Late Friday, Oscar Health filed to go public, adding another company to today’s burgeoning IPO market. The New York-based health insurance unicorn has raised well north of $1 billion during its life, making its public debut a critical event for a host of investors.
Oscar Health lists a placeholder raise value of $100 million in its IPO filing, providing only directional guidance that its public offering will raise nine figures of capital.
Both Oscar and the high-profile SPAC for Clover Medical will prove to be a test for the venture capital industry’s faith in their ability to disrupt traditional healthcare companies.
The eight-year-old company, launched to capitalize on the sweeping health insurance reforms passed under the administration of President Barack Obama offers insurance products to individuals, families and small businesses. The company claimed 529,000 “members” as of January 31, 2021. Oscar Health touts that number as indicative of its success, with its growth since January 31 2017 “representing a compound annual growth rate, or CAGR, of 59%.”
However, while Oscar has shown a strong ability to raise private funds and scale the revenues of its neoinsurance business, like many insurance-focused startups that TechCrunch has covered in recent years, it’s a deeply unprofitable enterprise.
Inside Oscar Health
To understand Oscar Health we have to dig a bit into insurance terminology, but it’ll be as painless as we can manage. So, how did the company perform in 2020? Here are its 2020 metrics, and their 2019 comps:
- Total premiums earned: $1.67 billion (+61% from $1.04 billion).
- Premiums ceded to reinsurers: $1.22 billion (+113%, from $572.3 million).
- Net premium earned: $455 million (-3% from $468.9 million).
- Total revenue: $462.8 million (-5% from $488.2 million).
- Total insurance costs: $525.9 million (-8.7% from $576.1 million).
- Total operating expenses: $865.1 million (+16% from $747.6 million).
- Operating loss: $402.3 million (+56% from $259.4 million).
Let’s walk through the numbers together. Oscar Health did a great job raising its total premium volume in 2020, or, in simpler terms, it sold way more insurance last year than it did in 2019. But it also ceded a lot more premium to reinsurance companies in 2020 than it did in 2019. So what? Ceding premiums is contra-revenue, but can serve to boost overall insurance margins.
As we can see in the net premium earned line, Oscar’s totals fell in 2020 compared to 2019 thanks to greatly expanded premium ceding. Indeed, its total revenue fell in 2020 compared to 2019 thanks to that effort. But the premium ceding seems to be working for the company, as its total insurance costs (our addition of its claims line item and “other insurance costs” category) fell from 2020 to 2019, despite selling far more insurance last year.
Sadly, all that work did not mean that the company’s total operating expenses fell. They did not, rising 16% or so in 2020 compared to 2019. And as we all know, more operating costs and fewer revenues mean that operating losses rose, and they did.
Oscar Health’s net losses track closely to its operating losses, so we spared you more data. Now to better understand the basic economics of Oscar Health’s insurance business, let’s get our hands dirty.
In the guts
In good news, Oscar Health managed a slight improvement in its “InsuranceCo Combined Ratio” in 2020, compared to its 2019 result.
The company defines the Combined Ratio as “the sum of MLR and InsuranceCo Administrative Expense Ratio,” or its medical loss ratio and its related administrative costs combined, then calculated as percent of its net premiums before taking into account ceding activity.
It’s a little technical, but MLR calculates what percentage of total premiums (before ceding) were consumed by claims. For Oscar Health, that number improved from 87.6% in 2019 to 84.7% in 2020
And InsuranceCo Administrative Expense Ratio is the “costs associated with running [the company’s] combined insurance companies” as a percentage of net premiums before any ceding activities. This ratio worsened to 26.1% in 2020 from 25.5% in 2019.
Add the two together, and you can see how well Oscar Health is doing in terms of what is spent to generate insurance revenue. Sadly for the company, its InsuranceCo Combined Ratio was 113.1% in 2019 and 110.8% in 2020. It got better, sure, but not by much, and was still far above the 100% mark that would indicate a break-even insurance business.
Or more simply, the company is seeing economies of scale, but not many, and not very quickly. Profitability, then, is a ways out for the firm. How much that bothers investors we’ll better understand when Oscar Health prices.
On that note, an early 2018 round worth $165 million valued Oscar Health at $3.2 billion. The company went on to raise more capital, including a $140 million round last December that TechCrunch covered, but we lack valuation information for more recent funding events.
Putting this all in context
Ultimately, the picture that Oscar Health paints of its business with this filing leaves a lot to be desired. Or, as healthcare analyst Ari Gottlieb, put it in a note, “It turns out that even a global pandemic driving reduced medical utilization is not enough for Oscar to achieve profitability. In fact, where many health insurers realized results that were well above expectations and prior years, Oscar reported record losses of $402 million,” Gottlieb wrote.
Gottlieb pointed to those medical loss ratios that are higher than what most individual-focused plans target and the payments that Oscar made to other health plans as part of the risk adjustment mechanism that’s part of the Affordable Care Act.
Gottlieb also saw a warning sign in the company’s decision to issue a $150 million four-year-term loan in October 2020, secured by the company’s assets at an interest rate of 12.75% per year, Gottlieb noted.
“Given the capital raise at distressed rates (to be paid back with IPO proceeds), a fair question may be not whether Oscar is seeking to take advantage of inflated asset values in the market but rather whether the company needs to pursue the public offering to obtain additional capital,” Gottlieb wrote. “Although, one wonders why they were unable to obtain the financing from Alphabet, given the consistent capital infusions over multiple years without any real evidence of a sustainable business.”
Gottlieb speculated that the public offering might have been necessary to pay off the loan and to keep the lights on at the company.
Finally, Gottlieb noted the company’s continuing losses.
“With 2020’s $400 million loss, Oscar has now accumulated $1,427,100,000 in losses since the company started in 2013,” he wrote. “In six years of having membership, Oscar has lost $106 per member per month. The magnitude of such losses in health insurance is unprecedented, certainly in the post-ACA period.”
A test for the venture-backed insurance model
Both Oscar and the high-profile SPAC for Clover Medical will prove to be a test for the venture capital industry’s faith in their ability to disrupt traditional healthcare companies.
The two companies were early entrants in what has become a flood of new businesses looking to reinvent healthcare in the United States. Good healthcare is a basic need that’s currently being addressed by a desperately broken and expensive model in the United States. The cost of care keeps climbing and outcomes for most Americans aren’t getting that much better.
The outlook is bleak since the U.S. spends more on healthcare as a share of the economy on average than any other OECD nation, yet has the lowest life expectancy and highest suicide rate. The nation also has the highest chronic disease burden of any OECD country and Americans visit their doctors less times than their peers.
It’s clear that something needs to be done. But under the current model there are some questions about whether Oscar’s approach can work.
As Gottlieb writes, “Seven years later as they embark on a proposed public offering, the data suggests that truth in advertising does exist. [Oscar has] created a new kind of health insurer. One that has sustained massive operating losses and inconsistent membership growth, while accessing unprecedented sums of investor capital.”