Last week, Oscar Health Insurance demonstrated a core competency: bragging for reasons that I can not quite figure out:
whats your MLR?
— David Anderson (@bjdickmayhew) March 1, 2018
And then their financials dropped for 2017.
— Bob Herman (@bobjherman) March 2, 2018
The startup lost $127 million on $229 million of revenue in 2017, according to newly filed financial documents. That equates to a somewhat higher net loss margin compared with Oscar’s $205 million loss on $426 million of revenue in 2016.
Looking at their financials there is some good news. They actually brought in enough premiums to cover their net claims. This is a big deal. It seems like their narrow network in New York got their pricing to a reasonable level instead of an OMG horrendous level that they had for their first three years. The rest of their claims expenses have either reasonable or actually good growth rates.
However two things are still leaping out at me. The total administrative costs Per Member Per Month (PMPM) are ridiculously high. In New York and Texas, general admin is over $80 PMPM and total admin is well north of $100 PMPM. Administrative costs have to get lower or premiums have to increase significantly. Medical Loss Ratio (MLR) require that at least 80% of premiums go to claims related expenses. Administrative costs and profits can be no more than 20% of premium. That means a profitable firm has to keep its admin costs to no more than a quarter of its claims expense. Oscar’s admin costs are about half their claims expense.
The other thing that is a problem is the net premium decreased. This is most likely due to significant risk adjustment outflows. Some of that is just 2016 estimates being bad accruing to 2017 but still their model targets comparatively healthy/young/digital savvy folks which means risk adjustment outflow estimation should be a core business capability.
Some of it was prior year adjustments to risk adjustment payable. So they underestimated how much they owed in RA in 2016, which hit their 2017 IS but doesn’t really reflect their 2017 performance (just means 2016 was worse than they originally thought)
— Wesley Sanders (@wcsanders) March 2, 2018
And again from Axios:
Flashback: Oscar CEO Mario Schlosser at the J.P. Morgan Healthcare Conference this past January: “Our business model is working.”
I just don’t understand what Oscar does differently than my former co-workers, besides lose a tremendous amount of money every year. They think they can get their MLR in the high 80s for next year, which is where a well run, lean insurer can profit but they are anything but a skinny insurer. Call me an old fuddy duddy but I am confused as to how they get to profitability with their admin costs as they are even assuming everything else goes right.