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As filed with the Securities and Exchange Commission on February 25, 2021

Registration No. 333-252809

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 2 to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Oscar Health, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   6324   46-1315570
(State or other jurisdiction of incorporation or organization)   (Primary Standard Industrial Classification Code Number)  

(I.R.S. Employer

Identification No.)

75 Varick Street, 5th Floor

New York, New York 10013

(646) 403-3677

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Bruce L. Gottlieb, Esq.

Special Counsel

Oscar Health, Inc.

75 Varick Street, 5th Floor

New York, New York 10013

(646) 403-3677

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Keith L. Halverstam, Esq.
Peter N. Handrinos, Esq.
Latham & Watkins LLP
885 Third Avenue
New York, New York 10022
(212) 906-1200
  Joseph C. Theis, Jr., Esq.
Paul R. Rosie, Esq.
Goodwin Procter LLP
100 Northern Avenue
Boston, Massachusetts 02210
(617) 570-1000

 

 

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT IS DECLARED EFFECTIVE.

 

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated February 25, 2021.

31,000,000 Shares

 

 

 

LOGO

Class A Common Stock

 

 

This is the initial public offering of shares of Class A common stock of Oscar Health, Inc. We are selling 30,350,920 shares of Class A common stock, and the selling stockholders named in this prospectus are selling 649,080 shares of Class A common stock. We will not receive any proceeds from the sale of shares of Class A common stock offered by the selling stockholders.

Prior to this offering, there has been no public market for our Class A common stock. It is currently estimated that the initial public offering price per share of Class A common stock will be between $32.00 and $34.00. We have applied to list our Class A common stock on the New York Stock Exchange, or the NYSE, under the symbol “OSCR.”

Upon completion of this offering, we will have two classes of common stock: Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock will be identical, except with respect to voting, conversion, and transfer rights. Each share of Class A common stock will be entitled to one vote. Each share of Class B common stock will be entitled to 20 votes and will be convertible at any time into one share of Class A common stock and mandatorily convertible upon the occurrence of certain events, as further described in “Description of Capital Stock.” Thrive Capital (as defined herein), which is affiliated with our Co-Founder Joshua Kushner, and Mario Schlosser, our other Co-Founder, will be the only holders of our Class B common stock, and following the completion of this offering, Thrive Capital and our Co-Founders will beneficially own approximately 82.9% of the voting power of our outstanding capital stock, assuming no exercise of the underwriters’ option to purchase additional shares of our Class A common stock. See “Description of Capital Stock.”

Upon completion of this offering, we will be a “controlled company” as defined under the corporate governance rules of the NYSE.

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, and, as such, will be subject to reduced public company reporting requirements. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

 

 

Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 22 to read about factors you should consider before buying shares of our Class A common stock.

 

 

Neither the Securities and Exchange Commission nor any state securities commission or any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions(1)

   $        $    

Proceeds, before expenses, to us

   $        $    

Proceeds, before expenses, to the selling stockholders

   $        $    

 

(1)

See “Underwriting” for a description of the compensation payable to the underwriters.

At our request, the underwriters have reserved up to three percent of the shares of Class A common stock offered by this prospectus for sale, at the initial public offering price, to certain persons associated with us. See “Underwriting—Directed Share Program.”

We have granted the underwriters an option for a period of 30 days to purchase up to an additional 4,650,000 shares of Class A common stock from us at the public offering price, less the underwriting discounts and commissions.

 

 

One or more funds affiliated with Tiger Global Management, LLC, Dragoneer Investment Group, LLC and Coatue Management LLC, who are all existing investors in the Company, have indicated an interest in purchasing up to an aggregate of $125 million each (up to $375 million in the aggregate) in shares of our Class A common stock in this offering at the initial public offering price. The shares of Class A common stock purchased by such investors will be subject to a lock-up agreement substantially consistent with the lock-up agreement signed by our existing stockholders and described in the section titled “Underwriting.” Because this indication of interest is not a binding agreement or commitment to purchase, one or more funds affiliated with Tiger Global Management, LLC, Dragoneer Investment Group, LLC and/or Coatue Management LLC may determine to purchase more, less or no shares in this offering or the underwriters may determine to sell more, less or no shares to one or more funds affiliated with Tiger Global Management, LLC, Dragoneer Investment Group, LLC and/or Coatue Management LLC. The underwriters will receive the same discount on any of our shares of Class A common stock purchased by one or more funds affiliated with Tiger Global Management, LLC, Dragoneer Investment Group, LLC and Coatue Management LLC as they will from any other shares of Class A common stock sold to the public in this offering.

