Oscar Health Inc (OSCR) 2022 Q1 法說會逐字稿

Good afternoon. My name is Christian, and I will be your conference operator for today's call. At this time, I would like to welcome everyone to Oscar Health's 2022 First Quarter Conference Call.

(Operator Instructions)

Thank you. I would now like to turn it over to Cornelia Miller, Vice President of Corporate Development and Investor Relations, to begin the conference.

Thank you, Christian, and good afternoon, everyone. Thank you for joining us for our first quarter 2022 earnings call, where we will share the results about the trajectory of the company and the results of the first quarter.

Mario Schlosser, Oscar's Co-Founder and Chief Executive Officer; and Scott Blackley, Oscar's Chief Financial Officer, will host this afternoon's call, which can also be accessed through our Investor Relations website at ir.hioscar.com. Full details of our results and additional management commentary are available in our earnings release, which can be found on our Investor Relations website at ir.hioscar.com.

Any remarks that Oscar makes about the future constitute forward-looking statements within the meaning of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our annual report on Form 10-K for the annual period ended December 31, 2021, filed with the SEC and our other filings with the SEC.

Such forward-looking statements are based on current expectations as of today. Oscar anticipates that subsequent events and developments may cause estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our first quarter 2022 press release, which is available on the company's Investor Relations website at ir.hioscar.com.

With that, I'd like to turn the call over to our CEO, Mario Schlosser.

Good afternoon, everybody, and thank you for joining us. Thanks, Cornelia. Great intro. As usual, we will provide you today with a look into our financial results for the first quarter of 2022. Before we get into that, I want to remind you of why we think Oscar is well positioned in the evolving U.S. health care system, and I want to build on the themes you heard from us about last month at our Investor Day.

The past few years have seen the U.S. health care system shifts more and more towards more consumerization, towards increased risk sharing and technology adoption. We believe we have built a business that is well positioned to capitalize on this shift. And we are confident in our ability to deliver on our vision of making health care more accessible and more affordable for all.

Oscar now serves roughly 1.1 million members across this platform, including approximately 1 in every 13 ACA lives or roughly 7.5% of the overall markets. In the regions where we offer coverage, our market share is roughly 16% this year. First quarter membership and premiums are up approximately 100% year-over-year, and that's driven primarily by growth and by retention in the individual and small group markets. That's the kind of growth that we view as a clear indicator that consumers see the value in the different product offering we have.

And so importantly, at the same time, we are expecting meaningful year-over-year improvements in the medical loss ratio into the range of 84% to 86% for the year. We saw 80-plus percent of our individual members stay with Oscar, and 85% of our C+O members who are up for renewal after their full year contract period stay with us. Digitally engaged numbers are 6 percentage points more likely to renew. And our Net Promoter Score continues to climb ending the first quarter at an all-time high of 43.

As we see inflation and the cost of goods rising, our ability to direct our members to low-cost, high-quality care options is even more critical, particularly given that our book has been shifting towards a higher proportion of Silver members in a cohort with higher mobility where engagement is even more important and impactful. We see in the first quarter that our Silver numbers are 15 percentage points more likely to use our Care Router to find care compared to other Oscar members.

For our Small Group products, we continue to see strong growth as well. We ended the quarter with more than 36,000 C+O members across 8 states. Membership nearly doubled between the fourth quarter of 2021 and the first quarter of 2022, with monthly membership increases across all of our markets. This growth is driven largely by our strong product market fit, including the expansion of dual-network strategy and the ability for our [chassis] to meet the needs of small employers.

As I mentioned earlier, we are seeing high retention rates with our C+O members and attribute this in part to a high levels of digital engagements. Looking ahead of overall market dynamics. We think the individual market is becoming a more dominant force in U.S. health care. Pending some regulatory changes, including Medicaid redeterminations and the elimination of a family glitch, have the potential of pushing the ACA market up to 20 million members next year.

Medicare Advantage to a comparison has approximately 39.6 million members now, and that would mean that it took the MA market nearly 20 years to get north of 20 million compared to just 10 years for the ACA market to reach a similar stage of maturity. As a company, we know how to thrive in such a consumer-driven cost-competitive markets where affordability and experience matter, and we think that's a quiet revolution in U.S. health care that will continue to change the game.

