White House Pulls the Plug on Proposed Drug-Rebate Overhaul

(Bloomberg) -- The White House abandoned a push to end rebates paid to middlemen who negotiate drug prices on behalf of health insurers, a move that could turn scrutiny back on how drugmakers themselves set prices.

President Donald Trump has made lowering prescription-drug costs a top priority of his administration, and ending rebates was seen as a vital part of that effort.

The reversal caused investors to recalibrate their expectations. After mostly languishing this year, shares of companies that operate large pharmacy-benefit managers rallied, with CVS Health Corp. rising 7% to $59.23 at 9:35 a.m. in New York, while UnitedHealth Group Inc. advanced 3% to $254.98.

The president’s proposal would have prohibited drugmakers from paying rebates to PBMs in government programs such as Medicare. The move could have upended a complex system that influences tens of billions of dollars of pharmaceutical spending.

“Based on careful analysis and thorough consideration, the President has decided to withdraw the rebate rule,” said Judd Deere, a White House spokesman. He said that the administration was encouraged by bipartisan discussion on legislation to control drug costs.

Rebates had become a popular target of criticism in Washington after drug companies lobbied aggressively to cast them as the reason for high prices. Pharmacy-benefit managers negotiate drug discounts in the form of rebates, often keeping some of that money for themselves.

The practice, critics said, gives drugmakers a reason to keep list prices high, distorts incentives for drug plans who are supposed to prioritize the interest of their clients and leaves consumers paying more out of pocket for prescription drugs.

Substantial Shift

The about-face represents a second dramatic turn this week for the Trump administration’s campaign to rein in rising pharmaceutical costs. On Monday, a federal judge ruled the Department of Health and Human Services overstepped its authority with its plan to force drugmakers to disclose list prices in advertisements.

Pharmacy-benefit managers blame drug companies for soaring prices and have said that rebates help keep overall health costs down.

“We’re pleased the administration recognized the impact the rebate rule would have on seniors,” said CVS spokesman T.J. Crawford, “and look forward to continuing to work with all stakeholders on lowering drug costs. Any solution should start with addressing drug prices.”

The end of the rebate push is likely to swing discussion back toward the pricing practices of big drugmakers, and it could add momentum to other proposals that have been floated by the administration, such as tying drug costs to an index of international pharmaceutical prices. Trump last week said his administration is working on an executive order to tie drug prices in U.S. government health programs to the rates paid by other industrialized nations.

The shift is “a substantial setback for drug manufacturers that could have seen a windfall” from the rebate overhaul, said Hunter Hammond, an analyst at Height Securities, in a note to clients.

The Nasdaq Biotechnology Index, often viewed as a barometer of investor sentiment about drug prices, was down 1.2% in New York.

--With assistance from Margaret Talev and Robert Langreth.

To contact the reporter on this story: Anna Edney in Washington at aedney@bloomberg.net

To contact the editors responsible for this story: Drew Armstrong at darmstrong17@bloomberg.net, Timothy Annett

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