Diving into Oscar Health's S-1

Oscar has successfully improved the member experience, less so in reducing costs

Last week, Oscar Health announced its upcoming IPO, making it the latest in a string of digital health companies going public (including 23andMe, Talkspace, and Hims). Founded in 2012, Oscar’s mission is to be a new kind of health insurer, one that is consumer-centric and enabled by technology. The company has raised $1.6 billion to date from a star-studded group of investors which includes Khosla Ventures, Founders Fund, Goldman Sachs, and GV. Today, we’re going to dive into Oscar's S-1 to understand how the business works and what its future looks like.

Intro to Oscar

Oscar started out by focusing on the individual health insurance market, offering plans for people and families who are not covered by an employer or a public option like Medicare. In 2017, Oscar expanded to the Small Group insurance market, with plans which cover companies with 50 or fewer employees, and last year, Oscar launched its first Medicare Advantage plans, which are privately administered alternatives to traditional Medicare. As of Dec 31, 2020, Oscar had a total of ~400k members across 15 states, with more than three-quarters of them located in California, Florida, or Texas.

Almost all of Oscar’s revenue comes from premiums, which are paid on a per member per month (PMPM) basis for all of its plans. In 2020, Oscar collected $1.7 billion in premiums (up from $1 billion in 2019), though this comes with a very important caveat we’ll discuss later. On the flip side, the biggest line item in Oscar’s expenses is the cost of incurred claims, which are paid out to providers in exchange for medical services administered. Overall, the company reported a net loss of $407 million for 2020 (up from $261 million in 2019).

From a product standpoint, Oscar offers all of the standard services you would expect from a health insurance company, combined with some more provider-esque services. The former includes connecting members to in-network providers, providing the costs of various services, and processing reimbursement claims. The latter can be thought of as Oscar trying to become the “frontend” of healthcare for its members, and includes both virtual primary care and urgent care services. While many digital health companies have this frontend of healthcare vision in mind (think Teladoc, CVS, One Medical), Oscar is unique in pursuing this as an insurer.

Is Oscar a tech or healthcare company?

It is telling that in their S-1 opening letter, Oscar’s founders state the following:

We are sometimes asked whether Oscar is a tech company or a health care company. Our answer is that we use the tools and mindset of a consumer technology company to solve problems in health care.

In light of the blistering success of tech IPOs in the past year, the trajectory of Oscar’s market debut may hinge on where investors come out on this question. Investors would do well not to preemptively categorize Oscar as a tech disruptor as opposed to a health insurer, and to remember that if something looks like a duck and quacks like a duck, it probably is a duck even if Adam Neumann says it’s a tech company. Nevertheless, to definitively answer this question, we need to dig deep into Oscar’s operations and understand how the business works.

Digital technology has been used to revolutionize almost every industry in the last few decades because it has enabled fundamental advantages over traditional businesses. With Oscar, there are 2 main ways in which technology can be used to rethink health insurance:

1. By dramatically improving the member experience

2. By dramatically reducing costs

Oscar has dramatically improved the member experience

It’s clear that Oscar has put a great deal of thought into improving the member experience, and it isn’t just because their website looks like a re-branded version of Casper or Harry’s. Each new member that joins Oscar receives a welcome kit in the mail, which explains their plan features and benefits. They are given access to Oscar’s tech platform, which they can use to access their health information, find care, and manage prescriptions. Lastly, they get matched with a personalized Care Team, who can help answer questions about providers, prescription, and benefits throughout the member’s journey.

This Care Team concept is one of those services you might associate more with providers than payers, but there are several reasons it makes perfect sense for Oscar. First, some of the most common questions patients have when navigating the healthcare system are not at the provider-level but at the payer-level (e.g., Will this service or medication be covered? Is this an in-network provider?) Giving patients access to an on-demand team that can answer these questions is a clear user experience win. Second, Care Teams allow Oscar, as an insurer, to have a say in how members decide on their care (and more importantly, how costs are incurred). If done well, it can enable Oscar to be more efficient than the average payer when triaging patients for care and deciding how to connect patients to providers. This is why Oscar’s frontend of healthcare ambitions are particularly interesting, because unlike companies like Teladoc and One Medical, Oscar’s incentives are actually aligned with their members at the end of the day.

Oscar’s efforts to improve the member experience are validated by their data on member engagement and satisfaction. More than 88% of their members have interacted with their Care Team, almost half are monthly active users, and members give Oscar an NPS score of 30 (compared to 3 for the average payer). Considering the outsized role tech plays in Oscar’s services, the data on elderly members is particularly impressive: engagement rates are comparable between members aged 55+ and 18+, and NPS is actually highest in members aged 65-74. Strong adoption from elderly patients will be a key advantage for Oscar moving forward, especially as it expands into the older Medicare market.

Oscar NPS by Age Group. Source: Oscar S-1.

