Executive Summary
Oscar Health is an ACA health insurance company that achieved its first profitable year in 2024 after 12 years of losses. While the company has shown impressive operational improvement and trades at an attractive valuation, the thesis depends heavily on regulatory stability (ACA subsidies) and continued execution in a commoditized industry with thin margins.
Investment Thesis in 3 Sentences: Oscar has achieved operating leverage proof-of-concept but remains critically dependent on ~$7B/year of government subsidies (APTC) that expire December 2025. The stock is cheap (4x 2025E EBITDA) because the market correctly perceives existential regulatory risk. This is a WAIT for either (1) subsidy extension certainty or (2) a 30%+ price decline that provides adequate margin of safety.
Key Metrics Dashboard:
| Metric | 2024 | 2025E |
|---|---|---|
| Revenue | $9.2B | $11.3B |
| MLR | 81.7% | 80.7-81.7% |
| SG&A | 19.1% | 17.6-18.1% |
| Adj EBITDA | $199M | $390M |
| Net Income | $25M | ~$250M |
| FCF | $950M | ~$300M (normalized) |
Decision: WAIT - Regulatory risk too high at current price without sufficient margin of safety
Phase 0: Opportunity Identification
Why Does This Opportunity Exist?
- Structural Complexity/Stigma: Health insurance is perceived as low-quality, commodity business with thin margins and regulatory uncertainty
- Turnaround Skepticism: First profitable year after 12 years of losses - market questions sustainability
- Regulatory Overhang: Enhanced APTC subsidies expire Dec 2025 - creates binary uncertainty
- Profitless IPO Stigma: IPO'd at $39 in 2021, now $16.55 (-58%) - retail investors capitulated
- Small/Mid Cap Neglect: $4.2B market cap in complex industry = limited institutional coverage
Source of Potential Mispricing
If subsidies are extended (likely but not certain under current administration) AND Oscar sustains MLR discipline, the company could generate $300-400M sustainable FCF on $4.2B market cap (7-10% FCF yield). Market may be overly discounting regulatory risk while underappreciating operating leverage.
However: I cannot explain with certainty why this is cheap beyond regulatory risk. The risk is real, not imagined. Proceed with caution.
Phase 1: Risk Analysis (Inversion)
"All I want to know is where I'm going to die, so I'll never go there." - Munger
Top 10 Ways This Investment Could Fail
1. ACA Subsidy Elimination (CRITICAL - 40% probability of significant impact)
Risk Description: ~92% of Oscar's premiums are subsidized by Advanced Premium Tax Credits (APTC). Enhanced subsidies expire December 31, 2025.
Risk Quantification:
- If enhanced APTC removed: $600/month average subsidy reduction per member
- Membership could drop 30-50% as coverage becomes unaffordable
- Revenue impact: -$3-4B (40% of revenue)
- MLR would spike as healthier members leave first
Calculation:
Current membership: 1.8M members
Members with enhanced APTC: ~90% = 1.62M
Members who lose affordability without enhancement: ~40% = 648K
Revenue loss per member: ~$5,500/year average
Revenue impact: 648K × $5,500 = $3.6B lost revenue
Probability Assessment:
- Full elimination: 10% (requires ACA repeal)
- Enhanced subsidies lapse: 30% (Congressional gridlock)
- Subsidies extended: 60% (bipartisan support, election dynamics)
Expected Loss: 0.30 × $3.6B × 0.20 margin = $216M EBITDA impact
2. Florida Concentration (HIGH - 30% probability)
Risk Description: 871K members (52%) concentrated in Florida. Single hurricane, regulatory change, or market exit would be catastrophic.
From 10-K: "We have significant concentration in our Florida market, and our business, results of operations, and financial condition would be harmed if a catastrophic event were to occur in Florida."
Risk Quantification:
- Florida revenue: ~$4.8B (52% of $9.2B)
- Florida operating margin: ~2.5% = $120M contribution
- Hurricane/catastrophe impact: +5-10% MLR = -$240M to -$480M hit
3. Medical Cost Estimation Error (MEDIUM-HIGH - 25% probability)
Risk Description: Benefits payable estimate is highly subjective. 1% completion factor error = $173M impact on net income.
From 10-K MD&A: "Assuming a hypothetical 1% difference between our December 31, 2024 estimates of benefits payable and actual benefits payable...net earnings for the year ended December 31, 2024 would have increased by approximately $172.7 million or decreased by approximately $165.6 million."
