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.