Oscar Health Inc

NYSE:OSCR

Earnings Call Analysis

Robust Financial Improvements Poised for 2024 Profit

The company is on track to achieve an impressive financial turnaround. With almost one million members, premium income, while down 5% year-over-year due to membership shifts, saw a 6% increase pre-reinsurance. The Medical Loss Ratio improved dramatically by 610 points to 83.8%, underpinned by disciplined pricing and cost of care initiatives. Administrative efficiencies led to a 330-point improvement in expenses. These factors, combined with higher investment income from favorable interest rates, drove a steep combined ratio improvement of 560 points and a significant third-quarter profit. Looking ahead, direct and assumed policy premiums are anticipated to hit the higher end of expectations at $6.4-6.6 billion. The strategic outlook remains bright, with expected direct premium growth at or above market levels in 2024 and margin expansion from cost savings, forecasting total company adjusted EBITDA profitability next year.

Introduction to the Earnings Narrative

Oscar's Q3 2023 earnings call provided a comprehensive narrative of their financial journey and strategic direction, outlining a solid foundation and anticipatory steps for achieving profitability in 2024. As the CEO, Mark Bertolini, alongside CFO Scott Blackley, stewarded the company's call, they detailed Oscar’s year-to-date progress and updated financial outlook for 2023. Setting a cautiously optimistic tone, they wove a story of a company not just weathering the economic climate but also capitalizing on strategic initiatives—potentially revolutionizing their future financial landscape.

A Story of Outperformance and Optimistic Projections

Oscar's narrative is one of relentless outperformance, leading to increased adjusted EBITDA outlooks for the full year 2023. The story continued with their deliberate expansion strategies, which echo the company's past successes and reflect a conscientious approach towards growth. Oscar is eyeing direct premium growth mirroring or outpacing the market in 2024, driven by holistic experiences and disciplined financial management, indicating a positive trend in membership and premium trajectory.

+Oscar - A Beacon for Future Partnerships and Growth

With Oscar’s technology platform, +Oscar, the company narrated a success story marked by securing a new agreement with Sanford Health Plan. This partnership, built on an established campaign builder technology, intends not just to enhance membership engagement and improve operations but also projects +Oscar as an avenue ripe for future growth, expanding its influence over 500,000 lives.

Forging a Path to Sustainability and Future Expansion

Looking forward, Oscar sketched a strategy evolving around profitability targets in the near term and a robust plan laying groundwork well into 2024 and setting sights on 2025. Their narrative indicates a company not just surviving, but thriving by leveraging operational excellence and technological advancements to drive margin expansion and diversify beyond their current market scope.

Financials: A Testament to Improved Efficiency and Prudence

In a testament to operational efficiency, Oscar's improved core ratios—including a 935 basis points year-over-year improvement in the combined ratio to 101.3%—highlight a company mobilizing its strategic financial initiatives effectively. Notably, with the insurance company adjusted EBITDA improving drastically and the administrative expense ratio climbing down, Oscar paints a fiscal picture that shines with prudence and well-calculated tactics to reduce expenses and optimize capital.

Solid Groundwork and Positive Outlook for Investment Income

Scott Blackley's insights painted an optimistic picture for Oscar's investment income, hinting at a continuing upward trend into 2024, fostered by the higher interest rate environment and strategic portfolio management. The insurance company adjusted EBITDA reflects a significantly improved standing, bolstering the narrative of a strong fiscal foundation geared towards driving profitability in the upcoming year.

Guidance: Advancing Towards Total Company EBITDA Profitability

With a clear line of sight to achieving adjusted EBITDA profitability in 2024, Oscar's guidance depicts a company advancing towards its financial targets, anticipating direct premium growth at or above market and margin expansion anchored by cost-saving initiatives. The unfolding story reaffirms the company's operational momentum and its dedication to sustaining profitability, emphasizing initiatives that have already been set in motion.

Closing Chapter: Leverage, Momentum, and Commitment to Profit

In the closing remarks, the leadership forecasted profitability on an adjusted EBITDA basis for the total company, indicating they are not merely reaching a break-even but moving towards a profitable era. They are banking on the successful execution of activities that fueled improvement in previous years, projecting confidence in their strategic and operational approach to maintain leverage and momentum into 2024.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to Oscar Health's 2023 Third Quarter Earnings Conference Call. [Operator Instructions]I will now turn the conference over to Chris Potochar, Vice President of Treasury and Investor Relations.

