Good morning. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to Oscar Health's Third Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. Please be advised that this call is being recorded. You will have the opportunity to ask questions during the Q&A session. [Operator Instructions]. I will now turn the conference over to Chris Potochar, Vice President of Treasury and Investor Relations.

Good morning, everyone. Thank you for joining us for our third quarter 2024 earnings call. Mark Bertolini, Oscar's Chief Executive Officer; and Scott Blackley, Oscar's Chief Financial Officer, will host this morning's call. This call can also 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 period ended June 30, 2024, filed with the Securities and Exchange Commission and other filings with the SEC, including our quarterly report on Form 10-Q for the quarterly period ended September 30, 2024, 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 third quarter earnings press release 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.

Good morning. Thank you, Chris, and thank you all for joining us. This morning, Oscar reported positive third quarter results. Our strong results were driven by above-market growth, disciplined execution and improved financial performance. Underlying our third quarter results, we reported revenue of $2.4 billion, a 68% increase year-over-year. Our medical loss ratio increased 80 basis points to 84.6% with overall utilization modestly favorable relative to our expectations. We achieved total company adjusted EBITDA of $312 million year-to-date, representing a $246 million increase year-over-year. In addition, we reported a year-to-date profit of $179 million, a $300 million improvement over the same period last year. Oscar is executing against our plan and driving profitable growth. We remain on track to deliver total company adjusted EBITDA profitability and also expect to achieve net income profitability this year. Our strong momentum sets a solid foundation for 2025 and positions us to achieve at least 20% revenue CAGR and 5% operating margin by 2027. Scott will review our third quarter results in a few moments. First, I will cover key business highlights. Oscar closed the first 9 months of 2024 with approximately 1.65 million members, a 68% increase year-over-year. We added more than 73,000 members in the quarter as SEP additions further decelerated. We continue to expect MLR performance of SEP members to be a tailwind in 2025 as we retain these members and engage them through our technology. Our technology is also further optimizing our operations as we grow. In the quarter, we prototyped an AI tool that extracts data to prevent fraud, waste and abuse. We also launched AI programs for Oscar providers to enhance member speed to care, including a clinical intake bot that gathers information for quicker diagnoses and a feature that pre-populates preventative screening recommendations based on medical history.…

Thank you, Mark, and good morning, everyone. Our third quarter and year-to-date results demonstrate consistent solid execution. We grew membership by 68% year-over-year and reported nearly $312 million of adjusted EBITDA and approximately $179 million of net income year-to-date. Total revenue increased 68% year-over-year to $2.4 billion in the third quarter, driven by higher membership and year-over-year rate increases. We ended the quarter with approximately 1.65 million members, a strong increase of 68% year-over-year. Membership growth was driven by above-market growth during 2024 open enrollment, strong retention and SEP member additions. Consistent with our expectations, SEP member additions decelerated in the third quarter. Turning to medical costs. The third quarter medical loss ratio increased by 80 basis points year-over-year to 84.6%, primarily driven by higher SEP membership and a late summer COVID uptick, which were partially offset by favorable prior period development. Overall utilization trends were modestly favorable relative to our expectations. As we have previously stated, SEP members added in the second half of the year carry an in-year MLR headwind, primarily due to partial year risk adjustment dynamics and the short window for utilization and risk warning to occur. We continue to expect that the strong growth in SEP membership will be a tailwind to next year. Switching to administrative costs. The third quarter SG&A expense ratio improved by approximately 360 basis points year-over-year to 19%, driven by higher fixed cost leverage and variable cost efficiencies. Our third quarter adjusted EBITDA loss of approximately $12 million improved by $9 million year-over-year. Our strong operating results to date position us well to deliver on our total company adjusted EBITDA profitability target this year. Shifting to the balance sheet. Our capital position remains very strong. We ended the third quarter with approximately $3.7 billion of cash and investments, including $260…

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And your first question comes from the line of Stephen Baxter with Wells Fargo. Your line is now open.

Hi, thanks. Good morning. I was hoping you could expand a little bit on your competitive positioning for 2025. I appreciate, you said 6% rate increase in the market at 7%. It does seem like there's a bit of a barbell out there. You have certain players that are pricing closer to flat, maybe due to minimum MLR requirements or something to that nature and then also some larger players that seem like they're essentially restructuring their book. I'd love if you could characterize how the competitive environment looks now versus how you might have thought it looked, call it, 3 or 6 months ago.

