Challenging the Belief that Liability Laws Kill Medical Device Innovation

Many policymakers believe liability laws need reforming so that medical device makers are free to innovate without threat of costly lawsuits. But new research by Hong Luo and Alberto Galasso suggests innovation is not thwarted—just rechanneled.
by Michael Blanding

Doctors are afraid of getting sued. According to some accounts, 75 percent of them perform more tests and procedures than necessary to avoid potential lawsuits over medical malpractice. The phenomenon of “defensive medicine” has been examined exhaustively by researchers and invoked by policymakers in passing tort reform laws to limit the amount of damages patients can receive.

Less attention has been paid to the effect such reforms can have on medical device innovation. Under the chilling effect of potential lawsuits, a doctor may be less willing to try new procedures or technologies that deviate from commonly accepted treatments. By that line of thought, medical malpractice lawsuits would put a damper on innovation, and tort reform laws that limit exposure would spur it. But, there is another potential effect.

“When physicians are under pressure from high liability, innovators are incentivized to produce safer products to help them manage risk”

“When physicians are under pressure from high liability, innovators are incentivized to produce safer products to help them manage risk,” says Hong Luo, an assistant professor in the Strategy Unit at Harvard Business School. “That decision translates upstream to a company’s willingness to produce new products.”

That could take the form of more diagnostic tests or other complementary technologies that would help monitor procedures—for example, a new device to check the location of a baby’s head during a C-section so a delivery goes more smoothly.

“Both of these competing effects are happening at the same time,” says Luo. The question is which one is stronger? Luo examines that question with Alberto Galasso, a professor at the University of Toronto’s Rotman School of Management, in a new working paper, Tort Reform and Innovation.

Defensive medicine spurs innovation

They found, ultimately—and perhaps counterintuitively—that far from being an inhibitor to innovation, the practice of defensive medicine might have actually encouraged it.

Legal liability pressure in health care might spur medical device innovation. Source: Sudok1

In order to investigate the question, Luo and Galasso set up a two-stage model. The first looked at whether and how much an innovator would invest in R&D for a new product, anticipating doctors’ adoption decisions; the second looked at doctors’ reactions to those products.

“A physician has two choices for a procedure—a new technology or a default technology,” says Luo. “They will make that decision based on how useful it is, but also how much it exposes him or her to liability.”

While most doctors are insured and won’t themselves have to pay out in a lawsuit, they would still want to minimize risk of stress and loss of time dealing with claims and costs to their reputation and future employment. On the other side of the equation, a cap on damages through tort reform can influence whether or not a doctor is sued in the first place. “I’ve heard stories about lawyers not taking cases if the payout is less than certain amount,” says Luo.

Pressure on patents

In order to determine those effects on innovation, Luo and Galasso obtained data from the American Tort Reform Association on tort reform efforts between 1985 and 2005. They then crunched those numbers with data from the United States Patent and Trademark Office on the number of medical device patents in states during the same period.

They found, on average, that once a state passed laws limiting awards in a medical tort case, the number of patents in that state decreased a few years later by roughly 14 percent. In the half-dozen states with most medical device patenting that went through reforms in the sample period, tort reform laws decreased innovation by roughly 36 patents a year. (Interestingly, Luo and Galasso didn’t see an overall national effect on patents; innovators seemed preoccupied with the changing laws in their own states.)

The decrease in patents was highest in the riskier specialties, such as surgery and orthopedics, where liability is potentially high; it was lowest in comparatively low-risk specialties such as dentistry and ophthalmology.

From those results, the researchers conclude that the benefits that innovative devices provide in reducing risk outweigh the risk of trying new technology. “It seems, on average, the chilling effect is likely to be there, but it’s not substantial compared to the incentivizing effect for people to manage risk,” says Luo.

Those findings run counter to the usual tenor of the debate on tort reform. “One normal view shaping the political discussion is that you need tort reform because these lawsuits are slowing down innovation,” says Galasso. “Our key finding based on 20 years of medical device patents is that there is no evidence of that.”

Instead, the paper suggests a more complicated relationship between innovation and liability, in which certain devices may be negatively impacted, while others may actually be encouraged. “In order to think about this relationship,” says Galasso, “you need to be careful, and think about various dimensions. There are no simple rules policymakers can use.”

The findings might also help device makers themselves consider how they invest their R&D in new products.

“If you are only thinking about liability of your own product, then all you care about is reducing design flaws and making it safer to use,” says Luo. “But if you think more broadly about how liability influences demand, then you can think about how investing in complementary products might help doctors manage risk and perform procedures more safely overall.”

Investing in those kinds of technologies is not only good for doctors and the bottom line of medical device companies—it’s good for patients as well.

Related Reading:

New Medical Devices Get To Patients Too Slowly
Public R&D Investments and Private-sector Patenting: Evidence from NIH Funding Rules
Five Imperatives for Improving Health Care

About the Author

Michael Blanding is a writer based in Brookline, Massachusetts

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