Q3 2022 Oscar Health Inc Earnings Call
Particularly noteworthy against the backdrop of our strong membership growth.
So overall, we are executing on our plan, we are seeing the benefits of scale and of our infrastructure and we have confidence about the future. We will discuss our full year 2022 outlook later in the call.
As we look into open enrollments and as we think about our perspective on our positioning for 2023. We are first of all excited about the HCA markets.
The long term sustainability of the marketplace is too as evidenced by what looks to be record high new membership and the return of many different players with this open enrollments.
We would also have lift two years, where the market is stable.
Even against very complex backdrop sweeping grinding our improved performance.
And you know, we don't grow tired of saying this but the individually ECA market looks to us to ask much more like the future of a competitive U S healthcare system than any other health insurance markets. So it is smart to be really good at.
We see the recent competitive development is in a positive as there are more opportunities for the players that vermillion and that being said recent competitor exits demonstrate just how hard it is to navigate the ACA without having a property reinsurance business and without owning a modern day infrastructure Oscar is of course paying attention to these lessons.
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Now I'd like to share some insight in how we're thinking about 2023 performance in our individual business, we built our pricing to deliver margin expansion, while covering higher cost trends and the impact of Medicaid redetermination.
22 year to date medical costs are trending slightly below budgets and utilization is largely flat year over year. Thus, we have additional confidence in the assumptions we've put into pricing for 2023.
As we told you last quarter our approach in 2023 has long been focused on profitability over growth.
We are targeting effectively membership at the conclusion of open enrollment to be around 1 million members plus or minus 10%.
That being said this is a particularly challenging year to forecast given the recent market exits.
And so in this context, we have built and operating in a capital plan that is designed to allow us to deliver a proper insurance company in 2023 and to minimize parent cash outflows.
Our plan includes significant improvements in medical loss ratio driven by pricing for margin expansion and planned total cost of care improvements driven by our technology and strong operational execution.
We also expect to drive down our total company adjusted administrative expense ratio through variable cost improvements and fixed cost savings.
In pursuing profitability, we continue to focus on how we leverage our technology and our strengths to get US there. Let me give you a few examples.
In this past quarter the team deployed a number of infrastructure enhancements to drive further automation, we re factored our customer service experience to our members who have the most complex needs are automatically routed to a highly traded care guides our members with less complex issues like how to pay their bill around us to automated <unk>.
And we continue to see our product resonating with those who choose us with our net promoter score reaching 45 in the third quarter of this year, which is an all time high.
We also update our policies to reduce readmissions to better clinical incentive alignment within our network, we enhanced our prior authorization and claims matching logic to increase our application rates.
Also continue to work with our major vendors defines in year efficiencies and with our increased scale, we expect vendor contracts to be a source of additional savings in <unk>.
Yet to come.
All of this contributes to the progress we have made driving down MLR and our admin ratios, even with the massive membership growth we saw this year.
As we look towards closing our 2022 and the execution steps, we haven't flight for 2023, where confidence about these opportunities for continuing to drive dramatically improved results next year and these improvements also will give us additional leverage as we look to the future of our plus Oscar business.
As we said we expect that will have a proper insurance business next year with a combined ratio below 100%.
We're also excited to share that we are now targeting total company profitability in 2024, a year earlier than previously expected as we continue to drive cost savings across the business and with that I will turn the call over to Scott to walk us through the financials.
Thank you Mario and good afternoon, everyone.
Our third quarter results show the benefits of our increasing scale.
As Mario noted, we have roughly doubled our membership year over year and expect meaningful margin improvement.
We continued to deliver against our 'twenty two plan throughout the first nine months of the year I'll discuss the puts and takes of our guidance updates in more detail in a few minutes.
We ended the third quarter with over 1 million members, an increase of 81% year over year, driven primarily by growth in our individual business and our small group offering <unk>.
We are pleased with the strong traction of <unk>, we ended the quarter with 53000 numbers and we believe.
We have demonstrated that our innovative products are resonating and meeting the small employer market, where the demand is.