Oscar has less to show on reducing costs

The second area where technology can be used to rethink health insurance is by dramatically reducing costs. On this front, Oscar’s S-1 hints at several tech-enabled programs that are being developed or already being used to cut costs, but provides few solid numbers. The only two data points I was able to find were the following: Care Team triaging resulted in a median member savings of 7% for those who followed recommendations, and proactive Care Team intervention in urgent situations reduced the number of ER visits by 13%.

Beyond these, I was disappointed by how light the S-1 was on this front. Despite the improvements Oscar has made to the member experience, it’s hard not to believe that being able to reduce costs is even more important. The cost of monthly premiums are the single most important consideration for people when choosing a health insurance plan, and I would guess this is particularly true for the individual insurance market, where patients have full latitude of choice. For Oscar to show that they are not just a tech-savvy insurer with better design, they need to find a way to leverage technology to fundamentally shift the cost equation of their business.

There were a couple of easter eggs in the S-1 which lay out a potential path to achieving this goal. First, one of their member case studies mentions the following:

Our full stack technology platform allows us to use A/B testing to understand the effects of specific campaigns and programs, including this one.

This was the approach used to evaluate the impact of proactive Care Team interventions in urgent situations, which as we mentioned earlier led to a 13% reduction in ER visits. It also implies that their tech platform has been designed from the ground up to support these kinds of health economics and population health experiments, geared at finding ways to cut costs. Another quote provides an even more enticing look at the potential here:

[Our tech] platform enables us to run nearly 80 automated population health programs, or campaigns, as of December 31, 2020, that allow us to collect data and trigger real-time interventions at scale.

It is unclear what stage these programs are in, and how deep of an impact they would have on care decisions and costs. This is, however, the right direction for Oscar to be moving. By positioning technology at the center of their health insurance offering, Oscar has the ability to iterate and experiment like no other payer. They will need to pair that with a rigorous, scientific approach in order to find hidden opportunities for cost savings. Only then would Oscar be able to make the case that they truly belong with other tech disruptors.

Outstanding Questions

Besides the all-important cost reduction point, Oscar’s S-1 left me with a few other questions worth noting as well. First, it would’ve been very informative to see data around retention and churn of Oscar members from year to year. People choose health insurance plans based on a variety of factors, so interpreting these metrics wouldn’t be as simple as a typical subscription service, but they are rather relevant given Oscar’s stated goal of improving the member experience. In the absence of retention data to provide more context, it is somewhat concerning to see that the number of Oscar members decreased from 2019 to 2020 in several states, including New Jersey, New York, and Tennessee.

Second, the S-1 highlights a number of partnerships Oscar has established with other organizations, including both payers (Cigna) and providers (Cleveland Clinic, Montefiore Health System, Holy Cross Health). The language used to describe these partnerships seems to imply an important strategic purpose, but it is unclear at the moment what these agreements actually entail. The S-1 does state that all of the partnerships “are built on our full stack technology platform and member engagement engine”, suggesting that Oscar may see themselves providing more of a tech infrastructure service for payers and providers over time, in addition to their core insurance business.

Interesting Quirks

There were also a few interesting quirks I thought were worth highlighting. First, I mentioned earlier that Oscar’s revenue was $1.7 billion in 2020 (up from $1 billion in 2019), with a very important caveat. The caveat is reinsurance, whereby Oscar enters into agreements with other insurance companies to share both risks and premiums and decrease their capital and surplus requirements. If we look at Oscar’s revenue after reinsurance (i.e., excluding the premiums they pass along to other companies), Oscar’s premiums actually decreased from $469 million in 2019 to $455 million in 2020, a worrying sign for future growth.

Second, Oscar’s desire to provide virtual care services as part of its product has forced it to perform some interesting legal acrobatics to comply with state regulations. Many states restrict the practice of medicine to organizations owned by licensed doctors, and prohibit companies from having control over medical care and decision making. To get around this, Oscar’s virtual care services are provided through three independent, physician-owned organizations known collectively as Oscar Medical Group. While Oscar undoubtedly has their opinions on how virtual care in their platform should be carried out, the 3 physician owners of Oscar Medical Group technically retain full responsibility and ownership for all medical decisions.

Lastly, it is hard to overstate how much of Oscar’s business model feeds off provisions in the Affordable Care Act (ACA). As they write in their S-1, Oscar saw the ACA’s creation of direct-to-consumer insurance markets in 2014 as a challenge but also an opportunity, where an upstart insurer could establish traction quickly by offering a superior product. In 2020, 79% of Oscar members were enrolled in plans offered through ACA marketplaces and 60% of Oscar members had premiums that were subsidized by the ACA. It’s a valuable case study of how new government regulations can serve as a springboard for innovation, instead of a hindrance.

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Considering the current state of the US healthcare system, Oscar’s mission to rethink health insurance is admirable. They’ve already succeeded in using technology to improve the member experience, though the more difficult hurdle they now face is in reducing costs. If Oscar is able to merge their technological prowess with a mindset of rigorous experimentation, then perhaps they will be able to achieve their mission — and make a healthier life accessible and affordable for all.