Oscar Health, Inc.

my key observations over the last 128 days. I have met with leaders across the organization and have spent time digging deep into critical aspects of the business, including our 2024 pricing and market position, the areas of our operations where I see opportunities for greater efficiency, and our long-term strategic positioning. Overall, I have been impressed with what I have found. Over our 10-year history, we have invested in our infrastructure and operations. We have made great strides in right-sizing our operations for our scale, but I see opportunities for even more value creation in core functions. For example, we have strong processes in place for risk adjustment, but we can further enhance these capabilities and build even greater degree of efficiency and impact. There has already been material work underway that is yielding a positive result, and I plan to spend even more time in these areas going forward. Our people are our most important asset, and I have spent a fair amount of time assessing our team, getting a better understanding of our strengths and seeing where we can build upon our existing expertise. As we look at the needs of the organization going forward, we are making some leadership changes and bringing in some key hires to enable us to better build and execute on our strategic priorities. First, as we have discussed, Sid Sankaran, our interim CFO, is leaving OSCQR. We are very appreciative of his leadership, and I look forward to continuing to work with him as a member of our board. As we looked to fill the position, we conducted a very thorough external search. However, it became clear throughout the process that we already had the best person to take on that role internally. We are thrilled to share that we are welcoming Scott Blackley back to the role of CFO effective August 14th. Over the last 10 months, Scott has served as our Chief Transformation Officer. spending his time focused on aligning our overall revenues and costs, enhancing our operational efficiency, and building out our campaign builder product. Today, we are on track to hit our key targets, but we believe there is no better person for this next phase of Oscar than a seasoned leader who understands the nuances of our business. As part of this transition, I will be spending more time with our operations team, bringing my decades of experience as an operator to drive continual efficiency and momentum across key functions. We are also bringing on two new hires to round out our leadership bench, an industry veteran to run our corporate strategy and institute our management processes, and a senior leader to lead and ensure we continue to expand our Plus Oscar business. I have had the privilege of working closely with both individuals during my Aetna days, They will be starting in the coming weeks so you will hear more about them during our next earnings call. Let me spend a moment on how we are thinking about the future. I have been embedding critical processes that will enable our long-term strategic planning efforts. As part of this work, I have initiated a new management process, built a framework for our multi-year plan, reviewed our tech roadmap, and met with the board to kick off a cadence of meetings that will focus on succession, long-term strategy, and performance. I plan to spend the rest of the year driving continued performance improvements, laying the groundwork for our multi-year strategy, and accelerating Plus Oscar to expand on our modular approach. With respect to Plus Oscar, we have been seeing positive results with our first campaign builder clients. We currently have 235,000 unique patients active in the tool and have been seeing high engagement rates. We expect to continue our momentum in the second half of 2023 and look forward to bringing more modular components like Campaign Builder to the market. Speaking of our technology, Mario has settled into his role as President of Technology and Chief Technology Officer, and among many other things, has focused on how we can integrate AI into our tech and product roadmaps. As we have shared in the past, our proprietary tech stack allows us to be exceptionally nimble in our response to major technological paradigm shifts like AI. We have identified opportunities to further streamline administrative processes, enhance decision-making capabilities, and ultimately provide a more personalized experience for our approximately 1 million members. We have developed dozens of AI prototypes and have made progress on a number of use cases, and features that we plan to continue rolling out in the coming months. One example is Campaign Builder AI Actions, which leverages large language models to intelligently monitor for signals and deliver relevant interventions that better serve our members and patients' clinical needs. If you are interested in staying up to date on our latest AI insights and developments, please visit HiOscar.com slash AI. As it relates to the long-term strategy, We are working through an initial set of strategic pillars that will guide us through the next few years. First, we want to drive sustainable profitability and expanding margins through market leading and scalable operations. Second, we believe that member engagement is one of our key differentiators and want to continually invest in our member experience. Third, I believe we should look to diversify beyond our current offerings to leverage our member-centric approach to an increasingly more individualized market. And finally, we will continue to externalize our tech platform so that we can power others throughout the healthcare system. I believe these are the right strategic priorities for us over the next several years. We will share a more detailed long-term view of the company with you at an investor conference next year. And with that, I would like to turn the call over to Sid. Sid? Thanks, Mark, and good evening, everyone.

