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

All right. Welcome, everyone. My name is Michael Ha, I'm managed care and health care service analyst at Morgan Stanley. Our next session is with Oscar Health, a technology-enabled managed care company that plan offerings in the Individual exchange marketplace, Small Group and Medicare Advantage as well as selling its technology to help system providers and other health plans. So I'm pleased to have today with us, Co-Founder and CEO, Mario Schlosser; and Chief Financial Officer, Scott Blackley. And before I begin, I'll just read the research disclosure. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. And with that, thanks again, and I'll turn it over to Mario, who would like to make some introductory remarks.

Yes. Thanks for coming out. Just very briefly, I'll take 2 minutes to see you -- to tell you where we are as a company. We're actually just about 10 years old now at this point. So we started the company just about 10 years ago, in late 2012. And the original idea has been very much what's driving us today that we thought that there are 3 trends rippling through the health care system. One is a shift towards consumerization, the second is a shift towards more digital engagement, interaction, virtual care and so on. The third one is a shift towards more value-based care. In our insurance business, we are now north of $6 billion revenues this year, medical loss ratio 84% to 86% and the guidance, which we reaffirmed just last week with the benefits of costs coming down and having almost doubled coming into this year. And we really think that it's because we've been leaning into these 3 trends, and they're only becoming stronger and stronger. One data point for each. We had record high retention coming into this year in the ACA book of business, about 81%, which we think compares very favorably to where others were. We grew so much despite the fact that we were only the lowest price and about 13% of the rating areas that we are in. So growing on something else than price, that I think all speaks well to the consumerization aspects of Oscar. On the digitization aspects, we're running so many proactive outbound campaigns that we've substantially increased the number of times we interact with our members. We talk to our members. One example of the year sets, since the beginning of this year, about 51% of Oscar members have been in a campaign but not only read the campaign that we sent to them, but they interacted with it. They went in, click on a link and refill the drug or something like that. And even just last month, about 2/3 of our members got some kind of productive output on communication. So a real shift towards digitization, virtualization there. And finding in value-based care, about 48% of our members are now in attribution arrangements to a physician where a health system that is somehow at risk with us, upside or downside. And we think that also compares quite favorably to other commercial players, commercial market players. And of course, we're not done there, we're going to keep shifting that more and more towards where we need to be. So insurance business on a path towards profitability next year in 2023. And then we also, of course, think that because these 3 trends are so much strengthening in the marketplace and that every other health insurance CEO now sounds like I sounded 10 years ago. We think that what we have been building is powerful for others in this marketplace, for providers who want to go more towards risk for insurers who need to brush up on their presence in these individualized markets, and that is our +Oscar business, which we also think therefore, has a good future ahead of it. And looking forward to the questions and the conversation.

Great. Thank you, Mario. So we'll kick off the Q&A. And at the end, we'll leave some time for any audience Q&As. So just to get right into it, maybe a quick update on MLR utilization trends into 3Q. How is it trending relative to expectations?

Yes. So we were quite excited through the second quarter to see utilization trends that were more or less right in line with what we had been expecting for our membership. We added a pretty significant number of members, and we also shifted our book towards a higher portion of Silver plans. So we had expected that would come with the population that had higher morbidity. We've seen that play out, but we've also seen kind of the performance, both on the risk adjustment side and the claims side, the kind of -- with that membership. So we've really -- we had a little bit of a probably -- COVID came earlier this summer than what we had been expecting. We built an endemic version of COVID into our pricing, which really looks a little bit like the flu in terms of a couple of seasonal bumps. We're still expecting that -- we may have just seen the summer wave pull forward a little bit earlier than what we had expected. But in general, we're pretty much at baseline and nothing new to report in terms of MLR progression but through the first half of the year, which is when you -- second quarter is when you get your really first batch of data to really understand what's going on with your population. We're pretty pleased to see that it was performing pretty much right in line with what we had hoped.

Great. Great. Actually, sticking on the topic of pricing and flipping to InsureCo. As we think about the exchange marketplace, I believe you're expecting high single-digit rate increase, but presumably, that was incorporating no extension of the enhanced subsidies. But now that we're here, Inflation Reduction Act is passed. Are there any states that are reopening their books to figure out what rates could be or refinalize rates? How should we think about rate stability into next year?

