New Pfizer


As with everything that I will post to the investing section of this blog, the following should not be construed as investment advice.  It is simply meant to be the ramblings of a now-retired individual with some time on his hands.  I am not affiliated with any organization and have no interest in publishing other than for the intellectual exercise.  While I make an effort to be accurate with my facts, I do not assert that any of the following information is 100% reliable.  If I own a stock upon which I comment, I will always say so.  In  this case, I do own Pfizer in a personal account. 


New Pfizer

Barron’s this week decided to write up Pfizer and put the company on its cover page.  Since it’s a company I find interesting, I decided to dig a little deeper and provide some thoughts in something other than financial-rag-speak.  In a summary-up-front, I’d argue Pfizer makes a pretty interesting investment at current levels, albeit with a reliance on what the market will pay for an earnings re-acceleration story that begins sometime in 2020.  Pfizer isn’t yet a loved company, for good reason, but its market cap is too significant to be ignored by institutional investors.  Thus, I think the investing picture is skewed positively (just look at what’s happened with Bristol-Myers Squibb and AbbVie).  I think the idea of hedging out the Viatris (i.e. Upjohn-Mylan) exposure is intriguing if minor in its import. 


For a number of years now, Pfizer has been playing footsie with various ways to unlock value for shareholders, from merging with AstraZeneca to spinning out businesses (most notably its animal health business, Zoetis), to entering into joint ventures like the HIV endeavor, ViiV.  Under the leadership of new CEO Albert Bourla, who will become Chairman and CEO January 1, 2020, it seems that Pfizer will undergo a series of more decisive changes.  Ian Read, who had served as CEO since 2010, will step down. 

Let’s talk a little about Pfizer

Amongst institutional investors, I don’t think Pfizer is taken very seriously.  While Ian Read has put up a respectable strategy and operational legacy, it’s far from stellar.  Under his leadership, the company has acquired companies like Hospira for $15bn and Anacor for $5bn, as well as licensed products like Merck KGaA’s avelumab.  I think the Street would argue these haven’t been value-creating endeavors.  When it comes to R&D productivity – the life blood of any biopharmaceutical company – Pfizer has a checkered past that’s improved marginally of late.  In order to inform this statement, I arbitrarily peeked back at the company’s pipeline in 2016, just to remind myself of where we were.  As of February 2nd, of that year, Pfizer boasted 8 novel agents in Phase 3 development (i.e those that weren’t line extensions, new indications for marketed products or biosimilars).  Here’s the update on those: 



I think it’s fair to note that the approved drugs were approved only recently.  Thus, one wouldn’t expect sales to be too substantial as of late 2019.  That said, for drugs where there’s multi-blockbuster potential (i.e. >$2bn in peak sales), companies often disclose early figures to satisfy analysts.  From this list, the only candidate I’d characterize as an obvious success is Trumenba. 

Today, Pfizer has a few more interesting candidates in late development, as well as the fruits of some inorganic stratagems (e.g. the $11bn acquisition of Array Biopharma).  Still, I can’t say at this juncture anything’s really changed.  The organization is still led scientifically by Chief Scientific Officer, Mikael Dolsten, whose tenure closely matches that of former CEO, Ian Read. 

So, why are things interesting now? 

Let’s start with the inorganic stuff

On August 1, 2019, Pfizer announced that GSK and Pfizer had closed a joint-venture agreement under which Pfizer and GSK would contribute their consumer health businesses and obtain respective ownership stakes of 32% and 68% in the combined entity.  GSK is taking charge operationally, while Pfizer will step back and simply report its passive financial interest from here.  I won’t spend a lot of time on details other than to say 1) for once, it looks like Pfizer received reasonable value for the business it sold, 2) this is the kind of business where synergies ought to be real and obtainable (e.g. improved negotiations with the trade over shelf space, the elimination of redundancies, better purchasing of fairly standard supply chain items, maybe even some cross selling opportunities, etc.), and 3) GSK ought to improve on Pfizer’s performance (Pfizer Consumer Health Care had been posting flattish results, where GSK has been growing low-to-mid single digits). 

