Oscar Health Q1 2024 Earnings Call Transcript

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May 7, 2024

There are 9 speakers on the call.

Operator

Good morning. My name is Ellie, and I will be your conference operator today. At this time, I would like to welcome everyone to Oscar Health's First Quarter 2024 Earnings Conference Call. Please note that this call is being recorded. Thank you.

Operator

I will now turn the conference over to Chris Potechaar, Vice President of Treasury and Investor Relations. Please go ahead.

Speaker 1

Good morning, everyone. Thank you for joining us for our Q1 2024 earnings call. Mark Bertolini, Oscar'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 atir.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.

Speaker 1

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 ks for the period ended December 31, 2023, 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, 2024, 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.

Speaker 1

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 Q1 earnings press release available on the company's Investor Relations website atir.hioscar.com. With that, I would like to turn the call over to our CEO, Mark Bertolini. Good morning.

Speaker 2

Thank you, Chris, and thank you all for joining us. This morning Oscar reported strong Q1 results with solid year over year improvement across all core metrics. Underlying our Q1 performance, we reported total revenue of $2,100,000,000 Our revenue increased 46% year over year led by strong retention, above market membership growth during open enrollment and SCP member additions. Oscar achieved an important milestone in the quarter. We reported positive net income for the first time in our history.

Speaker 2

We generated $178,000,000 of net income, a significant $217,000,000 improvement year over year. Our medical loss ratio improved 210 basis points year over year to 74.2% and overall utilization was in line with our expectations. In addition, we achieved total company adjusted EBITDA of $219,000,000 a $168,000,000 improvement versus the prior year. Our strong momentum positions us to deliver on our total company adjusted EBITDA profitability target this year. We are seeing real earnings power in our insurance business.

Speaker 2

The business has scaled to a point where we are driving strong membership growth and improved profitability. We are delivering on our commitments and we remain on a solid path to grow sustainably over the long term. In a few moments, Scott will provide a more detailed review of our Q1 results. First, I will cover key business highlights. Oscar closed the quarter with a strong 2024 open enrollment period alongside record enrollment in the ACA marketplace.

Speaker 2

Total membership increased 42% year over year exceeding our expectations. We captured share in existing and expansion markets and drove superior customer satisfaction and record high retention. Our growth demonstrates that our value proposition continues to resonate with consumers. Oscar's affordable and personalized plans driven by our disciplined pricing and total cost of care initiatives attract consumers. Our superior member experience driven by our technology retains them.

Speaker 2

We ended the quarter with another record high NPS of 66. During the quarter, we continue to meet consumer needs through our technology. We drove more members to affordable benefit rich plans in key states where other carriers retreated including Georgia and Kansas. We also launched new products for our fast growing and diverse member population, which attracted differentiated member profiles in several new geographies. As an example, we launched our Spanish first program, Hola Oscar, to better support our Hispanic and Latino member base in Georgia.

Speaker 2

The program drives personalized care interventions through our engagement capabilities in their native language. Early results showed 2 47% growth and 93% retention in our Spanish speaking membership in Georgia in just 1 year. Our teams also successfully launched diabetes focused campaigns through Ola Oscar. Hispanic adults are 70% more likely than non Hispanic adults to be diagnosed with diabetes. Our campaigns introduced culturally relevant messaging to increase diabetes screening rates, including eye exams and kidney screenings, and close gaps in care.

Speaker 2

Tailored health engagement programs like these help drive our strong NPS of 87 among Spanish speakers. Finally, we continue to externalize key aspects of our member engagement and experience capabilities to power the healthcare system through Plus Oscar. Our efforts are gaining traction. In the quarter, all of our clients added more lives to our campaign builder platform, including a key provider group that expanded the relationship We continue to We continue to mature the product set and have an active RFP pipeline. Our strong performance in the quarter sets a solid foundation for 2024 and positions us to achieve our total company adjusted EBITDA profitability goal.

