Oscar Health - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 deteriorated sharply versus last year: revenue grew 29% YoY to $2.864B, but Medical Loss Ratio surged to 91.1% and operating swung to a $(230.5)M loss as Oscar booked an incremental ~$316M risk adjustment payable tied to higher ACA market morbidity.
• Against S&P Global consensus, Oscar modestly missed on revenue ($2.864B vs $2.918B*) and EPS (−$0.89 vs −$0.836*), reflecting the risk-adjustment true-up and elevated inpatient utilization despite sequential moderation in other categories.
• Management reaffirmed its updated 2025 outlook: revenue raised to $12.0–$12.2B, but MLR increased to 86–87% and full-year operating result cut to a $(200)–$(300)M loss; SG&A ratio improved to 17.1–17.6%.
• Strategic actions: 2026 rates refiled (expect double-digit increases), workforce rightsizing targeting ~$60M fixed admin cost savings in 2026, and new ICHRA initiatives (Hy-Vee partnership; assets including INSX Cloud, IHC Specialty Benefits, healthinsurance.org) to diversify and deepen distribution.
• Liquidity strong with ~$5.4B cash and investments, insurance subs surplus capital ~$1.2B (incl. $579M excess); management expects to absorb 2025 losses largely at subs, and reiterated an expectation to return to profitability in 2026.

What Went Well and What Went Wrong

What Went Well

• SG&A efficiency and fixed-cost leverage: SG&A expense ratio improved 90 bps YoY to 18.7% in Q2; management guided 2025 SG&A to 17.1–17.6% and flagged ~$60M run-rate admin savings in 2026 from workforce actions.
• Membership scale and top-line growth: Total members ~2.03M as of 6/30/25 (up from ~1.58M YoY), driving 29% YoY revenue growth to $2.864B; management cited strong retention and SEP additions in H1.
• Strategic positioning and tech/AI leverage: CEO emphasized “we expect to return to profitability in 2026” and highlighted AI-driven efficiencies and new ICHRA capabilities via INSX Cloud, IHC Specialty Benefits, and healthinsurance.org to power a consumer marketplace.

What Went Wrong

• Risk adjustment and morbidity shock: Q2 MLR jumped to 91.1% (from 79.0% YoY), driven by a market-wide rise in morbidity; Oscar recorded an incremental ~$316M increase to 2025 risk adjustment payable, recognized year-to-date in Q2.
• Profitability reversal: Operating swung to $(230.5)M and Adjusted EBITDA to $(199.4)M (vs +$67.8M and +$104.1M YoY); full-year 2025 outlook now a $(200)–$(300)M operating loss.
• Utilization mix: While utilization moderated sequentially through the quarter, inpatient remained elevated versus expectations (partially offset by pharmacy favorability), contributing to margin pressure.

Transcript

Speaker 6

Good morning. My name is Kelvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Oscar Health Second Quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. I will now turn the conference over to Chris Potochar, Vice President of Treasury and Investor Relations. Please go ahead.

Speaker 0

Good morning, everyone. Thank you for joining us for our Second Quarter 2025 earnings call. Mark Bertolini, Oscar Health's Chief Executive Officer, and Scott Blackley, Oscar Health'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 Health 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 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 March 31, 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 June 30, 2025, to be filed with the SEC. Such forward-looking statements are based on current expectations as of today. Oscar Health 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 second 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 Health is unable, without making unreasonable efforts, to calculate certain reconciling items with confidence. With that, I would like to turn the call over to our CEO, Mark Bertolini.

Speaker 1

Good morning. Thank you, Chris, and thank you all for joining us. Today, Oscar Health announced second quarter results, which are consistent with the preliminary results we released on July 22nd. We report a total revenue of $2.9 billion, a 29% increase year over year. MLR increased 12 points year over year to 91.1%, primarily driven by an overall increase in average market morbidity. Conversely, our SG&A ratio of 18.7% improved 90 basis points year over year. Overall, Oscar Health reported a loss from operations of $230 million, and the adjusted EBITDA loss was $199 million. In the first half of the year, earnings from operations were $66 million, and adjusted EBITDA was $129 million. We are also reaffirming our updated 2025 guidance, including revenue of $12 billion to $12.2 billion and a loss from operations of $200 million to $300 million.

