The Trump administration has finally dropped the hammer on pharmacy rebates, but don’t expect any policy to be finalized without a fight from pharma or health insurers.

The Centers for Medicare & Medicaid Services (CMS) is proposing an end to pharmacy rebates as they are now used. The administration’s plan would pull the plug on protections that pharmacy rebates receive from anti-kickback laws.

The rule would all but cease pharmacy rebates and force plans to share those rebates with beneficiaries. That would ban drug rebates tied to a percentage of the list price that drug manufacturers pay Part D plans, managed Medicaid, and pharmacy benefit managers. A new safe harbor would be granted to drug discounts passed straight to patients and fixed fee service arrangements between drug manufacturers and PBMs. The Medicare and managed Medicaid markets would shift from retroactive rebates for payers to upfront discounts for beneficiaries.

CMS officials see other potential savings. Ending rebates could function as a disincentive for pharma manufacturers to increase their list prices annually to cope with the demand for higher rebates. Rebates lower the average list price between 26 percent and 30 percent but this is not often reflected in patient cost-sharing, especially coinsurance on high-cost specialty drugs, according to CMS.

It is expected that such a move would increase premiums on healthier beneficiaries, even as those beneficiaries prescribed high-cost medications see reductions in what they pay at retail. CMS insists that any premium increases would be far less than the savings on prescription drugs, but healthy beneficiaries could see those premiums rise and potentially turn to other MA-PD or PDPs in open enrollment.

The rule does not apply to commercial plans, only to government programs, but policies enacted on the Medicare population frequently migrate to the commercial market. A decade ago, CMS’ decision to stop paying for “never events” – serious accidents or complications in hospitals that were preventable – led every other payer to adopt similar policies. If the administration’s move passes legal muster, it will become the new standard in the industry and spread to the commercial market.

While the administration will allow negotiations on such arrangements to begin immediately, the new safe harbors would start in 2020. That is optimistic given the likelihood of legal action to halt the proposal.

The administration could be using the proposed change as a bargaining chip to get the industry to the table.

But even a proposal this far-reaching could fall prey to the old trend of “CMS proposes regulation, the industry cries foul, CMS proposes a much milder final regulation.”

Bill Melville is a principal analyst at DRG and national healthcare policy expert whose work appears in Health Plan Analysis and Market Overviews. Follow him @BillMelvilleDRG

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