Risk Adjustment accrual that you're making, and, like, what gives you the confidence in, in what you're booking?
Well, clearly, risk adjustment is the hardest part of the estimates that you have to make in this business because it's estimating your own risk score as well as what the market risk score is going to be. I think we've had a long history of going through a lot of growth and not having a lot of misses around risk adjustment. I think we've got great models, and I think the benefit of that history really helps us to feel confident about, you know, where we are. The book that we have, it is early. Like, it's a quarter in, we have very little of the total claims volume has been received at this point. That's just not an Oscar, that's an industry phenomenon.
So, you know, a lot of what we do now is to look at, is there any signals in the claims data that we got, our risk adjustment? You know, we're a payer, so the reserves that we put up for that, you know, are based on the claims that we've seen in our models as to what that might mean for the rest of the year. We expect that our risk transfer as a percentage of direct premiums is gonna increase throughout the year, and so we do think this is the low point for us in the year and that ours will continue to go up. That's a dynamic partly attributable to you know, we do expect to continue to see SEP growth. That's part of what is embedded in our guidance.
Those tend to have a bit higher risk transfer that comes with them. For us, we would expect those to be younger people, and there's some utilization behaviors where we don't get as much information from them, and that drives a bit higher risk transfer. So we'll see that move up, but, you know, in terms of the full year estimate, it's early days. Feel comfortable with what we've done in Q1.
Another explanation I've heard for kind of how everybody could be at target margin at the same time is that we right now have more subsidies than normal because of what happened during COVID, and it's possible that, you know, since a large segment of the market is kind of lower income and getting highly subsidized, they become less price-sensitive because the government is picking up most of that bill. And so is there a potential that because the expanded subsidies basically cover a very large portion of premiums, that the entire market is able to kind of push larger price increases, such that if those subsidies were to go away, the pricing environment could become more competitive? Like, are there any signals or data points?
You know, I think that that's, that's certainly a possibility, that when you have, you know, people, a lot of whom are on zero-price plans-
Yeah
... they're, they're paying zero. But underneath that, you still have to be competitive. You know, and then when I just think about enhanced subsidies as a broader topic, you know, like, I see the CBO estimate out there that they expect the market to shrink by something like $5 million, and I think that's probably a pretty one-sided view of what may happen in the marketplace. You know, when I look at our existing plans and membership, but something like 70% of our members could actually buy down to a similar or lower cost out-of-pocket premium. And so, you know, with that, we'd expect a pretty, you know, significant amount of retention there.
And then, even for those that aren't able to do a buy-down to a similarly or lower-price plan, our experience is that people who have had access to care are willing to accept some price increase. So, you know, to come back to your topic of what does that do to, to margin profile, I think all of us in this industry have learned that, you know, chasing margin is a bad trade. It's because of the nature of risk transfer in this thing, you can't, you know, price down in one year and then kind of recover it in the next year because you've either got to give up MLR, you have risk transfer on the other side of that thing.
I just think that the whole industry is structured to be thoughtfully consistent with pricing year over year, which, you know, would suggest that now that we've seen a lot of the more aggressive players basically work themselves out of the market, that those that remain are gonna be pretty thoughtful about, you know, not blowing themselves on too aggressive a pricing.
You mentioned the subsidies, and it's, like, hard to, you know, understand if they'll even be passed, and then if they don't get passed, how many people, you know, lives will be lost, and then, you know, what happens to pricing? So even if we assume, like, stable MLR, do you think, like, you know, two years from now, if the subsidies did expire, you would be able to get enough fixed G&A leverage maybe on, like, cost trend growth that you wouldn't be, you know, seeing G&A pressure? Like, basically, my question is, like, would there be margin compression in the event that subsidies go away?
Yeah. Well, I think the two dynamics that we think about with enhanced subsidies, one is there's the whole political side of this, are enhanced subsidies going to be extended? And I certainly am not going to make a guess about what happens in politics in the U.S., but I think there's probably a middle ground here, where the Democrats clearly have a reason that, you know, this is a high priority for them to maintain subsidies. I think the Republicans are likely to do some trade-offs to get what they want and give on that side. Certainly, a high percentage of the ACA is in red states at this point, and so we would anticipate that there's gonna be a middle ground on that.
