Good afternoon. My name is Maria, and I’ll be your conference operator today. At this time, I would like to welcome everyone to Oscar Health’s Third Quarter 2021 Earnings Call. [Operator Instructions] I would now like to turn it over to Cornelia Miller, Vice President of Corporate Development and Investor Relations to begin the conference..

Thank you, Maria, and good afternoon, everyone. Thank you for joining us for our third quarter earnings call, where we’ll discuss our financial results, the momentum in our business and our updated guidance.

Mario Schlosser, Oscar’s Co-Founder and Chief Executive Officer; and Scott Blackley, Oscar’s Chief Financial Officer, will host this afternoon’s call, which 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 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 quarterly report on Form 10-Q for the quarterly period ended June 30, 2021, filed with the SEC and our other filings 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 our third quarter 2021 press release, which is available on the company’s Investor Relations website at ir.hioscar.com.

With that, I would like to turn the call over to our CEO and Co-Founder, Mario Schlosser..

one, growing revenue at a rate faster than the industry to increase market share and building additional insurance capabilities; two, growing our costs at a rate lower than our revenue growth as a result of the efficiencies and profit improvements gained from the +Oscar technology stack; and three, reducing overall medical costs by continuing to extract value and the tools we have built to engage our members and to engage and enable our provider partners, therefore, continue to make health care more affordable and accessible for our members.

With that, let me turn the call over to Scott..

Thank you, Mario, and good afternoon, everyone. Today, I’ll walk you through the positive top-line momentum in the business, explain periods of pressure in the underwriting results and how we’re thinking about the future as we look towards next year. Beginning with membership.

We ended the third quarter with 594,000 members, an increase of 41% year-over-year, driven by growth in our Individual, Medicare Advantage and Cigna + Oscar books of business.

Membership growth continued to exceed our expectations this quarter as consumers selected our plants during the extended special enrollment period, which ended August 15 in all but three of our 18 states. From the start of SEP through September 30, we’ve enrolled 187,000 members.

We believe our nearly 600,000 member base represents a great base as we go into 2022. Third quarter direct and assumed policy premiums increased 54% year-over-year to $899 million, driven by our membership growth as well as business mix shift towards higher premium plans.

Premiums before ceded reinsurance were $673 million in the quarter, up 62% year-over-year, driven by higher premiums and lower year-over-year risk adjustment percentage. Turning to risk adjustment. We recognized approximately $20 million of risk adjustment expense this quarter related to our risk adjustment data validation audit or RADV results.

The RADV exercise is atypical this year due to COVID. It spans two years, 2019 and 2020. The majority of the RADV headwinds relate to the 2019 audit results, which were recently completed. We’re seeing a marked improvement in 2020 audit results.

And thus far, we’ve seen better results in 2020 – excuse me, and we have made further enhancements in our risk adjustment process in 2021. As such, we expect this is a headwind for the quarter, but not going forward. Premiums net of reinsurance or premiums earned was $442 million, increasing 346% year-over-year.

This increase is driven by a reduced quota share cession rate up 32% in the third quarter of 2021 versus 80% in the third quarter of 2020. Our Medical Loss Ratio was 99.7% in the third quarter. There were three items that impacted the MLR.

The first item was the effect of the COVID spike in the third quarter, which inclusive of our COVID pricing in 2021 was approximately 500 basis points unfavorable on a year-over-year basis. Net COVID spend to the Delta wave accounted for approximately 600 basis points of MLR in the current quarter, which was modestly above our expectations.

Lower non-COVID utilization offset roughly half of the direct COVID expense in the quarter. As Mario mentioned, COVID costs spiked in August and declined through October, suggesting a potential lower impact in the fourth quarter, all else equal.

The second item impacting the MLR was the adverse risk adjustment data validation results, which drove approximately 300 basis points of MLR impact on a year-over-year basis. As I mentioned, this is a headwind in the quarter, but it’s not impacting our baseline.

The third item impacting year-over-year MLR was the growth in our SEP membership, which was higher than we anticipated. We estimate that the growth in our SEP membership drove approximately 100 basis points of pressure on the MLR versus same quarter last year.

