Chit Chat Stocks - Oscar Health Stock: Undervalued or Overhyped? (Ticker: OSCR)

Episode Date: July 30, 2025

On this episode of Chit Chat Stocks, Brett gives a research report on Oscar Health (ticker: OSCR). We discuss: (03:05) Understanding the Affordable Care Act (05:57) Oscar Health's Business Model and Market Position (09:03) User Experience in Health Insurance (12:15) Profitability Challenges in Health Insurance (15:42) Oscar Health's Growth and Market Share (18:42) Management Changes and Leadership Impact (22:42) Market Opportunities and Competitive Landscape (33:12) Navigating Financial Headwinds in Healthcare (38:27) The Rise of Individual Coverage Health Reimbursement Arrangements (41:41) Profitability Uncertainty in the Health Insurance Sector (46:30) +Oscar: A Moonshot for Oscar Health (50:44) Valuation Challenges and Market Perception (59:01) Emerging Moats in Health Insurance Subscribe to our Substack and read the full report: https://chitchatstocks.substack.com/ **************************************************** JOIN OUR NEWSLETTER AND FREE CHAT COMMUNITY: https://chitchatstocks.substack.com/  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  https://www.interactivebrokers.com/  Interactive Brokers is a member of SIPC.  ********************************************************************* Fiscal.ai is building the future of financial data. With custom charts, AI-generated research reports, and endless analytical tools, you can get up to speed on any stock around the globe. All for a reasonable price.  Use our LINK and get 15% off any premium plan: ⁠https://fiscal.ai/chitchat  ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. you are listening to chit chat stocks a podcast that helps you find your next great investment i'm one of your hosts ryan henderson and i'm joined as always by brett schaefer today we have one of our monthly research report episodes and we are talking about a disruptive company potentially disruptive company in the health care space this has been one that's caught a lot of

traction with investors and potentially one that's a little misunderstood as well. We're going to walk through how to analyze an insurance business, how to analyze a health insurance business too, because it's different than other industries. And we're going to go through the business model, the growth opportunities and where we think Oscar stands today. But before we do, Brett, what inspired you to research Oscar? Well, I think a lot of tweets out there. there's a lot of people interested in this company uh we saw on uh some of like just the popularity around people using it on you know our sponsor fiscal ai on twitter so many people talking about the company and when you look at some of the first metrics and for anyone that's

using you know a platform like fiscal ai there's a lot of growth metrics that'll pop out but there are so many different moving parts with this business today that I think one, it gets a little misunderstood on the bull side, but then on the bear side, it's getting tossed into this health insurance downturn, a really tough period for the industry, along with some of the potential fraud that's been going on and the investigations into people like UnitedHealthcare. So it's an industry that's large, highly profitable. There's major disruptions. So there could be an opportunity here for a promising stock. And we're going to get into it. But Ryan, I have to ask first, are you a participant of the Affordable Care Act marketplace? Do you buy your health insurance

as an individual there? I do. And let's talk here about what that is, because we might have some international listeners that have no idea what's going on there. So how did Oscar actually get started and lay the foundation for the American healthcare system overall? It is probably one of the most complicated and convoluted industries, I think, for someone who hasn't, especially I imagine international investors looking from the outside in. But even Americans, it's a little bit complicated. So take us through it. Yeah. And if either of us hadn't used these marketplaces, it would have been much harder for me to understand. So on March 23rd, 2010, the American healthcare system was changed forever with the passing of the Affordable Care

Act. Here's a quote from industry analysis. The ACA affects virtually all aspects of the health system, including insurers, providers, state governments, employers, taxpayers, and consumers. The law built on the existing insurance system, making changes to Medicare, Medicaid, and employer-sponsored coverage, and a fundamental change was the introduction of the regulated health insurance exchange markets. The goal of the ACA is to get more people on health insurance. It allows for broader Medicaid inclusion. That's government sponsored stuff for poor parts of the population. There are these exchange markets and there's financial help for people to afford health care plans on these marketplaces. since the passing, the percentage of uninsured Americans has been cut in half from around 15% of the population to 7.5% in 2023. Today, and with Oscar Health, we're going to focus on these exchange markets, the ACA exchange markets. That's the Obamacare exchange markets, if you want to use the popular nickname there. It is their growth and the growth of these

statewide exchange markets from both individuals and employers that has garnered investor excitement around Oscar Health, which I would say is maybe the only insurance disruptor from the 2020-2021 hype cycle that has turned into a real business. Well, maybe the 2025 might turn out to be an unprofitable year for them again. I know there's some other ones that are still hanging around, like Root and Lemonade, but at least within health insurance, you can go look at Clover's stock price, unless that's turned into a meme stock. Oscar Health is kind of one that separated itself on the path. It went through, as we'll go through, kind of the Carvana stock chart and has recovered quite a bit. Now, but back to the ACA marketplaces, they are state by state. They're

either run by the state itself or with assistance of the federal government. The marketplaces are essentially just online exchanges where people who do not have insurance provided by an employer, so that would be someone like Ryan or I, we, after we turn 26, buy our own insurance. For anyone that doesn't know internationally, if you're under the age of 26, you still get to get included on your parents plan. But you have to buy on the open market. And the theory is that a centralized exchange with all of the options out there will foster competition and reduce costs. Now enrollees in the marketplace have soared since 2020. After stagnating for five years, this was due to huge tax breaks and discounts for coverage as a part of the American Rescue Plan in 2020. And then the

