OSCR - NYSE

Good morning. My name is Dustin, and I will be your conference operator today. At this time, I would like to welcome everyone to Oscar Health's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Chris Potochar, Vice President of Treasury and Investor Relations. Please go ahead, sir.

Good morning, everyone. Thank you for joining us for our third quarter 2025 earnings call. Mark Bertolini, Oscar Health's Chief Executive Officer; and Scott Blackley, Oscar's Chief Financial Officer, will host this morning's call. This call can also be accessed through our Investor Relations website at ir.hioscar.com. Full details of our results and additional management commentary are available in our earnings release, which can be found on our Investor Relations website at ir.hioscar.com. Any remarks that Oscar makes about the future constitute forward-looking statements within the meaning of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our annual report on Form 10-K for the period ended December 31, 2024, and the quarterly report on Form 10-Q for the period ended June 30, 2025, each as filed with the SEC and other filings with the SEC, including our quarterly report on Form 10-Q for the quarterly period ended September 30, 2025, to be filed with the SEC. Such forward-looking statements are based on current expectations as of today. Oscar anticipates that subsequent events and developments may cause estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in the third quarter earnings press release available on the company's Investor Relations website at ir.hioscar.com. We have not provided a quantitative reconciliation of estimated full year 2025 adjusted EBITDA as described on this call to GAAP net income because Oscar is unable without making unreasonable efforts to calculate certain reconciling items with confidence. With that, I will turn the call over to our CEO, Mark Bertolini.

