Good afternoon. My name is Josh, and I will be your conference operator today. At this time, I would like to welcome everyone to Oscar Health's 2022 Third Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. I would now like to turn it over to Cornelia Miller, Vice President of Corporate Development and Investor Relations to begin the conference.
Thank you, Josh, and good afternoon, everyone. Thank you for joining us for our Q3 2022 earnings call, where we'll discuss our performance to date, our path to profitability and the recently announced management transition. Mario Schlosser, Oscar's Co Founder and Chief Executive Officer and Scott Blackley, Oscar's Chief Financial Officer and soon to be Chief Transformation Officer call, which can also be accessed through our Investor Relations website at ir. Hyoscar.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.
Hyoscar.com. Call. Any remarks that Oscar makes about the future constitute forward looking statements within the meaning of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward looking statements as a result of various important factors, including those discussed in our quarterly report on Form 10 Q for the quarterly period ended June 30, 2022, filed with the SEC and our other filings with the SEC, including our quarterly report on Form 10 Q for the quarter period ended September 30, 2022 to be filed with the SEC. Such forward looking statements are based on current expectations as of today.
Call. Oscar anticipates that subsequent events and developments may cause estimates to change. While the company may elect to update these forward looking statements at some point in the future, call. 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 call can be found in the Q3 2022 press release, which is available on the company's Investor Relations website. With that, I would like to turn the call over to our CEO and Co Founder, Mario offer.
Thank you, Julia, and good evening, everyone. Thanks again for joining us today. I will provide updates on several topics, call in more detail on the leadership updates that we shared earlier today. We will start with a look at the quarter. We see strong evidence of the continuing progress in our business.
Financial results in our medical loss ratio and administrative expense ratios year to date. Those improvements are particularly noteworthy against the backdrop of our strong membership growth. So overall, we're executing our plan. We are seeing the benefits of scale and of our infrastructure, and we have confidence about the future. We will discuss our full year 2022 outlook later in the call.
As we look into open enrollments And as we think about our perspective on our positioning for 2023, we are, 1st of all, excited about the ACA markets. The long term sustainability of the marketplace is to us evidenced by what looks to be record high new membership and the return of many traditional players for this open enrollments. We at Oscar have lived through years where the markets were unstable. And even against very complex backdrops, we've been grinding out improved performance. Hence, we don't grow tired of saying this, but the individualized ACA market looks to us much more like the future We see the recent competitive developments as in a positive as there are more opportunities for the players that remain.
And that being said, recent competitor exits demonstrate just how hard it is to navigate the ACA without having a profitable insurance business and without owning a modern day infrastructure. Oskar is, of course, paying attention to these lessons. Now I'd like to share some insight on how we are thinking about 2023 performance. In our individual business, we built our pricing to deliver margin expansion, while covering higher cost trends and the impacts of Medicaid determinations. 2022 year to date medical costs are trending slightly below budgets and utilization is largely flat year over year.
Thus, we have additional confidence in the assumptions we put into pricing for 2023. As we told you last quarter, our approach 2023 has long been focused on profitability over growth. We are targeting effective membership at the conclusion of open enrollments to be around 1,000,000 members plus or minus 10%. That being said, this is a particularly challenging year to forecast given the recent market exits. And so in this context, we have built an operating and a capital plan that is designed to allow us to deliver a profitable insurance company in 2023 and to minimize parent cash outflows.
The plan includes significant improvements in medical loss ratio driven by pricing for margin expansion and plan's total cost of care improvements driven by our technology and strong operational execution. We also expect to drive down total company adjusted administrative expense ratio through variable cost improvements and fixed cost savings. In pursuing profitability, we continue to focus on how we leverage our technology and our strengths to get us there. Let me give you a few examples. In this past quarter, the team deployed a number of infrastructure enhancements to drive further automation.
We refactored our customer service experience so that our members who have the most complex needs are automatically routed And we continue to see our product resonating with those who choose us with our Net Promoter Score reaching 45 in the Q3 of this year, which is an all time high. We also updated our policies to reduce readmissions through better clinical incentive alignments within our network. We enhanced our prior authorization and claims matching logic to increase our authentication rates. We also continue to work with our major vendors to find in year efficiencies. And with our increased scale, we expect vendor contracts to be a source of additional savings in years to come.