Inflation Reduction Act also extended these discounts through the end of 2025. As an individual, not an investor, I was disappointed to see this because then I realized, well, my health insurance premiums might be going up in 2026. A little disappointed in that. But the government assistance is expected to expire next year. This is a huge uncertainty for the entire industry, especially for someone like Oscar Health, that's really, you know, almost 100% in play in these ACA marketplaces. And we'll talk more about that later. Now, as we talked about, we have, I have experience using this as an independent contractor and small business owner. Ryan does as well. Essentially in November or December of the year, the state marketplace enters open

enrollment and you pick your plan for the upcoming year. There are varying tiers based on monthly premiums, total healthcare coverage, and out-of-pocket expenses. For example, I pay a high deductible one that's like $250 a month, a little bit of a tax break, and I get very cheap coverage, but it's cheap on a premium one basis. You have an up to $6,000 deductible and $9,000 annual out-of-pocket maximum. I'm doing one called Ambetter, which is owned by Centene Corporation. you get things like annual primary checkups are free, but most everything else you pay out of pocket up to that deductible. And the deductible is just an industry term for essentially you're going to pay that until the insurance kicks in. Now I say that because on the marketplace,

you can either choose a cheaper premium option based on some of their tiers, or you can have a higher premium option that covers a lot of stuff that you might know is coming down the line. Now, I'm talking about my personal one because when I was looking at this Oscar Health and the industry in general, I kind of thought, well, why did I choose this one called Ambetter, which, again, is owned by Centene Corporation? And I really couldn't tell you. I don't care about the brand. It simply seemed like the best, cheapest coverage I could get based on monthly premiums and my health care needs, which luckily are quite low.

The mobile application and website are okay. It feels clunky when dealing with my doctor, and you have to use this other software called MyChart, which is quite popular. That is a software suite that connects everything, but rather poorly, in my opinion. But if we go back to the actual ACA marketplace as a whole, there are restrictions set by the legislation that makes plans available somewhat commoditized. This is very, very important, at least in my opinion, when looking at the competition here. you cannot deny people coverage or exclude them due to pre-existing conditions such as diabetes plans can only vary by age location family size and tobacco use that's the four ways i guess discrimination might be a weird way to use it but it's only the four ways you can discriminate

and charge people a different rate some people might think that's good some people might think that's bad as someone that tries to be healthy in my own life i i feel like i wish i could have other things that are factored in uh but when you're looking at the business no other considerations can be made so you have essentially it's it's tough to compete you might have united health versus centene versus oxford health offer essentially the same insurance coverage for different people let's pause let's pause for a second yeah how do you feel about this whole process okay i mean i mean buying for the user experience uh it's it's the buying from the marketplace is fine i wish there was more ability to have customizations versus different lifestyles

but i know that gets into discrimination and stuff like that it's a whole um kind of a fine line of what you're gonna do but buying through the asa marketplace and i'd be curious your opinion too it's not too difficult once you understand the process after you do it a first time you can understand how it works pretty easy now dealing with the health insurance company that's a whole different matter and confusion can start probably immediately but what are your thoughts how is it i guess have you done it in texas yet yeah i have i did not think it was a very enjoyable experience there this is probably the one thing i noticed is that software is certainly built certainly built better not by governments like i think it's

more intuitive user experience and user interface when there's uh like a major financial incentive and it's it's a private company doing it and they care about that so i actually had a bit of a tough time but yes like you said once you finally get through it you navigate it all that my only gripe here is unless you read reviews or you do sort of side research on these companies and these providers you're solely going off of pricing whatever pricing is best for you and that like you said is now pretty much commoditized and you don't really have a sense of how the ease of use is, how the platform works, whether or not they're like a reliable provider and whether or not they're easy to ask questions to, customer support, all that. You don't really

have a sense of that until you actually start using them. I agree. Yeah. But on the flip side, unlike an employer, after a year, you can switch to someone else if you're upset with your current provider. True. Okay. Let's keep going through this. Talk about the economics and how they've, I guess, changed and how they're somewhat restrictive across the industry. Yeah. So profits are also commoditized per, I wish I knew their acronym, but there's a whole research group called the KFF that does a lot of good coverage on here and explains a ton of stuff within the market. Quote, in the individual and small group markets, insurers must spend at least 80% of their premium income on healthcare claims and quality improvement efforts,

leaving the remaining 20% for administration marketing and profit. So this is the medical loss ratio, the percentage of health insurance premium spent on claims every year. So essentially that 80% is it's what it's not the combined ratio, but whatever it would be for another type of insurance, the medical loss ratio is essentially, okay, look, your maximum that you can earn every year is going to be 20% of kind of a gross profit or maybe a contribution profit if we're kind of going to use another term from something that other listeners might be understandable about using a different industry. This is restricted.

It's maximized. So essentially, if you go over that, you have to pay it back every year. And that's their target for a health insurer. Now, you have to go through plan pricing every year. You have to go through a formal review process with your state, and you have to almost predict what your costs are going to be in the year ahead to try to line up with that 80% as best as possible. Yeah, so just to kind of rehash that. basically if they write a hundred dollars in in insurance policies coverage yeah a hundred dollars they can't go paying out fifty dollars in claims well they could potentially but then they'd have

to make up for it and improve their business whatever to get to that reimburse eighty dollars yeah they couldn't make business they couldn't make business improvements they would have to i think reimburse their uh their customers but essentially think about this as an investor you have 80 percent of the premiums are going to go out the door every year at least maybe more if you're not uh underwriting perfectly and then you have to be as best as possible you know have an efficient overhead cost marketing admin customer support you have that 20 percent to either spend on all that and then eke out a profit. Now, insurers have this ceiling. So where can they differentiate themselves? You kind of think, all right, well, the plans are almost a commodity.

