The Trump administration is proposing major changes in how prescription drugs are priced and paid for by Medicare.
The effort is designed to cut costs for senior citizens at the pharmacy counter and by its example could spur changes in the broader market for prescription drugs.
The draft rule from the Department of Health and Human Services would encourage drug companies to offer discounts directly to consumers and would reduce the role of middlemen that many policymakers say drive up list prices for medicines and increase consumers' costs.
"We're going to fundamentally rewire how we pay for drugs in this system," HHS Secretary Alex Azar said in a briefing with reporters on Friday.
The key change would be the phaseout of rebates negotiated secretly between drugmakers and pharmacy benefit managers such as Express Scripts and CVS Caremark. These PBMs administer prescription drug plans for insurers and employers.
A portion of the rebates paid by drugmakers now goes to insurers or employers, and PBMs take a cut of the savings for themselves. The administration's proposed rule would put pressure on the companies to pass those discounts to consumers.
The new draft regulation would set up a pricing battle between pharmaceutical companies and the PBM middlemen.
Express Scripts, the second-largest pharmacy benefit manager, warned that the changes could drive up premiums for Medicare's prescription drug insurance plans.
"Rebates have been a key driver in keeping premiums low for all Medicare beneficiaries, so any changes to the impact of rebates in the [Medicare Advantage] market will increase premiums, which will drive up costs for [the government] and the program as a whole," the company said in a statement to NPR.
The proposed rule would discourage those rebates for companies doing business with Medicare's prescription drug benefit by redefining them as possible illegal kickbacks.
"Today's rebate system is set up in the shadows to serve entrenched interests: drug companies who set these prices so high and the pharmacy benefit managers who receive billions of dollars in rebates without patients ever knowing where the money goes," said HHS's Azar in prepared remarks on Friday.
Rebates account for about $150 billion in discounts in the prescription drug market each year, according to the drug industry trade group PhRMA and HHS. But only a portion of the money is passed along to insurance companies.
The current system encourages drug companies to set high list prices because they know that pharmacy benefit managers will ask for rebates, typically calculated as a percentage of that price, if the medication is to be included in the list of drugs they cover.
The changes, if implemented, could also make the notoriously opaque markets for prescription drugs more transparent, because consumers would see the discounted price negotiated by the pharmacy benefit manager when they picked up their medicine at the pharmacy counter.
"This is a huge potential change, transformative," said Dr. Walid Gellad, director of the Center for Pharmaceutical Policy and Prescribing at the University of Pittsburgh.
Today, the actual cost of a prescription drug is often a percentage of the drug's list price, so those initial high list prices end up driving up the price paid at the drugstore. In addition, many seniors on Medicare have to pay the full cost of some drugs.
PhRMA, which has long blamed pharmacy benefit managers for high prices, welcomed the proposal.
"We applaud the Administration for taking steps to reform the rebate system to lower patients' out-of-pocket costs," said Stephen Ubl, PhRMA's president and CEO.
But Dr. Aaron Kesselheim, a professor at Harvard Medical School who specializes in the economics of the pharmaceutical industry, said the move alone wouldn't cut drug prices overall.
"We may need reforms to the middleman system, but simply trying to eliminate rebating without any other steps threatens to drive up drug prices overall," he said. "Rebates are a key mechanism that insurers use to try to reduce net drug prices."
Azar says the change, if implemented, will encourage drug companies to cut their list prices to compete for business. But the administration also acknowledged that premiums for Medicare's prescription drug coverage could rise by about $5 a month.