The underwriters expect to deliver the shares against payment in New York, New York on                , 2021.

 

Goldman Sachs & Co. LLC  

Morgan Stanley

  Allen & Company LLC  

Wells Fargo Securities

Credit Suisse

    BofA Securities
Cowen                       LionTree                    Ramirez & Co., Inc.   Siebert Williams Shank

 

 

Prospectus dated                 , 2021.


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Letter from Joshua Kushner and Mario Schlosser

Co-Founders

Many founders’ letters, especially in health care, open with a story about a personal experience that led to the founding of the company. We did have those eye-opening events in 2012–a leg injury for Josh and the birth of a first child for Mario–and they did in fact lead us to create Oscar.

But we’d like to start by telling you about our name. Oscar is named for a real person, Josh’s great-grandfather. He was an immigrant to America. His given name was not Oscar. But that’s the name he got at Ellis Island, and he stuck with it.

When it came time to start our business, we wanted to let our members know that we were not a faceless health insurer whose logo lives on a card in their wallets. We wanted to communicate that we could help them navigate the health care landscape like a doctor in the family would. So we chose a real name–of somebody whose life story inspires us–to say that we intend to serve them like a real-life human and not a disembodied corporation.

In our first year, we placed subway ads in New York that said: “Hi, we’re Oscar, a new kind of health insurer.” We love when people tell us that they remember those ads. It tells us that our message got through.

Oscar was also inspired by the doctor who took care of Mario and his family growing up. Mario was born in a small town in Germany. His hometown doctor began his day in the clinic and every afternoon hopped on his bike to visit patients. Seeing patients in their homes let him head off small problems before they became big problems. Being under his care was, in fact, like having a doctor in the family.

When Mario moved to the U.S. as an adult he learned how unusual that experience sounded to American ears. He saw that the reason wasn’t any lack of dedication among American caregivers. It was because of the fee-for-service system–a system that produces worse outcomes than in other countries, and at a higher cost. As a computer scientist, Mario wondered whether technology could deliver the experience of a doctor in the family–but this time at scale.

Oscar today is eight years old. We’ve grown a lot in that time. We signed up 15,000 members in New York in our first year and are proud to serve 529,000 members in 18 states today. We are prouder still that we lead our market category when it comes to members who say they would recommend us to their friends. That tells us that we are living up to our name.

How do we do this? It may sound counterintuitive, but we bring a human touch to health care through the use of technology and data. We were inspired by consumer businesses that use the power of computer science to make complex decisions simple and intuitive for their customers. We believed this approach could transform health care just as it has so many other fields.

We knew from the beginning that this would require building a full-stack platform that we control end-to-end. We understood it would make the challenge of being a startup health insurer even harder. But we believed it was the only way to create a differentiated member experience.

Now, nearly a decade in, we have entered the phase where our technology investment is truly beginning to compound. We still continuously improve our platform with more than 50 code updates each day. But our core systems are now mature and give us a window into nearly every health care interaction our members have. Our technology lets us help members find the right doctor, access virtual care, and powers Care Teams that assist them in navigating the health care system. It also lets us constantly test, re-test, and optimize based on real-time data, like the very best tech companies that inspired us.


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We also embrace the opportunity to be a health insurer. This may seem counterintuitive to many, especially given our own unpleasant experiences with the system. But health insurers are uniquely positioned to improve the lives of individual consumers and the system as a whole. Insurers are the only entities in health care who have the same incentives as consumers–to find quality care at an affordable price–and that are involved in nearly every health care interaction. This gives us unique leverage to help bend the cost curve and improve access to care. Most of our members in the individual market could not have gotten affordable insurance coverage 10 years ago. Serving them is a privilege for all of us at Oscar.

