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

Good afternoon, everyone. My name is Erin Wright. I'm the health care services analyst at Morgan Stanley, and we're happy to have with us today Oscar Health. And with them, we have CEO, Mark Bertolini with us today. And you so much for taking the time and taking the time to talk to us. And just for some important disclosures before we get started. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you do have any questions, please reach out to your Morgan Stanley sales representative. And with that, we'll go ahead and get started. And I just want to start out with a high-level question for you, and talk about kind of what do you believe the market is kind of overlooking at this point in time in terms of the growth opportunity? And how kind of Oscar is well positioned kind of going forward to harness that growth?

Sure. We see a lot of growth opportunity from 2 perspectives. One, our ability to expand markets. Our ability to grow faster than the market. Both of those support at a minimum, the better than 20% or better than market growth that we expect to see. In this last year, we've grown by 69% versus an overall growth of 30% in the marketplace, still using disciplined pricing, reducing costs, enhancing margins. Beyond that, we have this boogie man called the enhanced subsidies that everybody spends time worrying about. And I know you all get paid to be sleepless to figure this stuff out and listening to people like me talk about it. But I actually sleep because I actually create multiple models that allow me to get to the numbers I need to get to over 3 years. And so we look at this from a number of different perspectives. First of all, the CBO, would anybody in here keep their job with the -- did financial analysis like the CBO does? Anybody? Viewer? So on the CBO numbers, the worst possible number is meant to scare people. On the other side, you have the paragon numbers, which talk about these enhanced subsidies going away because people are cheating. The reason is because they have a tax bill offset that they used to get these things passed earlier on, and that sets up the advantages of the battle over tax cuts and enhanced subsidies. But more importantly, the paragon report yesterday said something very interesting, if you all read it or didn't read it. Paragon park will report call to the importance of the individual market for the future, number one. Number two, the importance of ICRA as a product in that number two; and number three, taking people over 100% of the federal poverty level out of Medicaid and putting it into ACA. Now I don't know how many people in here have done the calculation, how many people over 100% of the federal poverty level, but there's a bunch. But nobody has put that into their calculation about what's going to happen to the market growth. So there's a lot of market growth opportunity in this business going forward. First of all, no one party is going to win everything. I doubt that one party will win both houses. In Congress. So getting anything done that's going to require a compromise, which means some form of enhanced subsidy still has to exist. Now our plan that we presented at our Investor Day says by 2027, we can be at $2.25 a share EBITDA plus -- pre-EBIT, I should say, plus growing at more than 20% over the 3 years CAGR, and that's without enhanced subsidies. With subsidies, we see more. So that's my overall view of growth in the marketplace.

That was great. And so as we think about -- let's dive into a little bit of utilization since it's been a topic kind of today, too, at the conference. And we definitely want to ask about subsidies and everything else, too. But could you just give us an update on the latest cost trend dynamics that you are seeing, and maybe break out between, I guess, new and legacy members and what you're seeing on that front?

Inpatient, lower than we expected. We have professional services and pharmacy about what we thought it was going to be and outpatients higher. That's largely ER visits. But we believe it's a lot of the new growth coming in from SEP. But also, I believe there's a lot of growth coming in from immigration. And for people who never used health care before -- excuse me, there is a convenient place to go to get health care. But it's not -- overall, the numbers are where we expected them to be from a utilization standpoint.

Okay. That's helpful. And then I guess on the last quarterly conference call, you did indicate that enrollment kind of would be coming slower or at a slower pace than in the second quarter. I guess, has this played out according to your expectations thus far?

Through August, our growth has slowed in SEP. So it's moving as we expected to at the end of the second quarter.

And is 15% still the appropriate kind of market growth expectation for next year?

So far, yes. So far, that's our number.

Okay. Okay. And then talking a little bit about, I guess, geographic expansion in your Investor Day and you did target kind of expanding into some additional markets that 150 plus MSAs. I think it's how you characterize it by 2027. How many of those -- or how do we think about the cadence of that and how many of those in 2025?

