Oscar Health: Wait For Evidence Of Profitability (NYSE:OSCR)

Recommendation

Oscar Health, Inc. (NYSE:OSCR) is undergoing what many companies are going through these days – shifting focus to profits – as the days of low rates are over. While OSCR stock has potential to be worth multiple times what it is priced at today, I believe the near-term concerns on the path towards profitability is what matters. As such, I think it would be better to wait for more concrete evidence of Oscar Health, Inc.’s ability to generate profits before investing.

Business

Oscar Health, Inc. provides a technological platform that helps members find the best doctors and hospitals by analyzing their unique medical histories and making recommendations based on that information in real time.

Current state of U.S. healthcare is not good enough

While consumers may be most aware of issues with cost and quality of care, all of the key players in the U.S. health care ecosystem face substantial obstacles to reform. At a time when health care costs in the United States are expected to consume nearly 18 percent of GDP, innovative approaches from the private sector are more important than ever.

As healthcare costs have risen steadily over the past few years, more and more of the responsibility has been passed on to the individual. Increasing competition, to the benefit of consumers, would result in most economic sectors. However, this is not the case for the healthcare industry. Despite consumers’ increased financial stake in their health care decisions, many still lack access to the fundamental information they need to make smart decisions. Many people as a result have lost faith in the American healthcare system.

Another issue plaguing the healthcare sector is that different parts of the industry have different incentive structures, leading to widespread disorganization and inefficiency. Problems have been compounded by the fact that these different players in the industry have historically relied on their own, legacy technological systems. These legacy technological systems are inflexible and disjointed, which makes it difficult to meet the needs of consumers at a time when they are demanding greater coordination.

Finally, as individuals take a more active role in their health care decisions, they have a greater desire for customization, efficiency, and cost savings. COVID has increased consumer demand for innovative models of care delivery, such as telehealth. Although there has been a rise in consumer demand for telehealth services, the current reimbursement model (fee-for-service) and disparate legacy systems make it difficult for telehealth to address anything beyond the most elementary health problems. The full potential of this potentially game-changing technology will only be realized by organizations that have an incentive to reduce the total cost of care and have a platform that integrate real-time, individualized patient records.

OSCR underlying tech and its real-time interventions

From the beginning, Oscar Health, Inc. understood that the healthcare system was too broken to be fixed by merely rearranging the components already in place. Before they could provide members with timely actionable insights, they realized early on that they could cut costs by having complete control over their data and procedures. This required developing a new system from the ground up specifically for this purpose. Currently, the Oscar Health, Inc. platform has the capability to execute a diverse range of automated programs for population health, allowing it to gather data and perform real-time interventions on a large scale.

OSCR’s capacity to act in real time is a differentiating feature. Members rely heavily on OSCR Care Teams as their first point of contact when attempting to navigate and gain access to care through OSCR. OSCR is capable of suggesting and eventually shift members to more efficient and cost-effective care because of the strong relationships it forms with members through their participation. Care Teams are assigned to each member, and they are backed up by a larger network of medical professionals in the area. This group serves as a reliable hub through which members can develop trusting, long-lasting connections. A member’s Care Team can assist them in locating top-notch medical professionals and answer their questions about their benefits, scheduled procedures, and medications. Instead of referring a member to another department when they can’t answer a question, Care Guides will take it upon themselves to find the information and hand-deliver it to the member themselves. In my opinion, the OSCR Care Team approach is a major factor in the high level of members satisfaction that they experience.

Licensing the technology platform could drive further growth

In my opinion, there is a way forward for Oscar Health, Inc. to license its technology platform to additional participants in the healthcare industry through a licensing agreement. In particular, I believe OSCR’s integrated functions and customer-facing applications are unique and have the potential to provide significant value. As a matter of fact, OSCR has already shown that this is possible by announcing the first deal of its kind with Health First via a per member per month model. Despite my impression that these possibilities are still in their infancy, I do believe that even a limited amount of progress into this possibility could significantly contribute to Oscar Health, Inc.’s expansion formula.

Expand total addressable market through other adjacent verticals

The expansion of Oscar Health, Inc. into new areas of health insurance may present significant opportunities in the long run. Small businesses may find OSCR appealing because of its user-friendly platform and the fact that it has partnered with a large insurer, Cigna (CI). My guess is that Medicare Advantage [MA] could also benefit from this offering, especially considering that in some ways MA is similar to the individual market (where Oscar Health has already been successful) in that it involves selling directly to consumers. While I have a hunch that these openings could be worthwhile, it’s tough to gauge interest in the offerings at this early stage because of their relative infancy.

Focus is on path to profits now

Since Oscar Health, Inc. is positioned to significantly improve MLR and save the company $120 million on administrative expenses, the company has set 2023 as the target year for InsureCo profitability. As a result, management hopes to achieve profitability at the consolidated level a year ahead of schedule (by 2024).

In addition, Oscar Health, Inc. has announced that their current CFO will be transferring to the role of Chief Transformation Officer following the loss of HealthFirst as a +Oscar client. In this role, he will be responsible for balancing revenue and expenses and making strategic decisions with a view toward increasing profitability. Thus, I anticipate that changes to the +Oscar SaaS business will garner the most attention from investors, as this division has been seen as a growth driver by investors ever since the IPO.

Although I am heartened by the progress made in reducing medical costs and the renewed emphasis on profitability, I am still concerned about the possibility of failing to meet the targets set for enhancing medical loss ratios and cutting administrative costs by $120 million.

Valuation & model

Using consensus estimates, I believe Oscar Health, Inc. could be worth much more than it is now. As previously stated, OSCR can expand its total addressable market and extend its growth runway through a variety of channels and strategies. However, none of this matters if the company lacks a path to profitability, which is why the shift in management focus to profitability is such an important event to monitor. I believe the best course of action here is for OSCR to execute their cost-cutting initiatives and demonstrate actual results before investing in the stock.

The company has a lot of cash on hand, which gives them some peace of mind that they won’t need to raise capital anytime soon.

Risks

Competition

Market conditions for consumers have improved, but competition has also heated up. As more payors enter the market, OSCR may find it harder to sustain its recent outsized growth and increase in margins.

Path to profitability

A poorer-than-anticipated path to profitability will have a negative impact on the stock price. This could be the result of offering more competitive pricing or taking more time to scale than the competition.

Summary

Oscar Health, Inc. is adjusting its priorities to focus on profits, like many other companies are doing now that low interest rates are no longer in effect. Although the stock has the potential to greatly increase in value, I believe the company’s current concerns about reaching profitability should be taken into account before investing. It would be wise to wait for more solid proof of Oscar Health, Inc.’s ability to generate profits before making a decision to invest.