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

We can get started. For those of you who don't know me, my name is Adam Ron. I work for Bank of America, covering managed care and healthcare facilities. It's my honor to host Scott Blackley, the CFO of Oscar Health. And the fact that you guys are here and not at Cigna, I think, means you're pretty familiar with the Oscar story. And so I won't spend too much time going into detail on that. But the company is primarily focused on the exchanges today, and so a lot of our questions will be focus there.

And so, I've been covering the industry for a while, and this is the first time, I think, in a long time that the exchanges have been this stable. In the beginning, many carriers joined and exited. There were big profitability swings year-to-year. But this year, it looks like the first time ever where we got positive data points from you, from Centene, Molina, Elevance, Cigna, United, CVS on the exchanges all at the same time and it's a bit surprising. And so, one, if everybody has strong margins at the same time, doesn't that set up a difficult kind of like competitive landscape for pricing in 2025?

The thing I would say about the competitive landscape is, I would prefer to compete with large competitors who have established EPS guidance, targets for margins. And I think what you're seeing is, pretty consistent behavior where we're all trying to maintain the financial side of the business and get strong performance and unwilling to do things to damage that, to meaningfully increase share. And for us, our ability to price in a disciplined way and price where we were able to be competitive on pricing, but then leverage our NPS and other non-price sides to help fuel our growth, our distribution strategy, our partnerships there and our member-centric kind of brand, really help us to be able to -- on top of pricing, that's a huge part of the selling points of Oscar. And so, going back to your original question, do I think that there's price competition to come? In a competitive but -- a competitive landscape with large, sophisticated players, that typically does not equate to a lot of price volatility. And that's what we saw this year, and I'm optimistic that we can see stability, of course, in individual one market or another, you're going to see people lean in. But on average, I would expect more of the same.

Well, kind of along that train of thought, like, we had a dinner with Cigna last night and they were talking about their exchange business and they were saying, you know, it's still early, it's Q1. There's been a lot of membership that moved around and it's hard to get visibility on the risk adjustment accruals. And so, they were kind of positioning it as a bit of uncertainty in terms of where that would shake out, because right now you have a lot of new members and you kind of don't exactly know how that's going to end up from a coding perspective. And so what gives you the confidence that like these 6 other companies that I mentioned, somehow ended up on the other side of kind of like a risk adjustment accrual that you're making and like what gives you the confidence in what you're booking?

Well, clearly, risk adjustment is the hardest part of the estimates that you have to make in this business because it's estimating your own risk score as well as what the market risk score is going to be. I think we've had a long history of going through a lot of growth and not having a lot of misses around risk adjustment. I think we've got great models. And I think the benefit of that history really helps us to feel confident about where we are, the book that we have, it is early. Like it's a quarter end, we have very little of the total claims volume has been received at this point. And that's just not an Oscar, that's an industry phenomenon. So a lot of what we do now is to look at is there any signals in the claims data that we got. Our risk adjustment, we're a payer. So the reserves that we put up for that are based on the claims that we've seen in our models as to what that might mean for the rest of the year. We expect that our risk transfer as a percentage of direct premiums is going to increase throughout the year. And so we do think this is the low point for us in the year and that ours will continue to go up. That's a dynamic partly attributable we do expect to continue to see SEP growth. That's part of what is embedded in our guidance. Those tend to have a bit higher risk transfer that comes with them. For us, we would expect those to be younger people and there's some utilization behaviors where we don't get as much information from them, and that drives a bit higher risk transfer. So we'll see that move up. But in terms of the full year estimate, it's early days. I feel comfortable with what we've done in Q1.

Another explanation I've heard for kind of how everybody could be a target margin at the same time is that we, right now, have more subsidies than normal because of what happened during COVID. And it's possible that since a large segment of the market is kind of lower income and getting highly subsidized, they become less price-sensitive because the government is picking up most of that bill. And so is there a potential that because the expanded subsidies basically cover a very large portion of premiums that the entire market is able to kind of push larger price increases such that if those subsidies were to go away, the pricing environment could become more competitive? Like are there any signals of data points...

