Thank you. Good afternoon, everyone. I'm Steve Baxter, the healthcare services analyst here at Wells Fargo, so we're pleased to have Oscar with us this afternoon. As you likely know, Oscar is one of the largest exchange plans in the country. From the company, we have CFO Scott Blackley, so thanks again for coming to the conference. Anything you wanted to start with, or if you just get right to the questions?
First of all, thanks for having us. You know, I think the main thing I would say about the company is when I look at the fundamentals of the business, the core of the business is performing remarkably well, right? We're really excited about the fact that utilization has been as we expected. We've seen favorable admin performance. Just feel like, you know, the core of the business is running really well. You know, we just updated our guidance last quarter. You know, it's a pretty unique thing that you can both have significant SEP growth and improve your profitability over your expectations for the year. The combination of those things makes us, you know, excited both about 2024, but about our prospects of 2025 as well.
Okay. Yeah, that's great. And, you know, we saw, just to kind of clear through this one, you put out an 8-K reaffirming, you know, full year guidance. Anything you want to touch on about, you know, enrollment trends, you know, visibility to utilization, you know, either as the second quarter has developed further or anything you've seen, you know, maybe in the month of July?
Yeah. I would just say that, you know, we're reaffirming guidance. That obviously means that we're not seeing anything that is unexpected in terms of the company's performance. On SEP, we have seen, you know, continued deceleration of SEP additions
Got it.
- which is comforting for us in terms of what we built into that long term for our, guidance for 2024.
Okay. And then just to help us, you know, kind of understand, you know, the improvement in your guidance that you made, you know, with the second quarter results, and just to kind of put a couple of the pieces together. I think earlier in the year, if we were to go back to Investor Day, you know, I think you made a comment that through something, I think it was, believe it was April, the company was running something like $40 million favorable to plan. If I have that correct? And then just thinking about the magnitude of guidance improvement, I think, you know, what we kind of assumed was, hey, that's four months, six months gets us to 60. Maybe when they report the second quarter, the guidance goes up by $60 million. Instead, the guidance goes up $35 million, right?
And I think it sounds like a lot of that is just driven by your SEP assumptions. But can you walk us through what you factored into the improved guidance? And then, you know, maybe we can talk about some of the things that still potentially could drive performance, you know, in the back half of the year.
Sure. So through April, as you talked about, we were $40 million ahead of plan, and that really speaks to the performance of the book, you know, that core performance of the book that I spoke about. You know, the SEP volume has been greater than what we had expected. And, you know, we did have some prior year development that we recorded in the second quarter, which offset some of the pressure from the increased SEP that we built into the forecast.
So at this point, the guidance that we have outstanding, you know, kind of takes into account everything we had seen with SEP and with the, you know, our expectations that we would continue to see SEP growth into the, you know, the back half of the year at a decelerating rate to what we saw it in the first half of the year. You know, would expect that that comes with a little bit of MLR pressure. We built that into the guidance. So at this point, everything we know about kind of the SEP performance is built into that guidance, partially offsetting some of the good news that we had seen through April.
But when I step back and think about, you know, this is a business that benefits from scale, so, you know, growing faster than expected, we added $700 million of revenues to our guidance. That is just, you know, great news for the long term for this company. And SEP growth, while in year, has some MLR headwinds. What we've seen historically is that we have a great track record of retaining SEP members through open enrollment, and then in the following year, the MLR of those members tends to be, you know, kind of what we see with the rest of our OE population. So we just view this growth as a little bit of pressure this year, but certainly a tailwind to 2025.
Okay. So if we were to characterize the guidance change, I think that the key components are the underlying performance as ex-SEPs, you know, quite positive in the first half of the year, the moving parts around SEP and then the moving parts around, you know, PYD and risk adjustment. And then to the extent there is second half outperformance, like that would be an upside, or you think you've, like, factored in more of the level of outperformance you've seen in the first half?
We've factored in everything that, you know, we've taken into account the performance of that core book, right? We've factored in what we expect from the SEP. So at this point, that guidance, you know, I think that opportunities would be is risk adjustment going to come in better than anticipated? You know, we've already seen kind of the first weekly report. We have our own models that we rely on in coming up with our risk adjustment estimates. Seems like it's a pretty stable year for that. So, you know, don't have any expectations that that's gonna outperform.
