Earnings Call Transcript - OSCR Q2 2025

Operator, Operator

Good morning. My name is Kelvin, and I will be your conference operator today. I would like to welcome everyone to the Oscar Health Second Quarter 2025 Earnings Conference Call. I will now turn the conference over to Chris Potochar, Vice President of Treasury and Investor Relations. Please go ahead.

Chris Potochar, Vice President of Treasury and Investor Relations

Good morning, everyone. Thank you for joining us for our second 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 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 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, and the quarterly report on Form 10-Q for the period ended March 31, 2025, each as filed with the SEC and other filings with the SEC, including our quarterly report on Form 10-Q for the quarterly period ended June 30, 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 second quarter earnings press release available on the company's Investor Relations website at ir.hioscar.com. 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.

Mark Thomas Bertolini, CEO

Good morning. Thank you, Chris, and thank you all for joining us. Today, Oscar announced second quarter results, which are consistent with the preliminary results we released on July 22. We reported total revenue of $2.9 billion, a 29% increase year-over-year. MLR increased 12 points year-over-year to 91.1%, primarily driven by an overall increase in average market morbidity. Conversely, our SG&A ratio of 18.7% improved 90 basis points year-over-year. Overall, Oscar reported a loss from operations of $230 million, and the adjusted EBITDA loss was $199 million. In the first half of the year, earnings from operations were $66 million and adjusted EBITDA was $129 million. We are also reaffirming our updated 2025 guidance, including revenue of $12 billion to $12.2 billion and a loss from operations of $200 million to $300 million. Scott will walk through our financial updates in greater detail in a few moments. Now I want to share our view of what we are seeing in the individual market and why we believe the market will stabilize in 2026. We continue to believe in the long-term importance of the individual market for millions of consumers and employers. Let's start with recent market dynamics. The latest risk adjustment data from Wakeley, which includes claims data through April 30, indicates a meaningful market-wide increase in morbidity in 2025. This morbidity shift is impacting all carriers, increasing by mid- to high single digits across Oscar's markets. We attribute market morbidity increases to consumers entering the individual market for Medicaid redeterminations and healthier, low-utilizing consumers leaving the market in part due to program integrity efforts. Oscar is taking several actions to drive value and mitigate the impact of current industry-wide headwinds. We resubmitted 2026 rate filings in states covering nearly all current membership to reflect morbidity increases. Our engagement with state regulators continues to be productive. Our initial rate filings already reflected program integrity changes and the expiration of enhanced premium tax credits. We expect the market will have double-digit rate increases next year. We believe these overall rate increases will address the current morbidity pressure and the effects of program integrity efforts for 2026. We also see potential upside with growing support to renew enhanced premium tax credits in the upcoming continuing resolution. Oscar is a leader in the individual market with a 12-year track record of navigating dynamic markets. We are focused on what we can control. In addition to repricing, we remain disciplined in our expense management. Our team is rightsizing the cost of the business in the back half of this year. We continue to harvest technology and AI-driven efficiencies to optimize our operations and drive several medical cost affordability initiatives. The team is also reducing fixed cost headcount. We expect these actions will eliminate approximately $60 million in administrative costs for 2026. We also improved our 2025 SG&A guidance by 50 basis points at the midpoint compared to initial guidance. The individual market is experiencing a reset moment, but the market is resilient, and we see significant opportunity for long-term growth. The individual market's fundamental characteristics, combined with ICHRA, will drive a growing and stable risk pool over the long term. Oscar is at the center of building this future and is creating a competitive health care market for many more consumers and businesses. We are announcing several strategic steps to power ICHRA and further diversify our business. We acquired important early-stage assets with capabilities to help us build the consumer marketplace of the future. These assets include an individual market brokerage, a direct enrollment technology platform, and a consumer education website, healthinsurance.org. We are also launching a new ICHRA product with a well-known consumer brand in the Midwest, Hy-Vee, Inc. Our new ICHRA assets will give us capabilities to meet and exceed the expectations of consumers and employers. The technology platform, INSXCloud, is a fundamental asset of the marketplace as it is one of only 11 CMS-approved solutions, creating a digital storefront for all health products. The brokerage, IHC Specialty Benefits, offers individual medical and supplemental health products across carriers in all 50 states. The brokerage will allow us to offer consumers the supplemental health products they typically buy with health insurance. While the acquisition will not have a meaningful impact on our near-term results, we believe these capabilities are important building blocks of our long-term strategy. Hy-Vee is one of the most trusted brands in the nation with 570 grocery and convenience stores and 270 retail pharmacies. Hy-Vee and Oscar are introducing a new Hy-Vee Health branded ICHRA plan. We are initially launching this product for employers and employees in Des Moines, Iowa, for plan year 2026, subject to state approval. The plan offers superior benefits, including concierge medicine at an affordable fixed price through Hy-Vee Health Exemplar Care clinics. Our partnership is an example of the innovation we intend to drive with other employers, provider systems, and consumer brands in the United States. In summary, Oscar is well-positioned to manage through the market reset in 2025. We believe the market will stabilize next year, and we expect to return to profitability in 2026. Oscar's track record of disciplined execution, strong management processes, and a highly skilled team will continue moving us toward long-term growth. The individual market has greater long-term upside and is the future of health care. It is a market powered by individual choice. Choice drives a competitive market where consumers direct the innovation they want. Every American and American business deserves high-quality, affordable health care that fits their needs. I want to thank the Oscar team for their leadership and hard work. We continue to execute against our strategy, stay responsive to the consumer, and harness AI to move faster than the market. We are a company built on great technology with an exceptional member experience that will change health care. Now I will turn the call over to Scott to discuss our financials in more detail. Scott?