Yes. We thought that this would be a year where we generally have a more inflationary picture in rates. And I think that's exactly how it played out, right, high-single digits is what is coming through in all the various rate filings. We -- I am really pleased with the fact that in the past couple of years, the regulators in the states have gotten a lot more active in managing in the rate setting process. Regulators like Florida have always been very intelligent about not letting anybody price too low, take market share and then jack up rates for next year again. And I've been really thoughtful about working with the insurance companies there despite not giving anybody full visibility into the process as to what they can expect and where they can land. So that, I think, is a good process and importance in something like the ACA where you have an annual auction that essentially runs over and over again. Even holdouts like the Texas regulators are now very active in the rate setting process, which, again, in my view, only creates more stability and less breakout moves in enrollments and retention and things like that. There is a long process after U.S. bid rates, which happens in April, May, June, where the regulators will come back for 2 or 3 months with what they call objections and questions and things like that. And the subsidy enhancements were just part of that process. There were some states where you already submitted 2 different rate submissions from the get-go and they now pick the lower one. Many others where the regulators kind of came back and worked it in. So we did not see that to be a big impact in terms of how the rates changed. And you're increasingly now in this period where the rates are becoming public. Georgia became public last week, California last week as well. I think Virginia also a couple of days ago. And those publications, I think, confirms and reaffirms both where we priced. So we feel comfortable with where we priced, we priced for margin as we said. And where we think others are pricing, and it is overall a fairly rational pricing environment, as I would call it.

Great. Great. So maybe sticking on the topic of the exchange marketplace now that we have Inflation Reduction Act, so subsidies extended, potentially the family glitch fix, you have Medicaid redeterminations. You have a lot of membership growth tailwinds. And if you were to add all those pieces together, how should we think about membership growth into next year?

Yes, it's going to grow. I think that's the shortest answer for the year, somewhere between 10%, 15% is our internal estimates. But for something like Medicaid redeterminations, it really is just not clear yet. It's mainly you have estimates there, range from the market is going to grow from 1.4 million members all the way up to 7.5 million members. And I don't think anybody can claim right now that they will know what that will look like exactly. We anticipated that the membership book of business coming through redeterminations will be slightly more risky, and so we have some allowance in the pricing for that. There may be, depending on when it happens, the same risk adjustment penalty that you have for any special enrollment member coming in, right, where they are more risky -- not more risky, but where they cost you more from the way the math works in the first year as opposed to the second, third and fourth year. We -- if we look at our own Special Enrollment membership that came in, in the last 2 years or so, the way they looked for us is that we retain a high percentage of them, basically 80-plus percent. And they, in the first year, got this penalty against them on risk adjustment, in the second year, look like everybody else. If that happens there, it's just a positive for the market, though it may take a while to work itself through. Overall, the market will be growing. How much, will remain to be seen. And we think we can take our fair share in that. The last thing I would say, the big wildcard that in my view, not enough people have on their radar screen, both for ACA, but also for non-ACA, is the impact of employers increasingly shifting potentially into the individual markets. There is a tool now called individual coverage HRAs where if you're an employer, you can give pretax dollars to your employees, they combine the ACA. For the first time in the history of the ACA, that rate sheet now looks like it has every big national incumbent in it, I guess, for the second time, same last year. And we think there's probably a couple of hundred thousand lives now in the ACA that came through the employers, and that's up 5x from 2 years ago. If that keeps happening, say, massive secular tailwind for further growth in the markets and we're just in the very beginning stages of that.

Great. Great. So 10% to 15% growth is internal projections. Your pricing incorporates redeterminations, potentially risk adjustment issues, if lives are redetermined you pick them up later in the year, all that's baked in. So then heading into next year and [ AAPs ] get back to begin, any differences, changes in the ground game distribution strategy?

Distribution, obviously, is becoming a bigger and bigger component of the ACA marketplace. And for us, in the current year, our distribution expense was above what we had originally projected, and that was mainly due to the fact that we just saw more of our membership coming through the broker channels. Which those brokers are out there doing some really good work in terms of bringing new members into the ACA. So we do think it can be a productive way of not just facilitating kind of a swapping or bringing members from other plans to another plan, but also just bring in new people into the ACA marketplace. So this year, looking at '23, I would anticipate that distribution for us is an area where we're expecting to get a little bit stronger performance in terms of our ability to build into pricing and to appropriately kind of estimate how many members are coming through the different distribution channels. I think we'll be a bit more front-footed on being -- we've always tried to be at-market in terms of what we pay for brokers. I think we're going to pick our markets where we may be a bit more cautious in terms of pricing on commissions, but we think it's an opportunity for us and a catalyst for '23.

