Good morning. My name is Kelvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Oscar Health Second Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Chris Potochar, Vice President of Treasury and Investor Relations. Please go ahead.

Good morning, everyone. Thank you for joining us for our second quarter 2025 earnings call. Mark Bertolini, Oscar Health'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 annual report on Form 10-K for the period ended December 31, 2024, and the quarterly report on Form 10-Q for the period ended March 31, 2025, each as 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, 2025, 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 earnings press release available on the company's Investor Relations website at ir.hioscar.com. We have not provided a quantitative reconciliation of estimated full year 2025 adjusted EBITDA as described on this call to GAAP net income because Oscar is unable, without making unreasonable efforts to calculate certain reconciling items with confidence. 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. Today, Oscar announced second quarter results, which are consistent with the preliminary results we released on July 22. We reported total revenue of $2.9 billion, a 29% increase year-over- year. MLR increased 12 points year-over-year to 91.1%, primarily driven by an overall increase in average market morbidity. Conversely, our SG&A ratio of 18.7% improved 90 basis points year-over-year. Overall, Oscar reported a loss from operations of $230 million, and the adjusted EBITDA loss was $199 million. In the first half of the year, earnings from operations were $66 million and adjusted EBITDA was $129 million. We are also reaffirming our updated 2025 guidance, including revenue of $12 billion to $12.2 billion and a loss from operations of $200 million to $300 million. Scott will walk through our financial updates in greater detail in a few moments. Now I want to share our view of what we are seeing in the individual market and why we believe the market will stabilize in 2026. We continue to believe in the long-term importance of the individual market for millions of consumers and employers. Let's start with recent market dynamics. The latest risk adjustment data from Wakeley, which includes claims data through April 30, indicates a meaningful market-wide increase in morbidity in 2025. This morbidity shift is impacting all carriers, increasing by mid- to high single digits across Oscar's markets. We attribute market morbidity increases to consumers entering the individual market for Medicaid redeterminations and healthier, low-utilizing consumers leaving the market in part due to program integrity efforts. Oscar is taking several actions to drive value and mitigate the impact of current industry-wide headwinds. We resubmitted 2026 rate filings in states covering nearly all current membership to reflect morbidity increases. Our engagement…

Thank you, Mark, and good morning, everyone. This morning, we reported our second quarter financial results and reaffirmed the updated outlook we provided a couple of weeks ago. There is a market-wide shift occurring in the ACA marketplace, shifting towards higher average market morbidity. While we are now projecting a loss for 2025, we are taking corrective actions to ensure we are well positioned to return to profitability next year. In the second quarter, total revenues increased 29% year-over-year to $2.9 billion, driven by higher membership. We ended the quarter with more than 2 million members, an increase of 28% year-over-year. Membership growth was driven by solid retention, above-market growth during open enrollment and continuing SEP member additions. The second quarter medical loss ratio was 91.1%, an increase of 12 points year-over-year. The second quarter MLR was impacted by an incremental $316 million increase to our risk adjustment payable for 2025, driven by higher ACA marketplace morbidity that increased by more than our prior estimates. We recognized the year-to-date impact of the risk adjustment change in the second quarter. Applying the revised risk transfer accrual consistently across the first half would have resulted in an MLR of 80.7% in the first quarter and 85.1% MLR in the second quarter. With regard to the final CMS risk report for 2024, it was approximately $23 million favorable to the accruals as of the first quarter of 2025. Turning now to utilization. Second quarter utilization moderated meaningfully as compared to the first quarter. We saw sequential softening in utilization each month in the second quarter. Inpatient utilization remained elevated compared to our expectations and was partially offset by continued favorability in pharmacy. Outpatient and professional were largely in line with our expectations. Switching to administrative costs. We continue to deliver improvement in the…

[Operator Instructions] Your first question comes from the line of Josh Raskin of Nephron Research.