Richard Scott Blackley, CFO

Thank you, Mark, and good morning, everyone. This morning, we reported our second quarter financial results and reaffirmed the updated outlook we provided a couple of weeks ago. There is a market-wide shift occurring in the ACA marketplace, shifting towards higher average market morbidity. While we are now projecting a loss for 2025, we are taking corrective actions to ensure we are well positioned to return to profitability next year. In the second quarter, total revenues increased 29% year-over-year to $2.9 billion, driven by higher membership. We ended the quarter with more than 2 million members, an increase of 28% year-over-year. Membership growth was driven by solid retention, above-market growth during open enrollment, and continuing SEP member additions. The second quarter medical loss ratio was 91.1%, an increase of 12 points year-over-year. The second quarter MLR was impacted by an incremental $316 million increase to our risk adjustment payable for 2025, driven by higher ACA marketplace morbidity that increased by more than our prior estimates. We recognized the year-to-date impact of the risk adjustment change in the second quarter. Applying the revised risk transfer accrual consistently across the first half would have resulted in an MLR of 80.7% in the first quarter and 85.1% MLR in the second quarter. With regard to the final CMS risk report for 2024, it was approximately $23 million favorable to the accruals as of the first quarter of 2025. Turning now to utilization. Second quarter utilization moderated meaningfully as compared to the first quarter. We saw sequential softening in utilization each month in the second quarter. Inpatient utilization remained elevated compared to our expectations and was partially offset by continued favorability in pharmacy. Outpatient and professional were largely in line with our expectations. Switching to administrative costs. We continue to deliver improvement in the SG&A expense ratio. The second quarter SG&A expense ratio improved 90 basis points year-over-year to 18.7%. The year-over-year improvement was driven by lower exchange fee rates and fixed cost leverage, partially offset by the impact of a higher risk adjustment payable as a percentage of premium. In the second quarter, the loss from operations was $230 million, a decrease of $298 million year-over-year, and the net loss was $228 million, a $285 million decrease year-over-year. The adjusted EBITDA loss was $199 million in the quarter, a decrease of $304 million year-over-year. Shifting to the balance sheet. Our capital position remains very strong. We ended the second quarter with approximately $5.4 billion of cash and investments, including $205 million of cash and investments at the parent. As of June 30, 2025, our insurance subsidiaries had approximately $1.2 billion of capital and surplus, including $579 million of excess capital. Let me spend a moment on uses of cash. We expect the majority of the expected losses this year to be absorbed by the significant excess capital position of our insurance subsidiaries. With respect to quota share reinsurance, we expect our ceding percentage to be just under 50% for 2025. Turning now to 2025 full year guidance. We are reaffirming the updated outlook we shared with the preliminary second quarter results. We expect total revenues in the range of $12 billion to $12.2 billion in 2025, an increase of $850 million at the midpoint compared to the prior guidance range. Our improved outlook is driven by better-than-expected retention and higher SEP member additions. We expect SEP member additions to moderate in the back half of the year as continuous monthly SEP for those at or below 150% of the federal poverty level ends September 1. The revised guidance assumes risk adjustment as a percentage of direct and assumed policy premiums is in the mid-teens range and largely consistent year-over-year. Shifting to the medical loss ratio. We expect a full year MLR in the range of 86% to 87% with the increase driven by higher average market morbidity. The revised outlook contemplates higher market morbidity, the continuation of our first half utilization patterns with a modest increase in utilization in the fourth quarter as members may seek additional care if the enhanced premium tax credits are not extended. On administrative expenses, we expect a slightly better SG&A expense ratio in the range of 17.1% to 17.6%, driven by greater operating leverage and variable cost efficiencies. We expect a loss from operations in the range of $200 million to $300 million and an adjusted EBITDA loss of approximately $120 million less than the loss from operations. As Mark mentioned, we are reducing our workforce in the back half of 2025 with run rate savings starting in 2026. In closing, we are taking appropriate actions to return to profitability in 2026. Our 2026 rate filings reflect the higher market morbidity in addition to having contemplated trend, impacts from program integrity efforts, and the expiration of the enhanced premium tax credits. We know how to successfully navigate dynamic markets. We will continue to execute against our strategic plan, and we expect to deliver meaningful improved financial performance next year.