Good morning. Thank you, Chris, and thank you all for joining us. Today, Oscar announced third quarter results and reaffirmed updated 2025 guidance. We reported total revenue of approximately $3 billion, a 23% increase year-over-year. MLR increased approximately 380 basis points to 88.5% due to higher market morbidity, partially offset by favorable prior period development. Our SG&A expense ratio of 17.5% meaningfully improved by approximately 150 basis points year-over-year. Overall, Oscar reported a $129 million loss from operations and adjusted EBITDA loss of $101 million. Net loss for the third quarter was $137 million. We remain confident in our ability to expand margins and return to profitability in 2026. Scott will walk through our financials in details in a few moments. Before I get into our results, I want to underscore the long-term importance of the individual market. The individual market is the only source of affordable health coverage to 22 million Americans who power our economy. The majority of members are from the small businesses, service and farming sectors, which together generate nearly half of U.S. GDP. These hard-working people do not have access to employer coverage and rely on enhanced premium tax credits to fill the gap. For example, the average farmer making $60,000 a year now pays $75 a month for health insurance compared to $300 a month before the enhanced premium tax credits. That $225 is the difference between paying for health care or paying the bills. Limiting access to affordable coverage in the individual market undermines Main Street and rural America. This market is critical regardless of policy changes, and we are engaged with policymakers on both sides of the aisle to ensure Americans have access to the coverage they need. Now I will update you on current market dynamics. As we said last quarter, 2025 is a reset moment for the individual market. Overall risk adjustment data from Wakely in the third quarter show continued higher market morbidity, which we attribute to Medicaid lives entering the market and the initial impacts of program integrity efforts. Looking ahead, we see rational pricing in the 2026 open enrollment period. We also see the overall market to contract due to the expiration of enhanced premium tax credits and program integrity efforts. However, we remain optimistic Congress will reach a compromise on tax credits to address affordability issues many Americans will face without them. The Oscar team is well positioned to profitably grow share and improve margins. Our 2026 pricing strategy remained disciplined, balancing membership and profitability. For 2026, we resubmitted rate filings in states covering close to 99% of current membership. And our weighted average rate increase is approximately 28%. Our rate filings reflect elevated trend, significantly higher market morbidity in 2025, the expiration of enhanced premium tax credits and program integrity initiatives. Our teams are actively directing members to plans at affordable price points to ease this transition. We have a strong opportunity to capture share profitably as other carriers retreat or price themselves out of the market. Oscar ended the first nine months of 2025 with more than 2 million members, a 28% increase over last year. We are now in the first week of the 2026 enrollment period. The Oscar experience will be available in 20 states, including 2 new states, Alabama and Mississippi. We are also entering new markets and expect to grow share in existing markets in core states next year. Our total addressable market for plan year 2026 is approximately $12 million, up 500,000 year-over-year. Oscar offers consumers more choice in the individual market. We continue to diversify our product mix, evolving from condition-specific plans to plans tailored to meet different phases of life. Our long-standing clinical plans for members with diabetes, asthma, COPD and multiple chronic conditions remain strong performers in the book. Now our new product, HelloMeno, helps women take control of the menopause experience. Today, nearly 5.4 million women over the age of 45 are enrolled in the ACA, a rapidly growing demographic with limited support. Oscar is the first individual market carrier to offer this type of product in partnership with leading women's health clinics and menopause-certified clinicians across the U.S. We help members save up to $900 per year by getting them into the right plans with $0 benefits, early intervention programs and high-value treatments that improve outcomes at lower costs. Oscar also continues to shape the future of employer coverage through ICRA. Our pricing is competitive across our major markets compared to group plans. We expect to see continued conversion from small and midsized employers who are suffering from double-digit group rate increases. Our Hy-Vee Health with Oscar product is now live in Des Moines, Iowa for plan year 2026. This innovative plan is the first of its kind. The plan offers $0 concierge-type care at an affordable fixed price and in-store rewards for buying healthy food. We plan to expand this partnership in additional markets. Our momentum in ICRA reflects the growing demand among employers for a wider range of affordable and innovative benefits. Finally, Oscar is infusing an industry-first health AI agent, Oswell, into our entire product portfolio. Oswell is powered by OpenAI and helps members manage their health on demand. Unlike other AI tools, Oswell is connected to Oscar's cloud-native tech platform. It draws from claims, medical records, care guide notes and other member data for a personal experience. Members can better understand symptoms, common test results, medications and preapprovals tied to plan benefits. Owell also provides doctors with data to improve care paths and members with questions to ask their doctors so they are informed on their care. This is just the beginning of what we will do with leading AI models to redefine the health care experience. In summary, Oscar's highly innovative products, superior member experience and disciplined pricing set us up to grow market share. We remain front-footed and know how to run a successful company in dynamic markets. Oscar will continue to lead the individual market regardless of the outcome on enhanced premium tax credits. All of our attention and resources are focused on executing against our strategic plan. We are well positioned to expand margins and return to profitability in 2026. The ACA and ICRA have the potential to meet the health care needs of approximately 120 million working people. The individual market aligns with major macroeconomic workforce and consumer trends. More Americans work in the service economy than ever before. More businesses want affordable benefit options. More people want greater choice. Oscar is ahead of the demand, and we are creating the future of individual health care for all Americans. I want to thank the entire Oscar team for their hard work during our busiest time of the year. I am proud of how we consistently show up for our members, partners and the business community. I will now turn the call over to Scott. Scott?

