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

I thank everyone for joining us today. It's my pleasure to be introducing Oscar. Oscar is a technology company that uses technology to provide health insurance in the individual and with growing businesses outside of the individual market as well as selling its technology to other health plans to enable their health plans. So presenting today, we have Mario Schlosser, who's the CEO of the company. So I think we're just going to jump right into Q&A.

Let's do that.

All right. So I guess maybe it makes sense to take a step back and talk about why you chose the individual market as the right kind of starting point for building Oscar?

Yes. Yes, we've -- so my background is much more on the computer science side originally. I don't think I would have expect myself -- to call myself a health insurance executive ever. It's a great honor, though. The very basic idea is that in -- the health care system is too complex and too costly as we all know. I thought when we started Oscar now pretty much exactly 10 years ago, that is the case because there isn't anybody who has the full visibility of the end-to-end utilization of a member of the health care system. It's all too convoluted and too siloed in the way that's organized. And there isn't anybody who ultimately has -- can put forward financial incentives to make sure that your health care outcomes as an individual get optimized, except for the insurance company, but the insurance company misses 2 crucial components. One is their technology is often based on legacy systems, often based on acquisition of many other insurance companies, the core systems still based on [ COBOL ], things like that. And the second piece is they often lag member engagements. We felt that in the individual markets, which started about 1.5 years or so after these started. There's a very unique opportunity of engaging members, of building a membership base through word of mouth, of then -- get them into physicians, who would enable in different kinds of ways and put different centers in plan designs and so on and build a much more modern day risk-bearing engine that's built on great member engagement and great technology. So that was really the starting point of the year. Now I would say that the insurance markets or the health care markets have become more value-based care driven in the last 10 years. They've become more digital and virtual, and they've become much more individualized. I mean there are more and more individual nowadays making decisions as to which risk-bearing entity they're going to be with. And if that is the future of U.S. health care, as all will, that is kind of exactly the positioning we want to have. Because in that kind of a system, a tech-driven, high-engaging insurance company like us, I think, is very well positioned.

Yes. So you guys are looking to grow the top line, not quite as fast as you are doing this year, but still kind of that 20% plus. And we think about the exchanges, it's not necessarily seen as a market that can -- that itself is growing that fast. So you have to be taking share to kind of achieve your top line growth goal. So how do you think about being able to take share? And what drives that opportunity?

Yes. And let me start with the macro picture on the exchanges actually. I think there's a -- if you net out everything that could be happening in the exchanges into next year, it's still a growth tailwinds. We'll probably be one of the fastest-growing insurance markets, again, between Medicaid redetermination, the family glitch getting fixed and whatever happens with subsidies and so on. So that's an interesting time to be in still, right, in the marketplace. I see the much broader picture there also is that when we started the company, we very much thought that very few companies nowadays still have corporate pension plans. That all shifted over in the '80s lever from corporate pension plans towards 401(k) plans. So you have that revolution really rolling through the system from the employer determining what your pension looks like towards you getting the money, being able to invest it yourself. That same change is bound to happen in the U.S. health care system as well, and we've had 5-plus percent employer cost inflation for the past, whatever, 30 years, right? We had 1% ACA rate increases in the last 4 years. So right there, you see the power of an individualized markets. And therefore, the broader, bigger picture growth part of Oscar is that the more the market shift towards individualized, the more we can grow alongside that, and the more others in the system will need technology that we can give, and we can therefore grow there. Now how do we take share? I think one of the stats that I am the proudest about is from the past couple of years is that we have not been the cheapest in most of the markets we've been in for quite some time now. In the last open enrollment season, we were the cheapest, lowest cost plan, only 13% of our regions. And yes, we've obviously outgrown the markets in every one of the last couple of years and taken share. We're now at 16% market share in the regions that we're in. 1 in 13 Oscar members in ACA members is now an Oscar member. And so we -- the track record, I think, speaks for itself there. We have been able to take share. The way we do this is through great word of mouth, and this is a market where if members like the experience, if brokers like the experience, if physicians like the experience, they will tell each other and they will tell friends and family, "Hey, go to Oscar, and it's going to be a great plan for you." And we do this through continuously pushing on affordability. Can we put incentives, benefit designs in place that will get the average person or a particular segment of the population better and cheaper health care? And we do this by just continuing to work on operations, getting a bit more efficient every year, getting a bit better every year and how we pay claims and so on. And we're going to continue to do all those things.

