Oscar Health, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Oscar sells health plans in the Individual, Small Group and Medicare Advantage markets and provides technology-enabled services through +Oscar. Financial statements are unaudited and prepared under U.S. GAAP.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $1.522B | $1.017B | $2.991B | $1.990B |
| Operating loss | $6.5M | $106.5M | $31.9M | $175.0M |
| Net loss | $15.4M | $112.1M | $55.1M | $189.4M |
| Adjusted EBITDA (non-GAAP) | $35.6M | $(75.8)M | $86.6M | $(112.8)M |
| Medical loss ratio | 79.9% | 82.2% | 78.2% | 79.9% |
| InsuranceCo administrative expense ratio | 16.7% | 19.5% | 17.7% | 19.7% |
| InsuranceCo combined ratio | 96.7% | 101.7% | 95.8% | 99.6% |
At June 30, cash and cash equivalents were $2.322B, short-term investments $1.256B and long-term investments $189.6M. Total liabilities were $3.613B and stockholders’ equity $952.0M. Long-term debt had a $298.4M carrying value; the $200M revolving credit facility had no outstanding borrowings. Operating cash flow for the first half was $580.2M, compared with $777.3M in the prior-year period. Cash, cash equivalents and restricted cash increased $762.7M during the first half.
Risk adjustment transfer payable was $1.983B, up from $1.517B at year-end 2022. Management expected the insurance subsidiaries to pay approximately $1.4B into the 2022 policy-year risk adjustment program during Q3 2023. Management said Holdco cash and investments, excluding restricted cash, were expected to fund operating requirements for at least the next 12 months.
Material changes and drivers
- Revenue rose 50% in both Q2 and the first half. Premiums before ceded reinsurance increased 8%, which management attributed mainly to lower risk transfer per member, Individual-market rate increases and higher-rate Cigna + Oscar members.
- Comparability is materially affected by the 2023 quota-share reinsurance change: a 2022 contract accounted for under reinsurance accounting was terminated and a new 2023 arrangement is accounted for under deposit accounting. Ceded premiums fell sharply, while reported net claims and other insurance costs rose. Thus, reported revenue and expense growth does not by itself indicate equivalent growth in underlying business activity.
- Investment income and other revenue increased to $42.7M in Q2 and $79.9M for the first half, primarily reflecting higher investment yields and interest rates. Administrative services revenue fell to $3.9M and $7.7M, respectively, following termination of the Health First arrangement and transfer of services effective December 31, 2022.
- Membership was 970,543 at June 30, down 6% year over year. Individual and Small Group membership was 900,228; Cigna + Oscar membership increased to 68,472 from 46,045. Management cited steps to manage enrollment and capital as the principal reason for the total decline.
- Management reported better MLR, administrative expense and combined ratios, citing disciplined pricing, cost-of-care initiatives, lower distribution expenses and variable expense efficiencies. Adjusted EBITDA is non-GAAP and should be considered alongside GAAP results.
Outlook, risks and unusual items
- Management said it was tracking toward its milestone of achieving profitability for the Insurance business in 2023, while cautioning that profitability may not be achieved on time or at all. The supplied filing text does not provide a numerical full-year earnings or revenue forecast.
- Management cited seasonality in enrollment and claims, uncertainty in medical-cost and IBNR estimates, and variability in CMS risk adjustment. It also noted Medicaid redeterminations and changing enrollment patterns could affect membership and underwriting margins.
- Florida enrollment restrictions were removed after regulatory approval on August 5, 2023; Oscar expected to accept new Florida Marketplace members in the coming weeks and for 2024 Open Enrollment. The 2024 NBPP limits non-standard ACA plan offerings, which management said could constrain plan design flexibility.
- The Founders Awards were cancelled in March 2023. Oscar recognized approximately $46.3M of accelerated, non-cash stock-based compensation in Q1; first-half stock-based compensation totaled $104.8M.
- Oscar reported a continuing material weakness in IT general controls over financial reporting, including program change management, user access and program development controls. Disclosure controls were considered ineffective as of June 30, 2023; remediation was ongoing and had not yet been validated over a sustained period.
- A securities class action concerning alleged deficiencies in risk-adjustment data-validation controls remained pending. Oscar had moved to dismiss; briefing concluded July 7, 2023. The company said it could not estimate the outcome or potential loss. Regulatory reviews and other ordinary-course claims also could result in fines, sanctions or required practice changes.
- Oscar had $305M principal amount of 7.25% convertible notes due 2031. The revolving credit facility was scheduled to mature in February 2024 and was subject to minimum liquidity, premium and combined-ratio covenants. The filing lists a July 2023 amendment to the facility, but the supplied text does not explain its terms.
Important facts for investors to verify
- How much of the reported revenue and expense change reflects the reinsurance accounting transition versus underlying premiums, claims and margins.
- Whether the expected approximately $1.4B Q3 risk-adjustment payment, together with the large risk-adjustment payable, affects subsidiary and Holdco liquidity as anticipated.
- Progress toward 2023 Insurance business profitability, including subsequent MLR, administrative expense and membership trends.
- Whether the IT-control material weakness is remediated and independently validated, and whether any further control deficiencies are identified.
- The terms and implications of the July 21, 2023 revolving-credit amendment, and the company’s refinancing or facility plans ahead of the stated February 2024 maturity.
- Developments in the securities action, regulatory reviews, CMS risk-adjustment estimates and applicable capital requirements.