Obamacare is Slowly Killing Oscar Health
Why am I trashing Oscar Health on one of its best stock market days ever? Perhaps ironically, it's because I really like the company, but I hate its business model.
Why am I trashing Oscar Health on one of its best days ever, and following the best 12 months in its stock price history, returning investors a whopping 700%? (For comparison, over the exact same time period, the S&P 500 “only” returned 35%.) Perhaps ironically, it’s because I really like the company, especially the talent they’ve managed to gather and the innovative technology they’ve developed.
But I really hate Oscar’s business model.
It’s a weird thing to say considering Oscar projects to hit $8 billion in revenue in 2024, compared to $6 billion in 2023, and projects to be profitable for the first time since its inception in 2012.
The stock (OSCR) has had a wild ride since the company became public in March 2021. It went from the IPO price of $36, corresponding to a market value of $8 billion, straight down-down-down and reached $2.05 on December 22, 2022, corresponding to a market value of approximately $460 million, as losses accumulated. But in the last 12 months, as the losses started to shrink, the stock was on a tear, reaching $16.70 today, corresponding to roughly $4 billion. What a roller coaster ride it has been!
However, I think there is a lot of risk in dealing with the U.S. government, and that’s where all of Oscar's eggs are - in the ACA (Affordable Care Act, or Obamacare) market.
Oscar has been paid basically through one program only, the ACA program, mainly by the federal government, namely the CMS (Centers for Medicare & Medicaid Services).
Oscar has ventured into the reinsurance market, but it is now abandoning it, and I think it’s probably smart given the uncertainty and complexity of that market.
Risks of partnership with the U.S. government (CMS) in a capitated model:
Here are the risks of Oscar’s partnership with the U.S. government (CMS) in a capitated (reimbursement) model:
😡 The obvious risk is that, while CMS pays a fixed fee, Oscar assumes all the risk. This is the curse of the capitated model.
😡 Oscar cannot raise premiums without CMS oversight.
😡 Oscar’s health insurance margins are capped by the Medical Loss Ratio (MLR). Specifically, for insurance companies offering coverage in the individual and small group markets, the required MLR is at least 80%, meaning that the profit margin on health insurance revenue in the ACA market cannot be higher than 20%.
😡 If Oscar is projecting, in the best-case scenario, to make a 2% profit margin this year on a significant $8 billion in collected premiums, I can’t see how that’s sustainable long-term, given such already mature scale and the risks I’ve already outlined.
😡 Oscar has 1.3 million members. But are they really Oscar’s customers if most of them came through the government-run exchange? What if, God forbid, CMS decides to drop Oscar from the ACA exchange?
😡 CMS has many issues, but what they do have are excellent actuaries. CMS can reneg the contract to terms more favorable to them.
So, to summarize, in the capitated model with the federal government, a health insurance company is on the “risk” side of the model, meaning its potential profits are capped, while its losses could be infinite.
By the way, in what other industry do you take all the risk, but your return is capped? It’s mind-boggling.
I don’t have any good solutions here. However, I do believe that diversifying into a different business would help Oscar in the long term.
In the meantime, let’s continue to enjoy this impressive rally in OSCR.
I wish Oscar the best of luck. As I’ve said, I love how innovative they’ve been in digital health. I’ll be closely following its new developments and innovations.
👉👉👉👉👉 Hi! My name is Sergei Polevikov. In my newsletter ‘AI Health Uncut’, I combine my knowledge of AI models with my unique skills in analyzing the financial health of digital health companies. Why “Uncut”? Because I never sugarcoat or filter the hard truth. Thank you for your support of my work. You’re part of a vibrant community of healthcare AI enthusiasts! Your engagement matters. 🙏🙏🙏🙏🙏