Oscar Health, Inc. (OSCR) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to our next session here at Morgan Stanley's Global Healthcare Conference Day 4. So it's -- I'm Ricky Goldwasser. I'm Morgan Stanley's healthcare services analyst. And it's really my pleasure to have the Oscar management team here with me. So we have Mario Schlosser, who is Oscar's CEO; Scott Blackley, who's Oscar's CFO; and Cornelius Miller, who heads IR. Before we start with the presentation, just wanted to talk about something that's very near and dear for Morgan Stanley, which is the Morgan Stanley Alliance for Children's Mental Health. It uses the resources of Morgan Stanley Foundation, in collaboration with the expertise of our key non-for-profit member organization in the mental health space, to help address children's mental health, specifically for far-reaching challenges of stress, anxiety and depression. So now more than ever, we need urgent and coordinated efforts to prevent the existing global crises in children's mental health from escalating and all of us can play a role in this effort. So we really encourage everyone to learn more about the issues the children are facing around their mental health and become advocates of change. And you can learn more about it by visiting our website in the Mental Health Alliance portal. Now before we get started, and before I pass it on to Mario, please note that this webcast is for Morgan Stanley's clients only. It's not for the members of the press. And for any important disclosures, you can go to our website. And with that, Mario, Scott, Cornelia, great to have you here. And Mario, I thought I'd pass it to you to make some introductory remarks and help frame our conversation.

Sure. It's great to be here. Thanks for having us on, Ricky. Good to see you again, even though it's only virtual. I realize I've never been on an in-person investor conference, which is sort of -- I missed out on that since going public. But thanks for having us on. So it's been almost 10 years since we started Oscar in early 2012. And I think it's been an incredibly interesting time in health care in the last 10 years and even a more interesting time for Oscar Health, certainly, in the last 10 years. I think we have come quite far on our mission in changing the health care system for the better and then building a really great business alongside as well. We started the company because we thought health care is too complicated and it's too costly. And we thought that the system -- the health care system overall needs to go in a direction where it is more consumer oriented and you can have much more longitudinal relationships between the places where you get your care, the places that pay for your care and the end use of the member. The health care system needs to shift much more towards alternative channels of care delivery, virtual care, in-home care and so on. And the system needs to blend the lines -- blur the lines between the payers and the providers much more, and more risk-sharing, more value-based care and so on. To drive in that direction, we thought we have to be the insurance company and build a good book of business on the insurance side, and we have to also be a technology company. And I really still think that we are quite unique as a market player. We've combined those 2 things, and they go very much hand-in-hand. And I think we're unique in that because we've been able to grow a large book of business on the insurance side in the last 10 years. We've been able to -- while we've been doing that, bring down the costs, both on the medical cost side and on the admin cost side, and despite outgrowing the market there every single year. And at the same time, we've been able to build an entire full stack of technology and operations and services that underpins all of this. And I think that kind of a trifecta, if you will, is not something that is easily replicable. And we feel in a very, very good position, both in continuing to grow our insurance business, but also increasingly helping others in the health care system, whether they be providers or other insurance companies, to use our capabilities and fuel their operations and fuel their technology stack. And we're doing that in our platform, +Oscar business. So just a couple of data points as to where we are now. We grew about 45% on the top line going into 2021. We're into the second quarter now as of our recent earnings call there about a month ago. At the same time, in the first half of this year, we had a combined ratio of 98.5%, so actually, the profits in our combined insurance business there. And also at the same time -- so basically good growth, good cost performance. The third thing we look at is are we launching new innovative technology plays and capabilities that help us both in our insurance business and in our platform business. And then the third category of accomplishments we, again, I think, had a great 6 months -- first 6 months of the year. For example, we are now running campaigns through our internal campaign management of health and so on towards -- on behalf of partner health systems and provider systems we work with. We ran a PCP attribution campaign with one of our MA partner, or clients, if you will, where we just about sort of doubled basically the attribution as compared to not doing anything, and by some very nicely tailored messages that get to members based on the level of utilization in different kind of outreach formats and messaging. So getting them 2 PCPs in that system. We have, even all the way in the depth and the bowels of our insurance stack, now kind of a couple-of-clicks ability to launch a new network -- new provider network design, typically a very cumbersome activity that takes a long time in other co-admin systems. So these are things we've been doing on the technology side that we think are powerful, both the insurance business and for the platform business. And so that is, to me, all exciting. It's going to help us keep growing on the insurance side, where we have about 563,000 members across the individual markets, the small employer markets and the Medicare Advantage markets, and it's going to help us keep growing in the +Oscar platform business. We are -- we have a number of clients now that we've either built Medicare Advantage plans for or who have taken over existing books of business, putting them onto a platform and -- where our business is more services and a software business, and both of these again to go hand in hand. We're excited about what's to come there.