Speaker 2

Looking ahead, we remain focused on long term strategic priorities that enable to play a leading role in expanding the individual market. The ACA now has more than 21,000,000 people enrolled and is the fastest growing health insurance segment driven by the gig economy, consumerization and government policies. The market has reached a size that makes it a permanent attractive option supporting our country's most diverse and vulnerable populations, filling a critical gap in the insurance market. The ACA's continued growth affirms that individual plans meet consumer needs of affordability, access and quality and are a viable alternative to the conventional employer based models. We see a long term opportunity to grow the individual market by serving a broader set of consumers and markets.

Speaker 2

With this in mind, we are not renewing the Cigna Plus Oscars Small Group offering in 2025 to better align with our strategic direction. We continue to believe in the value of small businesses and look forward to serving this market in new ways in the future. In summary, we are off to a good start in 2024. Oscar is building a highly competitive franchise in the ACA market and the business has a sizable runway ahead to further scale and grow. We continue to execute, drive the excellence required to run a mature company and generate solid business returns.

Speaker 2

I am confident in Oscar's long term growth prospects. We look forward to sharing more details on our long term strategic plan including our EHR strategy at Oscar's upcoming Investor Day on June 7 in New York. With that, I will turn the call over to Scott. Scott?

Speaker 3

Thank you, Mark, and good morning, everyone. Our Q1 financial results demonstrate a solid start to the year. We continue to deliver on our commitments and reported approximately $178,000,000 of net income in the quarter or $0.62 per diluted share, an important milestone for Oscar. We are well positioned to achieve our target for total company adjusted EBITDA profitability this year. Before I get into the details of our financial performance this quarter, as a reminder, we implemented a new financial reporting structure beginning with the Q1 in order to increase transparency and improve comparability.

Speaker 3

Our discussion of financial results and guidance is focused on performance of the total company. In conjunction with today's earnings release, we filed an 8 ks, which includes supplemental information on 2023 quarterly results under our new financial reporting framework. Turning to our financial performance. Total revenue increased 46% year over year to $2,100,000,000 in the 1st quarter, driven by higher membership, rate increases and lower risk adjustment as a percentage of premiums. We ended the quarter with more than 1,400,000 members, an increase of 42% year over year.

Speaker 3

Membership growth was driven by strong retention, growth in existing markets and new service areas, as well as robust SCP member additions. On medical costs, the 1st quarter medical loss ratio improved by 210 basis points year over year to 74.2 percent, driven by our disciplined pricing strategy and total cost of care initiatives. Overall, utilization trends were in line with our expectations at this point in the year. Switching to administrative costs, the 1st quarter SG and A expense ratio significantly improved by approximately 8 70 basis points year over year to 18.4%. The significant year over year improvement was driven by variable cost efficiencies and improved fixed cost leverage, as well as lower risk adjustment as a percentage of premiums, which collectively resulted in 505 basis points of a year over year improvement in the ratio.

Speaker 3

The remaining 3 65 basis points of improvement was due to accelerated stock based compensation expense recognized as a result of the cancellation of the Founders Awards, which we recognized in the prior year period. We continue to make significant progress on improving profitability. Net income of approximately 178,000,000 dollars was significantly improved by $217,000,000 year over year in the Q1. Total company adjusted EBITDA of 219,000,000 dollars also significantly improved by $168,000,000 year over year in the Q1. Shifting to the balance sheet.

Speaker 3

Our capital position remains very strong. We ended the Q1 with approximately $3,700,000,000 of cash and investments, including $159,000,000 of cash and investments at the parent. As of March 31, 2024, our insurance subsidiaries had approximately $990,000,000 of capital in surplus, including $540,000,000 of excess capital, which was driven by our strong operating performance. Turning now to our 2024 full year guidance. Based on the Q1 results, we are reaffirming all of our full year guidance metrics.

Speaker 3

We expect total revenues in the range of $8,300,000,000 to 8,400,000,000 dollars a medical loss ratio in the range of 80.2 percent to 81.2 percent and SG and A expense ratio in the range of 20.5 percent to 21%. We continue to expect to achieve total company adjusted EBITDA profitability in the range of $125,000,000 to $175,000,000 As a reminder, as the new policy year matures, our overall per member claims levels may change with corresponding impacts to our estimate for risk transfer. Such changes would impact the numerator and the denominator of the MLR, but we would not expect them to have an impact on our per member underwriting economics. In addition, we continue to expect our quarterly MLR seasonality to be similar to 2023, although with a steeper slope. In closing, we've had a solid start to the year.

