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

Hi, good morning. My name is Cal Sternick, I am one of the managed care and facilities analyst here at JPMorgan. And I'm pleased to have with us here Oscar, and CEO, Mark Bertolini. Mark is going to make a few introductory remarks, and then we'll move on to a fireside chat format. Mark?

Great. Thank you. Good morning. Thanks for coming. I want to give a little bit of an insight on how 2024 is shaping up. We expect that we will have 1.3 million members when open enrollment is done. That is a 31% increase in membership and if you exclude the California exit, it's a 38% increase overall year-over-year. So double the market. It's pretty much how we've done. A lot of that growth came in existing markets, but also we had expansion markets. We did rural expansions off of our major metropolitan basis and provider contracts. And we saw appropriate level of profitable growth in those markets as a first year entry. I mean, we expect them to be future opportunities. There's a 500,000 life opportunity in those markets alone as we grow those. And the company has experienced over the years, entry into the market a little bit of a lower growth in the first year, but it accelerates as we establish our presence in the marketplace and people experience our member experience and talk to one another. And so there's a lot of opportunity. And to that point, this year, we expect our retention for 2020 in the enrollment for this year to be as high as it's ever been. So both retention and growth occurred. That is why we have the numbers we have, double again the market growth for the ACA. We expect 2024 as a result to be profitable. We are just finalizing our 2024 plan. We'll present that to the Board in the first week of February. So we will be profitable when we meet those commitments. We'll have more insight on to the exact parameters of revenue, cost and on EBITDA, and we'll save that for our fourth quarter call, which is on -- in February. So good start for the year. That has allowed us now to focus on strategy as an organization. And so we -- earlier than I thought we would because we've got good momentum in the business. We've got a management process that is keeping everybody accountable, and we have greater insight into the day-to-day operations and how we're functioning both externally and internally. So the next step is building a 3-year strategic plan, which we will have ready for your review in late spring or early June at an Investor Day. It will be a 3-year strategy with financials that will highlight our extension beyond ACA into other markets. Our first market opportunity will be in ICRA. We believe ICRA, time has come. We believe we have a different approach than most other people in that marketplace, but that will give us an advantage in growth in 2024 and 2025. And ultimately, we will get into the Medicare Advantage business, but that's a few years out using our +Oscar platform with health systems in the market by enabling them to provide private label opportunities in their local markets to their patients versus having to sell through brokers to the market.

Great. So we'll touch on the guidance, I'll come back to the guidance in a second. But first, I just want to take a step back. I mean I'm sure you had no shortage of opportunities. So what was it that brought you to Oscar?

6 years ago, Mario and Josh asked me to go to dinner because they wanted me to join their board. I find Board's depth by a thousands of pages of PowerPoints. And so I said, no. And they said, "Well, would you meet with us everyone." And so I said, "Sure, I'm happy to meet with you guys." You're still around, which was good, and you're actually -- you've got a mission. And so we started meeting every so often for dinner and one of the dinners they said, "Would you meet a person an hour a week." And this was as the stock was getting lower and lower. And I said sure. And so they gave me some shares in the company as part of it. And we met for an hour a week. And we just started taking the business apart a little by little, little by little, little by little. And as you know, at the CEO level in any organization, the details aren't as clear on a day-to-day basis. So finally, 1 day, they said to me, would you run the company? I was just finishing my development of the new CEO at Bridgewater Associates, where I was co-CEO for 18 months, and I was getting ready to step back and enjoy retirement again. And they said, "Would you run the company for us?" And I said, "What would that be like?" And you understand the structure of my compensation and the way they put it together. I got a set of shares based on where the stock price is. And ultimately, the big reward is getting it back to IPO or higher. And that's the mission over time. And so I joined the company on April 3, spent the first 10 weeks doing deep dives in every part of the business every day, taking apart each piece of the business and developing a list of things that just good health insurance companies do to run the business effectively and generate internal capital. And what I thought was low-hanging fruit were really watermelons rolling around on the floor. All we had to do is pick them up, and we found substantive savings, which will be demonstrated in our guidance for next year when we give it, that will have full year impacts that were started during 2023. Those include total cost of care initiatives. We renegotiated the PBM contract for a sizable return. We have built a management process with a cadence a week a month. The whole team gets together and reviews the business piece by piece for 2 reasons: one, holding accountability and making sure we're meeting our commitments, but secondly and probably more importantly, creating a common heuristic or mental model about how the business works. Because one of the things we found is that we had claims in backlog over provider data, which is every insurance company's problem these days and then forever. I've never seen a good provider database. And what was happening is those claims were not getting into the reinsurance recoveries or not getting into the risk adjusters. And so we clean that backlog out. And we process those claims. And that has been a huge impact on our risk adjustment and also in our reinsurance recoveries, which were going forward and maintaining that level of claims. And that's why our DCP went down in the second quarter as we work that backlog out. Because we had the backlog, we had a reserve on the backlog, we had a pad on the backlog of the reserves. And it was just coming up our ability to manage our reserves as a company. So that will begin to show itself in 2024 as well. And so we started that work and the team and we built a management process, and it's been fun. I'm enjoying it, and I think the team is excellent and brought in a couple of people, my Chief of Staff, Head of Strategy in Comms, was my Chief of Staff and Head of Strategy in Comms and Government Relations at Aetna. So Steve Kelmar's joined me and he's running the management process and embedding that throughout the organization. And then I hired Kerry Sain, who used to run our bswift platform at Aetna and built out that platform for us where we had more outside clients than we had inside clients, and Kerry's joined to run +Oscar. As we start to separate that business out, from the rest of the business, so we'll start reporting differently in the first quarter of next year, and Scott will talk about that in the fourth quarter call, but we're going to start separating +Oscar revenues and operations and not have this [ kludge ] corporate number that sits over the top of the insurance company.

