Strengthening the Power of Healthcare Insurers to Regulate Medical Device Risk

Abstract

This paper considers harnessing the market forces uniquely exerted by private healthcare insurers (insurers) to reduce medical device risks. Insurers regulatory power derives from their market-gatekeeping coverage and purchase decisions that determine the economic fate of all FDA approved devices, payment of injured insured-patient medical and other expenses, and, based on inflow of insured-patient payment requests, comprehensive market monitoring for product-related accidents, including early signs of new and increasing risks. Insurers thus can generate social regulatory benefits by providing FDA with current, reliable postmarket data on product risk and efficacy, including “first alert” warnings of emerging risks. More generally, by accounting for the implicit price of accidents, insurers coverage and purchase decisions can deter marketing of unreasonably dangerous devices and promote more medically productive use of products. However, insurers lack sufficient financial incentive to exercise their regulatory power for maximum social benefit. To correct the market defects that cause this problem, we propose two simple and virtually costless reforms: (1) require insurers to report medical device accidents to the FDA; and (2) replace state tort law with a federal rule of strict manufacturer liability that bases recoveries on proof of causation alone, pays damages directly and fully to the US Treasury, and is litigated on referral from the FDA by the Civil Division of the Department of Justice directly or by auctioning claims to private attorneys.

JEL Classification: K00, K13, K32, K41