Yes. So when you think about the beyond price, I think that's one of the concerns is that in the exchange market, highly visible what the pricing is. What is it that you think consumers really value the most to kind of say, I'll take -- I'll pay a couple of dollars more, but I'm getting XYZ in return? What is that?

Affordability is the first one. I think that there has really been a shift towards thinking about total cost of care, even though that's a mouthful and consumers will never call it that way. But consumers can do some simple math. They would look at, okay, how high is the deductible versus how many physician visits would I get, if I went over here for free directly out of what I can do here, Oscar Virtual Primary Care, virtual urgent care, great, that's going to help me lower some of my costs. And what we've been doing with formulary redesign and what we've been doing with launching plans for diabetics in various states, those are all things where people who find themselves in particular, out of utilization, they will see great, "I will save money here." Even though the per month cost might be $10, $15 or whatever higher. That's clearly something we see. It's not enough to do it. You got to also explain it. And that is where our member engagements and where our brand building comes into play. That's where our broker engagement comes into play, right? We've invested quite a bit in our broker relationships and even our broker technology, and that is partly because we really think the brokers have been very effective at explaining what is a better plan design to other -- to members, to [ veteran members over the years ]. And they're good multipliers for -- if an insurance company solves your problem as a member, and the broker has less of an issue there for you to solve as a member, they will tell that to others. And [ symbols ] are always in which we can outsell the competition there. To me, the more individualized this market gets, I think the more the flywheels become different. I saw this morning that some Airbnb, I'm sure that's not the first time somebody at this conference call heard Airbnb, but let me do it, that Airbnb talked proudly about how they're not changing their search algorithm. Now you can search, I think, by categories or whatever as opposed to buy something else. And so that is not something any insurance company would ever talk about, how their care routing or search algorithm looks. It is stuff we pay attention to because for end users and consumers, it does matter. And it certainly matters in an individualized market where there's not many, many layers of HR departments and so on in the middle of, and that will be old. We did change something that search algorithm this month as well. We changed how our facilities get ranked by cost efficiency. And these things really do matter, I think, in this market, and so we can outsell others.

Yes. And so actually just go back to a point you made earlier about thinking that the exchange market is a growth market. When you say that, do you -- can you just talk about all the puts and takes next year potentially with redeterminations coming back in, family glitch being fixed. Do you see growth on that basis even if subsidies aren't extended? Or are you saying, assuming that you get excited, there's going to be growth?

So I would not claim to have any deeper insight here than the various consulting research firms. But if I add together what the best things we can see then, if subsidies went away, it's probably about 1.5 million to 3 million member hits [ are sold ] to the exchange marketplace. And again, that would not be my starting point because I do think there will be a way to get them extended. Family glitch fixing affects 5 million people, but I think 1 million people up is a pretty good guess there. And then Medicaid redetermination affects, I think, 15 million people, but anything between 1.7 million up, and 7 million up is a pretty good -- is a range there. As we net all that out, you still end up with a higher market if all these things happen. And even the kind of lower ranges -- even the lower range of Medicaid redetermination, family glitch, I think, gets you still about even with subsidies going away. And again, subsidies, I don't think will go away. And I think these other things will probably be more towards the middle range of where the outcome could be. And so therefore, the net-net of this will be is still growing. And in all of this, we haven't counted at all what might also be happening indirectly from the ACA markets continue to stabilize. And it's the first time this last open enrollment periods that brokers in, let's say, South Florida, for example, started talking to me about, we could see -- we're going to start moving some companies over in to the exchange marketplace. We see opportunities of individualizing to individual coverage HRAs or simply to paying the penalty frankly, of getting employers out of large employer plans. That have not worked for most employers, right? The cost there, they will be 8% this year or so and to the ACA because the same insurance companies are now offering both. So why not move members from one to the other. I think those are all medium-term tailwinds that will be in that market as well.

That's helpful. I guess one thing that we've increasingly been wondering about as you think about that switch because you say, all right, if subsidies go away, that's probably a good risk pool that drops out, because they were just indicated, it was largely free. Medicaid redeterminations, you lose free coverage. You buy it on the exchange. Someone who's paying, when it was free before, is probably sicker than average. And so even if we kept it flat or if we grew, the risk pool might get incrementally worse. I mean how are you thinking about that as you price into next year? Is that a risk? Or is that something that you feel like you'd totally be able to price in?