Scott will walk through our financial updates in greater detail in a few moments. Now, I want to share our view of what we are seeing in the individual market and why we believe the market will stabilize in 2026. We continue to believe in the long-term importance of the individual market for millions of consumers and employers. Let's start with recent market dynamics. The latest risk adjustment data from Wakely, which includes claims data through April 30th, indicates a meaningful market-wide increase in morbidity in 2025. This morbidity shift is impacting all carriers, increasing by mid to high single digits across Oscar Health's markets. We attribute market morbidity increases to consumers entering the individual market for Medicaid redeterminations and healthier, low-utilizing consumers leaving the market in part due to program integrity efforts. Oscar Health is taking several actions to drive value and mitigate the impact of current industry-wide headwinds.

We resubmitted 2026 rate filings in states covering nearly all current membership to reflect morbidity increases. Our engagement with state regulators continues to be productive. Our initial rate filings already reflected program integrity changes and the expiration of enhanced premium tax credits. We expect the market will have double-digit rate increases next year. We believe these overall rate increases will address the current morbidity pressure and the effects of program integrity efforts for 2026. We also see potential upside with growing support to renew enhanced premium tax credits in the upcoming continuing resolution. Oscar is a leader in the individual market with a 12-year track record of navigating dynamic markets. We are focused on what we can control. In addition to repricing, we remain disciplined in our expense management. Our team is right-sizing the cost of the business in the back half of this year.

We continue to harvest technology and AI-driven efficiencies to optimize our operations and drive several medical cost affordability initiatives. The team is also reducing fixed cost headcount. We expect these actions will eliminate approximately $60 million in administrative costs for 2026. We also improved our 2025 SG&A guidance by 50 basis points at the midpoint compared to initial guidance. The individual market is experiencing a reset moment, but the market is resilient, and we see significant opportunity for long-term growth. The individual market's fundamental characteristics, combined with ICRA, will drive a growing and stable risk pool over the long term. Oscar is at the center of building this future and is creating a competitive healthcare market for many more consumers and businesses. We are announcing several strategic steps to power ICRA and further diversify our business.

We acquired important early-stage assets with capabilities to help us build the consumer marketplace of the future. These assets include an individual market brokerage, a direct enrollment technology platform, and a consumer education website, healthinsurance.org. We are also launching a new ICRA product with a well-known consumer brand in the Midwest, Hy-Vee Inc. Our new ICRA assets will give us capabilities to meet and exceed the expectations of consumers and employers. The technology platform, INSX Cloud, is a fundamental asset of the marketplace, as it is one of only 11 CMS-approved solutions, creating a digital storefront for all health products. The brokerage, IHC Specialty Benefits, offers individual medical and supplemental health products across carriers in all 50 states. The brokerage will allow us to offer consumers the supplemental health products they typically buy with health insurance.

While the acquisition will not have a meaningful impact on our near-term results, we believe these capabilities are important building blocks of our long-term strategy. Hy-Vee is one of the most trusted brands in the nation, with 570 grocery and convenience stores and 270 retail pharmacies. Hy-Vee and Oscar are introducing a new Hy-Vee Health branded ICRA plan. We are initially launching this product for employers and employees in Des Moines, Iowa, for plan year 2026, subject to state approval. The plan offers superior benefits, including concierge medicine at an affordable fixed price through Hy-Vee Health exemplar care clinics. Our partnership is an example of the innovation we intend to drive with other employers, provider systems, and consumer brands in the United States. In summary, Oscar is well-positioned to manage through the market reset in 2025.

We believe the market will stabilize next year, and we expect to return to profitability in 2026. Oscar's track record of disciplined execution, strong management processes, and a highly skilled team will continue moving us toward long-term growth. The individual market has greater long-term upside and is the future of healthcare. It is a market powered by individual choice. Choice drives a competitive market where consumers direct the innovation they want. Every American and American business deserves high-quality, affordable healthcare that fits their needs. I want to thank the Oscar team for their leadership and hard work. We continue to execute against our strategy, stay responsive to the consumer, and harness AI to move faster than the market. We are a company built on great technology with an exceptional member experience that will change healthcare.

Now I will turn the call over to Scott to discuss our financials in more detail. Scott?

