Oscar Health, Inc. Q4 FY2022 Earnings Call

Good afternoon. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to Oscar Health’s 2022 Fourth Quarter and Full Year Earnings Conference 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. I would now like to turn it over to Cornelia Miller, Vice President of Corporate Development and Investor Relations, to begin the conference.

Thank you, Regina, and good evening, everyone. Thank you for joining us for our fourth quarter and year-end 2022 earnings call, where we’ll discuss our execution against our annual plan, our expectations around InsuranceCo profitability, and our path to total co-profitability. Mario Schlosser, Oscar’s Co-Founder and Chief Executive Officer; and Sid Sankaran, 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. 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 30, 2022 filed with the SEC and our other filings with the SEC, including our Annual Report on Form 10-K 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 fourth quarter 2022 press release, which is available on the company’s IR website. With that, I would like to turn the call over to our CEO, Mario Schlosser.

Thank you, Cornelia. Good evening, everyone, and thank you for joining the call today. Before we get to fourth quarter and full year 2022 results, I would like to provide some context on our story to date. For the past five years, we have seen a 75% compound annual growth rate for Direct and Assumed Policy Premiums. We have improved the medical loss ratio by approximately 12 points since 2017. Our Net Promoter Score has increased more than 20 points during the same time period. Our members were the first to get access to free virtual urgent care. Our $3 drug list has made medications more affordable for them, and our $0 virtual primary care medical group has been helping more of our members get necessary preventative care. Fast forward to today, and the fourth quarter capped off a transformative year for the company. We have talked a lot about how 2022 was a year of monumental growth for the business. We nearly doubled membership and crossed the 1 million member milestone, and while that is impressive, what’s more impressive for us is how we managed that growth. We knew that heading into 2022, the step change in membership required us to put all of our focus on operating at scale and that our technology, operations, and people would be under pressure to deliver our target in medical loss ratio and expense ratios. To meet these challenges, we organized the company around three key objectives: medical cost management, sculpting the portfolio, and administrative cost management. As our year-end results show, we were able to execute against the plan we set out for the business in these areas, and we applied our learnings gathered throughout the year to position the company for profitability. Let’s first take a look at medical cost management. Despite doubling in size and welcoming a large number of new members that we knew little about, we reduced the medical loss ratio by 360 basis points hitting 85% for 2022. We applied the best of our technology to our efforts, and we also spent the year implementing and scaling traditional managed care processes in medical and social management. We realigned operations against a more localized operating model to respond to regional trends more quickly, and we developed targeted medical cost mitigation strategies. We were able to drive higher utilization of less invasive, more cost-effective procedures and reduce hospital readmission rates supported by changes to medical policies and thoughtful case management. We also applied our member engagements to medical cost management utilizing our campaign builder capabilities. The team developed campaigns and strategies to ensure our members seek the highest quality and lowest cost options for site of care and for drugs. We believe that our member engagement model allowed us to make further progress in bringing down medical costs in 2022, and we’re very excited about what else we will deploy in the course of 2023. Regarding our portfolio sculpting, heading into 2023, we prioritized margin overgrowth in our IFP strategy and we took high-single digit rate increases on average across the book. Our localized operating model has also enabled us to restructure our networks in certain markets, reduce unit costs, and drive improved quality with our provider partners. We continue to sculpt our portfolio both in terms of plan designs and markets to ensure we allocate our capital in places we view as most attractive and sustainable. As the third lever, we tackled the challenges of bringing down our administrative costs. Throughout 2022, we took a disciplined