We are sometimes asked whether Oscar is a tech company or a health care company. Our answer is that we use the tools and mindset of a consumer technology company to solve problems in health care. In the beginning it seemed next to impossible to assemble a team that could do both. Today Oscar is powered by over 1,800 employees, including our engineers, doctors, nurses, actuaries, data scientists, and insurance experts. We are grateful for what they have taught us–and each other. After nearly a decade, we truly have one foot in consumer technology and the other in health care, making what was once a challenge now one of our biggest competitive advantages.

As we look to our next decade, we are eager to tackle the opportunities and challenges that lie ahead. U.S. health care continues to individualize, digitize, and move towards value. We believe Oscar can play a significant role in powering that transformation.

What will not change is our mission–to make a healthier life affordable and accessible to all—which will remain inspired by those who led us to begin this journey in the first place.

As we expand to new markets, new geographies, and new product lines, we would be honored to serve you as Oscar members. We are equally honored to welcome you as shareholders into the next chapter of Oscar’s history.

Josh and Mario


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TABLE OF CONTENTS

 

     Page  

About this Prospectus

     i  

Prospectus Summary

     1  

Risk Factors

     22  

Cautionary Note Regarding Forward-Looking Statements

     65  

Use of Proceeds

     67  

Dividend Policy

     68  

Capitalization

     69  

Dilution

     72  

Selected Consolidated Financial Data

     75  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     76  

Business

     104  

Management

     140  

Executive Compensation

     149  

Principal and Selling Stockholders

     167  

Certain Relationships and Related Party Transactions

     173  

Description of Capital Stock

     178  

Description of Certain Indebtedness

     189  

Shares Eligible for Future Sale

     191  

Material U.S. Federal Income Tax Considerations for Non-U.S. Holders of Class A Common Stock

     195  

Underwriting

     200  

Legal Matters

     211  

Change in Accountants

     212  

Experts

     214  

Where You Can Find More Information

     215  

Index to Consolidated Financial Statements

     F-1  

 

 

Through and including                     , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us that we have referred to you. We, the selling stockholders, and the underwriters have not authorized anyone to provide you with additional or different information. If anyone provides you with additional, different, or inconsistent information, you should not rely on it. Offers to sell, and solicitations of offers to buy, shares of our Class A common stock are being made only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of shares of our Class A common stock. Our business, financial condition, operating results, and prospects may have changed since such date.

No action is being taken in any jurisdiction outside the United States to permit a public offering of our Class A common stock. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restriction as to this offering and the distribution of this prospectus applicable to those jurisdictions. See “Underwriting.”

 

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ABOUT THIS PROSPECTUS

Certain Definitions

As used in this prospectus, unless the context otherwise requires:

 

   

we,” “us,” “our,” “our business,” the “Company,” “Oscar,” and similar references refer to Oscar Health, Inc., formerly known as Mulberry Health Inc., and its subsidiaries.

 

   

Holdco” refers only to Oscar Health, Inc. and not any of its subsidiaries.

 

   

ACA” refers to the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, as amended.

 

   

Annual Election Period” refers to the yearly period when beneficiaries can enroll or disenroll in an Original Medicare or Medicare Advantage health plan. The Annual Election Period starts on October 15 and ends on December 7 of each year.

 

   

APTC” refers to advanced premium tax credits.

 

   

Co-Founders” refers to Joshua Kushner and Mario Schlosser.

 

   

direct policy premium” refers to monthly premiums collected from our members and/or from the federal government during the period indicated, before risk adjustment and reinsurance.

 

   

full stack technology platform” refers to our cloud-based end-to-end technology solution, which powers our differentiated member experience engine. Our platform connects our member-facing features, including our mobile application, which we refer to as our app, website, and virtual care solutions with our back-office tools that span all critical health care insurance and technology domains, including member and provider data, utilization management, claims management, billing, and benefits.

