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Trump administration proposes rules for Medicare plans as it seeks to lower drug prices

Jonathan Ernst | Reuters Health and Human Services Secretary Alex Azar listens as U.S. President Donald Trump delivers a speech about lowering prescription drug prices from the Rose Garden at the White House in Washington, U.S., May 11, 2018.

The Trump administration announced Thursday new proposals that would ban what it calls "backdoor rebates," as it seeks to lower drug costs for consumers at the pharmacy counter, a move that could impact the way insurers negotiate discounts on pharmaceuticals from manufacturers.

The Department of Health and Human Services is proposing new regulations for Medicare drug plans that would change the way drug discounts are negotiated, in order to address a "perverse incentive" which senior officials say drive up drug prices.

Under current federal regulations, discounts offered to consumers on Medicare and other federal government plans aren't allowed, due anti-kickback statutes. Right now, the discounts or rebates that PBMs extract from drug manufacturers for Medicare plans are not considered kick-backs. The administration says those confidential rebates have led to a "perverse incentive" for drug makers to make list prices on drugs artificially high.

"Every day, Americans — particularly our seniors — pay more than they need to for their prescription drugs because of a hidden system of kickbacks to middlemen," HHS Secretary Alex Azar said in a statement. "President Trump is proposing to end this era of backdoor deals in the drug industry, bring real transparency to drug markets, and deliver savings directly to patients when they walk into the pharmacy."

Instead, the department is proposing replace the rebate system. Pharmacy benefit managers, or PBMs, would get a flat fee for including drugs on their plans. The rule would also create a new so-called safe harbor for drugs discounts to be passed on to patients at the pharmacy counter.

New proposals must undergo a public comment period, under federal rules, before they can be finalized. The pharmaceutical industry lobby Pharmaceutical Research and Manufacturers of America (PhRMA) reacted positively late Thursday.

"We applaud the Administration for taking steps to reform the rebate system to lower patients' out-of-pocket costs… We need to ensure that the $150 billion in negotiated rebates and discounts are used to lower costs for patients at the pharmacy," said Stephen Ubl, PhRMA president and CEO in a statement, adding "This proposal would also fix the misaligned incentives in the system that currently result in insurers and pharmacy benefit managers (PBMs) favoring medicines with high list prices."

The health insurance lobby blasted the proposal, saying the administration "should go back to the drawing board" and take aim directly at high prices set by drug makers.

"Big Pharma has been working nonstop to deflect attention from outrageously high prices by convincing Americans that health insurance providers and their PBM partners are the problem, acting as so-called 'middlemen.' We are not middlemen – we are your bargaining power, working hard to negotiate lower prices with drug makers to save seniors and other patients about 50 percent a year on their prescription drug and related medical costs," maintained Matt Eyles, president and CEO of America's Health Insurance Plans (AHIP).

The news pressured shares of the parent companies of the nation's largest pharmacy benefit management firms in after-hours trade. The nation's four largest PBMs are now all integrated with health insurance firms, following the recent completion of CVS Health's merger with Aetna and Cigna's acquisition of Express Scripts. UnitedHealth Group owns the OptumRX PBM and Anthem will be launching its own unit IngenioRx in the second quarter.

"The market consolidation that we've seen with pharmacy benefits managers… makes it harder ( for drug makers) to push back against this demand for rebates" explained Lindsay Bealor Greenleaf, a director at ADVI Health, a health care policy consultancy. She said last fall, the administration proposed giving Medicare plans and PBMs more power to negotiate discounts from drug makers last fall, along with greater flexibility to favor less expensive drug in their drug plans.

"This proposal is more of a balanced approach with (the administration's) prescription drug reform, considering the increased leverage" of the PBMs, Greenleaf explained.

Insurers and pharmacy benefit managers have argued that the rebates are spread across the pool of insured patients in order to keep overall premiums lower. They warn that getting rid of the rebates altogether would result in higher insurance rates for all patients.

A senior health official said that under their proposed rule, the administration calculates that Medicare Part D premiums could go up between $3 to $5 per month, but for those who rely on drugs for chronic conditions "the savings far exceeds that" and the proposed system could bring overall list prices down by 30 percent.

The proposed rules would only apply to Medicare and Medicaid plans, under the revised kick-back statutes. But senior administration officials say the new rules could ultimately influence the way private sector drug plans are negotiated, as well.

"Maybe it will move everyone to a new structure," said Greenleaf. But she added that it could result in cost-shifting to private health plans.

"If PBMs aren't able to extract rebates for the government beneficiaries, maybe that could result in even bigger rebates (and higher list prices) on the commercial side."

— CNBC's Angelica Lavito contributed to this report.

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