Oscar Health, Inc.

Moat: 1/5

Understandability: 4/5

Balance Sheet Health: 2/5

Oscar Health, Inc. is a tech-enabled health insurance company focused on providing individual and small group plans, leveraging technology and data to improve healthcare access and affordability.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Oscar Health, Inc. aims to be a leading healthcare platform by offering technology-driven, affordable health insurance with a focus on a personalized member experience.

Business Overview

Oscar Health, Inc. (OSCR) operates as a technology-enabled health insurance company that aims to disrupt the traditional insurance market through innovative technology and a consumer-centric approach. Their core business revolves around offering health insurance plans directly to individuals and small groups, leveraging a digital platform that allows for seamless enrollment, claims processing, and a generally more convenient user experience. Their key strategies include building a direct-to-consumer approach and utilizing data analytics to understand member needs, ultimately with the goal of reducing health care costs and delivering better health outcomes. However, Oscar is still a young company with no current profits that is facing strong competition from more established competitors.

Revenue Streams

Oscar Health’s revenue is primarily driven by insurance premiums collected from members under the Affordable Care Act (ACA) and other plans, in most cases, it is received directly from CMS as part of the ACA government subsidies and from the members.

  • Direct premiums: Premiums collected directly from members via the Marketplace (healthcare.gov or state exchanges) and direct partnerships are the largest source of income.
  • Risk adjustment revenue: These are premiums earned based on the ACA’s risk adjustment program, where the company is paid more if it enrolls higher risk members. They are also a form of revenue that fluctuates a lot since it’s hard to predict.
  • Ceded Premiums: This revenue includes any reinsurance ceded by Oscar to insurance partners. This is a revenue stream that the Company uses to off-load risk from its own insurance plans.

Several trends are evident in the health insurance industry that shape Oscar’s business model:

  • Shift to consumer-centric care: there’s a growing preference for more personalized and accessible healthcare services.
  • Increased adoption of technology: digital tools and platforms to manage health insurance are becoming more widespread.
  • Emphasis on value-based care: Health insurance companies have moved into focusing on improving patient outcomes and reducing unnecessary costs.
  • Marketplace volatility: With major changes in regulations, especially concerning the ACA, the competitive landscape and market stability is harder to manage and predict.
  • Consolidation and Partnerships: There has been an increasing trend to consolidation and partnering within the insurance and healthcare industries.

Competitive Landscape

Oscar Health operates in a highly competitive market that includes many different competitors. This landscape features:

  • Established national health insurers: giants like UnitedHealth, Anthem, and CVS Aetna that have well-established operations, substantial market shares, and brand recognition.
  • Local and regional health plans: Local players who compete on a smaller scale but have better relationships with local provider networks and communities.
  • Technology-enabled startups: New companies utilizing technology to disrupt and improve the delivery of healthcare are appearing at all times, often competing on efficiency and innovation.
  • Government entities: Government programs like Medicare and Medicaid, and agencies that make rules regarding the pricing, eligibility, and other areas regarding insurance.

Competitors range from established giants to new startups, and therefore Oscar has to compete on all fronts to make significant headway.

What Makes Oscar Different

Oscar Health distinguishes itself in the insurance market with a differentiated strategy built around:

  • Technology and Digital Experience: It’s focus is on a tech-based healthcare platform offering members an easier and better overall experience. This includes convenient enrollment processes, streamlined claims systems, and easy to use digital channels for customer service.
  • Data-Driven Insights: Data analytics is a huge part of the business model, with the goal of improving healthcare decisions, optimizing healthcare costs, and creating personalized programs.
  • Focus on Individual and Small Group Plans: The target market is focused directly towards individual members and small businesses with an approach tailored for their needs.
  • Customer-Centricity: Oscar invests on providing great experiences for its members, and does not only have a simple relationship based on transactions.

Financial Analysis

Oscar Health has faced many difficulties to get its financials right after its creation. Their revenues are dependent on healthcare policies, and the changing market conditions have made it challenging to achieve consistent profitability, along with the high costs of establishing a tech infrastructure and a national healthcare network.

Revenue

Oscar Health’s revenues are almost entirely from premium revenues. This means that the company has not been able to diversify its sources of income, making them vulnerable to changes in regulations and market dynamics. Moreover, it doesn’t really take any profits from other business activities, which reduces its overall revenue potential. Over the past couple of years, revenues have grown but have not been consistent due to various factors.

Operating Margins

For a healthcare company, operating expenses are important to watch closely. They include direct medical costs for patient treatment, administrative fees, sales and marketing costs, and R&D expenses. In recent periods, Oscar Health’s expenses are larger than its premium revenue. They have been consistently struggling with large operating losses, since they have yet to achieve a scale large enough to achieve profitability. The primary reason is high claim losses and high administrative expenses.

Net income

Oscar Health has seen consistently negative net income, reflecting a recurring difficulty to bring in enough revenues to surpass its costs. Its ability to become profitable is highly dependent on its ability to manage expenses while also growing at a high rate.

Cash Flows

Oscar’s cash flows are generally negative, with high operating costs and investments offsetting positive revenue generation. Therefore, the company has had to tap into its financing activities, mainly debt and equity financing, to continue operations. Moreover, there are large amounts of cash that are used to support new ventures that may or may not be as successful.

