Oscar Health, Inc. Q1 FY2025 Earnings Call

Good morning, everyone. My name is Ellie, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Oscar Health First Quarter 2025 Earnings Conference Call. At this time, after the speaker's prepared remarks, there will be a question-and-answer session. Thank you. I will now turn the call over to Chris Potochar, Vice President of Treasury and Investor Relations.

Good morning, everyone. Thank you for joining us for our first quarter 2025 earnings call. Mark Bertolini, Oscar Health's Chief Executive Officer, and Scott Blackley, Oscar's Chief Financial Officer, will host this morning's call. This call can also be accessed through our Investor Relations website. 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 annual report on Form 10-K for the period ended December 31, 2024, filed with the SEC and other filings with the SEC, including our quarterly report on Form 10-Q for the quarterly period ended March 31, 2025, 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 first quarter earnings press release, available on the company's Investor Relations website. We have not provided a quantitative reconciliation of estimated full year 2025 adjusted EBITDA as described on this call to GAAP net income because Oscar is unable, without making unreasonable efforts, to calculate certain reconciling items with confidence. With that, I would like to turn the call over to our CEO, Mark Bertolini.

Good morning. Thank you, Chris, and thank you all for joining us. Today, Oscar reported strong first quarter results. Our positive results were driven by continued top line growth, bottom line performance, and year-over-year improvements across nearly all core metrics. Oscar reported total revenue of $3 billion in the quarter, a 42% increase year-over-year. We also generated net income of approximately $275 million, a significant improvement of $98 million over the prior year period. Earnings from operations grew by $112 million to $297 million, and we improved our operating margin by 110 basis points year-over-year to 9.8%. MLR increased 120 basis points year-over-year to 75.4%, primarily due to our risk adjustment true-up for 2024. We also drove greater efficiency in the business, and reported the lowest SG&A ratio in the company's history, at 15.8%, a 260 basis point improvement year-over-year. Our first quarter performance demonstrates the strength of our strategic plan, and we expect meaningful margin expansion this year. Scott will review our first quarter results in a few moments. First, I will cover key business highlights. Oscar's first quarter results put us on a solid path for 2025. We closed the quarter with approximately 2 million effectuated members, a 41% increase year-over-year. Our solid retention and new membership growth reflect the value of Oscar's innovative plan designs, and superior member experience. Our condition-focused plans are strong performers in the book. We are also seeing high levels of digital engagement across our IFP and ICRA membership, allowing us to more effectively manage member care. Oscar is deepening our market presence with new partnerships that give members more value-added services. In the quarter, we launched Oscar Community Resources with Find Help, a social care network. The program connects members with local food, housing, transportation, and other services beyond medical care that impact health. These resources will ultimately support our clinical intervention and case management programs to lower spend and improve clinical outcomes. Our technology is also further optimizing our operations and improving the member experience. The team recently launched a free live chat feature for Oscar, Virtual Urgent Care, which collects patient symptoms and severity, before provider engagement. Use of the new capability decreased member response times by 90%, and drove a 28% boost in provider efficiency. Similarly, our new AI tool for care guides is more quickly addressing member needs. We continue to build a scalable and efficient technology infrastructure that positions us to grow and differentiate the Oscar experience. Before I close, I want to talk about the current policy environment and attention on the individual market. CMS's proposed program integrity initiatives targeting fraud, waste, and abuse are positive for the long-term sustainability of the market. However, rules such as the shortened enrollment windows will constrain Americans' ability to shop. Amid many enrollment changes for 2026, many individuals are already facing meaningful premium increases. If the enhanced premium tax credits expire, they deserve adequate time to shop for plans that meet their needs. Oscar advocates for constructive solutions that strengthen the individual market. We are engaged with federal and state policymakers on both sides of the aisle. The individual market is a cornerstone of American healthcare, driving a record low uninsured rate, and a cost trend below CPI for the last several years. Policymakers recognize the market's role in our economy, and the gap it fills for their hardworking constituents. Oscar has been in this business since the ACA's inception, and we look forward to building an even larger individual market for individuals, families, and the business community. In summary, Oscar is off to a solid start in 2025. Our disciplined execution, strong top line growth, and margin expansion position us to achieve our 2025 targets. Oscar has the talent, technology, and products to continue scaling a profitable business. Oscar is one of the fastest growing players in the individual insurance market. We are creating a marketplace that meets consumer and employer expectations for choice, quality, and affordability. Our team's ability to stay responsive to stakeholder needs, and consistently execute in dynamic markets will continue to unlock new pathways for growth. Before I hand the call over to Scott, I want to thank the Oscar team for their dedication and commitment to our members and partners. We look forward to delivering strong results in 2025.

