All right, welcome, everyone. My name is Michael Ha, the Managed Care Healthcare Services Analyst at Morgan Stanley. Our next session, or our first session actually, is with Oscar Health, a technology-enabled managed care company, with plan offerings in the individual Exchange Marketplace and small group, as well as selling its technology to health systems providers and other health plans. I'm pleased to have with us today, Chief Executive Officer, Mark Bertolini. So with that said, thanks again, and Mark, I'd like to turn it over to you for an introductory remarks.
Sure. I'd start off by saying our fundamentals are strong. We're executing well. Our 2024 pricing and growth environment looks solid for us, and the tech platform is really delivering. Part of our, what has been noted, moderate pricing versus the market, is in large part our ability to now execute against the tech platform in ways that reduce our costs and allow us to bring more to the market. So, we're feeling good about next year.
Terrific.
This year.
Terrific. So maybe to jump into it with a couple of high-level questions. Now that you've been at the helm of Oscar for almost half a year now, you've already made a couple of key hires.
Yeah, 164 days.
Exactly. Not to mention, you've helped to orchestrate the PBM renegotiation, highlight a number of opportunities in fraud, waste, and abuse. I mean, the ICHRA opportunity, the MA payer-hospital partnerships, the list continues to build. With that said, number one, now, are you planning to continue hiring and deepening your management bench with more talent? If so, which areas of the business do you believe to be a target area?
Well, I think, first and foremost, our priorities haven't changed as an organization, so we still are after making sure we're profitable this year in the insurance company, full company profitability next year. We're very confident about both of those and feel really good about it, but we do need to start working on strategy. I had not anticipated being this far along this early, with a strategic event. So I brought Steven Kelmar on, who was my Head of Strategy and my Chief of Staff and Head of Comms and Government Relations. He's coming on board, to get the band back together, and then Kerry Sain, who's going to be working on +Oscar, because we now need to harden that platform in a commercial way versus an internal use way.
We will continue to build out the team in the organization. It's an opportunity now for us, that we're profitable, is that we'll continue to look for ways to bring our team up across the board, everywhere in the organization. That's sort of the mandate. So that part isn't done, and I would say the strategy, until it's inked in, in a place where we can execute against it, may or may not require us to bring more people on board.
Right. Got it. So I understand when you first joined, you were running deep dives on basically every aspect of the business.
Mm-hmm.
Now, are there any areas of the business that you believe could provide or present additional opportunities that you might not have discussed just yet? Or do you feel comfortable you've identified the full opportunity set over the next few years, it's now it's time to just settle in and execute?
I think there are always going to be more opportunities, and I think the largest part is going to be on the provider network. In a lot of our original vintage markets, our ability to get great provider contracts weren't all that strong, and that's really what's happened in California. That was a vintage market. The product we had put together wasn't the right product. The network we had put together wasn't working. We needed to find a different way, and so we went to the regulators and said, "Can we pull out, and come back when we're ready?" And they said, "Come and see us when you're ready." So I think as we talk about managing the portfolio of our markets, every market's going through a review now on the optimal version of a contract, both from terms and cost standpoint.
And we're also looking at our value-based contracts versus high-performing networks, as a different kind of approach to driving our healthcare costs down. We've got a lot more to do on that side.
Got it. And I definitely want to come back to California, but staying high level, with Oscar heading into 2024, exchange pricing slightly better than the national average-
Yep.
Just given the fact that initial optics would suggest you're well-positioned for growth, but could you discuss what gives you the comfort and confidence that the pricing Oscar submitted will be enough to cover the wide range of cost trend scenarios, all the while being enough to drive margin expansion to reach breakeven next year?
I mean, the great thing about coming where we've come from is that you can do an and on growth and margin. That's what we've done, is found that sweet spot. We've done Monte Carlo pricing analysis by market against each competitor, and that's how we pick these places to compete effectively. The pricing model is solid. It's based on our underlying costs as we see them, given the big changes we see in both operating costs and even ramp for 2024 is a lot lower than it's been in prior years. For our medical cost redeterminations we've had across the country in a number of markets.