I think it is a risk, but it is one that you can manage relatively intelligently. And it's 2 thoughts on this. One is that -- actually 3 thoughts. One is that regulators are very much aware of this as well. And the dynamics in the ACA is such that it is Federal money, but the states really control rate filings and things like that. One interesting data point is that the Texas regulators, now for the first time in the ACA's history, are starting to take over rate review from the Federal government, something that they announced in the last really couple of weeks or so only. And I see that as a really interesting indication that the ACA market is becoming so big and powerful that even a very, let's say, fierce state like Texas is now saying, "Wow, this is a lot of membership covered in our states. We want to have a good say in how we're distributing Federal dollars to something that's good for people in our states." And so these regulators in these states have various ways of them telling us and other insurance companies, price for different scenarios. There are some states who were pricing for us where we're asked to file different rate scenarios for Medicaid redetermination, depending on where it happens, for subsidies going the way or staying. And so that's kind of one lever, I think, on how that balance at risk, one thought. Second thought is that I think it generally will be an inflationary rate environments. And you've had 4 years now of essentially 1% rate increases in the ACA, vastly due to health care cost trends. I mean health care cost trend has been 4% or 5% every year, right? This year, 7%, 8%, 9% or whatever else. And I think it's a great sign that, that individualized markets work and put cost pressure and competitiveness pressure on rates, but you can't keep going with that infinitely. And all the rhetoric I see from others is about, hey, we want to get to a certain target margin. And so I don't think you'll see a rational pricing next year, and people trying to take share in a situation where the market itself will likely grow and where you have some of this uncertainty on the risk sides. And so my second thought, therefore, is that on the margin, I expect insurers to be more careful in rate pricing there. And I see state regulators push more towards that because again, the money is coming from the Federal government or from the states, right? So it's better to have a stable rate environment rather than have -- with rates going up on the margin because the end user will not feel it. And the vast majority of members are still subsidized and even though cost sharing may go down a bit or whatever. But -- so therefore, the rate level can shift up without hurting anybody effectively. And I say the third thought is that the populations we are -- we might be seeing more of there, are populations we have gotten quite familiar with now, the last couple of years. We already have a lot of lower income population than we ever had before. I think at this point, 45%, believe it or not, of all Oscar ID cards that get requested, get requested in Spanish. That's a astoundingly high number, right? It's just a very different population, the ACA nowadays than it used to be the case, and this tends to also be lower income population. And so we see in the SEP population came in last year that there are differences in how these populations utilize, but you can adapt. And the question is how quickly you adapt. I said this in the earnings call, we saw a high preventative care utilization in the SEP folks, and we saw a high ER utilization when they came on board. The preventative has gotten out, great. You can't overutilize preventative too much, right? It makes sense. The ER utilization, still a bit there, opportunity for us to engage care out, get them into virtual and things like that.

Okay. That's helpful. I guess when we think about, you mentioned in the earnings call, I guess, in the quarter actually, your results versus our model was pretty much in line. But versus consensus, the MLR was a little bit higher, and the seasonality was a bit different than how the Street was thinking about it. I guess, it's hard to say how this treatment is thinking about it. But can you maybe help bridge kind of what the expectations were? And why the year is going to look the way it is versus how maybe people are thinking coming in?

Yes. Yes. So we reaffirmed the 84% to 86% MLR for the year, right, in the goals of the admin ratio. So that should give confidence that this was in line with what we thought would happen. What happened is essentially that from a Silver member point of view, we went from 50% to 65% highly subsidized Silver. And that means that we have more members with a much richer cost-sharing plan designs, where you have much less of an effect that the later the year becomes, the more people add deductible and out of pocket max and the more they will start utilizing then. It's going to be smeared out more throughout the year. We were always out of line from a seasonality point of view as compared to all of our peers based on the year, and we had a much steeper curve generally a year, and that curve is simply going to be flatter now over the years. There's a little bit of that effect the admin as well. So that was one effect in all of this. The other effect in this is, frankly, to bore you into with literally arithmetic effects. Risk adjustment shows up in a different place in the MLR calculation, denominator and numerator, that switches place basically. And so the arithmetic of the MLR changes a bit. It makes that number higher. The underwriting dollars remains the same as the other piece that happened a little bit there. But we did have a little bit of negative PPD, but about 75% of that MLR difference to the consensus was, in our view, that seasonality in Silver shift and something we are very comfortable with, hence, we can manage. I think on the margin, if you go back to our IPO roadshow and even before that, we've always said, we want to be much more market average from a Silver versus Bronze splits. And so it's a good thing that we have been able to get towards that because it is better from a [ risk-bearing ] point of view to have higher mobility members in the ACA. And it gives us more of a chance to manage them as well, which I also think we can do a good job on.

