Oscar Health, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited consolidated financial statements prepared under U.S. GAAP. Dollar amounts below are rounded to millions unless stated otherwise.
Business context
Oscar sells Individual, Small Group and Medicare Advantage health plans and provides technology-enabled administrative services through +Oscar. It also operates the Cigna + Oscar Small Group partnership. Membership reached 1,075,445 at September 30, up 81% year over year, primarily from Individual-market growth and new Cigna + Oscar members.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $978.4m | $444.0m | $2,968.5m | $1,342.6m |
| Premiums earned, net of ceded reinsurance | $953.7m | $441.7m | $2,903.7m | $1,338.4m |
| Claims incurred, net | $852.7m | $453.6m | $2,395.9m | $1,141.5m |
| Operating loss | $(192.4)m | $(211.7)m | $(367.4)m | $(348.2)m |
| Net loss | $(193.5)m | $(211.5)m | $(383.0)m | $(373.7)m |
| Adjusted EBITDA (non-GAAP) | $(159.8)m | $(187.4)m | $(272.6)m | $(265.8)m |
| Medical Loss Ratio | 89.9% | 99.7% | 83.2% | 85.8% |
| InsuranceCo Administrative Expense Ratio | 20.7% | 23.1% | 20.0% | 20.9% |
| InsuranceCo Combined Ratio | 110.6% | 122.8% | 103.2% | 106.7% |
Q3 diluted and basic loss per share was $0.91, versus $1.02 in the prior-year quarter; nine-month loss per share was $1.80 versus $2.22. The combined ratio remained above 100% in both periods, indicating insurance claims and related administrative costs exceeded the premiums used in this ratio.
Liquidity, cash flow and debt
- At September 30, cash and cash equivalents were $2,112.9m; short-term investments were $718.2m and long-term investments $196.5m. Total assets were $4,308.7m and stockholders’ equity $1,084.6m.
- Operating cash flow was positive $229.0m for the first nine months, versus cash use of $216.2m in 2021. Investing activities provided $480.2m; financing activities provided $300.6m. Cash, cash equivalents and restricted cash increased $1,009.7m to $2,135.3m.
- Management reported $420.0m of cash and investments held at Holdco, excluding restricted cash, and said its forecast indicated those resources would fund operating requirements for at least 12 months. Regulated insurance subsidiaries held $2.6bn of cash and investments and had $693.9m of statutory capital and surplus, above minimum requirements.
- Operating cash flow benefited from changes in insurance-related balances. In Q3, the company paid $783.8m into the risk adjustment program for the 2021 policy year. Benefits payable were $995.8m and risk adjustment transfer payable was $1,078.7m at quarter-end.
- Oscar issued $305.0m of 7.25% convertible senior notes due 2031; net carrying value was $297.8m. Initial conversion price was approximately $8.32 per share. The $200m revolving facility had no outstanding borrowings and matures in February 2024.
Material changes and management commentary
- Q3 revenue rose 120% year over year, mainly on membership growth, rate increases and a shift toward higher-premium Silver plans. Net loss narrowed 8%; nine-month net loss increased 2% year over year.
- Management attributed improved MLR to lower net COVID-19 costs, pricing and member-mix changes, and, in Q3, lower unfavorable prior-period development. Administrative expense ratios improved primarily through operating leverage, partly offset by distribution costs and costs of scaling operations.
- +Oscar administrative services revenue reached $19.4m in Q3 and $58.4m year to date, largely following the January 2022 launch of the Health First arrangement. Health First announced its intent to terminate that agreement, potentially effective January 1, 2023; Oscar expected to provide services through at least December 31, 2022, with run-off services likely into 2023.
- Management said it had engaged CMS on options to manage membership growth to a level it could prudently support with capital. Quota-share reinsurance reduced capital needs; without those arrangements, subsidiaries would have needed an estimated additional $448.4m of capital at September 30.
Outlook, risks and unusual items
- The filing provides no quantified company financial guidance. Management noted that extended ACA premium tax credits run through 2025 and cited the ACA “family glitch” rule; it also discussed possible marketplace growth and uncertainty around Medicaid redeterminations after the COVID-19 public health emergency.
- Key uncertainties include medical utilization and claims-reserve estimates, risk-adjustment transfers, reinsurance availability and recoverability, regulatory capital requirements, competition and membership growth, and inflation in healthcare costs. Management cautioned that actual risk-adjustment transfers may differ materially from estimates.
- A securities class action filed in May 2022 alleges omissions in the company’s IPO registration statement concerning COVID-19 costs, special-enrollment membership and risk-adjustment validation results. Oscar said it believes it has meritorious defenses; it could not estimate the outcome or any potential loss.
- Disclosure controls were deemed ineffective at the reasonable-assurance level because of a previously identified material weakness in IT general controls, including program change management, user access and software-development controls. Remediation was ongoing and had not yet been validated as effective.
- Investments had $14.5m of gross unrealized losses at September 30; management attributed these to market fluctuations rather than credit events and recorded no material credit-loss allowance. A hypothetical immediate 1% interest-rate increase was estimated to reduce investment fair value by about $4.1m.
Important facts for investors to verify
- Whether improved claims ratios persist as utilization, member mix and prior-period claims estimates develop.
- How risk-adjustment settlements, including the large payable balance and Q3 payment, affect future earnings and cash flows.
- The capital and liquidity consequences of membership growth, reinsurance terms and any CMS or state-regulator requirements.
- The financial and operational impact of Health First’s planned termination of its +Oscar agreement.
- Progress in remediating the IT-control material weakness, and developments in the securities class action.
- Potential dilution and cash requirements associated with the convertible notes and other equity awards.