I wanna thank everyone for joining us today. It's my pleasure to be introducing Oscar Health. Oscar is a tech driven health insurance firm. Presenting today we have Mark Bertolini, CEO, and Sid Sankaran is the CFO. We also have Cornelia Miller from Investor Relations in the audience as well. I think we just jump into Q&A unless there's anything you wanna-.
Sure.
All right. Let's do it. I guess maybe just to start off, maybe ask the first one to Sid, because bringing Mark in from a company perspective it's kind of unusual for you've got a founder driven company who things are going well. You're on track to do the guidance basically that on the health insurance side, certainly that you laid out at your IPO. Things are going well. The founders give up some founding shares to bring Mark in. What was the catalyst behind that? What did you think that Oscar needed that, you know, someone from the outside with Mark's experience could bring to the company?
Yeah, sure. I'm happy to take that one on behalf of the company. I think the first thing is the company has been extremely grateful to Mark, who's acted as an advisor to the company for a couple of years, but most importantly, I think, to Josh and Mario as founders. I think it's important to note for those of the folks who followed Oscar for a long time, you know, I think what really drove that alignment between our founders and Mark was around vision, mission, and culture. If you closely watch the company, you've heard Mario reference, you know, Mark's speech at Mayo previously, or I think in our last conference presentation, somehow his book came up. I think the relationship has been terrific. You're right, the company's been performing and executing.
With that relationship with Mark, Josh and Mario, I think everyone just saw a unique opportunity to accelerate the path that the company's on and, you know, transform the company and the industry. I probably won't do justice to, you know, how this all came about. I probably should let Mark do that, to be honest. You know, it's probably a longer story than my comments.
Yes, I guess I was gonna turn that then to you.
Sure.
Like, we were just talking before this started about all the things that you're doing and involved in, yet you decided that this was the opportunity. You've got a wide range, but you decided this is the role you wanted to step into. What was it about Oscar that made you wanna come here, and what do you think you can bring that the company didn't have?
Sure. three years ago, Josh called me and said, "Hey, would you be on our board?" I said, "No. I don't wanna be on boards. Boards are death by PowerPoint." I'm doing my level best to get off of boards as I go along. I said, you know, "I'll talk to you guys from time to time. Just give me a call. We'll hang out." We were talking one day over a Pappy Van Winkle bourbon in one of my local restaurants, and Josh said, you know, "Could we meet, like, every week?" I said, "Sure." You know, we started meeting an hour a week about 18 months ago, and I was co-CEO of Bridgewater at the time.
You know, people started calling me and saying, "I didn't know you wanted to still work." People said, you know, "When you get done with the Bridgewater thing, come talk to us." As it would happen, I had a number of opportunities in the industry and tangential to the industry around tech, as I was coming off the Bridgewater assignment and going back on their board. Mario one day, and Josh were saying, they said, "We'd really like to ask you a question we're sort of embarrassed to ask, but would you come and run the company?" What I had found out over time with them is that, A, we had really tight mission alignment. B, they wanted input in how to run the business.
One of the things we talked about in one of our meetings was, "Have you looked at your pharmacy contract lately?" They said, "Well, no, it's not up for renewal." I said, "Oh, no, no. Every quarter you gotta be on those people." They started that process, and we've had a really good update to that contract, which will flow through over the next couple of years, which will help us on our mission to generate capital internally to invest in the business going forward. You know, so I said, "Let me think about it." They almost fell out of the chairs. I thought, you know, as I spent time with the company at the level of Josh and Mario, I learned a lot about what it stood for.
As I watched my prior company struggle to achieve, what we thought we could achieve by combining with CVS, I said, there's something that's gotta be able to break the back of this industry from the standpoint of the way it operates. Could it be a company that is focused on what is now 70% of the insurance premium, on the insured market, Medicare, Medicaid, and ACA? Could we make it 100% if we built the right platform? I thought, wow, if I got one more shot at me, I'll be 67 in June. If I got one more shot at me, this is probably the one that could work really well.
We put together the comp structure, which, you know, I and Josh and Mario talked about was, I don't get paid until the internal people get paid. My gaps are $1 above their strike prices. There's a little bonus at the top if we get back to IPO. I thought, this is a good way to do it. I'm getting less salary than I have in probably 20 years, but that doesn't matter. It really is the opportunity to sort of pay it forward and create a whole new way of attacking what is an intractable problem in the United States, our healthcare system.
