Oscar Health, Inc. Q1 FY2021 Earnings Call

Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to Oscar Health's First Quarter 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I would now like to turn it over to Cornelia Miller, Vice President of Corp Dev and Investor Relations to begin the conference.

Thank you, Mike. And good afternoon everyone. Thank you for joining us for our inaugural earnings call, which will focus on our first quarter 2021 earnings results, recent developments in our business and our outlook for the full year 2021. Mario Schlosser, Oscar's Co-Founder and Chief Executive Officer; and Scott Blackley, Oscar's Chief Financial Officer will host this afternoon's call, which can also be accessed through our Investor Relations website. Full details of our results and additional management commentary are available in our earnings release, which can be found on our Investor Relations website. 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 perspective dated March 2, 2021. 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 our first quarter 2021 press release which is available on the company's investor website.

Thank you, Cornelia. I'd like to welcome all of you to our first earnings call. We are thrilled to share with you our strategic position, our first quarter results and our guidance for the full year 2021. I want to start by grounding everyone in our distinctive positioning in the healthcare industry. Since day one, we've set out to be a different kind of health insurer using data and the modern technology stack to make healthcare more affordable and easier to understand for the consumer. We build our own technology to provide a superior experience for members but also to create a platform that would allow us to power more of the healthcare ecosystem around us. And we set out to create a unique brand that people value because it's simple, transparent and relatable. We think of the business as: one, an insurance business that includes our risk-based individual, small employer and Medicare advantage product lines; and two, our +Oscar platform business, where we generate revenue by making our technology stack available to providers and third party payers and enable others to grow risk revenues. Over the past nine years, we have built an impressive business. We delivered 73% year-over-year direct policy premium growth in 2020 and 44% year-over-year direct policy premium growth in the first quarter of 2021 while simultaneously achieving meaningful improvements in our medical loss ratio or MLR and our administrative expense ratio. We can tie those improvements directly to our technology investments and to our growing scale. This insurance business is strengthened by the growth in the individual markets and it's strengthened by our diversification across insurance product lines. Now our superior consumer experience and our performance is powered by +Oscar. The technology platform enables the full suite of interactions with our members and our providers have with us. The strength of our brands and the power of our technology drive industry-leading member engagement and as of 2020, 89% of our members have engaged digitally with Oscar, 47% are monthly active users and 75% of subscribers with medical visits use Oscar tools to search for a new provider. And we saw a 7% reduction in total cost of care for those members that accept our care recommendations when they look for a new provider. Now, let me spend some time on our key business metrics in the first quarter and the positive momentum we are seeing in our business today. We started this year, 2021, with a strong quarter marked by both solid top-line growth and bottom-line growth with direct policy premiums up 44% year-over-year, and 10 points improvement in our combined ratio, the metric that measures the profitability of our insurance companies. Now one click below that, I'd like to say some more detail about the growth and performance of our three different product lines in the insurance business. Our individual business performed well in the first quarter with above market growth during Open Enrollments and Florida, Texas, and California are the states with the largest number of Oscar members. Of note we attracted strong membership growth in these states, even when we were not the lowest price plan reflecting the value of our products and the strength of our brands. Additionally, we feel confident about our growth driven by the Biden administration's special enrollment periods which began on February 15 and will run through August 15. We certainly applaud the support and steps that the administration has taken to expand access to affordable healthcare in the country. Between January and the end of March, we have signed up an additional 50,000 new individual members for Oscar insurance that is growth in line with what the overall market is seeing. We anticipate further growth through the year driven by the enhanced premium tax credits that took effect on April 1 and our focused efforts to grow and retain membership. As you know, we believe that our platform, +Oscar, which we also use to drive our own insurance business enables us to consistently build the best products. That has been a key driver of our growth in our insurance business as well. An example here is Oscar Virtual Primary Care, which is now available in 82 counties and our approach to virtual primary care aligns incentives across Oscar as the insurance company, the providers on the virtual care platform and our members by offering downstream cost savings for those who resume virtual care and attribute themselves to an Oscar virtual primary care physician. Those members who use virtual primary care in 2020 were actually about 10% more likely to stay with Oscar, the insurance company year-over-year, than those who are not using Oscar Virtual Primary Care. Some other early results in Oscar Virtual Primary Care show that these kinds of innovations will continue to help us grow while improving our combined ratio. So, a couple of additional stats on Oscar Virtual Primary Care: the Oscar Medical Group, that's the medical group that delivers the virtual primary care, is now one of the top three largest primary care provider groups by volume of Oscar patients seen in those states. Members with chronic conditions have actually had higher adoption rates than healthy members in using Oscar Virtual Primary Care. Finally, 45% of members using Oscar Virtual Primary Care tell us they did not have a PCP prior to using the virtual offering and an additional 21% were explicitly looking for a new PCP. Thus, we're getting the volume, attracting the right more chronic members into the virtual primary care service and those who have chronic conditions and otherwise didn't have a PCP also have a good chance of attributing themselves to the Oscar Medical Group Physicians. Moving on to Medicare Advantage, our other insurance product line, we had approximately 3,600 members