So at this point, it is just run the business really well, do the things that we do every day, which is to focus on the fundamentals, make sure we have great discipline around cost and medical expense, and I think we've set ourselves up for a strong year.
Okay. And then what's the right way to think about how the SEP membership this year, like, what the performance evolves into over the next couple of years? And how should we think about the starting point, and how close to normalized levels of profitability do you think you can get on the membership that you retain next year?
Yeah. So SEP, when you get members through the special enrollment period, they, you know, as you go through the year, the MLR performance is actually worse the later in the year you get these members. And it's not because of some utilization issue. It's fundamentally because you have less time for that new member to get connected to the healthcare system. They, you know, don't have as much opportunity to get things like their scripts into the system. They don't have the opportunity to go and see their PCP, so you get less risk score information. And then when you do get that, you know, they do have risk score information, the calculation that you do with CMS has a duration factor that attempts to take that short period and annualize it.
It's just not effective in getting the full credit for those members. So you wouldn't, you know, those members, the vast majority of SEP are not like something about them inherently causes them to have higher MLRs. It is literally some of these kind of structural issues about when they come into the ACA. As a result, if you keep them over a cycle, they start to look just like the rest of OE members, right? So that's what we've seen historically. We've seen that these folks, we do have a high, you know, good track record of retaining a very significant portion of these members. And, you know, we think that's partly due to our, you know, member focus, high NPS score. We think it's partly driven by, you know, our strong relationships with the brokers that we do business with.
You know, all of those things, you know, give us confidence about our ability on a continuing basis to retain a high portion of these SEP members that we're adding this year.
If we start to think a little bit about 2025, you know, obviously, you have a profitability swing on those members that you're hoping to drive. When you think about what industry-level enrollment growth could look like for 2025 , what's your latest thinking on what that could be?
Yeah. At the Investor Day, we said that we would-- we expected that 2025 had market growth of something in the mid-teens, let's call that 15%. And, you know, not updating our expectations around that. You know, when we look at 2024, Medicaid redetermination and the members coming in from that are absolutely one of the primary catalysts for the amount of growth that we're seeing in the ACA this year. But underneath that, there is, you know, a number of, you know, trends that we think are gonna be sticky. Gig economy continues to expand in this country, underinsured being, you know, brought into the ACA by a very sophisticated broker, you know, process that now I think has been built into the ACA marketplace. You know, immigration is a trend.
We think that also is a catalyst for ACA growth. So all of those things give us some confidence that we're seeing them in 2024, and we would expect to continue to see those in 2025.
I think on the call, you mentioned something to the effect of you were, and I know that the market sizes are now different as you've grown a lot, but something like you're doubling the number of markets that you're gonna be in in 2025 . Is there, like, an equivalent statistic you could give for addressable market or TAM in the market that might give us a better sense of your TAM expansion?
Just to be really clear, we expect to double the MSAs that we're in by 2027, not 2025.
Okay.
And you know, I would expect that doubling our the MSAs that we're in will result in, from a addressable market perspective, you know, an increase, not quite the same magnitude as the doubling there, but you know, we would expect to see the addressable market maybe an increase to where we're something you know, approaching 70% of the total market.
Okay. And as you know, we're gonna start to see you know, rate filing information for you know, 2025, you know, kind of come out and become more publicly available. I mean, what should we expect to see as we get a look at what Oscar's data looks like? And as you started to review you know, the competitive landscape, at least the initial early reads for it, like, what jumps out to you for 2025
Yeah.
you know, worthy?
I think that when you look at pricing, what it screams to me is this is a market filled with large, sophisticated public companies who have established targets around whether it's EPS or margin. You know, we're all trying to ensure that we can deliver against those long-term targets. That translate through, you know, through to rational pricing.
Mm-hmm.
So what I think is going to be seen in pricing this year is you'll probably have. On average, the majority of pricing will be at trend and above, you know.
Mm-hmm.
