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

I want to thank everyone for joining us today. It's my pleasure to be introducing Oscar Health. Oscar is a tech-driven health insurance firm. And presenting today, we have Mark Bertolini, CEO; and Sid Sankaran, the CFO. We also have Cornelia Miller from Investor Relations in the audience as well. So I think we just jump into Q&A unless there's anything you want to - all right. Let's do it.

So I guess, maybe just to start off, I'm going to ask the first one to Sid because bringing Mark in from a company perspective, it's kind of unusual for you've got a founder-driven company who things are going well. You're on track to do the guidance basically that on the health insurance side, certainly that you laid out at your IPO, things are going well. The founders gave up some founding shares. To bring Mark in? What was the catalyst behind it? What did you think that Oscar needed that someone from the outside with Mark experience could bring to the company?

Yes, sure. Happy to take that one on behalf of the company. I think the first thing is the company has been extremely grateful to Mark, who's acted as an adviser to the company for a couple of years. But most importantly, I think to Josh and Mario as founders. And I think it's important to note for those the folks who followed Oscar for a long time, I think what really drove that alignment between our founders and Mark was around vision, mission and culture. So if you closely watch the company, you've heard Mario reference Mark's speech and may previously or I think in our last conference presentation somehow his book came up. So I think the relationship has been terrific. And you're right, the company has been performing and executing. But with that relationship with Mark, Josh and Mario, I think everyone just saw a unique opportunity to accelerate the path that the company is on and transform the company and the industry. And I probably won't do justice to how this all came about. I probably should let Mark do that, to be honest, but it's probably a longer story than my comments.

Yes. I guess I'm going to turn that then to you. So like we were just talking before the started about all the things that you're doing and involved and yet you decided that this was the opportunity. So you've got a wide range, but you decided this is the role you want to step into. So what was it about Oscar that made you want to come here? And what do you think you can bring to the company...

Sure. 3 years ago, Josh called me and said, "Hey, would you be on our board," and I said no. I don't want to be on boards. Boards are debt by PowerPoint. And so I'm doing my level best to get off of boards as I go along. And then about -- but I said I'll talk to you guys from time to time, just give me a call hang out. And we were talking one day over a Pappy Van Winkle Bourbon in one of my local restaurants. And Josh said, could we meet like every week? I said, sure. So we started meeting an hour a week about 18 months ago. And I was doing the -- I was co-CEO of Bridgewater at the time. And people started calling me and saying, I didn't know you want to still work. And people said, when you get done with Bridgewater thing, come talk to us. And then as it would happen, I had a number of opportunities in the industry and tangential to the industry around tech as I was coming off the Bridgewater segment and going back on their Board. And Mario one day and Josh was saying it and said, we really like to ask you a question we're sort of embarrassed to ask, but would you come and run the company? And what I have found out over time with them is that, a, we had really tight mission alignment; b, they wanted input in how to run the business. One of the things we talked about in one of our meetings was, have you looked at your pharmacy contract lately. And they said, "Well, no, it's not up for renewal." I said, "Oh, no, no, no, no. Every quarter, you got to be on those people." And so they started that process, and we've had a really good update to that contract, which will flow through over the next couple of years, which will help us on our mission to generate capital internally to invest in the business going forward. And so I said, let me think about it, they almost fell out of the chairs. And I thought, as I spent time with the company at the level of Josh and Mario, I learned a lot about what it stood for. And as I watched my prior company struggle to achieve what we thought we could achieve by combining with CVS. I said there's something that's got to be able to break the back of this industry from the standpoint of the way it operates. And could it be a company that is focused on what is now 70% of the insurance premium on the insured market, Medicare and Medicaid and ACA, could we make it 100% if we built the right platform? And I thought, wow, if I got one more shot at me, that would be 67 in June. I have one more shot at me this is probably the one that could work really well. And so we put together the comp structure, which I and Josh and Mario talked about was I don't get paid until the internal people get paid. So my gets are above their strike prices. And then there's a little bonus at the top if we get back to IPO. And I thought it's a good way to do it. I'm getting less salary than I have in probably 20 years, but that doesn't matter. It really is the opportunity to sort of pay it forward and create a whole new way of attacking, what is an intractable problem in the United States, our health care system.

Yes. So I guess when you think about that, why is Oscar the one to disrupt that marketplace?