Great. Great. I think right now, we'll shift gears to [indiscernible] Oscar for a bit. First off, the Health First termination, I think that caught us all by surprise over the past months. Just any overall thoughts on the termination? Could you maybe walk us through or talk us through how the tone shifted from Investor Day to 2Q to now?

With Health First, obviously, we're not going to talk about specifics of an individual client circumstance. But just kind of stepping back, that was a large, very complicated integration. Those types of arrangements can take years to typically get to a steady state. And both of us had challenges with integration. We talked about that in the second quarter call. So Health First made the decision and has told us that it's their intent to transfer those services back. If I just kind of step back from that arrangement and look at kind of what did we learn from that situation. We know that we use the same technology that we're deploying there. We use it for us. We use it for other partners and it continues to perform well in all of those circumstances. And so we really don't think that this is something that we or others should look at as a question about, was the technology right. I would say that we've learned that large-scale implementations come with lots of unforeseen complications, whether that's just how you work with your client on workflows and how you do things to just work together to solve problems. We're thinking that moving more towards a modularized approach is probably the best way to bring our technology to market. But we've spent 10 years and certainly hundreds of millions of dollars building this asset, which is our tech stack. And while this change with Health First is disappointing, we still believe strongly that we've got a great opportunity to bring kind of what we've built to the market in a more modularized way.

Got it. That makes sense. So not a technology issue, mainly more on the implementation side of things. So when we look at the SaaS offerings that you're building out, are there any potential lessons learned to apply to the SaaS offering implementation process? Or is that maybe not as applicable given smaller scope, time line is shorter, less complex?

Definitely applicable. I mean the whole notion that we just need to be much more on a SaaS footing as opposed to a business as a service footing partly came out of the experience we had in that year, but partly also was informed by the fact that in our many pipeline conversations and many client -- prospective clients that we're talking to and have been talking with for the past 1.5 years, what has just become very clear is that the majority of health plans right now have pressures on them, right? They are maybe very inefficient because the claim system is very old were they realized their member experience is completely beyond the pale. They're renting some provider directory from Optum, whatever as their member experience. And [ the same ], there's a vendor probably on the mobile phone. Or some other things in the ecosystem, but they often are already in the middle of some transformation of components as with a potential [ plan ] the other day, and they are in year 3 of a 6-year transformation of just their claims system. And in those situations, it just doesn't make any sense for us to come in and say, we'll take everything over, not only from a software point of view, but also from a service point of view, which is what the Health First deal was because that's when you run into established workflows that clients want to oftentimes keep in the way that they set them up to begin with. And so that is why we said pause 18 months on bigger replacement deals. And in those 18 months, find which implementation and execution partners we should be working with. Meaning we shouldn't be out there using our own engineers to implement this. It should be somebody else sitting on top of our infrastructure. We already have a bit more BPOs this year in terms of some of the core functionality we have internally, but they're sitting on our infrastructure. So the BPO folks get staffed on our technology, that's a very nice combination. We can apply this in +O as well. So that's one important learning. And the second learning, of course, is the more we can modularize, the more -- and the more we can leave the configuration of the particular workflow to the client, the more we can essentially insert ourselves into existing transformation efforts. And Campaign Builder is the module we announced a couple of weeks -- months ago now in -- that we're already selling that. And that is a really ideal candidate for this. First of all, it's sort of an acute name, Campaign Builder. It's a powerful tool. It really is a workflow design to well -- that can hook into almost any system you have, whether it's a system sitting in your -- data sitting in your EHR or data sitting in your third-party fire store that you get claims into from your insurance company you're working with, if risk being provider. And it can run not only -- it can not only let you design campaigns, targeting in real-time members who have to do certain things, but we can also deploy our content. And that's a really interesting opportunity for provider groups, for example, who know they got to fill certain [indiscernible] gaps. Who now they have to remind members to come into the appointments, but who have not a chance to A/B test a lot of these things, but we have done that, right? We have driven 94% PCP attribution with the MA plan we built with the health system in South Florida in Broward County because we run those campaigns for them, and we can then optimize those campaigns a lot and then take that content and use in other ranges as well. That's what this Campaign Builder tool can already do. And that is really just all of the above. It's much more on the software side. It's much more easily configurable. It's just very modularized and we can expand even the TAM of people we are selling that into and you can expect more in that vein from us. While on the other hand, on the more core admin pieces, more execution pieces, we're lining up the people we want to work with to do that execution with us and for us.

