Good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to Oscar Health's 2023 Second Quarter Earnings Conference Call. [Operator Instructions]. Thank you. I will now turn the conference over to Cornelia Miller, Vice President of Corporate Development and Investor Relations.

Thank you, and good evening, everyone. Thank you for joining us for our second quarter 2023 earnings call, where we'll discuss our strong first half results, disciplined execution and path to profitability. Mark Bertolini, Oscar's Chief Executive Officer; and Sid Sankaran, Oscar's Chief Financial Officer, will host this evening's call. This call can be accessed through our Investor Relations website at ir.hioscar.com. Full details of our results and additional management commentary are available in our earnings release, which can be found on our Investor Relations website at ir.hioscar.com. Any remarks that Oscar makes about the future constitute forward-looking statements within the meaning of safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our quarterly report on Form 10-Q for the quarterly period ended March 31, 2023, filed with the SEC and other filings with the SEC, including our quarterly report on Form 10-Q for the quarterly period ended June 30, 2023, to be filed with the SEC. Such forward-looking statements are based on current expectations as of today. Oscar anticipates that subsequent events and developments may cause estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in the second quarter 2023 press release, which is available on the company's Investor Relations website at ir.hioscar.com. With that, I would like to turn the call over to our CEO, Mark Bertolini.

Thank you, Cornelia. Good evening, everyone. I have been at Oscar just over 4 months now, and have spent my time continuing my deep dives across the business. I am feeling even more optimistic now than when I joined the company in April. I will discuss my key learnings in a few moments, but let me begin by providing an overview of our second quarter performance. We had a strong quarter, and our results demonstrate that we are executing on our path to profitability. All of our key metrics are performing in line or favorable to plan at this point in the year, and our NPS increased to a record high of 57% this quarter. Our medical loss ratio improved 230 basis points year-over-year to 79.9%, driven by our disciplined pricing strategy and total cost of care initiatives. We reached total company profitability for the second consecutive quarter with an adjusted EBITDA of $36 million and with a first half adjusted EBITDA of $87 million, increasing our confidence in our total company adjusted EBITDA target for next year. We continue to view insurance company profitability this year and total company profitability next year as important milestones for us. And we are very encouraged by our results to date. Sid will walk us through a more detailed review of our financial metrics later in this call. As we look to next year, we plan to maintain a disciplined pricing strategy that we believe appropriately targets both growth and margin expansion. Our growth strategy for 2024 focuses on leveraging the breadth of our deep provider partnerships to expand into more rural areas. We are planning to increase our service area footprint in more than half of our current states, which would meaningfully increase our overall TAM next year. On the margin side,…

Thanks, Mark, and good evening, everyone. As Mark noted, our second quarter results show the business is performing in line to favorable with our expectations and that we are executing well against our plan. We ended the quarter with just under 1 million members, which was consistent with our pricing and churn assumptions. On the volume side, membership has been slightly ahead of plan. While we have had limited SEP growth this year relative to prior periods, this has been largely offset by Medicaid redeterminations. At this point, Medicaid redeterminations have resumed in all of our states. Early data indicates that the emerging Medicaid redeterminations are healthier than expected and are not exhibiting any anti-selection patterns. I'd also note that we are now eligible to enroll new members in Florida again. As I noted last quarter, our portfolio strategy purposely and successfully shifted our member mix closer towards the market average. We now have a higher proportion of renewals than any time in our recent history, which has resulted in an older membership that looks very similar to the overall ACA population. Shifting our mix has been part of a deliberate strategy, which has resulted in a lower projected risk transfer as a percent of premiums this year. Our direct and assumed policy premiums were $1.6 billion in the quarter, a modest 3% decrease year-over-year driven by membership and partially offset by rate increases. Similar to trends we saw last quarter, our premiums before [indiscernible] insurance, which includes the impact of our lower risk transfer, grew 8% year-on-year to $1.5 billion. Turning to medical costs. Our medical loss ratio improved 230 basis points year-on-year to 79.9% due to our disciplined pricing actions and total cost of care initiatives. Our overall claims trends have been in line to slightly favorable relative…

