Oscar Health Q4 2022 Earnings: Still Waiting For Hard Evidence Of Profit (NYSE:OSCR)

Recommendation

Although there may be a negative impact on the risk pool due to Medicaid Redeterminations, which could affect the outcome, Oscar Health (NYSE:OSCR) is headed in a positive direction with some favorable developments in the fourth quarter. Underwriting execution will be crucial in meeting performance expectations. It is also certainly clear that investors are paying attention to OSCR ability to generate profit. This 4Q22 earnings clearly showed management focus on driving towards that goal – as shown by its guidance, and how the share price reacted. Based on my previous target price, I believe the upside is still significant today. However, my concerns remains the same (regarding profitability), however, it is more of an execution problem now. OSCR has to show that they can execute against its guidance. Until then, I believe OSCR is still a hold.

Earnings takeaway

In sum, the 4Q22 update demonstrates that OSCR is making steady headway toward profitability, and its improved cash flow profile is certainly an hard evidence that it is on the right track. In my opinion, FY23 will be the transition year, and OSCR will be profitable/breakeven by 2024. (similar to consensus estimates). Important metrics to track include management’s ability to deliver on its MLR guidance this year, the timing of 2024’s return to growth relative to margin improvement, and the impact of redeterminations on the risk pool.

InsureCo visible path to profitability

OSCR can now see a clear road toward profitability and positive cash flow. For InsureCo, management has issued revised EBITDA guidance of $20 million to $120 million, reiterating their 2023 profitability target. Higher interest rates in 2023 are expected to have a greater impact on net investment income [NII], which is included in management outlook along with an increase in MLR at the midpoint, relatively stable administrative expenses, and the inclusion of NII.

In my opinion, the guidance provided some useful insights into the management’s working assumptions. Excluding NII, a combined ratio in the range of 99%-102% indicates a business that is roughly breakeven. That aside, management MLR forecast of 82% to 84% is a result of high single-digit rate increases above the cost trend, savings from the company’s negotiated PBM contract, and a smaller proportion of SEP members. Finally, OSCR will keep its member cap in FL through mid-year, so redeterminations are not anticipated to have a significant effect on premiums or MLR. Nevertheless, the management views the expansion of the market due to redetermined members as a favorable outcome, despite acknowledging the MLR risk associated with these special enrollments. That said, management considers this risk temporary and not significant enough to affect the guidance. It is also significant to note that the EBITDA projection for InsureCo has been revised to include substantial net investment earnings of $90 to $115 million. These earnings are based on a yield of 3-4% from OSCR’s investment portfolio worth $2.9 billion.

HIX growth

Management is optimistic about the long-term potential of the HIX market and expects to resume expanding the membership base in 2024. Long-term opportunity with individual coverage HRA and a more stable risk pool were highlighted by OSCR, and redeterminations are expected to bring more lives to the exchanges in the next two years. Importantly, with profitability in mind, management plans to strike a balance between expanding the membership base and achieving consolidated profitability in the coming year. The primary indicator here is whether or not the high single-digit rate increase in 2023 for OSCR was sufficient to propel MLR improvement. In addition, it is important to monitor the risk pool as members of Medicaid who are up for redetermination.

Capital allocation

When the statutory capital requirements for Oscar are lowered from 25% to 10% to 15% at the end of 2023, I expect OSCR to receive a 1x gush of cash in Florida, on top of the prudent internal capital goals. It’s not hard to picture this amounting to hundreds of millions of dollars that management can use to boost shareholder returns.

3 key things to note

1. One year after announcing its existence, OSCR has now unveiled its first +Oscar deal, which will begin this year. While the sum of the revenue is not likely to amount to much, I see this as a promising sign that things are picking up speed.
2. Oscar and CVS are finishing up their renegotiated PBM contract. While I struggle to put a precise value on the positive impact on P&L, I believe this will have that effect.
3. most of management’s cost savings goals for 2023 have been met, and I expect earnings to grow as the company invests in additional new efficiencies.

Summary

I believe that OSCR is making progress towards profitability and positive cash flow, but I am still waiting for hard evidence of profit. Execution will be key for management to hit guidance, and I recommend holding OSCR until the company shows that they can execute against its guidance. In essence I believe that FY23 will be the transition year, and OSCR will be profitable/breakeven by 2024, but it will be important to track key metrics such as management’s ability to deliver on its MLR guidance, the timing of 2024’s return to growth, and the impact of redeterminations on the risk pool. Over the long-term, I am optimistic about the potential of the HIX market and believes that OSCR has a visible path to profitability.