On July 29, 2019, Pfizer and Mylan announced they were merging Pfizer’s aging/legacy brand business, Upjohn, with Mylan to create a new company which will be called Viatris.  The market promptly threw up all over this idea, with Pfizer’s shares dropping nearly six and a half percent.  I think I understand why folks were disappointed.  While Pfizer shareholders stand to receive 57% of Viatris, it will be run by Mylan executives/appointees.  This includes Chairman Robert Coury, whose reputation is controversial to put things gently, President Rajiv Malik and eight members of an eleven-member board.  Beyond this, Pfizer shareholders will still have to worry about the performance of a generic pharma company with much different growth opportunities and capital demands than Pfizer’s remainco – the innovative biopharma company; I’m sure some felt that a split-out or sale would have been much cleaner.  Pfizer and Mylan executives expect the deal to close in mid-2020. 

For better or worse, these two managerial exits will accomplish a couple of objectives.  First, it will make valuing Pfizer’s shares a bit easier.  There will be a public market for Viatris, and Pfizer shareholders will be able to monitor it in real time.  Consumer health, while subsumed in the GSK figures, is a steady business with very reliable metrics on a comparables or transactional basis.  It too should be easy to value.  With perhaps 85% of the value of Pfizer accruing to the remaining biopharma business, investors should also be able to focus their efforts.  Second, Pfizer personnel will be able to focus exclusively on the creation, development and launch of novel medicines addressing high unmet needs.  Perhaps this will have a positive effect on R&D productivity. 

What about the organic stuff?

I’ll state what is obvious to most.  A biopharma company is really just a series of products launched into an existing infrastructure.  In Pfizer’s case, there are a number of growth drivers, a couple of key products, one major product going off patent, and a number of late stage pipeline candidates that will probably set the tone for investors over the coming few years.  As of Q3, Pfizer’s Biopharma business (the innovative stub) boasted an annualized sales rate of roughly $40bn.  Lyrica, the one big product currently being genericized, has already been moved to Upjohn, so its worth is embedded in the inferential value Pfizer shareholders get in the proposed merger with Mylan.  Ibrance, a terrific drug for hormone positive breast cancer, accounts for about 13% of Biopharma sales and grew 27% operationally in the quarter.  Ibrance really faces no obvious competitive threats.  Prevnar, the leading vaccine used to prevent pneumococcal disease, accounts for about 16% of Biopharma sales and declined about 3% operationally.  Biopharma, overall, grew 9% operationally in the quarter.   

Pfizer’s pipeline is “O.K.” (hey — they don’t give two and a half stars to just anybody).  For better or worse, a lot of the dross has already fallen out.  Hence, the late stage pipeline is a bit thin, numerically, but of relatively high quality.  I highlight below four Phase 3 programs that matter, and I am optimistic about three. 




Pfizer has two growth drivers I believe are worthy of added comment.  The first is Xtandi, which I believe will win the war amongst next generation anti-androgens used to treat prostate cancer.  Xtandi looks cleaner than J&J’s Erleada and more flush with data than Bayer’s Nubeqa.  Alliance revenues for this product increased 25% operationally in the quarter (to $225mm) and should benefit from earlier and more extensive use pursuant to anticipated regulatory approvals.  The second is Vyndaqel, a novel treatment for an uncommon heart condition.  This product is off to a very strong start and boasts above average margins.  With time, it has multi-block buster potential. 


In my opinion, many of the theoretical risks Pfizer faces are mitigated.   

Merck & Co., is working on a pneumococcal vaccine that will compete with Prevnar.  It does cover a couple of serotypes that are clinically important and which Prevnar doesn’t cover.  However, Pfizer is in advanced testing with a 20 valent vaccine that covers these and 5 additional serotypes.   

Earlier this year, Pfizer’s Xeljanz, an oral medication for arthritis, received added warnings for clotting and related deaths on its prescribing label.  So far, this development hasn’t had a significant impact on sales, and it’s encouraging to see that Pfizer’s pipeline candidates of the same or a related class appear cleaner on side effects. 

If there’s a more existential threat, it’s that of health care reform.  A big chunk of Pfizer’s sales and earnings come from oral anti-cancer medications.  These are used disproportionately in the elderly, and are therefore often reimbursed under Medicare Part D.  While access to anti-cancer medicines is a sensitive topic, there is a lot of dissatisfaction amongst beneficiaries and a lot of government dollars at stake.  If one plans to own Pfizer long-term, the subject bears watching. 

