Oscar Health Files for Initial Public Offering

Oscar Health officially submitted its paperwork for an initial public offering (IPO) late Friday, joining the growing number of companies entering the public market. Headquartered in New York, this health insurance unicorn has secured over $1 billion in funding throughout its history, making this IPO a significant moment for its investors.

IPO Details and Company Overview

In its filing, Oscar Health indicated a preliminary fundraising goal of $100 million. This figure serves as an initial estimate, suggesting the company anticipates raising a substantial amount of capital through its public offering.

Founded eight years ago, Oscar Health was established to leverage the extensive healthcare reforms enacted during President Barack Obama’s administration. The company provides health insurance plans to individuals, families, and small businesses.

As of January 31, 2021, Oscar Health reported a membership base of 529,000. The company highlights this figure as a key indicator of its progress, noting a compound annual growth rate (CAGR) of 59% since January 31, 2017.

Financial Performance

Despite demonstrating a strong capacity for attracting private investment and expanding its revenue within the neoinsurance sector, Oscar Health currently operates at a loss. This mirrors the financial situation of numerous insurance startups that have been analyzed by TechCrunch in recent years.

The company’s ability to secure funding and grow its member base has not yet translated into profitability, presenting a challenge as it transitions to the public market.

A Detailed Look at Oscar Health's Performance

Gaining a clear understanding of Oscar Health requires some familiarity with insurance terminology. However, we will present this information in a straightforward manner. What was the company’s financial performance in 2020? The following metrics from 2020 are provided, alongside comparisons to 2019:

• Total premiums earned: $1.67 billion, representing a 61% increase from $1.04 billion.
• Premiums ceded to reinsurers: $1.22 billion, a substantial rise of 113% compared to $572.3 million.
• Net premium earned: $455 million, a decrease of 3% from $468.9 million.
• Total revenue: $462.8 million, down 5% from $488.2 million.
• Total insurance costs: $525.9 million, reflecting an 8.7% reduction from $576.1 million.
• Total operating expenses: $865.1 million, an increase of 16% from $747.6 million.
• Operating loss: $402.3 million, a 56% increase from $259.4 million.

Let's analyze these figures together. Oscar Health successfully increased its total premium volume in 2020, indicating a significant rise in insurance sales compared to the previous year. Simultaneously, the company ceded a larger portion of its premium to reinsurance companies. What is the significance of this?

Ceding premiums represents a reduction in revenue, but it can potentially improve overall insurance margins. As evidenced by the net premium earned line, Oscar’s totals experienced a decline in 2020 when contrasted with 2019, directly attributable to the expanded premium ceding. Consequently, total revenue also decreased in 2020 compared to 2019 due to this strategy.

However, the premium ceding strategy appears to be yielding positive results for the company. Total insurance costs, calculated by combining claims and other insurance costs, decreased from 2019 to 2020, despite the substantial increase in insurance sales during that period.

Unfortunately, these efforts did not translate into a reduction in the company’s overall operating expenses. Instead, these expenses increased by approximately 16% in 2020 compared to 2019. As expected, higher operating costs coupled with reduced revenues led to increased operating losses.

Oscar Health’s net losses closely mirror its operating losses, so further detailed data is not presented here. To gain a more comprehensive understanding of the fundamental economics driving Oscar Health’s insurance business, a closer examination is necessary.

Oscar Health's Financial Performance

Positive developments emerged for Oscar Health in 2020, as the company demonstrated a marginal improvement in its InsuranceCo Combined Ratio when contrasted with the figures from 2019.

The Combined Ratio, as defined by the company, represents the aggregation of the MLR (Medical Loss Ratio) and the InsuranceCo Administrative Expense Ratio. This is expressed as a percentage of net premiums, calculated prior to considering any ceding activity.

Understanding the Medical Loss Ratio

The MLR is a technical metric that determines the proportion of total premiums – before ceding – that were allocated to covering claims. For Oscar Health, this figure saw a positive shift, decreasing from 87.6% in 2019 to 84.7% in 2020.

This indicates a more efficient use of premium dollars towards actual healthcare costs.

Administrative Expenses

The InsuranceCo Administrative Expense Ratio reflects the costs associated with operating the company’s insurance entities, again as a percentage of net premiums before ceding. Unfortunately, this ratio experienced a slight increase, moving to 26.1% in 2020 from 25.5% in 2019.

This suggests rising operational costs relative to premium income.

Combined Ratio Analysis

When these two ratios are combined, the resulting InsuranceCo Combined Ratio provides insight into Oscar Health’s overall financial efficiency in generating insurance revenue. However, the company’s ratio remained above the desired benchmark, registering at 113.1% in 2019 and 110.8% in 2020.

