How Will the Supreme Court's Ruling Affect Pharmaceutical and Medical Device Companies?

Posted 27 June 2012 By Alexander Gaffney

On 28 June 2012, the Supreme Court of the United States (SCOTUS) is expected to pass down several judgments deciding the fate of the Patient Protection and Affordable Care Act (PPACA)-a sprawling piece of legislation that has inspired deep division among the American public.

At issue before the court is a series of court cases all asking SCOTUS a similar question: Is PPACA constitutional?

As indicated by the questions asked by the justices during the cases' respective hearings, this is not a question easily answered. The question has promoted so much debate, in fact, that the court accepted a number of cases intended to answer four separate issues:

Life science companies, including manufacturers of medical devices, pharmaceuticals and biopharmaceuticals, have an enormous amount at stake in the outcome of any Supreme Court ruling. This article breaks down PPACA into its individual titles and explains exactly what is at stake for companies and how various scenarios might affect them differently.

Title I: "Quality, Affordable Health Care for All Americans"

What it Affects: Insurance Provisions and Coverage

PPACA Title I contains a number of provisions aimed at containing the cost of care and expanding coverage through the institution of state-run healthcare exchanges, which are set to go into effect in 2014. At the time of PPACA's passage, the Congressional Budget Office (CBO) estimated some 32 million Americans would obtain coverage through the exchanges by the end of the decade.

Perhaps more important for life science companies is not how consumers obtain coverage, but what benefits they are entitled to through their coverage. Under Subtitle A of Title I, insurance companies would no longer be allowed to institute lifetime caps on benefits, could no longer cancel coverage under a practice known as "rescission," and would be required to pay for all preventative medical services rated by the US Preventative Services Task Force (US PSTF).

These provisions are of particular importance for pharmaceutical companies offering high-cost treatments, particularly for rare diseases. Several therapies released in 2012-Vertex Pharmaceuticals' Kalydeco (ivacaftor), Pfizer's Elelyso (taliglucarase alfa), Roche's Perjeta (pertuzumab) and Roche's Erivedge (vismodegib)-cost more than $75,000 per year or course of treatment. The long-term use of these drugs with caps on benefits could leave many patients exhausting their coverage limits in just a few years.

Even healthy patients could see more regular care under the provisions of Subtitle A, guaranteeing access to preventative medical services, which could well include access to some common drugs like statins-guaranteed under Subtitle D of Title I.

Subtitle C of Title I provides another protection for patients that could vanish if the Supreme Court strikes down the law. Under so-called "guaranteed issue" provisions, no insurer can deny coverage to someone seeking insurance based on pre-existing conditions and must allow sick enrollees to maintain coverage if they so choose. This, too, is a potential boon to life sciences companies, which could see the patients most requiring care gain access to treatments on a long-term basis.

Subtitle F-better known as the individual mandate-is also contained within this section, and requires individuals to obtain insurance coverage or pay a penalty to the federal government. Between PPACA's various provisions, an estimated 30 million people would obtain insurance coverage by 2016, although millions still will be uninsured.

The Potential Impact of SCOTUS:

If the Supreme Court strikes the entire law: Title I would be eliminated. Some of the most popular provisions might be carried on voluntarily by insurance companies, but they are unlikely to maintain those that offer the most potential for the life sciences industry.

If the Supreme Court strikes just the individual mandate: Title I would be heavily amended as the result of the individual mandate contained in Subtitle F.

If the Supreme Court Strikes all of the law's insurance provisions: Title I would almost certainly be eliminated due to its heavy emphasis on insurance provisions under the law.

If the Supreme Court Strikes the law's Medicaid Expansion: The expansion of Medicaid has little to do with Title I of PPACA.

Title II: "The Role of Public Programs"

What it Affects: A Massive Expansion of the Medicaid Insurance Program

Under the US's trifurcated system of healthcare in which consumers either obtain coverage through employer-run health plans, the private market or government programs, one of the largest insurance programs is Medicaid.

Unlike Medicare, which is a federally administered program focusing on those age 65 and older, Medicaid is a state-administered program partially funded and heavily regulated by the federal government. The programs currently exist as a patchwork of coverage provisions primarily focused on children (under the Children's Health Insurance Program, or CHIP), poor seniors, pregnant women, infants and the parents of children enrolled in Medicaid.

PPACA Title II would dramatically simplify Medicaid coverage provisions by opening eligibility to all citizens earning less than 133% of the federal poverty level. The program stands to expand from approximately 60.4 million enrollees to more than 82 million enrollees by 2019. Anticipating this huge expansion in coverage, legislators inserted a provision into Subtitle F of Title II requiring drug manufacturers to pay enhanced rebates for outpatient prescription pharmaceuticals-an estimated $38.1 billion worth of rebates through 2019. If PPACA is repealed, the rebates would remain at current levels, but so would the number of Medicaid enrollees.