Thank you, Mark, and good morning, everyone. This morning, we reported our third quarter financial results and reaffirmed our full year guidance. 2025 has been a dynamic year for the ACA marketplace. We've observed higher average market morbidity attributable to strong ACA growth from Medicaid redeterminations and ACA program integrity efforts that were implemented after the completion of 2025 pricing. We have taken disciplined actions to manage costs this year and to position us to ensure we return to profitability next year. Turning now to third quarter results. Total revenue increased 23% year-over-year to approximately $3 billion, driven by higher membership. We ended the quarter with 2.1 million members, an increase of 28% year-over-year. Membership growth was driven by solid retention, above-market growth during open enrollment and SEP member additions. The third quarter medical loss ratio was 88.5%, an increase of approximately 380 basis points year-over-year. We received a risk adjustment report in the third quarter for claims through July, which showed a further increase in market morbidity across several states. The third quarter MLR was impacted by a $130 million increase to our risk adjustment payable for 2025, partially offset by $84 million of favorable prior period development, primarily related to claims run out from the prior year. As discussed during our second quarter earnings call, we observed a sequential decrease in utilization each month throughout the second quarter. This trend persisted into early 3Q before stabilizing to be more in line with our expectations. Overall year-to-date utilization is modestly above our expectations. By category, inpatient utilization remained elevated but moderated meaningfully throughout the first 9 months of the year. Outpatient and professional were slightly elevated, while pharmacy remained favorable. Switching to administrative costs. We continue to deliver strong improvements in the SG&A expense ratio. The third quarter SG&A expense ratio improved by approximately 150 basis points year-over-year to 17.5%. The year-over-year improvement was driven by fixed cost leverage, lower exchange fee rates and disciplined cost management, partially offset by the impact of higher risk adjustment payable as a percentage of premium. In the third quarter, the loss from operations was $129 million, a change of $81 million year-over-year, and the net loss was $137 million, an $83 million change year-over-year. The adjusted EBITDA loss was $101 million in the quarter, a change of $90 million year-over-year. Shifting to the balance sheet. We have taken opportunistic steps to strengthen our capital position and optimize our capital structure. During the third quarter, we completed a $410 million convertible notes offering due 2030. Net proceeds were $360 million, inclusive of the cost of a capped call transaction, which increased the effective conversion price to $37.46. In addition, subsequent to quarter end, we entered into an agreement to redeem the vast majority of our outstanding $305 million convertible senior notes for shares. We ended the third quarter with approximately $4.8 billion of cash and investments, including $541 million of cash and investments at the parent. As of September 30, 2025, our insurance subsidiaries had approximately $1.2 billion of capital and surplus, including $564 million of excess capital. Turning now to 2025 full year guidance. Based on our results through the first nine months of the year, we are reaffirming all of our guidance metrics. For total revenue, we now expect to be towards the low end of our guidance range of $12 billion to $12.2 billion, driven by the third quarter ACA Marketplace morbidity that increased by more than our prior estimates. Membership growth has been strong through the first nine months of 2026.For the fourth quarter, our outlook contemplates a sequential decline in membership, driven by more historical churn patterns as the continuous monthly SEP for those at or below 150% of federal property level ended in the beginning of September. Our outlook also assumes risk adjustment as a percentage of direct and assumed policy premiums is in the high mid-teens range. Shifting to the medical loss ratio. We continue to expect a full year MLR in the range of 86.0% to 87.0%. The full year MLR guidance reflects higher average market morbidity, year-to-date utilization patterns and continues to assume a modest increase in utilization in the fourth quarter as members may seek additional care ahead of anticipated coverage changes next year. On administrative expenses, we continue to expect an SG&A expense ratio in the range of 17.1% to 17.6%, driven by greater operating leverage and variable cost efficiencies. We expect a loss from operations in the range of $200 million to $300 million and an adjusted EBITDA loss of approximately $120 million less than the loss from operations. While the third quarter risk adjustment true-up is expected to drive total revenues towards the low end of our full year guidance range, favorable prior period and in-year claims development and administrative expense efficiencies substantially offset the impact. So net-net, our outlook for the loss from operations remains unchanged. Now I'll spend a moment on our planning assumptions for 2026. While it is too early to provide formal guidance, we have taken appropriate actions to ensure we can deliver meaningful margin expansion and return to profitability next year. Our 2026 pricing strategy balanced growing market share and improving profitability. As Mark mentioned, our weighted average rate increase is approximately 28% for 2026. This increase anticipates above-average trend and is significantly higher market morbidity driven by increased market morbidity in 2025, the expiration of enhanced premium tax credits and the current ACA program integrity initiatives. We believe our disciplined pricing strategy captures the changing market conditions we've observed this year and the expected changes next year. Based on a review of final rates, our competitive positioning is in line with our expectations, and we are confident in our ability to profitably grow market share next year. As previously mentioned, we also took actions to eliminate approximately $60 million in administrative costs for 2026. In closing, we remain committed to bringing consumers affordable, innovative products and building an even larger ACA market over the long term. 2025 is a reset for the ACA marketplace. We've taken necessary pricing and cost actions and are confident in our ability to meaningfully expand margins and return to profitability in 2026. With that, I will turn the call over to the operator for the Q&A portion of the call.