We've tried everything in this industry multiple times. And now we're back on the path of buying physician practices, which stuns me as an arm's race that can't be won. And so as I look at that sort of model, I'd say, what would be nobody is ever focused on the actual customer experience to the end user. And if you look at all the disruptive capabilities that have come to our market over the last 20 years, it's all been about the customer experience, ones that really succeed. And here, we have a platform at Oscar, which is now up to an MPS of 50 on the front end of the business that is far and away higher than anybody else, everybody is clustering around 0 or negative, that we should try and take advantage of that and the opportunity. And we did. We talked about it back last October about pricing on the commission side for brokers. So let's try a few markets to see if the MPS matters, and it did. And I said, so this is a weapon that we can use to compete that nobody else has. And so if you think about it as a platform company with an insurance company laboratory, that could ultimately when the platform needs work, that's conversation we can have but would ultimately become the backbone of an individually focused consumer marketplace in health care, this is a company that can do it. And I'm more optimistic now than before I joined. I've spent the last 5 weeks deep diving on every aspect of the business.

And so I guess when we think about from the outside looking in, the initial reaction of the new manager coming in to an existing platform, there's a reason why you're there, but there's investments that you have to make. There's things you have to change. So it doesn't sound like you're saying these things that you're going to try to bring her take you off that trajectory towards profitability on a consolidated basis next year. So how are you thinking about making a change without, I'm so used to new manager comes in lowers the bar and it creates an easy bar to jump over. You're not doing that.

Not doing that, no, because we don't need to. In my first 5 weeks in the company, I've spent every day going through deep dives in every part of the company. And what I have found is that as a health insurance company, there's a lot of internally generated capital that's been left on the floor. I'll give you one example. If you have fraud, waste and abuse, that's usually averages 2 points or higher of paid claims, we're at 0.2. So we have a 10x opportunity there alone in generating internal capital. When we look at provider disputes because the data in the provider database is structured around contracts that are rather random, when you start thinking about getting rid of those disputes, which are not getting into the risk-adjuster accounts, not getting into our reinsurance recoveries, that generates a whole set of capital. So this idea of really running the company as an insurance company, dividends from the subsidiaries, making sure we're getting all of the fraud, waste and abuse, other processes that could generate hundreds of millions of dollars of capital, we have internally generated capital. If we just go get it, we'll be able to support our growth.

And so when you think about then those are the ways to finance the investments you need, what are the investments that you need?.

And actually doing that, when I was Chairman and CEO, that's a creeping domes at being at the top of a large organization. You don't know it goes on every day. So it's been fun playing around the plumbing and understanding the business again. And it's been great that people are amazing. They're really smart people. And we actually have a lot of people from Bridgewater, which is interesting inside our organization. So the second part is, okay, once we've got the business running properly and generating the capital we need, you want to think about how do we harden the platform to externalize that. When I talk about externalizing it, sharing it with other organizations, other opportunities, making it a true platform that could change the industry. And the problem we had with Health First, which I know you're going to ask sooner or later here, is that we put it into their business without business process or engineering or good systems integration. And the back end wasn't working as well as it should. So as I've gone through the stack piece by piece by piece, we have a plan that we're developing on hardening the stack in a way that we can externalize it, but that's not the end. You have to build SaaS capability in sales and service and support for each of these clients. And then beyond that, you have to have a systems integration capability and business process reengineering. So you have to build out the whole capability if you're going to externalize it. But externalizing it is just not enough. We have a lot of companies in tech that build products for other people without really having deep conversations on what is the experience on the other end of it, what is the use case? Why do it? And so when we look at 2 use cases that are staring at us right away, one is ICHRA. ICHRA hasn't taken off because nobody's, all people have done is built a product as a tool and talk about how it works versus what could it solve in the way of a need in the marketplace, right? I mean the major disruptors have always looked at what is an unmet need that I can create a great customer experience around that people will want to come to versus me having to sell to. And so in our as we look at ICHRA and coming off of my Bridgewater experience, things stay inflation for the next 3, 4 years, 5 years, maybe a recession. Wouldn't it be great if we created a nice product for a small group of middle market, the other 30% of the insured premium and say to employers here is a great way to enable your employees who most often in those groups are overinsured with a way for them to have a flex benefit kind of product on steroids that's got a great front-end and customer experience. We believe we can handle that. We have a diabetic product. We have a diabetes benefit plan at Oscar that is one of our most profitable plans because we know how to onboard them, how to get them into the pathway, how to make sure they get followed up. All those things are critically important. And so this idea of converting the rest of the insured market into ICHRA is an idea that wouldn't cause us to have to externalize the product right away, the platform right away because we could use our own insurance company license. But if you want to get to every market, you want to be able to have the platform available for people that are not as for insurance. You want to make it available to everyone.