Thanks, Sid. In summary, we've had a strong first half of 2023. Our results show that our discipline, focus and execution are delivering meaningful impact across our business. We are on track with all of our key metrics and expect to achieve insurance company profitability this year and total company adjusted EBITDA profitability in 2024. As we look to the remainder of 2023, we see more tailwinds than headwinds, which we believe positions us well for 2024. We believe that the individual market is the future, and that our experience, consumer-focused approach, technology and capabilities will enable us to continue thriving amidst its dynamic environment. I would like to thank the Oscar employees for their continued dedication and focus. They are the reason why we continue to be in a position to serve our members and make health care more affordable, convenient and accessible for people across the country. With that, I'd like to turn the call over to our operator for the Q&A portion of the call.

[Operator Instructions]. Your first question comes from the line of Stephen Baxter from Wells Fargo.

Just to make sure we have this right. I heard the commentary on the risk adjustment. 2022 came in favorable, but you didn't take much of it through to MLR EBITDA. If you could maybe help us with the impact on either line, just how that translated through the P&L, that would be great. And then just to confirm the approach on 2023, it sounds like the initial read you're getting from weekly is favorable relative to your initial assumptions, but that hasn't yet been reflected in either your results this quarter or the revised full year guidance that you provided because you're taking a bit of a wait-and-see approach on that. Could you just confirm those couple of things would be very helpful for us.

Steve, it's Sid here. Thanks for the questions. First, on 2022, effectively on 2022, we did see favorability in our final RA submission. That was offset somewhat by an accrual that we put up for RADV. And I would articulate our position as being cautious around margin with respect to 2022 claims. So we did top up the IBNR somewhat. As you look to 2023, while it's early, I would say the initial weekly submission was more favorable than we had anticipated at this point in the year. And we did highlight that we do expect lower risk transfer in 2023. So we did have some partial favorability flow through into the P&L this quarter, but I would say, relative to the initial weekly report, it was a small amount of favorability. And we'll follow our process over the course of the year. And as the data emerges and we get more confidence in the data, we'll revisit that accrual in the coming quarters.

Your next question comes from the line of Jonathan Young from Credit Suisse.

I just want to go to Florida. Your enrollment cap was recently moved. So how are you thinking about any benefit as members are redetermined in the back half of the year there? And just in the market generally? And then separately, I believe there was a restriction on extracting capital from the floor bats part of the agreement. Just curious how this changes your approach to the market given so much of the capital was in Florida.

Well, I think vis-a-vis new -- it's Sid here. Thank you, Jonathan. I think vis-a-vis new members will be eligible to enroll new members and we expect that, that will occur as kind of standard business as usual as we return to the exchange. And those members, I think we previously talked about the profitability dynamics of SEP members. So nothing different there. Vis-a-vis our return to the Florida market, I would just call out probably one thing. The terms of our agreement are effectively consistent with our agreement when we entered the state with respect to the regulators. So we always have targeted having constructive and proactive relationships with our regulators. We expect that to continue, and we're very grateful for everyone's support as we've entered Florida and are excited to yet again have another successful open enrollment.

Okay. Great. And I think you mentioned that you see some increased benefits on the PBM side. Just curious what else you see on the PBM side beyond the initial contracting that you conducted?

Yes. No, Sid here again. Nothing much I would add to that. I think, obviously, we've had a successful renegotiation to a PBM contract. I think you heard from Mark in prior calls that, that process will -- was reevaluated with respect to contract in 2023 and that we would anticipate that, that benefit will continue to accelerate in 2024. So nothing new to add there.

And we'll continue -- this is Mark. We'll continue to look at the [indiscernible] list and pricing quarter-to-quarter as we talk with our vendor.

Your next question comes from the line of Michael Ha from Morgan Stanley.

As we look to next year and your ability to hit enterprise profitability, just given your optimism around membership growth next year, if you do achieve very strong membership growth, I'm curious, is there a level of growth next year that you believe could potentially place some pressure on your ability to achieve profitability? Or do you believe you're in a strong enough position now at [indiscernible] scale, you can realize enough operating leverage regardless of the magnitude of growth next year? And then you also mentioned expanding your footprint in more than half of your space. As we think about the composition of that growth, does it matter where that growth ultimately comes from newer or older existing markets and your ability to hit profitability?