Operator, Operator

Your first question comes from Josh Raskin of Nephron Research.

Joshua Richard Raskin, Analyst

Appreciate the comments, Scott, on the uses of cash. But can you provide some guidance on 2025 free cash flow, understanding the strength in the first half and then the outflows, I assume, in the second half? And then on the risk adjustment payable, I know there's a lot of moving parts there, but I think the total on the balance sheet is about $2.65 billion. I think 2024 balance was $1.65 billion. It sounds like there was a small change there. So maybe there's something around $1 billion for 2025. And then I guess my question would be, why would the payable as a percentage of revenues be lower in '25 relative to '24?

Richard Scott Blackley, CFO

Yes. Well, Josh, let me start with your question about cash. So as we talked about in the prepared remarks, we feel like we've got a very strong capital position at this point, $5.4 billion of total cash and investments, $579 million in excess capital and $205 million of cash at the parent. The vast majority of the cash and investments are in our insurance subsidiaries, which more than covers the risk adjustment payable as well as our required capital, and that's where you end up with the excess capital. We think that the bulk of the remaining losses that we're forecasting for this year are going to be absorbed by that excess capital position. And so you saw that our excess capital decreased by about $300 million from last quarter, and that was the subsidiaries absorbing the losses in the second quarter. And with respect to parent cash then, I do think that parent cash will decline in the back half of the year, largely due to us making some additional capital contribution to the insurance subsidiaries where we don't have as much excess capital. But we feel confident that parent cash is going to be at levels that remain more than sufficient to cover the cost of the holding company and the things that we need. So we feel really good about where our capital position was going into this change in market morbidity and are confident that we've got the access to funding that we need to continue to run this company.

Joshua Richard Raskin, Analyst

Okay. Okay. That's perfect. And then just if could follow-up. How should we be thinking about your previous long-term targets for 2027, specifically the 5% margin and the $2.25 of EPS?

Mark Thomas Bertolini, CEO

Well, we're not changing our longer-term forecast at this moment, but 5% is still our target. We need to get through this pricing season, see how the membership is going to develop as we then look at '26, '27, and '28, we'll revise as necessary. But at this point in time, we're not changing our point of view.

Richard Scott Blackley, CFO

Josh, I want to add that regarding your questions about the risk adjustment payable, we will include a table in the Q that outlines all the risk adjustment payables by year to make it easier for you to understand. I would also note that the adjustment we recorded due to market morbidity is affecting the current year risk adjustment payable, and there haven’t been any changes to the prior year risk adjustment payable except for the true-up I mentioned.