Thanks, Stephen. I would point out first that our average rate increase is about 6% versus the market at 7% and we think that the market is largely rational and stable from a pricing standpoint. Again, I would remind people that you have to think about where your pricing is versus you were in prior years. It's a series of time series that you have to watch. And so, we believe everybody is in a good place. There are always a few players in a few markets who chase after share. We don't think that's sustainable. And we believe that the market is going to be a pretty stable market this year. We're confident of that.

Okay, got it. And just to expand a little bit on the SEP pressure. I appreciate the commentary that the additions decelerated during the quarter. But I guess just to understand why there's more pressure than you might have thought before. Are there still more lives in aggregate than you expected? Are there costs higher than you expected? Or is the risk adjustment impact worse than you thought for some reason? Just trying to understand that piece of it a little better, too. And if you're willing to size the drag from SEP inside your EBITDA guidance, obviously, I'd appreciate that level of insight, too.

Yes. Good morning, Steve, so with respect to SEP, obviously, we increased our top line revenue guidance, which is reflective of the fact that we've had more SEP additions than what we had anticipated at the beginning of the year and even through the third quarter. The performance of the SEP members has been right on track with what we would expect. Utilization has been on track with our expectations to slightly favorable. So, the story, I think, for the quarter is performance, underwriting performance of the book is strong and what we would have anticipated. And the story is just we've got more of these members than we had initially expected. You're seeing that both in the top line as well as in the bottom line performance of the company. And we do anticipate that the growth that we've seen is slowing and will slow into the fourth quarter. We've seen that deceleration already occur. And do you want to repeat the second part of your question on adjusted EBITDA? We'll come back to that one, I guess, later in the call.

Your next question comes from the line of John Ransom with Raymond James. Your line is now open.

Hi, good morning. So, my first question before the follow-up. I mean, going back to your Analyst Day, I mean, you provided a road map to 20% CAGR to 2027. Now that the revenue base is higher, should we think about that 20% CAGR coming off the higher revenue base? Or is there some adjustment that would kind of put that '27 number right where you started?

Yes. Good morning. Yes. Look, I think that the long-term guidance, we're not going to make an update to that. I would say that we are encouraged by our performance year-to-date in terms of growth. I think that sets us up well to achieve 20% CAGR through '27. We'll give you some more information about '25 when we do the fourth quarter call this year. But I think that we won't be making any updates to the long-term guidance at this time.

Great. And then my second question is, if we just think about '24, should we apply the higher, you talked about like a 90% MLR for SEP members, should we attach that to, say, the revenue upside? Or is there more revenue that you're generating this year where your MLR would expect to lift into '25?

I think that if you kind of de-average the MLR and look at our full year guidance, we do have SEP pressure that's probably outsized compared to what we would anticipate in the future given the amount of Medicaid redetermination that's coming in. So, all things equal, the performance of the core book has been very much consistent with our expectations this year. So, I would anticipate that absent SEP, you would have seen a lower MLR in the range of a little over 1 point for the full year.

Okay, thank you.

Your next question comes from the line of Jessica Tassan with Piper Sandler. Your line is now open.

Hi. Thank you, guys, for taking the question. I guess I would start with just the guide looks like it implies either medical claims expense is flat PMPM quarter-over-quarter or that risk adjustment payable shrinks quarter-over-quarter. I guess, can you just help us understand why either of those two things might occur, especially if the third quarter claims expense included some favorable prior period development, which wouldn't repeat in the fourth quarter?

Yes. I appreciate that question. And looking at the implied fourth quarter MLR, I would just make a couple of points. One, I called out some of the drivers in the third quarter, specifically COVID, which really was a third quarter phenomenon. We saw that spike and then conclude before the end of the third quarter. So, that won't continue. We expect SEP additions will be considerably lower in the fourth quarter, so we won't have that additional pressure. And then we have some payment integrity initiatives that we've been executing throughout the year, but are particularly picking up into the fourth quarter. So, all those things we would anticipate will result in a flatter growth in the fourth quarter versus kind of what we've seen historically and are the guidepost for the guidance that we put out.

Got it. And then just can you maybe help us understand how your risk adjustment practice has kind of evolved over the last two years? And, yes, how the risk adjustment kind of process and also forecasting or just accounting has changed over the last two years to make it more accurate and higher fidelity to the ultimate reconciliation?