Yes, I guess when you think about that, why is Oscar the one to disrupt that marketplace?
We've tried everything in this industry multiple times. Now we're back on the path of buying physician practices, which stuns me as an arms race that can't be won. So as I look at that, you know, sort of model, I say, you know, what would be. Nobody has ever focused on the actual customer experience of the end user. If you look at all the disruptive capabilities that have come through our market over the last 20 years, it's all been about the customer experience, ones that really succeed. Here we have a platform at Oscar, which is now up to an NPS of 50 on the front end of the business that is, you know, far and away higher than anybody else.
Everybody's clustering around zero or negative, that we should try and take advantage of that and the opportunity. We did. We talked about it back last October about pricing on the commission side for brokers. Let's try a few markets to see if the NPS matters. It did. I said, this is a weapon that we can use to compete that nobody else has. If you think about it as a platform company with an insurance company laboratory that could ultimately, and the platform needs work, that's a conversation we can have, but would ultimately become the backbone of a individually focused consumer marketplace in healthcare, this is a company that can do it. I'm more optimistic now than before I joined. I've spent the last five weeks deep diving on every aspect of the business.
I guess when we think about from the outside looking in, the initial reaction of a new manager coming in to an existing platform, there's a reason why you're there, but there's investments that you have to make. There's things you have to change. It doesn't sound like you're saying these things that you're gonna try to bring here take you off that trajectory towards profitability on a consolidated basis next year. How are you thinking about making a change without... I'm so used to a new manager comes in, lowers the bar, and it creates an easy bar to jump over. You're not doing that.
We're not doing that, no, because we don't need to.
Yeah.
In my first five weeks in the company, I've spent every day going through deep dives in every part of the company. What I have found is that as a health insurance company, there's a lot of internally generated capital that's been left on the floor. I'll give you one example. If you have fraud, waste, and abuse, that's usually averages two points or higher of paid claims. We're at 0.2. We have a 10x opportunity there alone in generating internal capital. When we look at provider disputes, because the data in the provider database is structured around contracts that are rather random, when you start thinking about getting rid of those disputes, which are not getting into the risk adjuster counts, not getting into our reinsurance recoveries, that generates a whole set of capital.
This idea of really running the company as an insurance company, dividends from the subsidiaries, making sure we're getting all of the fraud, waste, and abuse, other processes that could generate hundreds of millions of dollars of capital, we have internally generated capital. If we just go get it, we'll be able to support our growth.
When you think about then those are the ways to finance the investments you need, what are the investments you need?
You know, and actually doing that, when I was chairman and CEO of Aetna, there's a creeping dumbness of being at the top of a large organization. You don't know what goes on every day, so it's been fun playing around in the plumbing and understanding the business again. It's been great. The people are amazing. They're really smart people. We actually have a lot of people from Bridgewater, which is interesting, inside our organization. The second part is, okay, once we've got the business running properly and generating the capital we need, you want to think about how do we harden the platform to externalize it? When I talk about externalizing, it's sharing it with other organizations, other opportunities, making it a true platform that could change the industry.
The problem we had with Health First, which I know you're going to ask sooner or later here, is that we put it into their business without Business Process Reengineering or good systems integration. The back end wasn't working as well as it should. As I've gone through the stack piece by piece by piece, we have a plan that we're developing on hardening the stack in a way that we can externalize it, but that's not the end. You have to build SaaS capability and sales and service and support for each of these clients. Beyond that, you have to have a systems integration capability and Business Process Reengineering. You have to build out the whole capability if you're going to externalize it. Externalizing it is just not enough.
We have a lot of companies in tech that build products for other people without really having deep conversations on what is the experience on the other end of it. What is the use case? Why do it? When we look at two use cases that are staring at us right away, one is ICHRA. ICHRA hasn't taken off because All people have done is built a product as a tool and talk about how it works versus what could it solve in the way of a need in the marketplace, right? I mean, the major disruptors have always looked at what is an unmet need that I can create a great customer experience around that people will want to come to versus me having to sell to.
In our, as we look at ICHRA, and coming off of my Bridgewater experience, you know, think stagflation for the next three, four years, five years, maybe a recession. Wouldn't it be great if we could create an ICHRA product for a small group of middle market, the other 30% of the insured premium, and say to employers, "Here's a great way to enable your employees, who most often in those groups are over-insured, with a way for them to have a flex benefit kind of product on steroids that's got a great front-end and customer experience." We believe we can handle that. We have a diabetic product.