Thank you, Mark, and good morning everyone. We delivered strong financial results in the first quarter in line with our expectations. We continue to demonstrate consistent strong execution, and reported approximately $275 million of net income in the first quarter or $0.92 per diluted share. Total revenue increased 42% year-over-year to $3 billion in the first quarter driven by higher membership. We ended the quarter with more than 2 million effectuated members, an increase of 41% year-over-year and 22% sequentially. Membership growth was driven by strong retention, above market growth during open enrollment and SEP member additions. We had approximately 1.9 million paid members at the end of the first quarter. As expected, we experienced minimal churn from members who failed to file and reconcile. The first quarter medical loss ratio was 75.4%, and an increase of 120 basis points year-over-year. The first quarter MLR was impacted by $31 million of unfavorable prior period development, as an increase to our 2024 risk adjustment payable was partially offset by favorable claims run out from the prior year and a CSR recovery. On a year-over-year basis, the impact was approximately 60 basis points. Turning to utilization in the first quarter, we saw higher inpatient utilization that was partially offset by favorable pharmacy. Outpatient and professional were largely in line with our expectations. Switching to administrative costs, we continue to deliver meaningful improvement in the expense ratio. The first quarter SG&A expense ratio improved by 260 basis points year-over-year to 15.8%, the lowest quarterly SG&A expense ratio in the company's history. The year-over-year improvement was driven by fixed cost leverage, lower exchange fee rates, and variable cost efficiencies. Our strong first quarter results position us to deliver meaningful margin expansion this year. Earnings from operations was $297 million, a significant $112 million increase year-over-year. Operating margin was 9.8%, 110 basis points increase year-over-year. Net income was approximately $275 million, a significant $98 million increase year-over-year. Adjusted EBITDA was $329 million in the quarter, also substantially improved by approximately $110 million year-over-year. Shifting to the balance sheet, our capital position remains very strong. We ended the first quarter with approximately $4.9 billion of cash and investments, including $150 million of cash investments at the parent. As of March 31, 2025, our insurance subsidiaries had approximately $1.5 billion of capital and surplus, including $907 million of excess capital, which was driven by our strong operating performance. Turning now to 2025 full year guidance, based on first quarter results, we are reaffirming all of our full year guidance metrics. We continue to expect total revenue in the range of $11.2 billion to $11.3 billion in 2025. While membership at quarter end exceeded our expectations, our outlook now contemplates the end of the monthly SEP for those at or below 150% of FPL. Collectively, these updates resulted in no change to our full year revenue outlook. Turning to medical loss ratio, we continue to expect the MLR in the range of 80.7% to 81.7%. On administrative expenses, we also continue to expect an SG&A expense ratio in the range of 17.6% to 18.1%. We continue to expect earnings from operations in the range of $225 million to $275 million. As a reminder, we would expect adjusted EBITDA to be roughly $140 million higher than earnings from operations. In closing, we had a strong start to the year. We continue to execute against our strategic plan, and we're well positioned to achieve net income, profitability, and margin expansion again this year. With that, I will turn the call over to the operator for the Q&A portion of our call.

Thank you. Your first question comes from the line of John Ransom of Raymond James. Your line is open.

Hello?

John, do you have a question?