For the rest of this year, we continue to focus on execution. Turning to our strategic priorities for our insurance business. First, we are targeting profitability for Oscar insurance in 2023. Second, we expect to improve our margins by harnessing the power of our technology to drive down the total cost of care in our membership. And finally, we aim to drive long-term above-market growth and retention.

Let me give you a few examples for each of these. Starting with, as you know, we are emphasizing profitability over growth this year. This year one lever is pricing. And our planned year '23 pricing strategy contemplates market dynamics, exogenous trends and our drive for market expansion. In addition, the team is focused on driving towards greater variable cost efficiency using our technology to reduce manual processes as well as leveraging our scale to obtain better unit costs.

For example, today, we automate about 5% of our responses to inbound messages from our members. And we think we have meaningful opportunities to increase this automation of inbound messaging to at least 20% without an impact on member experience. Additionally, we're looking at ways to expand ourselves towards members as we know that about 70% of those who call care guides also have digital accounts. And heading into 2023, we expect to achieve additional operating leverage through continued top line growth and then with fixed cost growth.

In terms of driving down total cost of care, we are executing on several key areas for medical cost savings. For utilization management, we are extending our automated utilization management decisioning and program communications for providers, thereby reducing the need for manual intervention and allowing our clinicians to focus on more complex care management issues. We also will continue to focus on payment integrity, on our ex-formulary management and population health campaigns and on closing care gaps.

For example, members using our virtual primary care platform were 40% more likely to get their diabetic eye screening compared to a control group members who see one of the Oscar virtual primary care providers are seeing primary medication adherence at roughly 85% boosted by our $0 generic drug offering on these virtual plans.

And finally, looking at growth and retention, we are focused on balancing this with profitability. For example, we are expanding our virtual primary care plan offering to new states and markets given the influence on total cost of care. Our ability to achieve above-market growth retention even when we were not the lowest price plan in the last abnormal periods is the result of multiple tactics coming together and the leveraging of the most differentiated parts of the Oscar product offering.

Now we've had tremendous growth, and we've had some good outperformance trend into this year. And those give us confidence and afford us the opportunity to focus on markets where we can win. As such, we are focused on modifying our portfolio mix by markets and by products. This quarter, we made the decision to withdraw from the Arkansas and Colorado marketplaces for the plan year 2023. These are relatively small markets for us, and we intend to make these exits as seamless as possible, while continuing to provide service to the existing membership in these states throughout the year.

Turning now to +Oscar. Despite being in the market less than a year, we have approximately 100,000 client lives served, and we expect these clients will generate $65 million to $70 million in capital efficiency, fee-based revenue within this year. We have 3 strategic priorities for +Oscar. The first is to serve our existing clients well, leveraging the ongoing learnings we are gaining from the first full book migration we implemented with Health First Health Plans. These full book migrations are complex and challenging, and we continue to optimize our implementation strategy in partnership with Health First. We look forward to supporting Health First Health Plans in their expansion efforts for 2023.

Second, we are adding modularized offerings. And the news here is that we are already in the market selling our first externalized Software-as-a-Service solution, our campaign builder tool. As we have talked about, one of our secrets to success as a highly engaging insurer is our ability to spin up new campaigns and new workflows very quickly.

For our own membership base, we run hundreds of campaigns concurrently with right now when we look at the dashboards, a 48% member engagement rates. And with the launch of a campaign builder tool to the external world, we are now offering our toolkits and contents to other regional health plans and risk-bearing providers. This solution enables scalable, personalized interventions and it automates workflows to drive growth and manage risk.

The tool is a self-service solution designed for nontechnical teams to be a one-stop shop for engagements, driving clinical outcomes and improving efficiency. Clients can build programs or campaigns that can be A/B tested. They can deliver interventions with multiple touch points over time, the drug behavior change. And these campaigns deliver moreover meaningful business results. We've now have amassed a large new base of powerful and road-tested campaigns because we are this differentiated mix of both a risk-bearing insurer and a technology company.

