Four Habits of Highly Effective Risk Management Programs

A comprehensive, expert guide to staying out of trouble while reaping profits.

Kevin Quinley
Medmarc Insurance Group

It’s no secret that orthopedics has shown impressive strides over the past few years, and the news is only going to get better. According to a new study, the number of artificial joints that will need replacement for damaged knees will jump 673% by 2030, to nearly 3.5 million a year. Demand for artificial hips will climb 174% over the same period, to 572,000 a year, according to Exponent, an engineering and scientific firm.  

Venture capitalists say that within the biotech area, orthopedics is red-hot. This includes orthopedic devices and materials that replace hips, knees, hands, feet and parts of the spine.

For years, a consistent front-runner on the bestseller list has been Steven Covey’s book, The Seven Habits of Highly Effective People. This book explores common traits of effective individuals. Can we reframe that concept of effectiveness, though, into a macro perspective within the orthopedic technology area? The answer is, “Yes.” Failure to be “highly effective” in quality and risk management can put orthopedic companies in peril. The tort and litigation climate against orthopedic firms is formidable.  

Personal injury attorneys are well connected, constantly seeking “The Next Big Thing” in product liability. Some law firms specialize in suing orthopedic device companies. They scour FDA databases and the Internet for recalls and adverse-event reports. They network on Internet forums and at legal conferences built around “how-to” workshops on suing specific devices or manufacturers. Like drug companies, orthopedic device firms seek new growth  opportunities, but some draw criticism in the process. Personal injury attorneys accuse some implant companies of developing devices that seem like gimmicks at best—and health threats at worst—as they try to reignite their once high-flying stocks.  

Mealeys—a company specializing in seminars for lawyers—mass mails a glossy brochure on drug and device litigation. One such brochure invites lawyers to call a provided number to “get the latest” on suits against hip and knee implants, bone screws, tissue products and more. Monthly magazines such as Trial have articles on various niches of product liability litigation, overcoming legal defenses asserted by device companies and back-of-magazine ads featuring experts for hire in a wide range of testimony.  

Adverse outcomes are inherent in any medical procedure; orthopedic procedures are no exception. According to a Consumer Reports survey of 1,000 patients, published in June 2006:

• 5% of patients receiving knee or hip replacements require a second operation to fix problems caused by the first surgery

• 13% of hip replacement patients end up with legs of unequal length

• 25% of knee replacement patients still can’t walk a half-mile one year after surgery

No one says this is due to any product defect. Any adverse patient outcome, however, can spawn a claim or lawsuit. When the legal shooting starts, the orthopedic company is likely to get caught in the legal crossfire. These factors—plus an attorney glut—produce a recipe for litigation against orthopedic companies.  

Just as there are highly effective people, there are highly effective companies. Some firms have built sound risk management systems—ways to reduce financial risk or cushion its blow.  

After gaining more than 20 years of personal experience working with orthopedic and other medical device manufacturers, it has become apparent that world-class companies have certain recurring habits, practices and qualities. From the vantage point as a guy who manages claims and litigation for hundreds of medical device companies, following are some thoughts on the four habits of highly effective risk management systems.

Habit #1: The Best Companies Learn From Claims  

In departmentalized, compartmentalized companies, product manufacturing and risk management may not talk to each other much, or at best communicate infrequently. Certain management disciplines can counteract this tendency, though.  Here are some tips.

Conduct claim autopsies. When patients die of unknown causes, doctors perform autopsies. When patient death is unexpected, hospitals hold “M&M”—Morbidity and Mortality—committee meetings. In less fateful situations, orthopedic device companies should drill down to determine the cause of what happened. Engineers often call this “root cause analysis.”  Common root causes might be:

• Placing budget/financial considerations ahead of quality (overlooking the “hidden” costs of poor quality)

• Placing schedule considerations over quality (“We don’t have time to do it right, but do it anyway…”)

• Placing “political” considerations over quality (internal politics and external marketing)

High-dollar orthopedic claims should get the same post-mortem from a risk management standpoint. The aim is to learn. As philosopher George Santayana said, “Those who ignore the past are condemned to repeat it.” In other words, what went wrong? What can we do to keep this from happening again?    

Follow up with specific actions on specific problems. Once a claim file closes, circle back to the division or product group that has had a loss. Once we identify the exposure, we’ve got to formulate an action plan—ie, a concrete series of steps for resolving and monitoring the problem. A penchant for learning, coupled with an action orientation for follow-up, is a characteristic of highly effective orthopedic companies.  