As we mentioned in our last call, SEP members run less favorably than our OE population, driven largely by risk adjustment dynamics for the partial year. We have seen this effect come through in our results as we expected. And as we have more SEP members than last year, our MLR was higher versus the same period last year.

Looking forward, growth in SEP membership is a headwind for 2021 MLR, but we expect that retaining SEP members during our OE 22 will be a tailwind to next year. Turning back to our insurance company metrics.

Our third quarter insurance company administrative expense ratio of 23.1% increased 70 basis points year-over-year largely due to a combination of the risk adjustment items impact on premiums and distribution costs associated with SEP members. These were partially offset by the lack of the health insurance fee and operating leverage.

Our overall combined ratio, which is the sum of the Medical Loss Ratio and the insurance company administrative ratio was 122.8% in the quarter and 106.7% on a year-to-date basis.

Our adjusted EBITDA loss of $189 million increased $118 million year-over-year, largely driven by overall higher membership volume, volatility in the MLR and costs driven by higher-than-expected membership. Turning to the balance sheet.

We ended the quarter with $1 billion of cash and investments at the parent and another $1.5 billion of cash and investments at our insurance subsidiaries, and our $200 million revolver remains undrawn. Let me now turn to updated guidance for 2021 and offer some color on tailwinds and headwinds for the next year.

We are raising our expectations for direct and assumed policy premiums this year to $3.35 billion to $3.45 billion. At the midpoint, this represents roughly a 50% year-over-year increase in annual premiums. This also represents a $150 million increase from prior guidance at the midpoint, driven by higher SEP growth.

We are updating our full year MLR guidance for 2021 to 89% to 91%, a 400 basis point increase at the midpoint. The largest driver of the increase was the fact that our SEP membership growth has exceeded our expectations. While this is driving an increase in premiums, it also puts pressure on our 2021 MLR.

We have also updated for the full year impact of the risk adjustment data validation accrual. And finally, inclusive of the third quarter results, net COVID-related costs in 2021 are expected to be modestly higher than our prior estimates. We are maintaining our insurance company administrative guidance of 21% to 22%.

Based on the aforementioned adjustments, we are updating our insurance company combined ratio guidance to 110% to 112% and our guidance for adjusted EBITDA loss to $450 million to $480 million.

Pulling up, the results this quarter reflect strong continued top-line growth that will serve as a higher-than-expected starting point as we head into next year. While we experienced some volatility in our underwriting results this quarter, we think the drivers of the volatility will have a muted effect in 2022.

The RADV accrual this quarter is expected to be atypical, and we do not expect this to be a headwind going forward. The growth in membership through the special enrollment gives us a larger base to carry into 2022, and it’s unlikely to reoccur next year, absent a shift in regulations.

With respect to COVID, we have captured endemic-level COVID costs in our 2022 pricing. And while higher levels of vaccinations heading into 2022 and continued evolution of therapeutics to treat COVID patients may mute the effects of any future strains or outbreaks, as an industry, the impacts of such events remain a potential risk.

All told, we are optimistic heading into next year and anticipate giving 2022 guidance with our fourth quarter results. With that, I’ll turn the call back to Mario..

Thanks, Scott. Thanks for taking us through this. Before we take questions, I want to reiterate just a few points. First is that we – as we head into 2022, we see many tailwinds in our business. We are confident that our insurance business is well positioned, and we continue to target for full year profitability in that business in 2023.

And now you’ve all heard me discuss several times the key trends that we see shaping health care today with the first being an increased individualization as players across the health care ecosystem are realizing the buying power of consumers and how much value there is in a great member experience.

We believe that what we’re seeing here, the individual market growth continues this gradual paradigm shift towards further individualization. And we think we are best positioned for a world like that and to serve members in this kind of individualized type of market.

Less than a year after our IPO, our membership is significantly higher than we anticipated. And that isn’t a coincidence. It’s a result of a value brand, of a best-in-class products and of our consumer-oriented DNA. And we expect 2022 to bring another year of strong growth for all of our insurance business lines.

Now these same trends are at work in providing a fertile ground for the growth of our +Oscar business as well. And there, we’re excited about the coming step change with respect to the number of lives we have in our platform heading into 2022. And with that, I will turn the call over to the operator to open up the line for your questions..