In 80% of our markets, we are at our target margin, our target LRs for those markets, which is a huge improvement over the prior, which was about 65%.
Great. So in terms of the competitive landscape, the past couple of years in the Exchange Marketplace, it's looked like the top of an underwriting cycle, number of plans entering irrational pricing that's proven to be unsustainable. I mean, this year you took your foot off the gas pedal with exchange growth, but based on, you know, plan pricing and growth, and it feels like the market's now significantly better positioned, more rational. So how do you envision the future of the Exchange Marketplace? Do you think this is a marketplace where every few years we're going to go through the same underwriting cycle, rinse and repeat, or do we, are we now at a point where there are better players and a more sustainably rational market?
Well, one of the profound changes of the ACA that most people haven't really realized, the underwriting cycle has been pretty muted for the last 10 years since that bill was put into place. And the reason is with a minimum MLR, you can't buy market share and then price it up and get it back, because if you push your MLRs down too low, you got to rebate it. So it's impossible to buy business and hold it the way it was in the past. The minimum MLRs don't allow us to do that. As a result, what you're seeing this year versus last year, where people came in, irrationally priced, tried to buy a bunch of business, they've all of a sudden pulled back, pulled out of markets, refusing to grow because they can't win at the old game.
And we have learned over a decade now, how to play that game on a ramp over time without having to go buy business anywhere. The reason we slowed down is when I was working with Josh and Mario early on, in our weekly meetings, was let's get profitable first, and let's deconstruct the company by its operating model, the number of people by department. Let's take a look at where we can really make changes. Let's look at Holdco as whether or not we should be making the kind of investments we are and why. And let's get solid for 2023, get to profitability, build that engine, and then we can start growing again. And I think we're at the perfect place to do that.
Great. Great. So one more just on Exchange Marketplace growth. Actually, two more or three more.
Yep.
But you've been very public regarding your thoughts on the marketplace. You know, industry growth in 15%-20%, you guys can do at or above. So I'm curious, how much of that growth is attributed to redeterminations? I know you mentioned in the past, you're only, what, baking in a de minimis amount of redetermined lives into your expectations. But does that 15%-20% growth include redeterminations? How much contribution does it play into the-
Well, for the industry, it does, and it's a big piece. For us, it is not a big piece. We're not relying on Medicare redeterminations to drive our growth. We're looking at market expansion. We're going to pick up a total available market increase of about 500-600 thousand lives in markets that are contiguous to markets we're in, where we can leverage our provider contracts that are already in place, so we know what the cost structure is, and we can then look at markets by pricing to figure out where we can make margin. So that's what our expansion strategy has been built off of. That's where a big piece of our growth will come from.
Got it. So would you say redetermination, recapture of those lives next year would be upside potentially to growth?
Recapture would be. It's definitely in our plans. We have not planned a lot, and so if we get more, that would be great. So far this year, when we look at redetermination growth, we see the risk of that population much lower than we would have anticipated. It's a healthier group than we otherwise would have seen. Now, that may be our platform and our product and what attracts people to us, where the markets we're in, but we're seeing a healthier population so far than we anticipated.
Got it. Okay, so last one on the growth. The equation for Oscar to achieve at or above industry growth, it feels a lot more transparent now than, you know, a couple of months ago. Number one, the way I think about it, the enrollment cap in Florida is being lifted.
Yep.
Number two, as you mentioned, strong industry growth, maybe a slight headwind with the pause of California, which I do want to touch on.
Yep.
Better pricing, rural footprint expansion, that should more than offset the California pause.
Yep.
Am I thinking of the membership bridge in the right way, or are there any other pieces that I should be-
No, I think that's solid, and I think we're going to grow in markets. We also have markets that we've been in for a while that are going to have some strong growth this coming year. So, those will be new markets. And so we're diversifying our growth profile, not being as reliant on Florida as we otherwise would have been, and opening up new markets. So I think that's sort of the shape of things as we look at them. We have, you know, a great Net Promoter Score. We have great relationships with brokers.