Great. So you've been in the seat for almost a year, and it sounds like from everything you just listed out, there's been a lot to do in that year.

It's actually been 9 months.

Almost a year. Yes, right.

So I could give you the day.

What is -- what have been the biggest positive and negative surprises that you found so far? And what has been more challenging than you anticipated? And I guess, like where have you been pleasantly surprised?

Pleasantly surprised, the culture of the organization is amazing. There's strong communication across the team. People are really in it for the good. We actually have a few conversations about, there isn't an or in growing or being profitable because I would get the question from the team where, are we going to grow this year or are going to be profitable? No, no. We do the same for both. Both have to happen in order if we're going to stay in business. And I reminded them of my time with the Daughters of Charity, Chairman, Chairwoman, Sister Joyce Tashan, who used to tell me, Mark, no margin, no mission. We do not make money. We do not continue our mission to serve our customers. And so the team is -- so that's been some of the -- but the culture is amazing, the people are great. They all want to learn, which is fun. And in this role versus my other roles, which Aetna, there's a creeping dumbness when you become the CEO and Chairman of the company because there's a lot of stuff happening in the lower organization that they tell you not to worry about. And now I'm down at the ground level, working with the team and walking around the shop, and it's fun to watch it work and to build a group of people into a common team that understands how the business works and how to succeed. So that's been the pleasant surprise. It's close to my home. So my German Shepherd, Keva and I get -- I made the office dogs friendly, so we have dog day. But Keva and I, my German Shepherd, we get in the subway and it's a 30-minute ride down to the office, so that's pleasant on the subway on the one because we're at 75 Varick, which is in the middle of the Holland Tunnel exit and entrance. So there's no way to get there by any other conveyance. And so that's -- and the office is great and the people are great, and everybody is pulling on the ore, so it's fun.

And so you talked about growing and being profitable, and it sounds like you guys are moving in that direction this year. So the 1.3, you talked about, and I think you guys talked a little bit differently about growth this year. How did the growth come in relative to what you had anticipated? And you also mentioned really strong retention. Can you talk about what was driving that?

Well, the retention is our NPS. People like what we do for them. And so we've tested NPS in a couple of ways. Last year, we priced and I was involved in some of those pricing discussions before I was even on board, we priced by lowering some of the broker commissions. We're holding them while other people were raising them, and we didn't lose members. They stayed. They wanted to be with us. So that's one test. This year, what we did is we entered some new markets and we pushed on some old markets that were in second generation like Georgia and saw strong growth and interest in what we had to offer. So generally, we get a younger, healthier population. We've seen that in the SEP membership that's coming to the organization, particularly on Medicare -- Medicaid redeterminations. So that's why we've been a net payer all along as an ACA participant.

Great. You also mentioned the strategy this year is more focused on growing into rural areas where you can extend your provider network. So are there specific geographies you're focused on? Can you elaborate on some of the reasons you selected those? And what has -- how is the growth in those specific markets developed again, relative to what you had anticipated?

I think they've developed the way we thought they would. They're going to be slow in the beginning because you have to build awareness in the marketplace, number one; number two, they're on contracts that we have strong relationships with the providers, so we can extend that pricing into those markets; and then third, we take a look at the rates in the market and see how much margin there is because we will profitably grow. That's our mantra is we need to grow profitably, and we need to make money and grow if we're going to be a force that I think we can be in the future. So we look specifically at each geography. We look at the provider underlying provider contract and total cost of care. And then we add to that, what do the rates look like and what are the best markets to open up in.

And I mean just the overall market is -- we're seeing really strong growth this year. So can you talk a little bit about like what you think is driving that? Are you seeing a tailwind from redeterminations?

