As Oscar Health prepares for an initial public offering, some analysts argue that the insure tech darling's reliance on reinsurers makes the New York City-based company 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, or businesses that basically act as insurance for insurers. While reinsurers are also used by legacy payers, startups like Oscar Health 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 OMERS Ventures investment company.
"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 insure tech 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, he said they will close access to their balance sheets if the insure tech company is consistently losing money.
"Put yourself in the shoes of the reinsurer," Yang said. "They're these massive pools of capital, and they need to deploy it, and they need to find a rate of return. So they're looking for yield."
For Oscar Health, Yang said the threat of losing reinsurance coverage backing will force the company to focus intensely on stabilizing its medical loss ratio—basically, what portion of every premium dollar goes toward enrollees' medical care—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 Company, 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.
"How they're presenting this is, 'We have a capital-light strategy,'" Yang said. "Because a lot of the risk on the medical side or excess loss they're pointing over to AXA France and Berkshire Hathaway."
Oscar, 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% year-over-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 New York City-based 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 enrollees in 2019.
Dr. Adam Block, an assistant professor of health policy at New York Medical College, noted that, in addition to counting on legacy reinsurers to stabilize its risk pool, Oscar has also leaned heavily into the ACA's reinsurance program, with the majority of its policy premiums collected coming from the CMS in the form of advance premium tax credits.
While Block said he could not comment on its reinsurance strategy, he did note that the insure tech'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. And, because Oscar has a strong brand, he expects its public offering to go well, which would send a positive signal to other insure techs.
"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."
Mike Connor, CEO and co-founder of the Silicon Valley Insurance Accelerator, said that reinsurance companies are also increasingly investing venture capital in health insure tech startups, as they look for ways to grow and test out new ideas in the marketplace. While reinsurance investment has long been prevalent in the property and life sectors, reinsurers' cash is flowing faster than ever as more health insure techs pop up in the market. In 2020, investment in insure tech reached a record of $7.1 billion, according to CBInsights.
"They tend to be kind of a big mover and shaker in the direction of the industry and the kind of risks they underwrite and how that risk is underwritten," Connor said. "They're also at the forefront of taking what I would call a more progressive stance on shifting the paradigm of insurance to making risk more transparent."
Reinsurers are also investing in digital healthcare products that could, in turn, help keep their enrollees' care are costs down.
Swiss Re, for example, recently invested in remote monitoring startups WellthyTherapeutics and 100Plus. In October 2020, Munich Re dropped $55 million in Augury, an AI-based health tech platform.
"The boundary between life, wellness, health, etc., is being blurred," Connor said. "We're going to see solutions come to market that integrate all of those aspects because the truth is we're individuals that live in all those domains, even if the existing products don't."