Operator, Operator

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

Hua Ha, Analyst

So last year, when you set your '27 EPS target, $2.25, I saw a number of multiyear upside levers from the hundreds of basis points of opportunity on fraud, waste and abuse, the PBM renegotiation, provider contract renegotiations, upside from ICHRA that could drive considerable earnings upside well above $2.25. So with everything happening this year, the risk pool volatility, I was wondering if you could elaborate on what you view as multiyear earnings levers that may have been more longer dated that you may have had in your back pocket, but you could also pull forward and accelerate if needed? Like how large and tangible are these opportunities?

Mark Thomas Bertolini, CEO

Mark here. We are continuing to accelerate wherever we can across the board, particularly around medical costs. So I would say that we still have opportunity, plenty of opportunity to do better. You saw the effects of our administrative cost reductions through AI. We're now deploying Agentic AI in the clinical space as we look at ways of directing people and helping people find the right care at the right time. And so all of those things are coming to play. And we still, Michael, believe we have a lot of opportunity, and we are pulling all levers as we can now to set up '26 and beyond as profitable years.

Hua Ha, Analyst

Got it. Just my follow-up question. Looking ahead to the back half of this year, your updated guide, I just wanted to hear your thoughts on, is there a chance that the risk pool could deteriorate further? Like any additional potential shoots that could drop? I guess, 4 things that come to my mind are, number one, FTR rechecks. I know you're fine, but I'd be concerned if the broader market needs attrition. Number two, at the end of the year, SEP, if that drives more growth, how that could affect profitability? Number three, the duplicative membership CMS identified. And number four, the preemptive utilization in the fourth quarter. Just wondering these 4 items and if there are any others that might factor into your updated '25 guide?

Richard Scott Blackley, CFO

Yes. Thank you. So let me start with FTR. So on FTR, we've been telling you that we see little risk to us from that particular initiative. And just to double-click into that, we had an initial list of members who had failed to file and reconcile, which was around 27,000 members. And a portion of those members have already lost their subsidy. And we saw the remainder of those that had failed to reconcile lose their subsidies as of August 1. Importantly, though, 60% of that group actually did complete their file to reconcile process, which I think is compared to some concerns that, that might be a very significant portion of people that are unable to file and reconcile. So for us, and if that's indicative of what others may see in the market, we feel like that's pretty positive news. On dual eligibles in terms of Medicaid and ACA, what we've heard from CMS is that for us, that's approximately 2.5% of our membership or just under 50,000 members. We don't know exactly yet which way those members are going to go, whether they're going to land in the ACA or Medicaid. But our understanding from the FAQs is that the member will have to take affirmative action in order to retain their ACA premium tax credit. So on balance, I think that would suggest that we would see more of those members tending to go back into Medicaid and away from the ACA. We've also heard from CMS that the 2.5% that we've seen in our book is consistent for the market. And so I think that they gave a press release previously that I think was based on '24 information, looks like the '25 information is less significant in terms of those dual enrollments. And so we think this is a smaller exposure than maybe some have feared in terms of its exposure to losing that membership. And frankly, when we look at the utilization patterns of those individuals, they are higher on average than our book. And so there could be a little bit of benefit to morbidity if everyone in the market has seen similar patterns and those folks move from our books back into Medicaid. And with respect to the other things that you listed out, look, I think that SEP is moderating into the back half. We do have a fourth quarter increase in utilization. We think that, that's possible, but we've pulled some levers that we think will offset the effects of that in our guidance. And so overall, we feel very good about that we've factored all those risks into our pricing for '26 and feel like we're on the path to return to profitability next year.

Operator, Operator

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

Jessica Elizabeth Tassan, Analyst

Can you help us understand the assumptions regarding market stabilization and the return to profitability in 2026? Additionally, how do you plan to strengthen the balance sheet in case next year's profitability expectations fall short or face challenges?