There is some tailwind in Medicare -- Medicaid redeterminations. It's like almost 4 -- almost 5 million people have come out of that in growth in the overall market. We've seen our share of that, but it has not been the primary driver of our growth.

So -- and if we focus it now to sort of the profitability side of things, right? You talked about last year about having about 80% of your members within your target MLR range and pulling out of California should take another step up this year. In terms of the MLR progression going next year, I know you're not giving guidance yet, but how big of a lever do you expect California to be versus some of the core medical management stuff that you guys are working on? And can you talk about some of the medical management strategies you guys are implementing?

Well, so let me just give you some sense. So we're -- we've improved by 8 points on our administrative costs since 2021. We've improved by 10 points on MLR over that same time period and 15 points on EBITDA. So all of those are indicators that were moving in the right direction, and we're doing the right things. We're examining how we think about providers. I'm always puzzled by how value-based contracts when there are 1 million of them actually really work. I can't imagine a doctor saying, "Well, Mark's in my office today and he's from Oscar", so that's a value-based contract 102. And therefore, I need to treat them this way in order to win. So, therefore, I'm going to treat them differently than the last person that was here 20 minutes ago. That just doesn't happen. So why do providers -- and if value-based contracts are all that powerful, why doesn't every provider or the majority providers succeed in them, they don't. So as you look at value-based contracts, the question is why do some providers succeed? And those providers succeed because they have constellations of providers that they work with, that provides a better form of care, a better result of care. And so we even embarked on high-performing networks, a strategy to look at high-performing networks with a company that used to be an Oscar asset is now an alumnus asset called J2 that looked at constellations of providers that are generally higher performing. And instead of us having the hubris of telling people who to refer to and what hospitals do admit to, we're going to say, we want your high-performing network front to back to be part of our program. And we want to wrap our virtual medical group around it, Oscar's Virtual Medical Group, with social determinants of health aspects that allow us to support you in the community when you're taking good care of these patients. So we're going to try that in a few markets. I would argue we could probably pay them fee-for-service because they just do a better job altogether and create better relationships by supporting them and providing overall care for the community. So that's sort of how we're thinking about total cost of care. On the UM side, we're revamping a number of our things on the UM side to get to a lower level of metrics because my 2009 experience at Aetna, when we missed by $500 million on earnings, was that we didn't understand the lower levels of utilization in the group, the intensity going on underneath the general indicators that insurance companies used to measure that. So we're looking at that as also is an important part of our management process going forward. So we think there's a lot of opportunity in our provider network, particularly as we grow and we build good relationships. And those relationships generate great member experiences that prefer people to use this.

And can you talk about what some of the building blocks are to getting to total co-EBITDA profitability next year?

So it's -- we had variable and fixed cost leverage this time. Our level of increase in expenses was far smaller than the revenue that we're going to generate. And that was one of the things that Scott and I worked on, Scott, our CFO, who's standing there in the back of the room, making sure I don't say anything bad. And what we did is when we had the first round of the plan, I turned around, handed it back to and said, there's no operating leverage then let's go find it. And we pushed the rest of the team on being more focused to generate our plan. So we have operating leverage. So that's important because that allows us to grow profitably, and it's part of the mix of growing profitably. Secondly, in the total cost of care, we continue to push to get our MLRs down lower than they've been this year, and that's in the plan. And so again, not giving any guidance, there's a huge opportunity there. On the PBM contract, we shouldn't wait to renew it. Every quarter is an opportunity to go after the MAC list and get better discounts because that's what the pharma companies do. They get better discounts, the PBMs every quarter on the MAC list. And we didn't have that in our operating model. It is now in our operating model. And then again, opening -- regoing back and we have this new contract called PADU, Preferred, Acceptable, Discouraged and Unacceptable. And each contract that we have with providers is measured by that on financial terms and on the terms of the contract itself. And we have a list of what contracts need to be moved, first-generation contracts when the company got started, to that optimal status. And we're starting to go after them in a manner of size, renewability and setting targets for the team to get those contracts in a better place. So that's total cost of care. And then on the growth side, I mean, one of the things we did this year, Mario is a Polymath and a genius in so many different ways. I thought I could read fast, that guy is amazing and heavy stuff. And Mario did Monte Carlo pricing for every market for us this year. And that put us in a sweet spot in virtually every one of our markets. And actually, in some markets, after the first round of rates came out, we actually went up on a few rates because we could get more margin out of it, but -- so we're using more sophisticated pricing models to compete.

So I mean, the name of the game right for managed care is always you have the balance between margin versus membership growth. And so -- and I know we're not -- it's a little early to talk about '25 and beyond here, right? But how do you think growth profile looks beyond this year? I mean, is the expectation that you guys will continue to outpace the overall market growth going forward? Do you expect to take more of a balanced approach as you focus on profitability?

