Oscar Health, Inc. Q4 FY2021 Earnings Call

Good afternoon. My name is Rachel and I will be your conference operator today. At this time, I would like to welcome everyone to Oscar Health 2021 Fourth Quarter and Full-Year Earnings Conference Call. Our 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 Corporate Development and Investor Relations, to begin the conference. Ma'am, please go ahead.

Thank you, Rachel, and good afternoon everyone. Thank you for joining us for our Fourth Quarter and year-end earnings call, where we'll discuss our financial results, the benefits of our increasing scale, and reaffirm our 2022 outlook. 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 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 the 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 September 30th, 2021 filed with the SEC and our other filings 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 or reconciliation of these measures to the most directly comparable GAAP measures can be found in our fourth quarter 2021 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, Mario Schlosser.

Good evening everyone, and thank you for joining us. We have created something unique here at Oscar. We entered 2022 with strong tailwinds in our business, and a clear strategy set for the years ahead. Building on our record-breaking growth, we remain focused on scaling operations and driving towards profitability. We are leveraging the technology we have built to reduce medical costs, to provide better clinical outcomes for our members, and to reduce our operating expenses. The ecosystem is changing towards consumerization, towards risk sharing, and towards increased adoption by technology, and we believe we're delivering on a unique business that points to capitalize on the surface. We are well-positioned to deliver on our vision of making healthcare accessible and more affordable for all. We're doing this through both our risk-based business and our plus Oscar client relationships. As you will recall, we shared some preliminary Q4 2021 results, as well as 2022 guidance on January 27th, we will dig deeper into those metrics now. To start, Scott is going to take you through our Q4 and full year 2021 financials, and then I will come back and highlight the key themes for Oscar and 2022. But that's I would like to turn the call over to Scott.