Michael, it's Sid here. I'd probably make 2 points in response to your question. First, your first question. I think I think it's important to just remind ourselves that Oscar really has been an execution story. And to quote Mark, we're very focused on increasing that internal capital generation. So as we grow and as evidenced really by our financial performance in the first half of the year, you see that on the MLR side, we've been pricing for margin expansion. And we have had a real strong focus on best performing markets and staying disciplined. So new membership and new membership growth is really positive operating leverage to our story. And so we don't really see growth as a constraint to achieving that profitability target. With respect to the second question, I think we've also commented about this. I think the vast bulk of our markets right now are really performing at target MLRs. And so we've highlighted that in the individual market with some of the exits that we've made, we're very confident in our current market performance. As you know, pricing has just been released and early, but obviously, we're pricing in line or above trends. And so based on the current portfolio of how the individual market is performing and again, just looking at the financial performance through the first half of the year, you're starting to see that definitively in the P&L. We feel good about both the expansion into new markets and how current markets are performing. So no real flags there.

Great. And if I could just ask one follow-up question about, I guess, the bridge to membership growth next year. If you were to bridge it, which bucket would you deem as being the most significant to achieving at least 20% premium revenue growth next year? Could it be the Florida enrollment cap removal, toggling broker commission back up or your 2024 rate strategy? Any color there would be great.

We're looking to diversify this, Mark -- Michael. We're looking to diversify our revenue across more markets. So we have priced appropriately and -- and with margin in mind in certain markets where we believe we can accelerate our growth in other markets. Florida will grow, but it won't grow at the kind of rates that supported us since 2022, which allows us, from an operating leverage standpoint, to be a much more efficient in this whole period than we were in 2022. So we don't see the kind of ramp that you would expect with growth in the latter quarter of the year and then rolling into 2024.

Yes. And I would just highlight a couple of things. I think you heard in Mark's prepared remarks that our NPS was at an all-time high this quarter. I mean we really do not see any of our other competitors bringing to bear the customer experience or innovation that Oscar does. And so we're very pleased with how NPS has landed so far and expect to continue to invest in the member experience.

And we'll be using Campaign Builder as a tool and reenrollment. And growth in this fall enrollment, as we begin to address directly to our members on the opportunities they have here at Oster.

Your next question comes from the line of Gary Taylor from Cowen.

Just had a couple of questions. One, followed your commentary on the '22 and '23 risk adjustment. Payable accrual and the offset that you called out for RADV accrual and IBNR. Question was, why are the claims payable on the balance sheet down about $100 million sequentially with -- including this IBNR boost? I mean, it just implies inventories are down pretty substantially sequentially.

We -- as I said in the first quarter call, we have worked very hard at making sure that we are efficient in collecting our risk-adjusted information, settlements with providers and our excess reinsurance coverage. We can't do that with claims in backlog. So we have worked the backlog down. And while we haven't pulled all the way that through the triangles, we believe that it's a huge opportunity for us to be more efficient and get as much internally generated capital as we can.

Yes. So Gary, just adding, it's Sid here, adding a little bit more color to that. We did, in particular this quarter, to Mark's point, as part of a deliberate operational strategy, have 3 effectively large settlements that we cleared out this quarter. And so one of the reasons you've seen our DCP be so high is as we have had a fair amount of bulk reserves up for those settlements. So as those work down, you should expect DCPs will come back a little bit more in line, which will probably higher than the market, but hopefully, our trend line brings the DCPs down.

Sooner or later, you run out of claims.

So we should still expect it to come down, and there's no P&L impact to that. It's a cash flow dynamic?

That's right because [indiscernible].

Got it. And then just one more for me. Since AI is obviously very topical this year, and Mark, you discussed it a little bit. Can you give us a little more -- maybe some examples on -- you talked about AI interventions. Are you talking about clinical interventions or flags with clinicians and providers? Or would these be more interventions with your beneficiaries? Like what are some of the examples you're talking about there?

Gary, can you hear me in this microphone now?

Yes. I was going to say Mark or Mario.