Oh, sorry, I didn't think I was in the queue. They told me I wasn't in the queue. Yes, just cleaning up a little bit, the numbers. What - the 2 million membership you ended the quarter with, how should we think about that number for the second quarter, and for the rest of the year?

Yes, good morning. Membership in the first quarter had a couple dynamics. So, first of all, we saw really strong payment rates, which was great, and exceeded our expectations. And then SEP in general was quite strong as well. We ended the quarter with more members than what we had anticipated. Looking forward, I would expect that our membership will trend up in the first half of the year. However, with the proposal to end the continuous SEP for individuals that are at or below 150% of the federal poverty level, we would then see membership trend down in the back half of the year. So net-net, I end up kind of in the same place as what we were expecting when we gave our guidance at the beginning of the year.

So in other words, 1.8 million by the end of the year, but trending up and then trending back down?

Yes, I think that's about where we would expect to finish the year.

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

Hi, good morning, thanks for the question. Just wanted to ask first on the grace period membership. I think it would be really helpful to potentially get some context around what percentage of your membership that represented during the quarter, and what that might look like for maybe a more recent period, kind of normalized number. Just we can think about how much larger that is, and then obviously, to the extent that that's a more contribution-positive part of your book. Maybe you could help us just think about how that works its way into the MLR seasonality for the year. And then secondarily, just wanted to get an update on risk adjustment. I think you provided a net impact in the press release in terms of the 2024 true-up. Maybe you could also provide us just the risk adjustment item in isolation, and then just remind us how that's informing how you're thinking about 2025 risk adjustment? Thank you.

Okay. Why don't I start with the membership? As you start the year, you have a portion of that membership, which is getting auto-renewed, and we would expect to see those people end their grace period as of April 1, which is why we shared the difference between effectuated and paid membership. We've seen paid memberships perform really well, and I would expect that in the second quarter, we would see the gap between paid and effectuated memberships normalize. What happens on a go-forward basis is we would expect to see normal patterns in terms of the percentage of our members in grace. Shifting towards the prior period development, so PPD was $30 million net unfavorable in the quarter. The increase to the risk adjustment was $92 million, which was offset by favorable claims run out, with the other factors mostly offsetting. That was about 60 basis points of the increase in the year-over-year MLR. The rest of the increase in year-over-year MLR was mixed-related. So those are the drivers, Steve.

Your next question comes from the line of Jon Yong of UBS. Your line is now open.

Thanks for the question here. Just on new versus retired members, is there anything of note between the utilization patterns between the two? Assuming that may have been fluid, could you comment on that? And then on the better than expected pharmacy, that's a little different than comments we've heard across the space. Anything notable there? Thanks.

Yes, I would say that on utilization, we're seeing a continuation of some of the trends that we saw at the end of last year, which is higher inpatient utilization with favorable pharmacy. Overall utilization was above our expectations, and we didn't see any specific driver of conditions that really was driving inpatient costs. We had some flu, but nothing that would be outsized. Overall, at this point in the year, we're at about 15% of claims completion, so it's pretty early for us to draw any conclusions about utilization. I would expect that the elevated utilization is going to mostly be offset by risk adjustment. The other thing I would add is that we start the year with a list of actionable initiatives that we would expect to be able to leverage to decrease medical costs. We don't include those levers in our guidance. We're taking action on those initiatives at this point to offset any potential headwinds from increased utilization that we've seen.

Great. If I may ask, just one of your competitors is exiting the exchanges in '26. How do you think about the opportunities and risks around this, and what it may mean for you? Thanks.

Hi, Mark here. We view this as both sad and as an opportunity. We hate when competition is lessened in the marketplace. We believe that's inappropriate. The more people we have in, the more opportunities for people to find the product that works for them. However, in this circumstance, we have fairly significant overlap with this competitor, and we view that as an opportunity come January 1, 2026, to help people maintain their coverage, at a level of pricing that we find disciplined and competitive in the market.