[Operator Instructions] And we will take our first question from Michael Ha from Baird.

Regarding the September weekly report, I understand there's worsening market morbidity shifts. But curious, is there any indication in that report how much of that might have been from things like FTR rechecks and removal of duplicative members heading into fourth quarter? I'm curious to hear how you view the potential risk of there being maybe more market morbidity shifts in the December weekly report. So thoughts there would be great.

Michael, thanks for the question. So the Wakely report that we received had market morbidity increases by about 1.5 points to 2 points across several of our markets. We think that the drivers of that increase are the same types of things that we discussed last quarter, obviously, to a lesser magnitude. As you think about that report captures claims through July. And so it wouldn't capture the impacts of FTR or dual enrollment churn that really happened in the third quarter. On those two topics, I would say that we've seen about 45% of the people who were part of CMS' list to us on FTR or dual enrollments with 45% of that list has churned. When we look at the nature of those members, they actually have higher risk than our average book. So if we -- if the whole industry had similar types of characteristics in their populations, that actually would be a tailwind to market morbidity. So we don't see any reason to change our expectations that market morbidity will stay consistent through the end of the year.

Great. And just one more question. So G&A, if I take a step back, has been such a bright spot in your fundamental story. I think it's shined a really powerful light on +Oscar as well. So I'm thinking ahead regarding your longer-term G&A target for '27, 16% I wanted to ask if you still feel confident on achieving this target even with the magnitude of expected member attrition over the next couple of years. So I'm curious on the target. And I guess, more broadly as well, how to think about decremental margins.

Thanks, Michael, Mark here. We actually believe we have more room in our SG&A as we go forward. The AI models we're creating, we've got well over two dozen models on the back end. We've just launched our first agentic. We have another one coming out of the lab. We have a lot of really good opportunity with AI to streamline our operating costs. And of course, the discipline we have on making sure that our variable costs, first and foremost, are fit to the size of our business. So if there is market shrinkage, then we believe that we have plenty of time to be able to adapt our variable costs to fit our cost structure going forward.

Our next question comes from the line of Josh Raskin from Nephron Research

I was wondering, Scott, if you could just elaborate a little bit more on the underlying cost trends in the quarter and maybe any changes you saw from the first half? And within that, what areas drove that favorable development and seemed like a pretty sizable number for the prior year? And then I guess, I know it's super early, but any sense of that expected increase in utilization that you mentioned as we're entering fourth quarter? Are you seeing any of that as members get their new rates?

Josh, let me go through those questions. So I'll start with the PPD, which was $84 million in the quarter. And that was -- about half of that was related actually to risk adjustment where we had some favorable development around some of our estimates for rebates. I know you wouldn't expect that we have rebates because we're a large payer, but we do have some markets where we do pay rebates, and we got some clarity on a few topics that allowed us to true that up. So that was about half of it. The remainder was favorable development from claims, and that just is, I think, encouraging for us that we continue to see both prior year development that's favorable and in-year development. So we feel like those are positives in terms of that we're appropriately reserving for the risk that we're seeing. And if I shift then to what's going on in utilization and trend, I would say that utilization continues to moderate year-over-year. it's still modestly elevated versus our pricing expectations. Inpatient remains elevated, continued to moderate into the third quarter. Outpatient professional, slightly elevated. I would say that we believe that some of the changes we're seeing in terms of shifts between categories is a result of some of the total cost of care initiatives that we're running, where we're really focused on driving appropriate site of care transitions. So not much there that we're seeing that gives us pause. And generally speaking, I think that we look at utilization softening throughout the year and approaching kind of where we expected in pricing to be a good thing.