Speaker 3

We delivered net income profitability for the first time in Oscar's history, and we are well positioned to achieve total company adjusted EBITDA profitability this year. With that, let me turn the call back over to Mark for closing remarks.

Speaker 2

Thank you, Scott. In closing, our Q1 performance lays a strong foundation for 2024. Oscar continues to deliver on our commitments and I can see the momentum in our business. We are confident we will achieve our total company adjusted EBITDA goal this year. Our team remains focused on our long term growth objectives, which position us to capture emerging innovation opportunities in healthcare.

Speaker 2

Oscar is purpose built to meet the rising expectations of consumers and bring the market more tech first solutions. I want to thank all of our employees for their efforts in delivering another strong quarter. As I walk the halls, I feel our team's dedication and passion. Their commitment to serving our members and partners drives our continued results, which we laid out in our impact report last month. We continue to build a more sustainable and equitable future both at Oscar and in the communities we serve.

Speaker 2

I look forward to speaking with many of you at our Investor Day next month. With that, I will turn the call over to the operator for the Q and A portion of our call.

Operator

Having said that, our first question comes from Stephen Baxter of Wells Fargo. Your line is now open.

Speaker 4

Hi, thanks for the questions. So wanted to get an update on the expectations around the performance of your membership growth in 2024. I guess how's the mix of those numbers compared to your expectations? And can you update us on where you sit in terms of metal mix and how that's changed year over year? And then I guess the last question would just be, it sounds like you're not necessarily expecting risk adjustment to be a big swing factor in terms of the guidance and where you sit for the full year.

Speaker 4

Obviously, the Q1, I think, looks like a pretty solid starting point to kind of use your phrasing. What would you need to see in order to let the upside that it feels like you saw in the Q1 flow through the guidance? Thank you.

Speaker 2

Thanks, Steve. We reported 1,400,000 members, and that's been stronger SEP growth than we expected this early in the year. We're not sure if that's a pull forward or what's going to happen later in the year or it will continue to grow over time. And as we look at that growth rate, if it is longer over time, Medicaid redetermination is through November, We would expect that we're going to have less and less insight on risk adjusters later in the year, which will work against us in the quarters, but we'll recover in the Q1 of next year when we get that data all submitted through CMS. Scott?

Speaker 2

Yes. So Steve, number 1, I

Speaker 3

think that we're super excited about a strong Q1, strong membership growth, medical expenses on plan, SG and A that was slightly favorable to what we were expecting. So a good start to the year. With respect to the SEP membership growth, as we told you in our call at the end of the year for Q4, we did anticipate in our plan that we would see strong SAP growth. And that growth typically has an MLR that's about 10% higher than what we would see in OE. We have a history of retaining a high portion of those members.

Speaker 3

So in the next year, they tend to have MLRs that look just like other OE members. So grabbing that SCP this year is a good thing for 2025. In the current year, as Mark talked about, the big question for us at the moment is we saw really robust SCP membership growth in Q1. And is that a trend that's going to persist or is that a pull forward of membership at this point in time? We just don't have enough visibility to know for certain.

Speaker 3

And so that's impacting a little bit of our full year guidance and thinking about if we do see more SEP growth in the back half that will come with some MLR impacts. And we just think we've got a great position to start the year with a strong first quarter.

Operator

Our next question comes from Adam Wong from Bank of America. Your line is now open.

Speaker 5

Hey, thanks for the question. I think in the past you've mentioned that you don't want Oscar to be a single product line company, but this quarter you're exiting Medicare Advantage and it sounds like exiting the Cigna and Oscar small group relationship. So I would love to hear a little bit more color on what exactly is the rationale behind the exit for Cigna Plus Officer? And then to the extent you still believe that the company won't be a single product line business, like what are the major opportunities? Is it Health IT?