Great. Thank you for that, Mario. So let me start with the insurance business. And on the insurance business with really sort of the COVID dynamic. Can you maybe give us updated thoughts on utilization, what you've seen in terms of both COVID, but also non-COVID utilization relative to the baseline and relative to your expectations?

Scott, do you want to give an update there?

Yes. So on COVID, in the first half of the year, we saw COVID at elevated levels in the first quarter, started to drop in the second quarter. At the same point, we saw non-COVID utilization that was below baseline in the first quarter, and then was above baseline in the second quarter. We thought to note that some of that above baseline non-COVID utilization in the second quarter was a bit of pull-forward in demand as we saw things like preventative and diagnostic services being part of the drivers of that, which are the types of things that are reasonably expected not to occur multiple times throughout the year. So we think that, that's what we were seeing through the first half of the year. As we saw COVID starting to really spike following our earnings call, we adjusted our full year MLR guidance. And we've now assumed that COVID costs will be elevated and remain elevated through the second half of the year, basically at the same level as what we saw in the first half of the year. And then on the non-COVID utilization side, we're expecting that non-COVID utilization will remain at around baseline levels. So even as we've assumed higher COVID costs, we haven't assumed that utilization will fall below baseline levels. We think that gives us a nice balance in our guidance where we did see COVID costs really spiking above what we have built into our guidance. It's reasonable to assume that we may see some offset in terms of non-COVID utilization declining as there's some capacity issues in the health care system. So that's a little bit of what we're seeing in terms of the full year guidance.

Yes, Ricky, some of the things we look at also, of course, is the more coincident real-time indicators we can pull out, like percent of conversations and consumer streams that are about COVID or percent of conversations in Virtual Primary and in urgent care services about COVID. And those have risen into the early part of August when we had the earnings call, and they've not broken out, neither to the top nor the bottom since then. So it's been pretty standard -- pretty stable there since then, which we think is sort of like within the realm of what's to be expected. And yes, that's a rough update on that.

Great. And then when we think about the full tech stack and sort of the advantage, and I think it also kind of like ties into kind of like how you're managing through these times and some of the uncertainties that some see in the market. You are one of the few players with a full tech stack. So what's the differentiated advantage that it brings to you?

We generally chunk this into 3 categories. We want our technology to drive efficiencies in the business. We want it to enable use cases that help build a book of business that others can't easily copy. And we want it to be available for partners we work with. There are many situations, we think, in the U.S. health care system where somebody else, besides us as a payer, might be in a better position to build a longitudinal relationship, to take risk on it, to deliver care in different channels or alternative channels of care. And there, we want to be the technology -- but actually the services platform, but let the others do the work and take the risk and grow that book of business. So these are the kind of 3 categories we have. Now that meant, for us, and I think this has long been a very counterintuitive aspect, maybe even to the public markets that we wanted to build all the bowels of the insurance company as well, co-admin, claims design and things like that. In my view, it's comparatively easy to build a nice website or a nice mobile app, whatever else, frankly, even that took a while for the rest of the industry, but it is -- gets much harder to have a really coherent visibility of data across everything you're doing, everything you're touching on the provider side and the member side. It gets much harder to really combine interesting incentive and benefit designs with your front-end member experience and your back-end provider experience. And that's where we're targeting our technology. So I'll give you an example in each one of these categories. On the efficiency side, for example, it may be something as pedestrian as paperless billing. We now have for ourselves a record number of members on paperless billing, which saves, believe or not, a couple of million dollars a year. And you need member engagement to even ask people whether you can stop sending them a bill in paper. So nothing is near there in terms of cost savings. On the enablement of use cases others can't easily copy. I think our Virtual Primary Care plan is a great example, where, not only when you attribute yourself to our Oscar Medical Group and the providers in our group, are you getting free Virtual Primary Care through whatever, video, phone call, chat and so on. But when the Oscar clinician tells you, go get this lab test, get this drug, then in real time, we can discount the costs on those things also and stuff gets written directly into our claims system, drives cost estimates going forward and things like that. And it's a powerful example for a use case, where you need both the back office design of a claims medical design as well as the front office member experience -- provider experience and so on. And those have to come together. And of course, in the third category of platform and customization of the Oscar capabilities there, the ability that we now have of going in and doing that on behalf of partners or clients in the health care system, I think, is only starting to pay dividends and become more and more powerful. There's obviously a recent -- I'll give you an example that I don't think I've given in the past. There was a recent CMS rule now, of course, that payers have to put -- increasing their data out into file formats and make it available to folks who want to use it with other startups or other payers or other providers and so on. And we can run campaigns now on that kind of data format and could run on other people's data as well. And it's something we're gearing up to do. And that is a very powerful, I think, example of taking a piece of technology we have and have been using it and holding it for our own purposes and using it now on behalf of others, and driving impact there. And again, that's only starting to have impact.

