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October 11, 2012 Articles

Affordable Care Act's Impact on Life Sciences

The Supreme Court’s Patient Protection and Affordable Care Act decision will have a positive effect on the life sciences industry, but may cost the manufacturing sector billions over the next decade.

By Matthew P. Amodeo, Jennifer R. Breuer, Anna Schwamlein Howard, and Robyn S. Shapiro

On June 28, 2012, the U.S. Supreme Court released its much-anticipated decision on the constitutionality of various provisions of the Patient Protection and Affordable Care Act (PPACA). The Court upheld the “individual mandate” as a legitimate constitutional exercise of Congress’s taxing authority. The Court also upheld the requirement for states to expand eligibility under their Medicaid programs, although it struck down the provision that could have required noncomplying states to forfeit 100 percent of the their Medicaid funding. Although much of the analysis of the decision’s impact has been and should be focused on the ruling’s complex underpinnings and effect on public and private sources of health care coverage, it is important to understand the impact within life science segments of the health care industry.

Individual Mandate Upheld
Under the PPACA’s “individual mandate,” virtually all Americans must maintain health insurance coverage starting in 2014. Those challenging the individual mandate argued that it exceeds Congress’s authority under the Commerce Clause of the U.S. Constitution in that the Commerce Clause does not extend to the regulation of inactivity—the failure to purchase health insurance. The Court ruled that the Commerce Clause does not grant the federal government the authority to require citizens to purchase health insurance, but the Court found that the individual mandate is a constitutional exercise of Congress’s taxing authority because the penalty for those not purchasing insurance is essentially a tax.

Although the mandate has survived constitutional challenge, many remain skeptical that it will have a significant impact on insurance purchases, because failure to purchase insurance has no criminal implications and results in relatively small required “tax” payments.

Medicaid Expansion Limited
In the case, the 26 state plaintiffs argued that the PPACA’s expansion of Medicaid to benefit nearly all people under the age of 65 with income at or below 133 percent of poverty was coercive because the federal government could take away all of the states’ existing Medicaid funding if they failed to expand their coverage. The Court let the expanded Medicaid coverage requirement stand but invalidated the provision that could have forced states that did not comply to forfeit all of their Medicaid funding. The Court stated that any forfeiture of a state’s Medicaid funds must be limited to those funds associated with the expansion requirement.

The Court’s ruling leaves questions regarding implementation of the Medicaid expansion requirement. To ensure cooperation from the states, the federal government may need to offer additional financial incentives or find some other means to ensure implementation of this aspect of the PPACA.

In the weeks leading up to the decision, there was much discussion as to what would happen if the individual mandate were struck down. In that event, the government argued in briefs, the guaranteed-issue and community rating provisions of the law should be invalidated but all other provisions of the Act could be severed and survive. Those bringing suit argued that the PPACA’s requirements were so intertwined that if the individual mandate were found to be unconstitutional, the entire act would have to be invalidated.

Because the Court upheld the individual mandate requirement, it found no need to address severability. Thus, additional provisions of the PPACA (such as those relating to closing of the Medicare Part D coverage gap and the excise tax on medical devices) were upheld by the decision.

Impact on Life Sciences
The Court’s decision affects the life sciences industry in a number of ways, including innovation and compliance initiatives by medical device, pharmaceutical, and biotechnology companies.

A number of provisions in the PPACA provide incentives and resources for product innovation. First, it is expected that more than 30 million Americans will obtain health care coverage on account of the PPACA. A bigger pool of Americans using their health coverage to pay for treatment will yield growth in pharmaceutical sales and perhaps the ability to charge higher drug prices. This, in turn, could spur innovation.

In addition, the PPACA created the Therapeutic Discovery Project Program, through which $1 billion in new therapeutic discovery project grants and tax credits will be awarded. In 2010, 2,923 companies specializing in biotechnology and medical research in 47 states and the District of Columbia received awards under the grant program. Firms can opt to receive either a grant or a tax credit under the program, which allows both profitable companies and start-ups that are not yet profitable to benefit.

A third measure in the PPACA likely to have a positive impact on innovation is a provision that gives biotech companies a dozen years of exclusive rights to the data underpinning their products.

Conversely, the ruling leaves intact a 2.3 percent excise tax on medical devices, which is estimated to cost the industry $20 billion over the next 10 years and which manufacturers fear will hamper innovation. On the other hand, some believe that—as in the case of pharmaceutical manufacturers—expansion of health care coverage will increase the demand for medical devices and offset the effect of the tax.

The Court’s ruling affects not only the speed but also the direction of innovation in life sciences products. PricewaterhouseCoopers has identified five broad pillars of medical technology innovation: financial incentives (such as reimbursement for the adoption of new technologies); resources for innovation (such as academic medical centers); a supportive regulatory system; demanding and price-insensitive patients; and a supportive investment community of venture capitalists and other investors. PricewaterhouseCoopers, “Medical  Technology Innovation Scoreboard: The Race for Global Leadership” (Jan. 2011).

Various provisions in the PPACA promote the development of more cost-effective ways of delivering care, including a measure that calls for more real-world evidence of a new drug’s superiority over other treatments in order to qualify for reimbursement. Such provisions may spur more definitive product innovation as opposed to production of “me too” drugs and new devices that make only modest improvements to existing products.

Certain provisions in the PPACA also have an impact on compliance initiatives in the life sciences industry. The PPACA includes sunshine provisions that require pharmaceutical and medical device manufacturers to track and report payments and other transfers of value greater than $10 to physicians and teaching hospitals. Although improper industry-provider relationships primarily were uncovered by whistleblowers and government investigations under prior laws, the sunshine provisions place the onus on life sciences manufacturers to disclose their relationships with providers for review by others. This enhanced transparency and data accessibility could result in sharper scrutiny by enforcement agencies of potential improper relationships and violations of fraud and abuse laws.

Moreover, provisions in the PPACA enhance the government’s ability to pursue violations of existing fraud and abuse laws, such as revisions to the intent requirement of the anti-kickback statute. The provisions also allow the government to strengthen fraud enforcement tools (through changes to the False Claims Act), civil monetary penalty laws, sentencing guidelines, and exclusion authority, and dedicate $250 million for fraud and abuse enforcement. These changes will require life sciences companies to carefully structure and manage relationships with providers, and ensure that their compliance initiatives include efficient and effective operating procedures for tracking and reporting payments, educating and training sales and research personnel, and auditing and monitoring provider relationships.

Keywords: litigation, health law, Patient Protection and Affordable Care Act, PPACA, Supreme Court, Medicaid, health care, Commerce Clause, Anti-Kickback Statute, False Claims Act, Sunshine Provisions

Matthew P. AmodeoJennifer R. BreuerAnna Schwamlein Howard, and Robyn S. Shapiro are attorneys with Drinker Biddle & Reath LLP.

The substantive text of this article previously appeared in an online update published by the ABA Section of Litigation Health Law Litigation Committee.

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