[Chris Potochar, executive]

Good morning, everyone. Thank you for joining us for our third quarter 2023 earnings call, where we'll discuss our strong year-to-date results, our updated financial outlook for 2023 and the path to total company adjusted EBITDA, profitability in 2024.Mark Bertolini, Oscar's Chief Executive Officer; and Scott Blackley, Oscar's Chief Financial Officer, will host this morning's call.This call can also be accessed through our Investor Relations website at ir.hioscar.com. Full details of our results and additional management commentary are available in our earnings release, which can be found on our Investor Relations website at ir.hioscar.com.Any remarks that Oscar makes about the future constitute forward-looking statements within the meaning of safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our quarterly report on Form 10-Q for the quarterly period ended June 30, 2023, filed with the SEC and other filings with the SEC, including our quarterly report on Form 10-Q for the quarterly period ended September 30, 2023, to be filed with the SEC.Such forward-looking statements are based on current expectations as of today. Oscar anticipates that subsequent events and developments may cause estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in the third quarter 2023 press release, which is available on the company's Investor Relations website at ir.hioscar.com.With that, I would like to turn the call over to our CEO, Mark Bertolini.

[Mark Bertolini, executive]

Thank you, Chris. Good morning, everyone. Thanks for joining our call. Today, I'll review strategic drivers of Oscar's momentum and preview our plan to deliver sustainable growth and profitability.We had another strong quarter with solid core business performance, increasing our optimism for 2024, total company adjusted EBITDA profitability. We had a strong membership retention across our book and our leading NPS increased to a record high of 60. Our insurance business is performing well with all core ratios improving meaningfully year-over-year in 3Q and year-to-date.In the quarter, our medical loss ratio improved 610 basis points year-over-year to 83.8% driven by our disciplined pricing strategy and execution on our total cost of care initiatives. Insurance company adjusted EBITDA profitability remains solidly on track for this year. We also maintained total company profitability through the first 9 months of 2023 with adjusted EBITDA of $66 million. Given our year-to-date outperformance, we are raising our full year 2023 adjusted EBITDA outlook. Scott will walk us through a more detailed view of our financial metrics later in the call.Now I will turn to our business highlights. We are 1 week into open enrollment, marking Oscar Health Insurance's 11th year as a prominent player in the ACA market. Starting in 2024, we will bring new technology-enabled individual and family plans to 165 new counties in 11 states across our broader 18 state footprint. Based on our competitive positioning, we expect to achieve direct premium growth at or above market in 2024. Our growth strategy includes several expansion drivers focused on accessibility, affordability, and member experience.First, we are expanding in Oscar knows well, including Iowa, Ohio, and Georgia. The expansion appropriately balances risk and includes rural counties that build off of our existing provider rate structures and distribution channels. Second, we are enhancing our leading HolaOscar program for our growing Spanish-speaking member base. The program delivers culturally authentic experiences, including providers who speak the language. Our Spanish-speaking members have an even higher NPS than our overall member average and represent a growing segment of the ACA market.Third, we are introducing more personalized plan designs. Our newest plan, Breathe Easy, aligns benefits with the needs of members suffering from COPD and asthma. Breathe Easy builds on the success of our diabetes care plan, which has generated notable results, including 9% better medication adherence, 17% increases in eye exams and 12% higher rates of kidney disease screenings. The processes we implemented in 2023 give us confidence in our execution.In 2024, our strategy balances growth with sustainable margin expansion. The core building blocks include our; 1, disciplined pricing strategy; 2, administrative expense initiatives; and 3, total cost of care efforts. We plan to reduce medical expenses through substantial PBM contract savings, fraud, waste and abuse initiatives and network re-contracting. All of these factors lay an achievable path to total company adjusted EBITDA profitability in 2024.Now turning to +Oscar. This morning, we announced a new agreement with Sanford Health Plan, a provider-sponsored plan supporting one of the largest U.S. health systems. The multiyear agreement leverages our campaign builder technology to drive member engagement and interconnectivity through their operations. Focus areas include improving member growth and retention, appropriate PCP utilization, clinical program engagement, and adherence. Our Sanford Health Plan partnership demonstrates the growth potential of +Oscar. After just 1 year of offering campaign builder to third-parties, we have grown to serve 500,000 lives.The addition of Sanford Health builds on Campaign Builder's success with +Oscar clients. A recent example includes a large physician group in MSO, where we initiated an annual wellness visit campaign, which successfully engaged approximately 86% of patients. That outreach drove a 10% increase in PCP utilization within 30 days of campaign execution. In addition, we continue to build new campaign builder features that integrate open AI for +Oscar clients and Oscar Health Insurance. These enhancements synthesize data from multiple sources to deliver high frequency, personalized interventions, and intelligently monitor for signals that route better care. These successes demonstrate the impact +Oscar is making to improve access and quality for Oscar Health Insurance and the potential to power the broader health care system.Looking ahead, our leadership team continues to evolve our strategy. Near term, we remain committed to our profitability targets. Longer term, we are focused on continued margin expansion. We have a strong operating plan that lays the groundwork for 2024 and sets us up for success in 2025. Our focus includes: 1, running a great company; 2, continually enhancing the member experience; 3, accelerating +Oscar revenue by commercializing our technology platform; and 4, driving further momentum in Oscar Health Insurance by diversifying beyond the ACA.Over the next several months, we will continue to map out our strategy and look forward to sharing it with the market at an Investor Day in 2024.With that, I will turn it over to Scott.