So Mario, when we think about that, and let me tie it also to market, right, because the exchange individual marketplace has been very competitive, always, but especially in the past years, we've seen a pickup. So does your tech stack, does your tools give you an advantage there? The markets are highly competitive in terms of pricing, so does it give you an advantage when pricing? Or is this a dynamic that you think is going to take just more time to play out?

I like to not argue with hypotheticals here, but just argue with our own track record, and I think that just speaks for itself. I mean, growing at what was a CAGR of 60% in the last 3 or 4 years, while also bringing down the overall cost structure, while also bringing down the medical loss ratio is not an easy feat while also doing this all in our own infrastructure. I think that speaks for itself in a situation where the rate trends in individual markets was around the 0 line for the past couple of years -- for the past 2 years now. And where that market, by the way, itself really didn't grow until going into this year now. I think that's a very powerful sort of fact that imply, in my view, in our view here, that we've somehow cracked some codes in the health care markets that we don't just grow with underpricing others. We don't just grow with building network designs nobody understands. We grow because we have a high NPS. And by the way, our NPS came up another 10 points to 40 since the beginning of this year, while doing these other things as well. We grow because we make it easy for partners to work with. Brokers of ours get paid quickly in our own platform. And we grow. We grow because the other stakeholders that we interface with in this highly complex U.S. health care system, like health systems like physicians and so on, see in us something that they can't as easily do -- or don't want to as easily do with other stacks in the markets. And so I think the tech stack plays a role in all of these. And if you look at the clients we have on the +Oscar side or the first clients we have there, for example, the folks we built MA plans for on the health system side, these are all health systems who we have already worked with and grown a book of business around and within the ACA marketplace before we then eventually worked with them in a +Oscar capacity and built them a health plan, for example. And I think neither would we have had the relationship with them that got this competitive unit cost to build this book of business at an improving and good medical loss ratio. If we didn't have this entry point of -- we have a differentiated technology stack, we can work with you in a differentiated capacity. We can build something new for the long term nor would have we been able to eventually convert this to more risk-bearing relationships, longer-term relationships and build a plan around these folks. And I think those are all the ways in which this very much comes in. I think this is something people maybe misunderstand if they come from health care, perhaps, and if they sort of like intersect with technology. And this might be sort of a highfalutin comment, but I'll make it anyway. When we look at our own technology investments internally, we say we have to invest in a way that these things don't add, but they can multiply. Then you get exponential growth as opposed to like just linear growth. And again, claim system is a great example. We didn't set out to build a claim system to get a 96% authentication rate. That's also a great authentication rate on the claims side and leads to better performance there on the pure claims PMPM -- what it cost us to administer these claims. We built the claims system, in conjunction with the member experience to put more innovative plan designs out there. That is much more than an additive relationship, which kind of multiplies these 2 capabilities. And that also means if you sort of really believe in this exponential sort of part of the S curve, where stuff really goes up quickly because we have a number of tech assets that really powerfully multiply, that you really haven't seen even the impact we can still get from all of this. And that is something I'm very, very confident that we're going to continue to see. But you don't need to look too far. Our own track record, I think, speaks for itself there already.

So let's talk a little bit about +Oscar and about that idea of patient engagement, and it is becoming increasingly more important and will become more so. We hear a lot of companies talk about it. But soon it's really going to matter to health care pockets, right? It's going to become an important part of caps and stars in 2023. So once it hits to your reimbursement, I mean, it really -- it matters meaningfully. What are you seeing in terms of the pipeline of interested payers and providers that are coming to you ahead of that?