If you assume that there's a middle ground, and you assume some of the statistics I just talked about in terms of people's ability to buy down, and stay in the ACA, you know, there could be a metal mix issue, where your premiums, your, your total premiums might see a little bit of top-line pressure. But bottom line, you know, we generate healthy margins on those, on, you know, those types of plans. And so I, I think it's too early for me to say that I see margin pressure on, you know, out there from the expiration of enhanced subsidies. You know, I really think that we would expect to, you know, do everything we can to maintain our trajectory.
... moving a little bit closer to the current day, where do you think industry enrollment in the exchanges is today? Where do you think it ends at the end of the year, and where do you think it goes in 2025? Because, you know, even setting aside the subsidies, it's kinda hard to understand what the core growth of this market is because there's been so many political changes.
Your mic low.
Oh, sorry. There's been so many political changes, and so the exchange enrollment has been kind of, like, lumpy year to year. And so, you know, just what you think the core growth of the enrollment is in 2025, I guess, as a base of, like, what we could expect going forward if subsidies are maintained.
Yeah, in 2025, I think that, you know, a couple of the enhanced subsidies clearly one of the reasons for growth in the marketplace in 2024. And I think that if we see those same subsidies, which they're part of law, so they'll, you know, they'll be there for 2025, I would expect that that continues to be a catalyst for growth. And then that, you know, there's other factors that we think are going to continue to be catalysts for growth in the individual marketplace. Certainly, unemployment is, you know, is at very favorable levels right now to the economy. It's unlikely that, you know, at least in my estimation, that we would see that going lower. You know, so that doesn't pose much of a risk for shrinkage in the marketplace.
And then when I look at just the way we work, more gig economy workers, more small and middle market types of employers that are going to be looking. The trend for them is, you know, nowhere but up, and it's one of the reasons why we believe ICHRA has got such a promising future, is that, you know, we think that that's a non-sustainable trend for many of them, and that they will start to transition to more ICHRA, where that's gonna push more people into, you know, individual markets, and that would also be a catalyst for the ACA.
So your base assumption is that the exchanges grow faster than the U.S. population, but how much, you know, of the 20% revenue target that you have out there comes from the market growth, and then you expanding into new geographies, and then taking market share from your competitors?
I really appreciate you doing that commercial for our Investor Day, which, you know, is on June seventh in New York, and we'll lay out more of those types of points at that meeting.
I think Mark has said that he doesn't want Oscar to be a single line of business company, like, focused specifically on the exchanges, and you've started to talk about ICHRA. But in terms of other business lines, like the small group partnership with Oscar, or sorry, with Cigna, you recently announced that you'd be exiting. So what happened there with Cigna? Why didn't the economics work, and what is your new strategy for the small group market, if that is still a target?
Yeah. So, starting with Cigna + Oscar, that was an arrangement that we were able to achieve, you know, good growth in the business, but the economics of the bottom line performance, that business was not meeting the targets that we had for it. I think that's as much as we were, you know, when you have a partnership arrangement and you're split in economics, sometimes it's hard to really optimize around that, 'cause each party is trying to optimize the piece that they get.
So, you know, that just came to a natural point where we had to make a decision about were we going to extend that or were we gonna shift our focus elsewhere, and we decided that we'd rather spend, you know, our time and capital, pursuing areas that we felt, you know, had a better performance opportunity longer term. Which kind of leads me to the individual markets, which is what we are, you know, really focused on from a being a risk provider, and being the plan of record. You know, we think that the individual marketplace is where, where we really want to lean in and do that.
That doesn't mean in markets like, you know, Medicare Advantage, that we're not gonna participate in that, but I think that our, our expectation is that we would, you know, primarily participate in, in the MA markets as a service provider. And we think that, you know, as part of our + Oscar strategy, over time, we will have opportunities to provide our infrastructure to, to MA plans and to help grow, and foster their businesses. So that would be kind of, I think, the direction of travel for us.
