A successful IPO for Oscar Health could open doors for more ‘insurtech’ firms

AS OSCAR HEALTH PREPARES for an initial public offering, some analysts argue that the New York City-based company’s reliance on reinsurers makes it a technology startup in the insurance industry, rather than a full-stack health insurer.

Oscar, which did not respond to interview requests, is liable for just 23% of the risk associated with the policies it has sold. The company has passed on the rest of the uncertainty to reinsurance companies, businesses that basically act as insurance for insurers. While reinsurers are also used by legacy payers, startups like Oscar generally rely on these companies to a greater degree as a way to way to break into the expensive industry and offer competitive premiums, according to Michael Yang, a managing partner at investment company OMERS Ventures.

“Insurance is very capital intensive to get going,” Yang said. “Ultimately, you need capital for a rainy day. Pardon my French, but sh*t’s going to happen. You’ve got to pay out the claim. So insurers are happy to have a reinsurance partner to help spread the risk out.”

For “insurtech” startups, paying reinsurers to take on some of the risk associated with their high-cost cases can be a less costly way to grow than selling equity to venture capitalists. As competition increases in the reinsurance space, with hedge funds continuing to enter the market, Yang said reinsurers are often happy to extend their risk pools and pocket some of the premiums. But, like any investor, they will close access to their balance sheets if the insurtech company is consistently losing money.

For Oscar, Yang said the threat of losing reinsurance coverage backing will force the company to focus intensely on stabilizing its medical-loss ratio and growing its member count. In 2020, the company passed on 32% of the risk associated with its health insurance to AXA France View and 45% to Berkshire Hathaway Specialty Insurance Co., according to the S-1 it filed with the Securities and Exchange Commission. This left the company liable for just 23% of the risk associated with the policies it sold, which also limits its profit potential.

Oscar is presenting a “capital-light strategy,” Yang said.

The company, which offers individual and Medicare Advantage plans along with small group coverage through an alliance with Cigna Corp., generated $462.8 million in revenue in 2020, down 5.2% from $488 million the year prior. Its net operating loss reached $402.3 million, a 55% yearover-year increase from $259.4 million in 2019. Oscar in its S-1 filing acknowledged it has not been profitable and, as of December 2020, accumulated a deficit of $1.4 billion.

The company said it plans to grow by acquiring new members in existing and new markets, introducing new products and plans, evaluating acquisition opportunities and monetizing its technology and administrative services, like it did in a recent agreement with Health First Health Plans. In 2020, the company counted approximately 529,000 members, up from nearly 230,000 in 2019.

In addition to counting on legacy reinsurers to stabilize its risk pool, Oscar has leaned heavily into the Affordable Care Act’s reinsurance program, with the majority of its policy premiums collected coming from the CMS in the form of advance premium tax credits, noted Adam Block, an assistant professor of health policy at New York Medical College. He said Oscar’s focus on Medicare Advantage could be a strong way to compete since there is generally a standard price paid for services in government-sponsored coverage. This allows the company to avoid being undercut by bigger players with greater leverage when it comes to price negotiations.

“It shows you can do this and lose money and still do well in the market,” Block said. “If their IPO does well, and many of the investors cash out, then it is a signal that you can succeed in this, which I don’t think is necessarily a bad signal. I have always believed that the insurance industry was in need of a shake-up.” ●

Oscar generated $462.8 million in revenue in 2020, down 5.2% from $488 million the year prior. Its net operating loss reached $402.3 million, a 55% yearover-year increase from $259.4 million in 2019.