Yes. I think we see a number of things. One is that -- these 3 trends I mentioned at the beginning, the trend towards trying to be the front door to health care, right, consumerization, individualization, the trend of what's trying to be the center around which a much more longitudinal patient relationship develops, I think, is very much coming to people's minds way more so than before. The trend towards alternative channels of care, virtual care and home care is one, obviously, pandemic has accelerated that, and that's going to continue to be the case. And the trend towards more value, more risk-sharing and so on towards, whether you're a digital health player is saying, "I want to take risk on this," or a provider who's saying, "I shouldn't just spend money when people walk through the door here," that's all -- these are all very real. And I think they get fueled by a number of different kind of recent happenings. One is the pandemic, obviously, right? We all know that people service and the pressure and pandemic shift towards risk, help the folks there who have that already. But you also see this by all the noises that big technology companies are making for coming into these markets. Nobody wants to be a book publisher on Amazon. So sort of like user comparison there, right? That's putting pressure on the players you already have in the markets. And finally, the U.S. health care markets are not just kind of 4 or 5 big national payers. It's a ton of, obviously, local players, hospitals and payers, other risk-bearing entities that have even less of an ability of creating a longitudinal great member relationship that goes beyond the sort of like -- when you walk into the 4 door -- the 4 walls of the system whatever else, and then the relationship exists. And so that creates a very fertile ground for health systems to say, "I want to have a health plan. Why take longitudinal risk," or for health systems to say, "I have a health plan. It's subscale. I want to do something with it and reinvigorate it." And that's the second thing. And the third thing for more local players to say, "I don't have the ability right now of attracting a great engineering team, but I want to make sure I have a stack that I can more nimbly use to go and work with different network providers, to work differently with my members here and so on. That's, I think, the background against which this occurs. And so yes, I think we fit very, very nicely into that because we can both give the potential clients a solution on the kind of low end of the stack, the core admin piece. But we can also go all the way to the high end of the stack, the member experience side, where, obviously, you're given the full stack and getting a health plan in a box basically and get that up -- set up very, very quickly in a number of -- in a matter of months. And we're seeing exactly those conversations at a much higher clip than even in the past in the pipeline now and are confident that these are longer sales cycles, but that more and more will roll through there over the next couple of months.

So when you talk about longer sales cycles, when do contracts need to be signed up to be in place by 2023? So how long is the sales cycle?

I see these 18-month sales cycle, sometimes even above. I mean, there are some conversations we are in right now for 2025 even. So that can be something. But I'll point it our past. I don't have to make anything up. We've done this in the past. We announced a Cigna relationship in, I believe, January 2020 last year, right, and we were in the market by October, November 2020. And by the way, we're now in 8 states -- not just 8 markets but 8 states, right? So like a rapid clip of rolling this out in additional states there even. We announced the Health First relationship, which wasn't even a greenfield relationship, but had 60,000 lives that are coming over on to the Oscar platform. 37,000 and 23,000 individual lives pre-AEP, pre-OE that was announced in March this year. And the first actually implementation that's gotten checked off is that the brokers selling Health First products are now already on the unified broker portal, namely the Oscar Broker Portal. And they went from 5 broker portals to 1 broker portal. Again, health care is not one big algorithm. It's all lots of base points you can eke out here and there. And I think that's why we build all these various technology assets. But so that can give you an idea of how quickly we can turn this around. Now that means that there's a range, of course, of time lines, but 18-plus month sales cycle, but it can be as quick as us saying 9 months ahead of time, switching over a book of business and we're good to go here.

And I got a couple of questions from investors who just want to relay that. So one of them is when we put it all together, right, +Oscar, the insurance business, how do you think about the long-term margin potential of the business? So clearly, they're -- all these heavy investments that you're making that really kind of make it a little bit hard to understand for investors to see the steady-state economics. So could this structure, the cost structure, the 2 sides of the business, could it enable you to generate better long-term margins than others in the industry?