approach to expense management, which improved our insurance company administrative ratio by 125 basis points year-over-year. This work, which included leveraging our technology to define fixed administrative cost efficiencies across our customer service operations, as well as increasing automation throughout our clinical operations, has set us up very well for 2023. As part of this efficiency work, we also moderated the acquisition costs of our 2023 IFP book and took other decisive cost actions that positioned us to enter the year with a lower cost base. Overall, coming into 2023, on the cost and margin side, we have already completed much of the work needed to achieve our 2023 targets, and with a greater portion of our book consisting of returning members than ever before in our history, we have better visibility into our member population and the related cost structure. In summary, we proved our technology can scale, and there continue to be opportunities for efficiency going forward. We also did all of this while delivering an all-time high Net Promoter Score of now 47. In 2023, we expect the majority of our tech resources will be focused on impacting insurance company operating results near-term, which means less focus on growing the +Oscar platform revenue. That being said, we have continued to develop our first +Oscar standalone module campaign builder, and during this quarter, we signed our first campaign builder deal with a South Florida-based MSO, which is leveraging the tool to power their value-based care operations, drive primary care utilization, and manage medical expenses. We intend to grow campaign builder at a thoughtful pace with a modest rollout in 2023 as we build our execution capabilities and ensure successful deployments with our initial clients. As we think about +Oscar long-term, we believe that focusing our tech on increasing efficiency and profitability in our insurance business will translate to even better capabilities we can bring to the market. And before I hand it over to Sid, I want to talk about what we like to call internally the Oscar magic, our member engagements. This part of our company continued to be a differentiator for us in 2022. We maintained high levels of digital engagement, and as our membership has grown and changed from a demographics perspective, we have added channels to increase engagement with members who have historically been harder to reach. For example, in an SMS campaign we launched to drive active renewals and autopay enablements, that campaign saw about a 33% response rate compared to about a 2% rate you would get from a similar email campaign targeting similarly non-digitally engaged members. Nearly 78% of those members who responded “yes” to keeping their plan ultimately renewed into their same plan, and nearly 10% activated autopay. We made exciting strides towards leveraging this member engagement engine with our provider partners as well. We told you that we are investing to bring our tools to our providers, and we’ve begun to use our real-time data more and more to deepen our provider relationships, working with the most closely aligned provider partners we have. We are co-creating campaigns to improve outcomes and lower total costs of care. For example, we spent 2022 piloting campaigns focused on annual wellness visits, closing these gaps, and other care quality campaigns. In fact, you can see a demo of this technology on our IR site, ir.hioscar.com. We are excited to scale these campaigns with nuance into our 2023 efforts as well. There are many successes we think in 2022, which gives us strong momentum into 2023 across the business. We believe we are better positioned than ever before to achieve profitability based on disciplined execution in 2022. We’ve got a very clear roadmap for the organization to achieve our goals for the year, which is profitability in our insurance business in 2023 and total company profitability in 2024. We believe we have enough cash to get us there, and Sid will walk you through the plan for this in his part of the prepared remarks. Fundamentally, Oscar is a growth company, and we are positioned well in environments where consumers have increasingly greater choice in buying power. The ACA continues to be the fastest-growing health insurance segment, projected to hit 20 million enrollees in the near term, and we see shifts to programs like individual coverage health reimbursement arrangements as another signal that the marketplace offers unique value for individuals and increasingly also for employers. With these market tailwinds, we are excited to return to top-line growth in 2024. Now with that, let me get Sid on here, and he will walk you through the numbers in more detail.