So when we look at markets and market growth, we look at various geographies where we can extend our provider relationships from other areas where we know that the rating areas is reasonable and being disciplined in its pricing. And so as we do that, every year, we look at all of them and then we go about building our networks where we need to. And in some cases, for example, this year, we pulled back in a few markets in Georgia because we just couldn't get there. But they were not big impacts on total available market. Our overall goal is to double our markets from 150 today, to 300 by 2027. And we're on that glide path and believe we can achieve that. So if you look at how we see getting our revenue to where we expect to, half of it's going to come from current markets. The other half is going to come from new markets.

Okay. Okay. And then have any additional kind of rates coming since your second quarter commentary? And if so, kind of how would you characterize, I guess the underlying market like seems stable, rational?

Very stable, very rational. We don't see anything that looks untoward. We do have areas where we price differently than some of our competitors because we felt we needed to, but that's typical market behavior. But we are -- overall, the markets are very rational, very consistent to disciplined pricing and we don't see any unusual competitive entrances.

Okay. Okay. And then I guess, you don't have a complete graph on sort of the landscape until we get to kind of October time frame. But I guess -- yes, any other expectations in terms of what you're seeing from a pricing approach standpoint or change in thoughts around that?

I mean the wonderful thing about this market is that the minimum MLR creates a gating mechanism that doesn't allow people to be predatory in pricing. Because you can buy business, but then the next year, you got to price it up in order to make -- keep your margins and then you have minimum MLRs that causes you to rebate. So you can't win. So the old underwriting cycles of 3 years on, 3 years off that we had back in the day prior to the ACA, are now gone, and it's created a lot of rational marketplace. I mean the ACA market with 21 million lives has the best trend of any other risk pool in America. And that portends a lot of opportunity to what the Paragon people are saying and what the current administration is saying about the ACA being in a good place for a lot of Americans to be and how do we expand that total available market. And that's going to take pricing. That's going to take some regulatory changes at the state level in order for us to be able to grow that TAM for the individual marketplace.

Okay. And then let's talk a little bit about ICRA and the opportunity there. I guess could you just, for those newer to it and don't know it as well, I guess, could you just provide an overview of the program and the opportunity you see from here?

Sure. So ICRA is 2 sales. The first sales to an employer to move to defined contribution. And quite frankly, that's been the whole effort so far in the United States around ICRA. They get employers to move to defined contribution and then they move the employees out into the marketplace to buy whatever they want to buy. And so if you were to look at our book today, 3,400 of our members are ICRA members, not through our design but because they were pushed into the market to buy an individual policy and they found our products to be the right one. 3,400 members. We picked up 294 this last enrollment. So if you think about that as a model, our addition to the model and the pilots we're doing with 3 specific vendors today is to help enhance that employer sale. But very quickly, focus people on benefit plan selection at the employee level because getting them into the right plan creates more opportunity for them because they can buy more product if they don't have to spend at all on health insurance. And it also helps the employer to stabilize the defined contribution over time because people are in the right risk pool. If you just push people into the market, people tend to buy the plan they had before because they don't know anything different. What we need to do is work with the broker community, and this is how we engage brokers and get them interested in ICRA to move these employees through benefit plan selection into the right products where they get more opportunity to buy other products like vision, dental, disability life insurance allows more product offerings for the marketplace for people that don't get that today in the ACA and allows the employer to use defined contribution as a tool that saves them money over time.

And you mentioned the pilot programs. Like how is that going relative to your expectations? Or how are those progressing and in the time line of the ramp in terms of how to ramp?

