Oscar Health, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Oscar sells health plans in the Individual, Small Group and Medicare Advantage markets and provides technology-enabled administrative services through +Oscar.
Financial results and position
| Metric | Q1 2023 | Q1 2022 / comparator |
|---|---|---|
| Total revenue | $1.470 billion | $972.8 million; up 51% |
| Premiums earned | $1.429 billion | $955.4 million; up 50% |
| Net loss | $39.6 million | $77.3 million |
| Net loss attributable to Oscar; diluted loss per share | $39.8 million; $0.18 | $75.2 million; $0.36 |
| Adjusted EBITDA (non-GAAP) | $51.1 million | $(37.0) million |
| Medical loss ratio (MLR) | 76.3% | 77.4% |
| InsuranceCo administrative expense ratio | 18.6% | 19.8% |
| InsuranceCo combined ratio | 94.9% | 97.2% |
Operating loss was $25.4 million, compared with $68.5 million in Q1 2022. Adjusted administrative expense ratio improved to 21.7% from 23.8%. Adjusted EBITDA is a non-GAAP measure and includes adjustments for stock-based compensation and other items.
- Cash flow: Operating activities provided $414.7 million, investing activities provided $135.5 million and financing activities provided $0.5 million. Cash, cash equivalents and restricted cash increased $550.7 million to $2.131 billion. Operating cash flow was affected by changes in reinsurance recoverables/payables and risk-adjustment balances.
- Liquidity: At March 31, cash and cash equivalents were $2.110 billion, short-term investments $1.325 billion and long-term investments $165.2 million. Holdco held $260.4 million of cash and investments, excluding restricted cash; management expects this to fund Holdco operating needs for at least 12 months. Insurance subsidiaries held $3.4 billion in cash and investments and had $765.1 million in statutory capital and surplus, above applicable minimums.
- Debt: The carrying value of the 7.25% convertible notes due 2031 was $298.2 million; principal issued was $305 million. The $200 million revolving facility had no borrowings and matures in February 2024.
- Membership: 1,017,332 members at March 31, 2023, down 5% from 1,073,595 a year earlier. Individual and Small Group membership was 948,431; Cigna + Oscar membership was 67,108.
Material changes versus Q1 2022
- Revenue rose substantially, but the comparison is materially affected by reinsurance accounting: Q1 2022 included $359.7 million of ceded premiums reducing revenue, while the 2023 quota-share arrangement was accounted for under deposit accounting. About 48% of premiums were covered by quota-share arrangements in Q1 2023.
- Direct and assumed policy premiums increased 2.3% to $1.719 billion. Management attributed premium growth to rate increases and changes in risk-transfer estimates.
- Net claims expense increased 49% to $1.092 billion, primarily reflecting the reinsurance program change and its accounting treatment. Management reported that MLR improved, citing disciplined pricing and total cost-of-care initiatives.
- Investment income and other revenue was $37.2 million versus a loss of $1.1 million, primarily due to higher investment yields and interest rates. Administrative services revenue fell to $3.9 million from $18.5 million after the Health First arrangement ended and services transitioned effective December 31, 2022.
- Management cited lower distribution expenses in explaining improvements to administrative expense ratios. The quarter included $46.3 million of accelerated stock-based compensation expense following cancellation of the Co-Founders’ awards.
Outlook, commentary and risks
- Management said it was tracking toward its milestone of Insurance business profitability in 2023, while cautioning that it may not achieve profitability on schedule or at all. The filing does not provide a specific quarterly or full-year financial guidance range.
- Oscar managed enrollment growth to preserve capital, including temporarily stopping acceptance of new Florida members for 2023; resuming new enrollment there is subject to regulatory approval. The company had previously targeted 900,000–1,100,000 members at the close of Open Enrollment.
- Management expects Medicaid redeterminations, which began April 1, 2023, and the end of the COVID-19 public health emergency to affect enrollment and potentially underwriting margins. Medical utilization, claims estimates, risk-adjustment transfers and reinsurance recoveries remain uncertain.
- CMS’s 2024 marketplace rule limits non-standard ACA plan offerings, which Oscar says could constrain plan design flexibility. The company also identifies ACA and subsidy changes, regulatory and capital requirements, provider concentration, competition, and reinsurance availability or terms as significant risks.
- A securities class action concerning alleged disclosures about risk-adjustment data validation remains pending; Oscar moved to dismiss the amended complaint on April 4, 2023. The company says it cannot estimate a possible loss and believes it has meritorious defenses.
- Disclosure controls were deemed ineffective as of March 31, 2023 because of an ongoing material weakness in IT general controls, including program-change management, user access and software-development testing and approval. Management is pursuing remediation but has not concluded it is complete.
- Mark T. Bertolini became CEO effective April 3, 2023; co-founder Mario Schlosser became President of Technology.
Important facts for investors to verify
- How much of reported revenue and claims growth reflects underlying economics versus the change in quota-share reinsurance accounting.
- Whether claims development, risk-adjustment estimates and reinsurance recoverables/payables support future margins and cash generation.
- Progress toward 2023 Insurance business profitability and the assumptions behind that milestone.
- Holdco liquidity, statutory capital needs, reinsurance renewals and the February 2024 revolving-facility maturity.
- Remediation and independent validation of the IT-controls material weakness, and developments in the securities class action.