Some numbers and some investing thoughts

In sum, it would appear that Pfizer’s stated target of achieving a 6% CAGR for Biopharma over at least the coming five years appears reasonable.  However, I was surprised to see how little attention was given to the company’s earnings progression on its most recent quarterly call, given the impact of Lyrica and the various moving parts associated with GSK and Mylan. 

Through 9 months of 2019, Pfizer earned $2.39/share on an adjusted basis.  Management has provided guidance of $2.94-3.00/share on an adjusted basis, which means that Q4 guidance is $0.55-0.61/sh.  That’s a pretty big step-down from $0.75/sh. In Q3 and a run rate of roughly $0.80/sh. before the loss of Lyrica.  If there’s a silver lining, it’s that there’s only $200mm/Q of Lyrica left to go in the U.S. 

For Q4, Pfizer has pointed to a few cents in dilution from a full quarter of the Array acquisition, as well as a further deterioration in exchange rates.  Pfizer had also indicated it will move from contemporaneous reporting for its consumer health business to a one quarter lag under the new GSK J.V., and that this would lead to 2019 earnings dilution of roughly $0.03/sh.  Despite all this, I expect there’s also a bit of expectations management built into guidance.  According to Pfizer’s 10Q, Upjohn earned $2.3bn, $2.0bn, and $1.4bn before overhead in Q1, Q2 and Q3, respectively.  Sales declined from $3.1bn to $2.2bn over that stretch.  U.S. Lyrica sales declined from roughly $900mm to $200mm.  Thus, in round numbers, Upjohn’s earnings power probably troughs at $1.2bn before overhead and taxes.  On the flip side, Biopharma earnings have grown from $5.9bn in Q1 to $6.1bn and $6.5bn in Q2 and Q3, respectively.  In Q4, earnings should increase again, if for no other reason than growth in the high margin product, Vyndaqel.  Say Q4 Biopharma is $6.7bn, Upjohn is $1.2bn, and combined Other Business Activities and Corporate is $3.2bn in expense (i.e. on trend).  That would put Q4 earnings in the ballpark of $0.70/sh. at a 16% tax rate.  Add the Array and consumer health care dilution, and Pfizer maybe ends up at $0.65/sh. 

In 2020, consumer health care will normalize and should start to grow.  Biopharm should too.  Thus, I think the current consensus of $2.74/sh. is achievable.  However, this probably isn’t hugely important to the thesis, but rather a bulwark against which value investors can start to gauge their level of optimism for a renaissance at Pfizer Biopharma.   

So, let’s think about that.   

Pfizer includes a table of segment performance in its press release.  From it, you can deduce a few things: 

  • Biopharma and Upjohn both boast attractive gross margins.  In the case of Biopharma, gross margins hit 91.5% in Q3, which CFO Frank D’Amelio attributed to productivity and a contribution from Vyndaqel.  I think it’s reasonable, given a lack of significant patent expiries from here forward, to expect 2020 gross margins for Biopharma to hover in the low 90’s%. 
  • R&D runs nearly $2bn per quarter, and you can be assured that nearly all of that accrues to Biopharma.  The other businesses simply aren’t R&D intensive.  Based on Array’s S.E.C. filings, it appears we should add about a quarter of a billion dollar R&D load to Pfizer Biopharma for that organization, bringing the total to perhaps $8.25bn on an annualized basis. 
  • If points 1 and 2 are in the right ballpark, the key to deriving the base from which to get excited or not for Biopharma depends on the allocation of SI&A.  Here, too, I think it’s safe to assume that most of the bodies and overhead will accrue to biopharma.  I base this on logic (e.g. you don’t run DTC campaigns for generics, biosimilars or soon-to-be extinguished products; you don’t detail aggressively with sales reps and you aren’t willing to pay for market data from iQvia).  What’s more, the numbers make sense.  If we tie 90-95% of unallocated SI&A to Biopharma, we arrive at a figure of roughly $2.7bn, or 27% of net sales.  This is actually on the low side of the average for a pure-play peer set.   



If those are the right numbers, Biopharma has earnings power in the range of over $19bn before interest and taxes in 2020.   