Well, so we will demonstrate this coming year that we can move margin and grow. And our goal is to be a 5-plus percent operating margin. And when we get there, we expect that there is a onetime revenue kind of firm valuation at that point. And so we need -- that's first priority. That's strategic pillar number one, make that happen. And so we're going to share with you our glide path on that for 2024 in our fourth quarter call, which we're excited about. The second part is really to extend lines of business and create a bigger individual market. So that's where ICRA comes into play. 70 million people in middle market and small group insured employers where we have an opportunity to make that model work. We believe our product set and the way we approach the market and the member experience are going to have a fundamentally different impact on these employer groups than they have in the past. And when you look at the macroeconomic environment and particularly around rates and the Fed, nothing is going to happen very quickly there. In spite of all the Pollyanna stuff about they're all going to go down next year, and we're all going to go back to happy land. It's just not going to happen. The Fed is going to keep watching employment, GDP and inflation, and they're going to hit it over the head every time they think it's going to rear, its ugly head again, which they got behind of in 2018. So this ICRA product is a huge hedge for employees, and we were trying to control the inflation on their costs. So it's a macroeconomic opportunity. So we think that makes the individual market larger which gives us more opportunity to grow. When we're even not fully engaged in all the markets where we could be on the ACA.

And I want to touch on ICRA in a second, but we think about the overall individual market, there's obviously been a lot of volatility over the last few years. It's SEP, right? And even since the inception, you had the 3 Rs and like you had issues in the first couple of years.

Yes.

Yes, I'm sure you remember that. How are you thinking about the market now? Now that I think some of the pricing has started to rationalize a little bit? Are you thinking it becomes a more stable environment from a pricing and margin perspective?

So if you go back to 2007, when we were worried about the next election and what would happen to Medicare Advantage, all of us in the industry said, if we can get to 20 million lives, they can't shoot it. It's just too big to kill. And we're going to get close to that this year. So I think it's here to stay. I think the individual market is going to continue to grow. When you hear that the state of Texas is considering building their own health care exchange, that's a sign that the Republican resistance around that's going to go away. And I actually see a longer-term market where the individual market is one bucket of people, not Medicaid, not COBRA, not ACA, where people can go to one place to buy an individual product and keep what they have. And we think that's a huge opportunity if the individual market becomes that much larger across the country. And we think that's an even bigger TAM for us over time. So I don't have any concerns about it. I think on the subsidies, it's going to have an impact. I don't know that the Republican is not passing, it is a good idea, given that a lot of the constituency that is supporting the party now are those people. And so what kind of dynamic is going to take to get those subsidies renewed on the 400 plus?

Well, they did try to do repealer in place with no replace plans. So I feel like nothing is added to the [indiscernible].

It didn't get any far. It didn't get that far. I don't think that's going to happen.

So do you think when we get to 2025, is it looking like another temporary extension is most likely do you think they get made permanent?

I have no idea. If you ask me -- I mean, I used to be pretty good at predicting what the federal government was going to do. Now, it's literally a random number generator. I mean, they can't even sit in the same room with each other without calling each other names. It's actually really sad.

Yes. No, I agree. Do you think it matters the outcome of the election in terms of how that impacts what happens with the subsidies?

As long as it's a divided government, it's going to continue to be the same mess it is. And so I think we just play through it.

Okay. So okay, let's move on to ICRA then. What drives increased adoption of ICRA here? And like how does the go-to-market strategy for those type of products compared to the way you approach the ACA market?

So I grew up in Detroit, you never went to a car dealership and said I have $350 a month, how much -- what kind of car can I buy? That's how health insurance works. You get a premium and then you go get your warranty card. And then if you break, you present yourself to a dealership and with some pocket up money out of your own pocket, you get fixed. And so this idea of conflating the financing arrangement with the investment is a problem. And what most people have done around defined contribution has talked about defined contribution as a financing arrangement. They've not talked about the underlying investment that's going to stabilize the population so that when the employer gives up the insured policy and gives up choosing the payer that they're not going to be stuck arguing with their employees about whether or not the defined contribution amount is enough. And so the only way to do that is because most people in those groups are overinsured for a small group of people that are sick, is what kind of products can we design for the people who are sick to stabilize the growth of that defined contribution over time and start there with the employer versus going right to define contribution saying you have to give up your control of these things.

So why do you think it hasn't taken off yet? Like what are the challenges in getting employers to switch to this type of benefit?

Nobody is talking about the investment. They're talking about the financing. Here's an easy way for you to get out of this trouble just to find contribution for your employees. That works the first year. And then if they have an increase in experience, the employees can't get the coverage they need, they're asking for more. And we actually believe that there's actually a sizable reduction in the overall cost of the employer by going into defined contribution with the right products underneath it. We actually picked up, I think, 240 members in this year's enrollment that are out of ICRA plans, which I found interesting without us offering a product.