 

   

Health Insurance Marketplaces” refers to the health insurance marketplaces established per the ACA and operated by the federal government for most states and other marketplaces operated by individual states, for individuals and small employers to purchase health insurance coverage in the Individual and Small Group markets that include minimum levels of benefits, restrictions on coverage limitations and premium rates, and APTC.

 

   

health insurance subsidiary” refers to any subsidiary of Oscar Health, Inc. that has applied for or received a license, certification or authorization to sell health plans by any state Department of Insurance, Department of Financial Services, Department of Health, or comparable regulatory authority. As of December 31, 2020, Oscar Health, Inc. had 14 health insurance subsidiaries.

 

   

health plans” refers to the health insurance plans that Oscar sells in the Individual and Small Group markets and the Medicare Advantage Plans that Oscar sells in the Medicare Advantage market. The term includes co-branded health plans sold directly by our health insurance subsidiaries, in the case of our Cleveland Clinic + Oscar, Montefiore + Oscar, and Oscar + Holy Cross + Memorial Health plans, and co-branded plans sold directly by our partner and partially-reinsured by a health insurance subsidiary, in the case of the Cigna + Oscar plan.

 

   

IBNR” refers to health care costs incurred but not yet reported.

 

   

InsuranceCo Administrative Expense Ratio” is defined as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating and Non-GAAP Financial Metrics—InsuranceCo Administrative Expense Ratio.”

 

   

InsuranceCo Combined Ratio” is defined as the sum of MLR and InsuranceCo Administrative Expense Ratio.

 

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Medical Loss Ratio” or “MLR” is defined as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating and Non-GAAP Financial Metrics—Medical Loss Ratio.”

 

   

member” refers to any individual covered by any of our health plans. A member covered under more than one of our health plans counts as a single member for the purposes of this metric. Our membership is measured as of a particular point in time and may decrease over time as individuals disenroll throughout the year before they become effectuated members.

 

 

   

monthly active users” refers to the total number of members who have logged into our website or app or contacted their Care Teams for the month of December 2020.

 

   

NPS” refers to net promoter score, which can range from a low of negative 100 to a high of positive 100. NPS benchmarks can vary significantly by industry, but a score greater than zero represents a company that has more promoters than detractors. For Oscar, NPS reflects member responses to the following question—“On a scale of zero to ten: How likely is it that you would recommend Oscar to a friend or colleague?” Responses of 9 or 10 are considered “promoters,” responses of 7 or 8 are considered neutral or “passives,” and responses of 6 or less are considered “detractors.” We then subtract the number of respondents who are detractors from the number of respondents who are promoters, divide that number by the total number of respondents, and then multiply the resulting figure by 100. We use this method to calculate an NPS score for each member segment, where a member segment is defined by a region and subsidization level of a member. We then calculate our aggregate NPS by taking a weighted average of the segments, where the weights reflect the actual representation of that segment in our aggregate membership. We do this to adjust for differing survey rates and response rates to our survey in different segments of our membership. Our methodology for calculating NPS reflects responses from our members who choose to respond to the survey question. In particular, our NPS reflects responses given to us between January 1, 2020 and December 31, 2020, and reflects a sample size of 16,651 responses over that period. NPS gives no weight to members who decline to answer the survey question.

 

   

Open Enrollment Period” refers to the yearly period when individuals and families can enroll in a health plan or make changes to an existing health plan. In most states, the 2021 open enrollment period for the Individual market started on November 1, 2020 and ended on December 15, 2020; it ended as late as January 31, 2021 in certain states in which Oscar does business. The Medicare Advantage Open Enrollment Period, which permits switching between Medicare Advantage plans, started on January 1, 2021 and ends on March 31, 2021.

 

   

PMPM” refers to per member per month.

 

   

Special Enrollment Period” refers to a time outside the Open Enrollment Period or Annual Election Period when an eligible person can enroll in a health plan or make changes to an existing health plan. A person is generally eligible for a special enrollment period if certain qualifying life events occur, such as losing certain health coverage, moving, getting married, having a baby, or adopting a child.