And for example, one campaign to increase annual wellness visits appointment bookings resulted in a roughly 15% increase in visits schedules and a 20% reduction in no shows. And finally, in +Oscar, we're continuing to take steps towards offering our full platform as a software as a service solution besides it as a business process as a service solution in order to increase our TAM and to expand the margins.

Our prospective clients are saying that they like our tooling and a SaaS solution will allow for an easier integration onto our platform. Moreover, SaaS deals are largely software solutions, so we'd expect them to have 40%-plus margins. We've had some exciting tech launches this quarter as well. And I always want to also mention those to share just a few examples. Outbound interactions from concierge care guides are now driven by an aggregate score of all underlying tasks for a particular member. And let's just make sure that we drive outreach to the highest priority of individuals and tasks.

And because we're built on a tightly aligned tech stack, a change like this in one place flows through everywhere, helping us prioritize campaigns better. Deep in our core admin systems, we launched a product update that mergers imported provider rosters continuously rather than the batch process. And a result of this update, data [statements] for provider data went down from hours to minutes and led to the elimination of the need for manual engineering interventions for updates of provider rosters and provider data.

That's in turn, another change, made it easier for us to improve how we rank facilities in our Care Router by efficiency, not just physicians but facilities. These are just a few examples for ongoing improvements in our infrastructure, and we have a lot more coming this quarter as well. We remain steadfast in our commitment to our strategic priorities of positioning the insurance company for near-term profitability of continuing to increase our penetration across the U.S. insurance markets and accelerating growth for +Oscar. We view the first quarter results as a positive step on the path towards the objectives. And with that, I'd like to bring in Scott.

Thank you, Mario, and good evening, everyone. Tonight, I'm going to walk through our first quarter 2022 results. But before I jump into the numbers, I'll call out a few key takeaways. We continue to see meaningful top line momentum and increased scale. Our first quarter results were largely in line with our expectations, and we are focused on execution in 2022 as a stepping stone to insurance company profitability in 2023. And finally, with over 1 million members, our scale enables us to optimize our 2023 pricing for margin first, and growth second.

Turning to the results. We ended the first quarter with approximately 1.1 million members, an increase of 98% year-over-year driven by growth predominantly in our individual and C+O books of business. In the quarter, membership growth modestly exceeded our expectations, driven by a higher effectuation rate and a retention rate of 80%. First quarter direct and assumed policy premiums increased 104% year-over-year to $1.7 billion, driven by higher membership and business mix shifts towards higher premium Silver plans.

Specifically, Silver members now represent 65% of our overall mix, up from 50% last year. Premiums earned increased 159% year-over-year to $955 million. Note that we entered into an additional reinsurance agreements as of the beginning of 2022. This is increasing our total quota share coverage rate from 34% in 2021 to 46% in the first quarter of 2022. For our existing reinsurance contracts that we had as of last year in our accounting, we reduced premiums and medical claims for the reinsurers proportional interest.

For our new quota reinsurance treaties, the terms required different accounting where the net economic impact of the arrangement is included in our other insurance cost line item. Our 10-Q will have more details about the accounting for these arrangements. Our first quarter '22 insurance company administrative expense ratio was 19.8%, which was roughly flat year-over-year as operating leverage and variable efficiencies were offset by higher distribution costs. Scale benefits drove 220 basis points of improvement in our first quarter adjusted administrative expense ratio, which was 23.8% in the quarter. We expect the admin ratios will be flatter throughout the year with a modest uptick in the fourth quarter.

Turning to medical costs. Our medical loss ratio was 77.4% in the quarter, an increase of 300 basis points year-over-year, which was largely in line with our expectations. The mix shift towards more Silver members drove around 75% of the increase. These members have richer benefit designs with lower deductibles resulting in flatter MLR seasonality. Therefore, we expect our overall seasonality to be less dramatic throughout the year than it has been historically.

In addition, Silver members generally have higher morbidity versus Bronze members, and the increase in Silver members results in a lower risk adjustment transfer offset by higher claims. While this is neutral to the bottom line, it increases the MLR due to the impact on the numerator and the denominator. The remaining MLR variance was attributable to adverse prior period development relative to favorable prior period development last year, which was more than offset by year-over-year -- excuse me, which was more than offset by favorable year-over-year net impacts of COVID.