One of our components of + Oscar that we'll be rolling out in the next year is a broker portal that will give them a lot more in the way of support, in working with our customers and their customers and our members. So these kinds of things are, you know, not dollar compensation, but are important parts of their being able to re-enroll people and keep their growth profile going.
Got it. So coming back to California-
Mm-hmm.
Pausing membership next year, and, you know, as you reshape the strategy and product offerings, any way you can help us conceptualize what the high-level changes are going to be areas of improvement in California? I think you mentioned the provider network. To get Oscar back on track, any potential timeline on when these changes could be actioned to reenter the California market? And what are your thoughts on your ability to immediately recapture those lives once you go back in?
So I don't want to get too deep in the complication, but what I would call the product is more of an HMO-like product in California. We're testing in other markets sooner because we won't be ready for California. It's going to take us some time to get in. It's called HMO Oscar, is the program we're building, and that will be our new entry. It'll be new provider relationships with a bigger footprint in more markets. So we're looking at a very different entry than what we did back when we started, which was, let's find a health system that'll work with us, build a tight relationship with, and see if we can grow off of that. That wasn't working.
Not only was it not working from a growth standpoint, because of the way we had to price it, because we're losing money on it. We needed to. When I met with the team on it, literally the first day I was there, I said: Show me the circumstances under which we can make this relationship work. They couldn't. So we got to move. Luckily, we have a good relationship with the state, and they said, you know, well, let's, you know, let's work on this. Now, there is a moratorium, as you know, of five years on this sort of thing, and we said: Is there an opportunity for us to come back? They said, "When you're ready, come and see us.
Right. They need much sooner than 5 years, but the implication is great. Yeah. So then coming back to redeterminations, I know we talked about 2024. For 2023, you know, to the extent, and I know you mentioned mix shift has been better, healthier lives. To the extent you do pick up more lives the back half of this year, there is that risk coding capture potential headwind, right? Because more—it's just tougher to risk code later in the year. Is that adverse mix selection baked into your guidance, and how should we think about that for 2023?
Yeah, we have baked that into our guidance, based on our anticipated growth, for the remainder of this year. So, and again, like I said, we're seeing a healthier population come through than we anticipated when we put together that projection. And so we're feeling good about that. We are looking at, you know, Mario and Josh know the folks at OpenAI, and they've been working with them for a long time on this sort of stuff. And so we've developed almost 50 large language models that we're applying against our platform, mostly against the back end, to make it better. Part of that is how much can we capture risk coding upfront on these people as they come in to get ahead of the curve, versus waiting for the chart review later on.
So we're doing virtual home assessments, things like that, to gather the data that we would be... then allow us to look for the signs of what we would need to, in order to justify the risk adjustment.
Got it. Got it. And I, I do remember you mentioned, I think AI drove 20% better economics and risk adjustment just this year, so-
On the same file that we looked at manually, yeah.
Right. Right. Okay, great. So then taking a step back and thinking about the enhanced subsidies, you know, they've helped support the broader industry growth over the past few years, but they are set to expire in 2025. Curious, what are your thoughts on the potential for further extension of these subsidies beyond 2025? Any thoughts on what the perfect White House congressional makeup would be to get this passed? And then if the subsidies do expire without an extension, how impactful do you think that would be to the Exchange Marketplace?
Yeah, I think the perfect White House and congressional strategy would be one where we started over with all new people. But having said that, I think at the end of the day, this is just where... Remember Medicare Advantage. Well, you probably weren't even around then. Medicare Advantage in 2010, some of you will remember, in 2010, how everybody said: Oh, it's going to go away, the Republicans are going to throw it out. And we said, "Well, if we can get to you know, 15-20 million lives, they can't." And they didn't, and now they won't touch it. And so I would argue we're at the same place with the ACA today. We're going to be at 18-some million by the time January rolls around.
