Oscar Health, Inc. ($OSCR)

Okay. Well, thank you for joining us for the next panel. We're really pleased to have Oscar Health with us for the next panel. I'm Scott Fidel, I'm the health care services analyst here with Goldman Sachs. Joining us today from Oscar, we've got Scott Blackley. He's the Chief Financial Officer. And then also, we have Bianca Rodriguez from Investor Relations, who is also in the audience with us today. So first of all, Scott. Great to see you and welcome to the conference. It's great to have Oscar and it's great to have you here as well. We've got a nice list of questions and conversation that we're going to have. But Scott, I thought maybe first, you did have an 8-K out this morning, and had sort of an allusion to a business update. I'm sure we'll get into that. But maybe I'll sort of kick it over to you if there's any initial comments you wanted to make and sort of set things up for the conversation.

Great. Thank you. Good morning, everyone. Yes. So why don't we start off with just a quick update on where we are with the business as we've closed out the month of May. I would say that '26 is off to a very strong start. We spent several years planning for how 2026 was going to play out with the expiration of enhanced subsidies. I think a lot of that planning work that we did is showing up in the results that we're seeing. As you talked about, Scott, we did file an 8-K this morning and just reaffirmed our full year guidance. But behind that affirmation of our current guidance, we do see some pretty healthy tailwinds in the performance of the company. First off, I would just say that when it comes to membership, we continue to see trends as expected. So we finished open enrollment with 3.4 million members. That migrated down to about 3 million members at the beginning of Q2, and things are proceeding more or less as we would expect from there. On utilization, utilization through May has been and continued to be modestly favorable to our expectations. So continue to see strong performance there. And then another important update, we did receive the final 2025 Wakely report. This report is based on the actual data that the carriers submit to CMS. So it tends to be the most accurate weekly report of the year. And that report was $130 million favorable to the accruals that we had booked in the first quarter. So a pretty significant tailwind to where we were at the end of the first quarter. So I take all that together, I think there's some pretty strong tailwinds. But given that we still are waiting for the first 2026 weekly report, which gives us a bit more information about the market morbidity this year, we are holding off on making any updates to our guidance at this point in time. But I think we go into the quarter close this month with a pretty strong tailwind.

All right. Well, great. Thanks for those updates. Scott, that's encouraging and also helps to provide some nice visibility into trends year-to-date. And certainly, those are three topics that we were going to want to discuss. So to the extent that we can drill further, looking forward to doing that. Just first on the first formal Wakely report, the June report. Can you just -- to the extent of -- I know it's coming in June, what's -- where would you sort of guide investors to in terms of to when expect that report would come out?

Yes. So we tend to get the Wakely report -- the first one we'll get here, we should receive it at the end of this month. We'll run -- we'll have claims through April. And then each report has claims for an additional 90 days. So we tend to get a report from them every month. And obviously, the first report has got a light amount of claims data. And so it is -- we typically look at it as just indicative of how does it compare to our expectations. Last year, we saw that market morbidity was certainly accelerating in a way that the market hadn't expected. So it can give you information even though it's early. So we will we should have that report again by the end of this month, and we're looking forward to seeing it because a lot of what had the research that's come out from third parties, our own claims data, is suggesting that market morbidity in '26, which we all went into this year with assumptions that it was going to increase pretty dramatically. It looks a lot of the early signs are suggesting that it is probably going to come in a bit lighter than what we all expected, which would be good news for us. In fact, Wakely had published an early report on market morbidity market sizing in April. And that report had a range of market morbidity, which actually was lower than what we had built into pricing. And so if indeed, we see that market morbidity come in favorable as the Wakely early report had suggested that gives us an opportunity for some upside for the year.

Yes. And maybe we'll even step back and we'll just -- let's -- why we just stay on Wakely since we're already there and just sort of make sure that we cover each of the steps and sort of getting to where we are now. So first, going back to that final 2025 report. And like you said, it is while it's a 2025, it has earnings implications, as you just talked about. Maybe can you provide us some more information visibility around -- the particular input that ultimately informed those revisions to your accruals when thinking about sort of data, sort of what you saw around the overall market and around morbidity and around the risk profile of the market and then relative to how you were assuming that for Oscar versus the market, and then we'll sort of move to the interim report.