The Potential Impact of SCOTUS:

If the Supreme Court strikes the entire law: Title II would be eliminated.

If the Supreme Court strikes just the individual mandate: It is unlikely Title II would be affected by the individual mandate being declared unconstitutional.

If the Supreme Court Strikes all of the insurance provisions of the law: Title II could possibly be struck down as it represents an expansion of public insurance.

If the Supreme Court Strikes the law's Medicaid Expansion: Title II would be struck from the law in its entirety. The federal government likely would need to dramatically reconfigure its funding mechanism for Medicaid, possibly making the program operate more like Medicare.

Title III: "Improving the Quality and Efficiency of Health Care"

What it Affects: Medicare Part D and the Independent Payment Advisory Board

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 represented one of the single largest expansions of a federal program in history, giving more than 40 million Medicare-eligible seniors access to a federally subsidized plan to help them afford drugs. But the program, called Medicare Part D, almost instantly became as notorious for what it did not cover as for what it did.

Under the law, federal subsidies evaporated after consumers used up $2,400 in coverage in a single year, and only returned once a Medicare enrollee had spent more than $6,154 in a single year. Another controversial provision of the law prohibited the federal government from forming a single bargaining unit to negotiate with drug manufacturers, thereby decreasing its negotiating position relative to the industry.

Subtitle D of Title III seeks to correct the former of these two issues, albeit not in a direct way. Under the subtitle's provisions, the "donut hole" will eventually be closed, with prescription drug companies picking up the tab for closing half of the donut hole through 2014. The program expansion will eventually cost the government more than $42 billion-a number that informed concessions given up by the industry in Title IX of PPACA. The terms of this agreement are eventually altered in Title X to include additional government support, but do not require additional support from the pharmaceutical industry.

Title III also contains one of the most controversial and least understood provisions of the law: the Independent Payment Advisory Board (IPAB). The 15-member board is set to act as a comparative effectiveness research (CER) body, determining the ways to best control Medicare cost growth. While the board is prohibited from rationing care or changing eligibility standards, it nevertheless could have massive implications for life science companies over the long-term. Given the organization's projected savings-$15.1 billion through 2019-it seems likely IPAB, or something like it, would be resurrected at some point even if PPACA is struck down by the Supreme Court.

The Potential Impact of SCOTUS:

If the Supreme Court strikes the entire law: Title III would be eliminated. Many pharmaceutical companies have already said they would not continue the drug rebate program on a voluntary basis.

If the Supreme Court strikes just the individual mandate: It is unlikely Title III would be affected by the individual mandate being declared unconstitutional.

If the Supreme Court Strikes all of the insurance provisions of the law: As Medicare Part D is technically an insurance program, it is possible the court could see the provisions of Title III as an insurance provision and throw out Title III.

If the Supreme Court Strikes the law's Medicaid Expansion: Title III is unlikely to be affected if the law's Medicaid expansion is deemed to be unconstitutional.

Title IV: "Prevention of Chronic Disease and Improving Public Health"

What it Affects: Insurance Coverage Provisions for Those Enrolled in Medicare and Medicaid

Title IV has relatively few provisions capable of affecting the life sciences industry, but those provisions carry a significant impact. As with private insurers-see Title I of the law-Medicare and Medicaid would both be required to cover free preventative health services for enrollees for US PSTF-approved services under Subtitle B of Title IV. These programs are expected to have little effect on the federal deficit, despite expanding coverage to approximately 100 million enrollees, but could be an enormous boon to life science companies.

Among the current US PSTF-recommended services are screening for depression, dental screening, screening for sexually transmitted infections and diseases and certain cancer screenings. This has the potential to open up tens of millions of new patients to treatment products manufactured by life science companies.

The Potential Impact of SCOTUS:

If the Supreme Court strikes the entire law: Title IV would be eliminated.

If the Supreme Court strikes just the individual mandate: It is unlikely Title IV would be affected by the individual mandate being declared unconstitutional.

If the Supreme Court Strikes all of the insurance provisions of the law: Title IV could potentially be struck down if the Supreme Court believes the insurance provisions of the bill are altogether unconstitutional, as Medicaid and Medicare are both public insurance programs.

If the Supreme Court strikes the law's Medicaid Expansion: Because Title IV contains a large number of provisions pertaining to Medicaid, the Title or numerous Subtitles likely would be struck from the law if the Medicaid expansion were deemed to be unconstitutional.

Title V: "Health Care Workforce"

What it Affects: Expanding the Healthcare Workforce

PPACA Title V does not have any provisions clearly impacting the life sciences industry.