Before we get to MA, you know, the company, almost uniquely, is the only one talking about ICHRA as the next growth opportunity, and it has existed as an option for a long time. And so what do you think needed to change in the market for ICHRA to see adoption, and does it rely on the subsidies? And, you know, what specific offering does Oscar have that, you know, whatever other ICHRA enablers out there wouldn't be able to offer?
You know, ICHRA is—it's an interesting thing. I think that a lot of the cost trends for small and middle market companies are going to make the pitch for why does this make sense, more obvious. I also think that the fact that the ACA has expanded to such a large business, you know, with 21 million lives, it's more stable. There's just more plans that are out there, and there's no stigma to, you know, having your employees choose plans that are on the ACA. Most ICHRA plans are not going to be subsidies eligible, so it does not rely on subsidies. But the catalysts here, I think, that are starting to set up with ICHRA, there's increased awareness of the ACA as a stable marketplace.
There's increased awareness of, you know, the brand. There's more companies focused on distribution. There are, you know, a number of platforms that are out there that are, you know, working to grow that business. So to me, this is a marketplace that's going to grow relatively slowly, followed by a pretty, you know, steep curve. All the, you know, the product design is what's been lacking, and we think that we have a real opportunity, given our member-centric business that we've run our entire history. We think that that's, you know, a huge selling point for employers.
... and then getting to the Medicare Advantage comment that you made. So what, you know, you guys ran an MA business for a while. I'm just curious, like, what specifically, you know, didn't work about the MA business, and what made you feel like there wouldn't be enough momentum to kind of, like, make that product work on a standalone basis? And then if you can go into how you expect to serve that market going forward and where you think-
Yeah
the opportunity actually is.
So, you know, our MA business was incredibly small, you know?
Yeah.
Several thousand lives, so we never had the scale, and it's a complicated business. I think everyone acknowledges that being an MA competitor requires you to do pretty much everything right. And when you're subscale and when you're trying to grow your primary business, at the way we were and achieve the economics, it just became a distraction that was not worth the energy of trying to grow, from a, you know, basically a de novo MA business. And so we learned a lot in that little experiment, but ultimately just didn't feel like it was, it was—you know, required too much resource allocation, for us to. And we just didn't really have the right infrastructure design to do that in a way where we wanted to try to continue to grow it.
And again, that doesn't mean that we're not interested in being part of MA in the future, but more likely as a service provider, as I said earlier.
But what do you mean by service provider?
Mainly, that we think there's an opportunity to bring our platform to health plans to help them, you know, run their MA book. You know, when I think about +Oscar, one of the biggest selling points was going to be, you know, the company's performance, and we think we've got an opportunity to deliver, you know, continuing improved performance over time, and that's gonna be the best selling point for our, you know, point for our infrastructure. And that's one of the promises that we see with +Oscar.
Yeah, I guess the +Oscar portion of the business has been part of the pitch since the company IPO'd, but there's been a few kind of changes in strategy since the beginning of that story. And so is there anything changing underneath in terms of what you're offering to clients and any data points you can share with us around, you know, the pipeline or, like, adoption of a specific product that gives you confidence that, you know, there'd be broader adoption in the future?
Sure. Well, Campaign Builder is the one product that we have in the market, and we've seen great traction with that. We've continued to grow the number of lives in that. You know, we've got over 500,000 lives that we're currently serving on Campaign Builder, and we've grown that number, you know, nicely. So it's a small business in terms of the scale compared to our insurance business, but we're learning a lot, we're building our muscle, and, you know, we think there's opportunity to continue to grow that.
When we look at our overall infrastructure and our opportunity to bring our infrastructure to the market, you know, the things that I see. One of the reasons why I joined Oscar in the first place was, you know, I am convinced that companies that started with cloud-native technology that was built on, you know, microservices, where it's all integrated, it all talks to each other, you've got one data source, that data moves seamlessly throughout your infrastructure, like, that is the recipe to win longer term. We see very few competitors that have anything that even is, that's remotely the same as what we have. You know, we think that there's opportunities to leverage AI in, in very differentiated ways.