Thank you, Mario, and good afternoon, everyone. Today, I'm going to walk through in more detail the 2021 results and I will reaffirm our 2022 guidance. Before I jump into the numbers, I'll call out three key themes that are emerging in our results. We are seeing strong traction in new members and retaining the majority of our existing ones. We have made great progress on efficiency with our higher scale and there is room for more progress. Lastly, we see opportunities for MLR improvement. Turning to the results, we had a number of one-time items in 2020 that impacted our year-over-year results, the largest of which was a $52 million net risk corridor settlement, which was recognized in the fourth quarter of 2020. We excluded this non-recurring item from all of our 2020 key results, including adjusted EBITDA. Moving to membership, we ended the year with approximately 598 thousand members, an increase of 49% year-over-year, driven by growth in our Individual C-plus and Medicare Advantage segments. Membership growth continued to exceed our expectations throughout the year as consumers continued to select Oscar's plans during the Special Enrollment period, powering our growth, we retained more than 80% of our year-end individual members in 2022. Fourth quarter direct and assumed policy premiums increased 59% year-over-year to $873 million driven by higher membership as well as business mix shifts towards higher-premium Silver plans and modest rate increases. For the full year, direct and assumed policy premiums increased 50% year-over-year to $3.4 billion, largely driven by the same factors. This represents more than 70% annual top-line growth over the past four years. Our enhanced scale drove greater efficiencies across our business in 2021. Specifically, our Q4 2021 insurance company administrative ratio was 24.5%, an improvement of 12 points year-over-year, and our full-year administrative ratio improved 430 basis points year-over-year to 21.8%. Fixed-cost leverage, favorable cost efficiencies, and the elimination of the health insurance fee in 2021 reduced the ratio year-over-year. Scale benefits also positively impacted our newest metric. Our adjusted administrative expense ratio was 34.4% in the quarter and 28.9% for the full year. The full-year metric improved by 560 basis points. Turning to medical costs, our Medical Loss Ratio was 97.9% in the quarter, down 10 points from the fourth quarter of 2020. We recognized $35 million of favorable development in the fourth quarter of '21, driven by lower-than-expected utilization in the third quarter of '21 and some positive prior year development. The full-year MLR of 88.9% was at the low end of our guidance as utilization came in as expected. Compared to 2020, MLR increased 420 basis points year-over-year, largely due to higher net COVID costs and higher SEP growth in 2021, which was partially offset by favorable development. Let me spend a moment on COVID. Overall, net COVID costs were in line with our expectations in the fourth quarter of '21. We continue to see direct COVID costs being partly offset by lower non-COVID utilization. Our overall combined ratio, which is the sum of our Medical Loss Ratio and the insurance company administrative expense ratio was 122.4% in the quarter and 110.7% for the full year. The full-year '21 combined ratio was essentially flat on a year-over-year basis as improvements in administrative efficiencies were offset by higher net COVID costs in the MLR. Our fourth quarter '21 adjusted EBITDA loss was $164 million, which was $52 million better year-over-year. For 2021, it was $430 million, an increase of $27 million year-over-year. In addition to the drivers impacting the MLR and the administrative ratios year-over-year, we had a release of premium deficiency reserves in 2021 versus an increase in 2020. Turning to the balance sheet, we ended the quarter with over $2.5 billion in total company cash and investments, including roughly $740 million of cash and investments at the parent and another $1.8 billion of cash investments at our insurance subsidiaries. A new funding of $305 million that we announced two weeks ago provides us with strong balance sheet resilience as we start the year. We are also reiterating our 2022 guidance, which reflects the increased scale of the business and builds on the momentum we saw last year. This includes an expectation for more than 80% growth at the midpoint in our direct and assumed policy premiums from $6.1 billion to $6.4 billion, as well as 400 basis points of improvement at the midpoint in our MLR to between 84% and 86%. I'd note that our MLR guidance assumes non-core utilization returns to baseline levels this year. We've had a strong track record of delivering high growth while still driving MLR improvement. Our direct policy premiums increased 70% on average annually over the past four years. During that period, we decreased our MLR roughly 8 points, excluding COVID, while our MLR decreased 13 points since 2017 as we effectively absorbed higher membership while reducing medical costs. We're also seeing a step change in our plus Oscar business, and we are expecting $65 million to $70 million of fee-based revenue in 2022. Our positive top-line momentum and increased scale continue to drive meaningful progress on our administrative expense ratios. Our adjusted administrative expense ratio has declined roughly 500 basis points over the past two years, and we're expecting another 300 basis points of improvement in 2022. Importantly, the majority of these costs are in our control. All told for 2022, we are expecting an adjusted EBITDA loss between $380 million and $480 million, which at the midpoint is roughly consistent with 2021 on an absolute basis. On a relative basis, this is roughly half of that of 2021 measured as a percentage of premiums before ceded reinsurance. Our larger scale is a tailwind for reaching our 2023 profitability target for the insurance company. We look forward to discussing this in more detail at our March 25th Investor Day. And with that, let me turn the call over to Mario.