Appreciate the comments, Scott, on the uses of cash. But can you provide some guidance on 2025 free cash flow, understanding the strength in the first half and then the outflows, I assume, in the second half? And then on the risk adjustment payable, I know there's a lot of moving parts there, but I think the total on the balance sheet is about $2.65 billion. I think 2024 balance was $1.65 billion. It sounds like there was a small change there. So maybe there's something around $1 billion for 2025. And then I guess my question would be, why would the payable as a percentage of revenues be lower in '25 relative to '24?

Yes. Well, Josh, let me start with your question about cash. So as we talked about in the prepared remarks, we feel like we've got a very strong capital position at this point, $5.4 billion of total cash and investments, $579 million in excess capital and $205 million of cash at the parent. The vast majority of the cash and investments are in our insurance subsidiaries, which more than covers the risk adjustment payable as well as our required capital, and that's where you end up with the excess capital. We think that the bulk of the remaining losses that we're forecasting for this year are going to be absorbed by that excess capital position. And so you saw that our excess capital decreased by about $300 million from last quarter, and that was the subsidiaries absorbing the losses in the second quarter. And with respect to parent cash then, I do think that parent cash will decline in the back half of the year, largely due to us making some additional capital contribution to the insurance subsidiaries where we don't have as much excess capital. But we feel confident that parent cash is going to be at levels that remain more than sufficient to cover the cost of the holding company and the things that we need. So we feel really good about where our capital position was going into this change in market morbidity and are confident that we've got the access to funding that we need to continue to run this company.

Okay. Okay. That's perfect. And then just if could follow-up. How should we be thinking about your previous long-term targets for 2027, specifically the 5% margin and the $2.25 of EPS?

Well, we're not changing our longer-term forecast at this moment, but 5% is still our target. We need to get through this pricing season, see how the membership is going to develop as we then look at '26, '27 and '28, we'll revise as necessary. But at this point in time, we're not changing our point of view.

And Josh, I'm just going to add that -- Josh, just to add that with respect to your questions about the risk adjustment payable. We're putting a table in the [Q] that shows you all the risk adjustment payables by year so that it's easier for you guys to navigate that. And I would just say in terms of the risk adjustment payables, the adjustment that we recorded, obviously, from the market morbidity is hitting the current year risk adjustment payable, and there's really nothing about the prior year risk adjustment payable that changed other than the true-up I spoke to.

Your next question comes from the line of Michael Ha of Baird.

So last year, when you set your '27 EPS target, $2.25, I saw a number of multiyear upside levers from the hundreds of basis points of opportunity on fraud, waste and abuse, the PBM renegotiation, provider contract renegotiations, upside from ICHRA that could drive considerable earnings upside well above $2.25. So with everything happening this year, the risk pool volatility, I was wondering if you could elaborate on what you view as multiyear earnings levers that may have been more longer dated that you may have had in your back pocket, but you could also pull forward and accelerate if needed? Like how large and tangible are these opportunities?

Mark here. We are continuing to accelerate wherever we can across the board, particularly around medical costs. So I would say that we still have opportunity, plenty of opportunity to do better. You saw the effects of our administrative cost reductions through AI. We're now deploying Agentic AI in the clinical space as we look at ways of directing people and helping people find the right care at the right time. And so all of those things are coming to play. And we still, Michael, believe we have a lot of opportunity, and we are pulling all levers as we can now to set up '26 and beyond as profitable years.

Got it. Just my follow-up question. Looking ahead to the back half of this year, your updated guide, I just wanted to hear your thoughts on, is there a chance that the risk pool could deteriorate further? Like any additional potential shoots that could drop? I guess, 4 things that come to my mind are, number one, FTR rechecks. I know you're fine, but I'd be concerned if the broader market needs attrition. Number two, at the end of the year, SEP, if that drives more growth, how that could affect profitability? Number three, the duplicative membership CMS identified. And number four, the preemptive utilization in the fourth quarter. Just wondering these 4 items and if there are any others that might factor into your updated '25 guide?