The last elephant in the room is the balance sheet

As of Q3, Pfizer’s cash, cash equivalents and short-term investments amounted to $9bn.  Long-term investments amounted to $2.7bn.  On the other side of the ledger, interest bearing liabilities totaled $53bn.  On these figures, Pfizer puts up about $60mm in interest income and $400mm n interest expense.  Just prior to the close of the Mylan combination, management contemplates that the new Viatris will make a one-time $12bn payment to Pfizer, and that Pfizer will use this to retire debt.  Thus, subject to variances in cash sources and uses for the coming half year, Pfizer ought to have a proforma debt balance of just over $40bn.   

If we take these figures through the income statement and apply a 16% tax rate, new Biopharma should have base earnings of over $0.65/sh. per quarter coming out of the Mylan transaction, and earnings ought to be growing double digits.   

Investing implications: 

Pfizer shareholders own 32% of a consumer health business with a greater-than $13bn top line.  Consumer health businesses, if run properly, boast 20% operating margins and low-to-mid single digit top line growth.  Typically, they are worth 3-6x sales, depending on moats and the appetite of investors. If we go with 3.5x forward sales, peg the run rate at $13.5bn, and give Pfizer 32%, the value to Pfizer is $15bn. 

Mylan currently trades at around $18/sh. and has just over 500mm shares outstanding.  It doesn’t appear that there’s a big deal-related discount built into the shares, given that the stock traded at $19/sh. before Pfizer and Mylan made their announcement.  Thus, if Mylan’s 43% stake in Viatris is worth $9bn, Pfizer’s is worth $12bn. 

Finally, there’s the payment.  Viatris is going to hit the ground with a ton of debt, but some decent early capacity to generate free cash (Mylan’s presentation says the goal is to get to 2.5x D/EBITDA or less by the end of 2021, while initiating a dividend).  On proforma 2020 sales of $19-20bn in 2020, Viatris will begin with $24.5bn in debt and EBITDA margins in the range of 40% (including synergies).  This $24.5bn includes the debt Upjohn will incur in order to make the one-time $12bn payment to Pfizer. 

If Pfizer has 5.6bn shares outstanding, consumer health is worth $2.7 per share, and Viatris and the payment are each worth $2.1. 



So, what’s Biopharma worth?

Well, I guess that’s up to the markets.  However, I think 15x isn’t unreasonable, given the pipeline and the lack of patent expiries until 2026.  If the company can put up $0.65/sh. beginning in Q3 2020, I think $2.70-2.90/sh. in 2021 is a good figure (just for Biopharma).  15x that would be $42/sh. at the mid-point, on top of which you could add the $7/sh. described above.  While that sounds like quite attractive a target for a lumbering, unloved biopharmaceutical company, I think it might be realistic to set one’s sights a little lower.  It’s almost never in management’s interest to give away the store all at once.  What’s more, I believe it takes time for companies to go from unloved to, well, something better than unloved.  Finally, it’s an election year, and health care reform is going to be on the agenda.  Thus, Pfizer may not see the upper forties right away.  Nevertheless, the bones of the idea feel right, and Pfizer does offer investors a 3.8% dividend while the broth clears.  One final thought relates to Mylan.  I, for one, am attracted to the Pfizer Biopharma and consumer health businesses to a much greater degree than I am Viatris.  If I were an institutional investor with the ability to hedge, I might short enough Mylan stock to hedge out my exposure to this fledgling entity.  That’s not to make a stock call one way or the other, but simply to focus my energies on the business about which I care. 



Colorado Public Option Update


Yesterday evening, the Colorado Department of Health Care Policy and Financing (HCPF) and the Colorado Department of Insurance (DOI) submitted a final report to Colorado Legislature regarding the development of a public health insurance option (the Public Option). In short, the final report’s recommendations closely resemble the draft recommendations issued in early October. However, after holding a number of stakeholder meetings, the HCPF and DOI leadership has elected not to move forward with a standard fee schedule but instead with a formula-based fee schedule that takes into account the inherent variability in hospital operations across the state. In addition, the final report provides added detail on proposed future activities, such as the development of an Advisory Board, use of shared savings under a Medicaid 1332 waiver, and the development of a more robust small group market.