I think that that's certainly a possibility that when you have people, a lot of whom are on 0 price plans, they're paying 0. But underneath that, you still have to be competitive and then when I just think about enhanced subsidies as a broader topic, Mike, I see the CBOE estimate out there that they expect the market to shrink by something like $5 [ billion ]. And I think that's probably a pretty one-sided view of what may happen in the marketplace. When I look at our existing plans and membership, but something like 70% of our members could actually buy down to a similar or lower cost out-of-pocket premium. And so with that, we'd expect a pretty significant amount of retention there. And then even for those that aren't able to do a buy down to similarly or lower price plan, our experience is that people who have had access to care are willing to accept some price increase. So to come back to your topic of what does that do to margin profile. I think all of us in this industry have learned that chasing margin is a bad trade. Because of the nature of risk transfer in this thing, you can't price down in 1 year and then kind of recover it in the next year because you've either got to give up MLR, you have risk transfer on the other side of that thing. So I just think that the whole industry is structured to be thoughtfully consistent with pricing year-over-year, which would suggest that now that we've seen a lot of the more aggressive players basically work themselves out of the market that those that remain are going to be pretty thoughtful about not blowing themselves on too aggressive of pricing.

You mentioned the subsidies, and it's like hard to kind of understand if they'll even be passed. And then if they don't get passed, how many people lives will be lost and then what happens to pricing. So even if we assume like stable MLR, do you think like 2 years from now, subsidies did expire, you would be able to get enough fixed G&A leverage maybe on like cost trend growth that you wouldn't be seeing G&A pressure? Like basically, my question is like would there be margin compression in the event that subsidies go away?

Yes. Well, I think the 2 dynamics that we think about with enhanced subsidies. One is there's the whole political side of this, are enhanced subsidies going to be extended? And I certainly am not going to make a guess about what happens in politics in the U.S. But I think there's probably a middle ground here where the Democrats clearly have a reason that this is a high priority for them to maintain subsidies. I think the Republicans are likely to do some trade-offs to get what they want and give on that side, certainly a high percentage of the ACA is in red states at this point. And so we would anticipate that there's going to be a middle ground on that. If you assume that there's a middle ground and you assume some of the statistics I just talked about in terms of people's ability to buy down and stay in the ACA, there could be a metal mix issue where your total premiums might see a little bit of top line pressure. But bottom line, we generate healthy margins on those types of plans. And so I think it's too early for me to say that I see margin pressure out there from the expiration of enhanced subsidies. I really think that we would expect to do everything we can to maintain our trajectory.

Moving a little bit closer to the current date. Where do you think industry enrollment in these changes is today? Where do you think it ends at the end of the year? And where do you think it goes in 2025? Because even setting aside the subsidies, it's kind of hard to understand what the core growth of this market is because there's been so many political changes. And so the exchange enrollment has been kind of like lumpy year-to-year. And so just what you think the core growth of the enrollment is in 2025, I guess, as a base of like what we could expect going forward if subsidies are maintained?

Yes. In '25, I think that a couple of the enhanced subsidies, clearly, one of the reasons for growth in the marketplace in '24. And I think that if we see those same subsidies, which they're part of loss. So they'll be there for '25. I would expect that, that continues to be a catalyst for growth. And then there's other factors that we think are going to continue to be catalysts for growth in the individual marketplace. Certainly, unemployment is at very favorable levels right now to the economy. It's unlikely that at least in my estimation that we would see that going lower. So that doesn't pose much of a risk for shrinkage in the marketplace. And then when I look at just the way we work, more gig economy workers, more small and no market types of employers that are going to be looking, the trend for them is nowhere but up. And it's one of the reasons why we believe ICRA has got such a promising future is that we think that that's a nonsustainable trend for many of them. and that they will start to transition to more ICRA where that's going to push more people into individual markets, and that would also be a catalyst for the ACA.

