Earnings Call Transcript - OSCR Q2 2022

Operator, Operator

Good afternoon. My name is Christian and I will be your conference operator today. At this time, I would like to welcome everyone to Oscar Health 2022 Second Quarter 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. Thank you. I would now like to turn it over to Cornelia Miller, Vice President of Corporate Development and Investor Relations, to begin the conference.

Cornelia Miller, Vice President of Corporate Development and Investor Relations

Thank you, Christian, and good afternoon, everyone. Thank you for joining us for our second quarter 2022 earnings call, where we’ll walk through our results and our trajectory for the rest of the year. Mario Schlosser, Oscar’s Co-Founder and Chief Executive Officer, and Scott Blackley, Oscar’s Chief Financial Officer, will host this afternoon’s call, which can also be accessed through our Investor Relations website. Full details of our results and additional management commentary are available in our earnings release, which can be found on our Investor Relations website. Any remarks that Oscar makes about the future constitute forward-looking statements within the meaning of 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 annual report. 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. This call will also refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our second quarter 2022 press release, which is available on the company’s Investor Relations website. With that, I would like to turn the call over to our Co-Founder and CEO, Mario Schlosser.

Mario Schlosser, CEO

Thank you, Cornelia. Hello, everyone, and thank you for joining us. Today, Oscar is serving more members and clients across the healthcare system than ever before. I'm proud of how our products are making healthcare more affordable and accessible for so many. In the second quarter, we have continued to build our momentum this year, and we're excited to provide an update on the progress we have made across a number of our priorities. As you know, we nearly doubled in size this year in terms of membership, and even with this dramatic growth, our results from the first half of the year are on track, and we remain confident in our ability to deliver on our guidance for the full year. Today, we report that direct and assumed policy premiums increased 101% year-over-year to $1.7 billion for the second quarter of 2022. Our medical loss ratio was 82.2% in the quarter, a decrease of 20 basis points year-over-year. We are seeing meaningful operating leverage from our scale in our adjusted administrative expense ratio, which improved 140 basis points year-over-year, and we are entering the back half of the year well-positioned to deliver on our full-year outlook. Looking first at our individual business. As you know, we have meaningfully increased scale in our insurance business and now serve over 1 million members. We now cover approximately one out of every 13 individual ACA lives, or roughly 7.5% of the overall ACA market. In these specific regions where we sell our plans, our market share is roughly 16%. And even with our growth this year, we continue to see industry-leading Net Promoter Scores, particularly in states like Florida, where we have a large membership base and a score of 56 Net Promoter Score this past quarter. In the first half of the year, in addition to supporting the significant increase in our scale, the team has been focused on initiatives to reach insurance profitability in 2023. We have developed an impressive number of product features and platform enhancements, with the majority focused on lowering the total cost of care for our members and improving operational efficiency. Let me start with our expanded use of what we call our care journeys. These are our automated fully digital outreach campaigns designed to improve clinical outcomes. We use them in our case management and in our Oscar virtual care teams. One of those care journeys, which leverages a fully automated EMR integration to prompt providers about required screenings, has resulted in about 10% higher adherence for three primary cancer screening metrics year-over-year. We also talk about what we are doing to address some common issues that impact managed care organizations. In the same vein of the process improvements and tech improvements we've been implementing, for example, we have refactored our system to improve the coordination of transferring members from out-of-network to in-network facilities. This work is designed to provide our members with the holistic support they need for longitudinal care, and we have successfully transferred about 60% of all temporary transfers so far this year. Finally, a great example for another one of the many issues generally in healthcare that's reduced overall medical costs, improved member experience, and improved provider satisfaction is a process that we call the total cost of care process. So we