All of this contributes to the progress we have made driving down MLR and our admin ratios even with the massive membership growth we saw this year. As we look towards closing out 2022 and the execution steps we have in flight for 2023, We are confident about these opportunities for continuing to drive dramatically improved results next year. And these improvements also will give us additional leverage as we look to the future of our Plus OSCAR business. As we said, we expect that we'll have a profitable insurance business next year with a combined ratio below 100%. We are also excited to share that we are now targeting total sense.
We are also excited to show you that we are now targeting total company profitability in 2024, a year earlier than previously expected as we continue to drive cost savings across the business. And with that, I will turn the call over to Scott to walk us through the financials.
Thank you, Mario, and good afternoon, everyone. Our Q3 results show the benefits of our increasing scale. Call. As Mario noted, we have roughly doubled our membership year over year and expect meaningful margin improvement. We continue to deliver against our 2022 plan Q1 2019 outlook.
I'll discuss the puts and takes of our guidance updates in more detail in a few minutes. We ended the Q3 with over 1,000,000 members, an increase of 81% year over year, driven primarily by growth in our individual business and our small group offering, C Plus O. We are pleased with the strong traction of C Plus O. We ended the quarter with 53,000 members, and we believe We've demonstrated that our innovative products are resonating and meeting the small employer market where the demand is. Our net churn continued to trend positively in the quarter, driven by higher retention and lower lapse rates, as well as increased special enrollment additions as compared to last quarter.
3rd quarter direct and assumed policy premiums increased 87% year over year to approximately $1,700,000,000 driven by higher membership, rate increases and business mix shifts towards higher premium silver plans. Turning to medical costs. Our medical loss ratio was 89.9% in the quarter, an improvement of roughly 10 points year over year. The improvement was largely driven by lower year over year COVID costs versus the delta wave last year, as well as by pricing actions and targeted cost of care initiatives. In the quarter, we had $3,500,000 of net unfavorable development while remaining fairly consistent quarter over quarter.
Specifically, COVID costs in the quarter were both lower than the Q1 2022 peak and just 30% of the delta peak at this point last year. Direct COVID costs were offset by lower non COVID utilization, which continued to be below expectation and below baseline this quarter. With respect to administrative costs, Our Q3 'twenty two insurance company administrative expense ratio was 20.7%, an improvement of 2 40 basis points year over year, call. Driven by fixed cost leverage from greater scale and variable cost efficiencies, which was partially offset by higher distribution expenses associated with the higher than expected membership. We also saw even greater operating leverage from higher premiums in our adjusted administrative expense ratio, which improved 5 10 basis points year over year.
As we enter the final months of the year, we are focused call on driving administrative cost savings that position us to reach our profitability targets. This includes having already optimized our distribution spend for next year, renegotiating key vendor contracts based on our scale and improving automation with our technology. Our overall combined ratio, which is the sum of our medical loss ratio and the insurance company administrative expense ratio was 110.6% in the quarter, 12 point year over year improvement driven by the MLR and the insurance company administrative expense ratio improvements that I previously mentioned. Our Q3 2022 adjusted EBITDA loss of $160,000,000 improved $28,000,000 year over year and improved as a percentage of premiums before receded reinsurance by 16 points with over $3,000,000,000 in total company cash and investments, including $420,000,000 of cash and investments at the parent and another $2,600,000,000 of cash and investments at our insurance subsidiaries. At the end of the quarter, we had $694,000,000 of statutory capital at our subsidiaries, including approximately $170,000,000 of excess capital.
Moving on to guidance. Based on our traction in membership, we are updating our full year direct and assumed policy premium guidance to the range of $6,700,000,000 to $6,900,000,000 an increase of roughly $550,000,000 at the midpoint. Distribution expenses are also trending higher as more members have come through the broker channel than was anticipated insurance company administrative expense ratio is now projected to be at the high end of our 19.5% to 20.5% range. Our medical loss ratio is projected to be around the midpoint of our 84% to 86% range. Excluding prior year development, MLR would be towards the low end of the range.