Two examples that I love the most, and I really will invite people to go to the website. We made the decision to open a bunch of our insights as we develop them and a bunch of our approaches to applying AI. Two examples, I like the most. One of them is having -- when we get claims traces out of our claims system or a new system, which played a role also in making sure we can work with claims backlog down this much, we get these explanations of the claim system for how we did the claim. They're still very complicated to look at and difficult to parse. So one, we have a language model now that can take those kind of system outputs and explain in much more natural language, much more intuitively, why a claim got paid or didn't get paid. And that is now being used by the internal claims folks just get a quicker insight as to what the system is in a particular situation, but we're pushing this over time also towards providers to provide a web application that Oscar has towards members and so on. That's a very nifty example because it relies on smart claim system that needs to be there to begin with. And then on top of that, can -- a language model can make an additional impact. The other one is also in the claims system. It's the configuration provider contracts. When we get a provider contract, it's a 100-page contract or so with a hospital system. They're complicated. They have some text in there. It turns out we can put that into a language model. The model can then, in a very nice way, parse what's in there and kind of prefill for an internal contract in person, what the configuration of our system looks like. And we built those configuration tools also over the past 2 or 3 years or so. Now fueling them with these language models is very powerful. And Mark has articulated that we have big plans around +Oscar modularization of that further and further. This kind of single-sided system that we built there is very powerful. And I think we're excited about bringing that to more and more organizations on the Oscar as well, and they can now also benefit from these AI developments we have there. hioscar.com/ai, again, is the place to go to. There's a confluence page here or a notion page there, you can -- that we update all the time. You can look and see how that looks.

Okay. I'll take a look. It sounds like the nearest term opportunities are still heavily focused on the administrative side, I think as some others have talked about, if I am understanding...

Yes. So I should answer that part of your question as well. Yes, we have a couple of clinical use cases that are in the virtual primary care practice, for example, around some summarizing lab results, but they all have a human in the loop. There's a lot of work happening right now around AI governance and clinical use cases. We tend to be at the forefront of helping do that. And [indiscernible] spearheading that. But on the operations side, there's so much more that can be done that, I think, clinical use cases are incredibly interesting for us. We can take a bit more time on rolling those out very thoughtfully.

Your next question comes from the line of Josh Raskin from Nephron.

Just SG&A or I guess, just the G&A expenses. When you take out stock comp in the quarter, it looks like they were up about, I don't know, $8 million, $9 million sequentially. And I don't know if stock comp is in any of the other line items, so that may be messing it up. But I'm just curious if actual dollars were up and kind of what's driving that?

Yes. Josh, Mark. That is investments in the back end, things like fraud, waste and abuse and other services that we're paying for, that we're getting in our underlying claims results.

All right. And that -- is it fair to say more than reinvesting some of the savings that you guys have found in terms of dollars down significantly year-over-year?

Yes.

Okay. And then Mark, you made an interesting comment that, over time, I know it's a longer-term question, you look to diversify beyond your current offerings. And then just to pose that with the commentary you made around it's an individual market. Should we be thinking about larger offerings back into MA or other individual markets? I'm just curious more color on that.

There are 35 million people in the individual -- or in the insured -- remaining in the insured employer market and in individual and small group and middle market employers. We see, mixed with our benefit plan designs focused on comorbidities and stabilizing that population, an opportunity to move more ably towards defined contribution where employers are less fearful of the fact that the few cases, sick cases in their employee population will blow up a defined contribution pool. And so we can stabilize that part of the pool, then we're able to offer a more flexible benefit program to the remaining of the employers through ICRA and defined contribution. So that's one approach. We believe that's one where we have no fixed view of that market because we're not in it in a very significant way, where our competitors will be slower to move in approach in that marketplace. So that's a place we think we can excel at, in large part because of our platform and our ability to reach customers more effectively and create a great member experience. The other part is indeed Medicare Advantage. With the pressure on rates that will come from the federal government around risk adjustment, we believe we have nothing to lose. Others do, but we have an opportunity to power our health systems by taking a negative 3% Medicare margins and turning them to something positive, let's call it, 4% versus 8%, where they can have their book of business really flip the earnings profile of their Medicare business and have a huge advantage for their institutions. There's a lot of work that needs to be done there yet. We have to be able to fully externalize the platform, not just components. We need to have a system integration partner or partners. We're talking to a number of people that we will consider in that space so that we can do the right level of business process reengineering and partnership with these big health systems to get a new private label Medicare Advantage business.