 

   

subscribing member” refers to the individual who has been designated the primary member under an Oscar account. Each Oscar account consists of one subscribing member and may include additional covered members, such as the subscribing member’s spouse and children. Numbers quoted for “subscribing members” throughout this prospectus include only subscribers 18 years of age and older.

 

   

Thrive Capital” refers to Thrive Capital Management, LLC, a Delaware limited liability company, and the investment funds affiliated with or advised by Thrive Capital Management, LLC.

 

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Rounding Adjustments

Certain monetary amounts, percentages, and other figures included in this prospectus have been subject to rounding adjustments. Percentage amounts included in this prospectus have not in all cases been calculated on the basis of such rounded figures, but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this prospectus may vary from those obtained by performing the same calculations using the figures in our consolidated financial statements or the figures included elsewhere in this prospectus. Certain other amounts that appear in this prospectus may not sum due to rounding.

Reverse Stock Split

After the effectiveness of the Registration Statement of which this prospectus forms a part and prior to the closing of this offering, we will effectuate a one-for-three reverse stock split of our Class A common stock and Class B common stock, or the Stock Split. The Stock Split will combine each three shares of our Class A common stock and Class B common stock, as applicable, into one share of our Class A common stock and Class B common stock, as applicable. No fractional shares will be issued in connection with the Stock Split. The historical audited financial statements included elsewhere in this prospectus have not been adjusted for the Stock Split. Unless otherwise indicated, all other share and per share data in this prospectus have been retroactively adjusted, where applicable, to reflect the Stock Split as if it had occurred at the beginning of the earliest period presented.

TRADEMARKS, SERVICE MARKS, AND TRADE NAMES

This prospectus includes our trademarks, service marks, and trade names, including but not limited to Oscar®, Oscar Health®, Oscar CareSM, and our logo, which are protected under applicable intellectual property laws. This prospectus also contains trademarks, service marks, and trade names of other companies, which are the property of their respective owners. We do not intend our use or display of other parties’ trademarks, service marks, or trade names to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties. Solely for convenience, trademarks, service marks, and trade names referred to in this prospectus may appear without the ®, , or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent permitted under applicable law, our rights or the right of the applicable licensor to these trademarks, service marks, and trade names.

MARKET AND INDUSTRY DATA

This prospectus includes estimates regarding market and industry data. Unless otherwise indicated, information concerning our industry and the markets in which we operate, including our general expectations, market position, market opportunity, and market size, are based on management’s knowledge and experience in the markets in which we operate, together with currently available information obtained from various sources, including publicly available information, industry reports and other publications, reports from government agencies, surveys, our members and providers, and other contacts in the markets in which we operate. Certain information is based on management estimates, which have been derived from third-party sources, as well as data from our internal research, and are based on certain assumptions that we believe to be reasonable.

 

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In presenting this information, we have made certain assumptions that we believe to be reasonable based on such data and other similar sources and on our knowledge of, and our experience to date in, the markets in which we operate. While we believe the market and industry data included in this prospectus and upon which the management estimates included herein are in part based are generally reliable, such information is inherently uncertain and imprecise, and you are cautioned not to give undue weight to such data or the management estimates based on such data. Market and industry data are subject to change and may be limited by the availability of raw data, the voluntary nature of the data gathering process and other limitations inherent in any statistical survey of such data. Certain of these publications, studies and reports were published before the COVID-19 pandemic and therefore do not reflect any impact of COVID-19 on any specific market or globally. In addition, projections, assumptions, and estimates of the future performance of the markets in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operation.” These and other factors could cause results to differ materially from those expressed in the estimates made by third parties and by us. Accordingly, you are cautioned not to place undue reliance on such market and industry data or any other such estimates. The content of, or accessibility through, the sources and websites identified herein, except to the extent specifically set forth in this prospectus, does not constitute a portion of this prospectus and is not incorporated herein, and any websites are an inactive textual reference only. In addition, references to third-party publications and research reports herein are not intended to imply, and should not be construed to imply, a relationship with, or endorsement of us by, the third-party producing any such publication or report.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before deciding to invest in our Class A common stock. You should read the entire prospectus carefully, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Some of the statements in this prospectus constitute forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”

Overview

At Oscar, we make a healthier life accessible and affordable for all.