Speaker 3

Thank you, Mark, and good morning, everyone. This morning, we reported our second quarter financial results and reaffirmed the updated outlook we provided a couple of weeks ago. There is a market-wide shift occurring in the ACA marketplace, shifting towards higher average market morbidity. While we are now projecting a loss for 2025, we are taking corrective actions to ensure we are well-positioned to return to profitability next year. In the second quarter, total revenues increased 29% year over year to $2.9 billion, driven by higher membership. We ended the quarter with more than 2 million members, an increase of 28% year over year. Membership growth was driven by solid retention, above market growth during open enrollment, and continuing SEP member additions. The second quarter medical loss ratio was 91.1%, an increase of 12 points year over year.

The second quarter MLR was impacted by an incremental $316 million increase to our risk adjustment payable for 2025, driven by higher ACA marketplace morbidity that increased by more than our prior estimates. We recognized the year-to-date impact of the risk adjustment change in the second quarter. Applying the revised risk transfer accrual consistently across the first half would have resulted in an MLR of 80.7% in the first quarter and 85.1% MLR in the second quarter. With regard to the final CMS risk report for 2024, it was approximately $23 million favorable to the accruals as of the first quarter of 2025. Turning now to utilization, second quarter utilization moderated meaningfully as compared to the first quarter. We saw sequential softening in utilization each month in the second quarter. Inpatient utilization remained elevated compared to our expectations and was partially offset by continued favorability in pharmacy.

Outpatient and professional were largely in line with our expectations. Switching to administrative costs, we continue to deliver improvement in the SG&A expense ratio. The second quarter SG&A expense ratio improved 90 basis points year over year to 18.7%. The year-over-year improvement was driven by lower exchange fee rates and fixed cost leverage, partially offset by the impact of a higher risk adjustment payable as a percentage of premium. In the second quarter, the loss from operations was $230 million, a decrease of $298 million year over year, and the net loss was $228 million, a $285 million decrease year over year. The adjusted EBITDA loss was $199 million in the quarter, a decrease of $304 million year over year. Shifting to the balance sheet, our capital position remains very strong.

We ended the second quarter with approximately $5.4 billion of cash in investments, including $205 million of cash in investments at the parent. As of June 30, 2025, our insurance subsidiaries had approximately $1.2 billion of capital in surplus, including $579 million of excess capital. Let me spend a moment on uses of cash. We expect the majority of the expected losses this year to be absorbed by the significant excess capital position of our insurance subsidiaries. With respect to quota share reinsurance, we expect our seeding percentage to be just under 50% for 2025. Turning now to 2025 full-year guidance, we are reaffirming the updated outlook we shared with the preliminary second quarter results. We expect total revenues in the range of $12 billion to $12.2 billion in 2025, an increase of $850 million at the midpoint compared to the prior guidance range.

Our improved outlook is driven by better-than-expected retention and higher SEP member additions. We expect SEP member additions to moderate in the back half of the year as continuous monthly SEP for those at or below 150% of the federal poverty level ends September 1st. The revised guidance assumes risk adjustment as a percentage of direct and assumed policy premiums is in the mid-teens range and largely consistent year over year. Shifting to the medical loss ratio, we expect a full-year MLR in the range of 86% to 87%, with the increase driven by higher average market morbidity. The revised outlook contemplates higher market morbidity, the continuation of our first half utilization patterns, with a modest increase in utilization in the fourth quarter as members may seek additional care if the enhanced premium tax credits are not extended.

On administrative expenses, we expect a slightly better 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. As Mark mentioned, we are reducing our workforce in the back half of 2025 with run rate savings starting in 2026. In closing, we are taking appropriate actions to return to profitability in 2026. Our 2026 rate filings reflect the higher market morbidity in addition to having contemplated trend impacts from program integrity efforts and the expiration of the enhanced premium tax credits. We know how to successfully navigate dynamic markets. We will continue to execute against our strategic plan, and we expect to deliver meaningful, improved financial performance next year.

With that, I will turn the call over to the operator for the Q&A portion of our call.

Speaker 6

Thank you. Ladies and gentlemen, we will now begin the question and answer session. As we enter the Q&A session, we ask that you please limit your input to one question and one follow-up. I would like to remind everyone to ask a question, please press the star button followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. One moment, please, for your first question. Your first question comes from the line of Josh Raskin of Nephron Research. Please go ahead.