Yes. Thank you. So let me start with FTR. So on FTR, we've been telling you that we see little risk to us from that particular initiative. And just to double-click into that, we had an initial list of members who had failed to file and reconcile, which was around 27,000 members. And a portion of those members have already lost their subsidy. And we saw the remainder of those that had failed to reconcile lose their subsidies as of August 1. Importantly, though, 60% of that group actually did complete their file to reconcile process, which I think is compared to some concerns that, that might be a very significant portion of people that are unable to file and reconcile. So for us, and if that's indicative of what others may see in the market, we feel like that's pretty positive news. On dual eligibles in terms of Medicaid and ACA, what we've heard from CMS is that for us, that's approximately 2.5% of our membership or just under 50,000 members. We don't know exactly yet which way those members are going to go, whether they're going to land in the ACA or Medicaid. But our understanding from the FAQs is that the member will have to take affirmative action in order to retain their ACA premium tax credit. So on balance, I think that would suggest that we would see more of those members tending to go back into Medicaid and away from the ACA. We've also heard from CMS that the 2.5% that we've seen in our book is consistent for the market. And so I think that they gave a press release previously that I think was based on '24 information, looks like the '25 information is less significant in terms of those dual enrollments. And so we think this is a smaller exposure than maybe some have feared in terms of its exposure to losing that membership. And frankly, when we look at the utilization patterns of those individuals, they are higher on average than our book. And so there could be a little bit of benefit to morbidity if everyone in the market has seen similar patterns and those folks move from our books back into Medicaid. And with respect to the other things that you listed out, look, I think that SEP is moderating into the back half. We do have a fourth quarter increase in utilization. We think that, that's possible, but we're -- we've pulled some levers that we think will offset the effects of that in our guidance. And so overall, we feel very good about that we've factored all those risks into our pricing for '26 and feel like we're on the path to return to profitability next year.

Your next question comes from the line of Jessica Tassan of Piper Sandler.

So I guess maybe first, can you just help us understand kind of the assumptions around returning to -- first of all, assumptions around market stabilization in '26, around returning to profitability in '26? And then just how do you kind of think about fortifying the balance sheet in the event that next year -- next year's expectation for profitability kind of surprises to the downside or is subject to adversity?

Yes. Look, I would say that for 2026, we -- as Mark talked about in his prepared remarks, we have built in, I think, fairly conservative assumptions about the impacts of program integrity, the impacts of this market morbidity shift, trend. All those things have been baked in. When we access information that we're able to get in terms of what does the competitive pricing landscape look like, we see higher -- very conservative rate actions from the larger carriers. And those -- we've all been more competitive historically, but we are certainly seeing very significant increases in prices next year to capture the impacts of the things that I just spoke about. So we feel like the pricing is contemplating the risks that are out there. So that gives us a strong expectation that we'll be able to both improve our margin from this year, obviously, and return to profitability. And then your question with respect to what happens in a down scenario from a cash and capital perspective. I would just say this, we feel like the company right now has a strong capital position. We feel like if we are at need to access capital that we'll have access for additional -- we have virtually no leverage in the company. We feel like we could add additional leverage, and we believe that we would have access to capital as needed.

Got it. And then I just have a follow-up. So we understand there was a large issuer that submitted data late -- risk adjustment data late for 2024. I don't think that other issuers will be penalized for that late submission, but just curious if the data in that submission had been contemplated in 2024, would your risk adjustment payable as a percent of premiums have been larger and make '25 look smaller as a percent of premiums on a relative basis?

Yes. We did see that true up. It was single -- small single-digit millions. It really didn't have any impact.

Your next question comes from the line of John Ransom of Raymond James.

I know things have changed, but when you were forecasting the market without enhanced subsidies, your number was about 21 million people. I mean we've seen some other numbers that say the marketplace might shrink by 40% or so. Kind of where do you stand in that debate as we sit now?

As we look today, John, we believe that our 18% that we projected in our long-term guidance is the bottom and that it will probably be higher. Again, we need to see how the rates play out in the marketplace. We have a good handle on program integrity efforts and that impact, but it will be higher than the 18% we had originally projected.

So what do you mean by the 18%, I'm sorry, just to clarify that.