constantly detect overall utilization or overflowing costs. And that process recently affected increased utilization of the treatment of uterine fibroids due to increasing awareness of the issue and a population getting older. We saw that the treatment of occurs with an outdated treatment protocol. There is recently a FDA approval of a new less invasive procedural treatment condition. We were able to quickly modify everything from claims logic to provide campaigns, member campaigns, and communication, including how this all shows up on our digital products, in order to focus utilization, improve outcomes, and drive down the total cost of care for these members. To be able to do something like that quickly is a great example for the wholesome impact of a tech-driven insurance company. We are also pushing ahead administrative efficiency projects, including continued improvements to our claims system to improve payment accuracy and the strategic replacement of some vendors. As we look ahead to 2023, we are prioritizing margin expansion in our individual business. The pricing submitted for 2023 plans, we expect an average rate increase in the high single-digits, and we have assumed that the ACA enhanced subsidies are accepted. Now, about 10 years in this market, we think we understand the ACA market very well, including the local nature of many of these individual rating areas. Our pricing is nuanced and focused on margin expansion while maintaining a competitive market position in key markets for 2023. For C+O, our small group products, we have had a particularly strong first half of the year regarding growth. Recently, we reached the 50,000 member milestone, which is up 10x year-over-year. We continue to hear positive feedback from the market about the unique product we have developed there, and we are excited to announce that we plan to expand into the Philadelphia markets, starting on January 1, 2023. We look forward to building on our collectively strong brand presence there. We also look forward to growing our virtual primary care offering for 2023 across the book and into more markets. In fact, expanding further on our technology platform, let me provide an update on how we are prioritizing our resources. First, as I said earlier, we have been focusing substantial resources on enhancing our infrastructure to serve the dramatic increase in membership we achieved during open enrollments, and most importantly, to drive the insurance company towards profitability in 2023. Second, we have devoted potential resources to the Health First implementation and the resolution of post-launch challenges that we are experiencing due to the complexity of a comprehensive integration at this scale. Now, given these two demands for our resources, we will not pursue full-service Plus Oscar deals for implementation in the next 18 months. We certainly remain committed to the Plus Oscar business. Our ongoing engagements with the market reinforce our decision to deliver our offering increasingly as Software-as-a-Service and to deliver more modularized offerings. These offerings typically involve shorter sales cycles, but we are also doing that Plus Oscar can deliver meaningful value to providers and other players looking to take on more risk that these organizations see value in lower modular solutions. We are actively moving forward with the development and sale of Campaign Builder, our first Plus Oscar modular product. Our conversations with prospective clients are progressing well. As the team prepares the technology for externalization, we are also adding important features based on market feedback. Specifically, we recently launched a next-best action feature, which serves only the highest priority messages at any given time to members to improve conversion rates. As the features launched, almost 51% of Oscar members have engaged in a campaign with engagement rates of 55%, and we expect our Campaign Builder clients will benefit similarly from the new future. Now, before I turn the call over to Scott, I'd like to spend a moment talking about the regulatory and legislative landscape that could impact the total additional market size in individual for 2023. Regarding subsidies, we are pleased to see the passing of the Inflation Reduction Act, which includes an extension to the enhanced ACA subsidies to 2025. We expect that the package will pass in the House as well and that the enhanced subsidies will continue for the next few years. With regards to Medicaid redeterminations, regardless of whether the public health emergency is extended in October or beyond October, we predict that the majority of redeterminations will occur in 2023. Importantly, we have included an assumption for Medicaid redeterminations in our 2023 pricing. We believe these items, combined with the potential for addressing a family glitch, should act as a tailwind for an expanding ACA market next year. With that, I'll turn the call over to Scott.