Hi, thanks. I appreciate the comments, Scott, on the uses of cash, but can you provide some guidance on 2025 free cash flow, understanding the strength in the first half and then the outflows, I assume, in the second half? On the risk adjustment payable, I know there's a lot of moving parts there, but I think the total on the balance sheet's about $2.65 billion. I think 2024 balance was $1.65 billion. It sounds like there was a small change there, so maybe there's something around $1 billion for 2025. My question would be, why would the payable as a percentage of revenues be lower in 2025 relative to 2024?

Speaker 0

Yeah, Josh, let me start with your question about cash. As we talked about in the prepared remarks, we feel like we've got a very strong capital position at this point, $5.4 billion of total cash and investments, $579 million in excess capital, and $205 million of cash at the parent. The vast majority of the cash and investments are in our insurance subsidiaries, which more than covers the risk adjustment payable as well as our required capital, and that's where you end up with the excess capital. We think that the bulk of the remaining losses that we're forecasting for this year are going to be absorbed by that excess capital position. You saw that our excess capital decreased by about $300 million from last quarter, and that was the subsidiaries absorbing the losses in the second quarter.

With respect to parent cash, I do think the parent cash will decline in the back half of the year, largely due to us making some additional capital contribution to the insurance subsidiaries where we don't have as much excess capital. We feel confident the parent cash is going to be at levels that remain more than sufficient to cover the costs of the holding company and the things that we need. We feel really good about where our capital position was going into this change in market morbidity, and we're confident that we've got the access to funding that we need to continue to run this company.

Okay, that's perfect. If I could follow up, how should we be thinking about your previous long-term targets for 2027, specifically the 5% margin and the $2.25 in EPS?

Speaker 1

We're not changing our longer-term forecast at this moment, but 5% is still our target. We need to get through this pricing season, see how the membership's going to develop. As we then look at 2026, 2027, and 2028, we'll revise as necessary. At this point in time, we're not changing our point of view.

Perfect. Josh, I'm just going to add that, Josh, just to add that with respect to your questions about the risk adjustment payable, we're putting a table in the queue that shows you all the risk adjustment payables by year so that it's easier for you guys to navigate that. I would just say in terms of the risk adjustment payables, you know, the adjustment that we recorded obviously from the market morbidity is hitting the current year risk adjustment payable, and there's really nothing about the prior year risk adjustment payable that changed other than the trope I spoke to.

Speaker 6

Perfect. Your next question comes from the line of Michael Ha of Baird. Please go ahead.

Hi, thank you. Last year, when you set your 2027 EPS target to $25, I saw a number of multi-year upside levers, from the hundreds of basis points of opportunity on fraud, waste, and abuse, the PBM renegotiation, provider contract renegotiations, upside from ICRA, that could drive considerable earnings upside well above $225. With everything happening this year, the risk pool volatility, I was wondering if you could elaborate on what you view as multi-year earnings levers that may have been more longer dated that you may have had in your back pocket, but you could also pull forward and accelerate if needed. How large and tangible are these opportunities?

Speaker 1

Hi, Mark here. We are continuing to accelerate wherever we can across the board, particularly around medical costs. I would say that, you know, we still have opportunity, plenty of opportunity to do better. You saw the effects of our administrative cost reductions through AI. We're now deploying Agentic AI in the clinical space as we look at ways of directing people and helping people find the right care at the right time. All of those things are coming to play, and we still, Michael, believe we have a lot of opportunity, and we are pulling all levers as we can now to set up 2026 and beyond as profitable years.

Got it. Thank you. Just my follow-up question, looking ahead to the back half of this year, your updated guide, I just wanted to hear your thoughts on, is there a chance that the risk pool could deteriorate further? Like any additional potential shoes that could drop? I guess four things that come to my mind are, number one, FTR rechecks. I know you're fine, but I'd be concerned if the broader market needs attrition. Number two, at the end of the year, SEP, if that drives more growth, how that could affect stability. Number three, the duplicated membership CMS identified. Number four, the preemptive utilization in the fourth quarter. Just wondering of these four items and if there are any others that might factor into your updated 2025 guide. Thank you.