Perfect. Perfect. That's helpful. And then is there some -- if there is some sort of compromise that extends the enhanced subsidies, what should we be looking for that would create a more stable reenrollment process? What mechanisms do you think would be helpful for consumers in getting their insurance for 2026?

Josh, I think a couple of points I would make. First, we have been very careful with our plan design and their strategies to create $0 goal plans, $0 bronze plans and have spent a lot of time with the broker community helping educate them on the types of products that they can move people to. And we're seeing good activity on that in the early innings of the open enrollment period. Secondly, if enhanced tax credits are extended, we don't think there will be any real meaningful way to change prices the longer it goes. And I think we're probably beyond that now, but we shall see. But I think there are a couple of things that could happen. One is that we have this minimum MLR in the ACA market. And then a minimum MLR would require us to rebate if the plans made "too much money" based on having lower MLRs. And we would see that as a positive thing for the community and for our members to get a rebate back from their plan as a result of having these enhanced tax credits continue. We don't know what the price effect is until we know what the plan is and quite frankly, how it's going to fit. But that's how we think about enhanced premium tax credits.

Our next question comes from the line of Jessica Tassan from Piper Sandler.

I was wondering maybe if you could talk about the enrollment in 2025 in diabetes, asthma, COPD specific plans. Maybe just remind us of the increased risk adjustment visibility and favorability of MLR in these plans, if any, and then the extent to which these plans were expanded for 2026 and whether they've got better retention or different metal mix.

Jess, thanks for the question. So the thing about these plans is that we create them to draw into the plans, people who are interested in managing their conditions, and it allows us to have really better-than-average engagement with those members, which helps us to manage costs for them and for us. So that's why we really think that these are both creative to help people manage their specific conditions. We continue to roll out new ones because we do see success with retention when we have people with these conditions. They have a high NPS on these plans. So it's still not a large portion of our membership, but it's an important part of our membership in terms of our ability to attract and retain members.

Got it. And then just maybe do you have any early thoughts on how Oscar's morbidity in 20 -- I know it's five days in, but how Oscar's morbidity in '26 might evolve relative to the market? Or maybe just anything in your pricing or product design or commercial strategy that you'd call out that would give you maybe more control over your morbidity relative to the market?

Well, on the first point, we have priced as if premium tax credits are gone. '25 impact of morbidity, '26 potential impacts on morbidity given the shrinkage of the market, which we think is anywhere between 20% and 30%. 20% is the lower end without a number of these things, 30% being the highest, but that has an impact on our morbidity and program integrity efforts as if they were implemented. And we stack those in our pricing. We did not look for any duplication. And so we believe we're well covered depending on whatever happens next year relative to the morbidity in the market. Anything to add on that, Scott?

No. And I think it's too early to say much about '26 morbidity. I think that when I look at the core performance of the company this year and I strip out kind of what happened with the impacts of market morbidity shifting higher this year, we're really pleased with the underlying trends, right? We're seeing an MLR when I strip out kind of the impact of what was happening with market morbidity, the MLR -- underlying MLR is pretty consistent with the guidance that we gave at the beginning of the year in the low 81% range. And so when I step back from that and look at the dynamics in the company, our ability to influence what's going on with our medical expenses, we feel like we're really well positioned to continue to navigate this marketplace. And as Mark talked about, we feel like our pricing captures the risk. We feel like the company is getting ever better at delivering our services. So we feel really well positioned for '26.

Our next question comes from the line of Scott Fidel from Goldman Sachs.