While we expect premium growth Moving to the total company performance, we expect our adjusted administrative expense ratio to be at the midpoint of the range as fixed cost discipline is driving operating leverage. All in, we are now projecting our 2022 adjusted EBITDA loss to be modestly above The $480,000,000 high end of our prior range of losses of $380,000,000 to 4.80 1,000,000 Notably, this still reflects roughly a 7 point year over year improvement as a percentage of premiums before ceded reinsurance. I also will reiterate a few key points on our preliminary views on 2023 performance. We are targeting effectuated membership at the conclusion of open enrollment to be around 1,000,000 numbers, plus or minus 10%. We're expecting that we'll drive significant improvements in MLR, driven by pricing for margin and total cost of care initiatives we have planned, and we have identified over $120,000,000 in total company administrative expense cost savings based on our membership outlook.
When we take these factors together, we expect that we'll have a profitable insurance business next year with the combined ratio below 100 and a dramatically lower adjusted EBITDA loss versus what we are guiding to for 2022. With the positive leverage we see in our business, Given the membership expectations and targeted improvement in profitability, we believe we have sufficient cash and liquidity to fund the company into 2024 as previously signaled. Our financial plan for 2023 is to focus on driving bottom line improvement and reduced parent cash outflows. We continue to utilize reinsurance as a risk and capital management lever and note that our $200,000,000 revolver remains undrawn. Who will provide detailed guidance for 2023 and more detail on our path to profitability during our Q4 earnings call next year.
And with that, let me turn
it back to Mario. Thank you, Scott. Before we close, I'd like to talk about how we will be organizing as leadership team to further strengthen our focus on our near term priorities and ensure we are building for a future beyond them. Effective December 1, Scott will take on a new role as Chief Transformation Officer. And in this role, Scott will focus on how we align our overall revenues with our costs for both insurance company and total company profitability.
Scott will be working across the organization to ensure that we are executing our business plan and aligning our operational strategy with our tech expenditure. He will also be partnering with me on the approach for how we leverage our technology stack and the larger strategic considerations for these parts of the company, including our go to market strategy for Plus Oscar. This move is about maximizing the capacity of a leadership team that is already aligned and executing. The team has demonstrated a focus and discipline this year, laying the tracks for the critical milestones of insurance company profitability in 2023 and total company profitability in 2024. And given the importance of these goals, we wanted a member of the senior team to focus exclusively on these goals.
I want to thank Scott for the work he has done in the CFO role, and I'm excited to have him provide his experienced leadership in this critical new role. High five, Scott. With Scott transitioning, we asked our former CFO, Sid Zankaran to rejoin Oscar as Interim CFO. SIT has stayed very close to the business and our finances as a member of our Board and the Chair of our Finance, Risk and Investment Committee. Given the similarity with our finances strategy.
We felt that Sid was a natural choice to step in and Sid will join Oscar immediately and will transition into the CFO role effective December 1st. Will be starting a search for a permanent CFO. Sid, would you like to say a few words?
Thanks, Mario. The Oscar team has a great plan in place, and I'm excited to step in as the Interim CFO and help us execute on our goals. As a member of the Board, I've remained highly engaged and closely aligned with Mario, Scott and the rest of the executive team. I'm thrilled to step back in to help and look forward to reconnecting with our investors and the analyst company.
Thanks, Ed. And just in closing, we at Oscar have navigated a lot of complexity of our 10 year history, but what has remained the same is our fundamental belief what changes are needed in the healthcare system and the role we can play in bringing those about. The U. S. Healthcare system is moving towards a more consumer driven, more digital and virtual and more value based system.