We have a diabetes benefit plan at Oscar that is one of our most profitable plans because we know how to onboard them, how to get them into the pathway, how to make sure they get followed up. All those things are critically important. This idea of converting the rest of the insured market into ICHRA is an idea that wouldn't cause us to have to externalize the product right away, the platform right away, because we could use our own insurance company license. If you wanna get to every market, you wanna be able to have the platform available for people that are not Oscar insurance. You wanna make it available to everyone.
You mentioned ICHRA on the call.
Yep.
I guess it's been an option.
Right
... years, and it hasn't taken off. What was the barrier to that taking off, and why will it take off over the next few years?
People have been selling it as a financing mechanism, not a solution. You have to go to market with an idea what is the use case whereby this product actually works? I think the frustration has been building in the small and middle market enough now where employers are starting to say, "This is a real burden." How can we talk to them about relieving that burden through this kind of capability that not only ensures them there's a way to finance it, but there's a way to bring people onto the platform that works for their employees? How do we control the rise in healthcare costs over time? Getting them in properly, getting them in the right approach, focusing on their health, much like we have in Medicare Advantage in the industry to great effect, but on a smaller scale.
I think that's the ICHRA opportunity. We have to prove out the use case. We're now working on what is the use case? Why would people wanna use it? Not just how do we build an ICHRA product, which is the way people have done it in the past.
Okay. I guess when we think about this business, two years ago, everyone was growing really fast, and fast was all that really mattered. Now interest rates rising, and now profitability matters. You know, as you pivoted this year from growth into profitability, exited some markets, and pushed through pricing, you know, to get that long-term multiple, you gotta be able to do both, right?
Right.
You gotta be growing and, you know, hitting the profitability targets. It sounds like you're saying next year you're gonna be doing that. Can you talk a little bit about... it usually in health insurance, it's easy to grow or it's easy to improve margins. It's kinda hard to do both at the same time. Can you talk about what makes-
Our bar is so low right now, we can't help but do both. I mean, really. I mean, if you look at the stuff, I mean, in our projections how to work on the back end using OpenAI, GPT-4. Some of them will implement. It'll be a great thing for fraud, waste, and abuse. Put it on the front end of the claims process. That happen. I think we can grow margin and grow profitab-- with disciplined pricing. I mean, Mario is a genius to say the least. He's intimidating in his Medicare Advantage product. I see us working with health systems across the country. Here's the scenario I see coming. The industry, I was one of the people who helped create the product back in 2005 to...
Sooner or later, people go, "What's going on here?" They're looking at the risk adjustment formulas, and they're looking at all those sorts of things. Let's say it gets cut in half. It's now 4% as an option. On the hospital side of the business, their margins in Medicare are -3%, versus Medicare fee-for-service. If you put them in the business of signing up their patients for Medicare Advantage, branded their product, you've got two advantages that don't exist in the marketplace today. You don't have to use brokers because you're signing up your patients as they come through the door. On the back end, you can get 5-star ratings much easier because you're in your own place. Put those two things together, call it 4% on risk adjusters or margin on risk adjusters.
They go from -3% to 4%, that's a 3.5% gain on their overall margin in the hospital system. They'd be crazy not to do it. We have to, again, build the use case, build the approach, build the support for it, and being able to make that happen without having to put up all the capital to be in Medicare Advantage and underwrite all of it.
I guess at the core, though, you're an exchange business for right now.
Yep.
How do you think about the exchange business growing next year and then the next-.
Yep
... few years after that?
Low twenties, high teens from the standpoint of premium opportunity.
Okay. That's premium growth.
Yep.
You should be growing at least that.
More. Yep.
More. If you think about it from that perspective, you've talked a lot about disciplined pricing. Am I to assume that if you're growing 20%, a third of that's pricing and two-thirds membership? Is that, like, how to think about it? Talk about premium growth?
Well, they'll tell you when you file.
Yeah. We're not gonna give up our price, we're not gonna give up our pricing formula, but that was a nice try.
That was all right. I like that one.
Yeah. I haven't had a lot of success on those type of questions this whole week. All right. 20% premium growth this year, but, like, I kinda get it for-
2024.
... 24. Sorry. Because of redeterminations.
Yep.
After that, are changes a growth business outside of ICHRA?