First question, and I understand it's still very early into the OEP here. But could you maybe just sort of walk us through the initial intelligence and feedback that you're getting from all your channels? What -- how that may inform the -- how sort of enrollment may be or sign-ups may be tracking relative to the industry expectations and then the expectations, Mark, that you just mentioned around that down 20% to 30%. Obviously, very early here, but just curious on sort of the initial indicators that you're getting from the OEP.

Thanks, Scott. We have seen a lot of activity more than we thought we would see at this point in time. However, you have to look at the structure of bonus programs and the broker network and all the education we did, and we are not banking on anything based on what we've seen in the first five days, quite frankly, that we'll be willing to leverage off of and say we expect our enrollment to be x for 2026. And so we're pleased with the progress so far, but we're not banking any of it as a future perspective on what our enrollment will be -- in the beginning of the year.

And Scott, I'd just add, Mark talked about this, but I think it's an important thing. We did a significant amount of preparation with our brokers, training, mapping members. So we went into open enrollment with a pretty sophisticated game plan about where do members who are going to lose subsidies map to. We've got -- brokers have all of the information about people who may lose subsidies. So should the enhanced premium tax credits get extended. We know who the members today are who would be impacted by that. The brokers know who they are. We would certainly be able to quickly outreach to them and try to bring them also into the marketplace. So the early days are certainly showing that the preparation and the work we did is proving successful.

And also, I would add that we had in November or late October, it was auto mapping on the plans that are leaving the market, and we received the share that we thought we would receive.

Okay. Got it. And then for my follow-up question, curious to what extent just as you've gotten the latest Wakely data and has shown variation in morbidity and sort of your positioning around risk adjustment in different states. How much were you able to, I guess, sort of factor or inform your pricing and your positioning strategy for 2026? Just curious around how much that may have sort of fed into your go-to-market strategy for '26 to try to sort of operate against some of those changing morbidity dynamics?

Yes. Well, as Mark said, we're expecting the market is going to contract by 20%, 30%. We actually -- our best estimate is towards the lower end of that range in terms of impact, but we price towards the high end of that range. So we think we've got some -- the potential for some buffer already in there. Based on the way that we built the pricing for '26, Mark went through that we didn't attempt to look for overlaps in the way we measure. We think that creates some natural cushion in terms of the ability to absorb the change that we've seen. So net-net, I think that we continue to believe that our '26 pricing is resilient against what we've seen so far and it positions us well to return to profitability and see margin expansion next year.

Our next question comes from the line of Stephen Baxter from Wells Fargo.

I guess the first question would just be trying to dive into the competitive dynamics a little bit more for next year. It seems like maybe some of your large peers have rate increases that are at or maybe above your 28%, but then maybe some of the not-for-profits could be a little bit lower. Just to kind of boil it down, like is there any kind of metric you have where you kind of have an analysis of what percentage of your markets you're going to be in a low-cost position, either just in the silver market or maybe across all your markets and how that compares to 2025? And then I have a follow-up.

Steve, so when we think about competitive position relative to last year, first of all, all these increases in prices, you've got to start with last year's price position where last year, we were only, I think, in 15% of our markets, we were the lowest or second lowest silver price plan. This year, that's moving up to 30%. We still think that, that's less than some of the other large competitors that we see in the marketplace. So while we're competitive, we're not as competitive as some others. When I think about that relative price position, we think we can grab share in several of these markets. We think that the average price increase nationally is around 26% based on research by the Kaiser Family Foundation. So we think that we've done a nice job of putting our pricing into the market in a way which is competitive, allows us to grow margin, but also is disciplined and allows us to protect ourselves as well.

And one more point, Steve, because we believe the enhanced tax -- we priced without the enhanced tax credits being in place. Our metal strategy is fundamentally different than where we were last year. While we still think we'll have a lot more -- we'll still have the majority of our people in silver plans, we have priced gold and bronze plans that fit certain profiles in certain markets based on our underlying provider networks that allow us to have differential pricing from our competitors that are hard to compare by looking at average rate increases.

