Oscar Health, Inc.

You will have the opportunity to ask questions during the Q&A session. And if you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, press star 1 again. Thank you. I will now turn the conference over to Chris Potichar, Vice President of Treasury and Investor Relations.

Good morning, everyone. Thank you for joining us for our third quarter 2024 earnings call. 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.highoscar.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.highoscar.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 period ended June 30, 2024, filed with the Securities and Exchange Commission, and other filings with the SEC, including our quarterly report on Form 10-Q for the quarterly period ended September 30, 2024, 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 earnings press release available on the company's investor relations website at ir.highoscar.com. With that, I would like to turn the call over to our CEO, Mark Berlini.

Good morning. Thank you, Chris, and thank you all for joining us. This morning, Oscar reported positive third quarter results. Our strong results were driven by above-market growth disciplined execution, and improved financial performance. Underlying our third quarter results, we reported revenue of $2.4 billion, a 68% increase year over year. Our medical loss ratio increased 80 basis points to 84.6%, with overall utilization modestly favorable relative to our expectations. We achieved total company-adjusted EBITDA of $312 million year to date, representing a $246 million increase year over year. In addition, we reported a year-to-date profit of $179 million, a $300 million improvement over the same period of last year. Oscar is executing against our plan and driving profitable growth. We remain on track to deliver total company adjusted EBITDA profitability and also expect to achieve net income profitability this year. Our strong momentum sets a solid foundation for 2025 and positions us to achieve at least 20% revenue CAGR and 5% operating margin by 2027. Scott will review our third quarter results in a few moments. First, I will cover key business highlights. Oscar closed the first nine months of 2024 with approximately 1.65 million members, a 68% increase year over year. We added more than 73,000 members in the quarter as SEP additions further decelerated. We continue to expect MLR performance of SEP members to be a tailwind in 2025 as we retain these members and engage them through our technology. Our technology is also further optimizing our operations as we grow. In the quarter, we prototyped an AI tool that extracts data to prevent fraud, waste, and abuse. We also launched AI programs for OSCAR providers to enhance member speed to care, including a clinical intake bot that gathers information for quicker diagnoses, and a feature that pre-populates preventative screening recommendations based on medical history. Our technology continues to enhance our growth and position us to efficiently scale the business. We continue to expect double-digit ACA market growth through the 2025 open enrollment period year over year. The OSCQR experience will now be available to more individuals, families, and businesses in new markets across our 18 state footprint. OSCAR's expansion increases our total addressable lives to approximately 11 million, an increase of 700,000 lives year over year. Our average rate increase is approximately 6%, compared to 7% for the overall market. We priced for trend and expect that our discipline pricing strategy and total cost of care initiatives will drive meaningful margin expansion next year. OSCAR is giving our fast-growing and diverse member base more health insurance choices in this open enrollment. First, we launched a new multi-condition plan that helps members manage diabetes, pulmonary, and cardiovascular diseases together, which can save members 25% or more. The solution builds from our diabetes care plan, which has reduced member costs and is a strong performer in our book. Second, we introduced a tech-first HMO that delivers frictionless experiences. Our technology addresses known pain points for members and providers. like no other HMOs before it. The product gives us an opportunity to access new member segments across markets. Third, we rolled out a new Spanish first solution, Buena Salud, which builds on the success of our Hola Oscar program. The solution prioritizes the preferences of Hispanics and Latinos who make up nearly one-third of our member base, connecting them to a healthcare community that shares their cultural heritage. Finally, we are making OSCQR the carrier of choice for employers through ICRA. Employers can now offer defined contributions to their employees to access OSCQR's suite of products. We are working with a variety of ICRA platforms to transition mid- and large-size employers to the individual market. Industries with large populations of part-time independent and gig workers are prime candidates. In addition, our team is partnering with Stretch Dollar to help small businesses with fewer than 50 employees access the ACA and drive employee sign-ups during open enrollment. Most of this group is either new to insurance or is facing double-digit rate increases on their small group plans. The ACA has created the largest risk pool in the industry with significantly lower cost trend and is an attractive option for businesses of all sizes. In summary, our plan is working. OSCAR is on a clear path to sustainable growth and profitability. Our consistent execution positions us to achieve our 2024 targets. OSCAR has multiple pathways to achieve our long-term strategic goals, and we are becoming a large-scale player. We are maturing our markets, strategically growing in new markets, and attracting new consumer segments. I am confident in our growth. I am confident in the OSCAR team. I am confident about the future of the individual market. OSCAR's continued expansion underscores the value of the ACA for Americans across party lines. We are building a consumer marketplace that meets expectations for choice, quality, and affordability. People want the freedom to buy and use health insurance products tailored to their needs, like they do in every other part of their lives. That is what the OSCAR experience is all about and what our steps toward a larger individual market creates for individuals, families, and businesses. Before I close, I want to thank the OSCQR team for their hard work in kicking off what I am sure will be a successful open enrollment. We look forward to continuing to deliver strong results. I will now turn the call over to Scott. Scott?