Background. Pursuant to the passage of HB19-1004 earlier this year, HCPF and DOI have been working together to make available a Public Option in the Colorado individual health care insurance marketplace. This Public Option would resemble those individual plans offered by various carriers in the State, but would mandate adherence to a fee schedule instead of charges negotiated off a hospital’s chargemaster (an itemized list of gross charges developed by each hospital for various products and services offered by that hospital). Ideally, the Public Option would be anchored to reduced net hospital charges compared to current alternatives, and would therefore be more affordable.

Keys to the Final Report. While yesterday’s final report closely resembles the draft report issued over a month ago, there are some changes and added details worth considering.

  • The Final Report maintains a focus on hospital pricing (and pricing in general) as a lynchpin to the lack of health care affordability in the State. Considering where Colorado ranks in terms of hospital prices and profitability (#12 for the former, according to a John’s Hopkins University report: [] and #2 for the latter, according to Medicare cost report analyses conducted by HCPF and DOI), this seems appropriate. Items such as pharmaceutical pricing, physician reimbursement and waste received less attention, but could in theory be addressed in the future. Policy initiatives contained in the report omit those that would specifically enable hospitals to address administrative bloat and medical supply expense, instead leaving that to the hospitals to address on their own.
  • The Final Report maintains the draft recommendations of partnering with health care insurers to launch the Public Option. This also makes sense and will probably work. In an indirect way, the Public Option is essentially a coverage expansion, making health care more affordable for those that can’t or won’t purchase health care insurance for financial reasons. But for a proposed increase in the Medical Loss Ratio (MLR), insurance companies ought to be O.K. with the idea of underwriting more policies while avoiding the threat of wholesale disruption. From the State’s perspective, leadership gets to avoid budgetary expense and risk, as well as potential operational disruption (developing and managing a provider network, ensuring eligibility and claims administration is smooth year-to-year, etc.).
  • Instead of insisting that health care insurers build a network off of a fee schedule that averages between 175% and 225% of Medicare prices (yes, twice what Medicare currently pays hospitals for various services), HCPF and DOI recommend that hospitals be paid according to a formula that takes into key variables, such as 1) payer mix (e.g. does the hospital disproportionately serve the poor and indigent), 2) hospital designation (e.g. is the hospital a critical access hospital that needs to stay in business in the interest of Coloradoans), 3) margins, and 4) administrative expenses. This, in my opinion, is a better approach than “one size fits all”. There are inherent differences in hospital operations that tie to Colorado’s diversity statewide, and driving a universal fee schedule whose prevalence likely increases in the future puts vulnerable hospitals at risk of closure. Of note, the Final Report included an updated actuarial analysis of anticipated savings based on the new inputs highlighted above. Where the Draft Report pegged savings at 9-18%, the Final Report has the Public Option saving about 10% vs. current alternatives.
  • The Final Report speaks more specifically to the use of a Medicaid 1332 waiver to channel public option savings into greater affordability in the future. Under federal law, a state can apply for a waiver to direct savings it creates versus projected federal spending, rather than simply abide by the statutory formula. In this case, the State is contemplating using Public Option savings to improve subsidies for individuals between 200% and 250% of the Federal Poverty level (income of about $24-30K), as well as a create a subsidy for individuals between 250% and 400% of the Federal Poverty Level. As noted in both the Draft- and Final Report, these are the individuals who find it the most difficult to afford health care insurance and access the system, even if they have coverage. According the Final Report, the Public Option will create about $89mm in savings in 2022, the first year of availability.
  • Finally, the Final Report tantalizingly hints at the future of the Public Option. Specifically, the Report speaks to the development of options for employers with up to 100 employees. Today, many small employers do not offer coverage to their employees and there are issues that impede coverage for employees and families of those that do. Over the short-term, the Final Report recommends that small business employees be allowed to avail themselves of the individual Public Option. Further, it recommends that this access be extended to small business owners that choose to self-fund with stop-loss insurance. Over the longer-term, the Final Report speaks to the notion of developing a dedicated Public Option for the small group market with the help of health insurers that are participating in the individual market. While it will take time, the implication here is that the fee-schedule based, transparent model of shopping for health care will grow, and that health insurers will be called upon to act as agents of improved affordability for the State.

