COVID's Int'l Trade Impact Holds Health Co. Legal Implications

By Brett Johnson and Claudia Stedman
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Law360 (April 26, 2021, 6:26 PM EDT) --
Brett Johnson
Brett Johnson
Claudia Stedman
Claudia Stedman
The ongoing COVID-19 pandemic crisis has highlighted the reality that, like all other industries, the provision of health care is now almost completely reliant on an international supply chain of both services and products.

With such a historically heavily regulated industry at the domestic level, the impacts of international trade, which usually rely on flexibility and just-in-time delivery principles, are at times challenging to synchronize.

It is difficult to fully appreciate the plethora of legal consequences on a transaction, whether that be the direct provision of health care services or supplying the mammoth industry to enable the delivery of such services.

As a new normal related to international trade and the health care industry becomes reality, concentration on novel legal issues is important to help avoid the sometimes harsh consequences when domestic regulatory agencies exercise historical oversight.

Supply Chain

The supply chain is the entire process of making and selling commercial goods, including every stage from the supplying of materials and the manufacturing of the goods through to their distribution and sale.[1] The COVID-19 pandemic has revealed numerous issues in the worldwide supply chain, particularly and notoriously in allocating personal protective equipment, or PPE.

One glaring concern for the global supply chain, which was not necessarily brought on by COVID-19, but certainly has been exacerbated by the pandemic, is the fact that so much of the world's manufacturing comes from China.

Because of such international dependence on Chinese manufacturers, global supply chains for virtually all markets, not just health care products, were affected during the initial phases of COVID-19 and which led to a significant spike in PPE costs and associated risks with noncompliant PPE.

As countries brace for impact from the second wave of COVID-19 and mobilize health care workers to roll out the vaccine, supply chain inadequacies undercut efforts to vaccinate efficiently.

For instance, last month, according to NPR, health care providers in hospitals in Massachusetts, New York, Arizona, California and elsewhere have observed that "those with the most exposure to COVID-19 are not always the first to get vaccinated."[2]

Similar supply chain issues surrounding vaccine distribution, testing and PPE are likewise disrupting efficient allocation of needed resources in the U.K. and other European countries.[3]

Whenever there is a supply shortage of essential products, such as PPE, the tendency is to cut corners on compliance to save on unanticipated increased costs and ensure timely delivery.

However, there are significant risks that the health care industry cannot fully mitigate by utilizing third-party procurement agents, cooperatives or distribution arrangements.

As referenced above, the health care industry must comply with international trade laws, including the prohibitions of doing business with denied parties or purchasing products from embargoed countries. This is very similar to the excluded lists that the health care industry is more familiar with.

In addition, industry agents must comply with other trade laws related to, among others, anti-corruption, anti-money laundering and customs regulations.

However, the standard health care supply or service agreement rarely includes such provisions and instead concentrates on the traditional health care regulatory issues, such as anti-kickback and Stark Law compliance. The reality is that consideration should be given to inclusion of all of these provisions in international agreements for services or supplies.

Counterfeiting

Counterfeiting is a significant problem in the international medical community and has grown over the past months due to COVID-19.

As referenced, at the beginning of the pandemic, hospitals scrambled to procure PPE. Quickly though, these health care systems realized that the "proliferation of counterfeit PPE ... has created a gray market" where counterfeiters can easily sell their products to hospitals in desperate need of equipment, according to an article from Healthcare Finance.[4]

Since the pandemic began, counterfeiters have "update[ed] classic scams, including impersonating health officials to steal personal information, price gouging and fake treatments" and are implementing "newer schemes like embedding malware in tracing apps," according to a Nextgov article.[5]

The U.S. Food and Drug Administration and U.S. Immigration and Customs Enforcement issued warnings to consumers who might unknowingly purchase fraudulent COVID-19 tests, vaccines and treatments.

