Oscar is the “hip”, “tech-forward”,”disruptive” health insurance company out of New York. It is a young company that is seeking to disrupt the health insurance industry with cool new online disease management tools.
It is losing money.
And I can’t think of how the business model works on two aspects.
The first aspect is the simplest aspect. Insurers make money when they pay out less in claims than they take in premiums. Pre-PPACA there were three major areas an insurer could control. The first is that it could pay a low rate per service used. This is a strategy of network design and leverage. Big insurers can use the hundreds of thousands of covered lives that they control to leverage a good deal from providers. It is a volume versus price trade-off.
The second means of financial performance control is minimizing the number of services. This is a benefit design question. Deductibles and co-insurance and co-pays are used to keep people from using services. Tiered benefit structures with high level premier providers and then a basic level of in-network providers attempts to drive people to low cost providers that are not prone to prescribing marginally useful but expensive services.
The third means is avoiding expensive people through aggressive underwriting and dumping people once they are expensive.
PPACA significantly restricts the third option (there are a few ways companies still try to do this by making fugly networks and high tiering drugs).
The first and second forms of financial control still remain. And this is where I have a disconnect on their business model.
Modern Healthcare has a decent article on Oscar but one thing really stood out to me:
Oscar appears to be picking up steam near its home base of New York and New Jersey. Anthony Cancela, CEO of Cancela Insurance Brokerage in South Plainfield, N.J., said Oscar rents out a “fairly larger network” for its individual customers and rolled out an extensive advertising campaign.
Renting networks is not cheap. The network builders take a cut between the charge rate of the providers and the contracted rates. It is very seldom a rate that is competitive with other providers. It is a rate that tends to be much higher than Medicare plus a smidgen that is the dominant exchange pricing strategy. So that leaves utilization control as the last form of financial control for an insurer. Oscar may have some decent predictive modeling tools and utilization diversion tools that shift people to PCPs and urgent cares instead of ERs or diabetics to wound clinics instead of in-patient hospitalizations, but those tools are only so good.
The other part of the Oscar business model I can’t figure out is that they are a large net payer of risk adjustment dollars. Oscar is actively marketing itself to young, tech-savvy and healthy people. That is a good way to control utilization as young people tend to use a lot less services than old people. However the Exchanges have risk adjustment that makes this a near net revenue neutral strategy. Risk adjustment sends money from insurers that have low cost and good health populations to insurers that are covering a sicker and more expensive population.
It’s targeted market is young and it is healthy so it means Oscar is paying in:
Oscar is attracting the highly sought-after younger, healthier crowd, but it has been losing money as it gains insurance price-setting experience. The CMS said in September that Oscar owed roughly $8.1 millionunder the Affordable Care Act’s risk-adjustment program for the individual market. Risk adjustment requires plans that had healthier, lower-cost members to pay into a pool that is then directed to health plans that had sicker members.
So Oscar is able to get young and healthy people on an expensive network and high risk adjustment payments. I can’t figure out their business model past the buzzwords.
Bartholomew
“The Clintons never helped me to do a thing in my life, and all of a sudden they control my destiny?”
Since the morning host has decided to politicize, it’s okay to join in.
I wonder if being willfully blind has consequence. Or scapegoating to avoid confronting reality. Or trying to shove people into a straitjacket of lies. Hmmm…
Beware of the Angry White People Supporting Hillary and Spreading the ‘Bernie Bro’ Myth
MomSense
If you can’t figure it out, there’s no hope for the rest of us.
DiTurno
Richard, just wanted to say that I love your posts. Your knowledge of health care and your lucid prose are a great addition to BJ (which I probably shouldn’t abbreviate).
C.V. Danes
Their business model is to appear trendy to the hipster crowd and hopefully peel enough of them off the competition to make a profit on having a large pool of low utilization users. Plus, making the competion more expensive because they will be stuck with the older, sicker, non-hipster folks.
In a vacuum this might work, but I think they will soon get squashed by the big players who have vastly deeper pockets.
Richard Mayhew
@Bartholomew: Wrong thread?
Richard Mayhew
@C.V. Danes: It fails because of risk adjustment as a strategy. The low utilizers who cost nothing also have minimal net revenue post-risk adjustment. It could have been a viable strategy pre-PPACA (although building up the underwriting expertise to be profitable assholes takes years too)
Chyron HR
@Richard Mayhew:
Sorry, buddy, but Tad Devine says you’re the enemy regardless of what you post.
The Raven
Last time I had thoughts like that, the firm was Enron. Could it be some sort of scam?
Richard Mayhew
@The Raven: I see a lot of buzzwords and a lot of talk about disrupting a dinosaur industry. Speaking as someone in that industry, I am not seeing the mechanics and more importantly, the high profile hires that Oscar has made are people who are not in healthcare but are either consultants or politically connected.
Ken
@The Raven: No, it’s not a scam, because sometime in the last 25 years we got to the point where “get a lot of money from investors on a dubious business plan, use it to pay ourselves fabulous salaries and bonuses, and get out before it collapses” is no longer considered a scam.
See also the Carson campaign. (ETA: And the words “consultants or politically-connected” in Richard’s comment 9.)
BBA
Like most VC-backed firms, its business model is to keep raising funds from VCs until they figure out a real business model. New to the insurance world, but it’s how just about every iPhone app maker got started. Uber, for instance, is still losing money.
Xboxershorts
@Richard Mayhew:
And I have yet to see where adding a layer of profit (or profit taking to be exact) has ever added value or savings to a service.