So we're learning a lot because we're different segments. We have 1 in the small group segment under 50. We have 1 in the middle market segment, and then we have 1 in the large employer segment. And interestingly enough, the middle -- the small group and the large market are the ones that are generating more interest. We're finding in the small group market, employers are tired of paying double-digit rate increases. We need some legislative changes. So we are now in the process with 4 different red states, creating legislative language with them to change the regulations to enhance the interest of small employers in ICRA, which is where it needs to happen at the state level. Secondly, on the large side of the market, we're getting a lot of interesting interest from hotels, hospitality, health systems to move their employees into defined contribution as a way of managing their costs. We haven't sold any of those yet. We've sold some in the small end of the market. We haven't sold any in the large end of the market, but we have a lot of interest to work with employers there. All of these studies are showing us ways to approach the broker network more effectively because quite frankly, it's just been an open game there and getting more people interested at the broker level, and exclusive relationships, allowing them to sell our products the right way. And then on the other side, the go-to-market strategy as it relates to employers and how we approach them and convince them of the economics of the program over time.

Okay. And then in terms of those recent conversations that you've had with employers, I guess, and they're exploring this option, I guess, what I've been most excited about in terms of sort of the offering and I guess, what areas make them more hesitant also for -- from a transition standpoint?

Even the largest employers offer a few plans. And a lot of employees are overinsured as a result of trying to create a plan that fits everybody. Number one. Number two, and interestingly enough, is there's a lot of talk about insufficiency of network adequacy in the ACA. But if you have more product -- if you have more people and competing in the markets, which is what we want, it grows the total available market, but it gives everybody a choice to get the network they want. So it doesn't have to be in 1 plant. So one of the big problems we had at Aetna, when we were selling a large group is we need to have a network that fit everybody in that employer's needs. In the ACA, the employee picks the plan they want because they can pick the network they want as a result. So we don't need to have these wide dispersed networks in the ACA counter to the belief that a lot of people are challenging. There's not enough large networks in the ACA. If you got everybody in and they all have different network models, somebody is going to be able to find the network that works for them. And so I think that for the large employers is one of the big issues. Is it going to be affordable? Do we have the right networks available for our employees.? And then the third thing is, is that a lot of large employers have benefit staffs of 30, 40 people that buy pharmacy and buy dental and buy a vision, and you've got a disenfranchise those folks in some way, to get to a product sale to a large employer because it's their living. That's how they make their living and they want to keep it.

Okay. I do want to switch gears to the subsidies, if we can. In terms of -- and you've already given a lot of commentary here. But your long-term guidance doesn't include or assume the extension of enhanced subsidies. But what's your latest thoughts in terms of just what you're seeing from a political standpoint in D.C.?

Yes. When you look at our overall membership, 63% of it is from red states. 76% of the growth in 2024 were from red states. So there's a constituency problem. And I think the enhanced subsidies -- and one of the other things is some of the data we picked up this week, Scott Blackley, our CFO, was doing this work, is that a large number of people who are in 0 premium plans don't use health care. It's just a safety net. They're worried about if they need it. So if you think about that as a trade in no enhanced subsidies, if they have to trade down from a silver 0 premium plan to a brown 0 premium plan for safety, then there isn't that much of a conversion to have to make. So the real issue is going to be with people who are using health care and are getting 0 -- are getting full subsidy and not having to pay any premium in how you move them from one plan to another. And again, [indiscernible], if the subsidies completely go away, which I don't think will happen. So in D.C., I think the -- I think once the dust settles on the election, whatever that may be, I think there's a good story for us on either party and being able to offer a solution that's going to help get more Americans into an individual market, which has the best trend of any risk pool in America.

Do you think that there's anything else? I mean, obviously, subsidies being the big question area, but lately, but is there anything else percolating from a regulatory standpoint on either side that you're paying attention to in particular?

So we are paying a lot of attention to a bigger idea, which is there are a number of red states who have either recently or are in the process of building a state-based exchange. And the idea is, let's separate the financing decision from the investment decision, and allow people to pick a product in the individual market, if they're in Medicaid, COBRA, ACA or ICRA, and let them keep it if there are circumstances change by moving the funding mechanism instead of making them pick a new plan. So creating state-based exchanges that are for all individual products in 1 pool. That's got a lot of interest. We actually have a red state team coming from the commissioner's office to our Board meeting this week to sit down with our board and talk about that idea, and about ICRA regulatory changes in their state to support it.