in eight counties at the end of the first quarter of 2021, more than doubling year-over-year. In our MA plans at the core, we enable providers to take risk, enabled by the great member experience in the efficient tech stack that +Oscar platform provides. We're pleased with our performance in Medicare Advantage heading into the year. In this past annual enrollment period, we were the fastest growing HMO plan in the Bronx, and we expect to see continued organic growth from our existing markets. We are also seeing strong engagement rates with our digital tools among our Medicare Advantage members. For example, more than 50% have utilized our care routing to help them find in-network care. Additionally, we have significantly improved our quality measures this year through implementation of new quality programs. As a result of one of these programs, 88% of our New York Medicare Advantage members are adhering to the critical medications prescribed by their physician, which puts us among the top performing Medicare Advantage health plans. We are thrilled to take on an additional 37,000 Medicare Advantage lives through our Health First partnership starting January 1, 2022. The Health First agreement provides validation of our +Oscar platform strategy, particularly in the context of Medicare Advantage. These additional 37,000 members provide us with scale in Medicare Advantage, bringing the total number of MA members using +Oscar to more than 41,000, even before the results of this year's upcoming Annual Enrollment Period in Medicare Advantage. Looking ahead, we expect growth for the Medicare Advantage business to be driven organically through the Oscar Insurance business and additional +Oscar platform via the Medicare Advantage. In small group, our third insurance product line, we are in the early phase for our Cigna + Oscar products, and there’s a lot of runway in front of us. In the first quarter, we successfully launched three new states for the products: California, Connecticut and Arizona, building on the two states we had launched in late 2020. In the seven months since we launched the first states in Cigna + Oscar, we have launched five states overall reflecting our platform's ability to launch rapidly in these kinds of platform relationships. It is early and growth will be driven by existing market cultivation and expansion into new geographies. Now going back to the comprehensive power of our model and our platform, I think the numbers I just went through show that our platform is enabling a better product offering that's powering our growth. And just as importantly, that platform is also enabling us to continue to improve our unit economics. While we're growing the top-line in our insurance business, we also saw these improved unit economics coming through. One of the things that we are most proud of is that we grew our direct policy premiums from $1.3 billion in 2019 to $2.3 billion in 2020. At the same time, we have seen MLR, our medical loss ratio decreased from 87.6% in 2019 to 84.7% in 2020. This wasn't just a COVID improvement, as the same powerful medical loss ratio trends continue into the first quarter of this year, even without the same COVID tailwinds we saw in 2020. In fact, we view our improving MLR performance as a validation that our technology-powered model is working. To give you a few examples from the last few months, we estimate our virtual visits and urgent care visits saved 22 basis points of MLR by reducing unnecessary ER visits during 2020. Another example is that our technology supporting our risk adjustment workflows resulted in above 70 basis points in savings in 2020 in our medical loss ratio. We see the same impacts that are helping us on the medical loss ratio side are also driving an improved admin ratio, which we believe will compound in the years to come. Their tech enhancements have delivered savings directly to our bottom line. For example, building our own claims system has saved us roughly 90 basis points compared to the costs we would incur when using a common industry vendor. Of note, our auto-adjudication rates of claims, the automatic processing of claims in the first quarter is now up to 95%. So in summary on the insurance business, our priority is to deliver continued revenue growth with tightly managed administrative costs and a lower medical loss ratio. That's a simple formula and we're very focused on that and to ensure that this business becomes profitable. Now, I'd like to spend time talking about +Oscar, a key element of our growth strategy. +Oscar is our technology and services platform designed to help healthcare clients grow risk-based revenues with a great member experience. We branded this platform as +Oscar a few weeks ago, building off the organic interest we have historically seen from the markets. We are also busy from the markets, and of course our successful provider-sponsored health plans that we built with the likes of the Cleveland Clinic, ACHN in South Florida, and Montefiore. With the overall U.S. healthcare market shifting towards value-based care, delegation of risk, and virtual care, we believe we have been and are well-positioned to serve these growing segments. Part of what the +Oscar provider clients are looking for is enablement, and we are delivering on that need. For example, we can send data from virtual consultations with attributed members directly into a health system, we have fire integrations, or in the Health First's case, our utilization management and peer routing teams would use these +Oscar tools to help sort of Health First members in an innovative way. The next phase of our growth for this business, the platform business, will come from arrangements with providers looking to take on risk either through provider-sponsored health plans or agreements with payers, particularly in Medicare Advantage, individual, and small employer segments. This represents a near-term addressable market of more than $230 billion of premium revenue, and we expect +Oscar to be a meaningful growth driver for Oscar in the years to come, with long-term target EBITDA margins reaching 20% plus. The +Oscar arrangements with Health First health plan were announced in January, and we are on track to transition approximately 37,000 Medicare Advantage lives and 20,000 individual market lives onto the +Oscar platform for the planning year 2022. With this transition, we estimate that starting in 2022, beyond our own at-risk lives, we will have 72,000 individuals accessing +Oscar or full platform arrangements, even before the results of the upcoming Open Enrollment and Annual Enrollment periods. We continue to believe that our past investments in our technology stack will be critical to our plans to mature and expand +Oscar. Going forward, we expect our investments will be targeted toward the most high-impact areas that will help +Oscar scale. With that, I would like to turn over to Scott Blackley, our CFO, to take us through the numbers.