Let me spend a moment on COVID and utilization trends. Net COVID costs on a per-member basis are lower year-over-year, driven by lower severity of the Omicron variant, resulting in fewer claims for COVID-related treatment. In periods with high COVID infection rates, we have seen some level of offset from lower non-COVID utilization, and we saw that trend continue in the first quarter. Our overall combined ratio, which is the sum of our medical loss ratio and the insurance company and administrative expense ratio was 97.2% in the quarter, an increase of 300 basis points year-over-year, primarily driven by the MLR.

Our first quarter '22 adjusted EBITDA loss of $37 million was $9 million higher year-over-year, but as a percent of premiums, it improved to just 2.8%, down from 4.6% last year. Turning to the balance sheet. We ended the quarter with over $3.4 billion in total company cash and investments, including roughly $735 million of cash and investments at the parent, and another $2.7 billion of cash and investments at our insurance subsidiaries.

In the first quarter, the primary use of parent cash was to fund the insurance subsidiaries required capital related to the open enrollment premium growth. Owing up, our first quarter results were in line with our expectations, and we are making no changes to our 2022 outlook. After a quarter with our larger membership book, we're seeing a membership profile that is as we expected. It's a slightly higher morbidity population associated with higher Silver members. Compared with prior years, this should result in less seasonality in our quarterly results.

And finally, as a reminder, our guidance excludes any effects from regulatory changes, including the resumption of Medicaid redeterminations. With that, let me turn it back to Mario.

Thank you, Scott. Also, always great. These are complex times, and it's a complex market out there, certainly, yes. For us on the back of our record-breaking growth, we're trying to keep things very simple, serve members well, serve clients well and continue to move towards insurance profitability in 2023. We are doing that against the backdrop of a health care system that is moving further into the direction that we've long described to more individualized, more digital, more about value.

And moreover, we believe that the move away from point solutions in health care is solidifying our strategy and positioning. We chose all those years ago to become an insurance company and to build our own technology stack, and that sets us apart in the markets. We're quite far along in that journey now, and we're leveraging our tech to serve members and clients and to do so profitably is a milestone we cannot wait to hit. I want to thank all of the Oscar team members. We're a company that is powered by people and their tireless work serving members is what makes Oscar a special place for me and for them.

Now with that, we'll turn over to the operator for the Q&A portion of the call.

(Operator Instructions)

Your first question is from Ricky Goldwasser from Morgan Stanley.

A couple of questions here on MLR. You broke it by Silver and prior period development. Can you give us some more context on what is the MLR that you're seeing for the new members that you onboarded given that there's so many of them this year versus MLR of existing members?

Yes. So with regards to the MLR, the first comment I would make is with our SEP membership that came over, 2 observations. One, we saw very high levels of retention of that group of SEP members that we added last year coming over and joining us in 2022. Then on the side of MLR, again, those members performed as we expected, which was really very closely aligned to the same as what we would have been seeing with the rest of the membership that came on. And again, this is kind of what we were expecting and gives us confidence about the rest of the year trajectory with those members.

And then as we think about sort of those new members that you onboarded this year, did you kind of have a sense of the MLR that's associated with them just given that the mix now seems to be skewed more towards the new members?

Yes, again, I think that what I would say is that the SEP members that we added are they -- I would anticipate that their MLR is going to be literally the same as the members that came in that we had previously had in our OE. So that's going to be the same.

Okay. Great. And then, Mario, just I have to ask about +Oscar. Recently, you've taken a more active role in sort of leading the +Oscar effort. So maybe you can discuss kind of what are kind of you're most focused on? And what are you seeing in terms of the pipeline?

Yes. It's fantastic for me to be out on the road, dinner's conversations, hearing with potential clients would want and so on. What we're seeing is clearly a recognition that continues to be the case coming out of the pandemic shift towards value, thinking about how do you rebuild old and aging systems, how do you get close to the member, who's going to occupy this hot center of member engagements. That is really in everybody's minds. Lots of interest in our core admin systems, lots of interest in our member experience, lots of interest in our campaign builder.