So that's where I think things will settle out, you know, trend plus. You know, for us, we'll probably be just below the national average on pricing. That obviously varies market by market, but we feel like we're competitively positioned on price. But as always, we really focus on a disciplined pricing strategy to make sure that we are getting paid for the risk we're taking, that we're delivering the growth that we want, but we're also improving margin. So that's kind of what I see from pricing.
Yeah, I think definitely on the publicly traded company side, we definitely understand that there are some companies out there that will be trying to make progress back to, you know, some of the margins they think they should earn over a period of time. There is a healthy chunk of the market, though, coming from, you know, not-for-profits like Blue Cross Blue Shield-
Sure.
plans. Do you feel like there's any change that you're seeing in their behavior or their approach to the market? Or do you think that maybe there's a bit more caution about doing something right before, hey, we have this subsidy uncertainty?
You know, I'd lump them in with large, sophisticated players. They have-
Mm-hmm
... you know, similar dynamics that we all do in terms of, you know, setting long-term objectives for your company and trying to hit them. So I think that we continue to see pretty rational behavior in this marketplace. And I do think that, you know, is reflective of stable trend, you know, growing market. You know, all those things are benefited by stability in the players and the pricing.
Okay. So then if we're thinking about, you know, essentially for you guys, pricing to trend for next year, you know, you do have these big gross margin initiatives that we've spent a lot of time on in the past, both the PBM recontracting, going out and, you know, going in, working with providers to improve your unit costs and payment integrity as, you know, kind of the third big driver. As we go into 2025 , right, how should we think about how much of that margin improvement is being realized in 2024 , and what's still in front of the company for the next couple of years?
Yeah. So we gave our long-term targets of, you know, we expect to, by 2027, be at 5% EBIT margin or better. You know, the progression of when we get there, obviously, a larger book compared to where we started the year, is a tailwind for us. There's, you know, there's no penalty for growing, getting there sooner. And so we're excited about the potential of the larger book this year being a catalyst for stronger performance next year than we had expected, potentially getting us to those targets sooner, sooner than expected. But I would just say, you know, we stay committed to growing revenues at a 20% plus CAGR. Feel like we can deliver on that.
If we see, you know, with more growth this year, you know, we think that positions us well to just be a larger company, larger scale, results in better economics for us. So, you know, it, we feel really, really positive about the performance of the company versus when we set those long-term targets.
Okay. And then, you know, I think one of the points you've kind of been making throughout this, obviously, is that the 2024 base is larger from, you know, a revenue standpoint, and, you know, year-end membership probably even more positive than just given the, you know, kind of the annualization impact that that would have. Just remind us, I believe that the long-term guidance you developed was off the initial guidance that you set for 2024. How is the long-term guidance impacted by the fact that the jump-off point this year on the top line and for membership seems like it's a decent amount better?
Yeah. So we did set our long-term guidance based on our 2024 original. Let me say that again. Our 2027 long-term targets were set off our 2024 original guidance, right? So we've improved that guidance. We're not going to go and change those long-term targets, we just made them. But as I was just talking about, a larger company gives us the ability to take advantage of all the things that, we think are, important to drive margin. The ability to price for the risk you're taking, fixed cost scale, you know, the bigger we are, we don't increase our fixed costs in a meaningful way, so we're able to capture fixed cost scale. We think we've got some opportunities on the variable side. So I would just say that long-term targets stand.
The more we grow in 2024 and 2025, you know, the faster we're going to get to those long-term targets.
Okay. All right, and then, obviously, a big focus is, you know, the enhanced subsidies, right? Like you point out, that there are other drivers of growth in the market, but enhanced subsidies clearly are pretty important over the past couple of years in terms of driving the amount of growth we've seen. You guys have an estimate embedded in your long-term outlook that if enhanced subsidies expire and are not replaced with, you know, either full stop or in some version of it, you could see membership decline 15% or 20% at the market level. Just remind us, how did you go about developing those assumptions? Like, what were the internal pieces of analysis you did to arrive at that?
Yeah
... and how comfortable are you with that range of outcomes?
So in trying to estimate what would happen if enhanced subsidies go away completely, right? Which we don't think is the most likely scenario. We think that, you know, there'll be some compromise on that. We can come back to that in a minute.
Yeah.
