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Hi friends 👋,

Happy Thursday! 

Today is a first for Not Boring: a Sponsored Deep Dive on a public company, Oscar Health. I’ve only done Sponsored Deep Dives on private companies (and one blockchain), not for any reason other than the fact that startups have been the only ones to reach out. As a reminder, you can read how I choose what companies to write Sponsored Deep Dives on here. 

Oscar fits the three things I look for in a Sponsored Deep Dive company: 

1. I believe in the company. Table stakes, but true here. I would invest my own money (although I haven’t yet to avoid that layer of conflict) and I would write about Oscar even if they weren’t paying me (don’t tell Oscar!). 

2. The company has lessons applicable beyond the company itself, and potential benefits to you all. There’s a ton to learn here for anyone interested in taking on regulated, backwards industries with deep-pocketed, scaled incumbents. (Hint: it’s a long, hard road, but doable!)

3. The company’s story is interesting and fits with the trends we’re all most interested in. I started writing about healthcare a lot more at the end of last year, and it’s one of the complex problems I want to dig into more this year. This decade could be to HealthTech what the past one has been to FinTech. 

Beyond those three things, Oscar is a special one. It’s the only health insurance provider I’ve actually chosen for myself (way back in 2013), one of NYC’s most successful startups of the past decade, and my favorite kind of company: one whose complexity means that the market has a hard time understanding it. 

That complexity comes from the fact that Oscar is trying to be two things at once: an insurance company and a tech platform. It’s a big bet -- those are two very different businesses -- but if it pays off, they have the chance to make the healthcare experience meaningfully better. 

Plus, while it’s no longer private, it’s still very much an underdog in an industry full of giant incumbents, just like a startup. Despite its success, people still assume the giants will hold their positions for decades. Maybe that’s true in insurance in a way that it hasn’t been for any other industry, but that’s not the bet I’d make. 

Let me put the disclaimer/disclosure right up front: 

Disclaimer/Disclosure: THIS IS NOT INVESTMENT ADVICE! It never is, but that’s particularly true in an industry like insurance in which I’ve spent much less time. This is for educational and entertainment purposes only. Do your own diligence. I decided not to buy any OSCR since I knew I was writing this piece, although I may buy some after sending. This will likely be my stance on public company deep dives going forward. Thrive Capital, a large shareholder in Oscar, is an LP in Not Boring Capital. 

And let’s get to it.

The Oscar Puzzle

In late 2013, when I left the cushy confines of Bank of America Merrill Lynch and its gold-plated corporate insurance plan to head to a small Canadian startup that hadn’t even established a US entity, I was given a budget and told to go find my own health insurance. Oddly, I knew exactly what health insurance I wanted to get: Oscar. 

I’d seen the ads on the subways: “Hi, we’re Oscar, a new kind of health insurance company.” I loved the clean look. They used *tech*. I was now in “tech.” They were from New York. I lived in New York. It was a no-brainer. 

And when that clean welcome box showed up -- a welcome box! from an insurance company! -- I knew I’d made the right choice. 

(I checked with the company, and I was Member #5,540. At Oscar’s current 594,000 members, that means I was in the first 1% of people ever to sign up.)

Little friendly touches like that box were all part of Oscar’s original vision of building a health insurance company that could help its members navigate the healthcare system like a doctor in the family would. 

Since I signed up, Oscar has grown membership over 100x. It’s on a multi-billion dollar revenue run rate. It launched a tech platform, +Oscar, and partnered with leading health systems like Cleveland Clinic. It went public… and its stock is getting crushed. 

Oscar IPO’d on March 3rd at $39 per share and started trading at $36 per share, good for a market cap just north of $7 billion. Since then, it’s down nearly 77%, its market cap hovering around $1.5 billion. 

It’s underperforming both the major indices… 

…and the traditional health insurance companies, like UnitedHealth, Cigna, Anthem, and even Humana, whose stock has struggled more than its peers as of late.

On the surface, the mystery is solved simply: Oscar isn’t profitable yet. 

Say what you want about the traditional US health insurance industry (OK, fine, twist my arm: it’s confusing, inefficient, expensive, antiquated, and about 20 years behind on UX), but those companies print money. In Q3 2021, UnitedHealth, the most profitable, made $4.1 billion on $72.3 billion in revenue. 

Oscar, on the other hand, loses money on every patient on average. In health insurance terms, its combined ratio is greater than 100%. In Q3 2021, Oscar put up an adjusted EBITDA loss of $189 million on $673 million in revenue. Oscar’s stock had started to recover into Q3 earnings, but fell when the company reported that its medical loss ratio (MLR) – the percentage of premium it pays out for care – shot up from 82.4% in Q2 to 99.7% in Q3 thanks to an unfavorable risk adjustment data validation (essentially an insurance payment audit and true-up, read more here if you really want) and, of course, COVID. 

Oscar’s membership grew 41% YoY, from 420k to 594k, and revenue grew 63%, but the simple bear case would be that, amending the old joke for health insurance, you can’t lose money on every managed life and make it up in volume. 

But still, Oscar is trading below 1x its current revenue run rate, growing very fast, and signing up big partners to its software platform, +Oscar. It feels like an overreaction. 

Besides, Oscar wasn’t designed to be profitable yet. In fact, it’s doing two unprofitable things at the same time: building an insurance company and a tech platform from scratch. Both require real scale to become profitable, and Oscar’s bet is that by combining both, they’ll be able to achieve more scale, deliver better care, and generate better margins over the long-term than either side could alone. 

That’s why Oscar is making three decades-long, interconnected bets:

Bet #1: Technology can meaningfully improve member engagement, which leads to a better insurance business.

Oscar believes that by building a better experience, it can increase member engagement, by increasing member engagement, it can better guide its members’ care, and that by guiding its members care, it can create better long-term health outcomes at a lower cost. 

The pithy way to explain this piece of the strategy is that an ounce of prevention is better than a pound of cure. 

Bet #2: A better, tech-powered insurance business will help Oscar sell its technology to hospital systems who want to take risk, improving margins and increasing revenue without increasing Oscar’s risk.

In 2018, Oscar launched what would become +Oscar, its tech platform that lets health systems and other insurers tap into all of the tech that Oscar has built over the past decade. 

To understand this piece of the strategy, think Amazon and AWS. Oscar has spent a decade building and battle-testing its own proprietary tech, and now it’s selling that tech to others who need it and earning software margins in the process. Plus, those customers give Oscar scale. 

Bet #3: Turning its tech into a platform for third-parties will build scale into both the insurance and tech businesses, which will help improve care and lower costs. 

Combining Oscar’s insurance business with its +Oscar partners’ – like the Cleveland Clinic and Montefiore – will give Oscar the scale it needs to build a huge, profitable insurance business. Scale is useful in two ways here: 

1. Insurance Business. More scale means more leverage over the participants in its supply chain, better terms with reinsurers (reinsurance makes up a huge chunk of insurers’ costs), more ability to convince providers to join the network, and a lower admin ratio (amortize administrative costs over more members).  

2. Tech Platform. By opening its tech up as a set of primitives for others in the ecosystem to build with, it will get more data on which types of interventions, digital and physical, work best for which types of patients, and any campaigns it builds for one partner can be copy-pasted and used by any partner, building network effects into the system. More knowledge should lead to better long-term outcomes, and lower costs.

The best way to think about this piece of the business is like Shopify: arming the rebels (in this case, health systems and care providers) in order to compete with the giant incumbent health insurers.

Taken together, it’s a long-term series of bets which is, understandably, confusing to investors in the short-term. As The Abstract Investor summarized, the challenge, and opportunity, is that:

Many tech analysts aren't paying attention to insurance, while insurance analysts won't quite know how to look at a highly tech-stacked insurance company. That presents a potential opportunity for those that can figure out the murky puzzle.

That theory checks out, particularly when you look at how Oscar has performed compared to other public health insurtech companies: Bright Health Group and Clover.

Oscar has traded in-line with those companies despite the fact that the businesses are very different. If you need scale and tech to disrupt health insurance, neither Bright nor Clover has both. Bright is essentially a rollup and partnerships play with little meaningful tech; Clover is a tech player in the Medicare Advantage space with only a quarter of the “lives under management” that Oscar has, and no platform play like +Oscar to achieve scale. 

Oscar is the only player in the space that has a shot at achieving scale through technology.

The fact that these three very different companies are trading in line, and falling while the incumbents’ stock prices rise, is weird. It means the market is saying that, unlike practically every other industry in the world, health insurance will be impervious to disruption from technology-first companies. That seems off. I think the Oscar baby is being thrown out with the insurtech bath water.

So today, we’re going to dive in and try to piece together the murky puzzle. I’m not a healthcare analyst, and I don’t even try to play one on the internet, but I do love a good puzzle. We’ll cover: 

• How Health Insurance Works

• Oscar’s Origins: The Hipster Health Insurance 

• Oscar: A Tech-Enabled Insurance Business 

• +Oscar: An Insurance-Enabled Tech Platform 

• Putting Together the Puzzle  

To understand the bets that Oscar’s making, we need to understand how health insurance businesses work and where they’re broken. I promise I’ll make it as not boring as possible.

How Health Insurance Works

Almost every industry is easier to understand than it appears at first glance. It’s just about understanding the vocabulary, how businesses make money, and what levers they have to pull. Health insurance, while there’s a ton of complexity in the details, is not hard to understand at a high level. 

To understand how US health insurance works at the highest level (conveniently, that’s also the only level at which I understand it), let’s look at three things: 

1. The Size and Composition of the Market

2. The Health Insurance Profit Formula 

3. The Two Main Reimbursement models

The Size and Composition of the Market

Healthcare in the US is an unimaginably large market. 

Americans spend $4 trillion on healthcare per year -- 18% of GDP -- and 75% of that passes through insurance companies. Half of Americans have group, or employer-sponsored, health insurance, 35% have government insurance (Medicaid, Medicare, or Military), 9% are uninsured, and 5.9% have non-group plans. This last group, the individual market, is where Oscar started. 

The employer market is the monster here. It’s probably what you’re familiar with. Insurance companies sell plans to your company, and you get to choose from among their plans. In this system, your insurance is tied to your job, and people bounce from insurer to insurer as they move jobs. That means that no one insurer is incentivized to optimize for long-term health, so they optimize for the short-term, which often drives up long-term costs. 

To learn more about the health insurance industry, Oscar’s backstory, its tech-enabled insurance business, its insurance-enabled tech business, and how the puzzle fits together…

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Thanks to Dan for editing, and to Josh, Mario, Jackie, and JoAnna for working with me!

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Thanks for reading and see you on Monday,

Packy