[Operator Instructions] And your first question comes from the line of Kevin Fischbeck from Bank of America. Your line is open..

All right. Great. Thanks. I appreciate the color. So it sounds to me like you’re saying that you still feel like you’re on track for 2023 profitability at the insurance level, and that the issues in 2021 are largely kind of onetime.

I guess, without giving specific guide in 2022, do you think that 2022 is largely kind of a back-on-track year? Or is there reason to believe that there may be some headwinds that linger into next year that make it a little bit less of a straight line back to the profitability targets you have for 2023?.

Sure. Thanks, Kevin. Appreciate the question. So I think there’s a few factors that I would point to going into next year. The first is that we see an opportunity for improvement in the MLR next year. And as you just mentioned, the items that are putting pressure on the MLR this year and particularly this quarter are really largely transitory.

And so we think that we can see a better performance in MLR next year. And then secondly, as Mario talked about, we’ve really tried to take a thoughtful approach in our pricing for 2022, where we’re balancing growth and margin. And we think that we have a really good opportunity for another year of strong growth.

And I would just point out that scale at Oscar is going to be the driver of profitability over time. So bigger is certainly better, so we’re excited about the potential there.

And then the last thing I would just mention is that at the total company level, we’re also going to start having +Oscar deals contributing meaningful amounts of revenue and margin next year. So we see a lot of reason for optimism as we go into next year..

Yes. The final thing I might add is we continue to innovate. And I think the longer we are able to run, the longer we keep it up, the longer we are able to get value out of the tools we’ve been building, the systems we’ve been building, the better we will get out of it as well..

Okay. That’s helpful. I guess then the guidance for Q4 MLR – right so for the year, MLR being 200 basis points wide – I guess, implies like a very wide range for Q4 MLR.

So I just wanted to get some color as to why that is still a 200 basis point range for MLR at this point in the year?.

Yes. Probably because I’m a conservative CFO, honestly, and it is a pretty dynamic environment. But I would just say this, based on what we’ve seen in the third quarter, we updated to – for everything that we were seeing in the environment, and I would expect that, that guidance represents a reasonable effort in trying to capture all those risks..

Got it. Thanks..

And your next question comes from Gary Taylor from Cowen. Your line is open..

Hi good afternoon. I wanted to just hear your thoughts on how you’re thinking about the folks in that Medicaid coverage gap if the budget reconciliation legislation passes. And given that could be several million people, which is a positive, probably a lot of people with deferred care and higher potential care costs is probably a negative.

And then also wondering how their introduction into the risk pool for Individual might drive some greater volatility. But do you just have some overall thoughts on the outlook for that population..

Yes. Thanks, Gary. So we’ve been monitoring this closely, of course. And I do think there’s a high chance that something will pass there and that membership will come into the market. We have a favor of experience now in the prior years with accepting new segments of membership into the individual market.

But we’ve seen sort of like people leave and people come back into the market as the various individual markets and regulations change there.

I think one comparison that hints in this direction eventually is the utilization we’re seeing in this year’s SEP population, where we actually largely see the MLR issues coming from that SEP population attributable to the fact that we just can’t collect risk scores long enough in the year, and that’s the major headwind there.

From a utilization point of view, these folks who are coming in there, the kind of couple of places where they look a little bit out of line is they have some higher ER utilization, which potentially could be because of the fact that there’s some self-selection going on that when folks get sick and they come back into the market there.

But the other thing we’re also seeing there is a bit higher preventative care utilization, it’s a steep population. And so I think if that repeats, and that is very manageable.

And in fact, actually, I think we’re very much set up for that from a member experience point of view to grab those folks and make sure we can get to the right channels of care and things like that.

I repeat this interesting statistic from our virtual care business from – I think I mentioned last on the earnings call, which is that of the folks we have attributed now to our Virtual Primary Care physicians, 45%, but they didn’t have a PCP before. And so I think we’ve got those channels to attribute them there.

We talked a bit about how we run member outbound campaigns to get folks in order to PCP in person to get them to go to PCP in person. Those are all the machineries we can run. Overall, I think unequally say there’s a net positive for our business.