But in terms of sizing the impact of truly no, none of the current level of enhanced subsidies continuing into 2026, what we did, we went back and we looked at our history. We looked at when, you know, someone who had been on a $0 plan suddenly had to start paying something. You know, what happened with that population? How, you know, did they stay with us? Did they, you know, attrit? We looked at the people that are currently getting a subsidy and are, you know, at a certain price point, is there an alternative plan that they could go to without a subsidy and, you know, still have the same out-of-pocket premium?
And we considered all those factors, and basically, for 70% of the book, we would expect that they would be able to, if their subsidy decreased, they would be able to move to a plan where they had a similar out-of-pocket premium or cheaper than what they're paying today. For the remaining 30%, we think that roughly half of those people will stay with us, even if they had a price increase, and that's based on our past experience with those people. So, you know, we do expect there would be some attrition if, you know, subsidies went away. That's how we sized it. You know, it's not like we, we made this stuff up in a vacuum. We took our past history, we made best estimates, feel comfortable that, you know, those continue to be appropriate estimates.
Okay. And then if we were to, you know, try to come up with our own scenario where enhanced subsidies are extended, remain in place, full stop, you know, we're adding back the membership. I guess, how do we think about the margin that you assumed, like, decrementally? I know that one of the points you've made is that, you know, you have, like, a pretty fixed cost structure, as far as, you know, things beyond, like, broker commissions go. How do we think about the decremental margins that are built into the long-term targets on that 15%-20%?
Yeah. Well, I have a number of scenarios that we look at, like, what if this happened? What if that happened?
Mm-hmm.
The one thing I know for sure is that none of us here today is going to correctly predict what is going to happen with the political process and any outcome there. So, you know, I do think that with the let's call it a coin toss in terms of which party is going to be the winner in the elections this year, feels to me like the likelihood of some type of accommodation where there's gonna be some give to gets by either party. That seems more likely than one side winning outright, and that, to me, suggests that, you know, maybe it's not the form of enhanced subsidies we're seeing today. But is there going to be something...?
You know, it feels like that the trajectory right now would suggest some level of horse trading could be done there, which is positive to our long-term targets, because we explicitly built those targets assuming that enhanced subsidies went away. So anything that we do see is going to be upside to that. And I would say, I would expect that will allow us if, you know, we saw some level of subsidies beyond what we, had expected in our long-term targets, which is none, that means that we, you know, have the potential for growth that exceeds-
Okay
... a 20% CAGR and more than a 5% margin by 2027.
If I were to put you on the spot and say, three-year extension of the enhanced subsidies or a permanent extension-
Yeah
-of something in between, less generous enhanced subsidies, like, how does the company think about what would be better?
I think we would see high, you know, a lot of growth.
Mm-hmm.
I think we would get to the margin targets faster.
Do you think one is preferable to the other, like the permanence of a lesser extension?
You know what? I think that, in my mind, stability in this marketplace is, would be really profound, right? I don't think that we're benefited by policies that kind of come and go. I think that, what is very clear is that in the ACA, there's a lot of people who previously did not have the ability to get insured. I think that's an important thing from a country perspective to, you know, provide affordable insurance to, a lot of our previously uninsured marketplaces. So I personally would love to see, you know, kind of a stable and consistent level of, subsidies. From a near-term performance perspective, we probably would grow a lot faster-
Yeah
... if these subsidies got carried on. I'd probably trade that for, you know, a little bit of stability and a longer vision because, you know, we do run the company for the long term.
Perfect. Okay. And there's been a lot of, you know, headlines recently around, like, some changes to brokers and, you know, CMS, like, doing some things around, like, brokers' ability to, you know, sort of act in a manner that's probably more consistent with enrollees, you know, expectations and needs. Can you just elaborate a little bit on what you're seeing in terms of changes that are made for brokers and how you think that could impact, you know, the business in 2025 ?
Yeah. So, you know, if you don't know the ACA, this is a business that is really becoming a broker-driven business in terms of where the membership is being acquired. They're coming through brokers. The CMS rule that was made in the summer to make it harder to switch the agent of record, I think that, you know, was a good thing from CMS because there were certainly, whether it was known or implied, there were brokers that were moving members without their consent from one carrier to another. You know, we do everything we can to police the brokers that we have. We have long-term relationships with them.