Title VI: "Transparency and Program Integrity"

What it Affects: Marketing Transparency and Program Oversight

As far as the life sciences industry is concerned, PPACA Title VI is devoted to three main provisions: The Physician Payments Sunshine Act (PPSA), the Patient-Centered Outcomes Research Institute (PCORI) and a cavalcade of program integrity provisions intended to prevent fraud in federal programs.

Under the terms of PPSA, a bill long-championed by Sens. Charles Grassley (R-IA) and Herb Kohl (D-WI), the life sciences industry will be required to report all gifts over the value of $10 made to physicians. Companies giving physicians more than $100 in gifts during a single year also will be required to disclose their contributions under the law. Violators of the provisions, contained in Subtitle A of Title VI, could find themselves fined up to $10,000 per accidental violation and up to $1,000,000 per willful violation.

Subtitle E of Title VI contains a number of program integrity measures pertaining to Medicare, Medicaid and CHIP. Under this subtitle, program suppliers will be subject to enhanced screening to weed out unsavory practices and potential abuse. The Department of Health and Human Services (DHHS) also is empowered to issue subpoenas and require testimony from those thought to be engaging in abuse, with a bond in an amount relative to the size of the company under investigation. Those found to be stalling or otherwise preventing access to documents can be fined up to $15,000 per day or $50,000 per false statement.

Subtitle F of Title VI contains a provision that could impact life sciences companies. Under the law, if one state terminates a company from its Medicaid program, all states must do the same. This raises the potential risk for life sciences companies, as states will have a significant boost to their bargaining power when negotiating settlements for alleged misbehavior.

The final important provision for life science companies in Title VI is PCORI. The semi-public organization was formed to make recommendations regarding the use of the clinical effectiveness of medical treatments through the use of comparative effectiveness studies. While PCORI cannot order any federal organization to do anything, its decisions, much like those of the US PSTF, may alter physicians' prescribing and treatment habits.

The Potential Impact of SCOTUS:

If the Supreme Court strikes the entire law: Title VI would be eliminated.

If the Supreme Court strikes just the individual mandate: It is unlikely Title VI would be affected by the individual mandate being declared unconstitutional.

If the Supreme Court Strikes all of the insurance provisions of the law: Title VI does not contain any insurance provisions and is unlikely to be affected by the law's insurance provisions being declared unconstitutional.

If the Supreme Court Strikes the law's Medicaid Expansion: While Title VI deals with several federal programs including Medicaid, the provisions deal with program oversight rather than insurance administration. If the expansion of Medicaid were deemed unconstitutional, it is likely the majority of Title VI would remain unchanged.

Title VII: "Improving Access to Medical Therapies"

What it Affects: The Entire Biopharmaceutical Industry, and Biosimilars in Particular

No other title has as many regulatory implications for a single industry as Title VII, which contains the Biologics Price Competition and Innovation (BPCI) Act of 2009. Under the terms of Title VII, biopharmaceutical manufacturers receive 12 years of market exclusivity for their products during which no biosimilar manufacturer may market its products.

BPCI directs the US Food and Drug Administration (FDA) to establish regulations regarding the manufacture, marketing application and postmarketing maintenance of biosimilar products. Should the Supreme Court strike down the law, FDA likely would be required to scrap all regulatory efforts taken thus far by the agency, or at least place them on hold until new legislation is passed. Due to the current pace of the Food and Drug Administration Safety and Innovation Act (FDASIA) in Congress, it seems unlikely that replacement provisions for the BPCI could be added to that bill prior to passage, which must occur by the end of September.

In addition to the biosimilar provisions, Subtitle B of Title VII also establishes additional entities eligible for drug discounts under the federal 340B program, which limits prices for outpatient drugs obtained in certain hospital settings. Orphan drug products are notably absent from these price limitations.

The Potential Impact of SCOTUS:

If the Supreme Court strikes the entire law: Title VII would be eliminated, and FDA would be forced to table or scrap all efforts made thus far to regulate biosimilars.

If the Supreme Court strikes just the individual mandate: It is unlikely Title VII would be affected by the individual mandate being declared unconstitutional.

If the Supreme Court Strikes all of the insurance provisions of the law: Title VII likely would stand, as it is not closely related to any of the law's insurance provisions.

If the Supreme Court Strikes the law's Medicaid Expansion: Title VII is unlikely to be affected if the law's Medicaid expansion is deemed to be unconstitutional.

Title VIII: "Community Living Assistance Services and Supports Act (The CLASS Act)"

What it Affects: Long-Term Care Insurance

The CLASS Act is currently in a state of legislative limbo. Thanks to a provision inserted into the law by Sen. Judd Gregg (R-NH), the program was required to establish a fiscal model for ensuring its solvency over 75 years. The problem for the program, which is intended to allow people to purchase federally backed long-term care insurance (LTCI), is that it was unable to do so. Rather than repeal the section, Democrats have fought to keep the section in the hopes of resurrecting it at a later date when a solvency measure can be formulated.