I think it's going to be too hard for them to blow it up. Now, the enhanced subsidies are for 400% of the federal poverty level and up. That, you know, is going to have an impact on that market. We don't rely as much on that market as others do. And so I would argue that I ... This thing isn't going away. And when you see, when you start hearing the state of Texas wants to build its own state-based exchange, something has happened. And so I think this market is going to be very stable and be around for the long term, for a long while.
Got it. Super helpful. So +Oscar strategy, you know, it's, it's now been about over 12 months since the decision was made to delay all full service BPaaS deals as Oscar focused on, right, just achieving charitable profitability.
Right.
But that 8-month, 18-month delay is fast approaching. You know, where are you today with the BPAS? How does it fit into the overall +Oscar strategic mosaic? Should we expect Oscar to aggressively pursue these deals once that 18-month period is over?
So I think you're going to see a couple of things. We're going to roll out more components of the platform instead of waiting for the whole platform to be ready. And there's a reason for that. It's not just the way the platform operates, because the platform is very powerful inside the company today and what it's doing for us. It's the ability to pick that up and move it to other organizations. And so there's a whole set of SaaS capabilities from the standpoint of service and support, as well as business process reengineering and, you know, and systems integration that didn't happen at all in the Health First relationship. It was all sort of as we went along. And so we've got to get that right, and that's why Carrie's coming on board.
It's about the commercial aspects of externalizing a platform, not about the technical aspects. The technical aspects we're solving, the commercial aspects about how we bring it to market, how we install it, how we work with the party that we're signing up to do that, is the things that Kerry brings to the organization on how to build that out. That will take some time, but in the meantime, because we don't want to wait, we're now rolling out these components, and we're going to start to report them. Can't tell you when, but it's going to be soon. We're going to start to report those revenue flows, including the revenue flows that come out of Oscar as a result of using those tools.
Got it. Got it. Helpful. Currently, though, your +Oscar revenue is quite de minimis, right? I think-
Compared to our overall revenue, yeah.
Right. Right. Okay.
We'll start to think about how we report that.
Got it. So then staying on +Oscar and thinking about innovation, and we've heard a lot about Campaign Builder, and you mentioned, you know, modularization, more applications. But if I think of a year ago, a year and a half ago, at your Investor Day, when Mario was speaking, and he's mentioning six main tech modules, and I won't list them all, like member experience and things like that.
Yep.
But as we think about the next step in, you know, SaaS offerings, how many modules or applications are, would you say you're currently working on? How far along are you in that process to be ready for the market? You know, what inning, I guess, of the ballgame are you in?
Yeah. We're in the middle innings, so I would say, you know, we have three that we're looking at hard now. Now they have to prove it out. So from the standpoint of how much investment, what do we expect the returns to be, what's the pricing model gonna look like? All the commercialization aspects of the business, not just the tech aspects.
Mm-hmm.
So the tech platform is pretty solid. We're now looking at how we commercialize by components to get more of the platform out there.
Mm-hmm. Okay, got it. Got it. Middle innings, okay. So pivoting to ICHRA, and, you know, I understand your view that ICHRA, significant opportunity-
Yep.
It hasn't played out so far, but in the future, you know, you've constructed plan designs around, I think, disease states like diabetes, which you've talked about, that could drive disruption in the employer market. So when we think about the potential growth opportunity here, with the plan designs you've implemented for 2024, how should we think about the ramp of this growth opportunity? Will this be more of a opportunity that drives surprising membership upside next year or in the years to come? Like, how should we think of the penetration opportunity?
Well, the way we look at this is the remaining fully insured market that exists today is about 30% of the market. It's 35 million people, and its largest small group and middle market employers. They buy a level premium product from the big insurance companies, who make a reasonably good margin on it. The reason they're having this level premium problem or this cost problem is that the vast majority of employees in those groups are over-insured to cover the few people that need to be adequately covered. So our plan design work, our diabetes plan design and ACA is one of our most profitable is about how we bring them in, identify them, bring them in, and get them into treatment and improve the quality of their healthcare results.