There's not much you can differentiate on. You have the 80% max on profit pools. You really have the user experience, as Ryan mentioned, that you start using some of these insurance companies and they're terrible. You have customizations for add-on plans and different things that you can do with your customers. And then you have technology. Now that is where Oscar Health plans to disrupt the healthcare market. Are you tired of moving money between your bank account and brokerage account? Well, with Interactive Brokers, there's no longer a need to have a separate high-yield cash account. Interactive Brokers offers up to 3.83% interest on instantly available cash. That means if you've got some cash sitting in your brokerage account and you're waiting to

deploy that money until you find your next great investment, now it's actually going to be earning something in the meantime. This is just one of the hidden advantages that comes with being an IBKR customer. They simply do not cut corners. And I constantly find myself surprised by just how much they're willing to do for customers that other brokerage platforms are not. If you're interested in checking them out, head on over to ibkr.com. Restrictions apply. Interactive Brokers is a member of SIPC. And to be specific, what we're talking about here is like, okay, we've already discussed it. The economics are set out from the get-go. Assuming you underwrite very profitably, the most you can make is that 20% between the 100 and the 80% loss ratio.

So where can you make a difference? You just said it. The technology, the experience. And when we say that, we're talking about simple, simple things. Like running – how does the technology work? What's the login process like? What's the navigation like? Yeah.

claim automations customer support these very what seem tend to get swept under the rug but they are probably the biggest differentiators and it's why a service like oscar when you get into it has been able to grow is because it primarily i would say and you can disagree with me here if if there's anything else it's ease of use ease of use is the biggest thing and they're working against, fortunately for them, a lot of clunky solutions. Yeah. When I was talking with, and I'll shout them out, Fundacy Investor, they have a link to his report in the show notes. He did a report on Substack and it outlines Oscar Health and kind of his bold thesis on them. I was conversing with him and he said it's similar to how the neobanks, such as a SoFi or an Ally,

are competing with these ancient solutions from Bank of America that still run on coding and software from the 60s and 70s. And there's such an not even just an innovators dilemma, but a tech debt that really is going to if all these existing players wanted to compete properly with modern solutions, they'd almost have to build something from the ground up. And given how slim your profit margins are and the incentives in the industry, it's really, really hard to convince them or incentivize them to do that. That's why you have an innovative dilemma. But all right, we should go through the business. I know we definitely hate our vegetables to try to explain the ACA market. I don't really know if anyone truly understands it fully, but I think we got the

basics. You have restrictions there and a lot of stuff is commoditized. Now, let's go through Oscar Health's history. After getting frustrated with the initial rollout of the Affordable Care Act. The founders, Mario Schlosser, Joshua Kushner, and Kevin Nazemi started the company in 2012. As the story goes, the trio wanted to leverage digital tools and technology to build a better health insurer focused on the customer, the customer being the person buying the health insurance. We all know how bad it is to deal with these existing healthcare players. There's even a South Park episode on it. I haven't watched it, but I did see a clip on that. The group seemingly wants to grind you in submission and frustrate you enough until you give up. We've all experienced

this in some way, or at least if we live in the United States. Now, if digital tools can fix this, it would enable a better customer experience and reduce administrative costs. Remember, admin costs are some of the key things that you want to at least minimize or be the most efficient on in order to get from that medical loss ratio of 80% down to as much profit going to the parent company as possible. Their first insurance offering was launched on the New York Exchange, not the Stock Exchange, the New York ACA Exchange in 2013. It then expanded to other states such as Florida and is currently in 18 states as of 2025. Expansion has included things like small businesses, but with some major lumps along the way. They had to exit California. I think they

have exited or are about to fully exit Medicare Advantage because of profit worries. There's also a partnership with Cigna that is going away. However, on a net basis, from a standing start, Oscar Health has grown to 2 million total members, and its members have grown at a 51% annual rate since 2019. Ryan, for any of the video listeners or video watchers, is showing the total members chart on Fiscal AI, and it's jumped significantly since the start of 2020. some of the growth can be attributed to that broad tail individuals adopting the ACA plans because of the subsidies. But I think most is due to Oscar Stanley market share. Here are two quotes from their 2024 investor day. We've grown our ACA market share from 4% in 2021 to approximately 7%

today. So they are a 7% market share of that ACA group. Now you only have 2 million people there, But so that's a small percentage of the total health insurance population in the country. But of the 25 million people that use the ACA marketplace, that is still a sizable chunk. And here's one that I think is interesting and shows that they have room to potentially even gain more market share if they can replicate their model in more markets and kind of grow with some of the markets they're already in. And they talk about the one of their places, which is Iowa, that they've done quite well. Quote, Iowa is a bit of a different story. this is one where we've had more of a consistent growth trajectory over time. We entered there with an exclusive provider network partner, and we've steadily expanded with them across the state

to merely statewide. With this, our name has become synonymous with access to a reputable provider in very rural parts of the state. And now we've moved from 4% market share in Iowa to 18% today. So in some markets, they're up to 15, 20%, even higher market share, which I think is highly impressive given they just started about a decade ago. Now, why are people switching to Oscar Health plans? Well, we know it can't be because of a different base insurance due to the commoditization of the ACA, at least in most regards. It comes down to customer experience, technology backhand, and branding. Oscar has the easy-to-use mobile application for scheduling and communications, makes things very easy on that end. They have a 4.9 star rating on the App Store,

which I thought was a good sign. They also have NPS scores or net promoter promoter scores that they highlight are about 60 to 70 today versus about zero for the rest of the industry. They have a, what they call a care team that helps you find the best local providers for your situation. And they have $0 virtual care included with your membership. So essentially they have their own teldoc that is an extraordinary net promoter score for the industry the zero i think it just goes to show the frustration of this whole process and i i've had it as a customer like navigating some of these archaic websites and portals is like drives me up a wall it's having a real advantaged platform one that's better easier for the user it's actually a massive

differentiator in this industry i just looked it up right now and i hope this blog is correct it says that oscar health is available in the austin and san antonio area so maybe you need to make a switch ryan i think it's time all right let's talk about management unless there's anything we missed on the aca marketplace and their position i think well there's a quote from the founder he says their goal is no manual work no friction in the middle and no delays on any processing i think that's about it and i mentioned 15 to 20 market share to me seems doable if they can replicate what they've done in existing markets they have the blueprint to keep going from that 7%. Okay, let's talk management team. There's been