We can plug those things into our infrastructure in simple, efficient APIs that, you know, make it where we can go from an idea to actually running things in our technology really quickly. So when I look at how differentiated our tech is, and think about going to another health plan and explaining to them, like: "Why wouldn't you want this versus that spaghetti infrastructure that you have, cobbling together a bunch of, you know, old legacy types of technology, old code?" It's just obvious to me that it's just better. And so when I think about what is the opportunity for +Oscar, you know, we are still working on how do we bring that to market in the best way.
Mark's talked about, you know, we probably need some partners in terms of distribution, in terms of installation and management, and so we still are really bullish that there's a long-term opportunity with +Oscar. We'll have a little bit more to talk about that with at Investor Day. But, you know, from my perspective as to what I see differentiated in our company versus others, we are very different when it comes to technology and what we can do there, and I think that our results are going to increasingly demonstrate the power of the tech, what we're able to do around, you know, new generative AI and other, you know, types of opportunities. Like, we're gonna punch above our weight, and I think it's gonna be a real catalyst for value creation in the future.
Yeah, that kind of leads into another question I had around, first, the comment that you made that you didn't have the scale to compete in MA, and then second, the comment you made around differentiated technology. And so one of the questions I've always had about Oscar and about small insurers in general is, it seems like, you know, insurance managed care is a business about local scale and national scale, where, one, on the local level, you're able to get better unit economics from providers, and at the national level, you're able to leverage fixed G&A across a bunch of businesses. And so my question has always been, like: to your experience in MA, how is it possible for a small insurer to compete in a market that really is differentiated on scale?
You know, for example, could it be that you have narrower networks, or is it really entirely reliant on the tech stack, or is it, does it require that, you know, you raise a bunch of money, go buy a lot of business, and then get to a point of scale where you can compete?
Well, my personal experience is it takes about, you know, somewhere around 12 years to achieve the scale one needs to achieve profitability. So if I just look at Oscar, right, we have grown pretty aggressively, and I feel like we're just hitting the point where we're getting leverage from our fixed cost base now with our growth, where we're starting to see the ability to gain the benefits of scale. And it is a very hard journey to be a small insurer, when you're competing with people that have incredible advantages on unit costs and on variable cost efficiencies. And one of the things that I think is so unique about Oscar is we are early on our journey towards destination economics, right?
We still have room to go on operational efficiency, on getting more fixed cost leverage. And when I think about how, you know, our relative performance versus peers, most of them are already at the end of the journey on what they're able to do to improve, you know, economics, where we still have a huge opportunity to deliver. You know, I can do the same price and yet still drive more margin because my costs have a downtrend line versus a sideways trend line. And, you know, so yes, scale matters. I think we've achieved scale where we're able to start to actually create value from growth and for adding more scale. But, you know, it is...
It's a tough business if you're a small player, and we're thrilled that we've been able to grow to the point where we're, you know, we're expecting the company to generate Total Company Adjusted EBITDA profitability this year. That's a huge milestone for us.
But so scale is important, but to what degree is the technology important? Like, is it actually driving better medical cost outcomes or-
Oh, there's no question that the technology is driving performance. When I look at the drivers, you know, I talked about this in the earnings call. We had significant improvement in SG&A, you know, in first quarter of last year versus first quarter of this year. The biggest driver, and that was variable cost efficiencies. That was, you know, a lot of that was technology. Mark talked about the fact that we had, you know, significant growth in Q1 of 2024, that, you know, we were able to have fewer people on phones. We had fewer calls. We had so many more self-service tools that when new members needed to, you know, find information out about their plan, we were able to, you know, create mechanisms that they could get that information self-service, which reduced call volumes, it reduced the number of people that we needed on phones.
That's a pretty simple example of the types of efficiency, but, you know, we have a list of initiatives that we're driving that are focused on: how do we improve, you know, the cost structure of the company and the member experience that we have through technology? And I just look at the results that we see on the admin side and on the MLR side, and I think it's one part scale, but it's one part the effects of technology and our ability to drive improvements.
So if you had to rank order the benefits of technology between, you know, getting G&A leverage, improving member retention, and lowering medical costs, like, where would you rank those?
