Key Takeaways
- Oscar Health faces a significant binary risk with the Affordable Care Act’s (ACA) enhanced subsidies set to expire at the end of 2025, creating a potential “enrolment cliff”.
- The company has achieved a remarkable operational turnaround, reporting its first-ever profitable quarter in Q1 2024, shifting the narrative from a cash-burning ‘insurtech’ to a viable insurance entity.
- Management has expressed confidence in weathering a potential subsidy expiration, but the market remains sceptical given the high dependency of the individual market on these financial supports.
- The investment thesis is less about Oscar’s technology and more about a political calculus: the likelihood of Congress extending or reforming ACA subsidies before the deadline.
- Despite recent profitability, the stock’s valuation and high beta make it exceptionally sensitive to political headlines concerning US healthcare policy.
Oscar Health ($OSCR) presents one of the more interesting dichotomies in the current market: a company demonstrating a sharp operational turnaround while simultaneously facing a potentially existential political headwind. An observation from analyst ‘thexcapitalist’ correctly identifies the core tension between the well-documented risks of expiring Affordable Care Act (ACA) subsidies and the company’s own confident earnings guidance. This sets up a classic battle between improving fundamentals and macro policy uncertainty, forcing investors to weigh a tangible business recovery against a binary political outcome.
The Subsidy Cliff and Political Chess
The central risk, and one that cannot be overstated, is the scheduled expiration of the enhanced ACA subsidies at the close of 2025. These subsidies, originally expanded under the American Rescue Plan and extended by the Inflation Reduction Act, have been the primary driver of record enrolment in the individual health insurance marketplace. Their removal would translate directly into higher premiums for millions of Americans, logically leading to a contraction in the total addressable market for insurers like Oscar.
Management’s projection that the company can remain resilient, with some suggesting a path to meaningful earnings even in a post-subsidy world, strikes a confident tone. This confidence is presumably rooted in improved operational efficiencies, better risk modelling, and the pricing power that comes from its technology-forward platform. However, the market has reason to be circumspect. The entire architecture of the modern individual insurance market is built upon these subsidies. To believe they can vanish without severe consequences for enrolment figures requires a significant leap of faith in Oscar’s business model being fundamentally different from its peers, who would face identical pressures.
From Cash Burn to Black Ink
While the political risk is clear, ignoring Oscar’s recent financial performance would be a mistake. For years, the company was emblematic of the ‘growth-at-all-costs’ tech ethos, applied to the notoriously complex and low-margin world of health insurance. The narrative was one of disruption and user experience, but the balance sheet told a story of persistent and substantial losses. That story has changed dramatically.
In the first quarter of 2024, Oscar reported its first-ever profitable quarter, a milestone that signals a pivotal shift in strategy from pure expansion to sustainable operations. The improvement was not marginal; it was a significant swing from the losses of previous years, driven by a much-improved Medical Loss Ratio (MLR). A lower MLR indicates the company is spending a smaller portion of its premium revenue on clinical services, pointing towards better underwriting and member risk management—perhaps the first concrete evidence that its technology platform provides a genuine analytical edge.
| Metric | Q1 2024 | Q1 2023 | Year-over-Year Change |
|---|---|---|---|
| Total Revenue | $2.1 Billion | $1.5 Billion | +46% |
| Net Income (Loss) | $177.4 Million | ($39.7 Million) | N/A (Turned to Profit) |
| Medical Loss Ratio (MLR) | 74.2% | 81.6% | -7.4 percentage points |
| Total Members | 1.5 Million | 1.0 Million | +42% |
Source: Oscar Health Q1 2024 Earnings Release.
Valuation and Forward Outlook
The turnaround has not gone unnoticed, with the stock price reflecting a significant re-rating over the past year. Yet it remains a contentious name. Bulls will point to the improving fundamentals and argue that if the company can maintain profitability and grow its member base, it is undervalued relative to its growth potential. Sceptics will argue that the current earnings are a function of a market artificially inflated by federal subsidies, and that any valuation based on these figures is built on sand.
The full repeal of the ACA appears to be a remote tail risk, given its deep entanglement with the US healthcare system, now covering over 40 million people through its marketplace and Medicaid expansion. The more probable outcome is a political showdown in 2025, resulting in either another extension, a modified (and perhaps less generous) version of the subsidies, or a failure to act that triggers the cliff.
Ultimately, an investment in Oscar Health today is less a bet on ‘insurtech’ and more a wager on the outcome of US legislative politics. The company has done its part by fixing the operational side of the house and proving it can generate a profit. The question is whether the government will pull the rug out from under the entire market. For now, any position in Oscar must be sized with the understanding that its fate is inextricably linked to decisions made in Washington. As a speculative hypothesis, should Congress deliver clarity by extending subsidies in any form before the end of 2025, Oscar Health could outperform its peers significantly as the market is finally free to price the stock on its now-proven operational merits rather than on political fears.
References
thexcapitalist. (2024, May 29). *Why $OSCR is such a big deal? The risks are clear and well-known…* Retrieved from https://x.com/thexcapitalist/status/1795850571008073889
Oscar Health. (2024, May 7). *Oscar Health Reports First Quarter 2024 Results, Demonstrating Strong Momentum*. Retrieved from Yahoo Finance.
Simply Wall St. (2024). *Oscar Health (NYSE:OSCR) Share Price, News & Analysis*. Retrieved from https://simplywall.st/stocks/us/insurance/nyse-oscr/oscar-health
Seeking Alpha. (2024). *Oscar Health, Inc. (OSCR)*. Retrieved from https://seekingalpha.com/symbol/OSCR
