised to have a digital photo record of each machine sold, as well as segregated information by customer so any complaints, problems, recalls, warranty issues, replacement part orders or other matters can be traced by the individual machine.
It is important to have a clear process of documentation for authorizing material substitutions or process changes. The medical device company needs to be in charge of reviewing and signing off on any modifications of materials and processes.
4. Arrange for independent testing. Using or requiring the use of a certified third-party testing laboratory, especially one with US locations, means companies can provide a certificate of liability insurance. In addition to helping verify compliance with standards and regulations, part of the independent testing process should be retention of test results and product batch samples.
Independent testing can be a powerful selling tool with potential customers, as well as key evidence if a claim is filed against the medical device company.
5. Provide on-site staff. Some companies periodically inspect their foreign manufacturing locations to verify that expectations are being met or require periodic certification of Good Manufacturing Practices. A more continuous way of maintaining oversight is to have employees stationed overseas permanently so they can verify compliance and be available when issues arise. They also would serve as a continuous communication link with the home office, bridging language, cultural and time barriers.
6. Get expert advice on contract language. Contracts between the medical device company and the overseas partner require special attention. Legal expertise on what is enforceable in both countries is critical, as well as clear interpretations of provisions in both languages. In general, it is good practice to have an attorney with expertise in international products and contract law review a copy of any contract with a foreign company.
7. Verify adequate insurance coverage. Many of the aforementioned strategies are about developing and maintaining the type of working relationship with overseas partners that will result in high-quality products. When things go wrong, it is important for a medical device company to know that adequate product liability insurance is in place. The company should work closely with an experienced agent or broker who understands foreign requirements for any local insurance placement, as well as US policy exclusions that may leave the medical device company exposed. The goal is to ensure that coverage extends to cover all the exposures and liabilities that a company may face, regardless of where the claim arises or is filed.
A company would be wise to review its entire range of coverage with an experienced agent or broker to identify any gaps that develop when overseas activities come into play. For example, it may be appropriate to add foreign voluntary workers compensation coverage to make sure that there is coverage for those workers who are overseas for extended stays, as some states have a time limit on how long their statutory coverage applies.
Coverage for automobile accidents involving employees overseas, property that may be lost or damaged while in a foreign country or even claims that may arise from employees of the overseas partner are areas to examine.
Contingent business interruption coverage also should be considered. Contingent business interruption exposure is a necessary business suspension due to direct physical loss or damage to dependent properties anywhere in the world. Dependent property means those businesses you do not own or operate but depend on to 1) provide goods or services which you need for your operation; 2) purchase your goods or services; 3) manufacture your products for delivery to your customers under contract of sale; and 4) attract customers to the location of your business.
8. Use a domestic importer. Using a domestic importer is a strategy that may help provide a level of protection—assuming the domestic importer maintains product liability insurance, provides vendor coverage and provides a certificate of insurance annually. A large domestic importer with deep market penetration also may be influential with foreign manufacturers when it comes to meeting product safety criteria and other requirements. A foreign manufacturer may be much more reluctant to burn bridges or endanger a good working relationship with a domestic importer that is responsible for moving large amounts of their goods or materials to a number of US customers.
Maintaining Trust in a Competitive Market
In the medical device industry, quality control isn’t just important; it’s essential for the long-term survival of a company. Rigorous FDA standards and a highly competitive market are twin forces that cause companies to take great care with the products they sell to their customers. They know there always is a competitor standing by, ready to jump in with a replacement product.
After taking these kinds of careful customer-focused steps, no company wants to find that a lack of attention to detail during the manufacturing and production process has resulted in defects or faulty products. Once part of the production cycle moves offshore, a medical device company can limit challenges and potential liability issues that may arise by following the strategies outlined above.