Our net churn continued to.
Positively in the quarter, driven by higher retention and lower lapse rates as well as increased special enrollment additions as compared to last quarter.
Third quarter direct and assumed policy premiums increased 87% year over year to approximately $1 7 billion driven.
Driven by higher membership rate increases and business mix shifts towards higher premium silver plans.
Turning to medical costs, our medical loss ratio was 89, 9% in the quarter an improvement of roughly 10 points year over year. The improvement was largely driven by lower year over year covered costs versus the delta wave last year.
As well as by pricing actions and targeted cost of care initiatives in the quarter, we had $3 5 million of net unfavorable development versus approximately $20 million in the same period last year.
On a year to date basis, we had approximately $50 million of unfavorable prior year development.
Switching to utilization, we saw direct COVID-19 costs declined meaningfully year over year, while remaining fairly consistent quarter over quarter, specifically COVID-19 costs in the quarter were both lower than the Q1 'twenty two peak and just 30% of the Delta peak at this point last year correct.
Direct COVID-19 costs were offset by lower non covered utilization, which continued to be below expectation and below baseline this quarter.
With respect to administrative costs are.
Our third quarter 'twenty, two insurance companies administrative expense ratio was 27% an improvement of 240 basis points year over year, driven by fixed cost leverage from greater scale and variable cost efficiencies, which was partially offset by higher distribution expenses associated with the higher than expected membership.
We also saw even greater operating leverage from higher premiums in our adjusted administrative expense ratio, which improved 510 basis points year over year as we enter the final months of the year. We are focused on driving administrative cost savings that position us to reach our profitability targets. This includes having already.
<unk> optimized our distribution spend for next year renegotiating key vendor contracts based on our scale and improving automation with our technology.
Our overall combined ratio, which is the sum of our medical loss ratio in the insurance company administrative expense ratio was 110, 6% in the quarter, a 12 point year over year improvement driven by the MLR and the insurance company administrative expense ratio improvements that I previously mentioned.
Our third quarter 'twenty to adjusted EBITDA loss of $160 million improved $28 million year over year and improved as a percentage of premiums before re the ceded reinsurance by 16 points.
From being at 28% of premiums last year to 12% this year.
Turning to the balance sheet, we ended the quarter with over $3 billion in total company cash and investments, including $420 million of cash and investments at the parent.
And another $2 6 billion of cash and investments at our insurance subsidiaries.
At the end of the quarter, we had $694 million of statutory capital at our subsidiaries, including approximately $170 million of excess capital.
Moving onto guidance based on our traction in membership we are updating our full year direct and assumed policy premium guidance to the range of $6 7 billion to $6 9 billion, an increase of roughly $550 million at the midpoint.
Distribution expenses are also trending higher as more members have come through the broker channel than was anticipated in our insurance company administrative expense ratio is now projected to be at the high end of our 19, 5% to 25% range.
Our medical loss ratio is projected to be around the midpoint of our 84% to 86% range.
Excluding prior year development MLR would be towards the low end of the range. While we expect premium growth of approximately 100% year over year. We are also projecting roughly five points of combined ratio improvement, which speaks to our ability to operate at scale.
Moving to the total company performance, we expect our adjusted administrative expense ratio to be at the midpoint of the range as fixed cost discipline is driving operating leverage.
All in we are now projecting our 2022 adjusted EBITDA loss to be modestly above the $480 million high end of our prior range of losses of 380 million to $480 million.
Notably this still reflects roughly a seven point year over year improvement as a percentage of premiums before ceded reinsurance.
I also will reiterate a few key points on our preliminary views on 2023 performance.
We are targeting if actuated membership at the conclusion of the open enrollment to be around 1 million numbers plus or minus 10%.
We're expecting that will drive significant improvements in MLR driven by pricing for margin and total cost of care initiatives, we have planned.
And we have identified over $120 million in total company administrative expense cost savings based on our membership membership outlook.
When we take these factors together, we expect that we will have a profitable insurance business next year with a combined ratio below 100, and a dramatically lower adjusted EBITDA loss versus what we're guiding to for 2022.