And we're gonna roll out a few others. And as we roll those out, those become the test bed for how we handle that problem with employers in small groups and middle market, about the few people that blow up the risk pool and cause their overall cost to rise. Because if they're gonna go to defined contribution, which is the end result of it, then they have to be assured that that defined contribution is gonna be stable over time, reasonably stable, and we have to prove that out. So we're doing that work from an actuarial standpoint. Secondly, and probably more importantly, the ICHRA that has been sold so far has largely been around a defined contribution financing model, not about the underlying benefit, plan of benefits, how it works, and why it's an improvement for employees.
So we need to make this a member experience point to say, this can be really good for your employees. They don't have to buy the kind of coverage you're buying for everybody in your group. They can buy different coverage, and they can also buy other kinds of coverage in a flexible benefit model, but based on an individual market. There are 35 million people in that market. We have nothing to lose by going after it in a different way. So we view it as a huge opportunity for us to grow. We think the individualization of healthcare will be something that will happen, and we want to be able to drive that and prove that that model can work.
Got it. That makes sense. So thinking about MA, you know, you've mentioned over the past few months, potentially entering MA partnerships with hospitals, providers, basically empowering them with the right tools to take on risk and through these potentially co-branded MA plans. So with that said, you know, + Oscar was built for the Exchange Marketplace.
Yep.
So my question is, does +Oscar currently possess the full scale or full suite of MA-related capabilities when it comes to Risk Adjustment Stars, all the, you know, all of that? Or would you need additional investment resources to go back into Oscar to build that?
So let me walk you the logic of why we think this could work. You know, the best health plans, the latest numbers are 6%-7% pretax margins on Medicare Advantage. Hospital systems are at -3% on Medicare. They're not getting any of the benefit of the Medicare Advantage program and the improvements that have been made. They have been complaining to the government, and the government's now looking at risk adjusters and coding. So they could be pushing those margins down. That's a loss for the major insurers that are engaged in Medicare Advantage. We could go to health systems and say: How about you get 4% margins on your Medicare business versus -3%?
That's a 7% swing in your overall margin portfolio, 3.5% swing on your, that's a 4% swing on your Medicare portfolio, a 3.5% improvement on your overall margins. As a health system, we need to build a business model. Now, we haven't fully thought through, but I have, you know, good insights into this, about how we need to work with those systems differently than, again, just dropping a system and saying: Welcome, you're into Medicare Advantage. So we will be a technology partner. We'll need to be a business partner on how they run their business, to run to that advantage, to make the money that they can make by being in the Medicare Advantage program.
They can enroll their patients when they come into the institution instead of having to use broker networks. They can get Star Ratings much higher and much quicker because it's all their data located within the system, and it can be privately labeled. The issue we have to do is we have to build that business model with them, so there is more investment that's required. But the primary investment that needs to happen is we need to be able to externalize the full platform, and that's the work we're underway doing now.
Mm-hmm.
What will it take to externalize the full platform?
Got it. That makes sense, especially with V28 risk model versions, the need for your AI-driven risk coding capabilities probably is even higher.
Yep.
I wanted to touch on your PBM renegotiation. I understand the savings are a significant, important part of the bridge into next year, and it increases each year-
Yep.
- into 2026, I believe.
Yep.
So I wanted to understand, what, what are the specific, like, sources of these savings? You know, what part of the PBM relationship that you see as more obvious in terms of the opportunities, and more recently, with the Blue Shield of California news. Curious, how do you view that intentionally fragmenting a PBM relationship to 4-5 vendors? Curious to hear your thoughts.