Thanks, Mario, and good evening, everyone. It’s great to be back, and I’ve enjoyed reconnecting with all of you again. Our full year 2022 results were largely consistent with our expectations and guidance range. We believe last year’s performance offers a solid baseline for our 2023 targets, which I’ll discuss in greater detail in a few moments. Turning to the results, we ended the year with nearly 1.2 million members, reflecting growth of 93% year-on-year. A robust membership growth also drove a direct and assumed policy premium significantly higher. Full year direct and assumed policy premiums increased 99% to $6.8 billion driven by membership, mix shifts to higher premium plans, rate increases, as well as improved lapse rates and higher special enrollment period growth rates in the second half of 2022. Even with our sizable membership growth, our 2022 medical loss ratio improved 360 basis points year-on-year to 85.3%, primarily driven by lower COVID costs, mix and pricing, as well as execution on our total cost of care program. Excluding negative prior year development of $28 million in the calendar year, the medical loss ratio would have been 84.8%. Our fourth quarter medical loss ratio of 91.6% improved 630 basis points year-on-year, largely driven by the same factors as the annual medical loss ratio. However, the quarter includes $13 million of favorable intra-year development driven by favorable reserving trends relative to our pricing assumptions, partially offset by a more cautious view on 2022 risk adjustment given our growth. Overall, claims trends have been favorable in total, with inpatient and professional utilization coming in better than expected, offset in part by higher RX spend than projected. Switching to our administrative costs, our InsureCo administrative expense ratio improved 125 basis points year-on-year to 20.6%, driven by operating leverage benefits and administrative efficiencies from our enhanced scale, partially offset by higher distribution expenses. As we’ll discuss in guidance, we see 2022 as the high watermark for distribution expenses. Our fourth quarter InsureCo admin ratio of 22.3% improved 220 basis points year-on-year due to the items I just mentioned. Our overall combined ratio, the sum of our medical loss ratio and administrative ratio was 105.8% for the full year 2022, an improvement of 490 basis points year-on-year driven by the aforementioned improvements in each of the individual metrics. We believe our nearly five points of margin improvement, coupled with top-line growth, demonstrates the power and sustainability of Oscar’s model through disciplined execution of our business plan. Our adjusted admin expense ratio, which includes expenses in our holding company, was 24.6% in 2022, an improvement of 440 basis points year-on-year, primarily due to operating leverage and scale efficiencies. For the fourth quarter, our adjusted admin expense ratio was 26%, an improvement of 840 basis points year-on-year. Moving to our overall company profitability, our adjusted EBITDA loss was $462 million for the full year 2022, which was in line with our initial guidance range for the full year. This was better than our most recent expectation due to higher than expected net investment income in the fourth quarter, as well as admin savings to right size our cost as we tightly manage headcount ahead of 2023. The full year adjusted EBITDA loss reflects a 7-point year-over-year improvement as a percentage of premiums before quota share reinsurance. Our fourth quarter adjusted EBITDA loss was $190 million, an increase of $26 million year-on-year, which was largely driven by higher premiums. The fourth quarter adjusted EBITDA reflects a 9-point year-on-year improvement as a percentage of premiums before ceded reinsurance. Turning to the balance sheet, we ended the year with $3.2 billion of total cash and investments, including $340 million of cash and investments at the parent company. Our subsidiaries ended the year with approximately $700 million of capital and surplus, which exceeded our internal targets by $170 million. Note, we also set our internal capital targets at a higher threshold than regulatory minimums in order to ensure we maintain a strong balance sheet. As we look to 2023, we intend to continue to be disciplined and are already executing on our plan to improve core margins and profitability. This is reflected in our 2023 guidance, which we’ll discuss today. Our outlook for the year reflects largely stable premiums year-on-year, with continued meaningful combined ratio and adjusted EBITDA improvements driven by targeted actions the company has taken and will continue to implement to reach profitability. Specifically, we expect our direct and assumed policy premiums to be in the range of $6.4 billion to $6.6 billion. This is consistent with our prior commentary, but our membership will be largely flat between 2022 and 2023. As a reminder, we proactively worked with regulators to pause accepting new members in Florida, and therefore we do not expect new enrollments in that state in the first half of the year. We expect to begin receiving Medicaid redetermination members in the rest of our states beginning early in the second quarter. Overall, we’re projecting lower special enrollment period members as a portion of the overall book this year. This should be favorable to our medical loss ratio; however, it will be a net headwind