Title VIII contains no provisions that obviously affect the life sciences industry at this time.

Title IX: "Revenue Provisions"

What it Affects: The Entire Life Sciences Industry

Title IX contains four measures impacting the life sciences industry. As the result of the massive increase in the number of insured patients under PPACA, Congressional negotiators were able to extract concessions from the pharmaceutical and medical devices industries to partially offset the cost of providing prescription products to millions of new consumers. These fees as taxes affect each industry differently

Subtitle A tasks pharmaceutical manufacturers with paying an annual fee of $2.8 billion per year after 2018. Between 2012 and 2019, pharmaceutical manufacturers will pay fees of $18.7 billion to the government. An additional fee on manufacturers and importers of branded pharmaceutical products will extract an additional $27 billion.

A further $4.5 billion will be eliminated from a subsidy currently allocated to employers providing drug coverage to former employees. These employees will be covered under the Medicare Part D program, which the Congressional Budget Office (CBO) said could administer benefits at less expense.

Medical device manufacturers also are subject to fees payable to the federal government through a different fee mechanism. Device manufacturers-with the exception of retail medical devices like glasses-will be required to pay the government 2.3% of the sale price of the device. This excise tax is expected to cost medical device manufacturers $20 billion by 2019. As with the pharmaceutical industry, an additional tax on importers of some medical devices will extract an additional $20 billion in fees from the industry by 2019.

The Potential Impact of SCOTUS:

If the Supreme Court strikes the entire law: Title IX would be eliminated.

If the Supreme Court strikes just the individual mandate: It is unlikely Title IX would be affected by the individual mandate being declared unconstitutional.

If the Supreme Court Strikes all of the insurance provisions of the law: It is unlikely Title IX would be affected by the law's insurance provisions being declared unconstitutional.

If the Supreme Court Strikes the law's Medicaid Expansion: Title IX is unlikely to be affected if the law's Medicaid expansion is deemed to be unconstitutional.

Note: It is possible portions of Title IX's revenue provisions would be struck down since they are intended to pay for an expansion in coverage under the law. It is uncertain whether the justices would attempt to determine which sections should be eliminated or leave this task to the legislative branch.

Title X: "Reauthorization of the Indian Health Care Improvement Act"

What it Affects: Revenue Provisions and the National Institutes of Health

Unlike the other titles of PPACA, Title X was not in the original bill. Instead, Title X is a standalone piece of legislation passed through a process known as reconciliation that allowed congressional Democrats to get PPACA signed into law and overcome the threat of a filibuster in the Senate after Sen. Scott Brown (R-MA) won Sen. Ted Kennedy's (D-MA) former seat.

Title X is a set of unrelated provisions. Two main provisions in Title X are of interest to the life sciences industry: Subtitle D creates a center within the National Institutes of Health (NIH) to accelerate the development of medical products, and Subtitle B alters the "donut hole" rebate provisions in Title III. Under the revised "donut hole" provisions, the pharmaceutical industry will continue to support rebates for 50% of the cost of brand-name drugs not covered in the "donut hole," and the federal government will pick up half of the remaining tab, leaving consumers responsible for 25% of the original amount.

The Potential Impact of SCOTUS:

If the Supreme Court strikes the entire law: Title X would be eliminated.

If the Supreme Court strikes just the individual mandate: It is unlikely Title X would be affected by the individual mandate being declared unconstitutional.

If the Supreme Court Strikes all of the insurance provisions of the law: It is unlikely Title X would be affected by the law's insurance provisions being declared unconstitutional.

If the Supreme Court Strikes the law's Medicaid Expansion: Title X is unlikely to be affected if the law's Medicaid expansion is deemed to be unconstitutional.

 

Conclusion: Much at Stake for Life Science Companies

The life sciences industry, perhaps second only to the health insurance industry, is profoundly affected by PPACA. With tens of millions of new patients, potentially favorable insurance provisions, tens of billions of new fees, a new framework for biosimilar products and new organizations capable of affecting future prescribing habits, the true impact of the legislation-if allowed to stand-may not be fully understood for decades to come.

Regardless of the Court's decision on 28 June 2012, life science professionals will be forced to grapple with a rapidly changing healthcare landscape driven by a myriad of factors both within and outside of PPACA. The only question is whether they will be ready to confront the challenges before them.

Source note: This article adheres closely to the book Inside National Health Reform by John E. McDonough, Professor at Harvard's School of Public Health and formerly Sen. Ted Kennedy's (D-MA) Senior Advisor on National Health Reform, for analysis and budget scoring originally provided by the Congressional Budget Office (CBO).

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