Thank you, Scott. I want to close with a summary of why Oscar is positioned for success in 2022 and beyond. I firmly believe that Oscar is at the forefront of the new way healthcare will be delivered in the U.S. We feel that we have found a model that works in consumer-driven markets that are best served with deep provider partnerships and a frictionless experience. We observe real signs that more of the U.S. healthcare system will move further in this direction in the future. The ACA markets have served as a proving ground for the value of this frictionless experience in healthcare. Our innovative approach, which couples our full-stack technology with industry-leading member engagement, resulted in a powerful Open Enrollment season, where we saw monumental growth and record-high retention rates to the point that today, approximately 1 in 15 ACA members are now served by Oscar. The value of the experience we deliver is also evident in our retention, with just above 80% of our IFP members and 85% of the groups in C+O, with 90% in our latest cohort of +Oscar Medicare Advantage plans staying with us year-over-year. Our fourth-quarter of 2021 net promoter score reached 42, remaining meaningfully higher than the industry average of 3. Our growth to more than 1 million members is driven by our strong brands, our member experience, and our innovation in plan design and product offerings. We now have 40% of our members on our Virtual Primary Care plan offering, which has made the Oscar Medical Group the number one or number two Primary Care Group in every market where it is available. We also recently updated our cost estimator tool, which can price claims in real-time and empowers members with control and choice when it comes to their care decisions. These offerings enable us to achieve growth and improve margins for 2022. We in fact increased our premium rates at the overall book level. During this past open enrollment period for 2022, only 16% of all our new initiations came from markets where Oscar was the lowest-priced plan offering. Currently, only 13% of our total individual membership comes from markets where Oscar is the lowest price offering. We are also successfully bringing our unique model to +Oscar clients. In this platform, we are delivering clear business outcomes for them. For example, we have pointed the platform at different market segments, particularly the small group segments, and within just one year, we have grown from 16,500 to more than 30,000 members, actually doubling our member count. Our broker NPS score in the small business segments is 66, highlighting the value our stakeholders find in our frictionless technology. We continue to build out this +Oscar business and we expect, as Scott said, +Oscar to generate $65 million to $70 million of revenue in 2022. Our platform has clear applications across the healthcare system. For instance, one of our clients realized administrative savings of 20% by leveraging +Oscar. We are encouraged by our negotiations with prospective clients and look forward to sharing more details on this during our upcoming Investor Day. The best illustration of our path forward is the following: when we look across all our markets, we generally see that the lower the Medical Loss Ratio, the higher the net promoter score. In my view, this illustrates where a more consumerized healthcare system is heading and how Oscar aims to deliver on the ambition of making healthcare accessible and affordable. This mission motivates us to execute our business model of consumerizing healthcare profitably. Our current growth provides scale and operating leverage that we will harness to drive improved efficiency in administrative costs and Medical Loss Ratio. Despite nearly doubling our membership, we have swiftly met demand for new members and are seeing higher member satisfaction scores year-over-year. That said, we still have plenty of opportunities to operate more efficiently by leveraging our provider and member engagement initiatives to reduce healthcare costs, which remains our focus. In many ways, we are still a young company with significant improvement opportunities ahead. Over the last several years, we have added experienced healthcare executives to our branch, including most recently, a former Chief Legal Officer, oversight health, and three long-health executives normally for PCR as EVP and Chief Legal Officer, and former Edna CEO, Mark Alenia, as a strategic advisor. Before I close, I want to reiterate our strategic priorities for 2022 and 2023. First, we will continue to drive meaningful growth across our business, both for the insurance company and for +Oscar. Second, we continue to target profitability for the insurance company by 2023. We are committed to achieving overall profitability over time, as we are pleased with how we are reaching scale and gaining more efficiencies from our technology. Finally, I want to thank the Oscar team for working tirelessly during our first year as a public company to serve our members and work towards our mission of making healthier lives affordable and accessible for all. At Oscar, we are powered by our people and I continue to be inspired by the creativity, tenacity, and dedication that Oscar team members show every day. I am very proud of what we can accomplish together as a team. With that, I'll turn the call over to the operator for questions.

Thank you. Given time constraints, please limit yourself to one question and one follow-up. Thank you. Please stand by while we compile the Q&A roster. Your first question comes from the line of Ricky Goldwasser with Morgan Stanley. Sir, your line is open.

Can you just give us some color on any contribution that you had from marketing or sales channels and how that helped you achieve this milestone growth? And then also, as we look ahead to 2023, do you expect to see continued scaling or do you believe that now you have the scale that you need and from now on you're going to focus on margin expansion and MLR improvement opportunities?

Those are great questions. Let me address both and then have Scott comment on the second question as well. In terms of channels, the numbers come through from several different avenues. Generally, we grow in markets where we've got the perfect mix of product design, network quality, and deep provider partnerships, ideally complemented by word-of-mouth referrals. Now, another significant piece is our distribution efforts. We have worked extensively with the broker channel, particularly, and I mentioned earlier the NPS the brokers have when they work with us in our small group business. We have been able to deliver fast turnaround times and help them achieve their enrollment objectives. This mix of product, network, brand, and distribution is essential. As for where we are as a company and what our focus will be, I want to reaffirm our two goals for 2022: one is to continue growing the insurance company and +Oscar, where we believe there's a lot of runway ahead. We are only in half of the CAT markets right now and only in eight states for the SEP offerings. We have significant room for expanding growth with +Oscar partnerships as well, and we will continue to do that. However, we are also focused on ensuring we target profitability for the insurance company next year and, as I said, move toward overall profitability over time. That is where a lot of our internal focus is going right now, both in terms of improving administrative efficiency and cost structures. Scott, would you like to add more?

No, Ricky. I think that on that point, we'll be sharing more information about future plans at our Investor Day in March. So I won't expand on that.

Okay. And as a follow-up, considering the +Oscar, can you talk to the pipeline and the negotiations that you're having? Can you provide insight into the profile of the companies in the +Oscar pipeline?