This kind of future market is going to be defined by those who best engage members, help members save money and have the technology to incentivize better outcomes and earn the resulting risk premium. That's exactly the kind of system for which We have built our infrastructure and while we've been doing that, we have navigated an entirely new insurance market as a startup. We have absorbed numerous regulatory changes depth of experience sets us up very well for achieving our financial goals and for fulfilling our mission to make a healthier life accessible and affordable for all. We remain steadfast in this approach and we remain humbled that so many members continue to choose and stay with Oscar. We are also fully committed to and excited about the close partnerships we have built with the providers who serve Oscar members and the brokers who sell Oscar products, and we deeply value their support.
The plan we're executing against and this management team structured the focus on it, we are confident that we can live up to our promise as a company refactoring healthcare for many decades to come. And finally, before we go to the Q and A, I want to thank the Oscar employees who have been powering Oscar with their genius, great and member focus for the last decades. I'm proud of all that we've achieved and looking forward to the next chapter of building Oscar together. And with that, we'll turn it over to the operator for the Q and A portion of the call.
Your first question comes from the line of Michael with Morgan Stanley. Your line is open.
Hi, this is Connor Massari on for Michael. Just looking at growth here, you have family glitch fix, Medicaid redeterminations, enhanced subsidies extended, peers exiting market obviously, and seemingly a large number of growth tailwinds in 2023. And I believe the last we spoke here, internal estimates for exchange industry growth was 10% to 15%. But given all these tailwinds, how are you looking at that now? Has that changed at all?
And are there any headwinds that we should Ceter.
Yes. Conor, let me start with that. Maybe Scott, you can add a bit more perspective to it. So Conor, we've been making decisions Very clearly all year long, we wanted membership that fits in our capital operational plan. And we are there for managing the outcome of enrollments Into the cone we talked about, 1,000,000 members, plusminus10%.
And that considers all those growth factors that you just mentioned and all those various factors. I'd say in the medium to long term, we're Very excited, as we said, about our positioning in the market. We've got a great brands, great distribution relationships. Members really like being with Oscar as evidenced by the high NPS. So therefore, we can always go back to higher growth in years to come.
That's certainly the plan. But for this year, with a focus on profitability for next year in the insurance business, We really want to be in that co and managing towards that.
Conor, I would just add maybe a couple of other points. First of all, Going back to our pricing, we have we built in pricing to improve margin this year. And so while we have a competitive position, we're certainly across a variety of markets. And then secondly, we've also adjusted our distribution strategy. We've already put that into the market.
That's part of our expectations for an improved 2023 performance. And while we are still competitive with the market there, We've really reverted to distribution spending that looks a lot more like pre COVID levels versus what we experienced last year.
Thank you. Your next question comes from the line of Stephen Baxter with Wells Fargo. Your line is open.
Hi, thanks for the question. Just I guess 2, first on the health plan profitability in 2023. I just wanted to make sure when we're thinking about the improvement in the combined ratio that you need to drive, just roughly what are you thinking will be the bigger driver, are you expecting to be MLR or SG and A? And the $120,000,000 identified cost that you cited at the end of your prepared remarks, is that for the overall business or just for the health plan component of it. And I guess the last piece is just, I want to really make sure I understand why the EBITDA loss guidance is increasing.
It doesn't necessarily seem like you missed your internal MLR expectations. And then I hear you on distribution expenses coming in higher. It feels like that's something that you would have been aware of for most of the year at this point. Just help us understand the moving parts there and anything I might be missing in that analysis. Thank you.
Sure. I will try to make sure I hit most of those, a couple of big topics there. So, starting with 2023 improvement, I would expect to see significant improvements in both MLR and on admin. On the MLR side, I would point to pricing that we put into the market for next year, which was designed to cover trends, was designed to cover redetermination, as well as create margin expansion. And then as I mentioned in my talking points, we do have a number of total cost of care initiatives that we are executing right now.
On the admin side, we are expecting significant improvements in admin and And $20,000,000 that I spoke to is total spend for the company. And I would just point to a few things that drive the admin. The first is distribution, which will be a significant driver of the improvement in the insurance company. The second is vendor. We do use a number of vendors to go to your question on adjusted EBITDA in terms of where We're coming in at above the high end of our range and we expect it to be modestly over the 480,000,000 top end of the range that we previously disclosed.
