I admit it, I can not figure out why Oscar is a media darling. I might be an old fuddy duddy stuck to the ways of a dinosaur industry but I can’t figure out what they are doing that is so vastly superior to what my former co-workers (who work at a profitable entity by the way) do. And then I read this write-up on Oscar in BackChannel and I know what their core competency is; getting the tech press to write fawning write-ups. Is that truly a market breaking and market making core competency with sustainable value?
I just want to pull out a few things that had me wait the weekend to write this as I just couldn’t go into an immediate critique.
(By the way, “members” is Oscar’s preferred term for its users — “customers” sounds too meretricious, and “patients” implies that they are sick. Oscar thinks of itself as a wellness machine.)
Members is fairly standard language at every health insurer I have ever talked to, worked for or been covered by. If I am talking with actuaries or the finance department, I’ll hear the term covered lives as well. Per Member Per Month (PMPM) is a nearly universal metric for first pass cost analysis. Quora had an answer for PMPM from 2011.
The collaboration with Mount Sinai is part of Oscar’s new “narrow network” in New York City. This term refers to a tightly bounded but high quality set of medical services, and is a key component of Oscars full-stack approach.
Everyone is doing a narrow network these days. My previous insurance was through an IDN’s narrow network. My new job’s insurance is through a narrow network. Smart insurers use narrow networks to drive both pricing down and quality up. This would have been innovative in 2004. Now it is normal. Penn’s LDI has a great brief on the evolution of QHP narrow networks.
The numbers on Schlosser’s screen marking Oscar’s subscribers don’t seem game changing— some thousands in each age group; the largest chunk in the 26 to 35 bracket. It’s not surprising that young adults are susceptible to a health care insurer with the vibe of an internet startup; after all, Oscar has been called the “Hipster Health Insurer.” But there are both older and younger signups as well, even some people over 65. “It’s exactly on target,’” says Schlosser of the mix, his English heavily accented by his native German. As for the numbers themselves, Oscar had about 120,000 members last year and may not (because it left two markets) have many more this year
What I see in this paragraph is massive risk adjustment outflows.
We know that the current Exchange market is an older market with a median age over 35. Young people on average are net healthier individuals so their premiums will be used to cover sicker individuals. The marginal young person dollar is far more likely to see a significant portion of that dollar leave a carrier’s coffers to balance the risk pool. Oscar might be able to sign up a lot of people but the net of risk adjustment revenue is not impressive PMPM. The one risk adjustment protection that they have is that their pricing is not that good. For example in San Francisco (zip code 94105) they are the #3 Silver. For a single 40 year old, they are priced $39 per month more than the benchmark Silver offered by Kaiser and $76 more than the low cost Silver offered by CCHP. For a 25 year, it is a $30 spread from Oscar to Kaiser and $60 from Oscar to CCHP. The lowest price Silver assuming the quality is not horrendous will get most of the healthy people who are cost sensitive and not network sensitive so they’ll get the most risk adjustment exposure.
To serve its New York members, Oscar has opened its first dedicated clinic, in collaboration with Mount Sinai Heath System, one of its new partners for services in the city. The fourth-floor facility near the Jay Street subway stop in Brooklyn doesn’t resemble a doctor’s office as much as a spa, or the headquarters of a cool startup—down to the Nespresso machine and free Kind bars. In a conscious homage to the Apple Genius Bar, the traditional crabby receptionist is replaced by smiling “greeters” who help you log in on an iPad. They are trained to stand next to visitors instead of behind them, to foment a feeling of collaboration. Those with actual ailments are shuttled to exam rooms where doctors continue the digital huddle; visiting Oscar members who are feelin’ good can drop into a “multipurpose wellness center,” which will host classes on disease maintenance, pregnancy, and yoga, as well as TED-type talks on subjects of community interest.