Risk Quantification:
- Benefits payable reserve: ~$1.7B
- 1% error = $170M swing
- 2024 net income was only $25M - easily wiped out by reserve error
4. Adverse Selection Spiral (MEDIUM - 20% probability)
Risk Description: If healthier members leave (due to subsidy cuts or competitor poaching), remaining pool becomes sicker, requiring higher premiums, causing more healthy members to leave.
Risk Quantification:
- SEP enrollment drives higher MLR (84.6% in Q3 vs 74.2% in Q1)
- Risk adjustment transfer payable increased significantly in 2024
- Morbidity mix deterioration could add 3-5% to MLR = -$270M to -$450M
5. Regulatory Compliance Failure (MEDIUM - 15% probability)
Risk Description: CMS increasing focus on enrollment integrity. Unauthorized agent/broker enrollments could result in penalties or retroactive member removal.
From 10-K: "During the second half of 2024 CMS enacted new measures to respond to increases in unauthorized changes in consumer enrollments by agents and brokers."
Impact: Potential membership loss, regulatory fines, reputational damage
6. Competitive Pressure on MLR (MEDIUM - 20% probability)
Risk Description: United, CVS/Aetna, Centene all competing aggressively in ACA market. Price wars could compress margins.
Evidence: MLR has been stable at 81.7% but industry pressures could push toward 83-85% regulatory minimums.
7. Technology Platform Commoditization (LOW-MEDIUM - 15% probability)
Risk Description: Oscar's differentiation is tech-enabled member experience. If competitors match this, moat erodes.
NPS of 66 is strong but sustainable competitive advantage is unclear.
8. Convertible Note Dilution/Refinancing Risk (LOW - 10% probability)
Risk Description: $305M convertible notes due 2031 at 7.25% interest. Early repurchase rights exist at June 2027, 2028, 2029, 2030.
From 10-K: "During the quarterly period ended December 31, 2024, the Class A common stock sale price conversion condition was satisfied. As a result, the 2031 Notes are convertible during the first quarter of 2025."
Dilution at current price: $305M / $16.55 = 18.4M shares = 7% dilution
9. Management Execution Risk (LOW-MEDIUM - 15% probability)
Risk Description: CEO Mark Bertolini (former Aetna CEO) brought credibility but Oscar has never operated at scale profitably for multiple years.
Track record: First profitable year in 12 years. One data point does not make a trend.
10. Reinsurance Cost Increase (LOW - 10% probability)
Risk Description: Quota share reinsurance (50% ceding) reduces capital requirements by ~$550M. If reinsurance becomes expensive or unavailable, capital position weakens.
Inversion Summary: Bear Case in 3 Sentences
Oscar is a first-time profitable company in a commoditized, heavily regulated industry where 92% of revenue depends on government subsidies that expire in 12 months. The company has no durable competitive advantage beyond tech-enabled customer experience that larger competitors can replicate with their balance sheets. At 8x P/E on uncertain earnings, the stock is not cheap enough to compensate for existential regulatory risk.
Pre-Defined Sell Triggers (Non-Price)
- Enhanced APTC subsidies NOT extended by June 2026 - Exit immediately
- MLR exceeds 84% for two consecutive quarters - Reduce to 50% position
- Florida membership drops >10% sequentially - Full review of position
- Management turnover at CEO or CFO level - Reassess thesis
- Reserve development shows adverse trend >$100M - Exit position
Phase 2: Financial Analysis
Return Metrics
ROE Decomposition (DuPont)
| Year | Net Margin | Asset Turnover | Equity Multiplier | ROE |
|---|---|---|---|---|
| 2024 | 0.27% | 2.16x | 4.77x | 2.8% |
| 2023 | -4.6% | 1.75x | 3.85x | -31.0% |
| 2022 | -14.7% | 1.19x | 2.98x | -52.1% |
| 2021 | -29.8% | 0.66x | 3.44x | -67.5% |
Insight: First positive ROE year. Driven entirely by margin improvement (0.27% vs -4.6%). Asset turnover improving as revenue scales. High leverage (4.77x equity multiplier) typical for insurance.
Buffett ROE Test: FAIL - Requires 15%+ consistent ROE. Oscar's 2.8% is inadequate.