to premiums. Our expected medical loss ratio range of 82% to 84% reflects over 200 basis points of improvement at the midpoint versus last year, driven by rate increases, mix shifts, and total cost of care management programs. We are renegotiating our PBM contract, which will result in meaningful savings beginning in 2023, as an example of one of our cost of care initiatives. We do expect our medical loss ratio seasonality to look similar to last year, albeit with a more modest slope. Switching to admin, we expect our InsureCo admin ratio to be 17% to 18%, reflecting an improvement of 300 basis points year-on-year at the midpoint, primarily due to the identified cost savings that we have discussed previously. These savings largely consist of lower distribution expenses and vendor savings achieved by our increased scale. Importantly, the majority of these savings have already been achieved, and as a result, we are turning our attention to generating further efficiencies for 2023 and beyond. We expect our admin seasonality to be different from last year, with the first quarter being highest and declining gradually throughout the year, with third and fourth quarter ratios being fairly similar. We would call out that for 2023, we are targeting a combined ratio at or less than 100%. We are entirely focused on execution here as this remains the primary metric we use to assess core business margins and profitability. In order to better allow investors to understand the profitability dynamics of our statutory insurance subsidiaries and their underlying capital profile, we’re introducing a new metric, our InsureCo adjusted EBITDA, which includes the combined ratio, investment income, and the cost of our quota share reinsurance. We believe this metric will allow investors to better understand the capital and cash flow relationship between our insurance subsidiaries and our parent company. Unlike our competitors, given our startup nature, Oscar has historically not had meaningful investment yield on our portfolio relative to market competitors who’ve had longer duration portfolios yielding 3% or more. With the return to a more normal interest rate environment, investment income is expected to have a significantly positive impact on the InsureCo profitability in 2023. We ended 2022 with $2.9 billion of cash in investments at our subsidiaries. For 2023, we are estimating that our cash and investment portfolio will yield 3.5%, with a range of 3% to 4% for the year depending on Federal actions and the shape of the yield curve. With respect to our quota share reinsurance agreements, we have restructured our quota share contracts to maintain a similar ceding percentage year-on-year while lowering the cost. I’d also note that our new quota share contracts require deposit accounting upon their January 1 effective date, so you’ll see a diminutive amount reflected in reinsurance premium ceded going forward. Incorporating all these items, we’re projecting solid earnings and capital positions for our insurance company. For 2023, we project our insurance company adjusted EBITDA will be between $20 million to $120 million, resulting in profitability across the entities. Switching to our total company, we projected an adjusted admin expense ratio range of 20.5% to 21.5%, an improvement of 360 basis points year-on-year at the midpoint, largely due to cost savings previously outlined. In 2022, admin services revenue was $61 million, and we generated a modest bottom-line margin. For 2023, we agreed to terminate the Health First arrangement and will receive no further fee income while incurring a modest amount of transition-related costs. For our ongoing +Oscar arrangements, we expect fees of approximately $20 million to $25 million generating a positive contribution to our results in 2023. Our projected adjusted EBITDA loss range for 2023 is $175 million to $75 million, reflecting an improvement of $335 million year-on-year at the midpoint, largely driven by improvements in our core underwriting margins as well as meaningfully higher investment income with rising interest rates. The midpoint of guidance reflects approximately five points improvement in the adjusted EBITDA loss as a percentage of premiums before ceded reinsurance year-on-year. We enter the year with a very strong balance sheet, including $340 million of cash and investments at the parent level. In our base case, we believe we have sufficient cash and liquidity to fund the company to total profitability, which is expected next year. Specifically, we expect limited capital contributions to the insurance subsidiaries in 2023 with potential upside in our free cash flow driven by our insurance company adjusted EBITDA profitability. This is a substantial improvement from 2022, where we infused $420 million into our subsidiaries due to growth and net losses. As a reminder, as our insurance subsidiaries become profitable, there will be upstream tax earned payments from the subsidiaries to our holding company. We do not expect to be a cash taxpayer at the holding company for the foreseeable future given our sizable deferred tax asset. Given our substantial progress on insurance company profitability, our holding company costs net of revenue are now the primary use of funds for the company. As we’ve said previously, we are targeting total company profitability in 2024. With that, let me turn it back to Mario for his closing remarks.