Thank you, Mario, and good afternoon everyone. I'll begin by walking you through our Q1 financial results, and then I'll provide some guidance for 2021 full-year financial metrics. In first quarter, membership of 542,000 increased 29% year-over-year driven by growth in our individual Medicare Advantage and Cigna + Oscar books of business. Membership growth exceeded our initial expectations as new consumers selected Oscar's innovative plans through the end of open enrollment and into the special enrollment period. First quarter direct and assumed policy premiums increased 44% year-over-year to $823 million driven by higher memberships as well as business mix shifts towards higher premium plans and modest rate increases. On mix specifically, we saw a move from Bronze to Silver plans in our individual book, and we also saw a modest mix benefit from higher Medicare Advantage membership. You can see the block from direct policy premiums to premiums earned on the right side of our earnings presentation chart, which reflects the impact of risk adjustment and re-insurance on our revenues. Premiums earned of $369 million increased 332% year-over-year in the first quarter as we reduced our utilization of quota share reinsurance. I want to provide a brief update on quota share reinsurance. Under our quota share agreement, we seed a percentage of our premiums to our re-insurance partners, which reduces our premiums earned and therefore our risk-based capital requirements. Historically, we've used a higher level of re-insurance for risk management and for optimizing capital. Given our recent IPO and improving profitability, we chose to decrease our utilization of quota share reinsurance for this year. Our overall combined ratio, the sum of our medical loss ratio and insurance company administrative expense ratio, was 94.2% in the quarter, reflecting a consolidated profit across our insurance companies. This metric improved by roughly 1,000 basis points year-over-year demonstrating progress in both our medical loss ratio and our insurance company administrative ratio while proving our innovative model is working. Our medical loss ratio of 74.7% was down 670 basis points year-over-year from the first quarter of 2020, primarily driven by net reserve strengthening in the first quarter of 2020 ahead of COVID. Prior period development largely related to the second half of 2020 also had a favorable impact on the MLR this quarter. Non-COVID utilization was slightly below baseline levels, but was offset by higher than expected COVID treatment and testing costs in the first quarter. COVID costs peaked in January and then declined throughout the quarter. Our first quarter insurance company administrative ratio improved to 98% year-over-year. This metric reflects the administrative expenses that are necessary to run our collective insurance companies. The meaningful year-over-year improvement in the administrative ratio was driven primarily by operating leverage and operating efficiencies, as well as the removal of the health insurer fee. Our adjusted EBITDA loss of $26 million increased by $60 million year-over-year. This improvement is largely attributed to higher underwriting, the repeal of the health insurer fee, and lower quota share impact. These benefits were partially offset by increased administrative costs across the Insureco and Holdco due to higher membership and greater development in our +Oscar platform respectively. To summarize, our first quarter results demonstrate our continued top-line growth and improving profitability across our businesses. We expect that direct and assumed policy premiums for 2021 will be approximately $3.075 billion to $3.175 billion, driven primarily by membership increases. We expect our MLR will be in the range of 84% to 86% for the full year, which is roughly flat with 2020, despite headwinds from continuing COVID costs and a return to baseline utilization levels. We expect the MLR will be lowest in the first quarter and highest in the fourth quarter as individuals meet their deductibles throughout the year. We project our insurance company administrative expense ratio will be between 22.5% and 23.5%. We expect our full year 2021 Insureco combined ratio will be between 107% and 109%. We anticipate a meaningful improvement in our 2021 full-year adjusted EBITDA loss as compared to 2020 with a loss in the range of $300 million – $380 million to $350 million. With that, let me turn the call back over to Mario for some final remarks.