It's brilliant. It's the only way to deconstruct the PBM model, which has needed to be deconstructed for a long time. And, the capabilities of PBMs are needed in order to control costs, but the mystery model and the black box of all the money moves around is unnecessary. And so my recommendation to the PBMs that I've been engaged in, and I was involved in the, you know, the rolling out of Express Scripts back in the early 1990s when I was at New York Life, was sooner or later, people are gonna figure this math out, and we're gonna have to have a better landing point. So I view now PBM, the best PBM model to have is to have them be as a focus factory. Don't have the margin resign there, reside there, move the margin to where the members see value.
Use that as a cost driver to keep your costs low, so you can move that margin toward members see value.
Mm-hmm.
And so I think what Paul Markovich has done is brilliant. I tried to hire the guy like eight years ago to be chief operating officer at Aetna. You know, I think, you know, I think he's doing the right thing, and I think it's a model that may catch on.
Mm-hmm. So then when you think about the 10%-15% purported savings, and when you're doing your renegotiation, I mean, that to us, in a PBM business, that does, right, mid-single-digit margins, it sounds massive. How... Do you view that as realistic, or is that-
Our improvements in the contract?
10%-15% savings on the Blue Shield of California contract.
Yeah, you know, there's a lot of money in them there hills. You know, the buy-sell spread, the different quantities they use to do buy-sell spread, you know, the formula. I mean, we went back to our vendor, and our vendor was very quick to give us the discount we got, which was sizable, which means there's more money there.
Mm.
And so we need to be going after the MAC list every quarter, 'cause the MAC list changes, and we need to be constantly pushing on where we're getting our discounts on behalf of our members.
Got it. Your current relationship expires at the end of 2026?
At the end of 2026.
Got it. Okay, so pivoting to broker expense. I understand a large part of the expected admin ratio improvement this year was driven by just reducing broker fees, distribution costs, which proved to be a big lever for growth, right?
Yeah.
Keeping growth, you know, not growing. But as you get back to at or above market growth, do you believe this reduction is more temporary and going to flex it back up? Or is this more permanent reduction that you can, you know, expect to carry forward in-
We didn't cut broker fees. We didn't accelerate to what the market was doing.
Okay.
Okay, that's a big difference. So our costs were not as big as other people's costs were. And we did do some markets where we, you know, pulled back, but... And that was to test our Net Promoter Score. Is our Net Promoter Score real? If we can change the broker commission, people still wanna keep us, does that make sense for us? And because if you're going to invest in Net Promoter Scores, you need to use the technology platform to have to make members happy, is the member experience matter in the way we keep or retain people? And we had a great retention year in 2023, our best ever.
Mm-hmm. Got it. Great. So then, one thing that we don't talk about, I feel like enough, is the Cigna partnership, the Cigna + Oscar-
Mm-hmm.
small group book. I mean, it's grown significantly over the past couple of years. Looking forward, you know, the book is, of course, very small.
Right
Compared to the, the overall business. But is this level or pace of growth sustainable? It's sort of tough for us to model from our end. And then how should we think about, you know, the potential for this partnership to expand? Are there conversations ongoing with Cigna?
We have ongoing conversations. We have a joint venture board that meets and talks about how we can do well in this business. Right now, the underwriting margin is not great. And so we need to work on that. That's gonna affect growth, and so we need to talk about all the various factors of cost and against revenue and understand what's the best model to make that market grow faster. You know, that, you know, Cigna's got other relationships in that market. They've got their level funding product that they use for small group. We'll be looking at ICHRA as a model, so it won't be the only way we can get at that market. We have hopes that we can make it work, and we're working with them every day on it.
Great. Great. So last question. What do you think investors are missing about the Oscar story that in 12-18 months, they'll come to appreciate?
The power of the platform and our ability to use it in unique ways to disrupt the business. We don't have a whole lot to lose. We can't be a monoline company, so we're gonna need to diversify. And we'll continue to pursue that, and we're gonna use the tech platform to our own advantage, in the marketplace, both inside the insurance business and outside. Think of us as a tech company with an insurance company laboratory.
Perfect. Well, thank you so much, Mark, and thank you, everyone.
Thank you. Good to see you, Michael.