Speaker 5

And do you see ICRA as a separate line? So just more color on what you expect from those two businesses, because it seems like the services revenue only grew like 12% in the quarter. So we'd just love to hear longer term what the expectations around that are or if there are things beyond ICRA and Health IT that you see opportunity in? Thanks.

Speaker 2

Thanks, Adam. We did pull out of Medicare in large part because the provider we did pull out of Medicare in large part because the provider relationships we had in place were unsustainable and there wasn't anything we could do to fix them from the standpoint of getting to a profitable product. We do anticipate entering the market a different way, which we'll talk about in June when we have our Investor Day. But the near term opportunity for us is ICRA. And with ICRA we believe we have access to over 70,000,000 lives in the under 50 and middle market segments and we'll talk a lot about the significant progress we've made on that set of products and the pilots we'll be doing this year and launching into 25.

Speaker 2

I think on C plus O, we tried both companies tried very, very hard over the last 5 years to get the thing to a place where from an underwriting standpoint it was profitable. I think owner economics get in the way. When you have different pieces of the revenue stream going to different organizations and we just couldn't rationalize that in a way that would make the product work longer term. But more importantly, we believe ICRA is the solution for small group and middle market and we believe that that will be a much bigger opportunity. We want to focus on getting that right.

Speaker 2

Plus Oscar, we have work going on now about how we use that platform, externalized platform. We need work and investment on it in order to make sure it's ready for the market in a way that clients can use it appropriately as a full platform. So today, we're rolling out components. We'll have more to say about Plus Oscar when we get to the Investor Day and June 7.

Speaker 5

Thanks.

Operator

Next question comes from John Ransom from Raymond James. Your line is now open.

Speaker 6

Hey, good morning. Just looking at your SG and A line and you look as you look out a few years, what do you think is the sustainable level of SG and A to revenue to kind of get you to your ultimate targeted margin?

Speaker 3

Yes, John, thanks for the question. Look, we certainly were excited about the performance of SG and A year over year, significant improvement in that line item. And the improvement there, obviously, we called out the one timer related to the Founders Award. But the rest of the improvement is sticky and will continue going forward, Seeing a lot of impacts of our technology making our operations more efficient. We're seeing fixed cost leverage and those are two things that I think will continue for us.

Speaker 3

And so, I mean, we'll get into more of where we think our destination economics are for the business at the Investor Day. But I would say that we anticipate that there's still more improvement that we will expect in SG and A over the future. And the trends that we've seen thus far give us confidence that we'll be able to continue to drive it to even better levels in the future.

Speaker 7

Thank you.

Operator

The next question comes from Josh Raskin from Nephron. Your line is now open.

Speaker 7

Thanks. Good morning. Just first clarification on Cigna Plus Oscar, what's the revenue expectation this year embedded in the $8,300,000,000 to $8,400,000,000 And then my real question is just on the risk adjuster payable, down meaningfully year over year despite the increase in premiums. I know was all expected, but I'm curious if you've got any external data at this point that's sort of a first look or anything preliminary from Wakely or anyone else. And then how much of that improvement do you think is just better execution in coding?

Speaker 7

And how much of that is your membership more sort of a more normal risk pool?

Speaker 3

Okay. I'm sure I'm going to miss one of those questions, Josh. But I'll comment on the risk transfer. So risk transfer at this point in the year is mainly an internal estimate. We don't have a lot of external data.

Speaker 3

The risk transfer will we're expecting that the percentage of risk transfer is going to increase throughout the year. Part of that's just driven by seasonality of the book, but there's also as SEP members come in, they have typically they're younger and we end up having a higher risk transfer with that group. And so as we are expecting SCP growth throughout the year into the second half that will drive risk transfer going up. So at this point, I would say that we have a very good process for collecting the codes that we need to support risk transfer. I think that that's an area that having a lot of history in ACA, we've got some very strong processes including deployment of AI and other techniques that allow us to get things at a very efficient way.

Speaker 3

And we deliver a lot of value in that process. So feel good about the opportunity for us to convert making certain that we get full credit for the medical care that our members are receiving.

Speaker 7

And then just the C plus O revenues?