Thank you, Mark, and good morning, everyone. Our third quarter and year-to-date results demonstrate consistent, solid execution. We grew membership by 68% year-over-year and reported nearly $312 million of adjusted EBITDA and approximately $179 million of net income year to date. Total revenue increased 68% year-over-year to $2.4 billion in the third quarter, driven by higher membership and year-over-year rate increases. We ended the quarter with approximately 1.65 million members, a strong increase of 68% year-over-year. Membership growth was driven by above-market growth during 2024 open enrollment, strong retention, and SEP member additions. Consistent with our expectations, SEP member additions decelerated in the third quarter. Turning to medical costs, the third quarter medical loss ratio increased by 80 basis points year-over-year to 84.6%, primarily driven by higher SEP membership and a late summer COVID uptick. which were partially offset by favorable prior period development. Overall utilization trends were modestly favorable relative to our expectations. As we have previously stated, SEP members added in the second half of the year carry an in-year MLR headwind primarily due to partial year risk adjustment dynamics and the short window for utilization and risk warning to occur. We continue to expect that the strong growth in SEP membership will be a tailwind to next year. Switching to administrative costs, the third quarter SG&A expense ratio improved by approximately 360 basis points year-over-year to 19%, driven by higher fixed cost leverage and variable cost efficiencies. Our third quarter adjusted EBITDA loss of approximately 12 million, improved by 9 million year-over-year. Our strong operating results to date position us well to deliver on our total company adjusted EBITDA profitability target this year. Shifting the balance sheet, our capital position remains very strong. We ended the third quarter with approximately $3.7 billion of cash and investments, including $260 million of cash and investments at the parent. Through the first nine months of the year, the parent received approximately $130 million of capital distributions from our insurance subsidiaries. As of September 30, 2024, our insurance subsidiaries had approximately $1 billion of capital in surplus, including $575 million of excess capital, which was driven by our strong operating performance. 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. Let me now turn to updates to our 2024 full-year guidance. We are raising our guidance for total revenue by another $200 million to a range of $9.2 billion to $9.3 billion, reflecting higher membership driven by SEP member additions and more favorable lapse rates as compared to our expectations. Our revenue guidance has increased by $900 million since our initial guidance earlier this year. We now expect a medical loss ratio towards the high end of our prior range of 80.5 to 81.5%, driven primarily by the SEP membership risk adjustment dynamics that I mentioned previously. We continue to expect risk adjustment as a percentage of premiums to be largely consistent year-over-year. Switching to SG&A, we now expect an even lower SG&A expense ratio in the range of 19.4% to 19.6%, driven by greater fixed cost leverage. We expect total company adjusted EBITDA to be towards the high end of our range of $160 million to $210 million. And in addition, we expect to achieve net income profitability this year, another important milestone for Oscar. Looking ahead to 2025, we are encouraged by our competitive positioning and expect meaningful margin expansion to be driven by our discipline pricing strategy, total cost of care initiatives, and administrative savings. We look forward to sharing additional details when we provide 2025 guidance during our fourth quarter call. With that, I'll turn the call over to the operator for the Q&A portion of the call.

We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 and your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. We do request to please limit your questions to one question and one follow-up only. And your first question comes from the line of Stephen Baxter with Wells Fargo. Your line is now open.

Hi, thanks. Good morning. I was hoping you could expand a little bit on your competitive positioning for 2025. I think I appreciate you said 6% rate increase in the markets at seven. It does seem like there's a bit of a barbell out there. You have certain players that are pricing closer to flat, maybe due to minimum MLR requirements or something to that nature. And then also some larger players that seem like they're essentially restructuring their book. I'd love if you could characterize how the competitive environment looks now versus how you might've thought it looked, you know, call it three or six months ago. Thanks.

Thanks, Stephen. I would point out first that our average rate increases about 6% versus the market at 7. And we think that the market's largely rational and stable from a pricing standpoint. Again, I would remind people that you have to think about where your pricing is versus you were in prior years. It's a time series that you have to watch. And so we believe everybody's in a good place. There are always a few players in a few markets who chase after share. We don't think that's sustainable. And we believe that the market is going to be a pretty stable market this year. We're confident of that.