Thank you, Scott. I would like to close with a reiteration of our strategic priorities. One, we are dedicated to growing our insurance business while managing costs. Over the years, we have created a platform that will enable us to push the most innovative and the most engaging products into the markets, and continue to penetrate Medicare Advantage and small markets while growing individual plans. Growth in all three of these product lines will be driven by increasing market share in the current counties and by future market expansion. Two, we are focused on expanding the reach of the +Oscar platform by adding new arrangements with providers within the Bay of risk, particularly in Medicare Advantage, individual and small group. Three, we are fully committed to becoming profitable as our businesses reach scale. This will be driven by our growth, capital reductions in medical costs, and meaningful improvements to our administrative ratios. Given the progress to date and plans for further improvements, we expect our insurance company to be profitable in 2023, posting a combined ratio of less than 100%. Finally, I would like to give a heartfelt thank you to the entire Oscar team. They work tirelessly and with unparalleled compassion. As we like to say with genius and grace at the same time to ensure members have access to the care they need while we all work towards the vision of making healthier life affordable and accessible for all. With that, I will ask the operator to open up the line for questions.

Your first question comes from Stephen Baxter from Wells Fargo.

Hi. Thanks. Good afternoon. Just when we look at your MLR guidance, just wanted to get a little bit of help on how you're thinking about COVID through the balance of the year. So appreciate the comments about Q1, where you were relative to baseline. As we see COVID costs lower through the balance of the year, how should we think about what's your modeling inside that MLR for core utilization against the baseline level?

Yes. Hey, and thanks for your question. We really appreciate you joining us tonight, Steve. As I talked about in our prepared remarks, the MLR this quarter was in line with our expectations as lower utilization this quarter offset higher COVID costs. COVID costs peaked in January and then trended down through the quarter. When I look at our full year MLR, what we're anticipating is that we will continue to see a heightened level of COVID expenses that will work its way through the year, probably in the range of 3% to 4% of MLR. We expect to see that some of the deferred care from 2020 is going to come in as increased utilization in 2021, but we also anticipate that we may see some additional deferred care. So net-net, we would expect utilization levels to be around what I would call baseline levels on a pre-COVID 2019 comparison. We expect COVID to be roughly flat year-over-year, which we think is a good performance given the anticipated headwinds from COVID.

Got it. Thanks, makes sense. And then just wanted to ask about the special enrollment period members. It's early there, but can you talk about what you're seeing there in terms of utilization and how it compares to what you might see for your other new members this year or new members in a prior cycle? Thank you.

Yes. I think that with respect to the members coming in with SEP, so far we've seen no major differences in morbidity. What we're planning for the full year is that we won't see a significant differential between the SEP members from our base population. Of course, there is some risk there.

One additional data point is that it appears that there was a little bit more of a shift towards self-service among these new SEP members. We've seen about 30% more members choosing to do their own research on websites compared to those who used brokers during open enrollment. It might be an indication that it's a different segment of members now entering.

Interesting. Okay. Thank you. I will get back in line if I have a question. Thanks a lot.

Thanks.

Your next question comes from Kevin Fischbeck from Bank of America.