Balance Sheet Health: 2 / 5

Oscar has major long-term debt, low cash to liabilities ratio, and recurring operating losses. These all point to an unhealthy balance sheet. Their assets mostly consist of goodwill and other intangibles, along with some cash and short-term investments, which are prone to changes in valuation. They also heavily rely on goodwill and other intangible assets, which can be at risk of impairments.

  • Debt levels: The company has a high debt burden, which is not a desirable sign for an unprofitable company since this means a larger portion of income goes to pay interest. In particular, their recent bond issuances also have relatively higher interest rate.
  • Cash and Liquidity: The company’s cash is somewhat adequate but not high enough to guarantee safety. If losses persist, they could face future liquidity challenges.
  • Equity: The company’s equity is mostly from share issuances, with limited profitability. Therefore they are reliant on market sentiment to raise capital. They have used a series of new offerings to raise capital that can further dilute shareholder value.
  • Assets: The assets are largely in the form of intangible assets and goodwill, along with some cash and short-term investments, making them more prone to impairment or volatility.

Moat Assessment

Oscar Health, Inc. has a moat rating of 1 out of 5. This rating indicates that the company lacks a strong competitive advantage, and it is more susceptible to competition and market fluctuations.

Here’s a more detailed breakdown:

  • Intangible Assets: While Oscar has built brand recognition through its tech and user experience, it lacks the high power that other healthcare players like United Health or Kaiser have. Moreover, they aren’t able to create true pricing power through its brand. It also doesn’t possess patents, or any other regulatory licensing to have a better edge against its competitors.
  • Switching Costs: While Oscar’s digital platform offers some convenience, the switching costs for consumers isn’t high. It is relatively easy to move to other healthcare plans, particularly since health insurance plans are heavily standardized by the ACA.
  • Network Effect: Oscar benefits very little from network effects. This is because healthcare plans do not really become better when they attract more members.
  • Cost Advantages: Although they use tech heavily, Oscar does not have any significant cost advantage that is difficult for other players to implement. Moreover, the company has some of the highest operating costs than its peers.
  • Size advantage: Oscar is a very small player in the market, and the company is smaller than pretty much all of its competitors.

Therefore, due to low switching costs, high market competition and a low level of differentiation, there are no apparent factors that can provide a moat.

Legitimate Risks to the Moat and Business Resilience

Several factors can weaken Oscar’s business resilience and erode its competitive advantages:

  • Competitive pressures: As a newer entrant in the healthcare industry, Oscar must continuously compete with already established players, all of whom have larger economies of scale and larger market shares. This has made it tough for Oscar to gain meaningful traction and to grow.
  • Regulatory changes: The healthcare industry, particularly in the U.S., is heavily regulated. In recent years, new regulations and changes to current rules can significantly impact Oscar’s financial model.
  • Technology disruption: In a heavily technology reliant business, it becomes important to maintain cutting edge technology, and not become outdated due to emerging technologies. Innovation and new technologies are vital, and failure to adopt them can quickly make the platform and brand irrelevant.
  • Market maturity: As the industry matures, the rate of new customer acquisition may decrease, which will affect the growth potential of the company. Since many companies are competing in the same markets, their is a risk of cannibalization.
  • Management and execution: As a startup with many losses, management has not been able to prove that they can turn the company into a profitable and scalable business. Their strategy is complex, and any missteps may lead to larger challenges to the business model.
  • Lack of profitability: Due to heavy losses and high operating expenses, Oscar’s long term viability is not guaranteed. Therefore if the company does not achieve profitability soon, its ability to survive may be hindered.
  • Reliance on financing: Due to persistent losses, Oscar is heavily dependent on new financing in the forms of debt and equity, which may be hard to obtain in the future, specially if results don’t improve.

Recent Concerns, Controversies, and Problems

Oscar Health has faced several controversies and problems, most of them related to the company’s high operating expenses and inability to turn a profit.

  • Losses and Market Reaction: In the most recent Q3 2023 earnings report and call, Oscar missed expectations, causing its share price to drop 10%. Analysts and investors are becoming more critical of the management’s performance and abilities to create long term value. Moreover, many wonder if the current management team is the right one to lead the company forward.
  • High Claims: Oscar is dealing with increased medical claims that are eating away into its profits.
  • Uncertainty about future profitability: There’s high uncertainty about future revenue generation, long-term profitability, and ability to manage expenses and claims.
  • Changes to Business Model: Several recent announcements have been made by management to change certain parts of the business model. This implies an underlying weakness in the way the business was originally structured.
  • Lack of competitive advantage: While the company has touted its technology-driven platform as a major strength, many are starting to note that they don’t offer a true competitive advantage since they can easily be replicated.

Understandability: 4 / 5

Oscar Health’s business model is relatively straightforward but can be complicated for people without an understanding of the health insurance industry. It combines technology with health insurance, which may make it difficult for some to clearly see what advantages it gives. While the basic idea behind the company is easy to understand, the complexities of insurance, the many regulations, and intricate details of government programs and subsidies can be difficult to grasp. The company’s financial statements and technicalities can prove a little bit more challenging to analyze for people not acquainted with them. For these reasons it is more of a 4 out of 5.

Conclusion

Oscar Health, while innovative in its approach to technology in healthcare, lacks a durable economic moat. It’s dependence on premium revenue and issues with profitability and high expenses makes it more of a speculative investment than a value one. While the business aims to disrupt healthcare, its profitability, management effectiveness, balance sheet structure, and competitive dynamics are a cause for concern for a long-term value investor.