Oscar Health, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; unaudited U.S. GAAP results. Oscar sells individual, small-group and Medicare Advantage health plans and provides technology and administrative services through +Oscar.
Financial performance
Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise stated.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $1,440 | $978 | $4,431 | $2,969 |
| Premiums earned | $1,392 | $954 | $4,296 | $2,904 |
| Operating loss | $(58) | $(192) | $(90) | $(367) |
| Net loss | $(66) | $(194) | $(121) | $(383) |
| Adjusted EBITDA, non-GAAP | $(20) | $(160) | $66 | $(273) |
| Medical loss ratio | 83.8% | 89.9% | 80.0% | 83.2% |
| InsuranceCo administrative expense ratio | 17.4% | 20.7% | 17.6% | 20.0% |
| InsuranceCo combined ratio | 101.3% | 110.6% | 97.6% | 103.2% |
Revenue increased 47% in Q3 and 49% year to date. Premiums before ceded reinsurance rose 6% and 8%, respectively, despite lower membership, with rate actions and higher premiums per member contributing. Reported premium revenue also reflects a major change in quota-share reinsurance accounting: 2023 arrangements are accounted for under deposit accounting, unlike certain 2022 arrangements accounted for under reinsurance accounting. This affects the presentation of premiums, claims and costs and limits direct comparison of those line items.
Net losses narrowed year over year. MLR improvement was attributed to pricing actions and medical-cost initiatives; lower administrative ratios reflected lower distribution and employee costs, expense efficiency and premium scale. Investment income and other revenue increased to $44 million in Q3 and $124 million year to date, primarily reflecting higher yields and interest rates. Q3's combined ratio remained above 100%, while the nine-month ratio was below 100%.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $1.400 billion; short- and long-term investments totaled $1.224 billion. Current assets were $2.992 billion against current liabilities of $2.061 billion.
- Operating cash flow was a use of $569 million for the first nine months, versus $229 million provided in the prior-year period. The company cited higher claims payments and risk-adjustment disbursements. It made an approximately $1.4 billion payment for the 2022 risk-adjustment program during Q3.
- Oscar reported $2.4 billion of cash and investments at its regulated insurance subsidiaries, and $238.9 million at Holdco, including $9.8 million restricted. Management said Holdco's unrestricted cash, cash equivalents and investments were forecast to cover operating needs for at least the next 12 months.
- Insurance subsidiaries' statutory capital and surplus was $874.6 million, above applicable minimum requirements. Management estimated quota-share reinsurance reduced required subsidiary capital by approximately $454.2 million.
- Long-term debt had a $298.6 million net carrying value. The $305 million convertible notes carry a 7.25% coupon and mature in 2031. The $200 million secured revolving facility had no borrowings and was scheduled to mature in February 2024.
Changes, outlook and notable items
- Total members were 983,160 at quarter end, down 9% from 1,075,445 a year earlier. Individual and small-group membership declined; Cigna+Oscar membership increased. Management attributed the overall decline partly to measures taken to manage growth and capital. Florida enrollment restrictions were removed August 5, 2023; the company was accepting new Florida members for the 2024 enrollment period.
- Administrative services revenue fell 80% year over year, following termination of the Health First arrangement and transition of services effective December 31, 2022. Run-off services continue through 2023.
- Management said it was tracking toward its stated milestone of achieving profitability for the Insurance business in 2023, while cautioning that the goal might not be achieved. This is not a quantified full-company earnings forecast; the filing text does not provide a clear numerical full-year guidance range.
- Cancellation of the co-founders' performance-based awards resulted in $46.3 million of accelerated stock-based compensation expense in Q1 2023. Year-to-date stock-based compensation was $133.5 million.
- The company continued remediation of an IT general-controls material weakness identified in 2021. Although controls were enhanced, management had not concluded remediation was complete; disclosure controls were deemed ineffective as of September 30, 2023. The company said the weakness had not caused a financial-statement misstatement.
Risks and contingencies
- Risk-adjustment estimates are uncertain and may be revised as CMS data develops; actual transfers may differ materially. Reserve estimates for incurred but not reported claims also depend on actuarial assumptions.
- Quota-share reinsurance supports capital efficiency and claims-risk protection. Changes, nonrenewal, counterparty default or adverse regulatory treatment could increase required capital and claims volatility. Reinsurance does not release Oscar from its obligations to policyholders.
- The company faces extensive insurance regulation, capital requirements, competition, medical-cost estimation risk, provider concentration, and sensitivity to ACA policy and subsidy changes. The 2024 federal marketplace rule limits non-standard plan offerings.
- A securities class action alleges inadequate IPO disclosures related to risk-adjustment data validation. Oscar moved to dismiss; it said it could not predict the outcome or estimate a possible loss. Regulatory reviews and other ordinary-course claims may also result in fines, sanctions or practice changes.
- Other notable exposures include cyber and privacy risks, third-party and claims-system implementation risks, and the upcoming February 2024 revolving-facility maturity. The filing describes a $6 million estimated decline in investment fair value under a hypothetical immediate 1 percentage-point rise in interest rates.
Key facts for investors to verify
- Whether Insurance business profitability is achieved in 2023, and how it differs from consolidated GAAP profitability and adjusted EBITDA.
- How much of the reported premium and claims growth reflects underlying business performance versus the change in quota-share reinsurance accounting.
- Future membership, risk-adjustment transfers and claim-reserve development, including cash-flow effects of large settlement payments.
- Availability and terms of financing or replacement capacity following the revolving credit facility's February 2024 maturity.
- Progress in testing and remediating the material weakness, and developments in the securities action and regulatory proceedings.