Scott Blackley, CFO

Thank you, Mario, and good afternoon, everyone. Our second quarter results show solid execution across our businesses. We have delivered against our 2022 plan through the first half of the year, and we are reiterating our full year guidance. We ended the second quarter with approximately 1 million members, an increase of 84% year-over-year, driven by growth predominantly in our individual and small group books of business. Net churn through the first six months is trending positively compared to our historical experience. In the quarter, our lapse rates were favorable, and we had modest special enrollment member adds. Second quarter direct and assumed policy premiums increased 101% year-over-year to $1.7 billion, driven by higher membership and business mix shifts towards higher premium silver plans. Turning to medical costs. Our medical loss ratio was 82.2% in the quarter, an improvement of roughly 20 basis points year-over-year. This improvement stemmed from pricing actions, lower COVID net costs, and initiatives targeted at reducing the total cost of care. We also had some offsets from a lower amount of favorable prior period development compared to the prior year, which was $42 million favorable this quarter versus $54 million favorable last year. Key drivers of the prior period development this quarter include significant favorable current year development related to the first quarter, which was partially offset by net unfavorable development related to 2021 risk adjustment. On a year-to-date basis, we've had negative prior year development of approximately $42 million, which is related to 2021 and 2020, and we believe are driven by issues that are specific to those periods. Turning to utilization, we saw direct COVID costs that were down year-over-year and quarter-over-quarter. Importantly, based on what we are seeing in our data, we believe the current COVID wave has peaked. Regarding non-COVID utilization, it was slightly below baseline in the quarter, which effectively offset our COVID costs. I also want to note that as we expected, the MLR performance of our 2021 special enrollment members who we retained in 2022 has thus far been consistent with other members from open enrollment. Compared to 2021, we anticipate lower new members via the special enrollment period in the second half of this year, which we expect to be a tailwind to our year-over-year MLR performance. Looking into administrative costs, our second quarter 2022 insurance company administrative expense ratio was 19.5%, an improvement of 30 basis points year-over-year, driven by fixed cost leverage and variable cost efficiencies. As a result of greater operating leverage from our scale, our adjusted administrative expense ratio improved 140 basis points year-over-year. This improvement is notable, given that we continue to make investments to meet the increased scale of the business. Importantly, we are focused on tightly managing our controllable costs in the second half of the year to ensure our expense base going into 2023 is aligned with our profit targets. Our overall combined ratio, which is the sum of our medical loss ratio and the insurance company administrative expense ratio, was 101.7% in the quarter, an improvement of 50 basis points year-over-year driven roughly equally by the MLR and the insurance company administrative expense ratio and improvements that I previously mentioned. On a year-to-date basis, our combined ratio is 99.6%, reflecting a consolidated profit across our insurance companies. Our second quarter 2022 adjusted EBITDA loss was $76 million, which was $25 million higher year-over-year, but as a percentage of premiums before ceded reinsurance improved by 130 basis points from last year. Turning to the balance sheet, we ended the quarter with over $3.6 billion in total company cash and investments, including $611 million of cash investments at the parent and another $3 billion of cash investments at our insurance subsidiaries. At the end of the quarter, we had $670 million of statutory capital at our subsidiaries, including $150 million of excess capital. At this point, we believe we are well capitalized for the next couple of years under our plan. Based on the results to date and our forecast for the second half, we are reaffirming our guidance across all of our metrics for 2022. Our second quarter and year-to-date results are in line with our plans, and we believe lay the groundwork for us to achieve insurance company profitability in 2023. With that, let me turn it back to Mario.

Mario Schlosser, CEO

Thanks, Scott, and thanks to all of you for joining our call today. I'd like to close by reiterating a few key points. We are drafting off the strong momentum in our first two quarters, and we are achieving our full-year guidance. We are on track with our plan to achieve profitability in our insurance business in 2023, driven by our disciplined pricing strategy, our administrative efficiency work, and our medical cost management initiatives this year. That has been due to a lot of hard and focused work. I would like to thank all the Oscar employees. Their dedication and tenacity make this possible. With that, we'll turn it over to the operator for the Q&A portion of the call.

Operator, Operator

Thank you. Your first question comes from the line of Michael Hall with Morgan Stanley. Your line is open.

Michael Hall, Analyst

Hey. Thank you, guys. First question, just any update on how 2021 on a risk adjustment payable settled out? Also, given your prior analysis of your weighted risk-adjustment report, could you update your 2022 risk adjustment assumptions? I know that your risk adjustment transfer of payables went up about $400 million this quarter. I'm curious how much did it impact your MLR performance? Thanks.