Broader Implications. As we head into a presidential election in which several Democratic candidates are recommending dramatic changes to the way in which Americans access health care coverage, it’s probably worth noting that Colorado could serve as a model for where we are headed. Colorado is one of the first states in the country to pursue a public option and, in my mind, one of the states with both a tractable plan and the mandate to get it done. Without question, what happens depends substantially on who is elected and why. However, it’s worth noting that the Trump administration is already moving to increase transparency around hospital operations and the contracts hospitals and doctors have with health insurers. Thus, whether we are negotiating Medicare for all, Medicare for all who want it, or a Trump-driven alternative, I think it’s reasonable to expect change in the coming years. In my mind, there are limits to what can be done about labor-driven savings, considering the availability and compensation of physicians and nurses, as well as structural constraints that govern the training thereof. As a consequence, we will likely focus our reform efforts on hospital pricing and efficiency, pharmaceutical pricing and unnecessary utilization. In that context, especially in light of how much of our health care bill is dedicated to hospital inpatient and outpatient spending, we will not be able to enact stochastic reform, but rather incremental reform; we can’t take a dramatic or one-size-fits-all approach without inadvertently affecting access or quality. In that context, an “opt-in” model underpinned by greater regulatory oversight (i.e. a public option, whether it’s called Medicare or not) is the most likely route forward. Colorado’s plan could certainly serve as a blueprint in this regard.

The full report can be found here:


Health Care Transparency


Today, the department of Health and Human Services (HHS) announced that the Centers for Medicare and Medicaid Services (CMS) had issued two rules governing price transparency in our health care system. The first is a final rule governing outpatient and ambulatory surgery center price transparency, while the other is a proposed transparency-in-coverage rule. Proposed rules are typically opened to a comment period after which a final rule is issued.

The Hospital Outpatient Prospective Payment System (OPPS) transparency rule impacts hospitals directly. In order to comply, hospitals will have to post standard charge information, including list prices (the rule says “charges”, but these are the same thing), discounted cash prices, payer-specific negotiated prices and minimum- and maximum-negotiated prices. For up to 300 “shoppable” services, hospitals will be required to display the price information in a way consumers can use it to shop for services. In my way of thinking, this is only a mildly helpful rule.

  • Hospitals are being compelled to provide high-level pricing information, not granular information. Thus, the rule is helpful in that it will allow competing hospitals and health insurers in a local market to learn a bit about what one another are paying and being paid. This, over time, will probably drive more competitive behavior, especially if further reforms are assumed to be forthcoming.
  • Individual customers (patients) don’t get a lot out of this, in my opinion. While they will be able to “shop” for up to 300 common services, there appears to be a lot of latitude governing what’s a consumer-friendly tool in the world of health care. Will a consumer needing a partial knee replacement really know to shop for this specific procedure correctly at each hospital and whether the offering is what their doctor has recommended (e.g. the Oxford unicompartmental prosthetic from Zimmer Biomet)? Even if they did, will they know whether the most affordable hospital is in network, and what their out-of-pocket obligation might be? I doubt consumers will easily go from hospital website to hospital website comparing gross, cash-pay and negotiated rates for a procedure their physician has recommended they undergo.

The “Transparency in Coverage” proposed rule requires health plans to give consumers real-time, personalized access to cost-sharing information, through an online tool that most group health plans and health insurance issuers would be required to make available. In principle, that’s a fairly important statement. Theoretically, persons scheduling a procedure would be able to shop for the best location at which to have a procedure done. Best, in my way of thinking, means the most affordable to the patient, while maintaining high quality. Because cost-sharing often ties to a percentage of the overall cost of the procedure, persons would, as a side-consequence, learn something about the contractual rates agreed to between their health insurer and the hospitals at which the procedure is offered. While CMS doesn’t make clear exactly what will be required, today’s announcement goes on to say that health insurance issuers will be required to disclose negotiated rates for in-network providers (i.e. hospitals, clinics, etc.), and allowable rates of reimbursement for out-of-network providers. Depending on the level of granularity demanded by the government, this will also help shed light on the actual (not list) prices hospitals charge their various customers. In today’s health care environment, list prices bear very little resemblance to negotiated prices, with the former often reaching multiples of the latter. Finally, CMS proposes in the rule that health insurance issuers be allowed to take credit for “shared savings” payments in their loss ratio calculations. This is important because it removes a potential dis-incentive amongst health insurers tied to the calculation of loss ratios and statutory minimums. Put simply, if insurers were to offer lower cost plans and their customers were to choose lower-cost providers under the new transparency rules, loss ratios could improve to the point where insurers were dis-incentivized financially.

