A review of Oscar's analyst day and deep dive into the insurance + platform business
Oscar hosted its investor day on Friday - slides are here - and it was a pretty underwhelming session, especially for an organization that historically has shared some really impressive strategy documents (Oscar’s 2018 strategy deep dive stands out). Oscar’s investor day lacked much depth, which is perhaps understandable given the unsteady state of the business at the moment. From what was shared by the Oscar team led by CEO Mario Schlosser, I left the session with three takeaways:
All of that is a relatively nice way of saying the business appears to be struggling, and Oscar’s next twelve months are shaping up to be a “prove it” period for Oscar as both of its divisions face major uncertainty. As we’ll get into below, the +Oscar experience is a major mistake for a company in its first year after going public, and while we’ve known about the insurance losses, the time has finally come for Oscar to show it can get to profitability.
This is going to be a major test for Oscar, because while Schlosser repeatedly harped on the two differentiators for Oscar - member experience and technology - it’s not actually clear that these differentiators are needed to operate a profitable insurance business. That is a major challenge for Oscar. It’s also not clear that Oscar will be able to retain its member experience differentiator as it moves the insurance business to profitability - the changes it is talking about making sound a lot like those of a standard insurance business. Understandable, to be sure, just not entirely aligned with disrupting the industry.
To Oscar’s credit, it demonstrated during the session again that its tech platform is far ahead of the curve, particularly when compared to incumbent insurers’ technology platforms. It spent a long time during the session providing a product demo, and that is worth checking out. Oscar showed how patients interact with Oscar’s App and how Oscar’s clinical teams interact with its internal EHR to support patients. It’s a really impressive experience, particularly when you see things like Oscar’s ability to provide accurate cost estimates by adjudicating claims in real time. It’s readily apparent all of the effort that has gone into building this technology. I find myself wishing more of the newly public care delivery companies touting their tech platforms would go this in depth on the experience.
The state of things at Oscar is unfortunate, particularly if you’re bullish on the ability of tech and better experiences to drive change in healthcare. Oscar is example 1a of what should work. Yet it continues to struggle. I find myself continuing to root for Oscar to succeed, in large part because if it can’t, it serves as a huge negative signal for the rest of the startup landscape. Unfortunately, the investor day did not provide much confidence that Oscar is on a path toward success, at least in the near term.
Let’s now turn to each of the divisions and unpack some of the information Oscar did share, but first we’ll take a look at the waterfall chart Oscar shared as grounding on its financials.
Below is Oscar’s version of a waterfall chart, which provides some context for the financials of its two businesses:
The left two bars highlight the insurance business - Oscar will have $6.1 billion - $6.4 billion in direct premiums. Its InsuranceCo Combined Ratio includes MLR and the InsureCo Admin Ratio. When Oscar says it’s getting its insurance business to profitability in 2023, it’s this combined ratio that Oscar is targeting below 100%.
Then, you get to +Oscar’s revenue, which will be $65 - $70 million in 2022. The chart shows how minuscule the business is compared to the insurance business today, yet both divisions got equal airtime at the session. And then in addition to the InsuranceCo admin expenses, Oscar’s Holding Company has admin expenses, which when all taken together will drive an Adjusted EBITDA loss in 2022 of between $380 and $480 million.
So while Oscar is trying to hit profitability on the insurance business in 2023, that is on the InsuranceCo Combined ratio, not the overall business. Oscar shared it expects to hit profitability on an Adjusted EBITDA basis in 2025, which is still a long way out. While it’s understandable why they’re wanting to show progress towards that in 2023, it still raises questions for Oscar over the next several years as the public markets shift focus to profitability, particularly if they’re unable to hit the goal of InsuranceCo profitability in 2023.
Even though Oscar says it “operates in the most consumerized insurance markets”, its membership concentration in Florida is quite high, now accounting for 60% of its 1 million members. On the bright side, this shows how quickly membership can grow in certain markets, with Florida membership increasing from 115k in 2020, to 290k in 2021, to 600k in 2022.