Speaker 0

Yeah, thank you. Let me start with FTR. On FTR, we've been telling you that we see little risk to us from that particular initiative. To double-click into that, we had an initial list of members who had failed to file and reconcile, which was around 27,000 members. A portion of those members have already lost their subsidy. We saw the remainder of those that had failed to reconcile lose their subsidies as of August 1. Importantly, 60% of that group actually did complete their file to reconcile process, which I think is, compared to some concerns that that might be a very significant portion of people that are unable to file and reconcile. For us, if that's indicative of what others may see in the market, we feel like that's pretty positive news.

On dual eligibles in terms of Medicaid and ACA, what we've heard from CMS is that for us, that's approximately 2.5% of our membership or just under 50,000 members. We don't know exactly yet which way those members are going to go, whether they're going to land in the ACA or Medicaid, but our understanding from the FAQs is that the member will have to take affirmative action in order to retain their ACA premium tax credit. On balance, I think that would suggest that we would see more of those members tending to go back into Medicaid and away from the ACA. We've also heard from CMS that the 2.5% that we've seen in our book is consistent for the market.

I think that they gave a press release previously that I think was based on 2024 information. It looks like the 2025 information is less significant in terms of those dual enrollments. We think this is a smaller exposure than maybe some have feared in terms of its exposure to losing that membership. Frankly, when we look at the utilization patterns of those individuals, they are higher on average than our book. There could be a little bit of a benefit to morbidity if everyone in the market is seeing similar patterns and those folks move from our books back into Medicaid. With respect to the other things that you listed out, I think that SEP is moderating into the back half. We do have a fourth quarter increase in utilization.

We think that that's possible, but we've pulled some levers that we think will offset the effects of that in our guidance. Overall, we feel very good about that we've factored all those risks into our pricing for 2026 and feel like we're on the path to return to profitability next year.

Speaker 6

Great. Thank you so much. Your next question comes from the line of Jessica Tassan of Piper Sandler. Please go ahead.

Hi guys, thanks for the question. I guess maybe first, can you just help us understand kind of the assumptions around returning to, first of all, assumptions around market stabilization in 2026, around returning to profitability in 2026, and then just how do you kind of think about fortifying the balance sheet in the event that next year, right, that next year's expectation for profitability kind of surprises to the downside or is subject to adversity? Thanks.

Speaker 0

Yeah, look, I would say that for 2026, we, as Mark talked about in his prepared remarks, have built in, I think, fairly conservative assumptions about the impacts of program integrity, the impacts of this market morbidity shift trend. All those things have been baked in. When we access information that we're able to get in terms of what does the competitive pricing landscape look like, we see higher, very conservative rate actions from the larger carriers. We've all been more competitive historically, but we are certainly seeing very significant increases in prices next year to capture the impacts of the things that I just spoke about. We feel like the pricing is contemplating the risks that are out there. That gives us a strong expectation that we'll be able to both improve our margin from this year, obviously, and return to profitability.

Your question with respect to what happens in a down scenario from a cash and capital perspective, I would just say this. We feel like the company right now has a strong capital position. We feel like if we need to access capital, that we'll have access for additional, you know, we have virtually no leverage in the company. We feel like we could add additional leverage. We believe that we would have access to capital as needed.

Got it. I just have a follow-up. We understand there was a large issuer that submitted risk adjustment data late for 2024. I don't think that other issuers will be penalized for that late submission, but just curious, if the data in that submission had been contemplated in 2024, would your risk adjustment payable as a % of premiums have been larger and make 2025 look smaller as a % of premiums on a relative basis? Thanks.

Yeah, we did see that drop. It was single small single-digit millions that really didn't have any impact.

Awesome. Thank you.

Speaker 6

Your next question comes from the line of John Ransom of Raymond James. Please go ahead.

Hey, good morning. I know things have changed, but when you were forecasting the market without enhanced subsidies, your number was about 21 million people. I mean, we've seen some other numbers that say the marketplace might shrink by 40% or so. Where do you stand in that debate as we sit now?

Speaker 1

As we look today, John, we believe that our 18% that we projected in our long-term guidance is the bottom and that it'll probably be higher. Again, we need to see how the rates play out in the marketplace. We believe we have a good handle on program integrity efforts and that impact, but it will be higher than the 18% we'd originally projected.