And of all of those, the thing we're now most proud of is that we were able to already essentially start selling our first SaaS module. And we talked about this a little bit at the Investor Day that, that was the plan that we will be moving towards that. And again, the plan is continue to sell BPaaS, make the full platform available over time as a SaaS solution, but then also start modularizing smaller modules, we can land and expand and have a shorter sales cycle.

And there, our first offering is now the campaign builder and we're out there selling that to a larger portfolio of clients than even before including risk-bearing physician practices and other folks like that.

So the trend is very much alive. I think we're tapping into a -- we're hitting a real nerve there in terms of the pipeline. On the BPaaS side, as I said in the Investor Day, those are just longer sales cycles, and we're in the market there for 2024 for various opportunities still. But in the meantime pushing on the modularization and fulfilling clients' needs there. So stay tuned for that.

But everything I think, in how we've been describing what's going on out there is very much alive and feels very much like what people are looking for.

Your next question is from Stephen Baxter from Wells Fargo.

I just wanted to ask first, I guess, on the ACA expanded subsidies. Obviously, it's been fits and starts trying to get these subsidies expanded. I was hoping you could give us an update on your exposure to membership with these expanded subsidies. And then I guess, just further as we think about this in the balance of the year, how should we think about the relative risk profile or profitability of this membership versus your overall book? I mean it seems to stand to reason that they'd be good risk, but I would like to get your perspective on that.

Yes, Steve. Let me take the first part. We're now at record ACA enrollments, right? I think 14.5 million a historical high, 21% increase from 2021. I think a lot of signs out there that the ACA market is working. You saw the really low cost trends in the last couple of years increased. The reduced now on uninsured rates that data came through a couple of days ago, those are societal things and good for the health care system overall.

So that means, I think it would take a lot of irrationality in the political process, particularly given the state that those subsidies have been really important for. Florida, Texas, for example, it would take a lot of political irrationality to undo those subsidies. And my starting point would be to think that they will be found away -- a way will be found to extend them, whether it's in the lanes that session or before the end of the year, I think we shall see, but that is my best guess currently.

It's just kind of what always happened in the last couple of years in the ACA. It's an entitlement that works for a lot of people that is now seen as good. Clearly works for the health care system overall, providers and members and so on. And so that's my starting point.

Now if they were to go away, it'd probably about a range of 10% to 20% decrease in membership purely from the subsidies. However, that isn't the net. And I'd remind you there that to look at the net change in membership, you'd have to include Medicaid redetermination, the fixing of the family glitch, maybe other things that could happen before next year, like Medicaid capsule out there as well. All of those things push very much in the other direction.

And so that is why we're not sitting there at the moment, saying how do these -- all these things net out. So we're mostly saying, hey, we've got a great product, and there are big membership base to go after, and therefore, that's the plan. Impact on the MLR of the new membership is -- as Scott said, I'll echo him there. It really the 3 cohorts, members who renewed, members who came last year, members (inaudible). We don't see a lot of difference at the moment in MLR.

And they all have slightly different characteristics, but there's not a lot of difference in how that all nets out. That's where things like this certainly work. So in other words, a single population came in last year had this RA overhang against them. When that goes away, you've got them basically at the same MLR as everybody else that seems to be coming true. I'd say one small thing, which is that last we talked about the ECP population, we observed that they have slightly higher -- they have somewhat higher preventative utilization when they come in, and they have somewhat higher ER utilization when they come in.

And the preventive utilization is now back to where it used to be for that population. So that suggested was sort of like really an early catching up. And the ER utilization is still slightly higher, not enough to throw off the MLR on the book or on that cohort, but it just suggests that there is still movements that we can do, and we're certainly on that. Anything else, Scott, do you want to add?

No, I think you covered it.

Okay. And then just one secondary question here. It looks like the SG&A progression might be a little bit different this year than you've seen in the past. I think you're starting out closer to the midpoint and then in previous years, and you've seen much more of a ramp kind of throughout the year. Just remind us how you guys are thinking about SG&A seasonality for the balance of the year and what some of the moving parts are for that?