Florida is one of the biggest ACA markets with lots of growth, yet it’s also a very price sensitive market, particularly in South Florida, which is a notoriously challenging insurance market. So it will be worth watching what Oscar’s plans are in 2023 - if it raises prices in Florida, is it still able to drive the same level of membership because of its differentiated experience? If you’re a believer in Oscar, you have to think the answer to this question is yes. But Oscar’s approach on investor day - only providing an update on Florida membership and not going into detail on other markets - doesn’t give much confidence that it has seen this dynamic play out in other states on the exchanges.
Oscar did include the one chart below that shows how Oscar is now looking at markets, categorizing them as either “grow”, “maintain”, or “remediate”. Given that 10% of the markets are in the remediate category, it seems like we should expect to see some market pullbacks from Oscar in 2023. It again is not a good indicator that Oscar has built a viable insurance business at the moment, outside of the Florida market perhaps, which is one of the more volatile markets. Oscar mentions in the analyst Q&A that we should expect to see them try to drive growth in other large exchange markets, including California and Texas, which both have the benefit of significant exchange membership to go after similar to Florida.
Beyond Florida membership, Oscar gives an update on the progress of the C+O small group partnership. It is still relatively small at only 30,000 members in 2022, but it is growing quickly, so that’s good. But it also speaks to the state of Oscar’s insurance business that these are the two slides it can use on growth. A case study on one market and a partnership does not exactly inspire confidence that Oscar has found a way to grow its insurance business in a scaled, repeatable manner.
Oscar continued its notable shift to focus on profitability during the day. It is not giving up on growth entirely, but profitability clearly is the focus. Oscar illustrates in the waterfall chart below how it intends to achieve the reduction of its Combined Ratio on the insurance business from 104% - 106% in 2022 to <100% in 2023. More on the details behind this below.
In order to get to a Combined Ratio below 100%, Oscar has some work to cut out at least 5% of costs out of the insurance product, either via medical spend or administrative expenses. They spent a good deal of time talking about the initiatives they plan to undertake across the various categories, which are outlined below. The initiatives outlined sound exactly like what you’d expect an insurer to do when they’re looking to squeeze more margin out of their product, which I suppose is either a good thing or a bad thing depending on your lens. On the one hand, Oscar is operating an insurance business, and so it’s going to need to do the things any insurance business does to get to profitability - tinker with the network, increase premiums, squeeze on utilization management, improve operational efficiency, drive scale, manage broker spending, and potential exit markets. On the other hand, for an insurer that has always differentiated on member experience, these are generally the types of initiatives that have a negative impact on NPS. How is Oscar able to make these changes without looking like any other insurer?
This is the crux of the problem that Oscar faces in its InsuranceCo at the moment - while the tech and member experience sound like nice differentiators, it’s not clear that they actually matter all that much when operating an insurance plan. What matters are the things below. Oscar is now having to pay more attention to them as they focus on profitability.
It’s worth noting that what’s left out of this table, and perhaps the most common insurer tactic to drive more profitability, is increases in premium and/or plan design cost shifting. However, they are already starting to do this, and we’d expect more of that in 2023, which we’ll get into in a couple sections. See: “Will Oscar have more members in 2023?”.
Oscar’s results on the insurance side of the business are a reminder that, leaving aside the last few years in Medicare Advantage, being an insurer isn’t all that great of a business. I know the entire industry is drooling over the financial returns UHG has generated over the last decade, but there’s a reason why even it has been making Optum the focal point of the business.
For instance, Oscar is still struggling with losses even though its MLR isn’t even all that bad at this point - an MLR of 84% - 86% is getting to a respectable place, and Oscar can only gain a few more percentage points there at this point. The bigger challenge for it seems to be that it is currently running at a 19.5% - 20.5% InsureCo Admin Ratio. For a well performing plan in the individual markets, you’re looking at an 80% MLR and a 13% - 15% Admin Ratio, getting to a profit margin of 5% - 7%. That’s the best case scenario on Oscar’s insurance business, but would require significant improvements in both admin expense and medical costs.