With the positive leverage we see in our business. We are also now targeting total company profitability in 2024, a year earlier than we previously expected.
Given the membership expectations and targeted improvement in profitability. We believe we have sufficient cash and liquidity to fund the company into 2024 as we've previously signaled.
Our financial plan for 2023 is to focus on driving bottom line improvement and reduced parent cash outflows, we continued to utilize reinsurance as a risk and capital management lever.
And note that our $200 million revolver remains undrawn.
We'll provide detailed guidance for 2023, and a more deep and more detail on our path to profitability.
During our fourth quarter earnings call next year.
And with that let me turn it back to Mario.
Thank you Scott before we close I'd like to talk about how we will be organizing as a leadership team to further strengthen our focus on our near term priorities and ensure we are building.
<unk> beyond them.
At December 1st Scott will take on a new role as Chief transformation officer in this role Scott will focus on how we align our overall revenues with our costs for both insurance company and its total company profitability.
Scott will be working across the organization to ensure that we are executing our business plan and aligning our operational strategy with a tech expenditure.
He will also be partnering with <unk> on the approach for how we leverage our technology stocks and the larger strategic considerations for these parts of the company, including our go to market strategy for our plus Oscar.
And this move is about maximizing the capacity of a leadership team that is already aligned and executing.
The team, establishing a focused and disciplined this year laying the tracks for the critical milestones of insurance company profitability in 2023.
Total company profitability in 2024.
Given the importance of these cohorts we wanted a member of the senior team to focus exclusively on these goals I want to thank Scott for the excellent work done in the CFO role and I'm excited to have him provides his experienced leadership in this critical neuro high five Scott.
Okay.
With Scott transitioning we asked our former CFO with its bankruptcy rejoin Oscar as interim CFO suite has stayed very close to the business and our finances as a member of our board and the chair of our finance risk and investment committee given the similarity with our finances and our strategy. We felt that it was a natural choice to step in and simply join Oscar immediately and we're transitioning.
The CFO role effective December one we'll be starting a search for permanent CFO says would you like to say a few words.
Thanks, Mario the Oscar team has a great plan in place and I'm excited to step in as the interim CFO and help us execute on our goals.
As a member of the board I remain highly engaged and closely aligned with Mario Scott and the rest of the executive team I am thrilled to step back and to help and look forward to reconnecting with our investors and analysts.
Thanks, Ed.
And just in closing we had asked you have navigated a lot of complexity of our 10 year history, but what has remained the same as our fundamental belief what changes are needed in the health care system and the role we can play in bringing those abouts.
U S health care system is moving towards a more consumer driven.
Digital and virtual and more value based system. This kind of future market is going to be defined by those who best engage members health members save money and have the technology to incentivize better outcomes and earn the resulting risk premium.
That's exactly the kind of system for which we have built our infrastructure and while we've been doing that.
We have navigate an entirely new insurance market as a startup.
Arps, numerous regulatory changes and we've seen almost unprecedented growth.
All while solidifying or our costs and our camera models.
Thats depth of experience sets us up very well for achieving our financial goals and fulfilling our mission to make it healthier life accessible and affordable for all.
We've remained steadfast in this approach and we remain humbled that so many members continue to choose and stay with Oscar. We are also fully committed to and excited about the close partnerships. We have built with our providers to serve <unk> members and the brokers to sell Oscar products and we deeply value that supports that.
Plan, we're executing against and this management team structure to focus on it we are confidence that we can live up to our promise.
As a company, we factoring healthier for many decades to come.
And finally before we go to Q&A I want to thank the Oscar employees, who are empowering Oscar with the genius scripts and member focus for the last decades I am proud of all that we've achieved and I'm looking forward to the next chapter of billing Oscar together and with US we'll turn it over to the operator for the Q&A portion of the globe.
If you would like to ask a question at this time. Please press star followed by the number one on your telephone keypad.
Your first question comes from the line of Michael <unk> with Morgan Stanley . Your line is open.