I mean, we're countercyclical to the economy and recession. We're headed that way some way, shape, or form. We're an opportunity. I think you could build an ICHRA product that could be like COBRA for ACA, people going in and out of ACA. Could be a temporary workforce, you know, seasonal workforce product. I mean, there are a whole bunch of different ways when you look at the use cases. Again, we gotta put them on paper, we gotta hassle them through, we gotta figure out what the pricing would be and how we would sell them, but that's the kind of thinking we're putting to paper on this.
Okay, that makes sense. I guess what happens if subsidies go away in after 2025?
They don't go away.
You can't take a benefit away from someone.
No, you can't. Nope. I mean, Well, let's go back to 2009 when everybody thought that the Medicare Advantage business was gonna get blown up by Congress, right? We said, if we could just get from 13 million people to 20 million people, they can't touch it, and we did. They can't touch it. I think we're there with ACA.
All right. To your point about, like, use cases for this technology, I guess you're saying you had great technology, but you didn't have a great platform for selling and integrating.
Right.
with the customer. How long until you can have that in place and we should expect the technology business to really start to add?
I would hope in my next five weeks I'll know more about it. We still have some deep dive to do. We gotta work through what are the changes that need to be made to the platform? How long will they take? What will the investment be required?
Okay. I guess the same thing then on whether it's ICHRA or whether this MA opportunity, like, how? It sounds like it changes in the next couple of years driving it, and you lay the foundation now, and then these things pick up the.
When you get the platform right, you say which of these alternatives is the best one to pursue out of the box, based on our research. I would argue that there are enough partners out there that we could pull into this at some point if we wanted to pursue them both. For example, on the BPR and the systems in the SI front, the systems integration front, there are a number of key tech players that would be willing to play with us on that as distribution partners on that kind of product. I've had that conversation when I was at Bridgewater, when we were thinking about externalizing the Bridgewater platform.
There are tech companies that are looking for very specific, industry-specific leaders in technology that they can partner with to put those things on, to put those things out to the clients.
When you think about monetizing the MA opportunity, is that the same thing as monetizing the technology? Is that how, that's how you're gonna monetize the MA? You're not gonna take risk on that as one product?
No, we could take risk. We don't necessarily not have to take risk, depending on the situation. I mean, as you know, once you have a provider deal, When you see one provider deal, you see one provider deal. What do we need to do to encourage them to get into the business? How can we partner with them to do it?
I guess historically, and this is, I guess, the issue about value-based care in general, is that providers are usually good at providing care. They're not usually good at underwriting risk, and that's why there's two different industries.
Right.
How do you get them comfortable that they can actually underwrite risk on a price?
Well, this is the part that we're debating internally. I, you know, and I won't, you know, say that I've come to any conclusion, but I'm not sure I've seen a value-based contract that works, quite frankly, or works broad enough to matter. If we were to be able to build provider relationships with this great customer front end, imagine an Oscar customer coming in with a plan, no administrative or financial burdens or barriers in the way, and said, "This is what we want you to do, and we're willing to pay you for it on a fee-for-service basis." Is that a better deal? I don't know. That's something we can test.
If you have a value-based contract, whatever that may be, and there are 1,000 different definitions of it, and you don't have enough end to push through the thing, how do you ever know it's gonna have an impact on behavior? I'd just rather pay providers for doing what they do really well and pay them appropriately for it. There's a program that I've helped develop on pain, chronic pain management. We pay the coaches twice what a clinical psychologist gets to treat nociplastic pain. We ID those people in very specific ways on what makes them work best for the people we're serving. We pay them generously because it matters. It gets savings in a $1.4 trillion annual problem in the United States.
I think, you know, I think the use of risk in the product may not be as great as people think it is. We talk about, you know, what percent, and we did it on the call. We have 48% of our contracts are in value-based contracts, including capitation. What does that mean? How much change has it created? That's the debate I put on the table. I've not, you know, said, "Don't do it," but I put the debate on the table and say, "Tell me why we can't go to a provider that does really good work and say, 'We're gonna pay you for what you're worth. Just take care of our members.'
I guess then from that perspective, why even? You're saying why even have 40%? Why not have 20%? If you can do the stuff on your end, then.
Yeah.
That's all that matters.
Right. We'll see.
Okay. It's interesting 'cause I keep going back to your last presentation as CEO of Aetna, your investor day, and talking about breaking down the cost of care and how much could actually be influenced by the provider and then how much was social and how much was, again, individual. This really does line up very well with kinda how you were talking about it back then. But it does seem to me to have been, you know, I guess maybe there is secret sauce here, but it's the part that everyone's failed at. What is the key that you guys have been able to do so far that's gotten the consumer to behave differently?