Okay. Got it. And just to expand a little bit on the SEP pressure, I appreciate the commentary that the addition decelerated during the quarter. But I guess just to understand why there's more pressure than you might have thought before, are there still more lives in aggregate than you expected? Are there costs higher than you expected, or is the risk adjustment impact worse than you thought for some reason? Just trying to understand that piece of it a little better too. And if you're willing to size the drag from SEP inside your EBITDA guidance, obviously I appreciate that level of insight too.

Thanks. Yeah. Good morning, Steve. So with respect to SEP, obviously we increased our top line revenue guidance, which is reflective of the fact that we've had more SEP additions than what we had anticipated at the beginning of the year and even through the third quarter. The performance of the SEP members has been right on track with what we would expect. Utilization has been on track with our expectations to slightly favorable. You know, the story I think for the quarter is, you know, performance underwriting performance of the book is, you know, strong and what we would have anticipated. And the story is just, we've got more of these members than we entered, uh, had initially expected. You're seeing that both in the top line, as well as in the bottom line performance of the company. Uh, and. You know, we do anticipate that the growth that we've seen is slowing and will slow into the fourth quarter. Um, we've seen that deceleration already occur. And do you want to repeat the second part of your question on adjusted EBITDA?

We'll come back to that one, I guess, later in the call.

Your next question comes from the line of John Ransom with Raymond James. Your line is now open.

Hey, good morning. So my first question before the follow-up, I mean, going back to your analyst day, I mean, you provided a roadmap to 20% CAGR to 2027. Now that the revenue base is higher, should we think about that 20% CAGR coming off the higher revenue base, or is there some adjustment that would kind of put that 27 number Right where you started.

Yeah. Good morning. Look, I think that the long-term guidance, we're not going to make an update to that. I would say that, you know, we are encouraged by our performance year to date in terms of growth. I think that sets us up well to achieve 20% CAGR through 27. We'll give you some more information about 25 when we do the fourth quarter call this year, but I think that, you know, we won't be making any updates to the long-term guidance at this time.

Great. And then my second question is, if we just think about 24, should we apply the higher, you know, you talk about like a 90% MLR for SEP members. Should we attach that to, say, the revenue upside, or is there more revenue that you're generating this year where your MLR would expect to lift and the 25?

I think that if you kind of de-average the MLR and look at our full-year guidance, you know, we do have SEP pressure that's probably outsized compared to you know, what we would anticipate in the future given the amount of Medicaid redetermination that's coming in. So, you know, all things equal, the performance of the core book has been, you know, very much consistent with our expectations this year. So, you know, I would anticipate that absent SEP, you would have seen, you know, a lower MLR in the range of a little over a point for the full year.

Okay, thank you.

Your next question comes from the line of Jessica Tassen with Piper Sandler. Your line is now open.

Hi. Thank you guys for taking the question. I guess I would start with just the guide looks like it implies either medical claims expense is flat PMPM quarter over quarter or that risk adjustment payable shrinks quarter over quarter. I guess can you just help us understand why either of those two things might occur?

um especially if the third quarter um claims expense included some favorable prior period development which which wouldn't repeat in the fourth quarter yeah appreciate that question and you know looking at the implied fourth quarter MLR I would just make a couple points um one I called out some of the the drivers in the third quarter, specifically COVID, which really was a third quarter phenomena. We saw that spike and then conclude before the end of the third quarter, so that won't continue. We expect SEP additions will be considerably lower in the fourth quarter, so we won't have that additional pressure. And then we have, you know, some payment integrity initiatives that we've been executing throughout the year, but are particularly picking up into the fourth quarter. So all those things we would anticipate will result in a, you know, flatter growth in the fourth quarter versus kind of what we've seen historically and are the guideposts for the guidance that we put out.

Got it. And then just can you maybe help us understand how your risk adjustment practice has kind of evolved over the last two years and just, yeah, how the risk adjustment kind of process and also forecasting or just accounting has changed over the last two years to make it more accurate and higher fidelity to the ultimate reconciliation. Thank you.

Yeah, I think on risk adjustment, You know, this is an area where we do have a lot of history and strong modeling practices. You know, risk adjustment is always the most complicated estimate to make in our financial statements because we have to predict both our own risk score as well as the risk score of the market and do that calculation every quarter on a cumulative basis. We do get the weekly information. That helps us a lot with our relative position to the market. But, you know, we use that as an input to our modeling. And I would say that we've had a very consistent methodology for risk adjustment that has served us well. We've been fortunate to have very stable estimates with respect to risk adjustment. But, you know, I always want to caution. It is the most challenging estimate that we have to make. And there is a high level inherent volatility. But, you know, we do have strong practices, consistent practices that we've been following for several years.