Yes. I think on risk adjustment, this is an area where we do have a lot of history and strong modeling practices. Risk adjustment is always the most complicated estimate to make in our financial statements because we have to predict both our own risk score as well as the risk score of the market and do that calculation every quarter on a cumulative basis. We do get the weekly information. That helps us a lot with our relative position to the market. But we use that as an input to our modeling. And I would say that we've had a very consistent methodology for risk adjustment that has served us well. We've been fortunate to have very stable estimates with respect to risk adjustment, but I always want to caution. It is the most challenging estimate that we have to make, and there is a high level of inherent volatility, but we do have strong practices, consistent practices that we've been following for several years.

Your next question comes from the line of Joshua Raskin with Nephron Research. Your line is now open.

Hi, thanks. First one, I guess I have to ask because it's so top of mind. But at the Investor Day, you laid out that path to $2.25 in EPS and you included the assumption that the extended subsidies would indeed sunset. Has there been any change in your thinking around that assumption or maybe any change in the estimated impact or no changes to the $2.25?

We haven't made any changes to '25, Josh, but let me add a few points around it. We believe that both parties have an incentive to ensure that the program continues. We're currently at historic low in the U.S. of below 8% of uninsured. Going the other way would only confound the inflationary impacts that the current race focused around and resulted in the former President Trump being re-elected President. And so, we believe that they have as much, the Republicans have as much an interest in figuring out subsidies. Now, will it be exactly the same as they are now? Probably not. There may be a change at the top end. There may be shifts within the bands. But when you think about what's required in that 63% of our membership in the ACA comes from red states and red states for them that we know of are already standing up their own state-based exchanges that, a, this is a product that's here to stay; and b, there is every intention to make sure that we don't create an inflationary pressure as a result of pulling back subsidies and pushing people out of health care and into uncompensated care or even worse, having them pull out of pocket and increase their burden at home and being able to afford food, gasoline and entertainment.

Yes, that all makes sense. But I guess you're assuming the $2.25 million assumes a sunset, if something were to change favorably, I guess, you'd revisit that number. So, I guess that definitely helpful.

Definitely.

And then the second question, just around new product development. You guys have had a couple of interesting releases. I'm specifically interested in that guided care HMO product, how that works. Are those members expected to be more or less subsidized? And then perhaps any updates on ICRA and if you guys have any membership estimates for 2025 as well?

So, I would start on the product sets. We believe that our rolling out of new products, particularly the HMO product and the HMO product focus was on how do we make it different than HMOs in the past? And it was about around building, using our digital technology to create frictionless care in the eyes of the member, which means we must facilitate the provider getting things like referrals and authorizations through digital means so that there isn't this laborious process of review, rejections, denials and approvals. So, we've taken a hard look at how the product has worked in the past, a hard look at our own population, and we believe that this frictionless HMO product will be a real opportunity. We're launching it in a couple of markets this year. It is our intention to use that to get back into California. We need some more work on the California side before we can present it to the regulators there. But the HMO product, we believe, is in a really good place. On ICRA, we have 3,700 members as of now with open enrollment going on as we speak in a number of markets. So, we won't get ahead of ourselves in predicting. But I will remind you that our overall 3-year plan had pretty low membership from the standpoint of the total revenue of the company in the plan. So, we're not relying on ICRA for growth we view or to hit our numbers. We're looking at ICRA as an opportunity that could be a tipping point that could even drive our numbers higher.

Perfect. Thanks.

The next question comes from the line of Michael Ha with Baird. Your line is now open.

Hi, thank you. So one of your peers recently mentioned their expectation of industry market growth of mid-single digits. They mentioned CMS' implementation of that agent of record loss policy sort of impacted their view on industry growth. Also, one of your larger hospitals also mentioned 8% to 10% growth assumption. So, given that all these expectations are different than your 15% growth assumption for next year, I was wondering if you could discuss your view on 15% growth next year. Is that still your view? How do you reconcile the difference between you and your peers?

So, we continue to expect overall ACA market to grow by double digits and open enrollment '25. So, that's year-over-year. And we believe that's driven by continued Medicaid redeterminations and enhanced subsidies. We believe the 15% may now be at the high end of the range given what CMS has done regarding strengthening the program integrity efforts. So, it will have some downward pressure, but we still believe that we'll see double-digit growth in the ACA market overall. And again, we are launching the new markets. We picked up 700,000 new TAM now to a total of $11 million for all of our markets that we are now open and running for in open enrollment. And again, it's obviously too early to talk about what open enrollment growth will be, but we see that as an added opportunity for us to hit the 20% CAGR year-over-year going forward.