Got it. That's very helpful. And then just two quick numbers follow-ups. I guess, first, the risk adjustment, as you spoke to, is now 17% of direct premiums year-to-date, just making sure that's the right way to think about the full year at this point. And then what is cost trend running at this year? And what are you assuming cost trend is next year?

Yes. So Steve, I think that the 17% risk adjustment year-to-date is probably a reasonable estimate for the full year, plus or minus. And with respect to cost trend, I won't go further than to -- than I did in terms of my discussion of utilization and what we're seeing in that and kind of it's slightly above our pricing expectations for last year. We have for 2026, assumed a trend increase that is higher than what we've seen historically. And so we are expecting, at least in our pricing to see trend, and this is excluding the impacts of all the market morbidity shifts, but just core cost trend that would be higher than what we've seen in the past.

I think that last point is an important one because we stack these things and our morbidity includes a lot of these program efforts and the impact on the population as a result of how risk adjustment came out. So that's separate than the pure underlying trend of our relationships with providers.

Our next question comes from the line of Jonathan Yong from UBS.

I guess under the premise of a possible extension of the enhanced subsidies and whatever it may or may not include, how are you thinking about operationalizing this? And what may or may not be included in G&A at this moment, if anything? And what kind of step-up would you need if it were to occur?

I think the SG&A piece is not relevant to the enhanced premium tax credits, it's really around growth. So we look at both our fixed cost leverage and our variable cost leverage. We manage the variable cost leverage very close to membership, and then we impact fixed cost leverage, we actually already have going into '26 and expectations for '27. And that's part of what we're doing with our AI capabilities. In the end result, how we're going to operationalize it, we think we're in a good place I mean we look at this every day. We actually met on it yesterday to go over how do we have to think about growth up or down based on our projections. And I think we have the right tools in place with BPOs, for example, and other capabilities that we can use to meet the needs of the people we have on board or to pull back if we need to.

Okay. Great. And then I know, again, it's early on the enrollment period. But in terms of the members that are kind of showing up, are these kind of the typical members that would naturally have a 0 -- effectively not be paying anything and kind of for the members that are losing their enhanced subsidies, are they trying to downgrade? Or are they just kind of leaving the market altogether? What are you kind of seeing and hearing with respect to that?

Way too early to tell. We don't have that level of detail yet. We will get it, but it's going to be long.

Our next question comes from the line of Andrew Mok from Barclays.

You mentioned that your competitive pricing was in line with expectations and that you expect to take market share next year. Can you help us understand that strategy a bit more? Why is taking market share the right strategy in 2026? And do you think that is more likely or less likely to hurt from an adverse selection standpoint?

Taking market share really means taking advantage of people who priced way out of the market. And I think there's a subtle difference here between the group market that I hope you all understand. Given the risk adjustment mechanism and the way it works, it's almost impossible or just not -- it's not worth underwriting the members in the network. It's about the network itself and underwriting that provider network. And so some of our competitors who have priced way out of the market or left the market, we're using commercial networks at commercial prices where we have been using narrow networks in every market. And in the individual purchasing decision, people at the local market have the opportunity to buy their network and the plan design that works for them versus having an employer offer them a broad area of network, which costs more and a benefit plan that doesn't meet anyone's needs specifically. And so for that reason, we believe that looking at taking share from people that are pricing at 30%, 40% higher, we have an opportunity to take that share, put them into our networks and our underwriting and make it work better and effectively for us. And that's how we price. We're pricing off of the underlying cost of the network because we get covered on the risk adjustment side.

And I'd just reiterate something that Mark said earlier. We think this is -- what we see is evidence of a very rational marketplace, right? So it's -- we don't think that there's been anyone who's tried to do a land grab and price dramatically lower. We feel like we're right in the pack. So from an adverse selection perspective, that's not something that is at the top of our list of worries.