Yes, there are three major segments we've discussed before. The first segment includes health systems wanting to add more risk and deepen their involvement in the risk markets. We've seen quite a bit of interest in the past 12 months. The second segment features health systems that already have a plan and are participating in the risk business. The third segment consists of mid-sized insurance companies realizing that our model is moving towards providing a more consumer-driven experience. All three segments are actively present in our pipeline, and we are excited about the potential growth in the coming years.

Thank you. The next question comes from the line of Kevin Fischbeck with Bank of America. Your line is open.

Hey, thanks for the question. This is Adam Ronn on for Kevin. We were surprised by the fact that you weren't getting more SG&A leverage given that you grew revenue membership at such a rapid pace. From here, would you expect most of the cost leverage to come from higher revenue on the same SG&A base, or could there be a chance that dollar-wise it could actually decline?

Yeah. Adam, thanks for the question. I want to start by saying that our greater scale we are seeing in 2022 will help us achieve better cost leverage on both our fixed and variable costs going forward. We can negotiate better costs with vendors and optimize our operations, which will also provide opportunities for further fixed-cost leverage heading into next year. We see clear opportunities on the cost side beyond just what increasing revenues would bring.

All right, great. And then on 2023, if exchange subsidies were to expire, would that cause the overall marketplace to shrink, and would you still expect to grow in that environment? If not, would that hurt your ability to drive SG&A leverage and ultimately achieve InsureCo profitability? Are there any offsets, like potentially lower membership meeting better MLR?

Adam, I have a couple of thoughts on this. One is that we have several different business lines that are growing, including our +Oscar deals. We are diversifying our operations which is helpful in times of market fluctuations. I also want to point out that our company has experienced significant changes in regulatory environments over the years, navigating cycles of ACA and its implications. Despite these challenges, we believe that the benefits currently covering over 50 million people are unlikely to revert completely. We are generally optimistic that these subsidies will remain in place or be replaced with similar support under different terms. That said, we remain vigilant about potential changes and will adapt our strategies quickly if needed. The ongoing shift in the healthcare system towards greater consumerization will not stop regardless of what comes our way.

To build on Adam's questions about efficiency and scale, we continue to believe that our company is structured to grow effectively. Regardless of our growth trajectory, we foresee opportunities to create additional leverage within our model. This includes improving both fixed and variable costs. With the scale we anticipate in 2022, we expect to see significant improvements in vendor costs and operational optimizations, even with the growth we are witnessing in 2022.

Great, thanks.

Your next question comes from the line of Stephen Baxter with Wells Fargo. Your line is open.

Yes. Hi. Thank you. Can you talk a little bit about how your breakout of metal tiers for the exchanges is shaping up? I'd love to hear a reminder on where you ended up for 2021 in terms of your bronze and your silver mix, and how that is shaping up for 2022. Any specifics would be very helpful. Also, how are you thinking about your risk adjustment position as you move from 2021 to 2022 and how that could be impacted by product mix changes?

We can start with the metal tier mix, and then Scott can address risk adjustment. We've talked about how we were above the market average for quite some time with a higher volume of Bronze membership, which meant a lower PMPM and consequently higher risk of payout as a result. Part of our journey towards profitability has involved shifting that dial towards higher PMPM membership and more chronically ill members. Over the last three years, we've increased our silver membership from 37% in OE2020 to 65% in OE2022, marking a significant shift towards higher PMPM clients. We're going to continue pursuing this goal while innovating our plan designs across all tiers.

In terms of risk adjustment, we have seen strong performance in that line. Primarily, we have been making policy adjustments on an ongoing basis. I would anticipate that as we move more towards silver, we'll see a slight improvement in risk adjustment as a percentage of direct and assumed premiums. We saw some of that in '21 and would expect to see further improvements in 2022.

Got it. Thanks. And as a quick follow-up to the second question. Just the fee-based revenue you're expecting in 2022, can you provide any insights into how that's expected to ramp up throughout the year? Is it anticipated to be an even contribution? What should we think about the contribution margin of the incremental revenue?

On the fee-based revenue, we started to recognize that revenue with the first contract effective January 1st. That revenue is expected to be relatively stable throughout the year. In our C-plus business, we expect to ramp up and see that fee-based revenue grow throughout the year. Overall, it will be stable but should exhibit growth throughout the year. Regarding margins, we expect that fee-based revenue will contribute positively to the bottom line, starting in the first quarter.

