Q1 2024 Earnings Summary
- Oscar Health reported strong membership growth, ending the quarter with over 1.4 million members, an increase of 42% year-over-year, driven by strong retention and robust SEP member additions. They have a history of retaining a high portion of SEP members, which can lead to improved MLRs in future years.
- Medical Loss Ratio (MLR) improved significantly, with disciplined pricing and total cost of care initiatives being the most important drivers. The company is confident that these MLR trends will persist and believes there is opportunity to reach MLR levels competitive with industry peers.
- SG&A expenses significantly improved, with the SG&A expense ratio decreasing by approximately 870 basis points year-over-year to 18.4%. The improvement is driven by technology making operations more efficient and improved fixed cost leverage, and the company anticipates further improvements in SG&A in the future.
- Oscar is exiting Medicare Advantage and the Cigna + Oscar small group relationship, which limits the company's diversification and leaves it reliant on a single product line. The exits were due to unsustainable provider relationships in Medicare and inability to make the Cigna + Oscar product profitable after five years of efforts.
- The strong SEP membership growth contributing to current performance may not be sustainable, and there's uncertainty whether it is a pull forward of future growth. Furthermore, SEP members typically have a Medical Loss Ratio (MLR) about 10% higher than Open Enrollment members, potentially increasing costs and impacting margins in the current year.
- The company expects risk transfer payments (risk adjustment costs) to increase throughout the year due to seasonality and the addition of SEP members, which could negatively impact financial performance. Moreover, the risk adjustment estimates are based mainly on internal data with limited external validation, adding uncertainty to financial projections.
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Exit of Medicare Advantage and Cigna + Oscar
Q: Why exit Medicare Advantage and Cigna partnerships?
A: We exited Medicare because provider relationships were unsustainable, and we couldn't fix them to achieve a profitable product. We plan to re-enter the market differently, which we'll discuss at our Investor Day in June. Regarding Cigna + Oscar, despite efforts over five years, we couldn't make it profitable due to ownership economics and revenue splits. We believe ICHRA is a better solution for the small group and middle market, giving access to over 70 million lives. -
Medical Loss Ratio (MLR) Outlook
Q: Can MLR reach peer levels over time?
A: Our Q1 MLR was consistent with expectations, with utilization on plan. Though there's seasonality and SEP member additions can affect MLR, there's no reason we can't perform at MLR levels competitive with industry peers. -
SG&A Improvements and Margin Outlook
Q: What is the sustainable SG&A level to achieve target margins?
A: We're excited about the significant year-over-year improvement in SG&A, which is sticky and will continue. Our technology is making operations more efficient, and we're seeing fixed cost leverage. We anticipate further improvements in SG&A, driving it to even better levels. -
Membership Growth and SEP Impact
Q: How is membership growth performing, and what's the impact?
A: We reported 1.4 million members, stronger SEP growth than expected early in the year. We're unsure if this is a pull-forward or will continue over time. Grabbing SEP members is good for 2025, as we retain a high portion, and next year they tend to have MLRs similar to OE members. -
Risk Adjustment Process and Expectations
Q: How is the risk adjuster impacting guidance?
A: Risk adjustment at this point is mainly an internal estimate; we don't have much external data. We expect the percentage of risk transfer to increase throughout the year due to seasonality and SEP growth, which can have adverse effects. We have strong processes, including AI, for collecting codes to support risk transfer, delivering value in that process. -
Impact of PBM Re-contracting on Margins
Q: How much did the new PBM contract help year-over-year?
A: While we won't call out the specific impact, the PBM is embedded in our performance. We built the PBM into our pricing and are seeing margin improvements. Clearly, the PBM is a significant driver of our ability to price competitively and drive market improvement.
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