Yes. Thanks for the question, Steve. So with respect to the InsureCo admin ratio, a couple of things that I would call out there. On the one hand, in the quarter, we had more membership that came into our book via brokers, and that drove higher distribution expenses. And then on the other hand, we saw really variable cost efficiencies and operating leverage from scale. And net-net, those 2 things kind of offset each other. And that was really the driver of why we saw flat year-over-year results in terms of first quarter.

Then kind of to your specific question on seasonality, what I would say there is that I'm expecting based on kind of just the business that we've got now that including the broker expenses that I just talked about, we're going to see probably modestly less amount of seasonality. And specifically there, I would say that I would expect that we're going to see pretty flat levels of the admin expense ratio for most of the year with a slight notch up in Q4. So I do think that we should see lower seasonality in that book.

Your next question is from Jonathan Yong from Credit Suisse.

I guess just as you think about the enhanced subsidies, it sounds like you guys are heading into the pricing, assuming that the enhanced subsidies will be there. But I guess if it wasn't extended, how much of a lift would it be to reorient the overall G&A load to maintain the goal of InsureCo profitability in 2023?

Yes. I mean let me start and -- I'd start by saying that, again, if we net out all the changes, it's not clear to me that the market would get smaller, even without the subsidies, right? Medicaid redetermination, family glitch and all these things. Things are pushing in the other direction. So we're not too worried there. The second thing is we remain totally committed, as we said, to insurance company profitability next year. So we need to do there. Now in terms of the kind of leverage we have in the admin, Scott, perhaps you can talk about.

Yes. Look, I think that what I would say is depending on how all of these regulatory shifts might play out, you're going to have a couple of different factors. To the extent that we see subsidized members, if those subsidies are going away and we're not able to pick up those members. Certainly, we've already capitalized our insurance entities. So that would be favorable with respect to kind of from a capital and cash flow perspective.

On the other side of that, it also would then reduce for purposes of scale, we would be going backwards a little bit on our fixed scale that we picked up. So that would be certainly a bad guy. I think on the side of variable costs, we would be able to pull out a significant amount of variable costs, roughly half of our costs in the insurance company, administrative ratio are within our control and variable. So we would be able to make adjustments to those for the size of the book.

And then I would just comment on the other side of the ledger, we were able to see an increase in membership in going into '23, whether it was redetermination or the family glitch or any of these things. There, I think the fact that going into '23, where we're able to price for the risk that comes along with that membership group, I think that has the potential being a real tailwind for us certainly if we saw Medicaid redetermination come in, in '22. And depending on the pacing, it's so difficult to exactly predict when the health care emergency might end. But depending on the pacing of that, we could see that be a headwind to '22, that would certainly be a tailwind to 23 as we would expect those members to have high retention into the following year.

Final thing I'd maybe add is that from a regulatory point of view, this is obviously on regulators' mind as well. And so there's some -- there's a lot of work with the regulators in the pricing process to figure out what exactly we have in terms of time lines that we could use there.

Okay. Great. And then I guess this is just kind of sticking with the enhanced subsidies. If it was not extended, and I guess for this year specifically, is there an expectation or thought of members possibly overutilizing their benefits heading into the end of the year given the knowledge that they may not have insurance in 2023? I guess is there any thought to that?

I would argue a little bit with historical experience here, and this would sort of be similar to what happened in 2016 and 2017, and the kind of shift towards Silver loading and so on. And it is a -- I mean the takeaway there was that members do not necessarily read the CMS guideline publications every single month in the way that you do, Jonathan, surely, which is fantastic, and I do. So we did not see a big impact back in those days. So my starting point there would be it's not a huge concern. But I think now we're behind a whole bunch of hypothetical studies that to multiply together, so not really something we're too concerned about right now.

Your next question is from Gary Taylor from Cowen.

I had 2 quick numbers questions for Scott, and then a question for Mario about marketplace. On numbers, could you quantify the adverse PYD in the quarter? I mean, we'll see it in the Q in a few days here. But just since you had mentioned it, I was curious, I think that was a positive $5 million in the 1Q of '21.

Yes. In terms of the total year-over-year in dollars on prior period development, it was unfavorable year-over-year by $17 million, $12 million of that related to unfavorability in the current year quarter. So that's the quantification of that. And remind me, what was the second part of your question?