Yes. So the '25 report that we got, typically, there's not that much variability between the final Wakely report and the final CMS report, which will come out later. So from here, don't expect, at least historically, there hasn't been much volatility. So we feel like that's a good estimate of how '25 is closing out. . And I think that what -- the really good news about the Wakely report, I'll take the $130 million as a tailwind to the year, but seeing that market morbidity was not accelerating at the end of '25 as much as we and the rest of the market had expected. Like all of those assumptions ultimately got built into our guidance, got built into our pricing. So while it's a positive for our prior period development is also a persistent tailwind to '26 because of the way we thought about market morbidity and our pricing. The -- I'll just comment on overall risk adjustment, as you know, is the most challenging part of our business to predict. We have to predict our own risk scores, and we have to predict the market risk scores. Seeing '25 and how '25 is coming out also gives us an additional lens for predicting '26. And so it helps us to refine our models to understand better what's going on a state-by-state basis. and to be able to kind of be ready to receive that first Wakely report.

And then how much do you discount? Or are you able to bridge some of the unique dynamics around '25 versus '26 just given the more extreme or material sort of change in the marketplace just because of the sunset of the enhanced subsidies and the resulting particularly sort of changes into sort of metal level products that we've seen play out so far this year.

Yes. The -- I think for '26, we have as an industry. I think we have more information about market morbidity earlier in the year than we've ever had. The Wakely report that I think we and others sourced information gave the -- we gave that to Wakely early in the year, which they took and then gave back an early read on what is market morbidity looking like for '26. It's the first time we've all had that report. We also got additional third-party data about our incoming membership, which gave us much more information about the risk scores and the potential utilization of our new members. So we walked into this year, I think, with more information than we've ever had about the membership. Since then, just the read-through from first quarter, it looks like we didn't see any of the competitors that had called out significant pressure on utilization. Our results were -- our utilization was favorable to our expectations as well. So when I kind of take that information in the aggregate and look at how is '26 playing out, there -- I keep looking for some piece of bad news about '26, market morbidity. And at this point, I just haven't seen any.

Yes. Well, I mean relative to the -- I think the fear levels or just uncertainty around how much the market could see a deterioration in the risk profile because of the loss of the subsidies and then the sharper premium increases. It's certainly encouraging to see that. And Scott, can you -- to what extent can you sort of line us up with that in terms of that favorable underlying sort of variance around morbidity relative to maybe some of the assumptions that you had before that were in the accruals. And then again, I think also consistent with how the industry was thinking about things, in terms of like what are some of the underlying inputs into what you're seeing that's coming in more favorable? Is it in terms of demographics of the membership in terms of sort of the product, again, sort of shifting more into the products that ultimately -- I mean, again, that's may actually affect some of the utilization dynamics which we'll get to. Are there any particular characteristics that sort of jump out particularly?

Yes. I would say that given the amount of change that was happening in the marketplace with the expiration of enhanced subsidies I think we and others, including the consulting firms were probably as conservative as we could be in terms of trying to estimate what the effects of the loss of those subsidies would be on the marketplace. I think that Oscar has been working backwards from an assumption that the subsidies would expire in '26. That was when we did our last Investor Day a couple of years ago now, that's the guide that we came up with is in the event these expire, here's what's going to happen, we were hopeful that they wouldn't, but we were planning for the worst-case scenario that they would. And I think that, that has allowed us to really approach the market from the lens of what are the right products that need to be in this market if those subsidies are gone. And that really informed how we built our bronze plans, our gold plans and, to a lesser extent, silver because what we're trying to do is to make sure that we had plans that could give those individuals that were able to maintain benefits or some type of subsidy, a landing spot where they could go to gold and get rich benefits using the subsidy dollars that they had. They could go to bronze and get potentially a cheaper plan, not have an out-of-pocket increase but still maintain coverage. And that strategy was really successful in both allowing us to retain our own members but also collecting a lot of members from other plans that are new to the marketplace. So really, I think that when we look at what happened this year, you did see a fairly significant change in metal demographics. And at least in our case, that was very intentional something that we had worked for quite a long time, and we think that was a huge reason for the success this year.

Well, certainly, what we're talking about right now is going to have, I think, pretty meaningful implications for how you're thinking about '27 strategy. So we'll -- let's put an asterisk on that. But I first want to sort of fill in the updates that you provided and sort of continue to sort of build out that mosaic of the inputs to '27. So I think this is a good transition towards utilization. And I very much appreciate you giving the update so that we can actually talk a little bit about some of the backdrop around utilization and certainly not a significant surprise to hear that the bias may be more towards favorability just in terms of what we're hearing out in the market and with all the checks that we do. And then obviously, the rest of the Street does as well. I guess to start with, Scott, can you -- any more additional layering that you can give us around just when sort of as that sort of bias towards favorability in terms of the cost components or the key provider settings? Are you generally seeing it sort of broad-based? Or -- are we seeing -- clearly, it feels like on the hospital front, we've definitely felt like things have maybe sort of come in little bit more than the hospitals expected, but I don't want to put words in your mouth. What you're seeing out there?

