Oscar Health Inc. Q1 2023 Earnings Call
As an example increased scale has driven material pharmacy savings and improvements in our processes with our <unk> partner.
While we've had great progress to date I view these activities duties as merely the starting point to help reduce total cost of care over time.
Moving to administrative cost efficiency.
We have solidified the majority of our efficiency efforts at this point near for example, we successfully executed our distribution optimization efforts during open enrollment.
We expect these savings to continue throughout the year.
We're also achieving scale benefits in our cost structure. As another example, we recently negotiated a new multi year agreement with a large risk adjustment vendor.
Allowing us to realize significant savings going forward.
Our technology is also having an impact on our efficiency.
Recently, we rolled out a series of interactive automation of features that provide instant answers to members for common questions.
This technology has reduced inbound volume by 5%, 10% across customer service channels, while retaining assistant satisfaction ratings.
Finally portfolio sculpting remains a key tool to help us improve profitability as we exit underperforming markets.
The company has been disciplined in managing its portfolio and improving the sustainability of our margins over time.
We're announcing today that we have decided to pause our participation in the California individual market for plan year 2024, as the plan has not met our internal targets.
We intend to reshape our strategy and product offerings in preparation to re enter the market in the future.
Turning now to plus Oscar as you can see in our solid first quarter results. Our technology is clearly having a positive impact on the business.
While we are focused on profitability for the insurance company, we are continuing to build and develop campaign builder, which is plus <unk> engagement and automation tool.
I am happy to report that we are officially live with our first campaign builder client that we announced last year.
Since launch our client has been it hasnt seen in approximately 60% engagement rate with English speakers, and a 65% engagement rate with Spanish speakers, which shows the power of provider led communication.
We're also excited about signing another campaign build a customer a large value based primary care group that serves hundreds of thousands of patients across commercial Medicare advantage and Medicaid segments.
We will partner with this group to drive primary care utilization to owned and affiliated Pcp's closed process gaps and streamline operations.
Campaign builders, just one example of the technology tools that we expect to bring to market over the next several years.
Given the market context, I also want to share some thoughts on AI.
We believe that our proprietary technology stack is a sizable benefit for deploying large language models with great impact.
And our many pilots and tests large language models are good at explaining in natural language all claimed got paid.
But only if the claims system produces coherence structured output.
Large language models are good at extracting which specialty of members looking for but only if the system has been provider data.
Large language models are good at translating provider contracts into a system configuration file.
But only if youre claim system is easily configurable.
We are unique in having built a proprietary tech stack, including a modern data lake that will enable us to use large language models across every aspect of health care we.
We believe this can become a competitive advantage for us and our plus Oscar offering.
As we look to the future we continue to see many tailwind for the ACI specifically.
Specifically growth due to the resumption of Medicaid Redetermination.
The proposed new rule to expand marketplace coverage to Dhaka recipients.
And a continued shift of employers in the market through individual coverage hra's.
<unk> should benefit from the marketplace growth with our individual industry, leading NPS and consumer engagement.
While the HCA is the most individuals individualized market in insurance I believe our innovative products and technology are highly applicable to other individualized markets as well.
Medicare advantage is a space I know well based on my experience I see opportunities to form interesting partnerships with likeminded provider groups to participate in this space.
With that I'd like to turn it over to Sid to provide additional insight on our first quarter results.
Thanks, Mark and.
And good evening everyone.
Our first quarter results show solid fundamentals across the business and that we're executing well against our plan.
Okay.
We ended the quarter with approximately 1 million members, which was consistent with our pricing strategy from largely stable book.
As we previously mentioned our pricing and portfolio strategy is focused on shifting our membership mix towards the average ICA population.
Okay.
This year, we have a higher proportion of renewing members than we've ever seen historically.
We also have a more subsidized membership base with a very modest shift from silver to Bronx.
Similar to trends, we saw last year. We expect this updated mix will result in a higher morbidity population.
And therefore, a lower risk transfer as a percent of premiums.
We are pleased with this progress and I'll discuss the impact from this mix shift in greater detail in a few moments.
As expected our direct and assumed premiums grew modestly to $1 7 billion.
Driven by our high single digit rate increase on average across the book.
Our premiums before ceded reinsurance grew 8% year over year to $1 4 billion driven by the same factor as well as a lower projected risk transfer.
Turning to medical costs, our medical loss ratio improved more than 100 basis points year over year to 76, 3%.
Driven by our disciplined pricing actions and total cost of care initiatives.
Overall claims trends have been in line to slightly favorable with our expectations at this point in the year accounting for the mix of our 2023 population.