Richard Scott Blackley, CFO

Yes. For 2026, I would say we have incorporated fairly conservative assumptions regarding program integrity and the market morbidity shift. All of these factors have been considered. When we look at the competitive pricing landscape, we observe very conservative rate actions from larger carriers. Historically, we have been more competitive, but we are now witnessing significant price increases for next year to address these factors. This gives us strong confidence that we will improve our margin from this year and return to profitability. Regarding a potential downturn and its impact on cash and capital, we believe our company currently has a solid capital position. If we need to access capital, we expect to have the ability to do so, as we have virtually no leverage and could take on additional leverage if necessary.

Jessica Elizabeth Tassan, Analyst

Got it. I have a follow-up. We understand that a large issuer submitted risk adjustment data late for 2024. I don't believe other issuers will face penalties for that late submission, but I'm curious if the data in that submission had been taken into account for 2024, would your risk adjustment payable as a percentage of premiums have been larger, making 2025 appear smaller as a percentage of premiums relatively?

Richard Scott Blackley, CFO

Yes, we did observe that adjustment. It was a small amount in the single-digit millions. It really didn't have any impact.

Operator, Operator

Your next question comes from the line of John Ransom of Raymond James.

John Wilson Ransom, Analyst

I know things have changed, but when you were forecasting the market without enhanced subsidies, your number was about 21 million people. I mean we've seen some other numbers that say the marketplace might shrink by 40% or so. Kind of where do you stand in that debate as we sit now?

Mark Thomas Bertolini, CEO

As we look today, John, we believe that our 18% that we projected in our long-term guidance is the bottom and that it will probably be higher. Again, we need to see how the rates play out in the marketplace. We have a good handle on program integrity efforts and that impact, but it will be higher than the 18% we had originally projected.

John Wilson Ransom, Analyst

So what do you mean by the 18%, I'm sorry, just to clarify that.

Mark Thomas Bertolini, CEO

We experienced an 18% reduction in the book due to anticipated changes. We are still forecasting without enhanced subsidies, estimating 18%. However, we believe the actual number will exceed 18%, although we have not finalized it until we assess rates and market competitiveness.

Richard Scott Blackley, CFO

Thank you. When discussing profitability, we refer to earnings from operations, which indicates that adjusted EBITDA will also be positive. Regarding the Medical Loss Ratio (MLR), the year-over-year comparisons show a 630 basis point increase in the first half. As we look towards the second half, it is important to note that last year we experienced significant SEP growth during this time, while this year we anticipate a decline in membership for the latter half of the year. Therefore, when adjusting for the relative growth from last year to this year, we expect the MLR trends in the second half to increase sequentially from the adjusted MLRs previously mentioned. However, we believe this trend will resemble what we saw in 2023, or possibly 2022, rather than last year, which was heavily influenced by substantial growth.

Operator, Operator

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

Stephen C. Baxter, Analyst

Just a couple of quick follow-ups first, I guess, on the second half MLR commentary. I guess, first, there's an announcement from CMS about potential scrubbing of duplicative enrollment. I guess I would be curious to get your guys' perspective on what you feel like the impact from that might be? And if you're assuming anything for that in this guidance? And then on the second question, the fourth quarter provision you mentioned for some additional utilization. Can you help us think about the magnitude of that? And then I have a couple of quick follow-ups.

Richard Scott Blackley, CFO

Yes. Regarding the dual eligible enrollees, we are aware of the membership numbers, which indicate that there are less than 50,000 members who might transition back to Medicaid and consequently lose their subsidy. While they could pay out of pocket, they would forfeit their subsidy if they cannot confirm their ineligibility for Medicaid or related programs. It's important to mention that CMS indicates the 2.5% we observe aligns with similar numbers in the marketplace, suggesting that the risk may be smaller than previously anticipated. We believe that regardless of the direction these members take, we remain within our guidance range, which is what we expect for that aspect. Concerning the increase in utilization for the fourth quarter, I won't specify numbers but can say that we have incorporated this into our guidance. We are implementing various strategies to address increasing utilization, such as investing in fraud prevention and ensuring proper implementation of our provider contracts. We have identified areas in our systems where we may be overpaying, and we are actively working to correct these issues. This is a common challenge across insurers, but we see it as an opportunity. We are applying all these strategies to mitigate some of the pressures we have accounted for in our outlook.

Operator, Operator

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. We thank you for participating and ask that you please disconnect your lines.