Oscar's S-1: Why It Matters
There's more to this business than $400 million in losses
Oscar is going public. I’m sure you’ll be inundated with coverage on the matter this week, so I’ll keep mine short.
In this issue:
Why Oscar’s finances matter so much
Why Oscar’s losses aren’t the full story
Why Oscar’s finances matter so much
You’re probably aware of Oscar, the health insurer that launched in 2012 to compete in the individual insurance market. Their model focuses on the customer experience, with an app and an on-demand team of care coordinators. The goal is to create a differentiated experience that drives high engagement among their members, and in turn to leverage that engagement to save on medical costs, creating a deep competitive advantage.
Until now, we haven’t known if Oscar makes money with that model; the S-1 confirms that they’re losing plenty of it. More on the numbers soon, but for now let’s emphasize how much is stake in these financial results.
Consumer experience is part of a broader trend toward a more consumer-focused healthcare system. Lots of new healthcare companies are launched under the premise of fixing a particularly consumer-unfriendly process in healthcare (lots to choose from!). It’s an open question as to whether that’s a winning strategy or not.
Care coordination is a related trend that promises to create happier customers and lower costs in one stroke (discussed in depth last week). Since Oscar bundles coordination with insurance, its earnings are a strong indicator of whether care coordination can drive savings, net of its costs.
Individual insurance markets need to be healthy if they’re ever to compete with the employer-based status quo. Employer insurance saddles employers with the costs of providing health insurance, and discourages employees from pursuing new ventures on their own. (It persists for tax reasons.) Oscar provides a new approach, and much-needed competition, in many individual markets.
If Oscar succeeds, they validate each of these trends for the industry. If they fail, the industry needs to understand why, and change course. So, I’m rooting for them.
Reasons to be optimistic
Like I said, Oscar is losing piles of money: $406 million in 2020. I’ve personally observed a lot of eye rolling on Twitter about the losses; we all remember WeWork.
But the smart money is still in the game: just last December, Oscar raised $140 million from some name-brand venture funds, and a few months before, raised $225 million from a similar group. Of course these experts could be wrong!
I, a non-expert, just want to start a conversation about what they might be seeing. Some ideas:
Growth: Oscar reported 400k members at the end of 2020, up almost 75% from the year prior, and 529k members as of last week. Growth doesn’t solve everything: if you’re losing money on each member, you won’t make it up in volume. But that kind of growth can justify larger expenses on the line items that don’t grow directly with membership. Unfortunately, even after stripping out such expenses, Oscar is still losing money on each member (see the S-1 pg. 79 for discussion about their “InsuranceCo Combined Ratio”).
Oscar has probably focused so far on the markets where it expects to be most profitable, based on e.g. demographics and competitive landscape. What remains, then, are markets where it should expect to be even less profitable. If you don’t think there are big differences in the attractiveness of insurance markets around the country, you can be more bullish on the future, given Oscar’s improving product and go-to-market experience over time.
Cost control: Oscar needs to get control of its medical costs; the medical loss ratio (i.e. the percentage of premiums paid out in claims) has slowly fallen over time, but in 2020, wouldn’t have really fallen without help from covid-19. That leaves some hope that Oscar’s systems and apps for engaging patients are still in development, and still have more cost savings to realize. The “InsuranceCo Combined Ratio,” which might be a better metric than MLR, seems like its improving more consistently.
Reinsurance: Oscar’s biggest costs are for reinsurance, which is insurance purchased by an insurer 🤯. The reason is actually fascinating: one barrier to scaling an insurance company is the huge pool of capital required to be kept in reserve. Regulators want to ensure that claims can be paid! And Oscar has raised a huge amount of money ($1.6 billion) to fund those reserves.
If Oscar wants to grow faster than its reserves allow, it can rent some capital from someone who has a truly huge amount of it, namely a reinsurer. It’s a similar principle to when startups use AWS instead of a on-prem servers; AWS might cost a bit more per unit, but it’s a variable cost, and scales with the business, while the on-prem server is a fixed cost that must be paid in advance, before the business is proven. Oscar buys reinsurance so it can put some of it’s hard-raised capital toward other projects, like building an app.
As Oscar grows, some of these reinsurance fees should drop. It’s not a huge leverage point, because the drop in fees is nearly offset by higher claims. But it’s something.
Net Promoter Score: High NPS scores contribute to financial performance in two main ways: organic growth driven by word-of-mouth, and lower churn from happier members. Oscar’s NPS is +30; excellent compared to most health insurance companies (roughly zero). Compared to Accolade, which has a similar member engagement/coordinator model, not so much (+70).
Since Oscar is an insurer bundled with a care coordinator, it makes sense to see NPS near the average of those two businesses. Of course, the whole point of Oscar IS to bundle the concierge with the insurer, to improve the customer experience, so they’ve succeeded in that. The problem is that this is baked into their current financial performance; they’ll need to improve NPS going forward to see the financial benefits. Hopefully the above-mentioned product development opportunities help with that.
Sales and Marketing: Oscar spends money to acquire customers in a given year, but then realizes revenue from those customers over multiple years (since lots of customers renew their plan each year). This is even more true for Oscar, which doesn’t publish churn or retention figures, but does have higher engagement that should result in better retention. And since Oscar is growing, many future revenues have already been paid for from an acquisition cost standpoint, which means the long-term margins should be better than stated on their S-1.
Additional opportunities: Oscar is entering the Medicare Advantage space (but only with a couple thousand members so far). Perhaps more interesting is their ability to sell their differentiated tech platform or patient engagement model to other MA players, as they have begun to experiment with. More discussion on this point at the end of last week’s post; this is something to watch but not close to being a proven revenue stream.
Conclusion
Oscar is leading the way on a bunch of interesting avenues to better healthcare, but they can’t keep doing it for long unless they’re profitable. It seems both promising and highly uncertain that they’ll hit a positive operating margin any time soon.
Their best leverage point seems to be a continued focus on their products and platforms that enable a differentiated customer experience, which is simple but by no means easy. They’ve had nearly a decade to focus on it already, how much better can it get from here? At the very least, the big venture funds seem to think they’ve got a chance.