What the system does is treats acute care, right? It treats an acute problem, and says they're done when that's over, without any real consideration for the individual's version of what matters to them. When you reverse the conversation and say, "What is it about your health that gets in the way of the life you wanna lead? Let's work on that," now you have engagement, and now you have a plan. If it's a, you know, diabetic with peripheral neuropathy, they can't walk to the park with their grandchildren anymore, and you say, "You know what?
If your feet are a problem, and we get your diabetes under control, and you can do that again, is that something worth you wanna do?" If you put that plan together, including, you know, all the primary care, secondary care, home care that you need to do and say, "This is the best package to invest in you to make you what you need to be," then I think you can finance that differently. You don't have to put it through a risk contract.
This whole company seems to be about engaging the individual, and it really surprises me that you don't see MA as an opportunity, 'cause MA's individually sold.
Oh, we do see MA, we just don't have the capital.
If you had more capital, if you had unlimited capital, you'd be bigger in MA right now?
Sure, yeah. I mean, we just don't, we don't have the capital, and we don't have the right to go get the capital 'cause we haven't made money. You know, as I've said to the team time and time again, when we make money, people become friendlier.
All right. Maybe that's a question then for Sid. Like, can you walk us through cash today? You hit your endpoints this year, profitability next year. Like, cash flow and EBITDA probably are not, aren't always the same thing. How do you think about the cash and the ability to self-finance through next year?
You know, I'll restate a few things that I said on the call and hopefully add a little more color. I think first, importantly, we have $260 million of cash at the holding company. You know, that's a solid position for us to be in as an organization. More importantly, we disclosed on the call, obviously, you saw the solid first quarter results, adjusted EBITDA positive. You know, we're making money in our core insurance business, as Mark said. What happens when you make insurance in the core business? You know, from prior quarter, you saw our excess capital in those insurance subs go up, right?
We disclosed well north of $200 million of excess capital above our targets in the insurance subs, which are a great lever, you know, to fund future growth. At the same time, as you do that blocking and tackling as an insurance company, a lot of other things happen when you make money in those subs. You know, number one, we've talked about the deferred tax asset. How does that deferred tax asset work? Well, deferred tax assets, when you make money, you got a valuation allowance up on them. When you're losing money, you take that down, that's additional capital that you can use, and you're not a cash taxpayer for the foreseeable future. The second element is, we've had some unique e-elements of being a startup.
You know, some of them involve seasoning requirements, effectively lower premium to surplus in different entities. You know, as we age out of those, that allows us to look more like a traditional payer as well. The core to this is just executing on our plan, continuing to make money as we have, and, you know, that creates a lot of positive operating leverage for us around capital. Given what we said about, you know, our guidance for this year, as well as our objective to hit total company profitability next year, you know, we feel in a really good spot at this point in time. We also understand that this is a little complicated.
You know, we're happy to have Cornelia and Bianca, who are sitting here, and happy to introduce themselves to walk everybody through the work. You know, we feel in particular proud of kind of the milestone in the first quarter of adjusted EBITDA profitability and the insurance company's performance, you know, as a, as a good launching point for that.
We've got some opportunity in the reserves too.
You guys are getting out of California, which it sounds like is EBITDA enhancing. I guess there's a capital aspect to that as well, right? You'll be able to pull some of that cash-
Yeah. As always
out of the subs.
Yeah. As, as always, a lot of these things are kind of, you know, we're not reinventing the wheel here, as I think we joke, right? A lot of this is just traditional elements of running an insurance company. Obviously, you know, as you know, shrink portfolios, you exit them, you free up capital, you make money, you get ordinary dividend capacity out of regulated entities. It's a, it's an interesting inflection point for us there in the positive, as we look at kind of free cash flow for the company. You know, we're self-aware. We know there's a lot to do. As we always say, you gotta execute, right? You know, we're confident in the path to executing on that.
Inside the company, we're structuring a very, focused management process to get these things done. It's not, "You go do this, you go do that." It's, "We're gonna meet, we're gonna talk about these things, we're gonna review them, we're gonna hold people accountable, and it's gonna matter." We're not gonna distract ourselves unless we, unless we find it compelling with other stuff. We're gonna get this done.
All right. I think that's all we have time for, but thank you very much.
Thank you.
Great. Thank you.