Supreme Court Approves US Healthcare Reforms, Reshapes Political Calculations

A Final Verdict

The US Supreme Court has upheld the constitutionality of the 2010 Patient Protection and Affordable Care Act, otherwise known as "Obamacare". The court ruled that the Act was largely constitutional, with Chief Justice John Roberts siding with the liberal wing. The main threat to the legislation is now a political one. Mitt Romney, the Republican nominee for November's presidential election, said yesterday (28 June) that if elected, he would repeal Obamacare as one of his first acts.

To recap, the reform package introduced the following key changes to US healthcare provision:

• It imposes an "individual mandate" that requires Americans to buy health insurance or face fines beginning at USD95 in 2014 and rising to USD750 by 2016. The poor, Native Americans, inmates and religious objectors are exempt from the fines. Employers are required to auto-enroll their workers.
• Obamacare caps the amount health insurance companies can spend on non-medical costs such as administration and marketing.
• From 2014, it bars insurers from setting rates or refusing coverage on the basis of an applicant's current healthiness. Insurers must base their decisions solely upon data such as age, income, tobacco consumption etc.
• It grants tax credits for low-paid workers and small companies to buy health insurance through publicly owned exchanges.
• The Act allows children to stay on their parents' insurance plans up to the age of 26.
• From 2014, it expands Medicaid eligibility to anyone below the age of 65 who earns up to 133% of the federal poverty line. However, the Supreme Court ruling does remove the federal government's key stick to compel states to implement this.
• It imposes a 40% excise tax on high-value employer-sponsored health insurance schemes; an annual flat fee of USD2.3 billion on the pharmaceutical industry; a USD2-billion fee on the makers of medical devices; a USD6.7-billion fee on the medical insurance industry; a 5% excise tax on elective plastic surgery; and the restriction of health-related tax exemptions.

Supreme Court Pulls a Surprise

In the lead-up to the announcement there was a sense of resignation among most Democrats, who expected that the court's conservative majority would once again vote as a bloc. In the event, the vote was split as usual, with the four liberals (including "swing member" Anthony Kennedy) and four conservatives ranged against each other, but this time Chief Justice John G. Roberts sided with the former. He has been notorious in liberal circles for his perceived conservatism, so his move surprised left and right alike. The decision nonetheless appears canny both politically and legally. On the former front, Roberts challenges his reputation as a determined conservative activist and avoids a firestorm of criticism from the administration. On the legal front his carefully worded opinion provides endorsement to the "mandate" as a tax, but crucially it argues that it is not justified under the Commerce Clause of the constitution. This clause has been used as a broad justification for federal regulation in the past, but Roberts' opinion potentially narrows its scope considerably. He writes that the clause can be used to regulate what individuals do, but not what they do not do. Thus, in the longer run the opinion could provide a major boost to anti-regulatory efforts. Also, Roberts' declaration that the mandate amounts to a "tax" gives the Republicans a useful line of attack on the reforms in the run-up to the November elections.

Administrative Challenges, Adjusted Business Models

Whether they have approved of the reforms or not, businesses and government institutions have been not been helped by the unpredictability of whether they will be implemented. With the Supreme Court and still potentially Mitt Romney liable to overturn the changes, organisations have faced a dilemma over how much to prepare for what are significant new requirements. Many Republican-controlled states gambled on the reforms not passing, but now they must scramble to implement wide changes to the health insurance market. For example, states are compelled to prove to the Department of Health and Human Services by 1 January 2013 that their new health insurance exchanges will be ready by 1 January 2014. If not, the federal government will operate them. The expansion of Medicaid is also a challenge for hard-pressed states, although the court ruling does blunt the federal government's leverage in this case.

For insurance firms and hospitals, the administrative challenges are huge and the deadlines tight. State delays in setting up infrastructure for exchanges and the general unpredictability of the reforms have meant that many firms have made only limited preparations. The sectors have mixed feelings about the implications of the reforms. Insurers are expected to see the greatest challenge as they face tougher rules on the coverage they offer and what they charge. However, on the other hand many more Americans will need to enroll for insurance than in the past. Hospitals should meanwhile see a significantly greater proportion of paying patients than in the past, but also lesser reimbursement by Medicare. For the pharma and medical device industry there are pros and cons to the reforms. On the one hand, more insured people drives up prescription volume. On the other hand, the industry faces implementation of greater indirect price mechanisms. The use of cheaper drugs, many generics, will be emphasised and encouraged over innovative, yet more expensive drugs. Manufacturers will face stiff curbs on wining and dining doctors to support a particular product. The expectations for innovative drugs will increase; pharmocoeconomic data will have to be that much stronger to support their relative efficacy over cheaper drugs, and we will see a defined approval pathway for follow-on biologics. The current proposal is for 12 years of exclusivity.

Outlook and Implications

A crucial victory has been handed to Obama as he looks to secure the future of his signature reforms, but they still face political threats. Despite introducing similar reforms while governor of Massachusetts, Romney has made it clear that he would move quickly to repeal the reforms upon becoming president in November. It is not quite that simple, however, as we explore in two Romney victory scenarios below:

Scenario 1: Romney Wins Presidency But Democrats Control Senate: As president, Romney could well find the Senate still controlled by the Democrats, who would be able to thwart repeal. Under this scenario Romney does have a contingency plan of sorts as the reforms allow the federal government to grant waivers to states from some of its provisions, to promote "innovation". Romney could extend these waivers to all 50 states, although they would still be required to substitute the federal law with a state law that does not increase the federal deficit and meets benchmarks set by the act. Moreover, the waivers only apply from 1 January 2017 onwards, at the end of a first Romney term.

Scenario 2: Republicans Win Both Chambers and Presidency: Even under this scenario it is possible that Romney will not be able to repeal Obamacare in its entirety if Democrats retain enough seats to filibuster legislation; and it is highly unlikely the Republicans will win the 60 Senate seats needed to prevent this. This scenario could inspire Romney to repeal some parts of the law while retaining others. His own healthcare proposals contain strands of Obama's law, including: state health-exchanges; preventing discrimination against individuals with pre-existing conditions; and encouraging alternatives to litigation in medical disputes. Romney says he will cap non-economic damages, which is stronger than Obamacare's provision. However, it should be noted that some of the country's biggest health insurers have said that they will honour parts of the Act notwithstanding. UnitedHealth, for example, has pledged to ban the withdrawal of coverage, remove caps on lifetime payouts per policy holder and cover dependents until 26. Assuming they maintain this position, much of Obamacare will remain in force. Another reason for believing that Romney may himself seek to retain elements of Obamacare in this scenario is his habit of saying he will revoke the "worst parts" of the act, and similar formulations. Moreover, some of Obamacare's key provisions were part of Romney's own landmark health reforms when governor of Massachusetts—including the divisive individual mandate.

All in all, IHS expects that even with Romney as president, Obamacare will remain on the books long enough to see its effective introduction on 1 January 2014. It remains to be seen whether public interest in the controversy wanes and if enthusiasm for the benefits the reforms offer builds. Republicans clearly still feel that they can make hay out of their opposition, but they no longer have the argument that Obama "ripped up" the constitution.