Oscar is the first health insurance company built around a full stack technology platform and a relentless focus on serving our members. We started Oscar over eight years ago to create the kind of health insurance company we would want for ourselves—one that behaves like a doctor in the family, helping us navigate the health care system in our moments of greatest need. In the years since, we have built a suite of services that permit us to earn our members’ trust, leverage the power of personalized data, and help our members find quality care they can afford. We call this our member engagement engine, and it is powered by a differentiated full stack technology platform that will allow us to continue to innovate like a technology company and not a traditional insurer in the years ahead.

After eight years of selling health insurance, we are proud to have earned industry-leading levels of trust, engagement, and customer satisfaction from the 529,000 members who, as of January 31, 2021, have chosen Oscar. At the same time, we have achieved positive unit economics through a Medical Loss Ratio, or MLR, of 84.7% while generating direct policy premiums of $2.3 billion for the year ended December 31, 2020. We serve 291 counties across 18 states, and our members had over 5 million health care visits in 2020. They include families seeking coverage that works for toddlers and their busy parents, adults with chronic conditions who know their care providers by their first names, and seniors choosing a benefits package that will serve them throughout their retirement years. As we continue to bring the Oscar experience to new members, new states, and new markets, our goal will remain the same: to build engagement, earn trust, and help our members live healthier lives.

Hi, We’re Oscar

We created Oscar because of our own frustrations with U.S. health care. The U.S. health care system is the world’s largest and most expensive—estimated to have cost over $4 trillion in 2020—yet health outcomes are worse than in other advanced economies. Costs are so out of control that medical bills contribute to around 66% of all personal bankruptcies in the United States. It doesn’t have to be this way. According to a report published in the Journal of the American Medical Association in 2019, nearly 25% of health care spending in the U.S. is wasted, the result of a system plagued by misaligned incentives, lack of coordination, and administrative complexities.

Health insurers have substantial influence over the health care ecosystem because they disburse 75 cents of every health care dollar. Despite decades of effort, however, incumbent insurers have made little progress in reigning in health care costs or incentivizing key stakeholders to produce better outcomes. Instead, for far too many consumers, health insurance adds an additional layer of complexity to an already complex system. With an average Net Promoter Score, or NPS, of three, according to Forrester Research, customer satisfaction for health insurers ranks among the lowest of any industry.



 

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We founded Oscar to solve these problems and to provide consumers with access to the affordable, high-quality health care they deserve. We recognized that doing so would require reorienting how customers see their health insurer and what they expect from it. Too often, customers view legacy insurers as entities that merely take in monthly premiums and pay medical claims. We aimed instead to serve as their guide to a confusing and fragmented system, helping them save money by optimizing their spending. In order to achieve all of this, we would need to earn something that is all too rare in the health insurance industry: member trust. We would need to build a technology platform that provides an intuitive, seamless customer experience, and we would need to leverage the power of personalized data. Though our member experience would begin with trust, engagement, and

the smart use of data, our ultimate goal would be to bend the cost curve by guiding members to the right care at the right time and at the right value.

Our experience to date reaffirms our view that real change in health care can only come from the use of personalized data to drive real-time actionable insights and recommendations, such as guiding members to the right doctor, hospital, or site-of-care through what we call care routing. We know we are on the right track when 68% of surveyed members indicate that they trust Oscar to advise them on how and where to get the health care they need and 75% of subscribing members with a medical visit use our tools to search for a provider. This compares to an industry-wide average of only 45% of surveyed customers who trust their insurer for health care advice, and no comparable or available statistics from our competitors when it comes to care routing. Given the central role that primary care providers, or PCPs, play in managing care, it is especially meaningful that once our members join Oscar nearly half of their first-time PCP visits are to a doctor Oscar has recommended to them. It is the ongoing engagement and trusted relationship we have with our members that drives our NPS score of 30, which is in a different ballpark altogether than the average score of three among other health insurers.