Oscar spent exactly zero time during the investor day talking about the Medicare Advantage book of business. Interestingly, when asked about this during Q&A, Oscar’s CEO suggested that the Medicare Advantage market is past its peak - predicting that the market is going to get a lot tougher to succeed in with all the conversation around risk adjustment and FFS versus MA costs. It’s interesting to see a public insurance company CEO stating that so plainly - and something to keep an eye on for the industry. I’m not sure the other MA plans would agree with that take.
It’s also worth noting how bullish he is on the opportunity for providers to take risk on Medicare Advantage populations, and that he sees +Oscar as well positioned to benefit from that growth. It’s odd to see him bifurcate those two things - presumably if MA plans start struggling more, that will have some impact on provider success in the space as well, as it benefits significantly from the risk adjustment conversation.
Either way, it appears we shouldn’t expect to see Oscar attempt to drive much growth in the Medicare Advantage market from here. Oscar’s thesis that it could disrupt insurance markets where individuals make purchasing decisions by providing a better experience has failed, at least in this market.
Oscar’s entire history thus far has been a story of growth, yet it is now turning the ship to try to get to profitability, raising questions about its ability to retain membership as they do so. Oscar signaled to investors repeatedly that it plans to raise prices in 2023 (it believes the whole market will need to). Certainly, Oscar has presented some data (see below) showing that it has moved away from being the lowest cost plan in many markets and has still been able to grow membership. It also demonstrated high retention rates on the individual exchanges.
Certainly those are positive indicators - though it’d be great to see more consistent reporting by market to really understand what’s happening there. 2023 will be a huge test of Oscar’s thesis that a differentiated member experience will lead to members staying with their Oscar plan regardless of price. Now that they’ve decided to pull insurance plan levers and get to profitability, will the tech and member experience stand out as differentiators that drive membership, retention and performance? Or will Oscar look just like another insurance plan?
While Oscar leadership paints a rosy picture about the potential growth of the platform moving forward, the launch of +Oscar appears to have been a total failure for the company. Launched back in April 2021 just after Oscar went public, this platform business was seen as a potential growth channel for the tech platform to support other insurers in delivering a fundamentally rethought experience. It’s great in theory - Oscar has this excellent platform and should be able to convince other payors to leverage it to deliver similarly great experience.
Yet, it doesn’t appear that Oscar has signed a single new customer since the platform initially launched last year. See below for a screenshot from Oscar’s most recent 10-K highlighting the co-branded customers it has had for years. Additionally, Oscar’s leadership team made it clear on the call that it does not expect it to sign another client this year.
It’s hard to overstate how big of a misstep it is that Oscar hasn’t been able to sign up a single new client in two years after launching this as a separate division.
It would be one thing if this were for a completely unforeseen reason, but Oscar shared during the investor day that it was moving on from its initial all-or-nothing approach because it realized that this is a massive purchase decision for its customers, with a 18 - 24 month sales cycle and then 12 month implementation period. It’s understandable that Oscar wouldn’t find that appealing, but why launch +Oscar as its own division last year in the first place then? Did they really not have any understanding of that before launching a new division as a public company? What did they think was going to happen here?
The magnitude of this mistake invites questions about how well Oscar actually understands the needs of payors and providers it is selling to. Oscar’s COO, who oversaw the +Oscar business, resigned in early March, and it’s hard not to equate the performance of the business with that move.
What Oscar seems like it failed to understand in selling its platform is that while the tech may be amazing, it fell into the same trap many early stage startups find themselves in - nobody actually wants to buy the tech that you’re trying to sell them.