We had an 18% reduction in the book as a result of what was going to happen with -- right. And so we're still projecting in our numbers, no enhanced subsidies, and we were projecting 18%. We believe our number will be larger than 18%, but we haven't pegged it until we see rates and market competitiveness by market.

Okay. I got you. And then just secondly, if we assume the MLR comes in line and you're going to accrue at about 15.5% for risk adjustment. So that implies that your medical margin is down about call it, 600 basis points this year over last year. As you think about next year, how much of that margin do you think you can recover with pricing actions? And when you talk about profitability, is that EPS profitability, EBIT, EBITDA? Just some clarity on that would be great.

Yes. Thank you. When we kind of working backwards, when we talk about profitability, we're always talking about earnings from operations and earnings from operations means that adjusted EBITDA will also be positive. With respect to the MLR, the comparisons are impacted by looking at year-over-year, there was a 630 basis point year-over-year increase on the first half. And as you think about the second half and what that means, last year, we had a significant amount of SEP growth in the second half. And this year, we're expecting membership to basically trend down to the back half of the year. And so we think that as we look at kind of adjusting for the relative growth in the book last year to this year, we would expect MLR trends in the back half of the year to -- the MLR is going to increase sequentially from the adjusted MLRs that I mentioned in the call. But we think that, that trend is going to look a lot more like '23, maybe '22 than what it was last year because last year, we had so much growth that really drove that.

Your next question comes from the line of Stephen Baxter of Wells Fargo.

Just a couple of quick follow-ups first, I guess, on the second half MLR commentary. I guess, first, there's an announcement from CMS about potential scrubbing of duplicative enrollment. I guess I would be curious to get your guys' perspective on what you feel like the impact from that might be? And if you're assuming anything for that in this guidance? And then on the second question, the fourth quarter provision you mentioned for some additional utilization. Can you help us think about the magnitude of that? And then I have a couple of quick follow-ups.

Yes. So on the dual eligible enrollees, as we talked about, we know the membership. We know the number. For us, that's less than 50,000 members that potentially could end up moving back to Medicaid and losing their -- or losing their subsidy. I guess they could pay out of pocket, but they would lose their subsidy if they can't validate that they're no longer eligible for Medicaid or other Medicaid programs. I think it's important to note that we understand from CMS that the 2.5% that we see in our book is also the similar number in the marketplace. So probably a smaller exposure than what many had feared. So we factor -- we think that regardless of the outcome of which direction those members end up moving, we're well within the range of our guidance. And so that's what I would expect on that component. With respect to the fourth quarter increase in utilization, I won't dimension it specifically other than to say that we are -- we did build that into our guidance. We think that a lot of the levers that I talked about last quarter around what do we do when we see increases in utilization, we've been working those levers, things like leaning into some fraud waste and abuse investments that we can make, ensuring that we are fully and correctly applying our provider contracts. There are issues that we know where in our systems that we may not be -- we may be overpaying in spots. And so we are working to always address those. I think that's common for all insurers, but we see opportunities there. So we leaned into all those things which we think will help to moderate some of the back half pressure that we've otherwise built into the outlook.

Got it. Okay. And then just to hopefully add a little bit of clarity to some of the repricing and refiling discussions. So appreciating that I think in use, the vast, vast majority of your membership is now refiled rates for. Have you gotten assurances or any kind of clarity from the states about what they're willing to accept? Like have most states said like we will accept what you will submit? Or are you still expecting there's going to be a significant amount of scrutiny around the assumption changes that you're making? I want to just get a sense of how confident you are that the request changes you've made will actually end up going through.

Yes. Thanks, Steve. We have filed and we have had good conversations with the regulators. They have been accepting of our point of view and actually have been pushing in a few places to say, are we all priced properly. They don't want their markets to fail. That causes them to have to move membership, which they don't like to do. So they're very interested in making sure that we're priced properly. As you know, subsidies change with those kind of rates as well. And so we believe for individuals, it won't be as dramatic a change for them. But we believe we have pretty much received all the right messages from regulators that we're fine with our pricing models. And we believe everybody else is pricing rationally as well. I know there's some data out there from yesterday. It's not complete. There are a couple of markets where we've already filed where they have not updated the files online. So we are confident and our pricing includes everything we need to include.