Yes. I think I'll save the details of the categories of utilization for our full quarter update. But I would say that there's always puts and takes that you see along the way. So we are seeing exactly that. There are some areas that are running really quite favorable. There's other areas that are running a little bit unfavorable in the aggregate, which is what I really focused on, we're seeing utilization that is kind of persistently grinding favorable each month. And so that's a real positive. I think that there's a question about how much is AI in the background starting to affect whether it's hospital systems or the way that Oscar [Audio Gap] utilization. We've been working to sure that we remove friction from our member experiences. And that's always been kind of, as you know, the entire history of Oscar has been built around that concept. And I think we've been pretty methodically doing that over a number of years, but we're really starting to see some of that kind of working its way through towards more predictable utilization patterns because we know what type of things go straight through and get approved by us, what things need to actually go in for a clinical review. But it is something that I think you're starting to certainly see the hospital systems using more AI to help them with coding charts. And so I think that potentially a lot of this utilization favorability can be kind of attributed back towards just more efficiency in how we all manage patient interactions.

Okay. All right. And then getting back to just the membership dynamics and how that's tracking. So it sounds like things are right on track with your book of business is there? How would you characterize the overall market at this point? It feels like from our perspective, that we're probably right in that mid-20s type range if you sort of aggregate everything that we've seen in terms of down mid-20s, and I know that's part of the range that you provided as well. Is that still sort of makes sense to you? Or are you [indiscernible] in this direction?

Look, I think that our estimate was that the market would contract by 20% to 30% in 2026. We priced morbidity assuming a 30% contraction. And that currently, our risk adjustment accruals are based on that pricing view of a 30% market contraction. Just like you, I read everything I can get my hands on. I just see nothing in any of the competitor data, our own data, third-party kind of reviews that would suggest that it's going to be at the higher end of the range that we provided, the 20% to 30% range. So we'll see how it all plays out. I'm super excited to see this Wakely report just because while we think we've got good data that's going to help us understand how the year is going to play out, seeing that first confirmatory report will certainly give us even another layer of support behind starting to lean in and feel like, okay, market morbidity is going to come in below where we had all expected.

So let's talk about sort of where we sit right now. And to the extent that we can sort of tease out some of your thinking around the outlook for '27 and some of the key variables that may be in consideration around game theory and around how you're going to position pricing and how competitors are, so I mean, there are some interesting cross currents here, right? Because certainly, it feels like the market is performing better than feared so far this year, obviously, we're coming off of a pretty dynamic, pretty brutal last year for the sector in the exchange market, but also more broadly in, all the key markets on the government side. So margins have certainly been beaten down in our view is that the industry is sort of in that inflection towards cyclical recovery across some of these markets. We're seeing some of the key things that we track are certainly around capacity as part of our sort of different key sort of critical inputs on the underwriting cycle. And it's definitely sort of as would be expected in terms of this late sort of cycle sort of period, we've been seeing more announcements of market exits from carriers and more from regional and provider-sponsored carriers, the types that we would generally expect, but it's a steady tempo there. And so I want to sort of get your opinion on sort of to what extent that capacity dynamic sort of may influence your thinking. But ultimately, I think it's -- like, ultimately, it's like the big sort of choice or pick right is going to be like, are we going to -- are competitors going to pivot back to already sort of looking back to get on the growth side, more on the exchange side after seeing some of this favorability? Or is it the broader sort of pressure that the industry has faced across multiple lines? And again, still a market that is shrinking 25% and has a lot of underlying sort of variations going on in it you think that, that ultimately keeps a disciplined sort of balance around that price versus margin. And there's a lot in there, but there are game theory that you may be thinking about it at this point.

A lot to unpack. And so I would say '27 has some new set of regulatory requirements for the marketplace. As we think about pricing for '27. Trying to figure out how are each of the different new regulatory standards going to affect the size of the market. we did see another piece of litigation come out that last year, many of the program integrity efforts that CMS was trying to put into place ultimately got stayed by the courts. And a similar lawsuit was filed recently, same court systems, challenging some of the new rule-making that CMS has just released. So there's a little bit of a lack of -- while we know what the final rule proposal is, and we're working to build that into our pricing, we're also going to have to be thoughtful about having an alternative pricing scheme that says, what if some of the current proposed -- or some of the current regulations ultimately get stayed again.

So they are meaningful enough that you would have a...

I think that it would -- I think that there's some important things that would cause us to need to adjust some of the key inputs that go into pricing. So we'll be carefully monitored in that.

When would you expect to have visibility into that? Or is it...