I will close out with some very simple thoughts. The risk equation for a company has changed dramatically towards the positive. We are projecting full company profitability next year, and we expect we will have enough cash to get us there. We’ve done the work to bring down our medical loss ratio in line with other industry incumbents. Our administrative costs are coming down in line with our plan. We took on membership this year at sustainable margins that set us up for the future. We have differentiated products in the fastest-growing insurance markets in the country, making us attractive to both brokers and members alike. Having our own infrastructure that has proven scalable, and our ability to engage with members are massive differentiators. We are builders, and I find it personally very exciting to continue to build on top of this infrastructure. There is ample runway to get even more automated and efficient, and that is where we will continue to focus in the coming year. So the 2023 plan is straightforward. We know what needs to be done; we simply need to continue on the path we are on. Before I close, I’d like to thank the Oscar employees who’ve been so committed to building on the momentum of the past few years. We have great ambition and an even greater team. And with that, let’s turn it over to the operator for the Q&A portion of the call.

Our first question will come from the line of Michael Ha with Morgan Stanley. Please go ahead.

Hi, thank you. I understand this year you’re targeting lower distribution expenses and vendor savings from increased scale. I think you have mentioned that the majority of these savings were already achieved, and now you’re focused on further efficiencies. I was wondering if you could talk about what these efficiencies are? How that could yield additional savings, and whether that presents an opportunity for upside to earnings? Also, on Health First, I think you mentioned incurring a modest amount of transition-related costs. How should we think about the magnitude of those stranded costs?

Yes, Michael. Let me take the first question and then Sid can talk about the second part. I will point you back to the three levers we tackled in 2022 across admin, medical cost management, and portfolio sculpting in all three of these, we have, I think, way more room to go. Starting with the admin side, we renegotiated things like chart collection vendor contracts, essentially every medical management vendor we have contracts with, and PBM vendor contracts. The additional savings lie in further automation across our claims operation, eligibility and billing operation, and customer service operations. These functions are now nicely scaled, and I think we know what we’re doing now from both the point of view of minimizing errors and from being proactive in these areas. Across the board, we can still do more as we scale and as we experience high membership growth, automating more of these types of conversations. An example from last year on the customer service side is that we’re sending many more conversations through automated systems that can interface directly with our real-time systems regarding eligibility, claims status, etc. Sid, maybe you can address the second question about transition costs.

Yes, sure. Thanks, Michael. I appreciate the question. With respect to the runoff expenses, there are some modest expenses related to performing runoff services in 2023. We wouldn’t expect them to occur in 2024, and we wouldn’t really comment beyond that.

Got it. Thank you. If I could squeeze one more in, if I’m not mistaken, Florida is one of the most capital-intensive states. I think the statutory cap requirements are something like 25% for the first five years, but I believe Oscar first entered Florida back in 2019. So presumably, you’d be nearing the end of that, so you might get a decent chunk of cash back. Is that true? And if so, what would the timeline be on receiving that cash, and would your statutory capital requirements drop to 10% or 15% thereafter?

Well, Michael, again, thank you for that. It’s a great question. Yes, your read of the statutory regulations is consistent with ours, and those startup seasoning requirements would effectively run through the end of this year. Beyond that, we believe, as Mario said, we have a lot of potential for the company to grow organically while becoming more capital-efficient in some of our structures. So we’d of course evaluate that, but I think you’re absolutely right to call out that we would see that as an upside potentially.

Our next question will come from the line of Jonathan Yong with Credit Suisse. Please go ahead.

Hey, thanks for taking my question. I just want to hit on redeterminations and how you’re thinking about the risk pool of the members that you may end up recapturing. Do you have an assumption of how many members you think you will actually gain from redeterminations, and how are you thinking about their MLR coming onto your books later in the year? Thanks.

Yes, Jonathan, maybe I’ll take the first part, Sid, if you want to add anything feel free. So two levers there, of course. One is premium growth; the other one is medical costs. Overall, on both of these, we have made assumptions regarding redeterminations in the estimates in pricing, and also in the guidance for 2023. I would not consider these assumptions material to either premiums or medical loss ratio. Generally, I would say that anything that increases the ACA market size is a great thing for us. We’ll have side effects in making the market even more stable and attractive. We expect, like everybody else, that redeterminations will start in April. It's still not clear over what timeframe they will come in; the states have not given clear guidance. Some states will go population-based, while others will do it on a time basis. When we look at when those members roll into the Medicaid roles, it seems quite linear over each month of the year. So we won't see a potential bulk coming in any particular month. Texas has said they think it’ll happen in six to nine months, while Florida said it will take about twelve months. So there are quite different expectations in different states. Regarding Florida, as Sid mentioned, we do not expect to participate in the first six months of the year due to the membership limitation in place. Therefore, when we do participate in the medical loss ratio side, we share the observation that the acuity of these numbers will likely be higher than the risks already present in the ACA. Clearly, members who come in through special enrollments will have that headwind of partially risk adjustments. However, as we reiterated throughout the 2022 results, members who enroll through special enrollment periods tend to resemble the rest of our membership in the year following their enrollment. Overall, long-term, this is great for the markets; short-term, it may present medical loss ratio headwinds. That said, I'd emphasize that both on the growth and medical loss ratio sides, these impacts are quite likely immaterial to our 2023 projections.