Speaker 3

Sorry, that was the one I forgot. On C plus O, I think that for 2024 that's probably in the range of $250,000,000 to $260,000,000 of revenue. Bottom line has minimal impact to the bottom line. And going forward, when that book goes into runoff in 2025, it will be a much smaller revenue impact. But in both years, we would expect the bottom line to be insignificant.

Speaker 7

Perfect. Thanks.

Operator

Next question comes from Nathan Rich from Goldman Sachs. Your line is now open.

Speaker 8

Great. Good morning and thanks for the questions. Maybe just following up on the MLR, Scott, it seems like the underlying cost trend performance was in line with your expectations. And you kind of mentioned the steeper slope. I'd just be curious kind of how that MLR compared to your plan in the Q1 and any change in how you're thinking about cadence over the balance of the year?

Speaker 8

And then longer term, maybe how you're seeing the long term opportunity for MLR. Know some of your peers kind of operate in the high 70% range. Is that do you feel like you can get to a level with your member mix and geographic exposure that would be more consistent with kind of those peer levels over time?

Speaker 3

Sure. Nathan, on MLR, I think that the MLR we saw

Speaker 4

in the

Speaker 3

Q1 was more or less consistent with our expectations where we saw utilization that was on plan. There's always puts and takes in utilization, but in summary pretty much what we were anticipating. At this point in the year, you don't have a huge amount of visibility into the full year performance of your book. And so it's still early days in terms of what we would take away from the performance thus far in the year. But I would say that it's comforting that we're seeing what we expected.

Speaker 3

And so we do think that Q1 MLR is a good starting point. For the rest of the year, there is MLR seasonality. We've seen this historically in our business and we would expect it to be there again this year. The addition of SEP members throughout the year, we talked about the risk adjustment dynamics of those members that do have some adverse effects. And so that's another component of seasonality and I think that we'll see that this year.

Speaker 3

With respect to MLR in the future, I would say that there's 2 components of that. One is your pricing and we are always committed to making sure that we maintain disciplined pricing and that we have a price point that allows us to achieve the growth objectives that we want. So we balance those things out. I think we've got opportunities in total cost of care for us to continue to improve medical expenses in a way that we always want to support our members. And so we think we see opportunities to continue to drive that down.

Speaker 3

But ultimately, we will balance out the objectives of having a pricing in the market that allow us to grow and driving total cost of care that can eat into trend of expenses over time. But really there's no reason that our business can't perform at MLR levels that are competitive with the rest of our industry

Speaker 6

peers. Thank you.

Operator

Our next question comes from John Matson from Raymond James. Your line is now open.

Speaker 6

Hey, good morning. I want you

Speaker 2

to know I follow

Speaker 6

the rules and just ask one question. So, you guys give me a gold star. The only MLR question, if we look at the year over year improvement, what would you say are the key kind of an order of magnitude, what were the key attributes there? I know you have a new EBM contract, you've adjusted your pricing, your mix has changed. But if you looked at the kind of menu of all those things, what were the kind of top 1, 2 or 3 drivers of your MLR improvement year over year?

Speaker 6

Thanks.

Speaker 3

Yes. I think that the first thing I would just call out is pricing and margin expansion and being thoughtful about pricing for the risk that we were going to take, really seeing that be a significant driver and it's the most important driver in the year over year performance. We had a small amount of prior period development this year. It was or in the Q1, it was about $17,000,000 favorable, which was really run out on 2023 claims. So that was good.

Speaker 3

And the thing I would just say with MLR, the fact that what we're seeing in MLR are trends that I'm confident are going to persist is probably the most important takeaway I would have from the Q1 MLR performance.

Speaker 6

And then the PBM, how much should that help?

Speaker 3

I'm sorry, say again? PBM.

Speaker 6

The PBM recall, the tracking, how much should that help year over year?

Speaker 3

Yes. In the PBM, like we're not going to call out specifically the impact of that. It is embedded in the performance. Obviously, it really ultimately gets into what did you price for. We built that PBM into the pricing and we are seeing margin.

Speaker 3

And so clearly PBM is a significant driver of our ability to price at a level and that was competitive and continue to drive margin improvement.

Speaker 7

Thank you.

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