And besides the fact that it’s a net positive for our business, I’m thrilled about the fact that we’re going to get more towards football coverage for people across the country. And I think that’s just a great thing generally and is a good tailwind..

Okay, thank you..

And your next question comes from Jonathan Yong from Credit Suisse. Your line is open..

Thanks for taking the question.

Just with respect to the disciplined pricing commentary, does this inhibit your kind of growth for next year, if at all? And then are there any geographic areas where you feel you’re better positioned versus others for 2022 in the exchanges?.

Yes. Good question as well. So we – the way we think about pricing, as I mentioned in the script briefly, for us really is a balance of growth and profitability. We’ve been doing this long enough.

I think we know how to get towards this balance now, barring sort of like a very dynamic environment in the way we had it this year where a lot of stuff happened that really was hard to foresee. Let me kind of reground the numbers real quick. On a weighted average basis, we increased our rates across the portfolio for next year.

So if you really look at where membership is and which – they’re in, you kind of multiply this all out, we increased our rates from 2021 to 2022. So let me start there. I mentioned this in the script. I want to repeat this again as well. Last year, we were the lowest priced plan, about 10% of the markets we are in.

Now we’re only the lowest priced in about 5% of markets for next year. So that’s sort of like the overall backdrop. Now where we lean in and where we lean out from a pricing perspective is really driven by how much of a right to win we feel we have in certain markets. In markets, we have the strongest provider of partner relationships.

So we might even have provide our partners at risk together with us, in markets where we have great distribution relationships. Those are markets where we really say, all right, that’s a bit more share here.

And judging on just – again, it’s very early in open roman, first 10 days, but I do think we can deliver on that on the growth expectations and the strong growth, as I called it in the prepared remarks for next year.

And I really think that we are now at a point after doing this so many, many years where the product we have is to be resonating with people and with members and brokers and providers and so on. That’s the anecdotal information I really get from even being out there talking members and brokers and so on. I’d say two more things.

One is some of this is in plan design, really important lever we have. And we again launched a bunch of innovative stuff for next year there that’s, I think, already helping. And the second thing is that, yes, we continue to have our eye on profitability in the insurance business in 2023. Nothing’s changed our view of that.

That’s our target to achieve in future profitability in 2023..

Okay. Great. And then just kind of going alongside Gary’s question there, redeterminations are expected to come back next year. Was that kind of factored into your thinking and pricing? And kind of how are you looking at that component given that, that seems to be a moving target right now. Thank you..

Yes. Look, I think that we build our pricing based on the environment that we saw at the time that we put that out there. Certainly, this is one of the – if those members come into the market, we will be super excited to have them that are, as we talked about, they’re likely to come with some MLR pressure.

But over time, we think that’s a net tailwind for our company..

Thank you..

And your next question comes from Ricky Goldwasser from Morgan Stanley. Your line is open..

Hi guys. This is Michael Ha on for Ricky. I think you might have mentioned in your prepared remarks, but how much was the RADV Red impact to revenue this quarter? And can you just talk a little bit about the results of that audit. I know you mentioned that headwind is mainly 2019 and there is an improvement in 2020.

But what changed between 2019 and 2020? And lastly, you mentioned changes are being made in your processes this year. Could you talk about what changes those are? Thank you..

Sure. So the impact of the RADV accrual that we made was roughly $20 million. And as I said in my prepared remarks, it’s an unusual audit because it covers two years, 2019 and 2020. And I would just say that, first off, the results are below what we had expected. And we’ve identified causes.

There’s some that are just operational about how we got the data together to execute the audit. And then I would say the other thing is that on a relative performance basis, the market, our performance is high, but others improved a bit more than we did.

We’ve seen 2020 have better results, and that’s just through the audit that’s ongoing at the moment.

And then the types of things that we’re doing in 2021 and beyond are really just taking the opportunity to continue to enhance our, the effectiveness of our collection of scores and make sure that we build in a process where we can support all of the retrospective review through the validation exercise..

Got it. Thank you..

And your next question comes from Stephen Baxter from Wells Fargo. Your line is open..