Owner Earnings Calculation
Net Income (2024): $26M
+ Depreciation & Amortization: $32M
- Maintenance CapEx: ($28M) [All CapEx is maintenance for tech]
- Working Capital Increase: (~$0M) [Premium float neutral]
= Owner Earnings (2024): ~$30M
Owner Earnings per Share: $0.12
However: 2024 was turnaround year. 2025 guidance suggests $250M+ net income.
Normalized Owner Earnings (2025E):
Net Income (2025E): $250M
+ Depreciation & Amortization: $35M
- Maintenance CapEx: ($30M)
- Working Capital Increase: ($50M) [Growth investment]
= Owner Earnings (2025E): ~$205M
Owner Earnings per Share: $0.79
ROIC vs WACC Analysis
ROIC Calculation (2024):
NOPAT = Operating Income × (1 - Tax Rate)
NOPAT = $57M × (1 - 0.22) = $44M
Invested Capital = Equity + Debt - Excess Cash
Invested Capital = $1,014M + $300M - $500M = $814M
ROIC = $44M / $814M = 5.4%
WACC Estimate:
- Cost of Equity: 12% (high beta, regulatory uncertainty)
- Cost of Debt: 7.25% (convertible note rate)
- Target D/E: 30%
- WACC: 0.77 × 12% + 0.23 × 7.25% × (1-0.22) = 10.6%
ROIC - WACC Spread = 5.4% - 10.6% = -5.2% (Destroying value)
Note: 2025E ROIC ~12-15% would approach WACC. Needs 2+ years of profit to demonstrate value creation.
Valuation Trinity
1. Liquidation Value (Floor)
Current Assets: $2,845M
- Total Liabilities: ($3,824M)
= Net Current Asset Value: ($979M) NEGATIVE
Tangible Book Value:
Total Equity: $1,014M
- Intangible Assets: (~$50M)
= Tangible Book Value: $964M
TBV per Share: $3.72
Liquidation Value: $3.72/share (77% downside from current price)
Insurance companies rarely liquidate for NCAV - ongoing business value matters more.
2. Going Concern Value (DCF)
Conservative DCF Assumptions:
- 2025 Owner Earnings: $205M
- Growth Years 1-5: 15% (continuing ACA expansion)
- Growth Years 6-10: 5% (mature market)
- Terminal Growth: 2%
- Discount Rate: 12%
Year Owner Earnings PV Factor Present Value
2026 $236M 0.893 $211M
2027 $271M 0.797 $216M
2028 $312M 0.712 $222M
2029 $359M 0.636 $228M
2030 $413M 0.567 $234M
2031 $434M 0.507 $220M
2032 $455M 0.452 $206M
2033 $478M 0.404 $193M
2034 $502M 0.361 $181M
2035 $527M 0.322 $170M
Terminal Value = $527M × 1.02 / (0.12 - 0.02) = $5,375M
PV of Terminal = $5,375M × 0.322 = $1,731M
Total PV = $2,081M + $1,731M = $3,812M
Shares Outstanding: 259M
Intrinsic Value = $14.72/share
DCF Value: $14.72/share (11% below current price - NO margin of safety)
3. Private Market Value
Comparable Transactions:
- Bright Health sold at <0.1x revenue (distressed)
- Clover Health trades at 0.3x revenue
- Molina Healthcare: 0.5x revenue, 10x EBITDA
Oscar Private Market Estimate:
- 0.4x Revenue: $9.2B × 0.4 = $3.7B = $14.29/share
- 10x EBITDA: $199M × 10 = $2.0B = $7.72/share
- 8x 2025E EBITDA: $390M × 8 = $3.1B = $12.05/share
Private Market Value Range: $10-15/share
4. Relative Valuation
| Metric | OSCR | Molina (MOH) | Centene (CNC) | Clover (CLOV) |
|---|---|---|---|---|
| P/E (FY25E) | 16.8x | 12x | 10x | N/A |
| P/B | 4.1x | 4.5x | 1.5x | 0.8x |
| EV/EBITDA | 21x | 9x | 7x | N/A |
| P/S | 0.46x | 0.45x | 0.17x | 0.3x |
Observation: Oscar trades at premium to peers on EV/EBITDA despite lower margins and higher risk.