Okay, great. And then just on some of the automation that you were talking about to improve your operating efficiency, would that require any further investments that would be needed for 2023, or does your current capital planning account for all that, meaning there’s no need for extra investments? Thanks.

No extra investments needed; our current capital planning is based on us essentially following the plan we laid out. Everything Sid talked about in terms of base case cash plan InsureCo profitability in 2023 and total profitability in 2024 is all very consistent with us. We really expect, in fact, to be at the tail end of a series of multi-year investments. For example, the claim system we’ve been building internally is really at the end of its investment cycle. That system is already answering questions related to eligibility, claims, and other various provider- and member-facing service lines; and look more automation, I think we can implement in all of these aspects.

Your next question comes from the line of Gary Taylor with Cowen. Please go ahead.

Hi, good evening. A couple of questions. First, I just wanted to start with if you could tell us where you see enrollment landing at 1Q and year-end. I didn’t see any enrollment guidance in the release.

Yes, I think we obviously haven’t explicitly called that out in the guidance. I think with respect to membership, we expect membership to be roughly stable year-on-year. It’s important to point out that we are projecting lower overall special enrollment period members as a portion of the overall book. As a reminder, this will result in lower member months year-on-year, which is favorable to the medical loss ratio but creates a headwind to premiums.

But should we think that the business has some normal attrition from the first quarter through the year, and would redetermination sort of backfill that and enrollments more stable? Does that make sense?

Yes. If you think of the business, there is some normal course churn in the book, which is effectively lapses offset by initiations. The key point we want to highlight is that we’d expect new initiations this year to be lower than they would’ve been historically, because special enrollment periods will make up a smaller proportion of the book this year.

Yes, we generally see that whatever market share trends we have in open enrollments flow through the special enrollments as well, and that’s how we set up the guidance.

And then my second question was just regarding risk adjustment. I agree; I think doubling your enrollment premium year-over-year and bringing MLR down is actually impressive performance to be proud of for sure. If, when we do the final settlement of risk adjustment next June, what you’ve accrued there proves to be sound. I just wanted to give you a chance to address where you think you’re at for year-end and how it will settle up in June.

Yes, I mean, I think Gary, you’re highlighting a key point. Obviously, the final date will be out in June, and we’ll be able to make final judgments at that point. Given the dynamics in the marketplace, we thought it would be prudent to be cautious. In particular, in the second half of the year, you saw certain carrier exits in specific markets, including in Florida. Because of this, we thought it prudent to overlay some caution on risk adjustment as compared to previous years. That said, we always flag that as a risk, and we think we’ve been thoughtful about it.

One more quick question if I could; what was the 2022 InsureCo EBITDA under the definition you’re using going forward?

Yes. I think at this point, just for accounting purposes, we haven’t disclosed that, but as we think about financial disclosures going forward, we’ll consider what could be helpful to analysts and investors. I think you have good insight into the holding company, so if you’re trying to estimate that, think about the holding company costs, and you’re effectively reverse engineering that amount.

Your next question comes from the line of Kevin Fischbeck with Bank of America. Please go ahead.

Great. Thanks. I just wanted to make sure I understood what you were trying to say about investment income. It sounds like that’s a bigger tailwind than you thought it was going to be. Are you saying that’s part of how you’re getting to breakeven this year? Or like even excluding that, you would’ve been comfortable with the breakeven dynamic? Or is this something you think the Street didn’t catch onto?