And I'd point to a few things. The first is that the higher than expected distribution cost that we saw was really associated with additional new members. And We had eliminated broker commissions as of the beginning of Q2, but towards the tail end of Q2, CMS provided updated guidance Obviously, that wasn't implicit in our original guidance and that was that has created a headwind to our administrative expense ratio as well as driving up, the adjusted EBITDA loss. Obviously, we've already, And then the second thing I would just say is that we had hoped that we would be at the bottom end of our MLR range. But with that new membership, But it did take up some of the cushion we had in our MLR guidance and pushed this up into that top end of the range.
So obviously, these effects didn't all happen in this quarter, but we did see some worsening last quarter and we had hoped to claw back some of that, but the distribution expense in the Q3 came in really strong and pushed us over the top end of the range. Excuse me, I said that the MLR was going to be at the top end of the We're going to be in the middle end of the range, but we'd expect it to be at the bottom of the range, just to be really clear about that. And some of that MLR pressure that came with SCP is pushing us, took up a little bit of the guidance and moved us from the bottom to the middle end of the range. So those are the drivers. Hopefully, I got all your questions.
Thank you very much.
Your next question comes from the line of Nathan Rich with Goldman Sachs. Your line is open.
Hi, good afternoon. Thanks for the questions. Maybe just following up on that last one as it relates to 2023. I think you had talked about You're taking high single digit type price increases for next year. Now that you've kind of have a better view of the competitive landscape, how do you feel about your positioning and the ability to hit the membership target that you gave.
And do you think that membership outside of the range that you gave would Have an impact on a negative impact on your profitability? Or do you see flexibility within the organization to Hit your profitability goals even if given the challenge of forecasting membership next year, if that does fall outside of that $1,000,000 plus or minus 10 percent range. Thank you.
Yes, Nathan, let me hit the first part of this and then Scott, you can talk a bit about The range and what happens if you fall outside of it. So let me pick put on the long term path there first, which is just to reaffirm, we think we've got an attractive product. It's innovative, great distribution partners, very committed. We spend a lot of time with them and a good brand in the markets. We keep putting new products in the markets, including expanded virtual primary care offerings in 2 more states in 23 and things like that.
But this entire year, really, we've been managing, as I said before, for this Cone membership outcomes of slight shrinkage to maybe moderate growth at a $1,000,000 plusminus10%. And To give you a bit of an example there, we are in high single digits this year. As we said, the market is probably coming in around 6 percent or so on average across the country. So we did go above the markets, which speaks to the fact that again, we're going after the profitability and the margin there as compared to the growth. Last year by comparison, our increase probably was more in the 2% range The market is probably around the 3% range thereabouts.
And so you see that flipping really a little bit there. All in all, Pricing is always a very nuanced and local decision making. And because we're deeply tied into the local communities I think we generally feel good about where we are priced to be right in the middle of that cone in all the states and all the geographies where we want to be competitive and where we want to be getting the right membership. We're in a good place and in other ones, we've just taken rates.
And so Scott, you can talk about what happened? Sure. Nathan, just in terms of membership. I would just kind of point out 2 things. Obviously, bigger membership we think would be positive for earnings.
And on that side, that's clearly a positive. We think we would get more fixed cost leverage and have the potential for generating even greater earnings in our insurance business. On the flip side of that, that requires growth capital. And as we've been talking about, we are very focused on making sure that We really don't create additional demands on parent cash and that we leverage the capital that we've already got in our subsidiaries. And that is an important part of our strategy for trying to land in that 1,000,000 member range that we discussed.
Yes.
And if we fell outside that range, we'd have levers both to the upside and the downside to make sure we mitigate the impact on the financial outcomes.
That's helpful. Thank you.
Your last question comes from the line of Josh Raskin with Nephron Research. Your line is open.
Hi, thanks. Good afternoon or evening. I guess, first just from a strategic standpoint, Didn't hear about Plus Oscar this quarter. And so I'm curious, have you guys thought about sort of putting Plus Oscar on hold for even longer and maybe even divesting Medicare Advantage at this point and just really focusing on the individual and family plans as small group. And Are there strategic or regulatory reasons that make sense for you to even stay in MA at this point?