a change at the helm here. You talked about the founders, the three co-founders. They are not, well, they're still involved, but they're not running the company today. They brought someone else in. Who is he? What impact has he had on the business? All right. So along with the other insurance disruptors, their stock price, Oscar Health's collapsed in 2020. It went from $30 down to around $2 at the bottom. So 90% plus drawdown, I think that might even be 95%. Either way, investors got wiped out. I think everyone was scared. And you can understand why. Because you can look at this net income chart going from 2019 to 2022. And net income just got worse and worse. It hit a net loss of $606 million in 2022. I'm

sure if we were looking at it, then we would have said, how do we know if this company can ever get profitable? They seem to be just like the Lemonades or the Roots or the Clover Healths or all the other ones in the industry that can't seem to generate a profit. And the technology founders like Schlosser, who was the current CEO at the time, had built a great customer experience. But hey, look, they couldn't run a profitable insurance company. So in March of 2023, right near the lows, Oscar Health made a decision that might have saved the company they hired Mark Bertolini. Bertolini is an experienced insurance executive who was the previous leader of Aetna. Aetna, he helped produce a 27% IRR for shareholders over eight years before selling to

CBS in 2018. With the management change, Schlosser is now head of technology and product while Bertolini is the CEO. I think that is a good match. Bertolini is tasked with running a profitable insurer, while Schlosser is in charge of building technology and digital tools to help improve customer experiences and save on costs. I'm assuming that's what he was doing already, but they just needed someone that actually knew how to run a modern health insurance company. And when joining the company, Bertolini was asked if there was any low-hanging fruit to pick up, And he's kind of charismatic guy. He said there were watermelons rolling around on the floor. I think that's a good analogy for how they had easy ways to improve, for example, their negotiations with pharmacy benefit managers. And essentially, they weren't negotiating at all. So they're just taking the price from the pharmacy benefit managers and they saved, I think, at least $100 million, if not hundreds of millions of dollars by having basically regular renegotiations to improve on their costs.

Now, unsurprisingly, net income has made a quick recovery and we're now profitable. Over the last 12 months, $123 million in net income. More on, I know there's going to be some listeners that know about the 2025 guide. We'll get to that later. Bertolini has performance stock units tied to the share price hitting $11, $16, and $39 a share. We're at about $15 today. So not a huge, or I think a good point where if the stock price goes to 40, he's going to be handsomely rewarded. And at 68 years old, I believe he was brought on to get Oscar health consistently profitable before passing the baton onto someone else.

If he succeeds, he will be rewarded handsomely. According to the proxy filing, he has about 2.4% of the outstanding stock when including options and performance stock units that could vest, which could be worth around $250 million if Oscar stock reaches $50 a share. That's, I think, a good financial incentive for any executive. If we want to get to voting, though, it's not controlled by Schlosser, but Joshua Kushner and Thrive Capital, which have 70% combined voting power. They are a software and technology venture capital firm. Oscar Health is likely one of their big winners. One thing that might hold up or be something that happens eventually is they want to return capital to their outside investors. I guess from a voting perspective, it's much larger than their actual economic stake. But that's just something to watch out as the controlling interest could change eventually.

This is just something with the executive and board that could happen. I like the skin in the game here, though. The founders control the company. Schlosser is in charge of the technology and seems to have built a really good product. And Bertolini is incentivized to build a profitable insurer and make hundreds of millions of dollars if he can. No huge red flags there. from what i found yeah it seems like pretty good incentives across the board you've got the person that led the tech side of things and the platform and the usability and kind of

created this advantage to begin with still with the i assume a sizable stake in the business and i'm talking about schlosser here so he still has all the incentive in the world for the technology to maintain its advantage and then on the flip side you've brought Bertolini in and given him the proper incentives as well to get the company towards profitability and having those different share targets to his compensation. It makes sense. I mean, with an insurance company, I think you need in the modern day with an insurance company, I think you need both. Obviously, there's very few people that can be a great insurance ceo and have the technical expertise to be a software ceo there's probably no one

there's probably no one out there very different backgrounds and very different experiences needed for those roles so separating those two uh roles i think is probably the right idea let's go through the market opportunity here obviously oscar health seven percent market share across their target market? Who are some of the competitors? What sort of market share do you think Oscar Health could potentially get to? All right, folks, if you are a regular listener to Chit Chat Stocks, then you know that we use fiscal.ai, formerly known as FinChat, daily. Fiscal.ai is our complete stock research terminal. It's where we have our investment dashboards. It's where we create financial charts. It's where I read all the transcripts for conference calls,

sell side events, shareholder meetings, and it has Morningstar's high quality reports on more than 1700 companies. It really is the complete research platform for stock focused investors. If you use our link fiscal.ai slash chit chat, you will automatically get two weeks of fiscal pro for free. And if you find that it's worth upgrading, which I think you will, you'll get 15% off any paid plans with our link. Again, that is fiscal.ai slash chitchat. The link will be in the show notes. Well, the competitors are going to be people such as Centene, Elevance Health, and UnitedHealthcare that people know about. I would kind of group them all together as just the legacy providers. I know I talked about mine being from Centene.