Your next question comes from the line of Jonathan Yong of UBS.

I just wanted to go to your commentary on getting back to profitability in '26. I guess as you kind of think about where your peers are kind of shaking out at your pricing, their pricing, is there a level of enrollment where perhaps they're leaving a lot more enrollments to be left to the rest of the marketplace and where perhaps you absorb perhaps too much enrollment? Is there kind of a breakpoint where you just say, okay, this is just way too much. Can you frame that for us?

Yes. We have been very careful not to create adverse risk coming into our pool from others. And so our pricing has been very careful on metal levels, types of products. We have a new strategy, a couple of new strategies we've exercised in markets that are not the traditional strategies you've seen in the markets to avoid the things like adverse selection or adverse retention on the other side. So we believe we have picked the right spots by market at this point, and we are very aware of that issue. It was a constant part of our conversation. We've had multiple pricing meetings, probably more than anybody would want to actually attend, but we have to make sure we're in the right place.

Okay. And then as we kind of think about the G&A reductions that you're doing to set yourself up to '26, kind of can you talk to like where exactly these are kind of taking shape in terms of those cost reductions? And then I guess, similarly, is that $60 million the needed level to get to the level of profitability? Or is that -- if you didn't do this, would you actually hit that?

Yes. I appreciate the question, Jonathan. And I would just say, the action we take is just as we've seen the losses that we're now projecting for '25, we wanted to make sure that we just solidified our profitability position next year. So we just view this as one of the levers that we're pulling to ensure we hit profitability and have meaningful margin expansion next year. So with regards to the nature of the savings, we are having a reduction in force, which is roughly half of the savings were projected for next year. The other half is driven by a mixture of closing some open roles that we had planned as well as reducing some vendor costs. So the majority of those savings will roll into '26, but we will see some of that in the back half of this year, which is part of the improvement in our SG&A guidance for the full year '25.

And the focus has been on fixed costs. We assume there may be variable cost changes depending on where membership ends up, and we have not taken those actions yet.

Your next question comes from the line of Andrew Mok of Barclays.

Can you help us bridge the $907 million of excess capital at Q1 to the $577 million of excess capital you quoted today? I think the earnings revision was $500 million. The risk adjustment payable accrual increased and minimum capital is presumably increasing with a higher premium. So I just want to understand what's getting better in the capital bridge and what the capital commitments look like for the back half of the year.

Yes. So in terms of the decreases in capital, I would just point you to the loss that we recognized in the second quarter as being the biggest driver of the decrease in excess capital. We always have cash that's going back and forth between the subs and the parent. So for example, parent cash increase in the second quarter, that was due to some tax sharing payments that moved from the subsidiaries up into the parent. That also affects kind of the amount of excess capital at the subs. So that's the picture of where we are. As I already spoken to, with respect to cash and capital, we are very comfortable with our current position. We have a revolver that's expiring at the end of the year. So we're actively working towards extending and improving that facility. And overall, we feel very confident that we will have -- we have the right capital and should we need, whether it's for growth reasons or otherwise, to increase our capital position. We have a fairly unlevered balance sheet, and we think that we would have ready access to be able to improve our capital position as necessary.

Great. Can I just ask a few follow-ups on that? One, can you give us the level of minimum cash you'd like to retain at the parent? And two, just a follow-up on the risk adjustment. It looks like the year-to-date accrual is running around 15.5%. Is that a good number to think about for the back half accrual as well? And can you help us understand why that number wouldn't increase more year-over-year if market acuity is increasing?