Okay. Got you. So that's going to be a narrow network, MA, sort of the Oscar model, right, which will be high customer experience.

Yes, yes, yes.

Your next question comes from the line of Kevin Fischbeck from Bank of America.

Great. I wanted to go to the redetermination comment that you made earlier. I think you said that, that the risk pool is coming in a little bit better than you thought. I guess what had you been planning for as far as the risk pool? Did you think it would be equal to or worse than your current risk pool?

Yes. I think -- Kevin, it's Sid here. Previously, we said that we thought it would be slightly higher acuity. So while it's still early and it hasn't been a material part of our portfolio as yet, it's come in a little bit better than we've expected, but it's still early and we'll continue to watch it.

And I guess when you think about the visibility into that, I guess, because obviously, it's relatively new membership. I mean, do you feel like during past SEPs when the new members come on that you have relatively real-time information into that acuity? Or does it take a quarter or 2 before you can really get a sense for where that is?

Well, I think, Kevin, as you know, honestly, every time you get a new member, there's a lag in terms of risk scoring and of course, some of the key drivers of the boat-like pharmacy. But I think with respect to our data and systems, we have as good data and systems around the spaces as anybody in the industry. And so we feel we have a good line of sight into it.

And so when you think about how you price next year because, obviously, next year, the membership is going to be coming in more fully from redeterminations at least from a 9-month perspective, but probably don't remember as well. Did you also kind of assume that higher acuity into next year, so if it ends up staying in this acuity, is that a tailwind? Or is that something that's still TBD in your final bids?

Well, I think as you look to pricing, you'll always want to have discipline and caution. So until you've realized the experience, we wouldn't price it. So I think we still take a cautious view around those Medicaid redeterminations. And obviously, again, from a pricing perspective, as the experience comes in, we can revisit that over time.

And then maybe just going back to another question about kind of that breakout of the membership growth that you think you guys can do next year. How fast do you think the market is going to grow next year between determinations and everything else, like what the industry is going to be growing?

We have said before high teens for membership and low 20s for premium.

That's what you think the overall individual -- the exchange market will do? .

Yes.

Your next question comes from the line of Nathan Rich from Goldman Sachs.

Maybe just building up the last question. Could you maybe help put in context the geographic expansion? I know you said increasing your footprint in half your states. What's that kind of doing to the TAM that you can go after as we think about potential membership growth next year.

Yes, Nathan, it's Sid. Why don't I take that? I think first off, in the broader market, we don't yet know where final pricing and size will be in terms of our growth. But we think there's a material TAM increase from us -- for us. The biggest driver we've talked about is rural service areas where we have deep provider relationships and folks are excited to grow with us. I think at the same time, another unique driver we have is innovative product offerings, which Mark has talked about, and those enable us to tackle different segments of the marketplace. So ideally, for us, as we think about it, that's kind of double-digit TAM growth. But obviously, a lot depends on final pricing and where things land in different marketplaces.

Okay. Great. That's helpful. And then, Mark, you had mentioned bringing in new leadership for +Oscar. Any change in kind of priorities or opportunities for that business from your point of view?

The areas where we will focus with the new leadership is to accelerate our +Oscar development. Now that we are comfortable with our ability to deliver on profitability, although we won't lose that focus, we now want to start hardening the platform in ways that we can get external to the market sooner rather than we otherwise thought we could. We think bringing leadership on now, not from the standpoint of development and building out the platform, which Mario and his team have done very well so far and will continue to do, it's more about the commercialization and go-to-market side +Oscar and how do we address the market. The component-driven approach, which components will come next, but also how do we season the market in a way where we can approach a full platform with other actors in the health care ecosystem. The other question going on board is the person that will help us focus on long-term strategy and the cadence necessary to deliver on that strategy over time. And so I have a way of approaching strategy that we used at Aetna, a management process that supports it and a reward mechanism that incents it. And so we're building that out as we speak. And this person coming on board will be the person that will help drive on that side of the business.

There are no further questions at this time. This concludes today's conference call. You may now disconnect.