So is this mix right now of Silver, is this the right way to think about it going forward? Or is there still kind of shifts on the product line that we should expect over time?

I think we're about there. And there are, again into next year, interesting opportunities from -- the payment rule from CMS is now telling everybody, you got to bring back platinum plans and things like that. Then I think these changes generally are a good thing for us because we can hopefully be a bit more nimble around putting new plan designs out there. But we are close to the market average, and I think that's generally a good place to be in this markets. In many ways, I think I try to put the IR team for not to do it in the earnings call that this is going to be a boring quarter for the most part. And that should be a great thing, right, given everything that's happening in the public markets where everybody is getting blown up [indiscernible]. Because for us, the big goals for this year is to manage the book to the goals we've had to set us up for insurance company profitability for next year and to push more the +Oscar side. And then that just requires us to be on plan as opposed to do anything adventurous that we're not already doing. I think if we have a profitable insurance company next year, and all the other things you've been building, highly engaged members and tech platform ourselves and more +Oscar deals, it's a very unique package that I don't think others in this way have been able to build in the peer group we're in. And I think that should be great.

So let's actually look at all those things. So -- and sure grow profitability next year. So when we think about where you are today versus there, what are the levers to kind of get you to that level?

Yes. It's some MLR, some portfolio management, some admin really in -- is the short answer. Portfolio management is we did lease 2 states. We left Arkansas. We left Colorado. We announced that. That is just a rationalization of our planned portfolio there. These are states where we didn't think we can get to scale quickly enough and plenty of opportunities where we can do that in a good way. There were also some regulatory changes coming in those states. And so it made sense for us to then say, I'm not going to focus there. We're not expanding or we didn't announce any new expansion markets. And so that also gives us the chance to be focused in on where we are. So that's all portfolio management. Pricing is the other lever there. I mentioned I expect this to be an inflationary period for rate increases, so it was a good chance for us to kind of rightsize the pricing and all the markets we're in. On the MLR side, we still have a lot of blocking and tackling we can get rights. Opportunity for automating more in utilization management and getting better decisions there, opportunity for still pushing on unit costs from increased scale, opportunity for pushing more into risk contracts. We have some additional big risk contracts, downside risk contracts we're moving through the pipeline right now, and so those opportunities for us to make sure we lock in good MLR performance in more places in the country. There is a lot of, I think, additional opportunity from using member engagements to manage the diabetics better and changing how we rank facilities and driving members more towards higher efficiency places of care and so on, but we don't usually even count these going forward, because we want them to be sort of coming in where they come in. I think, again, I see Oscar as [ scatter ] preference insurance company. And there's a lot of magic that can unlock on top of that, that we can -- that will be clearer if the underlying operation makes money. And then on the admin side, finally, it's still a lot of opportunity for basic blocking and tackling as well in automation. I mentioned in the earnings call, we're automating right now. If you're a member, you message the Concierge teams. Right now, 5% of the responses you will get will be automated. Eligibility questions will be answered automatically. Benefits questions will be answered automatically, but there's still plenty of others, up to 20%, that we can think we can automate without ever a human being in the loop. And things like more detailed customer's questions, for example, and [ Scott ] would win this year, for example, all these things will take out cents on the dollar of PMPM. And they add up to something meaningful, and we're pushing all of those.

That's helpful. The comment you made about providers going to value-based care and things like that. Because I guess when we think about Oscar, we know no managed care companies ever on one end, but in general, one of the big differentiators between you and everyone else is that everyone else seems to be talking about, get the doctor to perform care differently. And you seem to be saying, get the consumer to engage with the system differently. And -- but you're doing stuff on the physician side and the provider side as well. So maybe just talk a little bit more about that, because that's not something that we normally equate with Oscar.