Your next question comes from Joanna Gajuk of Bank of America. Your line is now open.

Hi, good morning. Thanks so much for taking the question. So a couple of high-level questions on the regulatory environment. First, you alluded to the proposal that came out in early March. It would include a couple of different items in there. Any thoughts on which provisions would be finalized? It sounds like you don't agree with most of them. Because all in all, these items together, CMS had estimated would have reduced enrollment on exchanges by 3% to 9%. So it could be somewhat material, right? And then relatedly, any updated thoughts on people in Congress acting to extend the enhanced subsidies on exchanges? Can you remind us the percentage of your exchange book that is fully subsidized? Thank you.

Thanks, Joanna. I'll talk first to the enrollment changes that were made. I want to remind everybody that a number of these programs were in integrity and were put in midway through 2024, so we've seen some of the effect of that already. As we've reviewed and commented on the terms of the proposed regulation, we believe it's really important that we support CMS's effort to strengthen the integrity of the ACA and foster a stable risk pool. We want a market we can trust, where enrollments are real and that we're taking care of real people. So we're fine with all of that. The one issue that I mentioned during my comments is that the shortened enrollment period does not allow for enough shopping, for individuals and brokers who will have to comply with these regulations and find a new place to get coverage. We think they should seriously consider extending those enrollment periods.

I think that with respect to which of these things we expect to go forward, we expect that they will limit the continuous SEP enrollment in 2025. That's what we're planning for in terms of impact this year. Looking at the remainder of the impacts, there's a lot of overlap between what may happen with the new rule and what may happen with subsidies. So, those are all blended together. We’re not going to make any comments about how 2026 may run forward at this point. Regarding the percentage of our book that is fully subsidized, I would say that Oscar has always had a significant portion of our membership that receives some or full subsidized amounts of premiums.

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

Hi. Thanks. Good morning. Just to follow-up on the competitor exits, historically, are those generally good members to attract, meaning, medical management versus risk adjustment? And then how do those large exits impact your estimates of risk adjustment? Additionally, I'm curious if you can provide any progress on the ICRA market to sort of, in general, just sort of environmental progress and are you talking to large employers even about 2026 and maybe where we are in that cycle?

Great. Thanks, Josh. First and foremost, let me talk a little bit about ICRA. On the ICRA front, we believe that there is increased momentum. We're starting to see larger groups in the middle market space starting to get interested and talk to us about the opportunity. We have introduced through our House Ways and Means Committee testimony the idea of this tax credit issue that needs to make a level playing field for employers. We believe that that has some opportunity to get pushed through on this next bill. Once those conditions are in place, we believe the momentum will continue to build. We have talked to large employers. I was in a room with large employers earlier this week, where there's a lot of interest expressed. I was invited to speak about my comments on CNBC about the best way to solve healthcare problems is to eliminate the employer-sponsored health insurance market, and I gave the reasoning behind all of that. We believe that this is an opportunity. It will be slower because there's always resistance in these staffs. But we think that continues to be a very important market. Regarding your first question, we believe that risk adjustment levels play a level playing field for everyone at the end of the year. Our focus is to maintain disciplined pricing in the marketplace to be competitive and attract members. The reason that this competitor is exiting is that they fell behind on their margin and pricing, which created a difficulty in the market. As long as risk adjustment continues to work effectively, we believe we will be fine in these markets and continue to grow membership.

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

Hi, thanks for taking the question. I just wanted to start with your expectation for 2025. Is it still that the risk adjustment payable is a similar percentage of premiums as it was in 2024? And if not, can you give us a sense of any updated expectations on the risk adjustment as a percentage of premiums?

Yes, thanks, Jess. I would make a couple of comments about seasonality for a few different components of the book. With respect to risk adjustment, there is no significant adjustment at this point in time. Although if we see elevated claims continue, that would tend to push down the risk adjustment as a percentage of revenue. We’ll have to see how that plays out on MLR seasonality. I would expect that MLR seasonality will be a little bit flatter in the second, third, and fourth quarter than what we've seen historically. So, a step up in the second quarter with the fourth quarter being the highest. In terms of SG&A seasonality, we still expect to see gradual increases in the SG&A expense ratio each quarter.