Hi, This is <unk> on for Michael just looking at growth here, you have family, let's fix Medicaid redetermination.
Subsidy is extended periods exit exiting market obviously.
Similarly, a large number of growth tailwind in 2023 and I believe the last we spoke are internal estimates for exchange industry growth was 10% to 15%, but given all of these tailwind. How are you looking at that now has that changed at all and are there any headwinds that we should consider.
Yeah.
Yeah, Let me start with that maybe Scott you can out of it both respected to with so we've been making decisions very clearly all year long, we wanted membership that fits in our capital and operational plan.
And we as the info managing the outcome with enrollments.
<unk> with the Cowen we talked about a million members plus minus 10% and that considers all of those growth factors that you've just mentioned and all those various factors I would say in the medium to long term.
We're very excited as we said about our position in the market. We've got a great brands great distribution relationships members, we like being with Oscar as evident by the high NPS and so therefore, we can always go back to higher growth in years to come that's certainly the plan, but for this year with a focus on profitability for next year on the insurance business.
We want to be in the Cohen managing towards us.
Conor I would just add maybe a couple of other points first of all.
Going back to our pricing we have we built in pricing to improve margin this year and so while we have a competitive position.
We're certainly across a variety of markets.
We are slightly less competitive than we've been in the past, which I would anticipate is one of the factors that will drive our membership and then secondly, we have also adjusted our distribution.
Strategy, we've already put that into the market that is part of our our expectations for an improved 2023 performance.
And while we are still competitive with the market there, we've really reverted to <unk>.
Distribution spending that looks a lot more like pre COVID-19 levels versus what we experienced last year.
Thank you.
Your next question comes from the line of Stephen Baxter with Wells Fargo. Your line is open.
Hi, Thanks for the question I'll, just I guess two first on the health plan profitability in 2023, I just want to make sure when we're thinking about the improvement in the combined ratio that you need to drive just roughly what are you thinking will be the bigger driver or are you expecting it to be MLR or SG&A and the 120.
So identify cost and decided at the end of your prepared remarks is that for the overall business or just for the health plan component of it and I guess the last piece is just what it really to make sure I understand why the EBITDA loss guidance has increased them. It doesn't necessarily seem like you missed your internal MLR expectations and then.
I hear you on distribution expenses come in higher it feels like that's something that you would have been aware of for most of the year. At this point just help us understand the moving parts, there and anything I might be missing in that analysis. Thank you.
Okay.
Sure I will try to make sure I had most of those.
A couple of big topics there so.
Starting with 2023 improvement I would expect to see significant improvements in both MLR and on admin on the MLR side I would point to pricing that we put into the market for next year, which.
It is designed to cover trends was designed to cover Redetermination as well as create margin expansion and then as I mentioned in my talking points. We do have a number of total cost of care initiatives that we're executing right now.
On the admin side.
We are expecting significant improvements in in admin and would expect to see that both in the insurance company as well as our total company adjusted administrative expense ratio the $120 million that I spoke to is total spend for the company.
And I would just point to a few things that will drive the admin the first as distribution, which will be a significant driver of the improvement in the insurance company.
Second as vendor, we do use a number of vendors as part of our business and we've already negotiated many of those arrangements.
On our larger scale, we expect that we will be able to continue to do that and then third we anticipate additional fixed cost leverage as we move into 2023.
To go to your question on adjusted EBITDA.
In terms of where the where.
We're coming in at above the high end of our range and we expect it to be modestly over the 480 million.
The top end of the range that we previously disclosed and I point to a few things the first is that.
The higher than expected distribution costs that we saw was really associated with with additional new members and we had eliminated broker commissions as of the beginning of the second quarter, but towards the tail end of the second quarter CMS provided updated guidance to the industry that prohibited differentia.
Getting your broker compensation for the same if actuation here so we've restated that.
Obviously that what's implicit in our original guidance and that was that has created.
<unk> to our administrative expense ratio as well as driving up.
The adjusted EBIT loss, obviously, we've we've already put distribution pricing into the market for next year and so we've got a good line of sight to the improvements that we're expecting there.
