(Adds industry, analyst comment, background on legislation, PIX available)
July 11 (Reuters) - The Trump administration on Thursday scrapped one of its most ambitious proposals for lowering prescription medicine prices, backing down from a policy that would have required health insurers to pass on billions of dollars in rebates they receive from drugmakers to Medicare patients.
The decision represents a new setback to President Donald Trump's efforts to deliver on a pledge to lower drug costs for U.S. consumers ahead of elections next year.
It allows companies like Cigna Corp and CVS Health Corp, which negotiate rebates with drugmakers on behalf of the government's Medicare program, to continue to benefit from those discounts.
It also raises questions about whether the administration's other efforts to lower prices will affect the pharmaceutical industry more directly.
Shares of Cigna rose 12%, CVS gained 6% and UnitedHealth Group Inc was up 4%. Drug distributors like McKesson Corp and pharmacy Walgreens Boots Alliance Inc were also trading higher.
Pharmaceutical company shares fell, with Merck & Co, Bristol-Myers Squibb Co and Pfizer Inc all off more than 2%.
Baird analyst Eric Coldwell said Trump was likely refocusing his reform efforts on the drugmakers themselves.
"There are still many headwinds for the supply chain, but today's news clearly rerates the space higher. 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," he added.
The White House first launched the idea of ending the rebates last year as part of a drug pricing "blueprint" aimed at bringing down costs, an important election issue for Trump.
Democrats have also seized on drug pricing as a key issue for the 2020 Presidential elections, with some legislators pushing for new laws to allow the government to negotiate drug prices directly with manufacturers.
The rule would have forced companies like Cigna and CVS to either forgo these discounts or pass them onto Medicare patients enrolled in their health insurance plans and drug plans.
They argued that the 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.
'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 that negotiate pricing. U.S. Department of Health and Human Services Secretary Alex Azar said on Thursday he and Trump will also work to allow importation of cheaper drugs from other countries, a move drugmakers have opposed.
The rebate rule, which was in the process of being finalized and would have gone into effect next year, was estimated by the nonpartisan Congressional Budget Office to cost the government $177 billion over the next 10 years. The CBO also said that it was likely that drugmakers would not cut their prices because of the rule.
"Political momentum was building against the 2020 implementation of the CMS proposal to eliminate pharmaceutical rebates in government programs due to the perceived unintended windfall profits that might have accrued to pharmaceutical manufacturers," JP Morgan analyst Gary Taylor wrote in a research note.
Politico https://www.politico.com/story/2019/07/11/white-house-drug-rebate-rule-1405884 first reported the planned scrapping of the rebate rule on Thursday and the White House confirmed the decision to Reuters.
In recent weeks, Politico and other publications reported that the White House and Azar had disagreed over the rule.
"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.
"The Trump administration is encouraged by continuing bipartisan conversations about legislation to reduce outrageous drug costs imposed on the American people, he said. (Reporting by Caroline Humer and Michael Erman in New York; Ankur Banerjee, Tamara Mathias and Manojna Maddipatla in Bengaluru; and Bryan Pietsch in Washington D.C. Editing by Steve Orlofsky and Bill Berkrot)