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Kevin O'Leary

5/13 Earnings Week in Review: Babylon, Oscar, Privia

May 13, 2022
Company Research

Oscar Health

Link (release) / Link (transcript)

Oscar’s earnings announcement featured a heavy focus on moving the insurance business towards profitability in 2023, including an exit from two states on the exchanges where Oscar had small membership and didn’t see a path to success. It’s another remarkable sign of the times to see how quickly Oscar has pivoted away from the growth at any cost mindset to a much more balanced view. 

The earnings discussion itself was relatively uneventful, but let’s take a look at the updates on the insurance business and +Oscar from earnings:

Insurance Business

Oscar starts off the call with a reminder that at 1.1 million members currently it represents 7.5% of the entire exchange market. It averages 16% market share where it has products in the market. 

Oscar also shared some renewal stats: in the exchanges 80% of people renewed, and in the Cigna + Oscar product 85% of people renewed. It’s pretty amazing how much the individual market has settled down over the last few years in terms of member churn to where it now seems like many insurers are reporting retention rates in the 70% range. Will be curious to see if that continues to increase

In the opening remarks, Oscar’s CEO spent time walking through how they’re going to achieve profitability in the insurance business in 2023, leveraging pricing to balance growth / profitability, managing medical spending, and managing operational costs. It’s interesting to see how he describes each of the opportunities:

  • Profitable Growth. Oscar is expanding the virtual PCP plan design, because they’re seeing it has an ability to influence total cost of care. 
  • Medical spend. Oscar is focused on automating more utilization management, paying attention to payment integrity, population health, and closing gaps in care. 
  • Operational Costs. Oscar is focused on automating manual processes, i.e. 5% of responses to inbound member messages today are automated and they hope to get that up to 20%.

I look at that list and think to myself that all of these initiatives sound like they could have been copy + pasted from any of the major insurers earnings calls this quarter. Which is both a good thing and a bad thing for Oscar, right? It says they’re paying attention to the right things to build towards a profitable insurance business, which is clearly needed. On the other hand, isn’t doing the exact same things as the big insurers the antithesis of why Oscar exists? Yes, utilization management, payment integrity, and population health are great ways to reduce medical spend. But they’re also the same sort of programs that all insurers do that cause members to dislike their insurance product. For better and worse, it seems like the disruption mindset Oscar has historically had is giving way to a much more incrementalist mindset.

Oscar’s exchange book of business is apparently shifting significantly towards Silver plans, as they noted during the call that 65% of members are now on Silver plans, up from 50% last year. This shift to Silver members drove about 75% of the 3% increase in MLR in Q1, but Oscar doesn’t sound concerned as it believes these members are in richer plan designs that should have flatter seasonality over the year. Oscar noted that those members' use of Oscar’s care router is 15 percentage points higher than other members. 

Oscar backed out of two markets that have smaller membership, Arkansas and Colorado. Both markets are small so there’s no significant effect on financials for the organization, with the primary benefit being focus for the organization. They didn’t see a path to getting to scale in those markets and so chose to move on.

+Oscar Developments

+Oscar has signed up its first client on its new modularized SaaS product, with an insurer buying Oscar’s campaign builder tool to drive member engagement. This is going to be a major question for Oscar as it moves to a more modular SaaS product - certainly, there’s a whole set of companies that sell member engagement tools to insurers. It’s a known problem for insurers (check out McKinsey talking about next-gen member engagement back in 2019), and they will work with outside vendors to address those problems. So it shouldn’t be surprising that Oscar can win business in this market. It just seems like a far cry from the industry changing intention of taking Oscar’s platform and having other payors use it to fundamentally change how insurance is delivered. The data point cited as a success metric for +Oscar in this sale is that a campaign increased annual wellness visit appointments by 15% and reduced no shows by 20%. That sounds a lot like the sort of stats every member / patient engagement company throws out there. 

This approach invites a number of questions as to whether Oscar’s plan get a foot in and sell additional modules is going to be feasible - convincing a regional insurer to use your member engagement platform is a very different sale than convincing them to replace their core claims admin platform, as it sounds like Oscar has discovered over the last year. It’s also not a far cry from seeing an easier opportunity to start helping employers with engagement / navigation, which again is a very different type of sale and a massive distraction from the broader platform. So it will be interesting to watch how these +Oscar sales develop over time. But if Oscar’s next stage is as a member engagement platform for other insurers, I am even more worried about where all of this is headed for them.

