Oscar Health, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited results; comparisons are with the corresponding 2021 periods. Oscar sells Individual, Small Group and Medicare Advantage health plans and provides technology and administrative services through +Oscar.
Financial performance and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $1.017bn | $529.3m | $1.990bn | $898.7m |
| Net loss | $112.1m | $73.3m | $189.4m | $162.2m |
| Net loss per share, basic and diluted | $0.53 | $0.35 | $0.89 | $1.09 |
| Adjusted EBITDA (non-GAAP) | $(75.8)m | $(50.6)m | $(112.8)m | $(78.4)m |
| Medical loss ratio | 82.2% | 82.4% | 79.9% | 78.7% |
| InsuranceCo administrative expense ratio | 19.5% | 19.8% | 19.7% | 19.8% |
| InsuranceCo combined ratio | 101.7% | 102.2% | 99.6% | 98.5% |
- Q2 premiums earned, net of ceded reinsurance, were $994.6m, up 88%; administrative services revenue was $20.5m, versus $0.4m. For the six months, premiums earned were $1.950bn, up 117%, and administrative services revenue was $38.9m.
- Membership rose 84% year over year to 1,036,720 at June 30, including 986,017 Individual and Small Group members, 4,658 Medicare Advantage members and 46,045 Cigna + Oscar members.
- Q2 claims incurred, net, increased 93% to $808.6m; six-month claims increased 124% to $1.543bn. Management attributed the increases primarily to membership growth and higher utilization.
- Cash and cash equivalents were $2.363bn at June 30. Short- and long-term investments totaled $1.224bn. Total assets were $4.751bn; total liabilities were $3.503bn; stockholders’ equity was $1.248bn.
- Operating cash flow was $777.3m for the six months, versus $373.0m in 2021. Investing activities provided $181.4m, compared with $742.3m used in 2021; financing provided $300.2m, versus $1.215bn in 2021. Cash, cash equivalents and restricted cash increased $1.259bn.
- Long-term debt was $297.6m net carrying value. Oscar issued $305m of 7.25% convertible notes due 2031 in February; the notes are convertible at an initial price of approximately $8.32 per share. No borrowings were outstanding under the $200m revolving facility.
Changes versus the prior comparable period
- Revenue grew faster than membership’s 84% increase, supported by higher premiums, rate increases, a shift toward higher-premium Silver plans and new Cigna + Oscar membership. The new Health First +Oscar client also contributed to service revenue growth.
- Despite revenue growth, Q2 net loss widened by $38.8m to $112.1m, as operating expenses rose 87% to $1.124bn. For the first six months, net loss widened by $27.2m to $189.4m.
- Q2 MLR improved slightly, which management attributed mainly to lower net COVID-19-related costs and member mix, partly offset by prior-period development. Six-month MLR worsened, primarily because of unfavorable prior-period risk-adjustment development. Administrative expense ratios improved, but six-month combined ratio worsened.
- Interest expense increased, reflecting the new convertible notes. The 2021 six-month comparison included a $20.2m loss on extinguishment of debt, which did not recur in 2022.
Liquidity, outlook, risks and unusual items
- Management stated that Holdco cash and investments, excluding restricted cash, were expected to fund operating requirements for at least the next 12 months. It reported $611m of cash and investments at Holdco and $3.0bn at regulated insurance subsidiaries; these pools are subject to different restrictions.
- Oscar expected to pay approximately $785m into the risk-adjustment program in Q3 2022 for the 2021 policy year. The risk-adjustment payable was $1.498bn at June 30, up from $794.4m at year-end. Management said operating cash flow is sensitive to the timing of risk-adjustment and reinsurance payments and receipts.
- Insurance subsidiaries’ statutory capital and surplus was $668.8m, above stated minimum requirements. Holdco contributed $268m to subsidiaries in the first half. Oscar estimated that without quota-share reinsurance, subsidiaries would have needed about $452m of additional capital at June 30.
- Management gave no clear numerical full-year financial guidance in the provided filing text. It cited uncertainty from COVID-19 utilization and costs, healthcare inflation, risk adjustment, Medicaid redeterminations after the public health emergency, reinsurance arrangements, regulatory changes and continued growth-related expenses.
- A securities class action filed in May 2022 alleges omissions in Oscar’s IPO registration statement concerning COVID-19 costs, Special Enrollment Period membership and risk-adjustment validation results. Oscar said it believes it has meritorious defenses, but could not estimate the outcome or potential loss.
- Disclosure controls and procedures were reported ineffective due to a material weakness in IT general controls, including program change management, user access and software-development controls. Remediation was ongoing and had not been validated as effective.
- Available-for-sale investments had $15.3m of gross unrealized losses at June 30, which management attributed to market movements rather than credit losses. A hypothetical immediate 1% interest-rate increase was estimated to reduce investment fair value by approximately $6.4m.
- As a post-quarter item, the board approved reinstating the CEO’s $600,000 annual base salary on August 11, 2022, after a voluntary reduction to $430,000 in 2020.
Important facts for investors to verify
- Whether the anticipated $785m Q3 risk-adjustment payment, the elevated risk-adjustment payable and subsequent settlements materially affect cash at the regulated subsidiaries and Holdco.
- Whether membership growth translates into sustainable underwriting results, particularly given the six-month combined ratio of 99.6%, higher utilization and uncertainty in risk-adjustment estimates.
- How much of operating cash flow reflects timing and growth in payables, reinsurance balances and risk adjustment rather than recurring earnings.
- Progress in remediating and independently validating the material weakness in financial-reporting controls.
- Developments in the securities class action, regulatory reviews and any resulting financial exposure or required business changes.
- The terms and potential dilution or cash obligations of the convertible notes, and the availability of liquidity across regulated subsidiaries versus Holdco.