Yes. So on the parent cash levels, we have internal targets that we maintain. I would say that currently, we are well above our internal targets and are comfortable with the cash position at the parent even through the second half of this year. With respect to the risk adjustment, I think that the first half is reflective of the change in market morbidity. So it is now consistent. It's a good proxy for the back half as well. We had seen elevated claims and expected that we would see some risk adjustment offset for those. Obviously, now we know that we're not going to see that full offset. But at this point, we are -- we've adjusted for the market morbidity change, and that's fully reflected in the amount of risk adjustment that we're projecting in our guidance.

Your next question comes from the line of Craig Jones of Bank of America.

So when you're thinking about where you end up among your peers in each state in terms of the rate increase requested for 2026, as you refile in each state, there's a pretty wide range of rate increases requested. So are you targeting getting towards the higher end of rate increases in each state to be more conservative in 2026 with the risk pool potentially changing so significantly? Are you sort of more -- are you plenty comfortable in the mid- to low end of rate increases and are just confident in the rate that you've requested?

Yes. So as you might expect, we start with what do we believe we need to do to put ourselves in the right position to ensure that we are confident that we are covering the changes in market morbidity, the impacts of subsidies expiring, enhanced subsidies. And so we build up our price first just based on our own detailed modeling. That gets us into double-digit increases and significant double-digit increases in some of our biggest markets. When we look at how our price position looks compared to what we're seeing with competitors, we think that we're very competitive in some markets. We're less competitive in others. On average, we feel very comfortable that our price change is going to be comparable to some of our larger peers and that we have covered off the risk that we see.

Okay. Great. That makes sense. And then just to clarify, when you say double digits, is that between 10% and 99%? Or what's -- can you narrow that down for us a little bit?

I would say that you are correct in terms of that number could be any of those. But I would just say that we would expect that in '26, we'll see rate increases that will be multiple times what we saw last year.

Your next question comes from the line of Dave Windley of Jefferies.

I wondered if you could talk to the membership shifts that you are seeing. I think from the beginning of the year, your membership has obviously held up better than the original expectation. In that gain, are those SEP like new signees? Or are they switchers from other plans? And what do the -- what is the profile of those members that are switching to -- or are shifting to your book, one way or the other?

Yes. So I would say part of the improvement in membership is actually stronger retention and lower lapse. So it's not all from new membership. We do have growth in SEP. We see a good portion of that growth is in $0 plans. I think that many of the dynamics that have fueled growth last year continue to persist this year. We are comfortable that the members that we've added have MLR profiles that are consistent with our historical expectations that they'll be modestly higher than what we see for the full book, and that's kind of what we've seen thus far in '25. And as we talked about with utilization, we have seen that settling down to levels that are approaching our expectations for what we should see for the risk in the book. So I don't think that we see any kind of signals that these members that we're adding this year are driving some types of adverse selection or increased risk for market morbidity.

Okay. Got it. My follow-up question was going to be on the very last part of what you said. So it seems like better retention or switching of perhaps price-sensitive members to you, helps to perhaps maintain the risk profile of your book, but perhaps to the detriment of your peers' books that are losing members aren't in benchmark position, et cetera. Bottom line seems like the issue for assessing the market here, particularly for price leaders in the market is not so much your own book, but everybody else's book. And so I wonder how you get comfortable with that pattern not persisting through the balance of this year and further into next year in terms of just market morbidity continuing to deteriorate away from you as people get swept out of the market with the enhanced integrity. You've addressed a lot of this, but I just wondered if we could put a finer point on it.

Sure. And I would just say this, the increased program integrity rules have already been put into place for '25. We think that's been -- the effects of that have already manifested in terms of what we see in the first quarter change in market morbidity. With respect to the population of low to no utilizers, we just really haven't seen much of a shift in our book. We've seen actually quite consistent percentages of those members in our book consistent with last year. In fact, it's been consistent with a number of years. So we're not really seeing anything in that, that gives us great pause and concerns about kind of what's going on with market morbidity. I read, I see what others are saying in terms of the potential shifts there. We acknowledge that, that could be a source of pressure and part of the driver of market morbidity. But we don't see anything in our statistics through the second quarter that caused us to think that there's another leg that's going to drop in terms of market morbidity.

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. We thank you for participating and ask that you please disconnect your lines.