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By Caroline Humer and Bryan Pietsch
NEW YORK/WASHINGTON (Reuters) - The Trump administration on Thursday scrapped one of its most ambitious proposals for lowering prescription medicine prices, backing down from a policy aimed at health insurers and raising the possibility of new measures focused on drugmakers.
The abandoned proposal would have required health insurers to pass billions of dollars in rebates they receive from drugmakers to Medicare patients.
The decision represents a new setback to U.S. President Donald Trump's efforts to deliver on a pledge to lower drug prices for consumers before the November, 2020 election, when Republicans want to capitalise on voter concern over high healthcare costs.
It allows companies like Cigna Corp <CI.N> and CVS Health Corp <CVS.N>, which negotiate rebates with drugmakers on behalf of the government's Medicare programme, to continue to benefit from those discounts.
Shares of Cigna rose 9%, CVS gained 5% and UnitedHealth Group Inc <UNH.N> was up 6%.
Pharmaceutical company shares fell, with Merck & Co <MRK.N> off 4%, Bristol-Myers Squibb Co <BMY.N> down 3% and Pfizer Inc <PFE.N> off 2%.
Baird analyst Eric Coldwell said Trump was likely refocusing his reform efforts on the pharmaceutical companies themselves.
"There are still many headwinds for the supply chain, but... pharma and biotech seem to have drawn the ire of the administration more recently," said Coldwell, noting the industry's successful legal challenge of a rule that would have required drugmakers to include list prices in TV ads for their medicines.
"Shelving the rebate reform initiative, which pharma strongly supported, feels like payback," Coldwell added.
The White House first floated the idea of ending the rebates last year as part of a drug pricing "blueprint" aimed at bringing down costs.
Several Democratic presidential hopefuls have also seized on drug pricing as a key issue for the 2020 elections. Legislators, including House Speaker Nancy Pelosi, are pushing for new laws to allow the government to negotiate drug prices directly with manufacturers.
A senior administration official, speaking on the condition of anonymity, said the rule was too costly and could have hurt chances for bipartisan legislation.
“The decision was made that... it was not prudent to go forward with the rule right now, that it would be too disruptive, that the risk was probably too high, and that it might upset a legislative deal, which is our primary focus," he said.
The rebate rule would have forced companies like Cigna and CVS either to forgo the discounts or pass them onto Medicare patients enrolled in their health insurance plans and drug plans.
They argued that such a change would force them to raise monthly premiums and had been pressing the administration to consider its impact on Medicare, which includes people aged 65 and older and the disabled, and instead focus on drugmakers.
"Only drug manufacturers have the power to set drug prices. We believe that the key to lowering drug costs is to enact policies that encourage greater competition," JC Scott, chief executive of industry lobbyist Pharmaceutical Care Management Association, said in a statement.
PhRMA, the main pharmaceutical industry lobby group, disagreed, saying in a statement that the move ended the only government proposal that would have provided immediate savings at the pharmacy counter for patients.
'UNINTENDED WINDFALL PROFITS' FOR DRUGMAKERS
The Trump administration is considering a proposed rule that aims to bring some U.S. drug prices in the Medicare program in line with lower prices paid by other countries.
U.S. Department of Health and Human Services Secretary Alex Azar said on Thursday that Americans overpay for medicines, subsidizing socialist European systems. Most European countries pay for citizens' healthcare and directly negotiate drug prices.
Azar also said that he and Trump are working on allowing the importation of cheaper drugs from other countries, a move Trump has endorsed but which drugmakers have long opposed.
The rebate rule was estimated by the nonpartisan Congressional Budget Office to cost the government $177 billion over the next 10 years. The CBO also said it was likely drugmakers would not cut their prices because of the rule.
The government had hoped that by eliminating rebates of 15 percent to 30 percent, or more, of a drug's listed price, the prices would fall.
JP Morgan analyst Gary Taylor said in a note that political momentum had been building against the rebate rule "due to the perceived unintended windfall profits that might have accrued to pharmaceutical manufacturers."
Politico first reported the planned scrapping of the rebate rule on Thursday and the White House confirmed the decision to Reuters.
"Based on careful analysis and thorough consideration, the President has decided to withdraw the rebate rule," White House spokesman Judd Deere said in an emailed statement.
In recent weeks, Politico and other publications reported that the White House and Azar had disagreed over the rule. Azar said on Thursday that he planned to stay in his job as long as Trump wanted him there.
(Reporting by Caroline Humer and Michael Erman in New York; Ankur Banerjee, Tamara Mathias and Manojna Maddipatla in Bengaluru; and Bryan Pietsch, Richard Cowan, Roberta Rampton and Jeff Mason in Washington D.C.; Editing by Steve Orlofsky, Bill Berkrot and Dan Grebler)