When you look at Oscar’s product demo, it comes across pretty quickly that the tech is really nice. But when Oscar is out pitching to various smaller insurance and provider plans, those plans all have to evaluate what it’s going to be like to rip out all of their existing systems and replace those systems with Oscar. Oscar talks during the session about replacing 20 legacy systems with their own platform and integrating 120 data feeds. And surely when you rip out all of those pieces it should result in a better end state. But those organizations all have to ask themselves whether or not they’re ready to undertake that change and/or if they want to cede all of that experience to Oscar. That is a really challenging political decision for these organizations, and it shouldn’t have been a surprise to Oscar that the sales and implementation cycles are so challenging here.
Even Health First Health Plan, Oscar’s only client they spoke of during the investor day, hinted at these challenges. Health First Health Plan’s CEO gave a nice recorded plug for Oscar, but in that plug he referenced the “bumps in the road” getting the partnership launched over the last year. When your key customer is referencing bumps in the road in a recorded plug at your investor day, the level of the challenges at hand feel quite large. It’s not hard to imagine the magnitude of cultural change required in an organization like Health First Health Plan to rip and replace all of its legacy systems with Oscar.
All of this seems fairly obvious in writing it, and should be immediately obvious to anyone who has ever talked to leaders at incumbent health systems or payors. This makes it all the more befuddling how +Oscar screwed this up so badly, launching without any clear line of sight into potential future customers.
The one win for Oscar in the +Oscar platform is that it does appear to have a happy customer in Health First Health Plan now that it has gotten through the implementation period and is using Oscar’s platform fully. Health First Health Plan plans to grow its insurance membership substantially next year, which it appears is driving a lot of the growth for Oscar in this division.
This experience does show that the theory Oscar is operating on here isn’t entirely wrong, and that if you can successfully get a customer onto the platform you can actually drive some success for them. Unfortunately, the “if” in that sentence is doing a lot of work.
Oscar’s path forward with this division is moving to a more modular, SaaS approach to selling +Oscar that will make it easier for customers to adopt the platform. Rather than purchasing Oscar’s entire tech platform - claims processing, member app, EHR, etc - all in one fell swoop, it is now going to allow payors and providers to pick and choose which “modules” they want. There is definitely a logic to this pivot - by reducing the integration barrier up front, perhaps you can get more organizations to use a piece of the product. It seems like it should work to drive more growth.
Oscar pitches the benefits of a SaaS approach - shorter sales and integration cycles, with higher margins, because less support is needed for each customer. I can buy that in theory, but again, it’d be nice to see some additional evidence at this point given Oscar’s initial failure here. These are crowded markets as well, with well established companies like HealthEdge and Cognizant it is competing against. Oscar needs to show it can successfully win customers in these markets.
The chart below is interesting, and it appears the bottom right quadrant is where Oscar wants to go in the future. Of course it sounds appealing - selling their full-stack offering in a SaaS manner would be amazing. But it seems like a bit of a pipedream at the moment given its experience launching the BPaaS product. I’m not placing much weight on them getting there over time. It appears they’ll continue selling the BPaaS product as well.
Perhaps the most disappointing part of the entire +Oscar section was that they still aren’t able to articulate a customer pipeline for the platform
An analyst asked the question explicitly what the customer pipeline looks like, both across the SaaS and the BPaaS offerings, and the Oscar team didn’t say much other than “we’re out talking to customers every day”. Ok, that’s great, but it’s not an answer. Here you have Oscar, a public company that just launched a division that:
This is not confidence inspiring. Schlosser didn’t do himself any favors in this section of the presentation either, ad-libbing on the slide below about how he views digital care delivery as a future large market for the +Oscar platform.
The issue isn’t that he’s necessarily wrong - I’m sure he’s having many conversations with early stage virtual care delivery and insurance startups about how they want to take risk on their populations. Given they’ve never been in the insurance game, it would make sense that a new offering like Oscar would be a good option for them as a platform - there are fewer of the legacy challenges that incumbent payors have in adopting +Oscar. The issue is that Oscar is a public company conducting its annual analyst day event for Wall Street, yet it is ad-libbing on strategy like it’s a Series B company convincing Tiger to hand over a massive check.