Your next question comes from the line of Joshua Raskin with Nephron Research. Your line is now open.

Hi, thanks. First one, I guess I have to ask because it's so top of mind, but the investor day you laid out that path to $2.25 in EPS and you included the assumption that the extended subsidies would indeed sunset. Has there been any change in your thinking around that assumption or maybe any change in the estimated impact or, you know, no changes to the 225?

We haven't made any changes to 25, Josh, but let me add a few points around it. We believe that both parties have an incentive to ensure that the program continues. We're currently at a historic low in the U.S. of below 8% of uninsured. Going the other way would only confound the inflationary impacts that the current race focused around and resulted in President Trump former President Trump being reelected president. And so we believe that they have as much, the Republicans have as much an interest in figuring out subsidies. Now, will it be exactly the same as they are now? Probably not. There may be a change at the top end. There may be shifts within the bands. But when you think about what's required, and that 63% of our membership in the ACA comes from red states, and red states, or them that we know of are already standing up their own state-based exchanges, that A, this is a product that's here to stay, and B, there is every intention to make sure that we don't create an inflationary pressure as a result of pulling back subsidies and pushing people out of healthcare and into uncompensated care, or even worse, having them pull out of pocket and increase their burden at home and being able to afford food, gasoline, and entertainment.

Yeah, that all makes sense. But I guess the base case is still you're assuming the 225 assumes they sunset. If something were to change favorably, I guess you'd revisit that number. So I guess that's helpful. Oh, definitely. Okay. And then the second question, just around new product development, you guys have had a couple of interesting releases. I'm specifically interested in that guided care HMO product, how that works. Are those members expected to be more or less subsidized? And then perhaps any updates on ICHRA and, you know, if you guys have any membership estimates for 2025 as well.

So I would start on the product sets. We, you know, we believe that our rolling out of new products, particularly the HMO product, and the HMO product focus was on how do we make it different than HMOs in the past. And it was about around building using our digital technology to create frictionless care in the eyes of the member. which means we must facilitate the provider getting things like referrals and authorizations through digital means so that there isn't this laborious process of review, rejections, denials, and approvals. So we've taken a hard look at how the product has worked in the past. Bill Benos, A hard look at our own population, and we believe that this frictionless hmo product will be a real opportunity we're launching it in a couple of markets, this year. Bill Benos, It is our intention to use that to get back into California, we need some more work on the California side before we can present it to the regulators there, but the hmo product, we believe, is in a really good place on it raw. We have 3,700 members as of now with open enrollment going on as we speak in a number of markets. So we won't get ahead of ourselves in predicting, but I will remind you that our overall three-year plan had pretty low membership from the standpoint of the total revenue of the company in the plan. So we're not relying on ICRA for growth. We've used or they hit our numbers. We're looking at ECRA as an opportunity that could be a tipping point that could even drive our numbers higher.

Perfect.

Thanks.

Our next question comes from the line of Michael Ha with Baird. Your line is now open.

Thank you. So one of your peers recently mentioned their expectation of HIC industry market growth of mid-single digits. CMS's implementation of that agent of record loss policy sort of impacted their view on industry growth. Also, one of your larger hospitals also mentioned eight to 10% growth assumption. So given that all these expectations are different than your 15% growth assumption for next year, I was wondering if you could discuss your view on 15% growth next year. Is that still your view? How do you reconcile the difference between you and your peers?

So we continue to expect overall ACA market to grow by double digits and open enrollment 25. So that's year over year. And we believe that's driven by continued Medicaid redeterminations and enhanced subsidies. We believe the 15% may now be at the high end of the range, given what CMS has done regarding strengthening of program integrity efforts. So it will have some downward pressure, but we still believe that we'll see double digit growth. in the ACA market overall. And again, we are launching the new markets. We picked up 700,000 new TAM, now to a total of 11 million for all of our markets that we are now open and running for in open enrollment. And again, it's obviously too early to talk about what open enrollment growth will be, but we see that as an added opportunity for us to hit the 20% CAGR year over year going forward.