That was it. My second numbers question was the other expense in the quarter, I think [$3.055] that's getting added back to EBITDA, what does that represent?

That one, I'm going to send Cornelia back to you later after the call to give you the answer because I honestly don't know off the top of my head what that is.

Okay. And then, Mario, just while we're sort of talking about potential changes to ACA marketplace. How are you thinking about the finalized rules where you have to offer a standardized ACA plan at every middle level and every rating area where you offer a nonstandardized plan. I think you guys have had a lot of success with some of the innovation in your plan offering. So would this constitute an incremental administrative burden to be able to offer those or not material? And do you think it changes the competitive dynamic in the market at all?

Yes. The good thing is that the ability of having other plans in the marketplace doesn't go away. So we still have a lot of flexibility and a lot of ability of putting more interesting designs out there. And I think that is really important. There are some states where there is more constraints already. And I personally don't think that, that is always a great thing. It's better to have more smart regulation obviously in there, but more ability for defining better benefit designs and let the creativity flow there really in a good way. So glad that, that doesn't get taken away.

It is an interesting change. I think it is -- I would generally say I don't have a huge opinion as to whether it's going to be great for the market or not or whatever. I think generally, I would say, any change as it relates to plan design is generally a good thing for us because we can often act more quickly and we build our own systems, we don't have to go to a vendor and whatever, right, and configure these things more easily and more directly and price out exactly what that will mean.

So that part I like. I think it will be interesting to see what it means that there'll probably be more golden platform plans back in the marketplace. And those are things we're going to have to see what that means and where you can bet that we're working through it. Now the latest CMS rule was not that much of a surprise related to what they had talked about before. So we had some time already to prepare for it. And therefore, I think we're in the middle of pricing season, and it's all systems go on working through the pricing committees there every week.

But from this distance, it's not like a clear additional material administrative costs just to offer and maintain many more plans in a trading area, is that fair?

No, that's definitely fair. I mean we have more administrative burden from being in states we are subscale, which is one of the reasons why we said we're leaving 2 states in the prepared remarks. But when it comes to running benefits network side by side, and that's one of the reasons we build our own systems where we have a lot of flexibility.

Your next question is from Josh Raskin from Nephron Research.

Just first one, just a quick clarification on the change in ceded premiums. I understand the shift to deposit accounting for the new book. So did I hear it right, Scott, that it's 46% of premiums this year being ceded? And I assume the accounting has no impact on EBITDA, and I assume certainly nothing on cash flow, right?

Yes. So you're right, it is overall what we're going to call the reinsurance coverage rate, which is kind of the effective amount of reinsurance is 46% for the first quarter. And then when you look at kind of how that translates through into the accounting, you'll see ceded premiums of around 28%. And the difference there basically is the new treaties that we'll be running through on one line item, as you said, using deposit accounting. And you're right, there is really no impact on the treatment in adjusted EBITDA. So it's just a presentation thing. It's not -- it doesn't affect the bottom line.

Yes. And then just on the medical management side, I'm curious if you're starting to get any leverage or new conversations that are coming up with providers. I don't know if this weaves +Oscar opportunities as well. But as you grow membership with the providers thinking about Oscar in totality differently, and then maybe how are you working specifically? We've heard a lot about member engagement, but how are you working specifically with providers to better manage costs?

Yes. So on the provider side and the shift towards risk there, we are at a record level certainly this year in terms of dollars flow into value-based care arrangements that is both with physician groups and with health systems. And we have several health system contracts right now with long-standing partners. We're shifting one more towards risk and those are under negotiations, so I wouldn't want who that is and everything, but that's happening as well.

I think that's a nice vote in terms of confidence that we can run the MLR at a reasonable level, at a good level. And also in the fact that we have operations now really where we can make sure that the data flows in a good way and things like that. How we are managing risk with providers? It's a lot of bread and butter right now, I would say. One of the things we really brushed up on in the last 6 months, 9 months or so is to just have a lot more regimented management and orchestration provider of value-based care deals do not have any kind of customized data flow going there, whatever.