Within specific categories, we're seeing year on year decreases in inpatient and professional utilization.
While outpatient is trending very modestly above last year.
Partially offsetting this is a spike in pharmacy claims and note. It's early in the year.
Okay.
Given the morbidity of the population and our expected risk scores as we stated we expect less risk transfer this year.
This will have an impact on the numerator denominator of our GAAP MLR, but not the overall underwriting dollars.
With regards to seasonality, we expect the MLR will rise throughout the year, albeit less steeply given the risk transfer dynamics.
Moving to administrative costs, our insurance company administrative expense ratio improved 120 basis points year on year to 18, 6%.
Driven by the admin efficiency initiatives, we've already successfully executed against including distribution optimization and vendor savings.
Okay.
We see Q1 is the highest quarter for our admin expense ratio this year.
Our combined ratio of 94, 9% in the quarter improved by 230 basis points year over year.
And reflected insurance company profitability for the quarter.
Based on our results to date, we believe we are on track to achieve our full year insurance company adjusted EBITDA target of $20 million to $120 million.
Our adjusted administrative expense ratio of 21, 7% improved more than 200 basis points year over year due to the same factors that improved our insurance company expense ratio.
As well as meaningfully higher net investment income.
I am very pleased to report we achieved total company profitability in the first quarter.
With adjusted EBITDA profitability of $51 million.
An improvement of $88 million year over year and above our expectations.
The key factors that drove the year over year improvement include the better operating performance of insurance co.
Reduced quota share reinsurance fees and increased investment income from higher interest rates.
We expect Q1 represents the peak for adjusted EBITDA profitability this year, given our medical and administrative expense seasonality.
Shifting to the balance sheet.
Had $3 6 billion of cash and investments at the end of the quarter.
Including $260 million of cash and investments at the parent.
As a reminder, the first quarter includes one time items in parent cash such as bonuses that will not recur throughout the year.
We also.
Expect cash back to the parent from tax sharing payments that we expect to occur in the second half of 2023.
Yeah.
Our subsidiaries had approximately $765 million of capital and surplus.
Including $230 million of excess capital.
That excess capital positions us well to fund future growth and.
It allows us additional opportunities to optimize our capital position over time.
Based on the first quarter results, we are reaffirming all of our full year guidance metrics, including our MLR range of 82% to 84%.
And our adjusted EBITDA loss range of <unk> $75 million to $175 million.
Okay.
In closing we are encouraged by our performance in the first quarter.
And remain confident in our ability to achieve insurance company profitability. This year.
We believe that sets us up well to execute against our plan for total company profitability next year and for further margin expansion in the years to come.
We're excited to be the leading player in the ACA market, which has strong growth tailwind and we expect to expand our Tam with additional service areas next year.
The combination of our disciplined pricing along with strong customer satisfaction and brand.
Waits to value creation for Oscar in the years ahead.
With that let me turn the call over to Mark for final comments.
Thank you Sid.
I want to thank the Oscar employees for welcoming me and for the important work they do in serving our members.
Omission like ours requires a special group of people.
Motivated by driving real world impact.
Last month, we published our inaugural ESG report, where we shared the progress we've been making towards advancing health equity.
We're proud of the strategies and initiatives, we have developed and continue to iterate to build a more sustainable and equitable future within our organization and our communities.
In summary, we believe that we are off to a good start in 2023. The company is operating from a position of strength with profitability on the horizon.
I am confident that we have the right roadmap in place to actually.
Against our goals and the right mix of tools and experience to win in the market.
I'm excited for the journey ahead and optimistic about our future.
With that let's turn it over to the operator for Q&A.
Thank you, Sir and everyone. If you would like to ask a question. Once again that is star one on your telephone keypad at first we'll go to Kevin Sorry, Stephen Baxter Wells Fargo.
Yeah, Hi, Thanks, I appreciate the commentary on the portfolio sculpted and the actions are taken in California, and Mark I was hoping you could talk a little bit about the importance of further membership growth and achieving the company's financial targets, including the admin efficiency are targeting I guess beyond California. At this stage would you be expecting to grow membership and plan to report like pilots.
Any any comments you have there would be great. Thanks.
Okay.
Okay.
That okay can you repeat that.
Yes, Steve.
Could you restate the question for US please sorry, I was cut off there.
Yes, sorry about my connection is okay at the moment. So I appreciate the commentary on the portfolio scoped in and the actions you are taking in California. So I guess Mark could you talk a little bit about the importance of further membership growth and achieving the companys financial targets, including the admin efficiency that you highlighted I guess beyond California would you be expecting to return to the membership growth in <unk>.
Slide four and quickly.
Yes.
We expect to see.