I mean how meaningful would that be for you, I guess, in terms of broader implementation of that?

Given our MPS and our product offerings, particularly our culturally competent product offerings we offer. I will compete against anybody else in this business to get market share. We proved it this year. We can do it. And so if we can get a state-based exchange in every market across the country that allows people to keep their product while their funding mechanism changes, we win. Our retention is higher, our growth is higher. We have an NPS of 66 when the industry average is 0. And so for us, it's a huge opportunity to take that to a competitive advantage.

Okay. SG&A efficiencies, another area where we get questions, it's clear that Oscar has been embracing AI. I guess, to what extent can that help accelerate kind of expense efficiencies such as kind of the 2027 target of that 16% SG&A?

On the AI, so let me just sort of make 1 thing common about our 3-year strategic plan, our financials. It doesn't include anything of any significance sign of ICRA. It has some membership in that a lot. We don't rely on it. Number one. Number two, it has no enhanced subsidies. And number three, it has no additional AI improvements in the business. So last fall, we grew by hundreds of thousands of lives, with 200 less people, fewer phone calls and higher service standards using large language models. We are continuing to implement that. We now have what I call the continuous hackathon, where we have a 4-stage process where we have people ideate and what a large language model could do to help their business; two, spec out -- the second bucket is spec out those projects to see how much it will cost. What it takes to deliver what the customer experience is because we want the member experience always to be enhanced and what the returns are to the company as a result. The third is to test it to see if our estimates are right on spacing, and then fourth is to implement it. We have 3 large language models in each of those stages continuously as a way of driving our business further. So we believe there's a lot of room in AI. We're using it now on our risk adjusters and collecting charts, and finding members who have high risk as a way to get ahead of the curve of collecting the data necessary to submit to CMS for risk adjustment. So AI is one. The other is, we still have room to grow. We've been using AI in our payment integrity business, and where we thought we had a lot of opportunity. We've already passed that. We're making more opportunity. And ultimately, what we'll do is we'll replace our vendors on the back end of the business that help us by using large language models to create their support of our business, which will further reduce administrative costs.

Okay. Anything else from an efficiency perspective to call out?

We have a lot more discipline about -- around projects. We only put on the page what we can afford. We track them. We have a management process. We get together for a week every month. As my predecessor, and that they used to tell me, Mark, the only price of success as internal vigilance. And so you got to constantly manage the business and look at where it's headed. And so we bring the team together, go through the business from top to bottom, make sure we're meeting our commitments. Secondly, we teach people about the longitudinal nature of the business because prior to my arrival, people didn't connect the business from front to back, which left a hundreds of millions of dollars on the table and internally generated capital. And finally, it allows us some way to assess talent on which we continue to act on.

So the company should be generating kind of excess capital soon? And so how should we think about kind of capital allocation, ongoing reinvestment in the business and...

We have a lot of trapped capital in subsidiaries because we have to be profitable for 2 years in each subsidiary in order to dividend it up. So our first state in that area will be Florida. And -- but that doesn't mean we can't use it. So we can use it to grow in those markets, obviously. But secondly, we can do reinsurance contracts across our entities to move capital to other states. Now what that does is it, for example, we used Florida excess capital to handle Texas. All of a sudden, we've got the Florida Commission looking at both Florida and Texas. So it has risks from a regulatory standpoint, and we prefer not to do that. But we have ways of using it to get at it.

Okay. I did want to turn to +Oscar and kind of what are some of the monetization opportunities that you're seeing, I guess, are you prioritizing kind of beyond campaign builder [ profit ]?