Great. Great. Yes. I understand Campaign Builder, it's something you're pushing out very aggressively right now. I think at your Investor Day, you did mention 6 million module -- tech modules that you're focused on. Is that the way to think about it that there could be 6 additional kind of applications you push out? And if so, where are we along that kind of path of developing those modules?

Yes. It's -- we'll be very thoughtful, and we are hopefully very thoughtful about making sure the revenues are in line with the costs. And so it's -- I don't think it will be the right thing for us to right now go out and modularize everything right at the moment and then build it and they will come. That would not be the way to do it. So we're really doing this very much in response to market's conversations and what we're getting from prospective clients and existing clients. And the Campaign Builder was the first obvious one. The second one likely will be in the member engagement space as well. You have a lot of folks out there right now, particularly the sort of like medium-sized health plans who either -- who can't get member engagement out of their claims vendor, for example, even though some of the claims vendors are trying to add some of those solutions to their stock, but that's very difficult to get. They have to deploy a big software solution that is not usually health care or kind of piece it together with their own engineers from various vendor solutions. And so we have a very internal solution there. We can white label it. That's likely going to be the next points. Then we have a couple of solutions that you wouldn't necessarily expect to be at the top of the list, but where we're getting strong market demands and one of them is actually the broker platform. We have our own broker platform where our brokers manage their own book of business in MA and Individual and Group and so on. That actually also transmits to member engagement data as well, it tells the brokers, hey, Michael hasn't downloaded his mobile app, for example. Go tell him, maybe he'll pay you some extra for you to do that. So that's another one of these in there. And then beyond that, we're just really testing the market and seeing what else works. We can go all the way in the weeds there. And I actually think our virtual in-home assessments that members can sell schedule through the Oscar Medical Group. We collect risk scores in proactive outbound virtual home assessments is a really nifty feature that we right now couldn't buy from a virtual primary care vendor out there, but that's one of these things where we'd likely want to do it if we roll that out in conjunction again with a partner because the partner would have move of enterprise sales funnel going into some of those potential clients.

Just on this point, I know you want to move on to another question, so I'll keep this short. I think the thing I would just say is the company is like laser-focused on -- step 1 is getting the insurance company to profitability. That is where we are putting the vast majority of our resources right now. Building out this modularization approach is going to be a pace thing that's going to happen over time. Obviously, there's tons of power of having multiple products that you can then go into one client and add to an existing relationship. So that's the journey. But I just want to call out we're focused first on getting the insurance company to profitability. That's where we've got the resources, and we would see this business really expanding over time.

Absolutely. That makes a lot of sense and it sounds like we're at the beginning of a very vast white space opportunity, especially in the context of value-based care, so that's exciting. So maybe just shifting gears to capital position. One of the things I feel like is a misunderstood story or a part of the Oscar story is your capital levers, your quota of share reinsurance. And based on the numbers we've run, our estimate is every 10% increase or decrease from quota share reinsurance translates to roughly $100 million in net cash saved. Is that roughly the right ballpark to think about it? And historically, you've seen, I think, around 80% quota share reinsurance. Is that a level where you're comfortable toggling back up to if need be?

It's a -- I appreciate you calling it out as an important lever because quota share right now is offsetting something in the order of $450 million of capital. So that's the reinsurers component of that capital requirement. You're right that today, we're in the low 40s in terms of our reinsurance coverage. I think that's a nice comfortable spot at the moment. We do view it as a lever that if we're growing and want to take advantage of the cost of capital and the risk protection that we get from reinsurance, we certainly view this as an ongoing lever. In my heart of hearts, I would love to see quota share actually going down. It is a cost for us. But I view it as just all forms of kind of our capital stack of where should we be deploying our capital and what are the best cost of capital. And right now, it's a really effective tool for us. And I think it will be in the toolkit for a while. Size-wise, we're comfortable where we are, but we've been much higher, we've been lower. And I would expect that we'll be reactive to circumstances in terms of where we are in the future.

Only -- maybe the only thing I'd add is that, that makes InsureCo profitability for us so much more levered in a sense, right? These are all the opportunities we then earn by having the insurance companies make money, which, of course, is firmly in the plan for next year.

Great. Great. And enterprise profitability by 2025. I think right now, as we -- where we sit year-to-date, MLR performance has been great. I feel like investors had some underwriting concerns about with high growth comes high MLR and it feels like some of that overhang may have lifted and looking forward InsureCo profitability, in my opinion, feels clearer. But moving to 2025, what needs to get done to reach enterprise profitability over the next 2 years?