Oscar mentions it is still out selling the full BPaaS platform product for 2024 opportunities, although given the mentions about how challenging the Health First relationship has been and how one of the key strategic focus areas is growing that book of business, it’s not exactly confidence inspiring. Given the implementation timeline, you’d hope that Oscar would have a very clear idea in the next few months of who it is moving forward with, as it would be time to get moving on an implementation now - 2023 Open Enrollment is getting close to a year out at this point.

Privia Health

Link (release) / Link (10-Q) / Link (transcript)

Privia’s earnings release highlights well the benefits of being a provider enablement model at the moment, as it drove solid revenue growth in Q1. Privia did flip back to a net loss for the quarter after generating positive net income in Q1 2021, driven by an increase in provider expenses (in part due to entering into VBC contracts) and an increase in G&A driven by a $19 million stock based comp expense (if you removed that it would have generated positive net income again). And Privia was still profitable in Q1 2022 on an Adjusted EBITDA basis. 

Privia, which has historically been primarily in the FFS world, is starting to move quickly towards VBC. We’re seeing that in their addition of capitation revenue this quarter and the launch of Privia Care Partners, which we’ll get into below. Because of the combo of FFS and VBC, and associated six different revenue categories it reports, Privia makes for one of the more complicated stories in this physician enablement space, but the 10-Q actually does a relatively nice job of explaining the mechanics of how Privia creates medical groups in local markets. On to some takeaways from earnings:

  • The entry into Montana via a partnership with Surgery Partners came up a number of times during the call as a key strategic move for Privia. It’s notable in particular because Privia now has a 65 provider practice that spans 24 specialties under its umbrella, which certainly opens the aperture from primary care only. Privia notes in the earnings transcript that across its 3,370 implementing providers, 65% are primary care (internal med, family med, pediatrics, and OBGYN) but that it also has over 50 specialties represented. More on this in the next bullet.
  • The Q&A gets into this specialist topic, as Privia starts to position itself as a broader ambulatory care platform that is bringing together assets across the country in a differentiated manner. Interesting to see that they view Optum Care as the only other player doing this with national scale at the moment. It’s hard to argue with that currently, but it’s also hard to imagine that remains true for long. I imagine a number of players will be moving in this direction (i.e. see agilon’s deal with Maine Health, although that brings up a whole different set of strategic considerations with respect to ambulatory only or do you integrate the hospitals). Anyways, check out this response from Privia on its strategy:
Look, just broadly speaking, if you take a step back, our strategy is to build these very large-scale medical groups focused on primary care providers, and then we surround them with the right specialist. We partner with lower-cost health systems. And then obviously, entities like Surgery Partners and providing these value-added ancillaries as part of this broader ambulatory care delivery system, if you will, this is what we believe is fundamentally going to be a very valuable entity and where the puck is moving. It allows us to have a very broad access to the TAM, participate in 50 states, all patients, all payers, all reimbursement models. The only other company that does this at somewhat national scale, given the assets they've acquired, is Optum Care, as you know, but very similar strategy. We are a fraction of the size. Obviously, we don't have the balance sheet, but we are trying to do that in a very thoughtful capital-efficient partnership model and -- but we're trying to achieve the same result.
  • Privia breaks down its sources of revenue in the following chart in the 10-Q, which is a helpful way of seeing how much of its revenue is VBC versus FFS. It generates 72% of revenue from FFS business (FFS-patient care & FFS-administrative services), and 27% of revenue from VBC business (Capitated revenue, Shared savings, & Care management fees).
  • Privia doesn’t break out how they’re performing on Capitated Revenue yet, which is understandable given how early that is. But it will be curious moving forward to see if they break it out in provider expense to help investors understand how they are managing the capitation book of business. Its Provider Expense line item increased from $161 million to $242 million year over year in Q1, increasing as a percentage of overall revenue from 75% to 77%. 
  • Privia Care Partners launched 1/1/2022, with over 25,000 attributed lives across 300 providers in 100 clinics. Privia Care Partners is a new option for Privia to sign up providers to value-based deals without needing to be a part of the FFS MSO business. This provides some indication of the appetite for providers looking for support in taking on risk even if they’re not interested in support on the FFS business.
  • Privia reported having 23,000 MA lives as of 1/1 across its Florida and Mid-Atlantic ACOs, growing to around 30,000 as of 3/31. 
  • Privia articulates multiple times in the earnings call the relatively easy-to-understand flywheel dynamic happening right now that is driving so much excitement around physician enablement models, and causing independent providers to consider implementing them - essentially, VBC contracts are a path to sustainability financially that doesn’t require selling your practice to a health system or PE group, but they’re hard to implement and you need a partner to do so. Check it out:
And then, look, the model today is really set up well where we're seeing this flywheel effect with our existing physicians asking their colleagues to join an entity like Privia, where there are all these challenges, complexity of value-based programs, the infrastructure, the technology stack and so forth. And I think independent physicians are realizing our model of being best of both worlds, where they bought something bigger, yet maintain their autonomy and are supported by a bigger entity from all of these things and have a real governance structure around our singleton medical groups. It gives them this best of both worlds dynamics, which is hard to get relative to selling their practice to somebody, whether it's a health system, whether it's a private equity entity, and so forth. So I think we're seeing all that momentum our way in terms of -- and that's all reflected in the growth in the financial statements.