KBR and the logistics scandals of the Iraq war come immediately to mind…
Loviatar
@Richard Mayhew:
Internet of Things Business Model
– create App
– claim to be disruptive in a techie way
– generate buzz
– sell out when buzz is big enough to make you really, really rich
– don’t worry about actually making money, the point of the business model is to make you rich
see Uber, for example how it works.
The Raven
Uber, though, offers an innovative, albeit problematic, way of providing a real and useful service. They are also taking advantage of demand unmet due to regulation in the taxi business as well as evading labor law. I think, like Walmart, they’re underpricing in the hope of driving the competition out of business.
The Raven
Correction: Uber says they are planning to drive the competition out of business. Just what people who don’t have smart phones and cannot afford to pay Uber’s exorbitant peak-hour pricing are going to do is, ah, left as an exercise to the student.
TallPete
Fester Addams
Maybe they’re making a bet that the Republicans succeed in fucking up Obamacare.
C.V. Danes
@Richard Mayhew: Yup. I look forward to reading the inevitable case study in the Harvard Business Review :-)
gvg
Believe their own hype? Think they are smarter than everyone else? It’s happened before that people have essentially scammed themselves.
Question, do insurance companies have to show regulators that they have enough assets to cover promises in order to be in business? It sounds like they are going to fail and so the question is who is going to get hurt. I don’t care if the investors lose money but the people who need the healthcare and for that matter providers who actually gave services need to be protected.
The Raven
@TallPete:
I don’t understand that privatized Medicaid stuff — what value do the care management firms add? But they do take a cut…
This whole idea that a business bureaucracy is somehow more cost-effective than a government bureaucracy strikes me as a load of bullocks. What’s the business model — underpaying the office staff?
The Raven
(deleted by author — sorry, folks)
Richard Mayhew
@The Raven: Disclaimer: Mayhew had a Medicaid Managed Care contract and right now a decent chunk of my time/brain power is spent on that side of the business.
What is the value proposition for an MCO from the state’s point of view.
1) Capitated risk model gives the state way more predictability on expenses. The MCO bears the risk of a 300 person knife fight at the National Hemophilia Conference plenary session.
2) MCO’s can say NO — and the MCO gets blamed for the No not the state politician who get an easy applause line attacking us for being bastards
3) MCO’s tend to do slightly better than fee for service state organizations on getting preventative and maintenance care to members
Ken
@The Raven: I don’t think underpaying the staff works in medical insurance any more, since the PPACA sets a minimum MLR of 85%. I suppose paying less on the low-level staff lets you spend more of that 15% on dividends and/or on “hookers and blow” (to use Richard’s phrase).
Tyro
We should always be skeptical of businesses whose entire pitch is “we can do it cheaper,” simply because they’re not delivering anything new, simply doing something with fewer costs than the other guy, and almost certainly finding those savings by deciding that the customer will be willing to settle for less or finding some source of cheaper, less skilled labor.
What is the justification for Oscar’s existence that people do not already have access to?
Richard Mayhew
@Tyro: I have no problem with Oscar exisiting, we need to experiment, we need to try new things, and we need to expect that most experiments will fail.
IF Oscar’s predictive modeling tools are amazing in identifying diseases before they manifest themselves as expensive conditions, if their utilization management systems are incredible in that people only go to ER’s to stop arterial bleeding or get admitted to hospitals and all other indeterminate cases get sent to PCPs or urgent cares, if their transparency tools drive people to the most efficient providers, than it is a massive societal win and they make a shit ton of money.
I have no problem with that experiment and the favorable outcome (make a shit ton of money because people are way better off)
I just am having a hard time seeing all of their IF’s making sense much less being met.
PJ
@Tyro: Um, better service at a lower cost? Whether they can deliver it or not is apparently a question (and it will suck to be me if the answer is “not”, because they are my insurer), but every carrier in my area (NY) that had a similar sized network was significantly more expensive in premiums, deductibles, per visit charges, or all three.
SarahT
@Richard Mayhew : Don’t really understand this stuff, but as an fairly satisfied Oscar customer, I sure hope they keep going. I’m certainly not young and both my health and tech skills are meh, but they do have great customer service, a decent network, easy to understand billing, and competitive (for NYC) rates. I’d hate to have to pick another company next Open Enrollment period.
The Raven
@Ken: The minimum MLR is a maxiumum gross profit. 15-20% near-guaranteed by the gov, once they get bugs worked out? That’s a sweet deal.
@Richard Mayhew: Does lower-cost non-union clerical staff also have something to do with it?
Ken
@The Raven: The 15% isn’t the profit, it’s the operating budget. The profit is one slice of that, after they pay for salaries, websites, app development and maintenance, advertising, and whatever else they need to keep the business running.
SPC
@The RavenWith MLR, average margins are around 3-4% (and generally weren’t much higher before the ACA). Hopefully is helping reduce admin overhead a little.
Raven Onthill
@Ken: gross profit. Net profit, profit after those things are taken out? Well, that’s not a published number for private insurance companies, but it is for Medicare; it’s 2%. Let’s be generous and say that the private companies have 2% additional expenses (gee, whatever happened to the efficiency of private industry?) So why couldn’t insurance companies operate at 10% MLR? Since the volume is so high, they probably could operate on even smaller profit margins.
Unless someone shows me reliable data to the contrary, I will continue to believe that the gross profit is gross.
Raven Onthill
@SPC: so high? How is it that Medicare is so much more efficient?