Key Takeaways
- Oscar Health’s share price has shown a significant divergence from its operational results, appearing to be penalised by sector-wide sentiment rather than company-specific news.
- The company’s strategic focus on the ACA marketplace largely insulates it from direct headwinds related to Medicare Advantage rates or Medicaid redeterminations, a distinction the market seems to have overlooked.
- Actual Q1 2024 results demonstrated a material turn in financial health, with a 46% year-on-year revenue increase and a swing to significant profitability, challenging the narrative suggested by recent stock performance.
- The primary forward-looking risk is not operational but political, hinging on the renewal of enhanced ACA subsidies which are set to expire at the end of 2025.
A peculiar dislocation appears to have emerged in the health insurance sector, where Oscar Health has seen its valuation impacted by market anxieties to which it has deliberately limited its exposure. The narrative of government programme cutbacks has seemingly cast a wide net, catching companies whose business models are almost entirely elsewhere. This indiscriminate selling pressure stands in stark contrast to Oscar’s recent operational performance, which saw the company achieve a significant turn to profitability on the back of strong revenue and membership growth in the first quarter of 2024.
Guilt by Association: A Sector-Wide Contagion
The health insurance market is often treated by investors as a monolith. Headlines concerning Medicare Advantage reimbursement rates or shifts in Medicaid policy can trigger algorithmic and sentimental selling across the board. Larger, more diversified insurers such as UnitedHealth Group or Elevance Health possess significant exposure to these government-funded programmes, making them justly sensitive to policy winds blowing from Washington.
Oscar Health, however, has charted a different course. Following a strategic review, the company ceased its marketing and sales activities for its Medicare Advantage plans in 2023, effectively exiting the line of business to sharpen its focus.1 Its core operation is now almost entirely concentrated on the Individual and Small Group marketplace, facilitated by the Affordable Care Act (ACA). This makes the company’s fortunes fundamentally dependent on the dynamics of the ACA exchanges—namely enrolment trends, member risk pools, and, crucially, the subsidy environment—rather than the profitability of Medicare or Medicaid contracts. The market’s recent reaction, therefore, feels like a classic case of mistaken identity, where sector-wide de-risking fails to account for company-specific strategy.
From Growth to Profitable Growth
For years, the primary investor concern regarding Oscar was not its ability to grow, but its ability to do so profitably. The company’s first-quarter results for 2024 suggest a meaningful inflection point may have been reached. The headline figures paint a picture of a business hitting its stride, moving beyond the cash-incinerating phase that often characterises technology-led disruptors.
The turn to a net income of $177 million from a loss in the prior year is particularly noteworthy, driven by a substantially improved Medical Loss Ratio (MLR). A lower MLR indicates that an insurer is spending a smaller portion of its premium revenues on clinical services and quality improvements, pointing towards more disciplined underwriting and risk management—a key element of long-term viability.
| Metric | Q1 2024 Result | Year-over-Year Change |
|---|---|---|
| Direct and Assumed Policy Premiums | $2.1 billion | +46% |
| Total Members | ~1.4 million | +41% |
| Medical Loss Ratio (MLR) | 74.2% | Improvement of 990 bps |
| Net Income (Loss) | $177.4 million | from ($39.6 million) |
| Source: Oscar Health Q1 2024 Financial Results.2 | ||
The Real Risk: A Political Overhang
While the market may be mispricing Oscar based on unrelated sector fears, a significant and legitimate risk looms on the horizon: the future of the ACA itself. The enhanced premium tax credits, originally expanded under the American Rescue Plan Act and extended by the Inflation Reduction Act, are due to expire at the end of 2025. These subsidies have been a powerful tailwind for enrolment and affordability on the ACA marketplaces.
Their potential expiration introduces a major political overhang. A failure to extend them would likely lead to higher premiums for millions of individuals, which could, in turn, result in lower membership and a potentially sicker risk pool for insurers like Oscar. Management has expressed confidence in its ability to remain profitable even without the enhanced subsidies, but the market will likely remain sceptical until there is legislative clarity. The debate over valuation—with some bullish forecasts pointing to a single-digit price-to-earnings ratio on 2027 estimates—is therefore less about current performance and more about the perceived durability of its earnings power in a less certain political climate.
The current situation presents an asymmetric profile. The market appears to be pricing in sector-level fears that are largely irrelevant to Oscar’s model, while the company demonstrates tangible progress in its core operations. The true test, however, will be its ability to navigate the political complexities of its chosen battlefield. For investors, the thesis is a wager that operational execution can ultimately outweigh political uncertainty, a proposition that remains very much undecided.
References
1. Oscar Health. (2023, April 5). Oscar Health to Exit Medicare Advantage in 2024. Business Wire. Retrieved from https://www.businesswire.com/news/home/20230405005722/en/Oscar-Health-to-Exit-Medicare-Advantage-in-2024
2. Oscar Health, Inc. (2024, May 7). Oscar Health Announces First Quarter 2024 Results, Demonstrating Strong Momentum Towards Profitability Goals. Retrieved from https://ir.hioscar.com/news-releases/news-release-details/oscar-health-announces-first-quarter-2024-results-demonstrating
thexcapitalist. (2024, July 3). [OSCR was down 20% last week due to Medicaid cuts it has no exposure to whatsoever…]. Retrieved from https://x.com/thexcapitalist/status/1931071799673901290