You mentioned ICHRA on the call. I guess it's been an option for years, and it hasn't taken off. So what was the barrier to that taking off? And why will it take off for the next...

People have been selling it as a financing mechanism, not a solution. So you have to go to market with an idea of why -- what is the use case whereby this product actually works. I think the frustration has been building in the small and middle market enough now where employers are starting to say, "This is a real burden. So how can we talk to them about relieving that burden through this kind of capability that not only ensures that there's a way to finance it, but there's a way to bring people onto the platform that works for their employees. How do we control the rise in health care costs over time, getting them in properly, getting them in the right approach, focusing on their health, much like we have a Medicare Advantage in the industry to great effect, but on a smaller scale. So I think that's the rapport. We have to prove out the use case. So we're now working on what is the use case. Why would people want to use it? Not just how do we build an ICHRA product, which is the way people have done it in the past.

Okay. And then I guess, when we think about this business 2 years ago, everyone was growing really fast and fast is all that really mattered. And now interest rates rising and profitability matters. As you pivoted this year from growth into profitability, exited some markets and push through pricing. To get that long-term multiple, you've got to do both, right, you got to be growing and hitting the profitability targets. It sounds like you're saying next year, you're going to be doing that. So you can talk a little bit about usually in health insurance, it's easy to grow or it's easy to improve margins. It's kind of hard to do both at the same time. So can you talk about what...

How far is so low right now. We can't help but do both. I mean, really, I mean, if you look at the stuff, I mean, in our projections how to work in the back end using open AI chat GPT 4. And so and some of them will implement. It will be a great thing for fraud ways and abuts, put it on the front end of the claims process that happen. And so I think we can grow margin and grow with disciplined pricing. Mario is a genius to say the least. He's intimidating in his care advantage product. I see us working with health systems across the country. Here's the scenario I see coming. The industry, I was one of the people who helped create the product back in 2005, sooner or later, people go, what's going on here. And so they're looking at the risk adjustment formulas and looking at all those sorts of things. So let's say, it gets cut in half. It's about 4% as an option. On the hospital side of the business, their margins in Medicare are minus 3%, surgery Medicare fee-for-service. If you put them in the business of signing up their patients for Medicare Advantage, branded their product, you've got 2 advantages that don't exist in the marketplace today. You don't have to use brokers because you're signing up your patients as they come to the door. And on the back end, you can get 5 star ratings much easier because you're in your in your own place. Put those 2 things together, call it 4% on risk adjusters or margin on risk adjusters, they go from minus 3% to 4%. That's a 3.5% gain on their overall margin in the hospital system, they'd be crazy not to do it. But we have to again build the use case, build the approach, build the support for it and being able to make that happen without having to put up all the capital to be in Medicare Advantage and underwrite all of it.

So I guess, at the core though, your exchange business for right now, and how do you think about the exchange business growing next year and then the next few years after.

Low 20s, high teens from the standpoint of premium opportunity.

So that's premium growth. And you should be growing at least or more or more. And if you think about it from that perspective, you've talked a lot about disciplined pricing. So am I to assume that if you're growing 20%, 1/3 of that's pricing and 2/3 membership, is that like how to think about it? Or how does, what's the, how about premium growth.

We'll tell you when we file. We're not going to give them more pricing formula, but that was nice.

I haven't had a lot of success on those type of questions this -- so all right. So 20% per growth this year, but like I kind of get it for 24 sorry because of redeterminations. But after that, are changes in growth business outside of...

I mean we're countercyclical to the economy and recession. We're out of that way. In some way, shape or form. So we're an opportunity. I think you could build an ICHRA product that could be like COBRA for ACA, people going in and out of ACA ,could be a temporary work for seasonal workforce product. I mean, there are a whole bunch of different ways when you look at the use cases, yes, we got to put them on paper. We got to hasten through. We got to figure out what the pricing would be and how we would sell them. But that's the kind of thinking we're putting the paper on this.

Okay. That makes sense. I guess what happens if subsidies go away, you can't take a benefit away from someone.

No, you can't. No. I mean remember, let's go back to 2009 when everybody thought that the Medicare Advantage business was going to get blown up by [indiscernible], right? And we said if we could just get from 13 million people to 20 million people, they can't touch it, and we did. They can't touch it. I think we're there with ACA.

All right. And then to your point about like use cases for this technology. I guess you're saying you had great technology, but you didn't have a great platform for selling and integrating with the customer. How long until you can have that in place and we should expect the technology business to really start to add.