Habit #2: Compliance Is the Start of Risk Management, Not the Pinnacle

Compliance with FDA guidelines is a necessary but not sufficient condition for sound risk management. However, just following FDA regulations will not insulate orthopedic companies from product liability claims or suits. There still is a legal duty to exceed those requirements to make safe products, to produce devices that are free of design defects, free of manufacturing defects and free of deficiency warnings.  

With the exception of Federal preemption for certain Class III devices—a doctrine under attack by plaintiff attorneys—mere compliance with FDA standards will not insulate against product liability claims. Accordingly, orthopedic companies must meet FDA standards such as Good Manufacturing Practices to cement a risk management program, but they also have to exceed them.

While FDA compliance will not shield companies from liability, breaching FDA standards may be used against them. It may not be fair, but it is the reality. If you have a recall, an FDA 483, a warning letter or hundreds of medical device reports (MDRs), these can and will be used against you to support a claim of defect and to persuade a jury that your product malfunctioned.  

Lawyers can fight to make inadmissible all the “bad stuff” on recalls, warning letters or MDRs, but you may or may not win such exclusionary motions. Judges like to “let it all in” and invite you to appeal if these items may have a prejudicial impact. Many judges think this is a “jury issue,” not a judge issue, so they often will let juries hear most everything and then let plaintiffs and defendants argue over how much (or little) weight to give them.  

The FDA’s “baggage” on a company or product makes defense more problematic. This is not to downplay the importance of FDA compliance—to the contrary. Mere FDA compliance, though, is a part of—maybe a small part of—sound risk management for orthopedic firms. It is the starting point, not the ending stage. Thus, aim for a “Caesar’s wife” record in FDA compliance. Do not let it delude anyone into thinking that compliance makes you bulletproof from liability claims or will get a claim dismissed. Highly effective risk management programs invest in strong regulatory compliance, but they do not make that the sole foundation of a risk management program.  

Habit #3: Use a Diverse Risk Management Toolbox  

When orthopedic professionals hear about risk management, they may have only a vague idea of the phrase’s meaning. What is risk management? We can view it as a process that involves:

• Identifying possible causes of loss

• Finding ways to address the causes of loss

• Picking an appropriate technique to address the cause(s)

• Implementing the technique

• Monitoring risk management programs for results

Orthopedic firms also can view risk management as a toolbox of techniques. There are four classic risk management techniques, all of which apply in varying degrees to product liability:  avoidance, control, retention and transfer.

Avoidance, as the term implies, means shying away from an activity because of its potential for loss. Avoidance involves opting out of existing product lines or deciding not to engage in certain activities due to the risk of adverse patient outcomes. For example, a firm sees risks involved in, say, resurfacing arthroplasty due to high revision surgery rates and potential complications, deciding that the market just is not appealing enough to offset the perceived dangers. Avoidance is an extreme risk management technique, reserved largely for risks that an orthopedic firm deems uncontrollable or very threatening to its financial existence. View avoidance as a tool of last resort.

Control aims to reduce the frequency or severity of adverse patient outcomes. Loss control emphasizes quality manufacturing techniques to keep adverse patient outcomes from occurring in the first place. It focuses on warnings and labels, design, manufacturing and regulatory compliance.

Retention is a conscious decision to self-fund losses without transferring risk to an insurer. While large companies such as Zimmer, Biomet or Stryker might have the ability to “self-insure,” small firms may lack the means to seriously consider this.      

Transfer involves shifting the financial consequence of loss to another entity. The most obvious example is insurance. An orthopedic firm pays money—a premium—to a professional risk-bearer (i.e., an insurer). An insurer exchanges a promise to pay in return for a stream of premium.  

The premiums of the many fund the losses of the few. Insurance is a common risk management technique, but it works best when blended with avoidance, control and retention.  

Once they understand the critical importance of asset protection, orthopedic firms should heed the following risk management advice:

1. Do not retain more than you can afford to lose. Fortune 500 companies can afford to “self-insure” for millions of dollars. Few orthopedic companies can do this. While it is nice to capture premium savings from higher deductibles on property insurance covering plant, equipment and fixtures, make sure you have the funds on hand to pay any portion of a loss that’s uncovered due to a deductible.

2. Do not retain a lot to save a little. Generally, insure those risks with low frequency but high severity. One reason: they’re so unpredictable.  Orthopedic product liability claims typically have moderate to low frequency, but high severity. In today’s litigious age, one suit can financially cripple a device firm. One claim could cost you many times the tab for a year of insurance premium or even have catastrophic financial consequences. Do not gamble with your firm’s financial health to save marginal amounts on insurance coverage.  