Scott Blackley, CFO

Let me provide an overview of what transpired with PPD and risk adjustment. During the quarter, we received both the final CMS report for 2021 and the 2022 report from Wakely. These reports were key factors in many of our adjustments. In total, we recorded approximately $42 million in favorable prior period development. There were two main factors that contributed to this quarter's results. First, we experienced positive development on claims estimates, particularly from some of our newer markets. We used proxies from other regions to formulate our estimates, and the actual performance exceeded our expectations, resulting in a favorable impact of around $6 million to $8 million. The second factor affecting the quarter was unfavorable risk adjustment development from 2021, which we attribute mainly to market deterioration observed in the latter half of last year, where the market appeared to be sicker than our book, likely due to dynamics related to special enrollment periods. This accounted for about $26 million in adverse development, which we believe is specific to 2021. There were also some smaller offsetting items reflected in the numbers. Year-to-date, we've seen about $42 million in unfavorable development, with two-thirds of that tied to 2021 risk adjustment and a third related to 2020. Risk adjustment and estimates present significant challenges. Overall, our reporting from Wakely was consistent, showing slightly positive adjustments for 2022. When dealing with risk adjustment, maintaining consistent execution of processes is crucial, as adjustments and estimates must align with market trends. The volatility we've observed in this area confirms that our processes are effective.

Michael Hall, Analyst

Got it. Thanks, Scott. That's really helpful. And then just one more. As we think about the Plus Oscar pipeline, I think in the past, you've mentioned about one to two deals a year, but given you're no longer pursuing full service, and past deals for the next 18 months, but you're also rolling out new SaaS modularization efforts. I'm curious how does that impact your original one to two deal a year target? Like has that changed at all?

Scott Blackley, CFO

Yes. We talked about this at the Investor Day in the last quarterly earnings call as well. The question of modularization is one we've been consistently getting for the past 12 months. It's great for us to be out there offering Campaign Builder now. That's gaining positive traction in the market. We expect a higher number of transactions because it's a shorter sales cycle generally. Because of the significant growth we had and our desire to support existing clients, for the next 18 months, we will not pursue full-service implementations of larger deals. Overall, the trends in the marketplace are still alive and align with our long-term strategy, and there is continued movement towards hospitals and health systems taking on more risk. Our infrastructure uniquely supports these shifts, and we think this is an opportunity to focus on internal scaling and profitability in that time frame.

Michael Hall, Analyst

Got it. Thank you, guys.

Operator, Operator

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

Stephen Baxter, Analyst

Yes. Hi, thanks. I just wanted to follow-up on a couple of the questions there. First, I did think I heard you say kind of launch challenges. Let me just hear you expand a little bit on what exactly that means or clarify what you said on the revenue stream and expand on that issue. As you talk about the 18-month horizon, why 18 months; six months feels longer than 12 months given that the pipeline could elongate new deals could take a while to consummate. So I want to better understand these issues.

Scott Blackley, CFO

Let me start with the launch challenges. As we told you last quarter, full book migrations are complex and challenging. They're also not done after launch. We're now seven months in and working through refining the implementation. We wanted to commit additional resources to support new clients and make progress. It's a priority for us to ensure it’s done right. In terms of the 18 months, we're out there in the marketplace and continue to talk about future full-service deals. This gives us time to get the implementation correctly, and that means we will continue to be in the marketplace. By pausing on these larger deals, we can focus on our current members and achieving profitability in our now large book of business.

Stephen Baxter, Analyst

Okay.

Operator, Operator

Your next question comes from the line of Jonathan Yong with Credit Suisse. Your line is open.

Jonathan Yong, Analyst

Hi, thanks for taking the question. Just a question on your high single-digit pricing comment. This does seem to be in line with the national averages that have been coming out. How does this compare in some of your key markets like Florida? If you see a large bolus of membership come in 2023, how will it affect your dynamics of achieving profitability in the InsureCo?

Scott Blackley, CFO

Yes, Jonathan, thanks for the question. Our 2023 pricing was laser-focused on prioritizing margin expansion. The average rate increases we made were in the high single-digits, similar to what many are doing. However, it's nuanced where you need to go region by region to understand the competitive landscape. Overall, from what we've seen, the more experienced players in the market appear to be increasing prices more than others. We believe our pricing strategy is well-positioned for margin expansion.

Jonathan Yong, Analyst

Okay. Great. Thank you.

Operator, Operator

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

Kevin Fischbeck, Analyst

Great. Thanks. I want to revisit the Plus Oscar topic. When you first outlined this change in strategy, it seemed like it was an addition rather than a replacement over the next 18 months. I understand how you want to focus on health and profitability, but it seems something has changed. Can you clarify that? How should we think about financing? I'm curious about how much earnings might you not have versus your initial models due to this change?