We encourage our members to interact regularly with us through our mobile app and website, which make it easy for them to search for and access their medical history, lab tests, and various care options, as well as to refill prescriptions through our virtual care solution. We also assign each member a dedicated Care Team, typically composed of five Care Guides and a registered nurse known as a Case Manager, who build trust and engagement by providing personalized insights and real-time guidance through the health care system. As of December 31, 2020, 89% of our subscribing members have interacted with our digital or Care Team channels, 81% have a digital profile, 45% have downloaded our app, and our per member app download rate as of December 31, 2020 is approximately nine times higher than for other insurers. Almost half (47%) of our subscribing members are monthly active users.

Additionally, since 2014, all of our members have had 24/7 access to Oscar’s virtual care offerings, in nearly all cases at no additional cost. These include urgent care through our Virtual Urgent Care service and, since January 1, 2021, primary care through our Virtual Primary Care service. Of our subscribing members who have had one or more medical visits, 37% used our in-house virtual offering in 2020. Even before the ongoing COVID-19 pandemic, in the three-month period ended December 31, 2019, the total number of visits through our Oscar virtual program represented nearly one out of five (19%) of the total number of PCP, urgent care, and outpatient emergency room, or ER, visits by our subscribing members. Use of virtual care by our members has further increased during the COVID-19 pandemic.

The combination of our full stack technology platform and member engagement engine allows us to help our members find quality providers, but we understand that value is just as important. Over the next five years, health care costs are expected to grow at 5% to 6% per year, outstripping both inflation



 

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and gross domestic product, or GDP, growth estimates. Whether our members are spending their own out-of-pocket dollars before a deductible is reached or contending with rapid medical cost inflation, we are acutely aware of the need to make sure every consumer health care dollar is well spent. Our fully integrated systems and data infrastructure enable us to efficiently and effectively identify higher quality, lower cost health care providers in our network and our levels of trust and engagement earn us the ability to help our members find the right care.

The value of our proprietary insurance platform has been recognized across the industry as leading health care providers and insurers, including the Cleveland Clinic and Cigna, have chosen to form innovative partnerships with us. While each of these arrangements have unique elements, the common thread is that they are built on our full stack technology platform and member engagement engine. Many partnerships feature co-branding and/or risk-sharing in addition to fee based revenue or value based reimbursement, underscoring the distinctive value that our contributions add. We believe our investment in deeply differentiated technology provides a foundation that will enable us to monetize our platform and diversify our revenue streams over time, if we choose to do so.

We began by offering health plans in the Individual market because we believed it was where our member-first approach would set us apart. When the ACA created new direct-to-consumer channels in 2014, we knew that we would be competing with some of the nation’s largest health insurers. But we also knew we would have a unique window when a new entrant could gain market share rapidly by creating a superior product—one that could ultimately be extended to other insurance markets. After only eight years of selling health insurance in the Individual market, our strategy has proved out. We are the third largest for-profit national insurer in the Individual market in the United States based on publicly reported membership figures for insurers serving the Individual market during plan year 2020, and we expanded to Small Group in 2017 and Medicare Advantage in 2020. Today, we have at least one health plan in 291 counties across 18 states and expect to expand in the years ahead both geographically and with respect to insurance markets.

Since our inception, we have experienced significant member growth while keeping insurance premiums affordable for our members. As of January 31, 2021, we had 529,000 members, up from 82,000 as of January 31, 2017, representing a compound annual growth rate, or CAGR, of 59%, and we had an average individual per member per month, or PMPM, direct policy premium rate of $515 for the month ended January 31, 2021, a 9% increase from $473 for the month ended January 31, 2020. There can be no assurance that such member and premium growth will continue. For the years ended December 31, 2019 and 2020, after taking into account reinsurance premiums ceded, premiums earned were $468.9 million and $455.0 million, respectively. Our direct policy premiums for the years ended December 31, 2019 and 2020 were $1.3 billion and $2.3 billion, respectively, and we generated net losses of $261.2 million and $406.8 million, respectively.

