Oscar Health and Full-Stack Primary Care

How a Google investment and vertical integration strategy at Oscar Health create and capture winner-take-all dynamics in Primary Care.

Source: Bloomberg
Data: PitchBook
  1. Strategy: Oscar deployed significant capex building their in-house claims processing infrastructure, which likely ran near-term free cash flow into the ground with the goal of reducing long-term SG&A.
  1. Oscar meets its 2018 revenue target of $1B.
  2. Ends the year with an MLR of 80% (74% as of July 2018, which will increase as their members spend through their deductibles for the second half of the year).
  3. SG&A of 15% (assume lower than the industry average of 18% because of the company’s in-house claims processing unit, lowering labor spend).
  1. A higher percentage of employers and insurers are opting for narrow, selective provider networks due to rising premium expenses.
  2. Consumers are becoming increasingly comfortable with virtual interactions with the health care system, giving Oscar a frictionless distribution channel for health services and ownership of the front door to health care.
  • Overcapitalization of Health Services
  • Scaling Virtual Primary Care
  • Aggregation Theory
  • Cash Flow?
  • Conclusion

The Value Chain of Health Insurance:

Let’s start with defining the value chain for the health care services industry. Like a traditional consumer market, the chain is divided into three parts:

  1. Distributors (insurance companies, self-insured employers)
  2. Consumers (members, patients)
Oscar Health enrollment by year
Source: Bloomberg
Source: Oscar Health

Overcapitalization of Health Services

Health services in 2018 is an incredibly frothy market. One Medical recently raised $350M from the Carlyle Group, which includes Carlyle buying out approximately $130M worth of shares from existing investors. Paladina Health raised $165M from New Enterprise Associates after the fund bought the company’s network of 53 primary care practices for $100M earlier this year, and Iora Health raised $100M in follow-on financing earlier this year.

Source: Oregon.gov

Scaling Virtual Primary Care

Oscar, like Sherpaa Health, designed a virtualist model to deliver primary care services. Virtualists are primary care physicians who interact with Oscar members primarily through video or asynchronous messaging. As per Oscar’s marketing materials, their virtualists currently do the following:

  • Instantly schedule appointments on members’ behalf with our direct scheduling integrations.
  • View drug formularies in member plans and prescribe drugs.
  • Refer members to specialists.
Source: Rock Health

Aggregation theory

Oscar’s user experience and engagement has allowed them to aggregate loyal customers (members) and use their utilization data to figure out which suppliers (providers) they want to retain in their selective narrow networks, akin to Ben Thompson’s aggregation theory.

Cash Flow?

Will they have the capital to make this happen?


By scaling virtual primary care and Concierge services over a system built on excellent UX, Oscar has fundamentally designed the same gatekeeper model and narrow networks that made HMO’s successful at cost control in the 1990s without the corresponding consumer backlash that sunk them.

Resident Surgeon at UCSF. Biopharma and healthcare investor @BessemerVP. Cofounder @memorahealth. Alum @ycombinator, @broadinstitute, @harvardmed. Views my own.

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