While these rules are certainly good news for health care consumers, there are a few wrinkles that may impede the rate and magnitude of impact of these rules.

  • First, only beneficiaries of a particular plan will have immediate access to the cost-sharing information. Certainly, there could be organizations interested in aggregating the data for the purposes of publishing broader analyses, but we don’t know what the results of these efforts might be. A lot will probably depend on whether CMS is able to demand plan-by-provider level pricing, including how cost-sharing is calculated on the various constituents’ websites.
  • Second, there’s the issue of the caregivers, including the doctor. Health care is a fairly clubby industry. Doctors have admitting privileges to certain hospitals, and these often tie to soft relationships the doctors and hospitals have with one another. In addition, doctors are most comfortable with the other doctors and caregivers with whom they’ve developed a relationship (e.g. O.R. nurses, anesthesiologists). Thus, if a patient wants to use a particular hospital, especially one a bit out-of-the-way geographically, he or she might have to choose a different doctor – one with whom he or she has little familiarity.
  • Third, there’s a question of what plans will be covered. Given the exemptions the Employee Retirement and Income Security Act (ERISA) affords self-funded plans, I would expect this rule to impact only risk-based individual and group plans. Thus, we are talking about less than half of the covered workers in this country having access to an estimate of cost-sharing at the inception of this rule. Here’s the Kaiser Family Foundation chart on that subject:


  • Fourth, there’s the question of implementation. According to today’s press release, the Outpatient Prospective Payment transparency rule will go into effect January 1, 2021, while the Transparency in Coverage rule will go into effect one year after finalization. That’s actually quite fast in the world of health care, although this schedule means we probably won’t witness dramatic effects on the system until 2022 and beyond. On the one hand, hospitals will be required to develop and publish information under the OPPS transparency rule within the coming year; this is the easier of the two rules with which to comply. On the other hand, proposed rules carry with them a 60-day comment period. Thus, the Transparency in Coverage final rule won’t be issued until 2020, which means that health insurers will likely have until open enrollment in the fall of 2021 to come up with 1) the information, 2) the consumer friendly shopping tool and the high-level negotiated rate website, and 3) any plan design changes they deem desirable or necessary. If the Transparency in Coverage final rule is implemented on such a schedule, it will then take added time for stakeholders to adapt to the new environment.



Although it’s frustrating to see just how slowly and incrementally health care moves, I do feel as though we are finally poised to follow through with some pretty material changes to our health care system. For what feels like the first time, there are persons with both intent and deep understanding in positions of influence both at the Federal and State level. Persons such as Seema Verma and Alex Azar do appear to understand how our sausage is made and are moving ahead with reform that will ultimately have teeth. The same can be said for persons influencing reform in states like Colorado and North Carolina, among others.  At the same time, health care is routinely cited as the number one issue amongst voters, and we are heading into what’s arguably a very contentious election year.  I’m fairly certain the nature and scope of policy proposals in health care will receive significant attention in 2020, and that these will be compared with what’s been the experience under Obamacare and initiatives spearheaded under the Trump administration.  Over time, changes – whether driven first at the federal or state level – will likely lead patients to shop more aggressively for care, and high fixed cost entities like hospitals will have to respond by competing more aggressively for volumes. I would hope and expect that quality information improves in lock step with the financial information such that consumers can incorporate this into their thinking when it truly matters, and emphasize the financial information instead when providers are considered to be largely interchangeable. It’s a bit early to be making predictions about the future role of health insurers, since their fate likely hangs in the balance of whether a true public option becomes available at the federal level and whether a plurality of our population is compelled to take advantage thereof.

Getting Started




To test things out, I’m posting a map and link I think persons following health care reform may find of increasing interest over time.  It is the map published by All-Payer Claims Database (APCD) council, and it is interactive on that organization’s website.

APCD’s are at this point state-based databases of health care claims information sourced from many different payors and providers.  While they do not contain claims from all sources, they are typically diversified enough to provide a good cross section of activity and a reliable sense of what services are being provided at a reliably estimable cost.

The APCD council was originally a regional organization charged with helping states develop APCD’s and standardize rules, formatting, etc.  With APCD’s expanding nationwide, the organization changed its name and its objectives in 2010.