While an improvement was noted, it was minimal, and the ratio remained significantly above 100%, the threshold for achieving a break-even insurance operation.

Essentially, the company is experiencing limited economies of scale, and the pace of improvement is slow.

Implications for Profitability

Consequently, achieving profitability remains a future goal for the firm. The extent to which this impacts investor confidence will become clearer following Oscar Health’s initial public offering.

In early 2018, a funding round of $165 million established Oscar Health’s valuation at $3.2 billion.

The company subsequently secured additional capital, including a $140 million investment last December – as reported by TechCrunch – but current valuation details for these later funding rounds are unavailable.

Examining Oscar Health's Financial Performance

The financial disclosures made by Oscar Health present a concerning outlook regarding the company’s business operations. Healthcare industry analyst Ari Gottlieb expressed this sentiment, stating that even the reduced medical utilization spurred by the global pandemic failed to deliver profitability for Oscar.

Gottlieb highlighted that Oscar reported record losses of $402 million, a stark contrast to the positive results experienced by many other health insurance providers.

A key factor identified by Gottlieb was Oscar’s elevated medical loss ratios, exceeding the typical targets for plans focused on individual coverage.

Furthermore, payments made by Oscar to other health plans through the risk adjustment mechanism, a component of the Affordable Care Act, also contributed to the financial strain.

Concerns Regarding Capital and Debt

The company’s decision to secure a $150 million loan in October 2020 raised further questions. This four-year loan was secured by company assets and carried a substantial interest rate of 12.75% annually, as Gottlieb pointed out.

This capital raise at unfavorable terms prompted speculation about the motivations behind the planned public offering. It was suggested that the IPO may be crucial for securing additional funding rather than capitalizing on market valuations.

Gottlieb questioned why Oscar was unable to secure further financing from Alphabet, despite receiving consistent capital infusions over several years without demonstrating a viable, sustainable business model.

The possibility that the public offering was primarily intended to repay the existing loan and maintain operational solvency was also considered.

Accumulated Losses and Long-Term Viability

Gottlieb emphasized the significant cumulative losses incurred by Oscar Health since its inception.

By the end of 2020, the company had amassed a total of $1,427,100,000 in losses since its founding in 2013.

Over six years of operation, Oscar has experienced an average loss of $106 per member each month.

Gottlieb asserts that the scale of these losses is unprecedented within the health insurance industry, particularly in the period following the implementation of the Affordable Care Act.

Evaluating the Venture-Backed Insurance Approach

The performance of both Oscar Health and Clover Medical, particularly following Clover’s SPAC deal, will serve as a critical evaluation of the venture capital sector’s confidence in its capacity to revolutionize established healthcare organizations.

These two companies were pioneers in a rapidly expanding field of new ventures aiming to redefine healthcare delivery within the United States. Accessible, quality healthcare represents a fundamental necessity, yet the existing U.S. system is demonstrably flawed and excessively costly.

Healthcare expenditures continue to rise, but improvements in health outcomes for a majority of Americans remain limited. The U.S. allocates a larger percentage of its GDP to healthcare than any other nation within the OECD, despite experiencing lower life expectancy and higher rates of suicide.

Furthermore, the nation contends with the highest prevalence of chronic diseases among OECD countries, coupled with fewer physician visits per capita. It is evident that systemic change is required.

However, questions persist regarding the viability of Oscar’s strategy within the current healthcare landscape. As noted by Gottlieb, “After seven years, as they prepare for a potential public offering, the available data indicates a certain transparency. Oscar has indeed established a novel type of health insurer – one characterized by substantial and ongoing operational deficits, coupled with fluctuating membership numbers, all while securing extraordinary levels of investment funding.”

Oscar and Clover represent a significant investment in a broken system.

Challenges Facing Disruptive Insurers

The core challenge lies in balancing innovation with financial sustainability. Many venture-backed insurers focused on technology and user experience, but struggled to control costs effectively.

Membership growth has been inconsistent for these companies, hindering their ability to achieve economies of scale. This makes it difficult to negotiate favorable rates with providers and manage administrative expenses.

The influx of investor capital, while initially beneficial, cannot indefinitely offset operational losses. Ultimately, these companies must demonstrate a path to profitability to maintain investor confidence.

Implications for the Venture Capital Industry

The outcomes for Oscar and Clover will have broader implications for venture capital investment in healthcare. A failure to achieve sustainable growth could lead to a reassessment of the risk-reward profile of this sector.

Investors may become more cautious about funding companies that prioritize growth over profitability. A greater emphasis could be placed on business models that demonstrate a clear path to financial viability.

The success or failure of these ventures will shape the future of healthcare innovation and the role of venture capital in driving that innovation.