[Richard Blackley, executive]

Thank you, Mark, and good morning, everyone. Our strong third quarter and year-to-date results demonstrate that we are executing well against our plan. All of our core ratios saw meaningful year-over-year improvement, and we are tracking at or above our profitability targets.We ended the quarter with nearly 1 million members, largely in line with our expectations. Membership increased modestly by 1% in the quarter, driven by higher retention due to lower lapse rates and increased special enrollment additions as compared to the second quarter.We continue to monitor SEP membership trends, including Medicaid redetermined lives. Our data continues to indicate that SEP members are healthier than expected and are not exhibiting the anti-selection patterns.Our direct and assumed policy premiums were $1.6 billion in the quarter, a 5% decrease year-over-year, driven by lower membership, partially offset by rate increases. Similar to trends we saw last quarter, our premiums before ceded reinsurance, which includes the impact of our lower risk adjustment transfer grew 6% year-over-year to $1.4 billion.Turning to medical costs. The medical loss ratio significantly improved by 610 basis points year-over-year to 83.8% in the quarter due to our disciplined pricing actions and total cost of care initiatives. Our overall claims trends were in line to slightly favorable relative to our pricing expectations. Within specific service categories, trends remained consistent with last quarter.Compared to our pricing assumptions, inpatient performed in line, outpatient and Rx were slightly above, and professional well below. On risk adjustment, we continue to expect a lower risk transfer as a percent of premiums this year due to our member profile shifting closer to the overall ACA population. We received the second Wakely report for 2023, and we recognized $27 million of risk adjustment benefit in the quarter as the data continued to be favorable relative to our expectations. We continue to maintain a cautious approach to our risk adjustment reserves.Switching to administrative costs. The insurance company administrative expense ratio improved 330 basis points year-over-year to 17.4% in the quarter, driven by lower risk transfer per member as a percent of premiums and distribution optimization.Taken together, the insurance company combined ratio significantly improved by 935 basis points year-over-year to 101.3% driven by both an improved MLR and admin cost efficiencies. Year-to-date, the combined ratio significantly improved by 560 basis points to 97.6%, reflecting a consolidated profit across the insurance companies.Our insurance company adjusted EBITDA of $30 million in the quarter, improved by nearly $150 million year-over-year. On a year-to-date basis, insurance company adjusted EBITDA of $218 million, improved by $365 million year-over-year. Our third quarter '23 adjusted administrative expense ratio of 20.3%, improved 445 basis points year-over-year due to the aforementioned improvements in the insurance company admin ratio and higher net investment income. A significant year-over-year increase in investment income was driven by the higher interest rate environment.Investment income is a core fundamental of our business given the capital we hold and the carry we receive on the assets we hold against reserves. We have maintained a short duration in our investment portfolio this year, allowing us to benefit from rising rates. Based on attractive rates and our strong capital base, we have begun extending our duration. We expect investment income will continue to be a tailwind in 2024.Our third quarter '23 adjusted EBITDA loss of $20 million, improved by $140 million year-over-year. On a year-to-date basis, total company continues to be profitable with adjusted EBITDA of $66 million, a significant improvement of $340 million year-over-year. Our strong operating results to date position us well to deliver our total company adjusted EBITDA profitability target for 2024.Shifting to the balance sheet. We ended the third quarter with $2.6 billion of cash and investments, including $239 million of cash and investments at the parent. Recall the second quarter was expected to be a high watermark for both cash and investment income for the year as we paid out the 2022 risk adjustment transfer in the third quarter. Our capital position remains very strong. As of September 30, 2023, our insurance subsidiaries had approximately $870 million of capital and surplus, including $320 million of excess capital, driven by strong operating performance through the first 9 months of the year. We continue to believe our excess capital positions us well to fund future growth and allows us additional opportunities to optimize our capital position over time.Turning now to updates on our full year guidance. We now expect direct and assumed policy premiums will be at the high end of the $6.4 billion to $6.6 billion range. We continue to expect our MLR will be at the low end of the 82% to 84% range, representing a 330 basis point year-over-year improvement. We expect our insurance company administrative ratio will be near the midpoint of the 17% to 18% range, reflecting an improvement of 310 basis points year-over-year. Given the strong performance of our insurance business, we now expect our insurance company adjusted EBITDA will be a profit of approximately $155 million to $165 million. We also expect the adjusted administrative expense ratio will be near the midpoint of the 20.5% to 21.5% range, reflecting a 380 basis point year-over-year improvement.Notably, we now expect our total company adjusted EBITDA loss will be in the range of $50 million to $60 million, representing a more than $400 million year-over-year improvement. Looking ahead to 2024, based on our competitive positioning, we expect to achieve direct premium growth at or above market in 2024. We also expect margin expansion driven by our total cost of care initiatives and administrative savings related to automation and technology-driven improvements.As Mark mentioned, within total cost of care, we expect significant expense reductions from our new PBM arrangement, fraud, waste and abuse initiatives, and network re-contracting. At this point in the year, many of the actions to drive margin expansion next year have already been taken, providing a clear line of sight to achieving our target for total company adjusted EBITDA profitability in 2024.And with that, let me turn the call back over to Mark for closing remarks.