Well, I think the first step is, as you said, getting the insurance company to profitable in '23. Then that's not the end of the journey, right? We obviously have to continue to drive improved performance in our insurance business. We've talked about 3% to 5% margin as a near-term target for us in that business with 5% being probably -- 5% plus being the destination economics for where we think we can get to. And if we're at that type of margin profile, and we're approaching that on a large insurance business, that can fund the whole company. So I think that our most important journey is to get that insurance company profitable and to continue to drive margin improvement over time. And then the second thing I would just say is that in our holding company, we do have some costs that are within our control. We would look at managing those appropriately to rightsize to fit inside of what we need to be profitable. And then the third is, if we can get some market traction with things like Campaign Builder and other modularized services that we expect to bring into the marketplace, that can just be another form of offset. So I would point out, we have some levers we can pull. It is important to us. We understand that getting the company to full profitability, covering all of our costs is important for us to be able to maintain our own kind of journey, and we're focused on it.

Great. Great. And I think we have less than 3 minutes. If anyone has a question in the audience, maybe pause for a moment to see if there's any. Otherwise, I have 30 more questions I can ask here. Okay. Well, moving on. Cigna+Oscar, the growth has been, I mean, pretty significant. We're talking membership that's 10x year-to-year. I think 200% growth year-to-date. So looking forward, the book is still small in scale relatively speaking. But how should we think about the growth moving forward?

So we're happy with the growth, certainly. And I think it is -- it appears to us to be healthy growth, partly driven by geographic expansion, but just building out market share in all the markets we're in. One data point is that every month since the beginning of this, we've had more brokers in every new month selling the product than before. So it's just getting more wide spreads, more accepted and the broker MPS is very high, which is a nice indication as well that we can -- that there's good word of mouth. And the retention year-over-year, even though we only had really 1 year of retention now, it's also been very high. So good bones to the product really. It's a nice collaboration. We do all the administration of the plan, be it member experience and provider experience and paying claims. It's running on Cigna's network. And then we both figure out pricing together in the expansion markets. We're expanding into Philadelphia at the beginning of next year. So there's more geographic expansion to be done there as well. And it's really only at this point in 9 states, there's a lot more white space of places we're going to go there. The stated goal is to be a meaningful player in the small employer and ACA market, which is probably about 13 million members or so at this point across the country. And so there's a lot of, again, growth potential there to be the case. I -- we like this internally also because it has a nice component in +Oscar fee income, right? We get a pretty good chunk of the admin fees in that product, and then we share the risk on the risk side. And the more of these kind of things we can do, that's certainly also a nice vibrant pathway for more admin-type income in the future. These are also easy to do because they are greenfields, meaning we can set them up from the beginning to work correctly. And so the 2 partners have the right kind of ideas of how workflows are arranged. And so therefore, yes, good products and happy to keep going with it.

Great. Great. And with 1 minute left, maybe what do you think investors today might be missing about the Oscar story that they'll come to understand 12 to 18 months from now?

Great question. So I actually would say that it's maybe what I said at the very beginning. I -- we do not just come in and say, oh, let's do a little ACA insurance company that outsources everything. But we really came in and tried to thoughtfully say, there's a couple of things we know well. Digital, member engagements, it's a little known part of my resume, but I used to have a social gaming company for a while. And we know this idea of how to put incentives in front of the health care system and how to tweak those to get different outcomes. We want to build a company around that. And I really, really think that we have stuck very closely to that script in terms of the infrastructure and the features and the product design that we have built into Oscar over the past 10 years. And I really think we can also now claim that a lot of the success we have had. We're not making money yet, right? So there is a big proof point you can wait for us on delivering next year. But when we add that, that a lot of the success we have is because we have been leaning into these trends. And now suddenly we're at the point where in the past 2 or 3, 4 years or so, that is becoming -- have become so clear that if you're an insurance company, a risk-taker in the marketplace, you got to have answers on these things, value-based care, digitization and consumerization. They're not just empty talking points anymore. And I really do think that if the data shows that some of our success or a good amount of it has come because we've built these infrastructure pieces to support that, that will only get better in the future. And folks should measure us on that. And so if we can land profitability next year, when we can do that. I think to me is this important capstone of data points that really shows this is all working well together. And then in the next 10 years of health care more about these trends, continue more about this, the market turns in our direction, I just think we really have a very nice pathway ahead of us in rolling up more and more of the market. They are both in +Oscar and fueling others' ambition in us, but also in building our own book of business in the way we have.

Terrific. Well, thank you, Scott. Thank you, Mario, and thank you, everybody. I hope you have a good rest of your day.

Thanks a lot.