And then the second thing I would just say is that we had hoped that we would be at the bottom end of our MLR range, but with that new membership that also comes with some MLR pressure much less than what we experienced last year. So it's really not a big here a big impact to our current quarter results, but it did take up some of the cushion we had in our MLR guide.
<unk> and pushed this up.
To that top end of the range. So obviously these effects didn't all happen in this quarter, but we did see some worsening last quarter.
And we had hoped to claw back some of that but the distribution expense in the third quarter came in really strong.
And pushed us over the top end of the range.
Excuse me I said that the MLR was going to be at the top end of the range, we're going to be in the middle end of that range, but we had expected to be at the bottom of the range just to be really clear about that and some of the MLR pressure that came with SCP is pushing us.
Took up a little bit of the guidance and moved us from the bottom to the middle end of the range. So those are the drivers hopefully I got all your questions.
Thank you very much.
Your next question comes from the line of Nathan Rich with Goldman Sachs. Your line is open.
Hi, good afternoon. Thanks for the questions maybe just following up on that last one as it relates to 'twenty. Three I think you had talked about taking high single digit type price increases for next year now that you've kind of have a better view of the competitive landscape. How do you feel about your positioning in the.
Ability to hit the membership target that you gave.
And do you think that membership outside of the range that you gave would have an impact on.
A negative impact on your profitability or do you see flexibility within the organization.
Hit your profitability goals, even if given the challenge of forecasting membership next year, if that does fall outside of that $1 million plus or minus 10% range. Thank you.
Yes, let me hit the first part of this and then Scott you can talk about.
The range and what happens to be funded side of it. So let me put onto long term hot there for switches just to reaffirm we think we've got an attractive product. That's innovative great distribution partners very committed we spend a lot of time with them and a good brand in the markets.
We keep putting new products in the markets, including expanded virtual primary care offerings in two more states in 23 years and things like that but this entire year really we've been managing as I said before for this co novembers of outcomes. So slight shrinkage to maybe moderate growth at 1 million plus minus.
10%.
To give you a bit of an.
And examples of where we are in high single digits. This year as we said the market is probably coming in around 6% or so on average across the country.
We did go above the markets, which speaks to the fact that again, we're going after the profitability and the margins there as compared to the growth last year by comparison or increase probably was more in the 2% range and the market was probably around the 3% range thereabouts and so you see that flipping a little bit they are.
All in all.
Pricing is always a very nuanced and local decision, making and because we're deeply tightened to the local communities. There I think we generally feel good about where we are priced to be right in the middle of at Cowen.
In all the states and all the geographies, where we want to be competitive and where we want to be in.
Getting the right membership we're in a good place and in other ones, we've just taken rates and so on.
You can talk about.
Sure Nathan just in terms of.
Membership I would just kind of pointed out two things obviously bigger membership, we think would be positive for earnings and.
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On that side, that's clearly a positive we think we would get more fixed cost leverage and.
The potential for generating even greater.
Earnings in our insurance business on the flip side of that that requires growth capital and as we've been talking about we're very focused on making sure that we really don't create additional demands on parent cash and that we leverage the capital that we've already got in our subsidiaries and that is an important part of our strategy.
Liturgy for trying to land.
In that that 1 million member range that we discussed.
And as we fill out that that range, we'd have liver is supposed to be upset the downside to make sure we mitigate the impact on the financial outcomes.
That's helpful. Thank you.
Our last question comes from the line of Josh Raskin with Nephron Research. Your line is open.
Hi, Thanks, good afternoon or evening.
I guess first just from a strategic standpoint didn't hear about plus Oscar this quarter and so I'm curious have you guys thought about sort of.
And sort of putting a plus Oscar I'm holder or even longer and maybe even divesting Medicare advantage at this point and just really focusing on the individual and family plans in small group and are there strategic or regulatory reasons that makes sense for you to even stay in M&A at this point.
And then my second question would be and then I should practices sorry, with the welcome back said good to hear your voice.