Cool clinics with modern design principles and yoga classes sound great. They sound like a place to be hip and chill and part of Brooklyn’s third and fourth wave of gentrifiers while the real action for the next scene has passed the neighborhood by already. I again am seeing massive risk adjustment outflows. People who are active and taking classes and feeling good will have very low HCC scores. An insurer needs those people to pay for the very sick and the very expensive but too many of those people in the QHP market means risk adjustment outflows. If Oscar is optimizing their pitch to young and healthy people, making money under ACA rules and most likely any functional replacement of the ACA that has significant limitations on underwriting will be tough.
Plenty of insurers have adapted a neighborhood PCP clinic model. Harken and Zoom are also recent start-ups that had a focus on lifestyle and PCP access. Value Based Insurance Design (VBID) is proliferating where PCP care is very low or no cost sharing.
— Bijan Salehizadeh (@bijans) January 9, 2017
Optum and United Healthcare is making a major play far higher up the value chain with their most recent acquisition of a surgical specialty practice. They are also playing in the on-demand PCP business with MedExpress (I’ve used MedExpress for years and the experience has been extremely nice and user friendly)
I am also seeing a core problem with the individual market. Pre-ACA the individual market had two segments. The first were long termers such as consultants and contractors. They would stick around and PCP services could produce a decent return on investment through better future health. The other segment of the market were short termers who needed coverage for a couple of months as they changed jobs or something better came their way. They were healthy enough to pass through underwriting screening but they would be gone with anything more than a flu shot was a money loser in terms of preventative care. The ACA has added a third group, people who were either too sick or too poor to afford insurance. But again, we know the QHP market is still a very high churn market. Unless Oscar has almost no churn and can offer products in all lines of business in order to internalize the gains of prevention, PCP services are a poor financial investment for a carrier that is overwhelmingly in a high churn, individual market. And since they are chasing Millenials, that is a group that is extremely likely to churn out of the individual market due to either job moves or geographic moves.
Warren oversees over 60 engineers, who not only work on the app and convivial interfaces but also are constructing a digital infrastructure to make Oscar a platform where third-party developers can add value. Down the road, he sees the company as a pioneer in exploiting machine learning to improve services for customers, and maybe even to anticipate medical crises.
My first thought on this is that I’ll bet on Carnegie Mellon or Google or MIT or someone with millions of covered lives to really be able to effectively do deep data mining and predictive analytics rather than a company with 135,000 covered lives in 2016 and maybe 200,000 unique covered lives throughout its life. Non-obvious solutions need both massive data sets and amazing expertise. Oscar does not have the data sets that the Blues or Optum (UHC) or CalPers or Medicare has.
Secondly, sixty software engineers are not cheap. And I think the idea of building an infrastructure where other developers can plug in is a great idea but there is a massive chicken and an egg problem. Other people will want to plug in if and only if there are enough Oscar members to make it worthwhile to do so. And Oscar won’t get those members if they can get their pricing both under control and profitable. Right now Oscar is pricing their products in the middle of the market. This pricing is still insufficient to cover their claims expense through the first nine months of 2016 in New York (126% MLR when a healthy insurer’s MLR is in the mid-80s) and their administrative build-out costs are very high (26% of premium admin expense when a health insurer has no more than half that as their admin costs) Even if Oscar could run with no administrative costs, they would need to raise their premiums by 40% to break even on their medical costs. Their story is that they’ll use the combination of their awesome technology and a lower cost narrow network as a means of reducing their medical expenses but they need to find some combination of $142 per member per month in spending reductions or increased revenue to break even before we even think about their administrative costs.
It’s fairly easy to get good press and decent start up numbers when you’re taking a 30% loss on the operational product and you have a hugely expensive back-end that has not achieved economies of scale nor useful operational. The challenge and the thing that I still have not been able to figure out is how the hell does Oscar break even operationally in the individual and small group markets as those markets are extremely price sensitive and have higher than average churn. I can’t figure out how Oscar does well in the large group market as their price sensitivity is a bit less but they want bigger networks and more technical sophistication. I have been scratching my head for two years on Oscar and I am wearing out a bald spot over my right ear now.
So, if Oscar’s core competency is getting good press from the tech side, is that enough to actually pay the bills and be profitable?