Well, I think I’d reiterate a couple of points. As we think about our core underwriting profit, we’re targeting a combined ratio of less than a 100. At the core, that’s what we want to measure the business against. The second subtle point is that external analysts and investors try to do pure comparisons of ultimately gross margins, net margins, and how that compares to peers. Our investment income has historically been minimal, while our competitors have featured 3% investment yields. Now that interest rates have normalized, you’ll be able to include investment income in your model for Oscar similar to what you would use for other competitors. We think that’ll be about 3.5% this year in our base case, with a range of 3% to 4%. So that’s a great normalizer for us now when looking at our results versus those of other companies.

All right. Great. And then I guess you guys mentioned a $20 million size for the exchanges over time. That’s a pretty big growth rate from where we are this year, but this year membership is flat when the industry grew quite well because of all the actions you mentioned earlier. Are we done with those actions? Should we start to think about you guys growing in line or faster than the industry as you make that transition to final profitability? Or are there still things we should think about that mean you won’t grow quite as fast as the industry for another year or two?

Hey Kevin, so you’re right; we have a long-term goal for growth that we’re not moving away from. I think we have a lot of growth potential stored up in the company. This would have come through more in last enrollment had we not taken some of the actions we discussed. Overall, the market will have the savings we mentioned, and I truly believe that our long-term growth target means we will outgrow the market. That will continue to be our goal. We are also in the process of thinking through and working towards service area expansions for next year. So we’re back to figuring out where we can best grow with the most economical sustainable margin profile. Even as Sid mentioned, we still have a significant amount of regulatory reserve capital to grow in various areas. So that’s something we’ll tackle for next year. Additionally, we will continue to work on portfolio sculpting, looking closely at areas where we don’t see sustainable businesses.

Your next question will come from the line of Josh Raskin with Nephron Research. Please go ahead.

Hi, thanks. Good evening. I appreciate you taking the question. The midpoint of how you’ve set your MLR guidance implies an MLR down roughly 230 basis points year-over-year. How much of that is reflective of pricing actions that you took, and how much of that is due to medical management techniques to improve profitability relative to overall trends? I ask this in light of needing to sort of turn off or cap the membership in Florida to ensure there’s no mismatch there.

Yes. I think, Josh, it’s great to hear from you. I don’t believe there’s any mismatch. Mario mentioned rate increases in the high single digits, which we view as exceeding the trend. Of course, disciplined pricing across our markets has been a key element of our business plan. This year, we traded off profitability for growth. Secondly, there are real dollars embedded in the MLR savings, such as the PBM contract I mentioned. Renegotiating that, along with the rate increase above trend, is pushing us to our desired levels on the MLR side.

Got you. And then it looks like guidance implies about $195 million of corporate costs or parent-level overhead. What was that number in 2022, and how should we be thinking about that moving post-2023?

Yes. I think that answer won’t surprise you; it is down. As we look at that, we’re focused on expense management when decomposing our performance relative to peers. Oscar has made really meaningful progress on MLR, and I appreciate the great questions and comments you’ve raised today. Clearly, what you’ve heard from Mario and myself, and even the rest of the management team, is that we are dedicated to continue improving our operating leverage as you model the company forward.

And I can’t believe we made it to this point in the call without a utilization question for this current quarter. The medical loss ratio came in a little better than we were looking for. I don’t know if there were any prior period reserve developments relating to the current year. But was there anything else you would point out in terms of medical loss ratio trends for the quarter?

Nothing in particular for the quarter. Looking at the year, inpatient and professional utilization, as I mentioned, came in better than expected. RX savings was greater than we projected in terms of pricing. So there’s been a lot of focus on our total cost of care around PBM and drug spend, which is why we’ve highlighted the other element of renegotiating the PBM contract, which we believe will positively affect our results as we move forward.

Our next question will come from the line of Nathan Rich with Goldman Sachs. Please go ahead.

Great, thanks for the questions. Maybe first, just building on the medical loss ratio comments from the last question. I’d be curious to get your view longer-term on where you think MLR needs to be to reach the profitability path that you laid out for the business. Also, as you look to potentially return to growth, would you expect to keep MLR either in the low 80s or continue to improve it while also growing membership?