That's a court matter, and we would be hopeful that it gets resolved quickly. At least they've get some precedent about from how it was handled last year. So there's some optimism that we could see this get rapidly resolved. But like all things, in the government, surprise is probably more likely than not. So we'll keep a close eye on that. I think that the thing that I learned most specifically about 2025, my biggest takeaway from that is when you know what is coming, even when the changes are pretty significant, and you are -- we are able to price those into the assumptions that we use. And actually, within a relative range, we're able to predict what's going to happen in the marketplace. When things change midyear is when it gets pretty bumpy. And when you have a lot of midyear regulatory changes or midyear membership changes in who's allowed to access the marketplace. Those are the things that I think create the most volatility. So I'm pleased that we're going to try to get some of these things for 2027. It looks like we'll have clarity on how 2027...

And at least this year, too. There's not all that exact SEPs exactly what you said.

While it may seem like it's more dynamic, I actually view it as being a bit more structurally consistent each year where we know kind of what is happening in the year. We're able to price for it. So that gives me some optimism about being the predictability of the market. [Audio Gap] exited. This is a very hard business [Audio Gap] incredibly important. I think that for what you see is those who have been in this business and are staying in this business tend to have networks that are built neural networks. Some have Medicaid chassis. We've gone to the market with more of an approach of let's build neural networks. I think that you've seen others who've tried to use a commercial network, just struggle to be able to be competitive with that type of backdrop. And so, there are some carrier exits this year. We have a pretty good overlap with the markets where those carriers are. So that gives us an opportunity for '27. But overall, I think that the -- '25 was a tough year for everyone. I'm not sure that '26 is going to be quite -- that we're all going to conclude that we've completely recovered to where we need to be. So I know that when I look at the marketplace and I think about how we're approaching pricing, I would characterize it as competitive, but also this isn't a marketplace where you win by being significantly the lowest price because that just doesn't get you anywhere. So I would expect it to be a rational market in terms of pricing.

Got it. I have one more question on the exchanges, and then I want to sort of open it up to see if there's any questions in the audience. And then we'll see how much Lucie and ICHRA we can get in with the time. The final question on the exchanges is just around, again, that's sort of where we stand with market and program integrity and the numbers that we continue to still see around sort of how much of proper enrollment may or may not be in the market Paragon, just put out their update? And they're still calling that very substantial relative to -- especially with the -- against the size of the exchange market this year versus last year. Obviously, Oscar has a tremendous amount of technology, sort of monitoring things for our [Audio Gap]. What's your observation on maybe just sort of that the Paragon view or just the general, like, let's say, more much more cautious view on some of those -- the accuracy of all the enrollments that are in the market?

Well, look, I think that the Paragon report clearly has a lens that they're trying to paint on the marketplace. They start with the 23 million open enrollment and use that as their proxy for how many people were inappropriately enrolled. We think that's more likely should be -- your starting point should be kind of the post, and so there's already inflation. And it's also based on some census data that is known to be it's lagged. It -- the census themselves will say that they are very ineffective at capturing data for low-income populations, and immigrant populations. And I think that's -- those are important pieces of data in terms of what's going on with the marketplace. So I think that we know the folks at Paragon, they're obviously smart people, but I do think there's a little bit of a purpose for their report. When we look at things, our view is we think that a stable marketplace is best for all the ACA participants. It's the best thing for Oscar. And so we support thoughtful program integrity initiatives. We think they're good. In our own book of business, we do bring AI to look for anomalous patterns amongst members, amongst brokers. When we see those things, we suspend brokers if we see patterns that we deem suspicious. We have a constant dialogue with CMS about anything that we're seeing. So we try to be very front-footed in protecting ourselves in the marketplace from fraud. If we think that there's suspicious behavior amongst members, we don't recognize the revenue on those members. So we're trying to make sure that we set the company up to be successful in a world where we're we want to be a market leader in making sure that this is a clean and healthy marketplace.

Great. Well, we probably have time for a question or 2 from the audience if anybody -- has any anything that cares about?

Yes. The question being with as much power as the current administration has to create rules, what happens if you see a change in administration and how likely is it that we might see a flip flop? I'm sure there's a handful of initiatives that if we did see a different administration and power at some point in the future, certainly, they would have their own set of agendas. What I think that will likely be sticky as some of the program integrity initiatives that have been put into place. So I would expect to see those continue I think some of the expanded open enrollment or SEP type of characteristics that were put into place during COVID. I don't think those will be -- we'll see those returns. So I don't want to get too far ahead of ourselves, but I think that the parameters of what can be -- what would be different are narrower than maybe they've been in the past because I think the market is going to be more stable going forward.

Well, great. Well, I think we're right at time. So we're going to pause the session there. And Scott, I want to thank you so much for joining us and hope the rest of the conference goes well for you.

Really appreciate it, Scott. Thanks for your time.

You're welcome.

All right. Take care.