While I like the theme of the article, I think its application to Oscar deserves significant push…
Krishna Kaliannan

Thanks for your thoughtful response, Krishna. I’ll very briefly respond to some of the issues you raise; happy to have a more extensive conversation offline. I’m much more familiar with this space having recently diligenced a health insurance co for investment. So quick thoughts:

1. I agree w/ insurance exchanges as a great channel, but this is healthcare and a lot of education needs to take place just to get folks onto exchanges. Also, the exchanges attract healthy and sick patients alike which is not in Oscar’s best interest (see #5 below). Also, if acquisition was free or inexpensive, Oscar would not need to raise the hundreds of millions that it has to only capture 40k patients :)

2. Yes, float is something to consider, but it is more relevant to life insurance or auto insurance. In healthcare, the premiums come in monthly and the expenses go out in chunks, often in advance of the premiums. So new entrants into health insurance need to have large debt facilities to handle the swings in premiums in vs. payments out. Also, as you point out, ACA mandates 85% of premiums paid out in MLR, so there’s no opportunity to invest/float anything.

3. Tech companies also don’t make profits till year 4 or 5, if ever ;). Insurance companies typically get valued on EBITDA (because of their low margins), so rest assured there is no special treatment for them. Also, state regulatory agencies demand that healthcare insurance carriers operate cash flow positively so patients are not left out in the cold should a carrier go under.

4. Oscar can certainly reduce their expenses, but this is a tiny part of the equation. Operational expenses make up 5% of a premium dollar, so even a 50% reduction in costs only buys them 2.5% of margin.

5. Although it is seductive to think about these advantages, there are a few reasons why I don’t believe this to be true: a) the independent population pool, particularly millennials that Oscar targets, don’t have significant ER visits/admissions/healthcare costs. In many ways, this is what made Oscar attractive initially — that they would cherry pick low utilizers and thus offer a lower cost plan on the exchanges. Given UHG’s recent announcement, however, it seems that vision is not going to pan out because patients on the exchange can be expensive/high utilizers. b) there are significant economies of scale in healthcare mostly around contracting/provider pricing. Oscar has none of these benefits, so any physicians costs are probably 10–20% higher than the large carriers. As a result, Oscar steering patients away from out-of-network providers should be viewed as necessary for survival vs. a meaningful competitive advantage.

Again, happy to discuss in more detail, but without getting into too much vertical-specific nuance, I strongly believe that the Fundamental Law of Growth is just as relevant to health insurance companies, if not more (because of the regulatory compliance requirements).