Michael, just to add two quick things. Because this comparison is to open enrollment, you have to consider the fact that we've already seen substantial growth for Medicaid redetermination. And just the growth for Medicaid redetermination, I think, gets you to mid-single digits based on information that CMS has put out. And then on top of that, you've got the fundamentals that are underlying the growth in the market that cannot be explained just by Medicaid redetermination. And we're seeing those factors happening throughout the year. We would expect those to continue. And that's really the impact of the enhanced subsidy, strong distribution that's in place as well as a growing gig economy that's bringing new lives into this marketplace. So, we think all of those things are going to be a continued tailwind through open enrollment.

Great. Thank you very much. And at Investor Day, when you laid out your SG&A 16% target for '27, I believe, your SG&A assumption for this year is over 100 bps higher at the midpoint than where it is now expected to finish the year. So, just given the pace of operating cost leverage you're experiencing, could you talk about your updated thoughts on SG&A? Are you now tracking much better than, 30-70 in your fixed variable split? Could you talk about the opportunity to outperform 16% by '27? And just given the nature of broker commissions, would it be reasonable to say sort of the very low point on end-state mature G&A profile would be somewhere in the low teens?

Yes, Michael, I'll start off, and I'll turn it over to Scott. As we look at our underlying operating costs, it's a key lever that we need to continue to pull to provide an affordable product. And as we look at the next administration, we view that opportunity as creating freedom of choice, affordability and product variation that allows people to have the plan that they believe they want. And we believe that's consistent with the aims of the incoming administration. So, an important part of it. As we look at our SG&A point in time now, we have always more room to grow. And for that kind of color, I'll turn it over to Scott.

Yes. The improvement in the SG&A ratio that we've seen this year is roughly half of that is coming from fixed cost leverage and half of that is coming from variable cost efficiencies, which I think are the fact that we're able to actually drive improvements in both dynamics there really speak well to the opportunities for us going forward. Fixed cost leverage, obviously, is a critical part of our arriving at kind of our long-term destination on SG&A ratio. And Michael, you said that given kind of the fact that you've got broker expenses, you've got taxes and fees that really represent a very large share of total SG&A, you're probably in the right ZIP code in terms of low to mid-teens of the best efficiency could be. I think that's a reasonable estimate. But we've still got significant opportunities to gain fixed cost leverage, but we also are excited about our opportunities to drive down variable costs. And a lot of the AI initiatives and other initiatives that we're running in-house really speak to making our operating processes more efficient and more scalable. So, we think that we're just on the front end of being able to drive continued leverage and performance on the expense side.

And one more point, in '25, the administration has lowered the exchange fees as well, which has been an enhancement going into the year.

Your next question comes from the line of Adam Ron with Bank of America. Your line is now open.

Hi, thanks for the question. If we try to think about the jumping off point for MLR next year, can you help us size the favorable development this year that won't recur? And aside from that, should we assume that the point of SEP MLR that you mentioned that was dragging this year should come back? Or does that take a couple of years?

Yes. I think that when you think about the MLR from the perspective in the quarter, we had favorable PPD, we had COVID, we had SEP. COVID was roughly 90 basis points on a year-over-year basis in the third quarter. The impact of SEP was more pronounced than the favorable impact of prior period development. So, when I look at the quarter, we were at 84.6% on MLR, probably neutralizing those 3 effects that I just talked about, you're somewhere in the low 83% range in terms of run rate on MLR. And as I think about the go-forward impact of MLR, if we're in the mid-81s for the year given our price position, total cost of care, we think there's opportunity to continue to optimize on MLR. Obviously, there's what you build into pricing and what you allow to fall to the bottom line, those things always will impact the overall trajectory of MLR. But looking at where our MLR this year is, given some of the dynamics I just talked about in terms of SEP pressure and the like, we think that we've got a good chance to continue to improve that going forward.

And then to your point about pricing for next year, I think at your Investor Day, you said you thought that long term or at least over the next few years, the trend on the exchanges will be 3% to 5%. I think if I heard you correctly, you priced above that for next year. So, curious what's driving that and what's built into that view?

Yes. That absolutely is what we said. And I would say that pricing is a market-by-market phenomenon. And so, in some markets, we took above 6%, 6% is the average. We think that our pricing allows us to drive margin improvement and also to be competitive. So, those are the 2 things that you're always looking for. But again, that's an average. In some markets, we have significantly higher price increases and others lower, averaging out to about 6%.

There are no further questions, and that concludes today's conference call. Thank you all for joining. You may now disconnect.