Hi thanks. A couple on MLR to try to identify some of the core trends there a little more clearly. I think on the Q2 call, you said that in the back half of the year, you’re expecting about 600 basis points of pressure from COVID and also assuming no offset from lower non-COVID.

So it sounds like you did indeed see the 600 basis points of COVID this quarter, and I think mentioned an offset of about 300 basis points from lower non-COVID utilization. So that sounds to me like outside of SEP and RADV that the trends were actually better than expected.

But then I think you also said during prepared remarks that net COVID costs were worse than expected. Just hoping you could clarify which one of those it is and sort of what the pieces are there and I think lessened..

Sure. No, I appreciate that this is a complicated topic. So first of all, on COVID, our prior guidance, we increased our guidance last quarter for direct COVID costs, we’ve roughly doubled what we had previously assumed. And we assumed that our non-COVID utilization would be at baseline.

That was really creating a little bit of a natural hedge of what would be the net COVID cost that the company would incur. We didn’t really try to overcomplicate the estimate by forecasting precisely, here’s the direct cost, but you’re the offset for utilization. We knew that there was a risk that direct COVID cost could exceed our estimates.

And we expected if that would happen, that we would see utilization basically at lower levels that would offset. And we saw that happen. What didn’t happen is that utilization didn’t decrease enough to fully offset the increase in COVID expense.

So I would say that the – as I mentioned, we had $600 million of net COVID costs and that was in excess of our estimate..

Got it. Just to put a – hopefully put a fine point on it..

I said million – it was basis points, 600 basis points, excuse me..

Got it. Just to be totally clear, though, it sounds like in the second half, you were expecting 600 basis points of COVID cost with no offset. You got 600 basis points and said that there was 300 basis points of non-COVID as an offset. So makes sense that you did see some offset.

So I’m just confused about how in the quarter, it seems like overall, this is an issue that was worse for you than expected, but it sounds like it was actually better than the guidance. So is there something there that needs to be factored in that I’m just not missing.

Sorry, if that’s net COVID?.

No. Look, I think that on the guidance side, I would just say that net COVID costs were higher than what our guidance had assumed that was marginally higher, not by a lot. So I’m happy to pull that up offline, and we can give you the talk. But it’s 600 basis points of net, including the offset..

The gross was higher than we thought and didn’t get offset enough..

Got it. Okay. And then just the last clarification point for me. Just can you repeat and clarify the SEP impact for the quarter. And how much of the 400 basis points add into your guidance for the year. Thank you..

Yes. So SEP on a year-over-year basis was 100 basis points of additional MLR, and that’s on a year-over-year basis. In the quarter, the discrete SEP costs were 200 basis points. So that is the impact. We rolled those into guidance.

And we would expect that the SEP effect in the fourth quarter is accelerating, and so we built that into our full year guidance..

And your last question comes from Josh Raskin from Nephron. Your line is open..

Hi, thanks. Appreciate guys squeezing me in here. So parent cash was down, I think, about $100 million, and I know subsidiary cash was down. I think it was about $500 million. And I think about $200 million loss in EBITDA for the fourth quarter in terms of guidance and yet to be seen on 2022, but it sounds like, obviously, expecting a loss.

So I guess, just questions on capital needs, where you think your plan is now.

Has this impacted your thoughts on longer term capital needs or maybe even shorter term over the next year or two?.

Sure. Thanks for the question. And I would just say with regard to the cash that’s at the insurance subsidiaries, we make a payment on the risk adjustment that occurred in the third quarter. That was the driver of the decrease of cash there.

Broadly speaking, kind of pulling up, I would just say, first of all, we had $1 billion of parent cash at the end of the quarter. We’ve got all of our insurance entities are well capitalized. There’s excess there, which offers an additional buffer. And then on top of that, we have untapped liquidity with our revolver.

As I’ve talked about in the past, we always look at reinsurance as an option for us to mitigate the effects of growth. And so I think of that as a lever. So as we enter into 2022, I feel like we’ve got a strong liquidity position and we have levers there that we haven’t pulled should we need to do something to slow down the cash burn..

Very clear. Thank you..

And this concludes our question-and-answer session and our conference call. Thank you all for participating. You may now disconnect your lines..

Thank you very much..