Great. And if I could just follow up on membership. I think last quarter, you said that you expected membership to trend down in the back half of the year. It looks like 3Q membership was up about 90,000 members or 4.5% sequentially. So I just wanted to get more color on what's driving that change versus your expectation and the implications of that higher membership on 4Q MLR.

Yes. I appreciate that question. So membership was stronger than what we had expected in the third quarter. A good portion of that was driven just by lower churn. And so that is a positive that helps, obviously, with the MLR dynamics. We did have SEP member additions as well, but that ended as of September in terms of the continuous SEP, as I said in my comments. So overall, we continue to expect MLR to drift up in the fourth quarter. You can obviously do the math. We give you the full year guidance of MLR, so you can figure out what the point estimate is there. But we build -- when we reviewed our guidance for the year, we looked at all of the trends that we're seeing. We're looking at the details of is there anything that caused us to believe that we needed to increase the full year guidance of MLR, including the SEP performance. And we just haven't seen anything in the details that makes us concerned and we're able to reaffirm our guidance.

And one more thing I'll add is that we are very supportive of the program integrity efforts and the things that happened this year in program integrity had less and less impact on us as an organization than others because we spend a lot of time validating as much as we can the membership that comes into our plan. And if we see what we see as potential fraud, we sideline those brokers and those members and evaluate whether or not it's appropriate to bring them on board. So given that, when we received our dual eligible information, it was low double-digit thousands, very low double-digit thousands versus the headline report put out by certain people in the press of 2.4 million people. And so the obvious impact to us was a lot less than we thought it was going to be because we had done the homework upfront. We think this is a key part of making sure risk adjustment works well is that everybody uses these same tools to make sure that the people we're bringing on board belong on board, not because somebody else was able to get commission.

Our next question comes from the line of Craig Jones from Bank of America.

So a follow-up on the fraud comments there. There's been a lot of talk about the -- out of the current administration around the various ways to root it out. So if you were advising Congress on maybe what they could do with a negotiated deal on the enhanced subsidy extension, what would be some of the most effective tools that could be implemented for 2026, maybe during a special enrollment period alongside enhanced subsidy extension to help root out some of that fraud?

Again, we support all the program integrity efforts that were put forward this year. We were prepared and we have priced as if those were in place. We have kept that pricing in place because we expect some of them may come along through regulatory action by CMS throughout the year. We want to be prepared to handle that. Of course, we would prefer that the industry get the opportunity to work with CMS to do this within the pricing cycle so that we're having all of these impacts fit and that we aren't disadvantaging our members as a result, disadvantaging working Americans as a result of having to have these huge morbidity jumps because we did it in the middle of pricing. So if we could do it before we price and work together on it, we're more than happy to support the program integrity efforts put forward by CMS.

Our next question comes from the line of Steven Couche from Jefferies.

Is there any way you can quantify what you believe your cost advantage is from your narrow network strategy versus peers?

Yes.

Look, I think, obviously, we're not going to get into the details of our competitive positioning on that. And we think that many of the -- of our competitors do have particularly the more successful competitors have similar strategies around narrow networks. What's most important is really making sure that you have the right network, you have the right providers, you have the right systems in the markets where you're trying to grow. And we think that's one of the important reasons why we can have similar cost, but grow above the market average because we do spend a ton of time in making sure that we curate our markets and that we have the right set of doctors, the right set of hospital systems that are attractive in those markets.

Great. And then is there any way you can help us or share what your assumptions were for the impact of the program integrity measures because we've seen estimates anywhere from sort of a de minimis impact to something quite meaningful. And then are there specific program integrity measures that you think are going to have the most impact?

Well, look, I don't think that we'll get into the specifics of that. We do think that the state program integrity provisions would have been in place, had an adverse market or an adverse impact on the total size of the market. So we built that into our expectations, as Mark talked about, for pricing, but we'll have to see how those things play out, but we are prepared in terms of the pricing and for '26 that they may come back into practice at some point during the year.