By May 2020, Operation Stolen Promise, an initiative launched by the Homeland Security Investigations arm of ICE, produced 11 arrests and 519 seizures of counterfeit medical supplies.[6] By June 1, 2020, U.S. Customs and Border Protection agents had seized around 900,000 COVID-19-related counterfeits.[7]

The FDA voiced concern over the potential for deceptive and misleading products causing Americans to delay or stop appropriate medical treatment.[8] In response to the growing counterfeiting issue, earlier this month, the bipartisan Safeguarding Therapeutics Act was passed, authorizing the U.S. Food and Drug Administration to seize counterfeit medical devices and products, including vaccines.[9]

However, true counterfeits are not the only problem. A main issue is whether the products actually meet the specifications that are required by the facility, mandated by regulation or meet the applicable standard of care to provide the required protection.

For example, in the rush to obtain any PPE, specifications were not properly laid out in procurement orders. Or, PPE that may actually meet the specifications was obtained from manufacturers that were not authorized by the FDA to provide such items.

Thus, PPE and other products that did not meet the requirements were received. In some cases, the product may not have been inspected to identify whether specifications were met and, thus, were put into the supply chain. In other case where specifications were not met, facilities were required to utilize subpar products for other functions or donate the products.

Strapped with depleted or nonexisting supply, many hospitals made online solicitations for N95 mask donations. But federal and state regulations for how to spot counterfeit PPE changed so quickly that it was difficult for health care entities to keep up.

As such, some hospitals, like Lawrence General Hospital in Massachusetts, handed out counterfeit masks to as many as 40 nurses in a COVID-19 unit before someone noticed.[10] Even worse, in some instances, states knew of CDC warnings about counterfeit masks but nonetheless passed the PPE to thousands of paramedics and firefighters, prison guards and hospital workers.[11]

This health crisis expanded so quickly and ferociously in the U.S. that it created an all-hands-on-deck situation for health care systems. Hospitals were initially given a pass for not having appropriate procedures, policies or equipment in place for the surge of patients they were tasked with caring for. However, hospitals also have a legal obligation to provide a safe working environment for their employees.[12]

At the beginning of the pandemic, when the shortage of PPE was most acute, the Centers for Disease Control and Prevention released preliminary data finding that 55% of health care workers who had tested positive for COVID-19 were exposed at work.[13] Because of the number of confounding factors, it is difficult, if not impossible to identify causation between procurement of fake PPE and workers contracting COVID-19.

However, where health care systems knowingly procured fake PPE or had access to legitimate N95 masks but refused to distribute them, they could face liability for failing to adequately protect their workers.

Health care entities are likely to encounter lawsuits for terminating whistleblowers who spoke out about lack of access to legitimate PPE. Liability for health care entities who were unable to provide PPE to their workers because of supply chain problem will likely remain tenuous, however.

These supply chain issues are not usually the normal concerns of health care attorneys or in-house legal staff. However, facilities should consider performing audits or reviews of its procurement practices to ensure that international laws are followed and quality products are obtained for the safety of both patients and practitioners.

Consider procurement purchase orders that are specific about appropriate specifications for products and rarely allow alternative products that meet the specifications, but have not been approved by the FDA.

Procurement departments should consider requiring certifications of quality control from third parties to be included in any shipment. Finally, facilities should consider internal inspection practices to ensure that products they receive actually meet the required specifications.

Offshoring Administrative Support

In an effort to lower administrative costs, facilities and medical groups have increasingly utilized third parties to assist with nonpatient administrative tasks, such as medical coding and billing.

However, in addition to the significant patient privacy and cybersecurity risks addressed above, there are Centers for Medicare and Medicaid Services rules,[14] individual state regulations, contract provisions and facility policies related to such practices, and they are not always fully understood.

One of the main issues is whether the offshore services are indirect, incidental and/or considered overhead.

However, these terms are not always clearly defined. Although confusing regulations are usually interpreted against the regulatory agency,[15] this does not usually provide comfort to legal advisors attempting to comply with the law, who must also meet business realities associated with the increased scrutiny surrounding the costs of health care.