All of this makes it seem like Oscar still has a very long way to go in figuring out who is going to pay them to use this platform. Generically stating that health plans and providers will be interested without being able to go into any depth about who those payors, providers, and apparently digital health providers are doesn’t give much confidence that there is anything real here yet.
It also invites a question of what success looks like for Oscar in this situation. Given the early stage nature of the +Oscar platform, would Oscar be better off going private again and figuring out that business without the watchful eye of the public markets judging them every quarter? Is there a private equity buyer out there that would consider a transaction like this while Oscar is still losing significant cash? It’s something to keep an eye on, particularly if Oscar is able to get its insurance membership to profitability in 2023.
If you’re wondering about whether all of this is a little harsh on Oscar, that it’s challenging to negotiate these deals and maybe we should give them a break in launching a new business, ok. Maybe that’s fair.
But at the same time, Oscar is no longer the early stage startup disrupting an industry that it once was. It’s now a public company, and they should be able to articulate what they’re doing. For instance, look at agilon as an example of a company that has created confidence that it knows its customer and has a solid pipeline of deals. Based on Oscar’s investor day, it actually seems like agilon may be one of its closer comps moving forward, as Schlosser talked about the opportunity for +Oscar to help quality providers in local markets take risk, particularly on a Medicare Advantage population. That sounds a lot like agilon.
Yet take a look at agilon’s recent investor day - see the slide below as an example. agilon already has line of sight into its new partners for 2023. It is already sharing publicly how many partners it expects to have, how many providers those partners have, and how many members it expects to manage on behalf of those providers. In doing so, agilon provides confidence that they understand how complex these partnerships and negotiations are by sharing this sort of information in advance.
Where is the similar level of detail for Oscar on its partnerships in the space?
One of the oddities of the Investor Day was the seeming conflict between the results that Oscar expects +Oscar to achieve for other plans in managing admin costs while Oscar itself - which mind you uses the +Oscar platform - has demonstrated no ability to manage its own admin costs. Keep in mind that during the insurance section, Oscar had a whole list of efforts it is going to undertake to reduce its admin expense to the levels that other insurers generally are already at.
But as you’ll see in the slide below, Oscar suggests Health First Health Plan is expecting a 20% projected reduction in administrative costs from implementing the +Oscar platform. To be sure, that seems like a meaningful cost reduction if they’re able to achieve it. But it’s super confusing that Oscar’s admin costs are ~20% while most other plans have admin expenses in the 13% - 15% range, and yet Oscar expects the +Oscar platform to drive meaningful savings for those plans while being able to demonstrate no savings on its own plan.
So, if the tech platform is able to generate those sorts of administrative savings, it is counterintuitive that Oscar’s administrative costs are so much higher than other health plans. It seems like there’s two logical choices here:
Neither one of them seem particularly promising for Oscar moving forward.
It’s interesting going back and looking at the bull / bear case we wrote at the time of Oscar’s IPO (see below for a screenshot from our review of Oscar’s S-1). While at the time of the IPO I clearly was in the bull camp, I’ve flipped to a bear after this investor day - the +Oscar struggles, the concentration of growth in Florida, the need to act like a typical insurer to drive to profitability, and the failure to successfully enter Medicare Advantage are all major red flags that Oscar has struggled to address.
Of course, the tech platform continues to be the shining star for Oscar as it continues to attempt to differentiate on member experience and technology. But it has failed to show any of that translates into operating a successful healthcare business. 2023 is going to be a big year for Oscar. It’s first year as a public company has gone quite poorly, and Oscar needs to both:
If Oscar can do those two things, it has the opportunity to right the ship and continue down the path it has been on attempting to disrupt the industry. Unfortunately, its stumbles thus far puts Oscar in the category of needing to prove it. If it struggles in making the transition, it still seems like a big incumbent insurer will look at Oscar’s tech platform and decide it wants to acquire Oscar to re-platform its core insurance business, so there is certainly still some upside for Oscar here. But that is a really big decision for an incumbent and will need to be done at a reasonable valuation.