Our growth mirrored that of the market or a little higher and Thats our goal.
With pricing discipline, so I'll make sure I'll say that over and over and over again, but we believe that we can grow better than the market the.
The market is predicted to grow in the twenties.
Low twenties high teens high teens, and so we expect that we'll be able to put that growth into the marketplace for next year 2024 and growth is important but with disciplined pricing.
We will go next to Josh Raskin Nephron.
Hi, Thanks, Good evening guys.
Could you just start just give us a.
Rough size of the California book, either membership revenues and if MLR was expected to be at or above 100%. This year and then just related to the MLR down a little over 100 basis points in the first quarter guidance sort of implies down little more than 250 250 basis points for the rest of the year. So just help me understand was there some one time.
<unk> and <unk>.
<unk> or or or I'm, sorry in the rest of the year last year that that would create that and then just the last question just what percentage of your rapid use. This year are with capital providers are in value based care arrangements, maybe where was that in 2022 and how is that playing into the strategy.
Hey, Josh it's thin thanks for the questions I think you've got three there so I'll try and tackle sequentially.
First of all just context on California, I think.
You referenced some of the history, but just important notes in the early days of Oscar was probably about 25% of the portfolio today. It represents less than 5% of the portfolio and certainly in the past couple of years, while we've been managing that portfolio sculpting, Ed it's still underperformed our expectations somewhat with an MLR.
Over 100 percentage as you've commented.
So as we look at it while California is an important state the ACA will take a pause while we review the work required to reenter it in a more sustainable way.
With respect to your models, we expect to end 2023, with roughly 35000 members in California, and approximately $200 million in gross premium. So net net we would expect the exit from California would have a very modest impact on the top line.
And would have modest accretion to adjusted EBITDA given its historical MLR performance.
Moving to the second one I think your second question.
I think your second question was really around year on year comparisons for the MLR.
Really I think what youre seeing if you reflect on some of my comments is the membership mix that we have and in particular.
The shift towards more renewing members, which as we alluded to we'll change both the numerator denominator of the MLR calculation and importantly, it will also flatten the kind of seasonality effect that you've seen historically so.
So of course you have.
More detailed questions on that we're happy to have the team sit down with you offline on that.
I think your third question was just on.
On capitation, we don't specifically disclose that I think we've told you before that had been roughly.
40 ish percent.
Of our provider contracts around value based care type arrangements.
We'd leave it at that other than to say, we continue to believe value based care as a real opportunity as Mark commented in his remarks.
Thank you.
We'll take the next question from Michael Hall, Martin Stanley.
Hi. Thank you just wanted to quickly confirm are you expecting to grow at least high teens or low 20 membership growth next year and that includes the Florida market exit and then my second question is this.
Just one for Mark as we look at pluck Oscar and I understand in the past when you're asking as an adviser part of your efforts were focused on <unk>, but looking ahead now with Walter contacting a rolodex and Mario laser focused on pleasure Oster curious how you envision the future pipeline developing near term and I think you mentioned in your <unk>.
Marty I, bringing more capabilities to market.
Does that mean youre accelerating modularized and more applications beyond campaign builder and also alright, and a five part question, but did you announce a new campaign campaign build their contract today wasn't sure if I heard that correctly. Thank you.
Yes, So I think Michael have said here I'll take the first one then I'll hand, it over to Mark to talk about plus Oscar.
First off just restating that was a California market exits that you referenced there, so, California, which was as I said less than 5% of the overall book.
As we execute against our growth objectives that Mark highlighted there we've proven that we can grow in these markets and we continue to target that growth and it's very realistic for 2024 inclusive of the California decision, but you should expect <unk> to continue to show discipline in the 2024 pricing process around balance sheet.
And profitability.
Because I think as you see in the results. This quarter, we feel very positive that the decisions that we've been making to.
To drive the portfolio are really bearing fruit here and showing up in the financials. So.
We are pleased about that and maybe with that I'll turn it over to mark to.
Covered.
Oscar thesis and how he sees that sure into segue off of Sids comments, it's important that we continue to generate internally internal generation of capital to support our investments in the business and so we want to exercise pricing discipline, we do want to meet the market.
Or exceed the marketing growth, we believe because of the plus Oscar platform that we have a competitive advantage now with an NPS score of 50.
When the rest of the industry is averaging around zero and so we actually in our distribution model. This last year.
Put that to test in a few markets to see whether or not we could maintain membership with such a high NPS score.
Against the.
The commission race in signing up.
In signing up HCA members. The platform is strong on the front end very strong on the front end and so thats why the campaign builders taking off when we did announce though declined today.
