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Oscar(OSCR) - 2021 Q4 - Annual Report

Part I Business Oscar Health is a technology-driven health insurer offering diverse plans and monetizing its platform, with significant membership growth - Oscar is the first health insurer built on a full-stack technology platform, offering Individual, Small Group, and Medicare Advantage plans2933 - As of January 31, 2022, Oscar served over one million members across 22 states and 607 counties3033 - The company launched +Oscar in April 2021 to monetize its technology platform, generating fee-based and potential risk-sharing revenue31 Our Offerings Oscar offers Individual, Small Group, and Medicare Advantage plans, plus its +Oscar platform for external clients - Offers health plans in Individual, Small Group, and Medicare Advantage markets33 - Individual and Small Group plans are sold on and off ACA exchanges, with premiums subject to regulatory approval and risk adjustment343536 - Medicare Advantage plans receive a fixed PMPM premium from CMS, adjusted for Star ratings and member health status38 - The +Oscar platform provides technology and services to clients, generating fee-based income and risk-sharing revenue, with clients including Cigna and Health First Health Plans39 Membership Total membership grew significantly to 598,169 in 2021, with Florida, California, and Texas as key states Membership by Offering (as of Dec 31) | Offering | 2021 | 2020 | | :--- | :--- | :--- | | Individual and Small Group | 577,799 | 400,120 | | Medicare Advantage | 3,864 | 1,924 | | Cigna + Oscar | 16,506 | — | | Total | 598,169 | 402,044 | Membership by State (Top 3, as of Dec 31) | State | 2021 | 2020 | | :--- | :--- | :--- | | Florida | 291,894 | 115,171 | | California | 98,532 | 103,834 | | Texas | 90,369 | 93,164 | - For the year ended December 31, 2021, $2.5 billion of direct policy premiums were collected from CMS, compared to $911.6 million collected directly from members43 Government Regulation Oscar's operations are subject to extensive federal and state regulations, including CMS, ACA, data privacy, and fraud laws - The company is subject to comprehensive oversight from CMS for its Medicare Advantage plans, regulating payments, benefit design, marketing, and quality assurance80 - State insurance laws impose restrictions and require health insurance subsidiaries to meet statutory risk-based capital (RBC) requirements, which all subsidiaries met as of December 31, 20218586 - The ACA mandates minimum Medical Loss Ratios (MLR) of 80% for Individual/Small Group and 85% for Medicare Advantage, requiring premium rebates if not met9193 - The company must comply with numerous data privacy and security regulations, including HIPAA, CCPA, and NYDFS Cybersecurity Requirements949798 - As a recipient of federal funds, Oscar is subject to fraud, waste, and abuse laws, including the False Claims Act (FCA), which can lead to significant penalties and government audits103104105 Risk Factors The company faces risks including historical losses, regulatory changes, technology reliance, and internal control weaknesses - The company has a history of losses, with an accumulated deficit of $2.0 billion as of December 31, 2021, and may not achieve future profitability126 - A significant portion of revenue is derived from ACA-regulated health plans, making the business highly sensitive to changes or challenges to the ACA133 - The dual-class stock structure concentrates 82.8% of voting power with Thrive Capital and Co-Founders, limiting other stockholders' influence253 - A material weakness in internal control over financial reporting related to IT general controls was identified as of December 31, 2021290 Properties The company leases its corporate headquarters in New York, NY, and additional offices in Tempe, AZ, and Los Angeles, CA - Corporate headquarters are leased in New York, NY, with additional leased offices in Tempe, AZ, and Los Angeles, CA297 Legal Proceedings The company faces ongoing regulatory reviews and ordinary course legal proceedings, with no material impact expected - The company is subject to ongoing reviews by regulatory authorities regarding business practices, which can result in fines or sanctions298 - Oscar is involved in ordinary course legal proceedings, including class actions and claims from members and providers, but does not believe any pending matters will have a material effect299301 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Class A common stock began trading on NYSE in March 2021; no public market for Class B; no cash dividends anticipated - Class A common stock began trading on the NYSE under the symbol "OSCR" on March 3, 2021304 - The company has never declared or paid cash dividends and does not intend to in the foreseeable future, citing the need to fund business growth306 Management's Discussion and Analysis of Financial Condition and Results of Operations Oscar Health saw significant membership growth and premium increases in 2021, but net loss widened due to higher claims Financial Results Summary (in thousands) | | Year Ended Dec 31, 2021 | Year Ended Dec 31, 2020 | | :--- | :--- | :--- | | Premiums before ceded reinsurance | $2,712,988 | $1,672,339 | | Premiums earned | $1,831,020 | $455,035 | | Total revenue | $1,838,715 | $462,801 | | Net loss | $(571,426) | $(406,825) | Key Operating and Non-GAAP Metrics | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Members | 