This is incredibly well researched and written. Thank you for going through the effort.
As an insurance professional, we have now seen quite a few entrants coming in who are moving the needle, but I think there are some elements of insurance economics from which add to the complexity of the analysis. Ultimately, what are the economics that are going to drive the valuation? Is it insurance economics or SaaS/tech economics? The valuations for companies like Oscar and Lemonade where is the SaaS stratosphere. Much of the correction, is that investors are predicting that as much value as the technology these companies bring to the table, ultimately, they will NOT be able to capture that value in the same way traditional software companies can. This is because there are no winner-take-all dynamics at play. Making it easier for someone to buy and interact with insurance is a value creation exercise...but the COGS in the form of claims are unknown at the time of sale and they are leveraged (meaning with the wrong customer population, you can have losses that are multiples of what is budgeted). Because of this, there is not enough capital in the world to support the tail of the losses. So companies like Oscar will be dependent upon reinsurance indefinitely. Because of this, they can only carry poor loss ratios for so long before the costs of reinsurance escalate. Insurance is a great business at scale when the flywheel is positively spinning...but unlike other industries, the flywheel can spin in a negative direction. Long term success in insurance depends on short term profitability to secure less expensive reinsurance deals AND to grow book value to generate the secondary float income. These companies that are growing rapidly don't have any mechanism to the latter and it is the latter that has made State Farm and Allstate and Berkshire and Aetna and all of the other dinosaurs tech enthusiasts laugh at. But you cannot disrupt billions of liquid assets that support the premium volume they have. What investors see, and I think properly, is that these Insurtechs growth, fueled by their technology, could actually kill the companies. Investors are properly valuing these companies as insurance companies and not tech companies.
I do like what Oscar is doing. They are bringing needed value to the marketplace. Until they find a value capture mechanism, investors don't see a need to keep financing a capital burning enterprise, regardless of how much value they create. My $0.02
Unfortunately this is yet another example of propagating the continued materially misleading statements around Oscar's business model, which is not surprising given the company sponsored this write-up. The multiple statements in the piece that Oscar is only the lowest-priced plan in 10% of markets is highly misleading - 80% of the company's membership is concentrated in four states out of the 14 they operate in. Further, market-level data shows that nearly all of the membership is concentrated in places where they have the lowest priced plan. In Georgia, for instance, Oscar has only acquired 800 members after two years, because they do not have a price advantage. Fundamentally this is a business model that is built to fail - it relies on a super expensive administrative cost platform that cannot achieve enough scale to support a meaningful unit cost advantage and is entirely reliant on low price in a commoditized individual market to support growth.
Secondly, even ignoring all of the points that reflect a lack of nuanced understanding of the health insurance space, this write-up appears to be biased and lacking any objectivity by criticizing Bright (which also struggles from the same issues as Oscar) yet has built the primary care physician practice model that is discussed favorably.
Sorry but this stuff is important to call out since investors, including individuals who may lack the sophistication to do their own diligence, have already lost 80% since the IPO and need to understand the future is challenged, not full of potential, for Oscar, Clover, and Bright.
It's a nice article (albeit with its conflict of interest).
As much as I really like Oscar's approach, there's an old entrepreneurial truism that rings here: Be impatient for profits and patient for growth. The complexity of all the pieces coming together exposes risk from new entrants.
IMO, there are other value creators surrounding Oscar's ecosystem where they can bridge the gap to profitability, especially around consumer health before they even enter the medical side.
All being said, Amazon was losing money non-stop for many many years, and the trends may favor Oscar. However, in order for that to happen Hopefully sooner than a decade!
I want to protest “That’s not how health insurers really make money anyway; they make money like every other insurance company, by investing the float before they have to pay claims,” but I realize that’s not the point. This is the best explanation of Oscar’s other offerings for other insurers I’ve seen yet; everybody mentions “other insurers can buy their software” but with no explanation of what their modules even are. I wonder how the user experience (for the carrier/TPA) is on their claims adjudication software. Shiny ✨
My instinct is that a perverse set of off-the-books incentives protects the relationship between doctors, insurance, and drug companies. I wonder if Oscar can break into this good ol' boy club. And, do lobbyists, through legislation offer even more incentives and influence to keep the status quo? Even if these bugaboos prove to be far from reality, it seems like penetration into the TAM would take a very long time.
I'd like to see more detail on Oscar's unit economics. Maybe they are growing fast, but on that next patient, do they make money? How about on their SaaS offering?
Long term, I'd like this a lot more as a SaaS business. Build that up, ramp the consumer stuff down, unless you can get solid unit economics on the pts.
The Oscar Puzzle
This is incredibly well researched and written. Thank you for going through the effort.