I will say the app is okay, but again, I think Oscar Health's within their markets that they're in, remember they're only in 18 states right now, not in California, but they are in New York, Florida, and Texas, at least some parts of those states. Their market share gains, I think, show versus the competition that they do have a better product because given the restrictions, as Ryan mentioned, given the fact that you can't even differentiate on the health plan finder websites. The fact that they were able to do that shows how much better the product product is. But to properly understand the health insurance market, we need to look or at least the ACI opportunity, we need to talk about the ACA enhanced subsidies again. So this is a huge

overhang on the stock, as I mentioned before, and part of the ACA originally was to provide more subsidies and more tax breaks for individual payers if they fit below annual income levels. For example, if you're at a percentage of the poverty line, which I think is $15,000 or something like that in the United States, so it's a pretty low annual income, you pay zero or a minimal monthly premium for your health insurance in order to get you in the network and help with your healthcare costs that you otherwise couldn't afford. The COVID-19 stimulus package and follow on IRA act, gave out enhanced subsidies for health insurance premiums bought through the ACA marketplaces. So more people could afford health insurance. You got

a huge tax break or subsidies, however it works, that weren't there before. So more people bought them through the marketplace and more people got better plans. Now this, along with the rise of contracting gig workers is why from 2020 to today, the number of ACA members has doubled. Now, as of this recording, next year, these subsidies are set to expire unless the government tries to extend them again. I will mention that a lot of the new gains in members are from conservative states. So we could see an incentive from the controlling government now in the United States to do that. There could be some people that want that to happen, but I'm just going to assume they're going to expire. And this is going to increase premiums for a lot of people if they

stay on the existing plans, which could lead them to churn or go down to lower price plans or decide to forego insurance altogether. If your premium goes from $100 to $200 a month, that could become a much tougher financial decision for you to make, especially if you're one that's closer to the poverty line. Now, this is a looming headwind for Oscar, one that they are well aware of. I've seen some people that are bearish on the stock think that they somehow aren't factoring this into the equation, but it is a headwind nonetheless, and it's going to reduce the total addressable market in the ACA for multiple years. Now, as we go through the valuation work and some of their estimates, it's clear that this risk is hurting the stock, but here's how I look at it.

You have higher costs in the ACA marketplace. It's going to make customers more eager to find a better solution, which I think could lead to more people that stick around switching to Oscar Health. If you have a longer time horizon, 18 months, I think this is less of a concern and something that just needs to be priced into your valuation work. That 51% growth from 2019 is not going to continue because the market is going to shrink. Their members are going to shrink in 2026. Oscar Health also has tailwinds still at its back that include state expansions and continuing to steal market share from other players. And I also think looking at the stock specifically, uncertainty in the short run, such as this, can provide a potential opportunity for those with

a long-term time horizon. I see so many people go, I'm not sure what the next few quarters are going to look like. I'm going to wait on the sidelines. That is where, if you're patient enough, and I'm not saying go out and buy Oscar Health, but that's where an opportunity could be there. Now, subsidy eliminations, I don't think are going to kill Oscar's business, but it's going to present a speed bump. Now, a potential accelerant is the growth of individual coverage health reimbursement arrangements. I know, another acronym, otherwise known as ICRA. So, context here, the majority of health insurance in the United States is paid for by employers. Health insurers like UnitedHealth will sign deals with big businesses, such as, I'm just thinking

the big tech companies, something like that, Alphabet, Amazon, what have you. Now, they can give employees options for health insurance plans once they sign these large deals, but you can only go through that one health insurance company. Now, inherently, there's nothing wrong with this. However, I think the incentives can and have gotten misaligned. Employees now don't care about costs. Insurance providers lock in these large corporations, raise prices, only give people a few options on their plans and allow people to potentially over-utilize insurance benefits. ICRA plans break this model. With these plans, employers give employees a cash benefits or just part of their income in a specific bank account that they can use to buy insurance on the open

market, similar to individual plans purchased through the ACA. So it allows basically the individualization of the health insurance marketplace to be have an option for for employees. Now, this would be if these grow and if these take hold in which there has been some momentum in this area, especially because it can be much cheaper for employers to do. And that's something that Oscar Health pitches to people. But if this happens, there would be a huge benefit to Oscar Health, which is why they are pushing so heavily to grow these plans. They believe it would unlock an estimated 75 million new potential payers and potentially hundreds of billions of dollars annual premiums. As the modern cloud-based player

with more customizable, affordable plans. When I mean customizable, I mean something like, okay, you have diabetes. We're going to do a diabetes-focused plan specifically for you where we can't, and as we talked about before, we can't deny you coverage because you have diabetes, but if you have diabetes, we can say, all right, look, we have, you're paying this extra premium, but your insulin shots are all provided for the tech debt. All the way that these existing health insurance companies are run, they don't really have the chance to offer that. And when you make this individual, instead of someone going, all right, I have this option, this option, this option, I have three options. Now you can let them basically get a cash payout. They pay

for this insurance themselves, and they have all the options on the ACA marketplace. It's better for competition. It's better for diversifying risks across the entire marketplace. It just seems better, at least to me, for everyone within the value chain, except for maybe the legacy insurers. I think if these plans gain momentum, which, of course, the company is talking their book when they mention this, Oscar Health could have a huge growth in their total addressable market. If we're looking at the existing ACA marketplace, maybe Oscar Health has the chance to grow from 2 million today to 10 years from now, 4 or 5 million payers. If ICRAs and this new way of just basically paying employees and then they pay for their own insurance, if that

grows, we could see the addressable market grow to 10 million people or more for Oscar Health. We have a good chart from their investor that we included in the newsletter. So anything on that ryan what are your thoughts do you would you be interested in this type of product uh well it doesn't really apply to me right i guess well i guess everyone is interested in that if they pay for their own because then their employer is paying for it so but to put some numbers on it today the estimated addressable market for the aca marketplace in the united states is about 25 million people and it's going to shrink this year with icra assuming that it's fully rolled out and and uh it sort of maximizes its addressable market you could expand that