Michael, just add two quick things. The, you know, because this comparison is open enrollment to open enrollment, you have to consider the fact that we've already seen substantial growth from Medicaid redetermination and, you know, the, just the growth for Medicaid redetermination, I think gets you to mid single digits based on information that CMS has put out. And then on top of that, you've got the fundamentals that are underlying, you know, the, the growth in the market that cannot be explained just by Medicaid redetermination. And we think those, you know, we're seeing those factors happening throughout the year. We would expect those to continue. And that's really the, you know, the impact of the enhanced subsidy, strong distribution that's in place, as well as, you know, a growing gig economy that's bringing, you know, new lives into this marketplace. So we think all of those things, you know, are going to be a continued tailwind through open enrollment.

Great. Thank you very much. At Investor Day, when you laid out your SG&A 16% target for 27, I believe your SG&A assumption for this year is over 100 bits higher at the midpoint than where it is now, expected to finish the year. So just given the pace of operating cost leverage you're experiencing, could you talk about your updated thoughts in SG&A? Are you now tracking much better than, say, 30, 70 in your fixed variable split? Could you talk about the opportunity to outperform 16% by 27? And just given the nature of broker commissions, would it be reasonable to say that sort of a very low point on end state mature DNA profile would be somewhere in the low team? Thank you.

Yeah, Michael, I'll start off and I'll turn it over to Scott. As we look at our underlying operating costs, a key lever that we need to continue to pull to provide an affordable product. And as we look at the next administration, we view that opportunity as creating freedom of choice, affordability, and product variation that allows people to have the plan that they believe they want. And we believe that's consistent with the aims of the incoming administration. So an important part of it. As we look at our SG&A point in time now, we have always more room to grow. And for that kind of color, I'll turn it over to Scott.

Yeah. The improvement in the SG&A ratio that we've seen this year is roughly half of that is coming from fixed cost leverage and half of that is coming from variable cost efficiencies, which I think are, you know, the fact that we're able to actually drive improvements in both dynamics there really speak well to the opportunities for us going forward. You know, fixed cost leverage obviously is a critical part of our arriving at, you know, kind of our long-term destination on on SG&A ratio. And Michael, you said that given kind of the fact that you've got broker expenses, you've got taxes and fees that really represent a very large share of total SG&A, you're probably in the right zip code in terms of You know low to mid teens of you know the the best that that the the efficiency could be I think that's a reasonable estimate, but we still got significant opportunities to. gain fixed cost leverage, but we also are excited about our opportunities to drive down variable costs and a lot of the Ai initiatives and other. initiatives that we're running in-house really speak to making our operating processes more efficient and more scalable. So we think that we're just on the front end of being able to drive continued leverage and performance on the expense side.

And one more point. In 2025, the administration has lowered the exchange fees as well, which has been an enhancement going into the year.

Your next question comes from the line of Adam Ron with Bank of America. Your line is now open.

Hey, thanks for the question. If we try to think about the jumping off point for MLR next year, can you help us size the favorable development this year that won't recur? And aside from that, should we assume that the point of SEP MLR that you mentioned that was dragging this year should come back, or does that take a couple of years?

Yep, so I think that when you think about the MLR, you know, from the perspective in the quarter, we had favorable PPD, we had COVID, we had SEP. James Heiting. COVID was roughly 90 basis points year on a year over year basis in the third quarter. James Heiting. SEP was was higher than you know the impact of SEP was more pronounced than the favorable impact of prior period development, so you know when I look at the quarter. We were at 84.6 on MLR, probably neutralizing those three effects that I just talked about. You're somewhere in the low 83 range in terms of run rate on MLR. And, you know, as I think about the go forward impact of MLR, you know, if we're in the um you know mid 81s for the year given our price position total cost of care you know we think there's opportunities to continue to optimize on mlr obviously there's a what you build into pricing and what you allow to fall to the bottom line those things always will impact the the overall trajectory of mlr but um you know looking at where our mlr this year is given some of the dynamics I just talked about in terms of SEP pressure and the like, you know, we think that we've got a good chance to continue to improve that going forward.

And then to your point about pricing for next year, I think at your investor day, you said you thought that long-term, or at least over the next few years, trend on the exchanges would be at 3% to 5%. I think if I heard you correctly, you priced above that for next year. So curious what's driving that and what's built into that view. Thanks.

Yeah, that that absolutely is what we said. And I would say that, you know, pricing is a market by market phenomena. And so, you know, in some markets we took about 6%, 6% of the average. We think that our pricing allows us to drive margin improvement and also to be competitive. So those are the two things that you're always looking for. But again, that's an average. And in some markets, we had significantly higher price increases and others lower, averaging out to about 6%.

There are no further questions, and that concludes today's conference call. Thank you all for joining. You may now disconnect.