What do you mean by the 18%? I'm sorry, just to clarify that.

We had an 18% reduction in the book as a result of what was going to happen with, right? We're still projecting in our numbers no enhanced subsidies, and we were projecting 18%. We believe our number will be larger than 18%, but we haven't pegged it until we see rates and market competitiveness by market.

I got you. Just secondly, if we assume the MLR comes in line and you're going to accrue at about 15.5% for risk adjustment, that implies that your medical margin is down about, call it, 600 basis points this year over last year. As you think about next year, how much of that margin do you think you can recover with pricing actions? When you talk about profitability, is that EPS profitability, EBIT, EBITDA? Just some clarity on that would be great. Thanks.

Speaker 0

Yeah, thank you. When we're kind of working backwards, when we talk about profitability, we're always talking about earnings from operations. Earnings from operations means that adjusted EBITDA will also be positive. With respect to the MLR, the comparisons are impacted by looking at year over year. There was a 630 basis point year-over-year increase on the first half. As you think about the second half and what that means, last year we had a significant amount of SEP growth in the second half, and this year we're expecting membership to basically trend down to the back half of the year.

We think that as we look at kind of adjusting for the relative growth in the book last year to this year, we would expect MLR trends in the back half of the year to, you know, the MLR is going to increase sequentially from the adjusted MLRs that I mentioned in the call. We think that that trend is going to look a lot more like 2023, maybe 2022, than what it was last year because last year we had so much growth that really drove that.

Thank you.

Speaker 6

Your next question comes from the line of Stephen Baxter of Wells Fargo. Please go ahead.

Hi, thanks. Just a couple quick follow-ups. First, I guess, on the second half MLR commentary. There's an announcement from CMS about potential scrubbing of duplicative enrollment. I would be curious to get your guys' perspective on what you feel like the impacts from that might be and if you're assuming anything for that in this guidance. On the second question, the fourth quarter provision you mentioned for some additional utilization, can you help us think about the magnitude of that? I have a couple of other quick follow-ups. Thank you.

Speaker 0

Yeah, so on the dual eligible enrollees, as we talked about, we know the membership, we know the number. For us, that's less than 50,000 members that potentially could end up moving back to Medicaid and losing their, or losing their subsidy. I guess they could pay out of pocket if the, but they would lose their subsidy if they can't validate that they're no longer eligible for Medicaid or other Medicaid programs. I think it's important to note that we understand from CMS that the 2.5% that we see in our book is also the similar number in the marketplace. Probably a smaller exposure than what many had feared. We factor, we think that regardless of the outcome of which direction those members end up moving, we're well within the range of our guidance. That's what I would expect on that component.

With respect to the fourth quarter increase in utilization, I won't dimension it specifically other than to say that we did build that into our guidance. We think that a lot of the levers that I talked about last quarter around what do we do when we see increases in utilization, we've been working those levers, things like leaning into some fraud, waste, and abuse investments that we can make, ensuring that we are fully and correctly applying our provider contracts. There are issues that we know where, in our systems, we may be overpaying in spots. We are working to always address those. I think that's common for all insurers, but we see opportunities there. We've leaned into all those things, which we think will help to moderate some of the back half pressure that we've otherwise built into the outlook.

Got it. Okay. Just to hopefully add a little bit of clarity to some of the repricing and refiling discussions. Appreciating that I think in the news that the vast, vast majority of your membership is now, you know, refiled rates for, have you gotten assurances or any kind of clarity from the states about, you know, what they're willing to accept? If most states said like we will accept what you will submit, or are you still expecting there's going to be a significant amount of scrutiny around the assumption changes that you're making? We'll just get a sense of, you know, how confident you are that the request changes you've made will actually end up going through. Thank you.

Speaker 1

Yeah, thanks, Steve. We have filed and we have had good conversations with the regulators. They've been accepting of our point of view and actually have been pushing in a few places to say, you know, are we all priced properly? They don't want their markets to fail. That causes them to have to move membership, which they don't like to do. They are very interested in making sure that we're priced properly. As you know, subsidies change with those kinds of rates as well. We believe for individuals it won't be as dramatic a change for them. We believe we have pretty much received all the right messages from regulators that we're fine with our pricing models. We believe everybody else is pricing rationally as well. I know there's some data out there from yesterday. It's not complete.