basically 4x 5x almost to 100 million uh people in total which if you just assumed that oscar maintains its market share of that 25 million people so you said it's roughly seven percent of the markets that they're in that they have market share of right yes yeah yeah so if you sorry sorry that's actually seven percent of the total aca marketplace but they're only in 18 states so within their markets they're at about 50 on average they could get up to like 15 percent or so okay so assuming no expansion in terms of the markets if they were able to maintain that seven percent market share and icra was fully adopted and there was a hundred million people that could potentially be going to the marketplace to buy you'd be looking at nearly a triple in their

members uh actually a little more than a triple i believe which would be obviously massive for them in terms of premiums growth yeah and think about well people don't like thinking about this but think about health care cost inflation the premium growth would be much higher over a decade compared to that 3x, it would probably be closer to 4x or 5x. And they're not even talking about large corporations. This addressable market is for employers, small and medium sized businesses with employees with 1000 people or less, which it would be where you don't, it can just be so difficult to run that employer sponsored healthcare plan, as opposed to a large corporation that can have an entire team of, you know, 10 people doing that. Yeah, that makes sense. And the important

part here is because you can probably fall into the trap if you're a skeptic here that okay well the economics are already kind of slated out right the most they can have is that 20 percent or they have to have 80 medical loss ratio the so you're maybe thinking well how much does it really matter if they keep growing members i mean yeah it's great but like it's not like there's a whole bunch of added profitability. But you have to think a large chunk at the moment is fixed expenses, investing in the business, investing in the technology, the platform, developers, all that. That starts to shrink as a percentage of your expense pool once you've got more and more members. So not only do you get the added profits from those members, assuming that you're

underwriting profitably, but you also start to see some operating leverage there as well. Yeah. And that leads perfectly into the next section here, which is the uncertainty around profitability for the entire sector and their competitors over the next 18 months. So during for context for during COVID-19, the health insurance companies hit record levels of profitability because people underutilized health care benefits as the hospitals and stuff are crowded out for COVID needs. Now, this is normalizing and increasing costs. Plus, you have rising drug expenses. You know, you have the weight loss drugs that are a huge growth driver for, you know, just spending on that. And that's something that the health insurance companies have to factor in. You also have a steadily aging population. These are all factors that will impact Oscars pricing and profitability. Remember, huge changes in the health insurance market or just the healthcare

marketplace in general are very tough for these health insurance companies in the aca marketplace or just in general to price in because you have to make basically this year in november they have to say all right this is what our premiums are going to be for 2026 and then if there's a huge change in health care benefit utilization that can totally throw their profits out of whack which as we'll get into here has happened to them uh they are not immune to these headwinds you know Um, there's other companies though, that I think are facing even more headwinds and potential legal liabilities. You have, uh, major changes to Medicare Advantage that are hurting insurers like UnitedHealth.

Uh, hospital health is not going to be much impacted by that at all. Second, there's increased scrutiny around costs and claims practices just while this was yesterday, but just this week or last week, when people are listening to this United Health confirmed that the Department of Justice is looking into its Medicare practices to bolster payments on diagnosis for, you know, I forget the exact details, but they're bogged down by that. They're not focused solely on the ACA marketplace like Oscar Health. And Oscar Health is not going to be immune to this. I mean, they just revised their 2025 guide for an operating loss of $230 million due to updated actuarial assessments on paid claim submissions. That is compared to,

and I didn't write it down, but I remember they were guiding for, I believe, about a $200 million in positive operating income or even slightly higher. So we saw almost a $500 million shift in EBIT just from one change in the actuarial assessment. The company plans to, quote, take appropriate pricing actions for 2026 to get back in the black. But again, that shows that, well, we're going to be unprofitable for a year, but then we can change this. I guess it's better than writing a bad life insurance policy or something along those lines where you're stuck with something for 10, 20 or 30 years. But in this regard, you can be stuck for a whole year. You mentioned medical loss ratios. They originally guided for around, I think, 81%

for 2025, so right close to their target market. They're now guiding for 86% to 87% when if you're going to be profitable on a bottom line basis, you need to be closer to 80%. 2025 is not going to look great for them financially, even though revenue is going to soar again that's why revenue is something to look at with this company but it's not then you got to look at medical loss ratios first i'd say but i don't along with the entire rest of the aca market i don't see why they can't just reprice with the normalization of the market next year we've seen a bullwhip coming out of kobe 19 and they're going to price plans 20 30 higher and they're going to be profitable because you have, again, the 80% ceiling. And then you have to try

to just clear that. And that's what they're going to do. That's what they're mandated legally to be able to do. Now, this is where the Bertolini hire looks so promising to me. My confidence in the company's navigation of this pricing volatility would be much lower if we just had the technology founders still running. Now, on the whole, I still think this gives them solid counter positioning versus competitors today. I see no reason why they can't keep gaining market share, even if the market shrinks in 2026. You have all these other companies bogged down by Medicare, the employee-sponsored plans, the DOJ investigations, and importantly, they still have the major technology debt. The counter-positioning innovative dilemma will

still be there in 2026 and 2027. And as we'll go through with the balance sheet, unless things get extremely bad um they had the capital to weather a bad year okay before we get to the valuation let's talk about their moonshot in oscar plus although it's really plus oscar it's a terrible name but put the plus on the end all right what is this and what do you think of it okay well it's not going to impact the financials anytime soon at least if it does that'll be quite the cherry on top of any investment, but they do talk about it with their regular insurance, ICRA, and plus Oscar as kind of their three-fold Venn diagram thing they put in this investor day, which I think whoever, the intern that made this should be proud of. It's a nice looking chart.

