US Supreme Court Ruling Brings Mixed Blessings for Pharma

The United States Supreme Court yesterday (28 June) issued its opinion on the constitutionality of the individual mandate that lies at the heart of the Affordable Care Act (ACA). The vote was drawn along largely partisan lines, as expected, but with a couple of important exceptions. In a closely fought 5–4 outcome in favour of the reform, the decisive factor was Chief Justice John Roberts—famous for being no friend of liberals in general and President Barack Obama in particular—voting alongside the liberal wing of the court. Conversely, the much-touted swing voter Anthony Kennedy ended up voting against the mandate. This, however, ended up a moot point.

The Supreme Court opinion boils down to two key points:

• The upholding of the individual mandate that will require the vast majority of US citizens to purchase some form of health insurance or pay a penalty: The conservative wing of the court won the day on the issue of the constitutionality—or lack thereof—of the individual mandate within the context of commercial activity. Ultimately, however, the vote upheld the individual mandate, as the 5–4 vote focused on the fact that commercial activity was not relevant here; the mandate is valid under tax powers. The four votes against the law wanted to strike down the whole healthcare reform agenda as unconstitutional. The liberal wing of the court did not agree with the commerce-versus-tax issue, which was largely put forward by Chief Justice Roberts, but in the end sided with this argument as it meant that the overall constitutionality of the law was upheld, which was its prime goal.
• The penalising of states that do not implement the ACA's provisions regarding Medicaid expansion: The ACA had outlined that another critical tool for the implementation of healthcare reform was the potential penalisation of states that did not implement Medicaid expansion by withdrawing existing Medicaid funds. This mechanism was ruled invalid.

This final point represents a significant caveat. The court specifically outlined that individual states can chose not to participate in the expansion of Medicaid without the threat of being penalised through the withdrawal of Medicaid funding. This takes away a significant enforcement mechanism from the government as it prepares for the rapid escalation of insurance coverage over the 2014–16 period. Certainly, it leaves the door open for significant resistance, although at this stage it is unclear precisely how widespread that potential resistance will be. Such opposition can also still be reinforced by the stance of presidential nominee Mitt Romney, who has promised to repeal the reform if he is elected later in 2012; he immediately reinforced this message in the aftermath of the ruling.

There are several immediate implications to yesterday's outcome. Initially, it means IHS Global Insight's underlying assumptions on healthcare costs and spending in the US market will remain unchanged. If the law had been struck down, it would almost certainly have led to a significant revision of our forecast. As it stands, we continue to believe that although significant ACA provisions have already been implemented and will continue to do so for the next couple of years, there will be little overall impact before 2014, when the major expansion is due to occur and tax increases will begin to take effect. The latter will reduce real consumer spending, while the former will significantly increase Medicaid spending.

The spending equation continues to be somewhat uncertain and unclear. There will almost certainly be Medicare cuts to compensate for the massive demand increase, but our assumptions are for a significant increase in the cost of health goods and services.

For the pharmaceutical industry, the ruling means it can continue to look forward to the critical 2014–16 horizon as a period of significant healthcare expansion. Currently, Medicaid offers federal funding for lower income families and vulnerable populations such as the elderly and disabled. The ACA significantly increases the scope of Medicaid, enforcing provisions that require states to cover all adults who have incomes at a 133% threshold of the federal poverty level. It also offers the industry some much-needed certainty; although there is a significant mixture of positives and negatives in the ACA for the drug industry, there is also no doubt that the reform could have been much worse for it. If the reform had been thrown out, those risks—which include negotiated pharmaceutical pricing—would have re-emerged.

There are also critical, specific provisions within the ACA that were at risk of being dropped alongside the whole law if the mandate had been rejected. Thus, the positive opinion means the pathway for biosimilars approval, which was part of the "Obamacare" package, will go ahead as originally anticipated. It also means the industry will continue with the special payments and taxes directed to fund and support the reform, while the expected rapid expansion of insurance coverage will still occur over the 2014–16 period. This represents a major cost burden for pharmaceutical companies, including an estimated USD2.5 billion in fees during 2011, USD2.8 billion in 2013, and an expected total of USD80 billion in fees and rebates over a 10-year period. These negative implications are offset by the expected rapid increase in demand come 2014, however, as well as the transfer of the expensive, and often unprofitable, pharma-sponsored low income patient assistance programmes, which are now due to be transferred to the government.

The ruling also means several areas of implementation that had been slowed down in anticipation of the Supreme Court decision can now once again proceed. Most notably, this concerns the Physician Payments Sunshine Act. Several companies had made it clear that spending on these provisions was being deferred until there was more clarity over whether the law in general—and hence the transparency measures required—would be upheld. Separately, it also means the controversial Independent Payment Advisory Board will go ahead as planned, as the key institution arrogated with the role to cut Medicare costs in areas where Congress has been unable to do so. There are still risks here, with the House of Representatives voting to repeal this institution, which is not subject to judicial review or comment.

For the medical device sector, the key implication is that the medical device tax will go ahead as originally outlined in the ACA in January 2013. There is still a significant chance of repeal here, however; 2012's Health Care Cost Reduction Act removes this tax and has already passed the House of Representatives. It is thus now in the hands of the Senate. In the short term, it is still unlikely to be passed among Democrats in the Senate, notwithstanding the fact that some House Democrats did vote in favour of the repeal. The Supreme Court opinion has strengthened the Democrats' hand on healthcare, and with the impending election, we do not expect significant deviations from the party line. In addition to this, with the increased likelihood of major healthcare insurance expansion, there will be a premium on generating revenues towards healthcare, and the medical device tax is critical in this context.

Outlook and Implications

The CBO projects that the law will cost USD1.76 trillion over 10 years, representing an enormous expansion in insured healthcare spending in the most important market in the world for the healthcare industry; in many ways, this guaranteed expansion could not come at a better time amid significant economic austerity and cost containment in Europe.

There continue to be significant unknowns that may still impede the progress of ACA implementation. This is particularly true with regards to presidential nominee Romney and the general opposition of the Republican party. If the party is elected in the November election, there is a significant risk the ACA—or key provisions therein—will be repealed, but there are major questions over whether it will be in a strong enough position to do so. Quite apart from the significant boost to the healthcare reform agenda that the Supreme Court opinion has engendered, it has also had the secondary knock-on effect of significantly strengthening President Obama's political capital, thus increasing his chances of winning re-election.

Still, even if Obama is re-elected, there is a potential for obstacles to emerge at the state level, which may choose to opt out of Medicaid expansion. Even without the curtailment of federal power to enforce Medicaid expansion on states, our assumption is that they will still generally fall in line, as federal funding would still be at risk if they impede its progress. Naturally, those states that are dominated by Republican governors will be those that are more heavily disposed towards opposition. This includes key states such as Texas, Florida, and Georgia, but in the current economic climate, it is questionable how strong their hand is.