In a landmark ruling, the US Supreme Court upheld the individual insurance mandate at the heart of the Affordable CAre Act, which was the centerpiece of healthcare reform. For drugmakers and biotechs, the outcome means a degree of predictability, even though they will face billions of dollars in price cuts and fees. The initial reaction among investors was to send drug and biotech stocks down (here is the Supreme Court ruling).
"Today's decision means that the impact of the ACA on pharma will change little," Ian Spatz, a senior advisor to Manatt Health Solutions and a former vp for public policy at Merck, tells us.
For those curious to know the bottom line, the SCOTUS blog provided some helpful, on-the-spot reading and analysis this morning. "Those subject to the individual mandate may lawfully forgo health insurance and pay higher taxes, or buy health insurance and pay lower taxes. The only thing that they may not lawfully do is not buy health insurance and not pay the resulting tax,” they wrote.
"...The Affordable Care Act, including its individual mandate that virtually all Americans buy health insurance, is constitutional. There were not five votes to uphold it on the ground that Congress could use its power to regulate commerce between the states to require everyone to buy health insurance. However, five Justices agreed that the penalty that someone must pay if he refuses to buy insurance is a kind of tax that Congress can impose using its taxing power. That is all that matters.
"Because the mandate survives, the Court did not need to decide what other parts of the statute were constitutional, except for a provision that required states to comply with new eligibility requirements for Medicaid or risk losing their funding. On that question, the Court held that the provision is constitutional as long as states would only lose new funds if they didn't comply with the new requirements, rather than all of their funding," they wrote.
As for drugmakers and biotechs, they can continue to expect to pay fees and rebates that were agreed to help fund the Affordable Care Act over a 10-year period. For instance, the Avalere Health consulting firm expects the industry will incur as much as $105 billion in fees and other costs. This would include provisions for biosimilars, although so-called reference product sponsors, or those sell original biologics, will have 12 years of market exclusivity.
This likely explains why drug and biotech stocks fell after the ruling was announced. "Perhaps some (investors) had believed the whole law would go down with positives for pharma in eliminating fee, Medicaid rebate increases, etc.," says Spatz. Drugmakers will maintain liability for increased Medicaid rebates and Medicare Part D coverage gap closure, and benefit from roughly 30 million new lives coming into the system, notes Avalere.
The ruling is "negative because the costs are rather high and the industry may not recoup that much in new revenue once the uninsured come into the system in 2014. The fees were $2.5 billion last year and will be $2.8 billion this year. These figures are per the actual ACA law. In addition, the drug industry is also 'paying' for the ACA in the form of higher rebates and discounts," Michael Levesque, a senior vp at Moody's Investor Services, tell us.
Who is most vulnerable? Moody's points to Pfizer and Merck have the highest sales of drugs in the US market and are among the most exposed to the costs of the ACA. But relative to total revenue and earnings before interest, taxes, depreciation and amortization, or EBITDA, Bristol-Myers Squibb and Eli Lilly are more adversely affected than Pfizer and Merck.
Since the healthcare reform became law two years ago, industry has spent more than $3.5 billion discounting drugs for the elderly who pay out of pocket while in the Medicare Part D drug coverage gap, or donut hole, according to the Centers for Medicare and Medicaid Services, The Wall Street Journal writes.