Got it. That's helpful. And then just, I guess thinking about next year and the several alternative options. Can you give us a sense of the margin profile of bronze plans, both MLR and whether you have an opportunity to maintain flat margins, despite the potential for downward mix shift?

Jess, I would say that we're not yet going to be giving any information about 2026. Our intent is to continue to grow margin for this company. So we'll be looking at a pricing strategy that'll have disciplined pricing that'll allow us to continue to take share and improve margins moving forward.

I would add that there's relatively high overlap between the enhanced premium tax credits and the integrity regulations that they have put in place. Depending on how both settle out, the details of each will largely affect what the mix will do, relative to pricing versus morbidity.

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

All right, thank you. And congratulations on the quarter historic G&A print achieving 16% two years early before '27. With that said, I was wondering if you could elaborate more on the drivers of your G&A performance. How much of the beat would you attribute to fixed cost leverage versus lower exchange fee rates versus variable cost efficiencies? I'm trying to understand how durable this level of G&A is going forward. And again, the source of the beat as well?

Yes, I appreciate the question. Stepping back, SG&A improved, the ratio improved year-over-year by about 260 basis points, so a substantial step forward. Our cost trend is a great story. Our technology is playing a big part in driving the performance, and we've been focused and disciplined about expense management on both the fixed side and the variable side. Those are the primary drivers of the year-over-year improvement. To provide specifics, fixed cost leverage is about 40% of the improvement. Improvements in our variable cost structure account for around 15%. The remainder is coming from decreases in broker taxes and fees. A significant portion of the year-over-year improvement is durable, but as mentioned, we do expect to see some quarterly increases in SG&A going forward.

And Michael, as we previously mentioned, we have a variety of levers we pull as we progress through the year. We’re already reacting to 2026 and setting the stage with plans that will keep us competitive and enhance margins moving forward.

Great, thank you. My follow-up question, thinking about Oscar's valuation over the past few months. It's clear that investors are pricing in a worst-case scenario related to fraudulent activity in the marketplace. But with the increasing evidence, including required attestations helping to address the ghost member issue, non-payment of premiums now reflected in 1Q, and CMS even providing insight on members at risk nationally. With all these data points, could you refresh us on your latest thoughts here, and your conviction that the situation is no longer at a 4 million or 5 million fraudulent member problem? What will it take to fully dispel this debate once and for all?

We're not going to size the government's estimate; we're currently doing our own analysis. As we prepare for 2026, we'll have a clear view. However, we are not backing off our long-term targets and will continue to work toward achieving them. We believe that the market remains competitive and robust. Pricing may shift as we head into the 2026 market due to regulatory changes impacting both fraud and integrity, which might heavily affect pricing dynamics. We're monitoring these developments closely, and until regulations are clear, we're not going to make final estimates for 2026.

Our final question for today comes from the line of Dave Windley of Jefferies. Your line is now open.

Hi, thanks for taking my question. Mark, you may have addressed my question with your last point, but I was going to ask about the proposal to refund CSRs. What are your thoughts around that? Is that positive relative to integrity, and how much disruption to the pricing structure of the second lowest silver, et cetera, could occur if the government steps in and issues refunds for CSRs?

David, I would say that with respect to CSR and silver loading, practically speaking, implementing that would require considerable effort for plans to establish necessary processes, as well as for the government. We are not in favor of that going into place for 2026 because it would necessitate significant additional setup. In theory, it should be neutral for everyone, but it’s unclear how this will actually play out. We believe that it’s a considerable undertaking.

Got it. And to your point, we're in May, so bids aren’t that far away. A lot of undertaking for a couple of months' worth of time, I guess is the added point?

Yes.

And that concludes today's conference call. Thank you for your participation. You may now disconnect. Goodbye.