Babylon Health

Link (release) / Link (transcript)

Babylon’s stock had a brief bump after it raised revenue expectations for a second time this year, although the stock came back to where it has been trading for the last few weeks after management torpedoed the stock price by dumping all their shares on the same day as their SPAC lock-up expired. 

Babylon is a really interesting case to observe - on the one hand, the hodge-podge approach to cobbling together assets and lack of transparency into key business drivers creates a lot of skepticism as to the underlying business performance - what sort of VBC company doesn’t share an MLR number anywhere in the press release, accompanying deck, or earnings call? When you see the MLRs they’re posting, you see why they’re making a point to obfuscate it. On the other hand, the organic growth in value based care apparently driven by new client wins with payors is pretty impressive. Until they share more specifically on the model and how they intend to drive this VBC book of business to profitability, I’d be staying far away from this one. Babylon will be hosting an Investor Day on May 23rd, so we’ll see what we share there. Here are some other details from the session we found interesting:

  • Babylon’s bull case clearly resides around the growth that it is seeing in signing up new members into VBC deals. Check out the membership growth over the past year:
  • Over the last two quarters, it has grown membership substantially, primarily in the Medicaid market, even as the Commercial market is flat / declining. Babylon added 100,000 new members in Q1 via three new VBC contracts, and in the earnings call mentioned a few times that they’re very bullish on the pipeline for this year. They also state that most of this growth is organic, both in terms of state expansion and new client wins. Of course, Babylon provides very little detail on any of this, aside from increasing its revenue expectation for a second time this year. It’s gone from $710 million to a $900 - $1 billion range to over $1 billion currently. I’m not sure what it says that you’re increasing your revenue expectations two quarters in a row - it’s not like these VBC contracts should be materializing out of nowhere.
  • Babylon makes a big deal out of its ability to engage members, signing up high risk members 8x - 10x faster in a new deal in Mississippi in Q4 2021 than previous deals. Intuitively I can understand why that might be a good thing but Babylon stops short of actually articulating the business impact here - more than anything, I can see payors being extremely pleased by that (and that could be a big part of what is driving contract wins)
  • As I alluded to above, it is incredibly bizarre to see a VBC company not mention their MLR at all in a quarterly earnings report. At one point, Babylon refers to the cost of care delivery as a percent of revenue being 102%, but even that just adds to the confusion because revenue includes software licensing. It’s almost like they know the number is so bad they are actively trying to dissuade people from looking at the number. I’ve made the chart below looking at what their MLR is and as best I can tell it’s between 105% - 110%, and has been bouncing around in that range for
  • Babylon said a few times during the call with no uncertainty that it will not need to raise capital this year, which is a bit confusing given its net loss for the quarter was $90 million and Babylon only has $275 million in cash on hand. If it continues that level of burn over the next three quarters (or potentially gets worse), it’s hard to imagine how Babylon will avoid needing to raise capital this year or early next year to stay afloat. 
  • Reported 271,000 VBC members in Q1 2022, 83% in Medicaid, 6% commercial, and 11% Medicare. This is up from 66,000 VBC members in Q1 2021, 88% Medicaid, 12% Medicare. Babylon has 19,000 lives in the Direct Contracting program. Given the number cited above, this would appear to mean that Babylon has around 10,000 lives in Medicare Advantage (19k+10k = 29k which is ~11% of 271k VBC members)
  • Beyond those details, everything is quite vague with how Babylon is performing on its risk based contracts. You can see in the transcripts multiple questions from analysts trying to get a sense of Babylon’s path to profitability within these contracts. Somewhat confusingly, Babylon suggests that the risk contracts it signs up are essentially profitable year 1, and then basically they gain 500 bps (5%) of gross margin every year. Babylon provides very little data supporting this assertion, however, or the mechanism of how these contracts are improving over time. Compare this approach with that of agilon or Oak Street, where you can see data on their cohorts over time, and it makes me a bit nervous about what is under the hood here.