It is essentially, as you may assume, is taking their software and technology and outsourcing it to third parties. Currently, this does not include other health insurance companies because you don't want to give them your bread and butter. But it does include doctors' offices, hospitals, essentially what you call your network providers, what your customers may be utilizing through your health insurance application. Using, well, I forgot to finish my thoughts there, but essentially you're going to have unified data integration for the patient,

the medical providers. So, for example, your doctor, your dermatologist, your eye doctor, you're going to have basically a chance to connect everything together. And I know this is very corporate speak, but on a one unified platform and having that as the backend can help them in two ways. First, it can be a source of revenue. I think they talk about in their investor day, a $25 million IT spend from these network providers, again, doctor's offices, hospitals, stuff like that. Now, this is an obvious addressable marker for them to go after. What is not obvious is how it can help them further differentiate Oscar Health from the

other health insurance competition. If more healthcare providers are using Plus Oscar, they are more likely to work with Oscar Health Insurance. More providers means a better value proposition for users, which will work seamlessly with Oscar Software, making it a better customer experience. So you have, I hate to use the term flywheel, but it's not a flywheel. It's not a network effect, but essentially if you get more insurance payers, your customers using Oscar Health, and then you have more of these providers also using the software through Plus Oscar, you're going to have a more holistic and unified customer experience throughout the value chain. I call it a moonshot because no one's really using it today, but they're going to try to

push it and i think he gained momentum this is a chance to build i think a distinct distinct advantage versus other health insurance providers do you know who they're competing with here is this like a alternative to epic systems it'd be something like that i don't think it's necessarily an alternative for them because well in some ways it would be but they're not selling to other insurance providers. So I guess it would be, for example, if you're going to your primary care doctor, they might use this system instead of that. I will say there's a lot to be determined because they don't give out that much information. Their homepage is even hard to find for Plus Hoster. Again, that's why I called a moonshot, but they want to take the technology and software

systems they built you know automated claims processes ai customer support all the things they're building for oscar health insurance and they want to sell it to network providers and again i think that can hopefully convince more people importantly more doctors more hospitals more dermatologists whatever to join oscar health insurance and make you know that's an important part you need to get network uh network providers onto your onto your insurance plans okay let's walk through the valuation here there i have seen a lot of misleading valuation work done on social platforms about looking at this almost like a technology company and even though they have a technology component and advantage you got to value this like an insurance business so how do

you look at it how do you value them yeah now seeing high revenue growth i guess is great maybe you would rather have that than not but if you have a lot of premiums coming in and you're underwriting bad insurance that can also not even be a good thing i've seen a lot of charts out there people tossing around ev to revenue figures revenue growth rates i don't think this is the proper way to value an insurance provider but it does not matter how fast revenue is growing what matters first is underwriting profitable insurance oscar house has struggled with this And it's going to struggle in 2025 again, most likely given the recent guy. We also, when looking at the balance sheet, cannot subtract out at least too much of their cash balance.

They have to keep stuff on hand for claims. They also have to keep cash on hand at statewide subsidiaries for claims paid out there. So they technically, what they talk about is if they're ever going to return capital to their Oscar Health shareholders, that they have to, quote unquote, dividend up money to the parent company, which they can then use to pay a dividend or buy back stock for your outside shareholders. Now, when we look at the balance sheet, though, I think it looks solid. You have $3 billion in cash and short term investments, $1.9 billion in long term investments. So they combine just under $5 billion in somewhat liquid assets. You have 1.5, and if we go to the liability side, you have $1.5 billion in benefits payable, $1.95 billion in risk adjustment transfer payable.

Just think of that as other liabilities within the healthcare ecosystem. I was honestly trying to read the disclosure on that one. I think it's just essentially how the industry, either through reinsurance, and any industry expert could get could correct me on this they're either reinsurance or working with the other health insurers to diversify risk across the system so that's one liability that could be there they also have three million dollars 300 million dollars in long-term debt but how i looked at it is okay they they have enough cash there i think even if they have a bad year like 2025 they they're not going to need to raise money they didn't raise money along with this

reduced guidance. If they're going to want to expand into new markets, they're going to start out unprofitably and they have the capital to do that as well. Now, like other insurers, they're going to see earnings from this excess cash from interest income, which was $189 million over the last 12 months. But see, that's not bad compared to a market cap of just $4 billion. So what do we look at? How do we value Oscar Health? Well, there is much higher uncertainty here compared to a typical business, especially with the ACA subsidies going out the window. Some people are saying the whole industry is going to blow up. Other people say that it's not that big of a deal. It's not every day you go from, hey, just yesterday we're going for $200 million in positive

operating income to $230 million operating loss just one quarter later. However, from their 2024 for investor day through 2027, Oscar Health expects to grow its revenue at a 20% annual rate and reach a 5% operating margin. And this is assuming the enhanced ACA subsidies end. So if they don't end, they could grow even more. At the time of the investor day, revenue was $6.5 billion. It's grown at a much faster rate than 20% in 2025. I think we're at $10 billion plus right now, but it's going to fall in 2026 and maybe 2027 compared to 2025 due to these subsidies ending. Now, we assume 20% revenue growth for three and a half years. They should be doing about $12 to $13 billion in revenue in 2026, subject to change if inflation in healthcare

is much higher, which it could be given what they're kind of saying for these repricings. I've seen people and articles out there saying that there's going to be a 20% plus repricing for the ACA marketplace at a 5% operating margin on that. Well, $13 billion times 5%, that's $650 million in operating income. Now I'll ask you, Ryan, because I'm talking a lot, I want to take a break. How confident are you in that $650 million number? It seems pretty uncertain to me. It feels like 5% was kind of a hopeful figure and 5% operating margin was kind of a, let's put it out there. It's far enough away that we can hopefully make some operational tweaks that'll get us to that 5%. But I would be surprised if there's a fully

fleshed out plan that gets them to 5% operating margin from today. There's inherent uncertainty. Yeah, there's inherent uncertainty around the benefits utilization. This year, they thought they were going to be profitable. Now, is this year probably more extreme than others yes is the subsidy stuff an overhang yes now do i think that bertolini and his team that he's brought in can they reprice better and make it more consistently profitable once they get to a higher scale sure now 650 million dollars would give you a six times earnings multiple compared to the current market cap of four billion dollars is that enough to to make up for that risk maybe but clearly mr market does not believe that oscar