Thank you very much.

Thank you. The next question comes from the line of Jonathan Yong with Credit Suisse. Sir, your line is open.

Thanks for taking my question. I wanted to follow up on the details regarding the percent of silver tier members. Is there something structurally challenging about the bronze mix that makes it more difficult to generate profit there? I know that one of your peers has exited the Bronze tier entirely, so I'm curious what your perspective on that is, especially considering your shift towards silver domination.

Understanding the structure of the Bronze tier is critical. It generally presents a more complex scenario in achieving profitability compared to Silver for several reasons. Primarily, it yields a lower PMPM since it attracts more members who tend not to utilize healthcare as much. This results in two key effects: one is that it leads to poorer risk adjustments, and secondly, those members tend to have higher churn rates—historically around 15% to 20% of the market base. We have developed strategies to mitigate these issues. For example, our Virtual Primary Care initiatives and certain adjustments in deductibles in our Bronze plans have demonstrated valuable results in raising PMPM figures. Overall, even when members are not using healthcare services extensively, engaging with our digital platforms has yielded higher retention rates.

Great. I find your MLR data insightful, especially with the discussion around non-COVID utilization returning to baseline. Is this presumed to be a gradual process, and do you anticipate an increase in deferred care as COVID subsides?

Regarding MLR, for 2022, our assumptions are predicated on the fact that we priced for better margins and covered costs trends. We're expecting a typical, endemic level of COVID-related expenditures. Additionally, as we observe Omicron declining, we anticipate utilization from non-COVID to revert gradually throughout the year. From a year-over-year basis, we expect approximately 400 basis points of MLR improvement, primarily driven by reduced COVID expenditures and other influences. We have not seen significant evidence of a catch-up effect; cancer diagnoses and other health metrics appear stable across 2019, '20, and '21. Our internal data suggests that with a growing membership, retention rates remain consistent, suggesting that the population is not significantly different in terms of healthcare behaviors.

Thank you. The next question comes from the line of Josh Raskin with Nephron Research. Please go ahead.

Thank you. I wanted to discuss consumer engagement, particularly concerning digital engagement metrics. Could you provide insights into demographic differences in engagement and any correlations you've observed regarding digital engagement and both NPS and MLR?

Sure. We track how members who create a digital profile are engaging, and that's reflected in about 80% engagement in the fourth quarter of last year. We're still anticipating around 75%. Moreover, our app engagement numbers are considerably higher than our competitors, indicating a robust level of digital interaction. Age demographic differences are evident; for instance, the 56- to 64-year-old cohort sees about 25% lower digital engagement than younger segments. However, the overall interaction rates remain quite comparable due to more personal assistance interactions from older members. Interestingly, 40% of our conversations with members since the start of the year involved secure messaging via our care guides through mobile and web platforms. Importantly, we consistently see that digitally engaged members yield improved key metrics, including MLR, through their propensity to engage with better healthcare options.

Thanks. I also wanted to clarify the reason for the change in premium deficiency reserves at the end of the year versus the prior quarter.

You're correct. We built PDR in 2020 in anticipation of certain expectations, which influenced the size of our 2021 reserves. In 2021, however, we saw better performance across our book and fewer plans needing reserves. That's the primary reason for observing a lower PDR at the end of 2021. While there still exists a PDR accrual, the change stems from improved operational efficiency.

Thank you. And this will be our last question, coming from Nathan Rich with Goldman Sachs. Please go ahead.

Hi. Good afternoon. Thanks for the question. On the MLR, could you update us on what you've seen in the cohort data and what trends you've observed in MLR for the second and third years of membership? Additionally, is there a target MLR level the business should aim to achieve for InsureCo profitability?

With regard to MLR, we have data showing how performance evolves over time within our member cohorts. Early data indicates a slight dip in MLR during the initial onboarding period, leveling off as members become accustomed to their healthcare routines. We see consistency in member growth, which indicates confidence in our future capabilities to manage our MLR as new members join.

Okay, great. Thank you.

Thank you. This concludes Oscar Health 2021 Fourth Quarter and Full-Year Earnings Conference Call. Thank you for participating, you may now disconnect.