598,169 | 402,044 | | Medical Loss Ratio | 88.9% | 84.7% | | InsuranceCo Combined Ratio | 110.7% | 110.8% | | Adjusted EBITDA (in thousands) | $(429,826) | $(402,447) | Results of Operations In 2021, total revenue increased significantly to $1.84 billion, but net loss widened due to higher claims and expenses - Premiums before ceded reinsurance increased by 62% to $2.7 billion in 2021, driven by higher membership and plan shifts375 - Reinsurance premiums ceded decreased by 28% to $882.0 million in 2021, due to a lower average quota share cession rate376 - Claims incurred, net, increased by 425% to $1.6 billion, due to higher membership, increased COVID-19 and non-COVID-19 costs, and decreased quota share reinsurance377 - General and administrative expenses increased 59% to $265.1 million, attributed to headcount growth for partnerships, technology, and public company costs379 Liquidity and Capital Resources Oscar manages liquidity at subsidiary and holding company levels, with strong capital and recently raised $305 million via notes - As of December 31, 2021, health insurance subsidiaries held $1.8 billion in cash and investments, while Holdco held $738.6 million384387 - The combined statutory capital and surplus of insurance subsidiaries was $474.8 million at year-end 2021, exceeding minimum requirements386 - In March 2021, the company repaid its Term Loan Facility using IPO proceeds, with no outstanding borrowings under its $200 million Revolving Credit Facility as of December 31, 2021392395 - In February 2022, the company issued $305 million in 7.25% Convertible Senior Notes due 2031400 Critical Accounting Policies and Estimates Benefits Payable, including IBNR, is a critical accounting estimate determined by actuarial methods and completion factors - Benefits payable, which includes IBNR, is a critical accounting estimate based on actuarial methods, historical claim patterns, and medical cost trends418419 - Completion factors are the most significant factor in developing the benefits payable estimate421 Sensitivity of Benefits Payable to Changes in Completion Factors (as of Dec 31, 2021) | Change in Estimate | Increase (Decrease) in Benefits Payable (in thousands) | | :--- | :--- | | (1.00)% | $49,075 | | (0.50)% | $24,414 | | 0.50% | $(24,171) | | 1.00% | $(48,103) | Financial Statements and Supplementary Data This section presents audited consolidated financial statements and the auditor's report, highlighting critical audit matters for Benefits Payable and Risk Adjustment Transfer Payable Consolidated Balance Sheet Highlights (in thousands) | | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $3,321,650 | $2,272,106 | | Cash and cash equivalents | $1,103,995 | $826,326 | | Total Investments | $1,431,562 | $692,127 | | Total Liabilities | $1,929,128 | $1,823,088 | | Benefits payable | $513,582 | $311,914 | | Risk adjustment transfer payable | $794,398 | $716,370 | | Total Stockholders' Equity | $1,392,522 | $(1,295,893) | Consolidated Statement of Operations Highlights (in thousands) | | Year Ended Dec 31, 2021 | Year Ended Dec 31, 2020 | | :--- | :--- | :--- | | Total revenue | $1,838,715 | $462,801 | | Claims incurred, net | $1,623,995 | $309,353 | | Total operating expenses | $2,383,196 | $865,067 | | Net loss | $(571,426) | $(406,825) | - The independent auditor's report identified two critical audit matters: valuation of IBNR Benefits Payable and Risk Adjustment Transfer Payable under the ACA438440443 Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2021, due to a material weakness in IT general controls - Management concluded that disclosure controls and procedures were not effective as of December 31, 2021623 - A material weakness was identified in internal control over financial reporting related to IT general controls, specifically concerning program change management, user access controls, and program development controls626627 - A remediation plan to enhance IT control processes was initiated in Q1 2022630 Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 proxy statement - Information is incorporated by reference from the 2022 Annual Meeting of Stockholders proxy statement639 Executive Compensation Information on executive compensation is incorporated by reference from the 2022 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the 2022 Annual Meeting of Stockholders proxy statement640 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details securities authorized under equity compensation plans; other information is incorporated by reference Securities Authorized for Issuance Under Equity Compensation Plans (as of Dec 31, 2021) | Plan Category | Securities to be Issued Upon Exercise | Weighted Average Exercise Price | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 50,437,276 | $10.29 | 11,576,494 | Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2022 proxy statement - Information is incorporated by reference from the 2022 Annual Meeting of Stockholders proxy statement645 Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2022 proxy statement - Information is incorporated by reference from the 2022 Annual Meeting of Stockholders proxy statement646 Part IV Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed with the 10-K, including Schedule I - The financial statements required by this item are listed in Part II, Item 8648 - Schedule I, Condensed Financial Information of the Parent Company, is included; other schedules are omitted649