3. Do not treat insurance as a substitute for safety. Do not view product liability fatalistically because, “That’s what we have insurance for.”  Risk management and insurance go hand in hand. In fact, the more you invest in risk management, the less you may have to spend on product liability coverage. The best insurance rates go to firms that already have strong risk management programs. These programs:  

• Have rigorous quality assurance processes

• Don’t let cost issues override safety concerns

• Exhaustively review warning labels, marketing materials and promotional literature

• Closely monitor the outside user environment and make changes without dismissing unwanted feedback as “user error”

These are best practices!

Habit #4: Manage Sales and Marketing Processes

Three areas of the sales and marketing realm heavily impact risk management and receive close attention from “best practice” companies.   

The first is financial incentives to doctors. Orthopedic companies can face liability exposure for things that go beyond just the product. A hot area of litigation by plaintiffs’ attorneys is marketing practices. Several major orthopedic companies received subpoenas from the US Department of Justice last year about consulting and service contracts with surgeons.  

The personal injury bar is writing about these cases in its monthly magazines. For example, a former employee of one giant spinal implant company sued the firm under the federal False Claims Act, alleging his employer paid improper financial incentives to doctors to use its products. Another recent suit against a manufacturer of continuous passive motion devices alleged that an orthopedic company offered doctors trips, cruises, money through “directorship” agreements, jewelry for wives and, for one doctor, a leased Jaguar.

Any “spiffs” to doctors will be scrutinized. Beware of anti-kickback laws and relationships with physicians. Have these overseen by a designated compliance officer in a big company or a trained/informed person in a smaller company.

A second area of concern is the presence of sales representatives in the operating room. Often, in defending orthopedic surgical cases, there is an issue of sales representative(s) presence in the surgical suite and what “role” was assumed or played by the sales professional. There are issues of hospital protocol on individuals in the surgical suite, whether the patient was aware of other people present and consented to it, whether there was anything other than observation by the sales reps. These concerns are not purely theoretical. A growing number of claims involve the activity—or alleged activity—of sales reps in the operating room. In a recent Ohio claim, Zappola v. Stryker, a surgeon and an orthopedic sales rep were found liable for $1.75 million. The case involved a bone-cement product. The jury found that the salesman failed to provide adequate advice about the product’s use.

An orthopedic company has difficulty monitoring sales reps’ activities, but if organizations keep good records, have policies and procedures in place and keep reports by sales representatives, those practices make defending any claim more feasible. In some cases, sales reps have been individual defendants in suits, which can present some hurdles because the sales professionals often are no longer with the company when their time and testimony are needed to mount a defense in court.

The third area of concern is direct-to-consumer (DTC) advertising.  Today, consumers can see Jack Nicklaus on TV commercials plugging hip implants. Furthermore, at the 2006 annual meeting of the American Academy of Orthopaedic Surgeons, actress Angela Lansbury kicked off an education campaign with DePuy Orthopedics. One key legal defense in medical product liability cases is the learned intermediary defense. While DTC ads might capture market share, they may have product liability pitfalls.

The “learned intermediary” defense holds that medical device manufacturers may not need to warn patients about side effects, complications and contra-indications if they warn doctors, who presumably are learned intermediaries. Thus, it is up to doctors to thoroughly warn and advise patients as part of the informed consent process. Increasingly, however, device companies are leapfrogging and advertising directly to consumers. We see this in prescription drugs as well.  

There are concerns and pitfalls from DTC ads, though. In its 2006 annual House of Delegates meeting, the American Medical Association (AMA) endorsed a policy seeking a temporary moratorium on so-called DTC advertising of new prescription drugs and implantable medical devices. Medical devices were added to the proposal because many doctors who spoke at the meeting said DTC ads for medical devices already were appearing. AMA President-elect Dr. Ronald M. Davis noted that this is happening in such fields as orthopedics.

There’s no doubt that DTC ads can help capture market share. Some courts have held, though, that if you advertise directly to consumers, you can’t use the “learned intermediary” defense. A West Virginia appellate court ruled this way in June 2007 on a prescription drug case. This does not mean that orthopedic companies must abandon DTC ads, though some firms might consider that option. It means, be aware that advertising directly to consumers may deprive you of what would otherwise be a very viable legal defense to product liability claims. Have any DTC ads thoroughly reviewed by legal counsel before releasing them to the public.


A recent TV ad campaign for Las Vegas has the theme, “Vegas: What happens here stays here.”

Quality in orthopedic risk management does not work like that. The best ideas are empty slogans without relentless follow through and implementation. What we learn must translate into what we do. Orthopedic product manufacturers can build world-class risk management programs and convert them into effective “corporate immune systems” by reading—and heeding—these habits of highly effective risk management systems.

Kevin Quinley is senior vice president of Medmarc Insurance Group in Chantilly, VA. He is the author of 10 books, including Avoiding Product Liability Risk and Managing Litigation. He can be reached at [email protected].