Scott Blackley, CFO

What hasn't changed is our opportunity and product market fit, particularly in the changing healthcare landscape. The critical takeaway is that I believe Plus Oscar will continue to be a material component for Oscar over time. We have broad market share and a unique opportunity in our product offering. We're pausing larger implementations to ensure we can scale our current business and achieve our profitability targets. I would add that we continue to target total company profitability in 2025. Our focus on our most important objective is getting the insurance company profitable in 2023. As we grow Campaign Builder and other modularization services, we see opportunities to deliver profitability. We’ll need to focus carefully on managing our holding company spend levels.

Operator, Operator

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

Josh Raskin, Analyst

Hi, thanks. I wanted to revisit the pricing and expectations for next year. You talked about high single-digit pricing next year, which sounds consistent with the market. But based on your pricing actions, what does this really mean for Oscar's competitive positioning? Do you think you will grow or contract relative to the overall market? Also, what are your thoughts on the overall market and your expectations for growth given the finalization of subsidies?

Mario Schlosser, CEO

It's too early for us to give guidance on 2023, but we believe the pricing we’re putting in the market supports our path to profitability. Overall, we've been saying for a while that we think the increases for the market will be in the high-single digits. Results across 35 states, including Texas, support this prediction. We’ve learned to be cautious about racing to the bottom on pricing, and we feel confident about how we’re pricing. As the pricing comes out in September and October, we'll see more developments.

Operator, Operator

Your next question comes from the line of Lindsay Golub, Goldman Sachs. Your line is open.

Lindsay Golub, Analyst

Hi. Thanks for the question. Please explain more about how you're approaching plan design. If there are areas where you're making investments, how does that compare to competitors? Also, how does disciplined pricing and maintaining markets fit into your targeted high-teens to mid-20s revenue growth as you work towards profitability?

Mario Schlosser, CEO

Plan design is one of the superpowers of our insurance company and an area where we want to be more creative. Next week, we have our first meeting focused on innovative plan design for 2024. We have a number of new things we're working on this year that we will soon announce. For example, taking our virtual primary care plan designs into similar markets and rolling out specialized plan designs in certain states. We focus on incentives and rewards for our members, and I believe this work has had a real impact on our growth.

Scott Blackley, CFO

It's too early for us to provide an outlook on 2023 but the pricing we introduced supports our path to profitability, and that's why we prioritize margin expansion.

Operator, Operator

We have a follow-up question from Stephen Baxter with Wells Fargo Securities. Your line is open.

Stephen Baxter, Analyst

Yes. Just a couple of quick follow-ups. When you say you built in the Medicaid redetermination outlook in your pricing, how might this impact the market size, and when will this start to have a meaningful impact? What assumptions have you made regarding risk pools, and how do you feel about the range of outcomes you built into your pricing?

Mario Schlosser, CEO

It's about balancing factors. When membership comes in the middle of 2023, it could have SEP risk adjustment impacts similar to prior years, and the sooner it comes, the better it is for this phenomenon. We’ve built an upward trend in MLR and pricing. We expect this combination of SEP, risk adjustment, and higher mobility in our members will positively affect pricing, which varies by market. We're seeing favorable MLR performance in members from the SEP period last year. So, longer term, it's beneficial.

Stephen Baxter, Analyst

Okay. Thanks. One last quick question regarding the back half's implied G&A ratio, it seems to ramp up significantly compared to actual insurance company admin predictions. What should we think about as drivers for this difference?

Mario Schlosser, CEO

Regarding the insurance company, we expect less seasonal ramp-ups in administrative expenses compared to previous years. The fourth quarter should see modest increases based on our improved position from last year. For the holding company’s expenses, we’re making investments to support scale and client needs. These investments aren’t sticky, and we’ll look to drive efficiencies at the holding company level over time.

Operator, Operator

There are no further questions at this time. I would like to turn the call back over to our presenters.

Mario Schlosser, CEO

Thanks so much for the call. Thank you for the good questions. We appreciate your ongoing support and dedication, and we will see you soon. Thanks again.

Operator, Operator

This concludes today's Oscar Health's 2022 Second Quarter Conference Call. You may now disconnect.