Yes. So the focus on member engagements, I think, in our case, was both a natural gravitation towards that from just who we were early on and who we are, right? I come, as I mentioned, more from the Computer Science side and designing games and so on. So I really thought that there was a big block of health care or behavioral change on the member that almost nobody is tapping into. And that was just -- it's very natural to us. And I think it's generally important for companies to be naturally good at something as opposed to trying to be average at everything. So that's one place. And the -- however, it has, a little over the years, to some conflicts almost, like how much do we want to lean to the provider side, because it would naturally lead us to give up some ability of influence to the member or the member more directly, there's a powerful provider in the middle. And so the way we've done that actually oftentimes was to work with health systems. And I do think we were some of the earliest on the managed care side. So we have 50-50 upside downsides, even co-branded health plans with health systems, even before other insurers pushed down that pathway of Cleveland Clinic plan, for example; Cleveland Clinic and Oscar health plan, 50-50 risk sharing, been around since 2018, has great retention, great medical loss ratio performance and so on. So we have been building a lot of experience there. And we've built some really good playbooks there. For example, joint operating committees with these providers, sharing dealer back and forth. With Cleveland, for example, we share member reviews of how Oscar members review their providers in our systems. Those go back to Cleveland, they can look at that, and they can sort of like get input from that, which I'm not sure other insurance companies are doing it this way or even collecting in this way. And so we've got some really good bones, is my points, to build on the [ health care ] base care there. Now over the past 1.5 years, 2 years, we've made a deliberate attempt to shift much more towards provider practices. And I really think that, that is a big opportunity for us as well. The bones are there. We've been, I think, very well able to automate more data flow there. And we have been able to structure some benefit designs around these provider partners as well in ways, I think, others would have more trouble doing -- other insurers have more trouble doing, like building free parking, the benefit designs or whatever, right? That's all possible there. I think the real unlock and the real key that we're driving towards is to combine member engagements with value-based care driven by the provider. If you look at what providers can buy right now from a technology point of view, [ SEP ] point of view to manage health, to manage risk, they can't buy almost anything that connects better value-based care insights with member engagements. There isn't really an app that gives you great sort of like care pathways that then you can get to the member, that also on the back end time the benefit design in insurance risk management. I think that's a real opportunity we have. And for example, we announced this at the Investor Day, we're now doing a white label. We're getting paid to do a white labels, Oscar app now. That's entirely legal on the provider in one of our risk-bearing relationships. I think that's a step for us into that direction of enabling member engagements, the provider of value-based care. And I think it's going to be definitely a powerful pathway.

Yes. So in the last few minutes, I want to kind of go into that. So the +Oscar or even more broadly, how to monetize the technology outside of creating a great health plan, if you can talk a little bit about that. That seems like a huge opportunity, but it kind of feels, I think from the Street sometimes that there's not as many new arrangements as we would want to see. So can you talk a little bit about the pipeline for new deals? How we should think about the timing and the pace of the growth there?

Yes. So we have been largely in the marketplace selling Business Process as a Service full stack replacements, right? And that means that you have an existing book of business come over not only into a technology and platform, but also existing people doing the work coming over. Those are bigger and further in between and have longer sales cycles. And I think we even, in some level, anticipated when we started doing the first couple of them at the beginning of last year. And so it's very clear that the market echo is that people either be replacing their co-admin solution on a rolling basis over the next couple of years. A lot of the existing installations, they are getting long in the tooth, and that's going to roll forward. It's very clear that a lot of folks need to be out there developing member experience. Some try to do this by buying some things. Some try to do this by developing something by themselves. And so people think we've got something unique there. And then finally, running campaigns, tackling member segments and so on is another really important opportunity there as well. In all of these, people want to buy our staff either Software as a Service or in a modularized forum. And that's what we've been trying to push towards. And the good thing there is that, I talked about in the earnings call, is that we have been able to now start selling in the marketplace our first SaaS modularized solution or our campaign builder. And I think that was a nice turnaround time in getting that going. And we think that's a good opportunity to land and expand. It, I think, opens the funnel actually towards even provider practice and so on who would want to -- and go on and buy that. And it's an opportunity for laying more of the groundwork for them over time, more Business Process as a Service for replacing deals. For the 2024 time frame, we're well in the window of more Business Process as a Service replacement deals. And so the pipeline is still full of -- kind of all of the above, modularized SaaS, Business as a Service. And we have had so much growth on the insurance side that we did feel the freedom to not have to chase after every additional deal we could have gotten and rather get it right. And it is a bit of a trade on the investment side to build another BPaaS deal versus investment were in getting SaaS ready for '24. And so those are the things I think we took some trade-offs on. But to me, medium term, long term for the better. In the short term, we're going to starting campaigning better.

Okay. And so from your perspective, kind of that pipeline, the inflection point is kind of 2024, that's when we should really start to see all of these investments pay off?

I think, we -- yes, on the -- it will continue to pay off. We will grow with existing clients. So I actually expect good growth even in our fee income revenue stream in the next year even with the current set we have and as we talked about as well. And we will, I think, see additional revenue also come through on the modularization side before '24. And we have definitely a chance there as well, and we're going to keep pushing on that too.

All right. That's excellent. I think that's all we have time for. Thank you very much.

Great. Thanks, Kevin.