health will reach their goals is the upside though is it is it good enough to warrant taking on these health insurance market risks at today's price i kind of believe we are they have a track record of gaining market share they have a clear path to keep getting market share of the aca payers market in the next few years. There's major long-term upside if they can execute on these ICRA plans. And plus, Oscar, scale is very important to diversify risk in the health insurance market. And I see no reason why Oscar Health will not be able to gain operating leverage on its overhead once it gets a little larger than today. They already had that happen in 2023 and 2024. And I bet they would be able to beat traditional insurers on total overhead costs,

given that they're a modern system not built in the 70s, 80s, and 90s. Is that, I don't, like, okay, is there inherent uncertainty under the 5%? It's not like a Netflix or a software company that can just say, look, we have our subscription revenue, and then we can kind of fill in our costs and we'll get to that figure. It could have some volatility there, but is 5% reasonable in a normalized environment? I think so. I think 5% is a reasonable figure. now historically united health has traded a pe of between 20 and 30 today its pe is down to i think a record low of 11 because of its huge issues that we talked about briefly above

is if oscar health hits its targets and it trades at a pe of 20 that the stock is probably a four bagger from here especially the net interest income that we don't even talk about and that's just a few years from now. And then maybe it could be a 10-bagger farther out if market share gains continue. There's a lot of upside to make here. And you have to balance that with the risk of subsidies ending, the uncertainty of health insurance profitability, the fact that there could be another quote-unquote black swan that hits the market sometime in the future. Are they large enough? Do they have a good enough balance sheet? Are they pricing well enough? That's the major uncertainty with a company, and nothing's guaranteed.

There's just more uncertainty here than the average stock that we look at. Yeah, definitely. Let's talk about whether or not there's a moat here. Something that we really like to target, both you and I, in potential investments is emerging moats, companies that it isn't quite there yet in terms of investors assessing the moat. it isn't obvious. Obviously, Visa has a network effect. Obviously, Costco has a logistics advantage. Those moats are known. We want to find companies that have moats that are emerging, moats that are going to be wider in five years. Would you say Oscar Health has an emerging moat? That's a great tagline there, Ryan. I think we need to start using that little tease,

wink, wink, for the newsletter sometime in the future. I will first answer it by saying some investors argue that Oscar has a tech competitive advantage. I don't believe this is a long-term competitive advantage, but it does give them great counter-positioning versus the traditional health insurers, as well as a bit of helpfulness in the innovator's dilemma. After reading about the health insurance market, I think the competitive advantage at the end of the day is just scale. You need scale to diversify claims and risk across various demographics. You need scale in your network providers to provide a suitable value proposition. Think about it, Ryan. If you said I could choose whatever your, I don't know what your existing

one is. Let's say it's UnitedHealth. If you said I could use UnitedHealth in the ACA marketplace, and they have all these providers in the Austin area, or I could go to Oscar Health. Oh, wait, they have one person 15 miles away from me. Do they even have my dermatologist? Oh, wait, that's in closest one is in San Antonio. You need enough providers on your network and that takes time and you need the scale there. You also need scale to get a profit over your large fixed cost investments, especially when you have that max MLR, medical loss ratio, and you're going to eke out that 5% once you're large enough. I think Oscar Health is on its way to reaching enough scale. Is that 3 million members, 4 million members? I don't know, but it's definitely in

a better position than any other upstart trying to disrupt the industry i mean think of ryan we were going to start a health insurer today there's a lot of barriers to entry now they got the vc funding they got the bubble funding in 2020 2021 and they made it through to the other side and that also gives them the counter positioning and animators dilemma help that i've harped on time and time again that can help them compete with traditional payers so i think they're in good spot kind of like in uh sofi kind of like some of these other neobanks that i think can keep getting market share in their their you know in fin in uh financial services i think oscar health can do the same in uh health insurance and that they have i would say definitely an

emerging note are you buying oscar health oh that is the harder question that is the harder question i think i will maybe tease to read the newsletter i haven't decided yet maybe i will decide in the newsletter but as of now oh man the next 12 to 18 months look rough i will say that i do part of me thinks it's priced in part of me thinks it's it may not be just because of the as we talked about just all the uncertainty with the industry in general i want to own this i'm not sure if it's better than my worst idea in my existing portfolio but i do think it's i do think it's a great risk reward at these prices it could be a 10 bagger is the downside there yeah there's plenty of downside potential but i think that is

given the commoditization of the market the government stuff how it's all regulated and how everyone's going to essentially win on mlr if they price correctly i think the downside risk is being overstated by a lot of people today and even though there's the i know the value investors don't like the people tossing out revenue charts and just saying hey revenue is growing quickly it's a buy the stock looks cheap if they get their underwriting profits in check. Yeah. All right.

I think that's going to do it. As a quick reminder to all the listeners, if you want these in written format, we also publish our notes, our research reports on the Chit Chat Stocks sub stack. It's totally free at the moment. So you can go there and check out some of the charts that go along with this report.

And if you enjoy these episodes, please, please, please give us a review. It helps the show grow. And it would be a big thank you from us if you were able to do that. That's going to do it. Thank you to Brett for bringing this bit of a homework project and having to rip through the healthcare industry and understand all of the ACA marketplace and the other acronyms as well. But that is going to do it. Thank you all for tuning in. We want to remind listeners that Brett and I are not financial advisors. Anything we say or discuss here on the podcast is not formal advice or recommendation. We may buy, sell, or hold any of the securities discussed on the show.

So please do your own work. Thank you again for tuning in and we'll see you next time.