By Stephanie Armour and Joseph Walker 

The Trump administration on Friday said the federal government would reimburse health insurers for financial losses caused by the administration's plan to ban certain pharmaceutical-industry rebates in Medicare.

The backstop on most of insurers' losses could help prevent premiums from rising significantly as a result of the rebate-rule changes, while making taxpayers responsible for a greater share of cost overruns in Medicare's prescription-drug program.

The offer to assume most of the financial risk for the loss of the discounts is a sign the administration is likely to proceed with its push to end rebates, and it could address some critics' concerns. The idea has faced heated criticism from some Democrats, with House Speaker Nancy Pelosi saying last month that ending rebates within Medicare would raise premiums and do little to lower drug costs.

The drug-rebate proposal is a marquee part of the administration's push to lower drug prices. The rule would halt billions of dollars in discounts that drugmakers give insurers and companies such as CVS Health Corp. and UnitedHealth Group Inc. that administer Medicare prescription plans.

Health and Human Services Secretary Alex Azar has said it would spur manufacturers to pass discounts directly on to patients and bring new transparency to prescription drug markets.

But how the change will affect the complex financial structure of the Medicare drug program known as Part D is hard to predict. The government's plan to protect companies that administer Medicare's drug benefit could help minimize disruption to a program that insures more than 40 million people during an election year.

Federal spending is projected to increase by $196.1 billion over a decade as a result of the rebate-rule change, according to estimates by the CMS Office of the Actuary done prior to Friday's announcement. Premiums paid by beneficiaries would rise by $58 billion over the same period, but beneficiaries taking high-priced drugs would see their out-of-pocket costs decline by around $83.2 billion. Medicare is a federal health insurance program for people age 65 and older and the disabled.

Drugmakers, meanwhile, would save $39.8 billion over the decade because mandatory discounts they provide during a gap in individuals' Medicare coverage known as the "donut hole" would be reduced, according to the actuary.

These estimates don't reflect the new risk-sharing program announced Friday.

Rebates are a little-known but important part of the U.S. drug-pricing system. Drugmakers set list prices. But then many also offer rebates, or discounts, that reduce the amount that companies and the federal government actually pay.

The rebates can shape decisions about what drugs are offered and how much patients pay out-of-pocket. Drugmakers say the practice has led them to raise list prices to keep up with demands for greater rebates by companies that administer drug plans -- which seldom use the money to reduce out-of-pocket patient costs. That view has been adopted by Mr. Azar, a former Eli Lilly & Co. executive.

Critics also say they lead to higher prices without passing savings on to consumers.

But health insurers and businesses that administer Medicare drug plans say the rebates keep down premiums for all beneficiaries, a contention shared by many experts. The base monthly premium for Medicare drug benefits has declined for the past two years.

The administration in January revealed a proposal to end rebates that go to insurers and companies that run drug plans in Medicare and Medicaid by Jan. 1, 2020. Instead, the Trump administration said it would create a protection for discounts offered to directly to patients.

Insurers and companies that set up prescription-drug plans have balked. They also were concerned because they would have to submit bids to offer drug plans in Medicare in early June without knowing the fate of the rule or how drug prices could change.

Now the Centers for Medicare and Medicaid Services is saying it will shoulder most of the risk, if the rebate rule is finalized. After the first 0.5% of unforeseen profits or losses experienced by insurers or others that administer drug plans, the federal government would cover 95% of extra losses or get back of 95% of extra profits. The risk sharing would be optional for companies and last for two years.

"They are trying to deal with the uncertainty," said Tricia Neuman, who heads the Medicare policy program at the Kaiser Family Foundation, a nonprofit that focuses on health information.

The new risk-sharing program would be significantly more generous to insurers incurring losses than the current system, but also put greater limits on how much extra profit insurers can keep. From 2006 to 2015, insurers kept an aggregate of $9.1 billion in extra profits by overestimating drug costs in their bids, The Wall Street Journal reported in January.

Each year, insurers submit detailed estimates for how much it will cost to provide drug benefits, including their own profits and administrative costs. If actual spending varies from those estimates, insurers eat all of the losses or keep all the extra profits up to 5% of their over- or under-spending. For the next 5% of extra losses or profits, the government splits the money with the insurer; for further mismatches, the government's share is 80%.

The new, enhanced financial protections will give insurers leeway to keep both profits and beneficiary premiums steady even if total drug costs soar as a result of the rebate-rule change, says Peter Bach director of Memorial Sloan Kettering's Center for Health Policy and Outcomes. Since their losses will be minimized, insurers will be less driven to negotiate lower prices from drugmakers.

"It is amazing how much it costs the taxpayer to have the private sector save money for the taxpayer," Dr. Bach said in an email.

Changes to the rebate system in Medicare could have a trickle-down effect in the health system. Because the program represents such a big market, rebates could also fade in the private sector if they are ended in Medicare, some health analysts aside.

Steps in that direction are already under way. Sen. Mike Braun (R., Ind.) introduced legislation last month that would also end such rebates in the commercial sector.

Write to Stephanie Armour at stephanie.armour@wsj.com and Joseph Walker at joseph.walker@wsj.com

 

(END) Dow Jones Newswires

April 05, 2019 16:06 ET (20:06 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.
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