Well, the simplest one to measure is, you know, the savings on the SG&A side, where I can, you know, I can pretty clearly say, "If I do this, I get this savings." Those are simple things that we can measure, and we do measure. We have them rank ordered by return profile. We worked up the list from top to bottom. We have a pretty rigorous process of challenging that. You know, we do have on the MLR side and on membership growth and retention side, we have initiatives around those as well. And, you know, the opportunity, I think, is significant for us to continue to drive down MLR using technology.
Things like fraud, waste, and abuse is an area where, you know, right now, we use a good portion of the work we do is using third-party vendors. We think there's an opportunity for us using technology to in-house some of that type of work at better costs and better effectiveness over time. So those are examples where we continue to see use cases. You know, AI, we're early days in AI, but we are using AI now to do some things that I think are obvious savings, like taking information and creating extracts that allow people to, instead of going and working through a bunch of files to find information, they get an extract of, "Here's what you need," you know, that it's generated by our AI infrastructure, and that's efficiency.
So I think we're just on the front end of what we're going to be able to do there, but certainly, we are focused on delivering, you know, a superior member experience, and making certain that we can have affordable plans, that we have, you know, delightful member experiences, that we have good provider networks. That's the keys to that, and underneath that, you know, is: how do we make sure that our technology enables all parts of it?
If I could just circle back to a question I had earlier, 'cause I don't think you heard me on the mic: What do you think industry enrollment is today on the exchanges, and where does it end, like, on the current view in 2024?
Yeah, I think that, you know, the estimates are that the ACA is gonna be somewhere around 21 million lives, you know, in 2024, and no reason to see that, you know, shrinking next year. Seems like the catalyst next year in terms of continued enhanced subsidies, you know, continued... we think gig economy, you know, more, more small employers kind of shifting towards, plans that, that will put lives into ACA. All of those dynamics, we think, will continue to be catalyst for growth in 2025.
And then a question about margins. So, you know, I think from—I forget the years exactly, but from I think 2019 - 2023, Oscar improved EBITDA margins 800 basis points a year on average? And then this year, on the current guidance, I think it's another 300 basis points if you hit the high end of your EBITDA margin target. And so given that, like, really strong momentum in the hundreds of basis points of margin expansion, like, why shouldn't we expect the same type of margin improvement next year?
Well, number one, super proud of the performance of the company, and I think it speaks to, you know, both the management process that we've been executing, the technology there, and our increasing scale. So I do think that, you know, part of the reasons that we're so optimistic about the future of the company is that we don't think we've reached the end of that journey. We think there's still way, you know, significant room to go in terms of our ability to continue to drive improved financial performance. So I won't comment on exactly what to expect in 2025, but we are thrilled with, you know, kind of the first quarter of the company and expect to continue to deliver strong results throughout the year, generating, you know, positive Adjusted EBITDA this year.
You know, that's an important milestone, and then, you know, we would expect after that, that there's more good news to come.
I guess my last question here, as we're wrapping up time, like, if my line of thinking is correct and that next year you see a lot of margin expansion, you could be sitting here today, this time next year, you know, looking at the potential for significant free cash flow. Like, what would be the plan at that point?
Yeah. So, you know, as we start to get to total company Adjusted EBITDA positive, that means we use that metric in part because it's a good proxy for free cash flow. And so generating positive cash flow for us, you know, gives us a lot of opportunities to think about: How do we best deploy that capital? Number one is, you know, I would love to continue to fund organic growth. And, you know, right now we've got significant excess capital that'll allow us to grow without needing to, you know, add more capital into our subs. So organic growth is number one on the capital utilization front. Certainly, you know, if there's opportunities for inorganic growth, that would also be terrific.
When I think about optimizing things like quota share, where we use quota share right now to reduce the capital needs of the company, there's an opportunity to, over time, to rationalize quota share. And then I would just think about, you know, other, what we do in terms of our overall capital stack, where I think that at the moment, you know, we have very little leverage. There's more opportunities to make the capital stack a bit more efficient over time, and all of those things are gonna open up for us as we become, you know, consistently cash flow positive. So I think that's a real opportunity for us to enhance performance over time as well.
Awesome. I think that's all we have time for. Thanks so much.
Hey, thank you. Appreciate your time.