Although many facilities rely on assurances from the third-party administrative services that such offshoring is compliant, there are usually other provisions in the third-party agreement shifting risk to the facility or group. As this will continue to be a growing area of importance for facilities, regulatory and contractual clarification may be necessary.

The days when providing health care services was locally concentrated are over. The reality is that, along with the rest of the economy, the business of health care is global.

The shifting of risk to third parties, intermediaries or supply chain cooperatives may not be enough to insulate health care facilities and practitioners from the unavoidable risks associated with the global supply chain. As such, legal counsel should consider mitigation strategies that meld traditional domestic laws regulating health care services with the ever-evolving laws concerning international trade.



Brett W. Johnson is a partner and Claudia E. Stedman is an associate at Snell & Wilmer LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] Jack Grimshaw, What is supply chain? A definitive guide, Supply Chain, https://www.supplychaindigital.com/supply-chain-2/what-supply-chain-definitive-guide (last visited, Jan. 24, 2021).

[2] Gabrielle Emanuel, As Hospitals Roll Out COVID-19 Vaccines Health Care Workers Described And Anger, NPR (Dec. 28, 2020), https://www.npr.org/2020/12/28/950427961/as-hospitals-rollout-covid-19-vaccines-health care-workers-describe-chaos-and-ang.

[3] Shaun Griffin, Covid-19: Supply chain problems could delay NHS tests, 371 The British Med. J. (2020),

[4] Jeff Lagasse, health care industry is grappling with the emergence of counterfeit PPE in the COVID-19 battle, health care Finance (Aug. 13, 2020), https://www.health carefinancenews.com/news/health care-industry-grappling-emergence-counterfeit-ppe-covid-19-battle.

[5] Aaron Boyd, CBP Has Seized Nearly 900,00 Counterfeit and Unsafe COVID-19 Supplies, Nextgov (June 5, 2020), https://www.nextgov.com/cio-briefing/2020/06/cbp-has-seized-nearly-900000-counterfeit-and-unsafe-covid-19-supplies/165959/.

[6] Independent, Coronavirus: "Poorly constructed" counterfeit masks reaching US health workers, Independent (May 13, 2020), https://www.independent.co.uk/news/world/americas/masks-counterfeit-ppe-health-workers-personal-protective-equipment-us-coronavirus-cdc-a9511326.html.

[7] Supra note 29.

[8] FDA, Beware of Fraudulent Coronavirus Tests, Vaccines and Treatments, U.S. Food and Drug Administration, https://www.fda.gov/consumers/consumer-updates/beware-fraudulent-coronavirus-tests-vaccines-and-treatments (last visited, Jan. 24, 2021).

[9] Craig Clough, Trump Signs Bill Allowing FDA Seizure of Counterfeits, Law360 (Jan. 6, 2021), https://www.law360.com/internationaltrade/articles/1342346/trump-signs-bill-allowing-fda-seizure-of-counterfeits?nl_pk=20760519-7208-46af-8693-5588a5eea8a4&utm_source=newsletter&utm_medium=email&utm_campaign=internationaltrade&read_more=1&attachments=true.

[10] Juliet Linderman and Martha Mendoza, Counterfeit masks reaching frontline health workers in U.S, The Associated Press (May 12, 2020), https://apnews.com/article/850d9e6834fc71967af6d3dda65ad874.

[11] Id.

[12] Id.

[13] Blake Farmer, At Least 9,000 U.S. Health Care Workers Sickened With COVID-19, CDC Data Shows, NPR (Apr. 15, 2020), https://www.npr.org/sections/health-shots/2020/04/15/834920016/at-least-9-000-u-s-health-care-workers-sickened-with-covid-19-cdc-data-shows.

[14] 42 C.F.R. § 438.602 (2016).

[15] Exxon Mobil Corp. v. Mnuchin , 430 F. Supp. 3d 220, 243 (N.D. Tex. 2019) (reversing an OFAC penalty on due process grounds where the agency failed to give the regulated party fair notice of the applicable standards).

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