Supreme Court Upholds Majority of Affordable Care Act in Historic Decision

Posted 28 June 2012 By Alexander Gaffney

In a historic decision, the Supreme Court has upheld the vast majority of the Patient Protection and Affordable Care Act (PPACA), ruling in a tightly-contest 5-4 decision that the law-and its individual mandate-could stand with some minor alterations.

Chief Justice John Roberts, appointed by President George W. Bush, joined with Justices Ginsberg, Sotomayor, Kagan and Breyer to decide in favor of the law.

One of the law's most contested provisions, the individual mandate, which requires all US citizens to obtain health insurance or pay a fine, was construed to be a tax and effectively upheld.

"The individual mandate cannot be upheld as an exercise of Congress's power under the Commerce Clause," wrote Roberts. "That Clause authorizes Congress to regulate interstate commerce, not to order individuals to engage in it. In this case, however, it is reasonable to construe what Congress has done as increasing taxes on those who have a certain amount of income, but choose to go without health insurance. Such legislation is within Congress's power to tax."

"The Affordable Care Act describes the "[s]hared responsibility payment" as a "penalty," not a "tax," Roberts wrote in another section of the 197-page opinion. "It does not, however, control whether an exaction is within Congress's power to tax.  In answering that constitutional question, this Court follows a functional approach,'[d]isregarding the designation of the exaction, and viewing its substance and application.'"

Roberts further explained the tax penalty was "not so high" as to force people to purchase insurance, and neither is it restricted to willful violators of the insurance provisions. Paired with the fact that the penalty is collected by the Internal Revenue Service (IRS), Roberts found the penalty to effectively be a tax, and used it as justification to uphold the law.

Medicaid Provisions Present Problems for Pharma

In a move surprising to some, the court also ruled the law's Medicaid provisions need to be reined in so as not to violate the rights of states. Under the decision, states will be able to opt out of the government's Medicaid expansion while still being able to protect their existing Medicaid funding stream.

"The constitutional violation is fully remedied by precluding the Secretary from applying §1396c to withdraw existing Medicaid funds for failure to comply with the requirements set out in the expansion," Roberts wrote. "The other provisions of the Affordable Care Act are not affected.  Congress would have wanted the rest of the Act to stand, had it known that States would have a genuine choice whether to participate in the Medicaid expansion."

The law was expected to add tens of millions of Americans to the rolls of those insured through Medicaid, which is a federal program administered and partially funded by state governments. The ruling could have large implications for the pharmaceutical industry depending on how many states choose to opt out of the program's expansion. The industry had given up tens of billions in revenue in return for an expected expansion of prescription-eligible patients.

Importantly for biopharmaceutical companies, the law upholds the biosimilar pathway established under Title XII of the PPACA, otherwise known as the Biologics Price Competition and Innovation (BPCI) Act. Under the BPCI, the US Food and Drug Administration (FDA) is allowed to establish a pathway for biologics claiming substantial equivalence to existing biologic products. Biologic product received twelve years of marketing exclusivity under the law.

Medical device companies may be less than pleased about today's ruling. Under the law, medical device manufacturers will be charged with a 2.3% excise tax on all non-retail medical devices sold. The measure is expected to cost manufacturers more than $20-30 billion before 2019.  

In a statement, AdvaMed President Steve Ubl said his organization remains opposed to the tax, and will continue working to overturn it. "We have consistently opposed the $29 billion medical device tax," Ubl wrote. "We will continue to work with policymakers on both sides of the aisle to achieve this goal."

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The Supreme Court's Ruling

Additional analysis about implications of the court case may be found in Regulatory Focus' 27 June piece, "How Will the Supreme Court's Ruling Affect Pharmaceutical and Medical Device Companies?" The article breaks down the entire PPACA into individual sections and provides insight into how they might fare under four different Supreme Court scenarios.

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