And then my second question would be and I should preface Sorry with the welcome back, Sid. Good to hear your voice. I did notice the interim title. So maybe you could talk a little bit about the plans for the permanent CFO role. And I'd be curious to know who's sort of working on forecasting and financial planning specifically?
Thanks.
Yes, Josh. So let me So the biggest thing that we think we can do right now to make Plus Oscar an attractive product to just use it in the absolute best possible way for ourselves. And that's I think what we've been doing this year. I mean, if you recall coming into this year, Yes, we were somewhat surprised by the large growth we had and had to do a lot of work to make sure we pick up the phones, send the adikas on time and things like that and have dealt with the consequences of that work really for the past 6 to 9 months first 6 months of the year. And I think have been able to manage that well because As you can see, our metrics are landing where they need to be landing midpoint of the range for the MLR and for the combined ratio.
So that to us is the best marketing argument really for Plus Oscar. And we think that's just going to continue the same way into next year. It's also how we think about growth, right? More important for us to show that we have that membership and commensurate profitably than really anything else related to that can always go back to growth in the insurance business later on. So that's how we think about the priority for Plus Oscar right now.
That still means that the plan is what we have been saying at various conferences, which is focus until 2024 When it comes to bigger Plus Oscar deals, just on really not rolling out anymore there. We got to solve the question of How do we sell Plus Oscar in a more effective and efficient way and how do we implement Plus Oscar in a more effective and efficient way with 3rd parties? And both of these questions in our view require partnerships and both of these questions are really what Scott is going to be focused on, among other things in the Chief Transformation Officer role as we talked about. So that is plus Oscar in this sort of like bigger deal space. Now we are out there, I didn't mention this, but thanks for asking.
We are out there with Campaign Builder, that's our first module that We talked about in the past and the first client in the pipeline, they are all risk bearing physician groups and we've been already using that obviously for us internally, but also for physician groups already in our network in our upside down to value based care deals. And so that's the other one we're in there with and it's giving us a nice foot in the door we think into future clients for broader plus ODLs. And the final point I'd make here is The work we are doing internally on continuing to stabilize and enhancing operations is all work that will make a eventual bigger plus products better as well. So that's keeping continuing the year, but there's a very big overlap. Now on MA exits, I'm glad you bring this up.
We did in fact Largely do that. We exited our organic MA business in New York and in Texas. And that was not that material membership and but it did help the insurance company performance on the medical loss ratio, administrative ratio and things like that for next year. Hence, we did that with exactly an eye towards This increased focus we are really good at as we believe at ACA plans and virtual family plans as you say and we want to be focused there Hence, MA market is a market we want to eventually go back to more in,
but the way for us to be
in this market is through partners And that again is a future Plaso business and even the current folks we are working with there. So with that to your question, exactly a welcome focus And let's just make sure we land all
the planes we got to land for next year. And Josh, on 2023 planning and outlook, I've been leading that process and building our internal budgets and outlook for 2023. I'll be working with Sid closely, over the rest of this year to transition that over to him, where he will take that on. And as we talked about, We will formally be transitioning CFO role on December 1, but I expect Sid to arrive promptly at 8 am in my office tomorrow, and we'll start working on that transition. But the one thing I would just say is having someone who is deeply familiar with the company makes that process and transition, a much easier thing, and it gives me the liberty to move over to help drive the execution of some of the key plans that we've got in place for 2023.
In terms of the last question, you asked about permanent CFO. As I said, this is really for us about focusing on these big goals we have, Intraco 23 profitability, TotalCo 24 profitability. By this call next year, I think we have good visibility into 2023 Intraco profitability. And that is how long we think we'll all work together with this and it gives us plenty of time to then figure out what the next steps are beyond that, but we're fired up to work Together, I see all of us here, Alessa is there as well, Ramoli as well and in good shape there for the adventures to come.
There are no further questions at this time. This does conclude today's conference call. Thank you for joining. You may now disconnect.