As an insurance professional, we have now seen quite a few entrants coming in who are moving the needle, but I think there are some elements of insurance economics from which add to the complexity of the analysis. Ultimately, what are the economics that are going to drive the valuation? Is it insurance economics or SaaS/tech economics? The valuations for companies like Oscar and Lemonade where is the SaaS stratosphere. Much of the correction, is that investors are predicting that as much value as the technology these companies bring to the table, ultimately, they will NOT be able to capture that value in the same way traditional software companies can. This is because there are no winner-take-all dynamics at play. Making it easier for someone to buy and interact with insurance is a value creation exercise...but the COGS in the form of claims are unknown at the time of sale and they are leveraged (meaning with the wrong customer population, you can have losses that are multiples of what is budgeted). Because of this, there is not enough capital in the world to support the tail of the losses. So companies like Oscar will be dependent upon reinsurance indefinitely. Because of this, they can only carry poor loss ratios for so long before the costs of reinsurance escalate. Insurance is a great business at scale when the flywheel is positively spinning...but unlike other industries, the flywheel can spin in a negative direction. Long term success in insurance depends on short term profitability to secure less expensive reinsurance deals AND to grow book value to generate the secondary float income. These companies that are growing rapidly don't have any mechanism to the latter and it is the latter that has made State Farm and Allstate and Berkshire and Aetna and all of the other dinosaurs tech enthusiasts laugh at. But you cannot disrupt billions of liquid assets that support the premium volume they have. What investors see, and I think properly, is that these Insurtechs growth, fueled by their technology, could actually kill the companies. Investors are properly valuing these companies as insurance companies and not tech companies.
I do like what Oscar is doing. They are bringing needed value to the marketplace. Until they find a value capture mechanism, investors don't see a need to keep financing a capital burning enterprise, regardless of how much value they create. My $0.02
So Oscar is paying you?
Edit: so Oscar and Thrive are both paying you?!? This investment advice / marketing is blatantly designed to deceive the investing public.
Not ok guy!!
Unfortunately this is yet another example of propagating the continued materially misleading statements around Oscar's business model, which is not surprising given the company sponsored this write-up. The multiple statements in the piece that Oscar is only the lowest-priced plan in 10% of markets is highly misleading - 80% of the company's membership is concentrated in four states out of the 14 they operate in. Further, market-level data shows that nearly all of the membership is concentrated in places where they have the lowest priced plan. In Georgia, for instance, Oscar has only acquired 800 members after two years, because they do not have a price advantage. Fundamentally this is a business model that is built to fail - it relies on a super expensive administrative cost platform that cannot achieve enough scale to support a meaningful unit cost advantage and is entirely reliant on low price in a commoditized individual market to support growth.
Secondly, even ignoring all of the points that reflect a lack of nuanced understanding of the health insurance space, this write-up appears to be biased and lacking any objectivity by criticizing Bright (which also struggles from the same issues as Oscar) yet has built the primary care physician practice model that is discussed favorably.
Sorry but this stuff is important to call out since investors, including individuals who may lack the sophistication to do their own diligence, have already lost 80% since the IPO and need to understand the future is challenged, not full of potential, for Oscar, Clover, and Bright.
It's a nice article (albeit with its conflict of interest).
As much as I really like Oscar's approach, there's an old entrepreneurial truism that rings here: Be impatient for profits and patient for growth. The complexity of all the pieces coming together exposes risk from new entrants.
IMO, there are other value creators surrounding Oscar's ecosystem where they can bridge the gap to profitability, especially around consumer health before they even enter the medical side.
All being said, Amazon was losing money non-stop for many many years, and the trends may favor Oscar. However, in order for that to happen Hopefully sooner than a decade!
"First guy through the wall, he always gets bloody. Always." - Moneyball
I want to protest “That’s not how health insurers really make money anyway; they make money like every other insurance company, by investing the float before they have to pay claims,” but I realize that’s not the point. This is the best explanation of Oscar’s other offerings for other insurers I’ve seen yet; everybody mentions “other insurers can buy their software” but with no explanation of what their modules even are. I wonder how the user experience (for the carrier/TPA) is on their claims adjudication software. Shiny ✨
My instinct is that a perverse set of off-the-books incentives protects the relationship between doctors, insurance, and drug companies. I wonder if Oscar can break into this good ol' boy club. And, do lobbyists, through legislation offer even more incentives and influence to keep the status quo? Even if these bugaboos prove to be far from reality, it seems like penetration into the TAM would take a very long time.
Great article!
I'd like to see more detail on Oscar's unit economics. Maybe they are growing fast, but on that next patient, do they make money? How about on their SaaS offering?
Long term, I'd like this a lot more as a SaaS business. Build that up, ramp the consumer stuff down, unless you can get solid unit economics on the pts.
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