All right. Great. Thanks. I guess a couple of questions. How are you viewing your share of the enrollment coming in the SEP versus your share of overall enrollment? This is the first time we're seeing many people buying insurance with the higher subsidies. Just trying to get a sense if your model is resonating as well now that price isn't as much of a factor or whether it's resonating more or less.

Yes. We look at how much the market is up in SEP compared to the same period last year. Our market share gain we achieved in open enrollment appears to be continuing throughout special enrollments. What we are seeing in the marketplace is a slight shift towards higher premium plans, and it is important that our model delivering a great member experience will prevail. Even before the tax credits, we were not the lowest price plan in 90% of markets, yet we delivered 44% revenue growth in open enrollment.

Okay. That's helpful. And the commentary on how costs have trended through the quarter? Is that largely the same in Medicare and in the small group? Or can you highlight any differences there?

I wouldn't highlight any other differences.

Okay. And then you mentioned that you guys changed your view on reinsurance. Can you explain what that was related to? And how should we think about the use of reinsurance going forward?

With quota share, we've leaned in to that to help capitalize the company's growth and to reduce our cost of capital. After our IPO, we now have the proceeds, so we chose to reduce our utilization of quota share reinsurance for this year. In terms of going forward, we expect to dynamically manage that and are comfortable having a lower percentage in the near term.

Is there a benefit regarding the percentage fee you are paying at the end of the day for quota share, or is that relatively the same as the percentage of premiums?

The structure of the arrangements that we are retaining is roughly similar to before, so not a significant difference there. However, having a stronger view toward profitability gives me more confidence that we don't need to have quite as much quota share.

Perfect. Thank you.

Your next question comes from Carlos Consuegra from Credit Suisse.

Hi, good afternoon guys. My question is, can you provide more color on your Cigna partnership on small businesses and how many lives you are getting from that partnership in 2021 and any outlook you can share in the long-term for that?

We're off to a really good start with the C+O partnership. We've rolled that out in a number of new states and markets. It is included in our premiums that the guidance I gave you, and while we won't provide specifics on membership numbers, we are excited about the partnership and looking forward to expanding it.

Your next question comes from Joshua Raskin from Nephron Research.

Hi, thanks. I appreciate you guys taking the question. I've got two. The first one is just on the rebranding of the +Oscar segment. I'm curious what the catalyst was for that change in branding. Should we read into that, going to be more disclosures around revenue and segment profitability at some point?

The rebranding of +Oscar was driven by bids we have out five clients over the past couple of years. We've seen providers recognize the value we bring to help them shift towards value-based care and risk-based revenue. The second point is we have been organizing it differently, and Meghan Joyce, our COO and Executive Vice President of Platform oversees that business as we build our pipeline.

On the reporting side, at some point, as businesses grow and become more meaningful, we definitely want to do more disclosure. We’re going to start looking at the results of both our core insurance business and the +Oscar platform separately.

Yes, I think that will be helpful. And then just my second question on the 3,600 lives, I understand you don't want to talk too specifically about Cigna, but help us relative to expectations and growth as the year progresses?

We expect that book to be growing and continuing to accelerate in the second half of the year, but we don’t want to project where it will be without more granular detail for now.

Maybe I'll sneak in one last one. Just regarding PDR, $9.5 million; what line did that relate to?

On the PDR, it was really across all of the different product lines.

Your next question comes from Ricky Goldwasser from Morgan Stanley.

Yes, hi, good evening, and congrats on the quarter. My first question is on virtual primary care. Clearly, from the data points you provided on the call, it's having a meaningful impact on member behavior. Can you share what percent of members are on the virtual care offering? And what type of incentives do you offer members to get them to join?

Regarding incentives, we incorporate virtual care into the plan design. As a member, you pick a primary care physician in the Oscar Medical Group, and the care that doctor drives will have costs waived dynamically. It's growing, and we will keep you posted on adoption rates as we report them in future earnings calls.

Thank you. And my next question is regarding tech stack offering. I know you've mentioned that you look to do a couple of deals a year. What does the pipeline look like and how are these conversations with health plans going?

+Oscar is our technology platform designed to help healthcare clients grow risk-based revenues with a great member experience. The growth pipeline includes arrangements for providers looking to be at risk, with the goal of providing efficient plan infrastructure, effective medical cost management, and retention of membership.

Thanks, Ricky.

That was our last question at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.

Thank you very much to everybody on the call. We’re looking forward to continuing the conversation with you. Thank you.