There are a couple of markets where we've already filed where they have not updated the files online. We are confident in our pricing includes everything we need to include.

Speaker 6

Your next question comes from the line of Jonathan Yong of UBS. Please go ahead.

Hey, thanks for taking the question. I just wanted to go to your commentary on getting back to profitability in 2026. I guess as you kind of think about where your peers are kind of shaking out at your pricing, their pricing, is there a level of enrollment where perhaps they're leaving a lot more enrollments to be left to the rest of the marketplace and where perhaps you absorb perhaps too much enrollment? Is there kind of a break point where you just say, okay, this is just way too much? Can you frame that for us?

Speaker 1

Yeah, we have been very careful not to create adverse risk coming into our pool from others. Our pricing has been very careful on metal levels, types of products. We have a new strategy, a couple of new strategies we've exercised in markets that are not the traditional strategies you've seen in the markets to avoid things like adverse selection or adverse retention on the other side. We believe we have picked the right spots by market at this point, and we were very aware of that issue. It was a constant part of our conversation. We've had multiple pricing meetings, probably more than anybody would want to actually attend, but we have to make sure we're in the right place.

Okay. As we kind of think about the G&A reductions that you're doing to set yourself up for 2026, can you talk to where exactly these are taking shape in terms of those cost reductions? I guess similarly, is that $60 million the needed level to get to the level of profitability, or if you didn't do this, would you actually hit that? Thanks.

Speaker 0

Yeah, appreciate the question, Jonathan. I would just say the action we take is just as we've seen the losses that we're now projecting for 2025. We wanted to make sure that we, you know, just solidified our profitability position next year. We just view this as one of the levers that we're pulling to ensure we hit profitability and have, you know, meaningful margin expansion next year. With regards to the nature of the savings, we are having a reduction in force, which is, you know, roughly half of the savings we're projected for next year. The other half is driven by a mixture of closing some open roles that we had planned, as well as reducing some vendor costs.

The majority of those savings will roll into 2026, but we will see some of that in the back half of this year, which is part of the improvement in our SG&A guidance for the full year 2025.

Speaker 1

The focus has been on fixed costs. We assume there may be variable cost changes depending on where membership ends up, and we have not taken those actions yet.

Speaker 6

Thank you. Your next question comes from the line of Andrew Mock of Barclays. Please go ahead.

Hi, good morning. Can you help us bridge the $907 million of excess capital at Q1 to the $577 million of excess capital you quoted today? I think the earnings revision was $500 million. The risk adjustment payable accrual increased, and minimum capital is presumably increasing with a higher premium. I just want to understand what's getting better in the capital bridge and what the capital commitments look like for the back half of the year. Thanks.

Speaker 0

Yep. In terms of the decreases in capital, I would just point you to the loss that we recognized in the second quarter as being the biggest driver of the decrease in excess capital. We always have cash that's going back and forth between the subs and the parent. For example, parent cash increased in the second quarter due to some tax sharing payments that moved from the subsidiaries up into the parent. That also affects the amount of excess capital at the subs. That's the picture of where we are. As I already spoken to with respect to cash and capital, we are very comfortable with our current position. We have a revolver that's expiring at the end of the year. We're actively working towards extending and improving that facility.

Overall, we feel very confident that we will have, we have the right capital, and should we need, whether it's for growth reasons or otherwise, to increase our capital position, we have a fairly unlevered balance sheet, and we think that we would have ready access to be able to improve our capital position as necessary.

Great. Can I just ask a few follow-ups on that? One, can you give us the level of minimum cash you like to retain at the parent? Two, just a follow-up on the risk adjustment. It looks like the year-to-date accrual is running around 15.5%. Is that a good number to think about for the back half accrual as well? Can you help us understand why that number wouldn't increase more year over year if market acuity is increasing? Thanks.

Yep. On the parent cash levels, we have internal targets that we maintain. I would say that currently we are well above our internal targets and are comfortable with the cash position at the parent even through the second half of this year. With respect to the risk adjustment, I think that the first half is reflective of the change in market morbidity. It is now consistent. It's a good proxy for the back half as well. We had seen elevated claims and expected that we would see some risk adjustment offset for those. Obviously, now we know that we're not going to see that full offset, but at this point, we've adjusted for the market morbidity change, and that's fully reflected in the amount of risk adjustment that we're projecting in our guidance.