So +Oscar will also be used in ICRA as one. Secondly, we are working on a number of very interesting partnerships with large players in the industry, which we have yet to have enough confidence in then moving forward to be able to talk to the street about. But again, what we've done is we pulled all the way back, started right from the beginning again, how do you build an externalized platform? How do you take it to market? Who's going to be interested? Where are the best places to offer it? And so while people are impatient for -- to see +Oscar's results, we want to be very deliberate about making sure that whatever we put forward next works. So more to come, but I'm actually excited about it. I think it's a great opportunity for us.

So any details on time line or any -- no? Okay.

I do, but I'm not sure yet.

I'm glad there's internal plans there. Okay. And then feel free to ask a question or 2 from the audience, if you want. 2024 guidance, I guess, could you walk us through some of the nuances in terms of the impact of SEP -- or SEP's impact on guidance, given kind of the increase in both MLR and adjusted EBITDA, which is kind of a nuance there. I guess can you talk a little bit about that?

So the first thing I want to say is that SEP is more a revenue problem than a medical cost problem. What we have is a mismatch in getting the revenue that we should get for those members because we don't have the data to apply for that revenue as part of the risk adjustment model. So it's a revenue shortfall in the near term. That results in generally for the SEP population, a 10% higher MLR largely driven by the revenue. Some by the medical costs, but largely by the revenue. It gets worse as the year goes on. So it's not a street 10%. It's 10% on average throughout the year. The later it is, the higher it gets because we even have less data on those members. So between getting our members into care in products like our diabetes product or our Breath Easy product or our culture of competent programs like laser, all of that gets people into care in the right places for their illnesses, but it also gives us all the information we need to be able to apply for the risk adjustment, which in 2025 is actually a big tailwind. Now that the business has tailed off, the growth in the SEP has grown up -- tailed off in the third quarter, we're not as expecting as much SEP this year as we could have had. As a matter of fact, we actually looked at accelerating the SEP growth and taking a hit on margin this year to get it next year. But we said based on operating costs and everything else in managing the business, we didn't want to take that risk. And so we let it tail off through the broker channel. We're still going to get growth through the end of the year, but not anything like we saw in the first half of the year.

Okay. And then any other headwinds or challenges we should be considering as we're bridging to 2024? And into 2025?

I think we've got more opportunity in admin. We got definitely opportunity on growth with the market expansions we have. I'm feeling really good about next year, actually. And 2027 as well when we got to $2.25 a share and 5% margins, but it doesn't hurt to get there early.

Doesn't hurt. And then in terms of those long-term targets and thinking about squaring up your long-term targets and you seem relatively passionate about this, but the CBO and paragon reports that have come out, I guess, how do you match up between what we've seen from there and your long-term targets?

It's -- I mean, we're -- again, we're assuming enhanced subsidies go away. But we've done things to ameliorate the impact by offering other products to our members that allow them to keep 0 premium by stepping down a tier.

Okay. All right. And then anything else from -- that you think is kind of underappreciated that you want to express to folks today? [Operator Instructions]

A lot of the activity in our stock. I'll just say we have large holders who are been long investors. They've done real well over the last year. So a number of them have shorted the position to protect it. So you're seeing that in the stock. So a lot of the downward pressure on our stock are large investors who have taken actions to protect their own gains in our shares. And while I used to run a hedge fund, I hate it. And -- but I understand why they're doing it. But that's what we have to do. And so we're working on ways to help these groups move out of the stock when they have huge gains that they need to correct their portfolio. That's our problem right now in the stock price.

And I had 1 follow-up, I guess, on utility...

And I always love to really outperform and hurt the shorts anyway.

Okay. And just 1 follow-up on utilization trends. I mean anything you can dig in further in terms of you mentioned inpatients, but anything else to call out from a utilization standpoint?

No, ours is largely outpatient. Everything else is performing as expected or better than expected. So I'm including pharmacy, which is great.

Okay. If there is no other questions in the audience, I think it's great.

No questions?

Thank you so much. I appreciate the time. Great.

Thank you.