Yes, as we sit here today, we’re proud of the progress we’ve made on MLR. Moving forward, we would want to target it below 80%. Achieving this requires further work on pricing for some margin expansion. Additionally, our total cost of care savings program has demonstrated real benefits as we collaborate with our actuaries. A significant part of our resources is focused here on all the aspects of medical cost management. While this may sound unexciting, it's the foundational task of running a managed care company, and the team is fully committed to this effort, which gives us confidence in our ability to achieve our goals.

We’ve been in this market longer than almost anyone else and it’s clear that leading with price, without having the unit costs and management in place, does not work. We aren’t going back to those days. We will focus on the markets where we can build networks and providers who will share risk with us over time, creating longer retention and members who want to stay with those providers. In those markets, we believe there is significant growth potential still available, leading us to maintain our target MLR in the low 80s without returning to previous pricing strategies.

Great. And I just wanted to ask a quick follow-up if I could. Following up on Gary’s question about risk adjustment payable, with slower growth within the business this year, would you expect to be in a receivable position for the current year? When do you feel like you’d get better visibility on that?

We wouldn’t anticipate being in a receivable position, but we would assume that the payable would come down modestly as we look forward. Risk adjustment is a key area of focus for us, given that our membership demographics are fairly stable and known at this point. For context, this is the first time Oscar has had such stability in its membership, which provides strong data on our members, reducing volatility.

Our silver mix is now stronger, in the 60s. This in itself likely implies that we’re less likely to be a recipient from the pool and more likely a payer, as that’s somewhat different from other market participants. However, we’ve steadily been moving in the right direction, and we’ve priced some excellent plans in other metal tiers that operate effectively. This indicates we can expect lower claims than others, but potentially higher risk adjustment payouts, which we are comfortable with as long as we manage risk adjustments effectively.

Our final question will come from the line of Stephen Baxter with Wells Fargo. Please go ahead.

Hey, thanks. I had a couple of questions about the broader exchange market I was hoping to get some insight into. Obviously, you guys are not growing your membership this year, which is a very intentional decision. The market as a whole, especially key states like Florida, is seeing significant strong growth again in 2023. I’d like to get a sense of how you think about potential changes or improvements to the risk pool, and whether anything like that has been considered in the MLR outlook you provided today. Additionally, could you provide your perspective on the Florida market? It looks like growth there has gotten to the point where around 13% or 14% of the state population has signed up for the exchanges, while at the national level, that number is more like 4% or 5%. Love to get a sense of what you think is happening in Florida and whether that could be reflective of what other states could look like over time.

Yes, Steve, great question. Regarding Florida, we believe that the population is conducive to being part of the ACA. At this point, about 40% of our welcome kits that go out are in Spanish, and there is a considerable immigrant population in the state. The larger driver of growth in Florida is a very active broker base that is unique compared to other states. The same brokers we’ve been working with have become effective in identifying individuals who need coverage. Statistics indicate that a significant proportion of uninsured individuals in the U.S. could obtain free health care through the ACA, presenting a tremendous growth opportunity that many have not yet realized. As for growth trends, there is still plenty of growth potential. I briefly mentioned the individual coverage health reimbursement arrangements, which represent another growth wave that we are excited about going forward. On the risk pool dynamics, we know that as the market continues to grow, generally, this tends to lower the average risk score. There are annual trends in risk scores that we monitor closely. Notably, we have not made major assumptions around the ACA market this year due to the potential volatility that could arise from special enrollment periods. However, it seems likely that the risk pool will remain stable given the demographic mix of previously enrolled members. We watch these trends closely, and our reactions will be informed by data as they come in.

Yes, to clarify, regarding the PBM contract, we’re in the final steps of renegotiating that, and the new structure will deliver us benefits in 2023 and beyond. This is a multi-year arrangement that reflects the benefits of increased scale.

We’ve reached a level of scale that allows us to take these kinds of steps that may not have been feasible at lower scales. This is something we will continue to pursue moving forward.

We have no further questions at this time. Ladies and gentlemen, that will conclude today’s meeting. Thank you all for joining. You may now disconnect.