Margin of Safety Summary
| Valuation Method | Value/Share | vs $16.55 | MOS |
|---|---|---|---|
| Tangible Book Value | $3.72 | -77% | N/A |
| DCF (Conservative) | $14.72 | -11% | -11% |
| Private Market (Low) | $10.00 | -40% | -40% |
| Private Market (Mid) | $12.50 | -24% | -24% |
| Owner Earnings (10x) | $7.90 | -52% | -52% |
| Owner Earnings (15x) | $11.85 | -28% | -28% |
Intrinsic Value Estimate: $12-15/share (weighted toward DCF and private market)
Current Margin of Safety: -10% to -27% (OVERVALUED at current price)
Phase 3: Moat Analysis
Moat Assessment
| Moat Source | Presence | Strength | Durability |
|---|---|---|---|
| Brand | Weak | Low | 3-5 years |
| Network Effect | None | N/A | N/A |
| Switching Cost | Weak | Low | Annual (plans renew yearly) |
| Cost Advantage | None | N/A | N/A |
| Regulatory | Medium | Medium | Depends on ACA |
| Scale | Emerging | Low | Unproven |
Detailed Moat Evaluation
Technology-Enabled Customer Experience
- NPS of 66 is strong (industry average ~30)
- "Hola Oscar" Spanish-first program differentiation
- AI-enabled claims processing and care navigation
But: Large insurers can replicate tech with capital. United, CVS/Aetna have deeper pockets.
Moat Width: Narrow (1-3 years of advantage at best)
Regulatory Positioning
- Deep expertise in ACA marketplace
- Relationships with CMS and state regulators
- Specialized in individual/ACA market where scale matters
But: This is not a moat - it's table stakes. Competitors have same relationships.
Moat Durability Assessment
| Threat | Severity (1-5) | Timeline | Company Mitigation |
|---|---|---|---|
| Tech disruption by larger players | 4 | 2-3 years | +Oscar platform services |
| Regulatory change (ACA repeal) | 5 | 1-2 years | Diversification limited |
| New entrants | 2 | Ongoing | Market share gains |
| Customer power (price sensitivity) | 4 | Annual | Product differentiation |
| Supplier power (provider networks) | 3 | Ongoing | Virtual-first care |
Key Question: Will this moat be wider or narrower in 10 years?
Answer: NARROWER - Technology advantage is eroding as competitors invest. No structural barriers to competition. Industry consolidation favors larger players.
Phase 4: Management & Incentive Analysis
Leadership
CEO Mark Bertolini (since 2022)
- Former Aetna CEO (2010-2018)
- Sold Aetna to CVS for $69B
- Significant healthcare industry credibility
- Skin in the game: Owns ~1% of company
CFO Scott Blackley (since 2021)
- Former CFO of New York State of Health
- Insurance regulatory experience
- Less impressive track record than CEO
Compensation Analysis
| Component | CEO | % of Total |
|---|---|---|
| Base Salary | $1.0M | ~15% |
| Cash Bonus | $1.5M | ~23% |
| Stock Awards | $4.0M | ~62% |
| Total | $6.5M | 100% |
Bonus Metrics:
- Revenue growth
- MLR targets
- EBITDA targets
- Member satisfaction
Assessment: Reasonable alignment. Stock-heavy compensation. Short-term metrics (MLR, revenue) may encourage growth over profitability. No long-term ROIC metrics.
Capital Allocation Track Record
| Use of FCF | % | Assessment |
|---|---|---|
| Growth (Member Acquisition) | 70% | Appropriate for stage |
| Reinsurance Premiums | 15% | Risk management |
| Debt Service | 10% | Required |
| Buybacks | 0% | None |
| Dividends | 0% | Appropriate (growth stage) |
Assessment: Management focused on growth. No evidence of shareholder-unfriendly behavior. Founders Awards cancellation in 2023 was positive signal.
Insider Activity (Last 24 Months)
Limited insider buying. Significant pre-IPO investor selling (Thrive Capital, Alphabet).
Phase 5: Catalyst Analysis
Potential Catalysts
| Catalyst | Timeline | Probability | Impact |
|---|---|---|---|
| Enhanced APTC extension | Q4 2025 - Q1 2026 | 60% | +30% (removes regulatory overhang) |
| 2025 guidance beat | Throughout 2025 | 50% | +15% |
| Strategic acquisition target | 2026+ | 20% | +40% (takeout premium) |
| +Oscar platform revenue growth | 2025-2026 | 40% | +10% |
| Index inclusion (S&P MidCap) | 2025-2026 | 30% | +5% |
No Catalyst Assessment
Primary Catalyst: APTC subsidy extension is binary event that dominates thesis.