[Mark Bertolini, executive]

Thanks, Scott. In summary, we had another great quarter, and we are on track to deliver a strong 2023. Oscar is disruptive and growing. Our solid performance year-to-date demonstrates the strength of our strategic direction. Notably, we expect significant insurance company adjusted EBITDA profitability this year with a considerably lower total company adjusted EBITDA loss compared to 2022. These trends support our optimism for 2024 total company profitability.In Oscar Health Insurance, we continue to capture tailwinds in the ACA, reinforcing our belief that the individual market can be the market for everyone. In +Oscar, we are well positioned to serve as a technology solution for more of the health care ecosystem.Finally, I would like to thank our employees for delivering the Oscar magic to our stakeholders. It is a privilege to serve our nearly 1 million members. We could not do it without our team's commitment to our vision.With that, I would like to turn the call over to our operator for Q&A.

[Operator]

[Operator Instructions] Your first question comes from the line of Stephen Baxter from Wells Fargo.

[Stephen Baxter, analyst]

So I think you only just entered open enrollment, but I was hoping you could update us on your view of what you're expecting for market level premium growth in 2024 that you're going to grow at or above? And then just as a follow-up to that, I guess, is the pricing data has become more completely available for your competitors. How has your view of your competitive positioning evolved? It seems like a couple of the national players will be repricing for 2024, but you may have already been contemplating that in your thinking.

[Mark Bertolini, executive]

On the first question, we still -- I'm totally weekend. So we don't have a whole lot of data. And we do track it every day. Trends look on target to having high teens membership growth and low 20s premium growth. So we would call it too early, but we are pleased so far.On the second point, our rates are all out. Yes, that's true. However, what is included in our rates this year, are this notable total cost of care reductions we've created and also our operating efficiencies. So unless you look relatively over year-over-year multiple years, you won't see the impact of our impact on leverage, operating leverage and on total cost of care. So we're comfortable with our rates. Very comfortable.

[Stephen Baxter, analyst]

Yes. And then just in terms of the competitors, I guess, has there been anything surprising in terms of what you've seen as their positioning has become more fully available for 2024?

[Mark Bertolini, executive]

Yes. I think the big carriers, the big players, the carrier level action they've actually retrenched and pulled back. We think the market overall is stable and [Technical Difficulty] CVS Aetna increase their footprint to 4 new states, but they're less price competitive than they were in prior years. Centene remains in the middle of the market and modestly priced. UnitedHealthcare is a new entry in Wisconsin only, but generally improving its competitiveness. And Blue Cross Blue Shield is probably the most aggressive group out of the group so far in the markets we serve.

[Operator]

Your next question comes from the line of Adam Ron from Bank of America.

[Adam Ron, analyst]

First of all, congrats on the major progress you've made this year. But that kind of goes to the first question I have, which is for the last 3 years, I think you've increased total company adjusted EBITDA margins around 800 basis points a year on my math if you use the adjusted revenue. And so with next year, you're targeting adjusted EBITDA breakeven that would imply on the new guidance, roughly 100 basis points of adjusted EBITDA improvement. And so given the momentum coming out of this year, all the initiatives you've highlighted, all the tailwinds you've highlighted, 20% market growth next year. Are there any headwinds we should think about in context of the margin improvement magnitude you've had over the last 3 years that should argue for a much lower rate of margin improvement?