Great. Thank you.

Speaker 6

Your next question comes from the line of Craig Jones of Bank of America. Please go ahead.

Great. Thanks for the question. When you're thinking about where you end up among your peers in each state in terms of the rate increase requested for 2026, as you refile in each state, there's a pretty wide range of rate increases requested. Are you targeting getting towards the higher end of rate increases in each state to be more conservative in 2026 with the risk pool potentially changing so significantly? Are you more, are you plenty comfortable in the mid to low end of rate increases and are just confident in the rate that you've requested? Thanks.

Speaker 0

As you might expect, we start with what do we believe we need to do to put ourselves in the right position to ensure that we are confident that we are covering the changes in market morbidity, the impacts of subsidies expiring, enhanced subsidies. We build up our price first just based on our own detailed modeling. That gets us into double-digit increases and significant double-digit increases in some of our biggest markets. When we look at how our price position looks compared to what we're seeing with competitors, we think that we're very competitive in some markets. We're less competitive in others. On average, we feel very comfortable that our price change is going to be comparable to some of our larger peers and that we have covered off the risks that we've seen.

Okay, great. That makes sense. Thanks. Just to clarify, when you say double digits, is that between 10% and 99% or what? Can you narrow that down for us a little bit?

I would say that you are correct in terms of that number could be any of those, but I would just say that we would expect that in 2026, we'll see rate increases that'll be multiple times what we saw last year.

Okay, great. Thank you.

Speaker 6

Your next question comes from the line of David Windley of Jefferies. Please go ahead.

Speaker 1

Hi, thanks for taking the question. I wondered if you could talk to the membership shifts that you are seeing. I think from the beginning of the year, your membership has obviously held up better than the original expectation. In that gain, are those SEP like new signees or are they switchers from other plans? What is the profile of those members that are switching to or are shifting to your book one way or the other?

Speaker 0

I would say part of the improvement in membership is actually stronger retention and lower lapse. It's not all from new membership. We do have growth in SEP. We see a good portion of that growth is in $0 plans. I think that many of the dynamics that have fueled growth last year continue to persist this year. We are comfortable that the members that we've added have MLR profiles that are consistent with our historical expectations, that they'll be modestly higher than what we see for the full book. That's kind of what we've seen thus far in 2025. As we talked about with utilization, we have seen that settling down to levels that are approaching our expectations for what we should see for the risk in the book.

I don't think that we see any kind of signals that these members that we're adding this year are driving some types of adverse selection or increased risk for market morbidity.

Speaker 1

Okay, got it. My follow-up question was going to be on the very last part of what you said. It seems like better retention or switching of perhaps price-sensitive members to you helps to perhaps maintain the risk profile of your book, but perhaps to the detriment of your peers' books that are losing members, aren't in benchmark position, etc. The bottom line seems like the issue for assessing the market here, particularly for price leaders in the market, is not so much your own book, but everybody else's book. I wonder how you get comfortable with that pattern not persisting through the balance of this year and further into next year in terms of just, you know, market morbidity continuing to deteriorate away from you as people get swept out of the market with the, you know, the enhanced integrity.

You've addressed a lot of this, but I just wondered if we could put a finer point on it. Thank you.

Speaker 0

Sure. I would just say this, the increased program integrity rules have already been put into place for 2025. We think that's been, you know, the effects of that have already manifested in terms of what we see in, you know, the first quarter change in market morbidity. With respect to the population of low to no utilizers, we just really haven't seen much of a shift in our book. We've seen actually quite consistent percentages of those members in our book consistent with last year. In fact, it's been consistent with a number of years. We're not really seeing anything in that that gives us great pause and concerns about, you know, kind of what's going on with market morbidity. I read, I see what others are saying in terms of, you know, the potential shifts there.

We acknowledge that that could be a source of pressure and part of the driver of market morbidity. We don't see anything in our statistics, you know, through the second quarter that causes us to think that there's another leg that's going to drop in terms of market morbidity.

Speaker 1

Great. Thank you.

Speaker 6

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. We thank you for participating and ask that you please disconnect your line.