But an internal system that we can spin up very easily, new data sharing with providers and so on. That's the boring basics oftentimes, but those are all things of working within what we do. We do a variety of running campaigns to closely aligned partners. I mentioned a campaign about PCP attribution earlier today in the prepared remarks. That was the campaign we actually ran with one of the -- in that case, a health system that has risk with us and where we help them get PCP attribution.

And that campaign builder is really one of the places where we can get a lot of juice out right now from driving there. And then lots of small things that I think we want to maybe talk a bit more about in the next quarter or so as well in terms of how the product changes when you're in a risk attribution deal. For example, it's super small, but if you renew your prescription in the app that will go to your attributable provider in an easy way now.

Where if you go into the Care Router and you search for PCP, your provider will magically flow to the top there and things like that. So very, very simple stuff. It's a good testing ground for +O provider clients. If you take all this together, it's a big push and would win more there. We call this internally networks delivering value in the EV and a lot of falls under that kind of general rubric better PCP attribution using member engagement for that, better data sharing, better pushing of data into the point of care as well and all those kind of things.

And Mario, when you talk about value-based care, are you talking about 2-sided upside/downside risk? Or are you talking about incenting providers upside-only type of stuff value to help you with your cost management?

Yes. If you take everything we're doing on just a little bit of upside or whatever. I mean then our percentages of value-based care are pretty large. But yes, when I say value-based care, really, I mean the upside/downside. Like the contract I mentioned today that we're negotiating this year with health systems to really do risk. That's upside/downside, yes. Exactly.

All right. And ladies and gentlemen, this will be the last question for today's call, and it will come from Nathan Rich from Goldman Sachs.

Great. Mario, you highlighted the decision to exit 2 markets. I think you said Arkansas and Colorado. Could you maybe talk about just what went into the decision to exit those markets? And is it -- are those 2 markets material from an EBITDA standpoint? I understand you hadn't gotten scale there, so not material from a premium standpoint. And then you talked about looking at other remediate markets at the Analyst Day. Could you maybe just talk about where the company is in the process of evaluating those markets and potential to see decisions to exit additional markets in the future?

Let me just jump in on the -- from the financial side of exiting those markets, Nathan. They have -- they're really small. So from a P&L perspective, they don't have a significant or even close to material effect. There is a benefit, though, from just reducing the amount of overhang that we have to do, whether that's the compliance work we have to do or the statutory reporting that we have to do. So there is a small benefit. It really just reduces distraction and allows us to focus on where we have the right to win and where we really want to put our energies towards.

Yes. In terms of decision to exit there, so you're exactly right, these were in the remediate buckets that we talked about in the Investor Day. There were a number of commercial factors really starting with the fact that we just did not get the scale there, and we didn't really see a great right to win for us that would relatively speaking, be bigger than in the many other markets we are in, right? We have plenty of markets where we don't have scale yet, but we see a great path because we can work with a different provider partner where we can launch different products and things like that.

We didn't think that these markets just were at the top of that list. There were also recent regulatory changes in both markets that's made it a bit more of a sort of like a decision that made sense to do right now rather than leaning into those regulatory changes and doing the work of working through our systems and leaning, therefore, to the decision right now to withdraw. Although another comment on the regulatory changes there, right, I don't mean to say anything bad about that, but it just makes sense for us to save us that work if we don't think we've right to win in those markets.

Okay. That makes sense. And just a quick follow-up. Scott, you mentioned the membership profile this year being in line with your expectations. I know the risk adjustments created some uncertainty on MLR just in the exchange market. I just -- can you maybe just talk about how you feel like you've been kind of executing on this? And when we should expect kind of better visibility on what the impact should be for the full year?

Yes. So obviously, the first quarter is really the starting point for getting information and we're just starting to see claims data coming through. As you go into the second quarter, that's when you start to see your first kind of report out in terms of performance. So really, I would expect we're going to get our first really good view in terms of the characteristics and what we should be anticipating, any true-ups that we need to make around our estimates for risk adjustment. We'll see that in the second half, right at the end of the second quarter, so June of '22.

Ladies and gentlemen, this concludes Oscar Health's first quarter conference call. Thank you for participating. You may now disconnect.