- If extended: Stock likely rallies 30-50% as regulatory risk removed
- If NOT extended: Stock likely falls 30-50% as membership declines
Recommendation: Wait for subsidy clarity before building position.
Phase 6: Decision Synthesis
Valuation Summary
INVESTMENT RECOMMENDATION
Company: Oscar Health, Inc. Ticker: OSCR
Current Price: $16.55 Date: January 17, 2026
VALUATION SUMMARY
Method Value/Share vs Current
Tangible Book Value $3.72 -77%
DCF (Conservative) $14.72 -11%
Private Market (Mid) $12.50 -24%
Owner Earnings (15x) $11.85 -28%
INTRINSIC VALUE ESTIMATE: $12.50 (weighted average)
MARGIN OF SAFETY: -32% (OVERVALUED)
RECOMMENDATION: [ ] BUY [ ] HOLD [ ] SELL [X] WAIT
BUY PRICE (Buffett Entry): $8.75 (30% below IV)
ACCUMULATE PRICE: $10.00 (20% below IV)
FAIR VALUE: $12.50
TAKE PROFITS: $15.00 (20% above IV)
SELL PRICE: $18.75 (50% above IV)
POSITION SIZE: 0% (WAIT for better entry or catalyst clarity)
CATALYST: APTC subsidy extension (Timeline: Dec 2025)
PRIMARY RISK: Subsidy elimination causing 30-50% revenue loss
SELL TRIGGER: Subsidies not extended by Q1 2026
Scenario Analysis
| Scenario | Probability | 2026 Price | Return | Weighted |
|---|---|---|---|---|
| Bull (Subsidies + Execution) | 30% | $25 | +51% | +15.3% |
| Base (Subsidies Extended) | 40% | $18 | +9% | +3.6% |
| Bear (Subsidies Lapse) | 20% | $8 | -52% | -10.4% |
| Disaster (ACA Repeal) | 10% | $3 | -82% | -8.2% |
| Expected Return | 100% | +0.3% |
Risk-Adjusted Expected Return: ~0% - Inadequate for the risk profile.
Position Sizing Formula
Position Size = 5% × (MOS/30%) × (Quality/100) × (1-Risk) × Catalyst Mult.
Position Size = 5% × (-32%/30%) × (40/100) × (1-0.40) × 0.7
Position Size = 5% × (-1.07) × 0.40 × 0.60 × 0.7
Position Size = NEGATIVE (Do not buy)
Final Recommendation
WAIT - Do Not Buy at Current Prices
Rationale:
- No margin of safety - stock trades above fair value estimates
- Existential regulatory risk (APTC expiration) within 12 months
- First profitable year does not establish sustainable returns
- ROIC below WACC - currently destroying value
- Moat is narrow and eroding
Entry Conditions:
- Price Target: $10 or below (provides 20% MOS)
- OR Regulatory Clarity: Enhanced APTC extended with multi-year authorization
- AND: Two consecutive quarters of MLR below 81%
Monitoring Checklist:
- APTC subsidy extension news
- Quarterly MLR trends
- Florida membership stability
- Competitive pricing dynamics
- CMS enrollment integrity actions
What Would Make This a BUY
- Stock price falls to $10 (-40% from current)
- Subsidies extended for 3+ years (removes binary risk)
- MLR stabilizes at 80% with demonstrated pricing power
- Management articulates path to 15%+ ROE
Until these conditions are met, Oscar Health is a pass - the turnaround is real but not priced attractively enough given the risks.
Sources
| Document | Source | Key Data |
|---|---|---|
| 10-K 2024 | SEC EDGAR | Business model, risks, financials |
| 10-K 2023 | SEC EDGAR | Historical comparison |
| 10-K 2022 | SEC EDGAR | Pre-turnaround baseline |
| 10-K 2021 | SEC EDGAR | IPO year baseline |
| Q4 2024 Earnings Call | AlphaVantage | 2025 guidance, management commentary |
| Q1-Q3 2024 Earnings Calls | AlphaVantage | Quarterly progression |
| Income Statement | AlphaVantage | 6-year P&L |
| Balance Sheet | AlphaVantage | Capital structure |
| Cash Flow Statement | AlphaVantage | FCF analysis |
| Historical Prices | EODHD | Price history since IPO |
Analysis prepared following Buffett/Munger/Klarman value investing methodology All calculations derived from primary sources with explicit assumptions