As Mark noted, our second quarter results show the business is performing in line to favorable with our expectations and that we are executing well against our plan. We ended the quarter with just under 1 million members, which was consistent with our pricing and churn assumptions. On the volume side, membership has been slightly ahead of plan. While we have had limited SEP growth this year relative to prior periods, this has been largely offset by Medicaid redeterminations. At this point, Medicaid redeterminations have resumed in all of our states. Early data indicates that the emerging Medicaid redeterminations are healthier than expected and are not exhibiting any anti-selection patterns. I'd also note that we are now eligible to enroll new members in Florida again. As I noted last quarter, our portfolio strategy purposefully and successfully shifted our member banks closer towards the market average. We now have a higher proportion of renewals than any time in our recent history, which has resulted in an older membership that looks very similar to the overall ACA population. Shifting our mix has been part of a deliberate strategy, which has resulted in a lower projected risk transfer as a percent of premiums this year. Our direct and assumed policy premiums were $1.6 billion in the quarter, a modest 3% decrease year over year driven by membership and partially offset by rate increases. Similar to trends we saw last quarter, our premiums before C-degree insurance, which includes the impact of our lower risk transfer, grew 8% year-on-year to $1.5 billion. Turning to medical costs, our medical loss ratio improved 230 basis points year-on-year to 79.9% due to our disciplined pricing actions and total cost of care initiatives. Our overall claims trends have been in line to slightly favorable relative to our pricing expectations for the first half of the year. We are pleased with this trend, and it includes our expected mix shift to members with higher risk scores, as previously noted. Within specific service categories, inpatient is performing in line with our pricing assumptions, outpatient and Rx are slightly higher than expectations, and professionals materially below. Let me focus on risk adjustment for a moment. Historically, we've had a younger and healthier population than the market average and have therefore been a large payer into the risk adjustment program. The final CMS report for last year's risk adjustment was favorable to our expectations, driven by outperformance and value capture initiatives, including a successful pilot application with AI. However, we strengthened our RADV accrual and IB&R, which largely offset the benefit. While we expected a lower risk transfer this year due to our updated member The initial Wakely report for 2023 still came in favorable to our expectations. Given that we are only partway through the year, we have maintained an appropriately cautious approach to our risk adjustment reserve, which we will reevaluate in the coming quarters as we see more data. Switching to administrative costs, our Insurco administrative expense ratio improved 280 basis points year-on-year to 16.7%, driven by distribution optimization, vendor efficiencies, and operating leverage. Driven by the MLR and insure co-admin ratio benefits, our combined ratio improved 500 basis points year-on-year to 96.7%. Our adjusted administrative expense ratio of 19.5% improved 420 basis points year-on-year due to the aforementioned improvements in the insured co-admin ratio, lower hold co-expenses, and higher net investment income. Our strong operating results drove another consecutive quarter of total company profitability with an adjusted EBITDA of $36 million. Our first half 2023 adjusted EBITDA of $87 million is nearly $200 million higher than the same period last year. We are very pleased with our results to date and the momentum we've seen throughout the first half of the year. Shifting to the balance sheet, we ended the second quarter with $3.8 billion of cash and investments, including $250 million of cash and investments at the pound. As a reminder, we expect second quarter cash will be a high watermark for both cash and investment income for the year, as a large working capital benefit from our RA payable wears off next quarter. We expect to pay out the 2022 risk adjustment in August, and our lower projected 2023 risk transfer will continue to build throughout the year. Our capital position remains very strong. Our subsidiaries had approximately $840 million of capital in surplus, including $290 million of excess capital driven by solid operating performance through the first six months of the year. We believe our excess capital positions us well to fund future growth and allows us additional opportunities to optimize our capital position over time. Based on our encouraging first half results, we are making a few updates to our 2023 guidance. We now expect our MLR will be towards the low end of the 82 to 84% range. Our lower MLR and higher investment income is also projected to drive our insurance company adjusted EBITDA to the top end of the 20 to $120 million profit range. Importantly, we anticipate our total company adjusted EBITDA loss will be at the high end of the range or towards a $75 million loss for the year. In summary, our first half results increase our confidence in achieving insurance company profitability this year and lay a great foundation for total company profitability next year. We are very pleased with our progress to date and how we are positioned to execute in the back half of the year. As we look to the future, we believe our disciplined pricing approach, innovative offerings, and industry-leading NPS sets us up well to win for many years to come. Finally, I'd like to say that coming back to an operating role at Oscar has been a wonderful experience and a real privilege. The finance team is in great hands with Scott, and his contributions as Chief Transformation Officer have set us up well for success. As Mark also noted, I'm feeling incredibly optimistic about the company's future and believe we have the right plan, people, and strategy in place to execute on our goals. I look forward to continuing to work with Mark, Scott, and the rest of the management team for my seat on the board. With that, let me turn the call over to Mark for final comments.

Thanks, Sid. In summary, we've had a strong first half of 2023. Our results show that our discipline, focus, and execution are delivering meaningful impact across our business. We are on track with all of our key metrics and expect to achieve insurance company profitability this year And total company adjusted EBITDA profitability in 2024. As we look to the remainder of 2023, we see more tailwinds than headwinds, which we believe positions us well for 2024. We believe that the individual market is the future and that our experience, consumer-focused approach, technology, and capabilities will enable us to continue thriving amidst its dynamic environment. I would like to thank the Oscar employees for their continued dedication and focus. They are the reason why we continue to be in a position to serve our members and make healthcare more affordable, convenient, and accessible for people across the country. With that, I'd like to turn the call over to our operator for the Q&A portion of the call.