You know, we try to look for any behaviors that would suggest that we're doing business with a broker that's doing something that we don't think is appropriate. We do routinely have brokers that we exit from our portfolio. We're always in conversations with regulators about what we're seeing, what they're seeing. So, you know, I think that it's important for the stability of this market that we have good oversight over kind of the way the brokers work. We think they're an important partner. You know, this is a don't throw the baby out with the bathwater kind of situation.
Mm-hmm.
Most of the people out there, I am sure, are doing the right thing and, you know, might have some edge cases, but, it feels like some of the actions that CMS took on the margin have dampened the amount of conversations that are happening around, you know, inappropriate switching.
Okay. I guess in a similar vein, you know, there's been, you know, a couple of, like, relatively recent, think tank reports around things like income verification. What do we need to know about income verification, and what happens to the exchange market if there is some kind of future change where income verification potentially is something that's, you know, audited more in-
Sure
... real time versus on a lag basis?
So a couple thoughts there. Number one, we don't get income for the people who are our members. That is all done by the government, right? So all income verification is managed by CMS and the exchanges. And then we are notified that that person is a, you know, has passed those thresholds-
Right.
and is a member in the plan that they selected. It's an interesting thing because it is a. You're talking about your future income, so you can't go and just validate what is your future income through, you know, last year's tax filing. Many people, you know, who are coming into the ACA, may not even have filed a tax return in the past. I think that, you know, what is apparent is that, you know, CMS has been trying to ensure that they don't create too many barriers from people coming into the ACA marketplace.
I think that, you know, the ability for them to do more to ensure that, you know, that only those people that are appropriately in the ACA are in that. There's a reconciliation process that they have against what your stated income was versus your actual income. You know, they will enforce that, as they will. But in general, you know, from my perspective, I look at the things that we can control, which is making sure we do business with brokers that we feel like are of high integrity, and, you know, looking for any kind of behavior in members that causes us to think that we might be, you know, have some pocket of a problem and take, you know, quick actions against that.
But in terms of the broader CMS thing, I would say that we're a little bit of, you know, a customer of theirs-
Mm-hmm.
As opposed to a dictator of how they should manage things.
Okay. And another, you know, opportunity the company has talked a lot about is ICHRA. I think you're making a lot of investments now to prepare for the ICHRA opportunity. You know, over the past couple of months as the market continued to develop, and you're starting to see more signs of, you know, what 2025 could look like there, just give us some sense of what you're hearing from employers on-
Yeah
-how they might act. Is 2025 gonna be a year of continued strong growth for ICHRA, 2026 more than that?
You know, ICHRA is coming off of an incredibly small base. We do have ICHRA members this year, but it is, you know, a very, very, very, very small base. We're excited about having, you know, the potential to have more plans in the market that, you know, cater to ICHRA next year. We think that this is going to be a market that is going to grow. It may take, you know, several years for it to get to scale, but it has been really exciting for us. The number of inbound calls that we're just getting from companies that are hearing about ICHRA, want to understand more about it. You know, it just continues to cement our thesis that this is one of the best ways to build out an individual marketplace.
You know, early days, but we continue to think that ICHRA just makes a ton of sense, and that we'll see more and more companies that are going to be adopting it.
Okay. And when you think about Oscar's role of why, you know, it makes sense to work with Oscar, or, like, why it makes sense to put Oscar on the menu in one of these situations, if someone's moving to ICHRA, like, what's the pitch to employers about, like, why I wanna offer something like Oscar versus offering more traditional-
Yeah.
-insurance options?
Sure. So one of the things that, you know, Oscar has always been known for is our focus on the member and the member experience. And you can imagine, if you're going to an employer to talk to them about their employees, being a company that has a high NPS, that has, you know, a, a long-term track record of being focused on member experience and member delivery, that is a terrific selling point. We build plans that are specific and built towards, you know, helping people with chronic conditions.
Mm-hmm.
I think that can help us in terms of how we design programs for employers to help them deal with some of their employees that have chronic conditions. We can have, you know, them have access to some of those plans that, that work well for someone who, you know, maybe is a diabetic or has COPD, so that works well. But, I think what we're just getting traction with is employers starting to understand exactly how this market would work, how ICHRA would work.