A large multi specialty group practice that has Medicare Medicaid Medicare advantage Medicaid and the ACA in it and so we will put that to the test.
As we implement that product.
As far as the full platform being available that is the work that <unk>.
Mario and I.
We're now starting to work on in evaluating what we need to do to harden the platform.
We have some new technology coming out on the backend.
We are very confident in but until we know that it works front to back the whole platform won't be available, but we'll roll it out in pieces, where we find it valuable for our clients.
Our next question is Kevin Fischbeck Bank of America.
Hey, this is John <unk> on for Kevin Fischbeck.
So maybe sort of shifting topics a bit how are you guys thinking about MLR MLR.
MLR Medicaid Redetermination.
Sort of what impact that could have to your membership.
Risk pool look like.
But the new people getting on the exchanges do you think of a higher or lower MLR than the core.
And kind of along the lines of smaller groups.
Groups.
How is your Ti plus Oscar going sort of what traction are you seeing in small group market.
Great. Thanks, John said I'll take that I think as a reminder, we've mentioned before we expect a relatively de minimis impact from Medicaid Redetermination and our 2023 estimates.
We have said we do think these members will be higher acuity than our current population.
As of today the majority of our states are now live that's still early in the Medicaid Redetermination process and we've been monitoring our book and haven't seen anything meaningful in the trends yes.
But pulling up I mean, we believe the ACI has many tailwind for long term growth, including Medicaid Redetermination is over the next few years and we have.
Larger market with an appropriate risk pool.
<unk> will be very differentiated in delivering service to its members. So in the long run we think that'll be a good thing.
With respect to your second question I think <unk>.
Plus argument <unk>.
With respect to our small group joint venture.
Similar to the theme you've heard from US before we approach 2023 pricing with the balance of growth and profitability. We continue to see balanced growth across our markets, Georgia and Arizona in particular.
But of course, we're targeting profitable growth here and we.
We're going to continue to.
Target good retention and have real investments there a member and broker experience.
What are the opportunities to Kevin we're investigating zebra and the potential.
To grow the individual market through moving small group and middle market of employer sponsored into coverage.
Coverage on we're in the beginnings of that analysis, we see a lot of promise when you look at the insured premium in the marketplace.
Insured premium was almost 70% individual and you look at Medicare Medicaid.
And there is more opportunity for us to grow that market over time and so were.
We will be taking a hard look at that this year and looking at a potential launch next year.
Alright, great. Thanks.
Mark.
You have to say tomorrow.
And we'll now hear from Nathan Rich Goldman Sachs.
Hi, good afternoon, thanks for the questions.
Yes.
When we think about getting to profitability for the total business by 2020 for I guess, how are you thinking at a high level about the algorithm to do that between growth of the market and kind of leverage on that growth as you grow in line or above the market versus taking additional actions like exiting California and are you consider.
During any other revaluations of the of the footprint as you think about the markets that you want to be in going forward. Thank you.
We will be growing.
We'll be growing our footprint beyond where it is today. So we're looking at new market entry opportunities and.
And Thats, what we talked about when we talk about sculpting the portfolio, where should we be where we shouldn't be any longer how do we change the portfolio to get the best return as possible, but I think underlying all of that is the scale that we now have should be brought to bear on the operating platform and our contracts with providers, we recently as I.
I mentioned.
Renegotiated our contract with our <unk> partner with really good effect on that.
That'll be something that we continue to do over time is to look for opportunities on the contracting side look for opportunities on the operating side because a lot of the operating opportunities at scale should be generating more internally generated capital for us.
And Thats, what we are going to do to grow the bottom line for next year and at the Holdco level, we'll be paying attention to our spending will try and keep it in line with growth.
Unless we find real big opportunities in the plus Oscar platform that we can use to buy gear of growth for the future.
The only thing I'd add to Mark's comments that sit here is really we are giving you guys. Some guidance in terms of where we think a target MLR for the year of 82% to 84% an important metric we look at is.
Roughly 80% of the book for policy, our 'twenty three we expect to see within that range.
One of the largest margin market thats outside that is California, and so from that vantage point.
Thank you.
We're very far along in terms of what we've done on portfolio sculpting, because and I gave you that same number for last year, it's probably more like 60% to 65% in the book would have been in that target MLR range. So we feel very good about the progress and we feel good about the strategy and execution as Mark highlighted.
That's helpful. Thank you.
And everyone. A final reminder, it is star one if you have a question we'll pause for just a moment.
And there appear to be no further questions that does conclude our question and answer session. It also does conclude today's conference I would like to thank you all for your participation today.
May now disconnect.
Yeah.
Yeah.
Yes.