Yes. I mean let me give one high-level piece of sort of like a structural thought, and then Scott, maybe you can add some numbers to it. We exist on a spectrum, and the spectrum is essentially risk business over here, fully at-risk business over here and fully service -- I'm trying to put my hand on the screen here, fully service business or SaaS business over here. Our own book of business is fully in the risk side. And something like Health First is basically fully on the service/technology/SaaS sides. The margins range from insurance margins all the way to essentially services and even SaaS margins there on the right side. Something like Cigna +Oscar is already on that spectrum. It's a better margin than essentially just a risk margin because we do more of the admin and, therefore, get a bigger bite of the apple there, and share some of the risk, okay? And so we can -- we have sort of a chance of picking the rights and segments on that spectrum. Scott, maybe you want to do add some more things.

Ricky, I would just be brief in saying that I think this is one of the most powerful components of our -- of the flywheel of our company, where we can invest in technology and leverage that in our insurance business. And post what would be normal margins in that line of business, but we can also leverage those same investments to have a services business that's going to generate normal kind of margins that would be significantly higher than what we would see in just the insurance line. So on a combined basis, I think that gives us the opportunity to have margins that are above a typical managed care company and really have power of the future profitability of the company.

Great. And one more question from investors here. You have a large cash balance, sort of unrestricted cash. Would you look to M&A? And I think the specific question here is around Medicare Advantage. Could you acquire Medicare Advantage plan that is already is more of scale?

I think it's a possibility, yes, and we've given it thought. I think first of all, I want to say that M&A is a very important part of our business, and we're excited about it. And we're kind of going into 1, 1.22, about 10x our MA footprint, right, because we have a lot of members coming over from Health First. They're going to be on our platform, and we do considerations to one, that starts -- considerations for them there. That's, we think, a great amount of growth of our exposure to MA already. And so the strategy of building plans with health systems and groups and so on will continue to carry us forward there as well. And yes, we wouldn't rule out M&A there either but we don't have anything to say there just yet.

And we have time for one more question. So Mario, two questions for you. One is, when we speak with industry participants, I hear a lot that you have the best technology out there by far. And then it comes with the fact that, but you don't have a health care bench. So first of all, why not hire more people from the health care industry? And then my second question, now that you've been in health care for a decade, what's most surprising to you in the health care market?

Almost like these -- interrelated a little bit, these questions. So I'll try to keep it brief. So on the health care side, first of all, we very much think about this the same way. I think Oscar works at the intersection of health care and technology, and that's where the magic occurs. If we can't bring those 2 worlds together, we're not living up to our potential. People who joined just in the last year or so with -- Sameer, who used to run CareMore's west business and including operations. Steve Wolin is an SVP at Oscar. He's now our Chief Medical Officer, by the way, Sameer Amin -- Dr. Sameer Amin. Steve Wolin came from Optum from the strategy side there as our SVP of Member Programs and SVP of Platform as well. So we have plenty of folks coming from the health care system. And I think we are, in my view, an extremely attractive place to go and work at if you want to do really interesting stuff, that is also good business in the health care system with essentially a faster velocity. So if you have a great recommendation, Ricky, please, I'm all ears there for referrals and resumes. The biggest surprise, it maybe relates a little bit to this as well. I am still a little bit surprised as to how simple it can be at times to make money in niches in health care. Baby niches in a [ fortune of a ] system with not a lot of differentiation or, in my view, long-term kind of moat around it. It's still easy to make, have a great business around just being good at contracting, for example, or have a great business by just being good at building a network or something like that, and eke out very, very big amount of money that way and sign 20-year contracts that will like enshrine that. That is a great sign of the incredible, I think, change that is still going to happen in health care, where I think we will see more change happen in the next 3 years than we've seen in the last couple of years. That also means like rackets, almost in health care, in that regard. It would never occur to any technology company to sign a 20-year contract with a cloud provider. It would never happen. In fact, every technology company, if I were to build a mobile app tomorrow, I'd probably use 3 different clouds side-by-side. If the health care system goes any more into a direction where moats will be modified by a true differentiation of capabilities that are encoded in a stack, either of service or technology, I think you will see a period of change made to the system and a lot of business models change. I think we're very, very well positioned for that because we can obviously be a big provider of these kind of technology tools into others who need to undergo that change. And that's a huge upside, in my view, in Oscar that we will get more credit for in the years to come. I think you're on mute, Ricky.

Technology, huh? So Mario, Scott, Cornelia, thank you so much for spending time with us. And for everybody on the webcast, thank you for tuning in.

Thanks.

Thanks, Ricky.