Discussing our key takeaways from notable earnings sessions this week - Babylon, Oscar, and Privia
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:
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:
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 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’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:
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.
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.
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 sesion we found interesting: