Description

Intro
Oscar Health was founded in 2012 by Joshua Kushner, who runs a VC firm, and Mario Schloesser, a computer scientist who worked at McKinsey and Bridgewater before his first startup. Today Oscar is an ACA (healthcare.gov) insurer with 1.6m members across 18 states

Oscar was a covid-era “health-tech” IPO that fell 95% before bottoming in Dec 2022. Despite the sharp rebound since then, I believe the shares will be worth 2-3x the current price in three years.

There’s strong evidence that Oscar provides a materially better consumer experience. The NPS score is 66. Over 40% of members are monthly users of the app. Many trust Oscar to steer them to a provider.

Until recently, however, none of that has mattered and they've burned $2.7bn in capital. Today Oscar is at an inflection point. A new leadership team has materially improved the efficiency and focus of the organization. I believe they are building a competitive advantage with an effectively infinite runway.

Management
The company is controlled by Kushner through super voting shares held by his firm, Thrive Capital. Until recently, Schloesser was the CEO. In March 2023, Oscar announced that he would transition to CTO and Mark Bertolini join as CEO.

Bertolini’s track record is impressive. He was the CEO of Aetna from 2010 until selling to CVS in 2018. Over those 8yrs, Aetna shares had an IRR >27%. He reliably under-promised and over-delivered his targets. The bulk of his compensation at Oscar is in stock – 2.86m RSUs that vest over 3yrs, and 7.45m PSUs that vest based on the 4/2026 share price with hurdles at $11, $16, and $39.

Bull case

Oscar held an Investor Day in June and put out 2027 targets modestly more optimistic than mine. The financial targets were:

• >20% revenue 3yr cagr – driven primarily by market share gains and new geographies with a material offset from the generous ACA subsidies that expire at YE25.
• “at least” 5% operating margins – driven by slight MLR improvement and SG&A operating leverage
• $2.25 eps
• ~1.5bn in net parent cash

Today the stock trades for ~8x that 2027 net income target, 6x if you give credit to the net parent cash. I think the multiple should be closer to 30x in 2027 as:

• Revenue will still be growing double digits
• Incremental margins will still be meaningfully higher than existing margins
• The perceived growth runway will be 10x today’s. Investors today perceive the ACA as small and fragile, at high risk from a Republican electoral sweep. In 3yrs, I think the ACA market will be perceived as a decades long share gobbler as ICHRA eats into commercial markets, with additional upside to Oscar’s runway if they can find a way to package and distribute their technology in Medicare or Medicaid.

ICHRA

ICHRA stands for Individual Coverage HRAs. It’s employer health coverage offered by giving employees pre-tax dollars in the form of an HRA to go buy insurance directly and was effectively created by executive order in 2020. It’s often much cheaper and much easier to administer than group insurance, especially if you have a distributed workforce.

Today there’s a few hundred thousand people using it, and it’s immaterial to Oscar. However, in 2027, I expect the ICHRA TAM to be millions of members with continued high growth rates and a long runway. The growth will be driven by a) a number of players building tools that help employers administer the plans, b) inflation in the small group market is expanding the cost differential, c) more brand name carriers offering ICHRA focused plans and raising awareness, d) awareness and social validation are spreading among brokers and HR execs.

Creating ICHRA focused benefit plans and workflows is management’s top focus outside of the core ACA business. They have multiple pilots in progress right now and intend to have plans launched broadly in 2025. I don’t expect ICHRA to be a material growth driver for several years but do expect a large benefit to be in the multiple by 2027.

But the Republicans?

I don’t think the Republicans want to make big changes to the ACA. If they sweep the elections, I do think they’ll effectively eliminate the enhanced subsidies, which are set to expire at YE25 and is in Oscar’s 2027 targets, but I don’t think it’s all that important to them given how much of the subsidies go to red states.

Longer term, I think the exchanges become a very bipartisan platform. They are a decent chassis for a more market-oriented healthcare system. If you squint, you can imagine a world where everyone buys their healthcare individually with HRAs, with employers putting in funds for today’s commercial population and the government funding today’s Medicaid/Medicare members.

But it’s a scale game?

I agree and you can see it in their admin ratio, however you don’t see a dramatically lower margin than the overall market. The biggest player (Centene) is probably ~6-7%. Aetna is losing money. Cigna is ~3%. Oscar is guiding to slightly above breakeven this year, but that includes all the corporate overhead, technology spend, and a material 2024-only headwind from rapid growth. Steady state margins are probably already at or above industry averages implying they could be cost-advantaged in the near future.

Conclusion

There’s no doubt Oscar Health was run as a science project for most of its existence, but I do think they’ve built genuinely differentiating technology. Bertolini’s management has been a game changer. When asked about “low hanging fruit” in terms of opportunities, he talked about “watermelons rolling around on the floor.” Now I think they’ve reached an inflection where the benefits of their technology are more than offsetting their scale disadvantages, and it will shift from a cash incinerator to a cash gusher, with decades of growth ahead.

Catalyst

New CEO, improved operating leverage, market expansion