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Drug companies brace for Supreme Court decision on Affordable Care Act


Pharmaceutical Companies Brace for Supreme Court Decision on Obamacare

NEW YORK (GlobalData), 27 March 2012 - This week the United States Supreme Court will hear arguments regarding the constitutionality of the Patient Protection and Affordable Care Act, more commonly known as Obamacare. The question at the heart of the dispute is whether or not the federal government, exercising its power under the Commerce Clause of the Constitution, can compel individuals to purchase health insurance.

The case in question was brought by 26 states in conjunction with the National Federation of Independent Business. Cases regarding the constitutionality of Obamacare have divided lower courts, with different rulings going both ways. Due to the fractious nature of the lawsuits and the importance of the issue, the Supreme Court quickly took on these cases and has devoted an unusually large amount of time to oral arguments over three days this week. The outcome of the case is vitally important to the pharmaceutical industry, which may lose out on $115 billion in additional revenue over the next decade if the law is overturned.

The Court’s decision, which is expected to be released in June, will have a major impact on pharmaceutical manufacturers. Drug companies worked with the Obama administration to craft the legislation, and, despite some concerns, the law offers a potentially huge windfall for the industry. Due to pricing pressure and energetic generic competition, pharmaceutical companies have seen very little expansion in the world’s largest drug market. Instead, these companies have been forced to look to emerging markets, especially China and other Asian nations, but also Eastern Europe, for growth. According to the US Census Bureau, there are currently more than 50 million Americans who have no health insurance. If Obamacare is deemed constitutional and the individual mandate is implemented in 2014, the Congressional Budget Office predicts that about 30 million of these people will gain health insurance. While the relative merits of implementing Obamacare will be hotly debated, 30 million newly insured potential customers will be a certain boon the pharmaceutical industry.

The Supreme Court will be hearing arguments for distinct legal issues on each day of oral arguments. The first day, the question on the table will be whether or not the Court can hear the case at all. This issue stems from a provision of the Tax Anti-Injunction Act, a law dating to 1867 that makes it illegal for a court to rule on a tax before it is assessed. Neither the Obama administration nor the parties of the lawsuit would argue in favor of this, so the Court appointed a third-party to make the argument. The Court is widely expected to dismiss this question and rule on the rest of the act, in part because doing so would put states in the unsavory position of spending money to prepare for a law that may not be fully enacted. On the second day of oral arguments, the sides will argue the constitutionality of the individual mandate. On the third day, the Court will hear arguments about the severability of the law; in other words, if the individual mandate is deemed unconstitutional, to what extent does this affect the rest of the law? The Obama administration will argue that most of the rest of the law should stand regardless of the mandate, but opponents will argue that the whole law should fall.

The key argument against the individual mandate is that it is unconstitutional for the government to compel an individual to purchase a good or service. A commonly cited example is that the individual mandate is akin to forcing people to eat broccoli because it is healthy or buy a new car to help the auto industry. The argument is that the Commerce Clause gives Congress the power to regulate economic activity. However, a decision not to purchase health insurance is ‘economic inactivity’ and therefore can’t be regulated under this Clause. Proponents of the law argue that unlike most goods and services, which people can choose to purchase or not, everyone is part of the healthcare system. If a person without health insurance goes to the emergency room, someone still has to pay for that visit. The effect of America’s huge uninsured population engaging services such as ERs is increasing insurance premiums for those who do have coverage and costs for the government. The administration will argue that choosing to go without insurance has a significant effect on interstate commerce and is therefore justifiably regulated under the Commerce Clause.

It is likely that the momentum against Obamacare is driven mostly by politics rather than the underlying legal issues. When the strong emotions on both sides of the argument are stripped away, it appears that legal precedent supports the Obama administration’s position that the mandate is constitutional. Moreover, considering recent controversial decisions, the Supreme Court may not want to overturn the President’s signature law in a politically charged environment. Of course, no one can know what is on the Justices’ minds until the decisions are handed down. From the perspective of the pharmaceutical industry, however, the health of future profits depends on Mr. Obama’s success.

The US pharmaceutical market was worth $329 billion in 2010 and GlobalData anticipates that the market will grow to $505 billion by 2020, representing a CAGR of 4.4%. We predict that the overall effect of the legislation will be to add $115 billion dollars in revenue over 10 years. However, overturning the individual mandate would lead to more than just a loss of new customers. As mentioned, the pharmaceutical industry worked with the Obama administration to craft portions of the healthcare law. Key cost-saving initiatives in the law include programs to increase the use of generics and discounts for expensive branded drugs, which the industry agreed to in exchange for the promise of new patients. If the mandate is ruled unconstitutional, it is likely that these provisions will stay in place, but without the infusion of new customers to offset lost revenue. The closing of the so-called ‘donut hole’ in Medicare prescription drug coverage, another provision of the law that is helpful to the industry, could possibly be overturned, further harming companies’ profits. Regardless of individuals’ personal political preferences, those in the pharmaceutical industry should be hopeful that the Supreme Court does not overturn Obamacare.



This expert insight was written by GlobalData's Head Healthcare Industry Dynamics, Dr. Jerry Isaacson. If you would like an analyst comment or to arrange an interview, please contact us on the details below.


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