I did notice the interim title. So maybe you could talk a little bit about the plans for the permanent CFO role and I'd be curious to know who's sort of working on forecasting and financial planning specifically thanks.
Yes, So let me hit the plus four question first so.
The <unk>.
Biggest thing.
We think we can do right now to make plus Oscar and attractive product is to just use it in the absolute best possible wafer ourselves.
That's what I think what we've been doing this year I mean, if you recall, we're coming into this year.
Yes, we were somewhat surprised by the large growth we haven't had to do a lot of work to make sure. We pick up the phone center. Yet you guys are on time and things like that and have dealt with the consequences of that work really for the past six to nine months first six months of the year and I think have been able to manage that well because as you can see our metrics aligned.
Within ETP landing midpoint of the range for the MLR and for the combined ratio was so.
To us is the best marketing argument with your four plus Oscar and we think that's just going to continue the same way into next year. It's also how we think about growth, but more important for us to show that we have that membership and commensurate profitably than anything else related to that kind of which go back to growth in the insurance business later on.
So thats, how we think about the priority for best asking right now that still means that the plan is what we have been seeing at various conferences, which is focus on since 2004, when it comes to bigger plus Oscar deals.
Just on we did not ruling out any more there we got a sold the question of.
How do we sell plus Oscar in a more effective and efficient way and how do we implement as I was going to more effective and efficiently with third parties and both of these questions in our view require partnerships in both of these questions are really what's cuts is going to be focused on among other things in the chief transformation Officer Road as we've talked about so that as plus Oscar in these in December .
A bigger deal space now we are out there I didn't mention this but thanks for asking we are out there with campaign builder, that's our first module and we talked about in the past.
First clients the pipeline they are all risk bearing physician groups and we've been already using that obviously for us internally, but also for.
Physician groups already in our network.
And the upside down to value based care deals and so that's the other one we're in.
In the width, and it's giving us a nice flippant, but the way we think into future clients for broader plus our deals and the final point I'd make the areas.
The work, we are doing and so on leads on continuing to stabilize and enhancing operations is all work that will make a eventual bigger plus products.
Products are better as well so thats gives us keeping continuing to be a very big overlap now in EMEA exits Im glad you bring this up.
Did in fact, largely due that we.
Exited our organic <unk> business in New York and in Texas.
That was not that material to membership in <unk>, but it did.
It did help the insurance company.
Performance on the medical loss ratio of minutes of ratio and things like that for next year and we did that with exact eni towards this increased focus we are really good as we believe.
<unk> plans to mutual family plans as you say.
We wouldn't be focused the year end.
Every market is a market we want to.
Eventually go back to them.
More in but the way for us to be in this market as some partners.
And that again is a future of plus of our business and even the current folks are working with them. So that's to your question exactly a welcome focus.
Make sure we landed the plane. So we got a land for next year and.
And Josh on 23 planning and outlook.
<unk> been leading that process in building, our internal budgets and outlook for 2023.
Working with closely over the rest of this year to transition that over to him where he will take that on and as we talked about we will formally be transitioning CFO role on December one, but I expected to arrive promptly at <unk> am in my office Tomorrow.
And we will start working on that transition but.
The one thing I would just say is having someone who is deeply familiar with the company makes that process in transition.
Easier thing and it gives me the liberty to move over to help drive the execution of some of the key plans that we've got in place for 2023.
And so if you ask the last question you asked about permanent CFO .
As I said this is really for us about focusing on these because we have integral 23 profitability total cohort for profitability by this call next year I think we have good visibility into 2003 integral profitability and that is how long we think will work together with fits and it gives us plenty of time to figure out what the mix.
Sorry beyond that but we're fired up to work.
Together.
All of US here at <unk> as well as normally as well.
In good shape, therefore, the interest income.
Alright makes sense. Thank you.
Okay.
As a reminder, if you would like to ask a question at this time. Please press star followed by the number one on your telephone keypad.
Pause for just a few moments to compile any remaining questions.
Yeah.
There are no further questions at this time. This does conclude today's conference call. Thank you for joining you may now disconnect.