Yeah.
Just starting with the name, it doesn't convey a lot of information, and so there is some education to try to make sure that people understand, like, ICHRA is not there to take advantage of enhanced subsidies. I think that a lot of people start with that wrong premise. It's really about: how do you maintain, you know, a lower trend than what you may experience in a commercial plan? How do you, you know, create more choices for employees so they can kind of not subsidize each other? And how do you create better, you know, kind of economics as an employer that you can control and have... You're still gonna be subject to trend, but I'd much rather be subject to the trends in the ACA, which have been the lowest, you know, amongst all of the large healthcare products.
And those are the things that we're starting to- You know, people are like, "Oh, okay, I get that. That makes sense." So the more that message gets out, the more people, I think, appreciate, like, "Oh, this is something I should be looking at," and that's why we think we're gonna see some more traction there.
Got it. Okay. And in terms of, you know, the twenty twenty-seven targets that you've set for yourself, what's the right way to think about, you know, the level of dependence of, you know, ICHRA materializing to reaching those targets? I know that they're factored into the target, but I don't know that you guys are necessarily 100% explicit about ICHRA versus market expansion and traditional ACA. So what's the right way-
Yeah, to think about that. I would say we were appropriately cautious in building in too much ICRA into our long-term plan. You know, when we put those targets out there, we are committing to hit them. So, this is a new business. We do have to grow and create it. We are incredibly optimistic about our chances in doing that, but the long-term targets have, you know, it's there. There's a business that's built by 2027, but, you know, I like our chances for outperforming on that, but, it is pretty modest in terms of what we're expecting in our 2027 target.
Okay. And, you know, one exciting thing for the company is that if you guys do what my model says you could do, like, looks like capital becomes more of an opportunity rather than something that's been maybe more of a source of concern over the past couple of years. How does the company think about what it would do as it starts to generate excess capital above and beyond what it would need to, to fund its ongoing growth?
Yeah. It is really great in 2024 to talk about a company that's generating positive cash flow, and that just opens up a lot of doors, so you know, I would anticipate that we've already got surplus capital, excess capital in our insurance subsidiaries. We think, you know, over time, there'll be an opportunity to dividend some of that up to the parent, that would make it available for, you know, whatever appropriate corporate uses we may want, but my hierarchy for capital deployment is, first of all, fund organic growth, right? We think we've got an engine that loves to grow. We think that we've got the ability to price in a disciplined way that, you know, allows us to continue to grow above market and drive margin improvement. That's a pretty amazing combination.
I wanna put as much capital to work against that as we can. You know, look for opportunities to optimize our capital structure. As you know, we use quota share reinsurance. I think that as we become consistently profitable and cash flow positive, we may have opportunities to rationalize that on the margin. That can improve the bottom line. And then lastly, I think that having a strong cash flow-generating company gives us opportunities for inorganic growth opportunities, and even on the margin, you know, thinking about, you know, stock buybacks, probably the last stop on the train in terms of ROI, but certainly wouldn't say that, you know, right now, some of our equity programs for employees are diluted. Would love to at least have the opportunity to decrease dilution from that source.
And so, you know, we feel like the company's got a terrific opportunity to just optimize our entire capital stack and, you know, delivers just higher performance, higher ROEs.
Okay. And then, you know, maybe the last question, just, you know, in terms of, you know, the shift the company's made around, you know, eventually monetizing some of the technology platform, you know, how do we think about that being an opportunity that I think would primarily probably be beyond the current financial targets? Like, what level, again, of performance there is factored into the thinking on the targets?
You know, when you look at the long-term target, there's a slide that shows how much revenue comes from which sources, and what you'll see with Plus Oscar is that it's very small to the long-term 2027 plan. And that's not because we, you know, aren't working on it, don't have, you know, high expectations of what we can deliver, but we haven't yet, you know, kind of crystallized that strategy. We haven't brought products to market beyond Campaign Builder, and we didn't wanna build those in until we had line of sight to when those things might start coming out. But we are, you know, working on them. We continue to think that there's an opportunity to bring something to the market that, you know, can create value for us and for our shareholders.