So your base assumption is that the exchanges grow faster than the U.S. population, but how much of the 20% revenue target that you have out there comes from the market growth and then you expanding into new geographies and then taking market share from your competitors?

I really appreciate you doing that commercial for our Investor Day, which is on June 7 in New York, and we'll lay out more of those types of points at that meeting.

And so I think Mark has said that he doesn't want Oscar to be a single line of business company like focus specifically on these changes. And you started to talk about ICRA. But in terms of other business lines, like the small group partnership with Oscar, you recently announced with Cigna, you recently announced that you'd be exiting. So what happened there with Cigna? Why didn't the economics work? And what is your new strategy for the small group market, if that is still a target?

Yes. So starting with Cigna + Oscar, that was an arrangement that we were able to achieve good growth in the business, but the economics of the bottom line performance of that business was not meeting the targets that we had for it. I think that's as much as we were to, when you have a partnership arrangement and you're split in economics, sometimes it's hard to really optimize around that because each party is trying to optimize the piece that they get. So that just came to a natural point where we had to make a decision about were we going to extend that or are we going to shift our focus elsewhere, and we decided that we'd rather spend our time and capital pursuing areas that we felt had a better performance opportunity longer term. which kind of leads me to the individual markets, which is what we are really focused on from a being a risk provider and being the plan of record. We think that the individual marketplace is where we really want to lean in and do that. That doesn't mean in markets like Medicare Advantage that we're not going to participate in that. But I think that our expectation is that we would primarily participate in the MA markets as a service provider. And we think that as part of our +Oscar strategy over time, we will have opportunities to provide our infrastructure to MA plans and to help grow and foster their businesses. So that would be kind of, I think, the direction of travel for us.

Before we get to MA, the company almost uniquely is the only one talking about it grows the next growth opportunity, and it has existed as an option for a long time. And so what do you think needed to change in the market for ICRA [ Odyssey ] adoption? And does it rely on the subsidies? And what specific offering does Oscar have that whatever other ICRA enablers out there wouldn't be able to offer?

ICRA is, it's an interesting thing. I think that a lot of the cost trends for small and middle market companies are going to make the pitch for why does this make sense more obvious. I also think that the fact that the ACA has expanded to such a large business with 21 million lives, it's more stable. There's more plans that are out there, and there's no stigma to having your employees choose plans that are on the ACA. Most ICRA plans are not going to be subsidies eligible. So it does not rely on subsidies. But the catalyst here, I think, that are starting to set up with ICRA, there's increased awareness of the ACA as a stable marketplace. There's increased awareness of the brand. There's more companies focused on distribution. There are a number of platforms that are out there that are working to grow that business. So to me, this is a marketplace that's going to grow relatively slowly, followed by a pretty steep curve. All the product design is what's been lacking, and we think that we have a real opportunity given our member-centric business that we've run our entire history. We think that, that's a huge selling point for employers.

And then getting to the Medicare Advantage comment that you made. So what you guys ran an MA business for a while. I'm just curious like what specifically didn't work about the MA business? And what made you feel like there wouldn't be enough momentum to kind of like make that product work on a stand-alone basis? And then if you can go into how you expect to serve that market going forward and where you think the opportunity actually is?

So our MA business was incredibly small, several thousand lives. So we never had the scale, and it's a complicated business. I think everyone acknowledges that being an MA competitor requires you to do pretty much everything right. And when you're subscale and when you're trying to grow your primary business, the way we were and achieve the economics, it just became a distraction that was not worth the energy of trying to grow from basically a de novo MA business. And so we learned a lot in that little experiment but ultimately just didn't feel like it was required too much resource allocation for us to, and we just didn't really have the right infrastructure designed to do that in a way where we wanted to try to continue to grow it. And again, that doesn't mean that we're not interested in being part of MA in the future, but more likely the service providers, as I said earlier.