[Mark Bertolini, executive]

Thanks, Adam. We have not updated our guidance for 2024. We're in the midst of finishing our operating plan and presenting it to the Board this week. So we'll have more guidance on that later fourth quarter call. But I would say it's too early to make a year-over-year adjustment to where you think our earnings are going. Scott?

[Richard Blackley, executive]

Yes, Adam. Just a couple of thoughts. So one, I appreciate you calling out the trajectory in those metrics because we think that really speaks to the company's strategy and plan, and we are leveraging those same trends and the same set of activities that we've used to drive that trend over the last several years to take us forward into '24. So when we think about the things that we will see in '24, I think that we're expecting -- you talked about either being breakeven on adjusted EBITDA, we're expecting to be profitable on an adjusted EBITDA basis for the total company. We look forward to giving you some more clarity on the exact amounts on the fourth quarter call.

[Adam Ron, analyst]

And then a couple of clarifications. So you talked about risk adjustment related to 2022. And I think one of your major competitors in Florida, according to a CMS report kind of had like a shortfall in the risk adjustment payments they were supposed to make and there was a CMS report saying it was like $200 million in Florida alone. And 2 of your competitors took kind of like reserve accruals assuming that they wouldn't be collecting on those payments. And so I'm wondering if that flows through to you at all and if you've already made an adjustment for that.

[Mark Bertolini, executive]

So just a couple of points, Adam. So in the quarter, we recognized $27 million of risk adjustment benefit related to '23. And with respect to risk adjustment, we are a payer. So we're not exposed to collection of receivables that others in the market are exposed to. So the issues related to some exiting carriers don't apply to us.

[Adam Ron, analyst]

And then my last question is you pointed to the $320 million, I think, of excess capital to subsidiaries. Do you think -- a lot of companies talk about having excess capital, I'm not sure if the goal is to run some amount of excess capital. But given that amount, do you feel comfortable with if the market grows 20%, you grow 20% that you can fund all of your statutory capital outlays through just that excess capital loan? Or do you actually need a substantial portion to come from the parent?

[Mark Bertolini, executive]

Yes, great question. And so as I said in my talking points, we do think that our excess capital positions us to fund the growth next year based on our estimates. And not only do we have excess capital, but that excess capital is backed by our quota share reinsurance. So we don't fund 100% of the growth, and we will continue to use quota share next year, and we'll evaluate our total footprint. I think that there's a likelihood that we increase that modestly in certain states as opposed to taking it down. So I think that, at this point, we feel very comfortable that we have the right level of excess capital to support growth in most of the scenarios that we see.

[Operator]

[Operator Instructions] Your next question comes from the line of Josh Raskin from Nephron Research.

[Joshua Raskin, analyst]

Two questions for me. The first one just on the new +Oscar arrangement with Sanford. Is that -- is there any risk involved there just fees at risk or sort of any risk on the revenue side? And then more importantly, can you speak to your strategy in the small group market. I'm just curious your views on expansion of the partnership with Cigna, how important the ICRA opportunity is longer term and kind of what you're trying to do with the small group market.

[Mark Bertolini, executive]

Josh, on the Sanford Health agreement, there is no risk. All of our Campaign Builder relationships, there are no risk at this point. I don't expect to have any in the future. This is really a program that reaches out and engages patients for medical groups and others. And so we see this being a high margin, high margin product and a good growth product for us. Just the first of many that we'll roll out through +Oscar.On the small group market, we are in the midst of putting together a strategy to approach ICRA, not only in the small group market, but the middle market. We continue to value our relationship with Cigna and that will continue to move forward. And we see the small group market evolving as well as the middle market, and we think that it will be more individualized and digitized. And so we look forward to driving that change. And looking for ultimately partners and distribution to be able to make that work across the country.

[Richard Blackley, executive]

Josh, I'll just add one thing on -- let me just add one thing on C+O. So in the same way that 2023 for our IFP business, we really took a measured approach at trying to drive strong performance. I think in C+O, growth rates there have been slower than what we've seen in the prior year, and that's primarily a focus on making sure that we're disciplined in the way we execute against the marketplace. So continue to be excited about the potential for that business. But I think we've really just taken a measured approach of making sure we can create a business, and we're happy with the outcomes.

[Operator]

And there are no further questions at this time. This concludes today's conference call. Thank you for your participation. You may now disconnect.