Health Care Needs to be Reimagined

Though affordability and poor outcomes are the most visible problems with U.S. health care from the consumer perspective, all of the ecosystem’s key stakeholders—consumers, employers, payers, and providers—face serious challenges when it comes to improving the system. As U.S. health care spending approaches 18% of GDP—more than twice the average of other Organization for Economic Co-operation and Development, or OECD, countries—the need for creative solutions from the private sector has never been greater:

 

   

Lack of Consumer-Centric Solutions. Even though health care decisions are among the most important any consumer will make, it is easier to research the right auto mechanic online



 

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than the right oncologist and more convenient to make a restaurant reservation on a smartphone than to book something as simple as an annual physical. The reason has little to do with what is technologically feasible and everything to do with the skewed incentives created by the U.S. health care system.

 

   

Lack of Coordination and Interoperability. The health care industry is fragmented and inefficient, with different legacy health insurers, hospital systems, provider groups, and pharmacy networks each possessing distinct incentive structures—some or all of which may diverge from consumers’ interests. Even as consumer demand for greater coordination grows, inflexible and disparate legacy technological systems present a significant barrier to meeting consumers’ wants and needs.

 

   

Lack of Innovation. As consumers have become more involved in—and financially responsible for—their own health care choices, they seek more personalization, convenience, and value. Consumer demand for new care delivery models—such as virtual, home and mobile—has only accelerated due to the ongoing COVID-19 pandemic. The fee-for-service reimbursement model and fragmented legacy technology systems present serious hurdles for realizing the full benefits that telehealth can bring. We started Oscar to move health care forward and enabling innovative virtual care has been part of our DNA since the beginning.

We Have a Massive Opportunity

The U.S. health care industry is a massive and growing market in the middle of a paradigm shift that creates substantial opportunities for private sector innovation. According to the Centers for Medicare & Medicaid Services, or CMS, health care spending in the U.S. is estimated to have been over $4 trillion in 2020 and is projected to grow to over $6 trillion by 2028. Of the $4 trillion in health care spending, $3 trillion of that amount is estimated to have passed through health insurers in 2020, an amount that is expected to grow to nearly $5 trillion by 2028. Public and private health insurance companies today represent over $1 trillion of enterprise value in the United States alone. The secular shifts toward consumerization, technological innovation, and personalization in health care, along with the accelerating demand for value and accountability, have raised the stakes for health insurers when it comes to providing lasting value to consumers. As the first technology-driven, direct-to-consumer health insurance company, we have built an innovative full stack technology platform that is uniquely positioned to deliver against this challenge.

We currently sell health plans in three markets—Individual, Small Group, and Medicare Advantage—which, in aggregate, serve more than an estimated 50 million Americans and represent an estimated $450 billion in direct policy premiums.

As we scale, our addressable market will continue to expand due to our ability to enable new innovative models of integrated care. Our platform is increasingly modular and able to address large adjacencies within health care technology spend including telemedicine, care concierge, claims management and population health. Our member engagement tools and insurance operations infrastructure have the ability to be deployed alongside other provider and payer networks to enable new risk-based models. Collectively, we estimate these addressable markets represent an additional opportunity of $123 billion, including $40 billion in telemedicine, $20 billion in care concierge, $12 billion in claims management, and $51 billion in population health.

We Are a Differentiated Full Stack Technology Platform

“Full stack” is not a term typically used in the legacy health insurance industry, but it is common in the technology sector, where companies are accustomed to building dynamic technology systems



 

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in-house that can be adjusted on a daily basis to serve the evolving needs of the business on every level. When we launched Oscar, we knew that tackling the challenges of the U.S. health care system would be ambitious. We recognized early on that health care was too broken to fix by simply reconfiguring existing technologies, and we understood that our ability to bend the cost curve would require us to control all of our data and processes before we could empower members with real-time actionable insights. This meant purpose-building a platform from the ground up that we update through code deployments more than 50 times per day. This platform enables us to run nearly 80 automated population health programs, or campaigns, as of December 31, 2020, that allow us to collect data and trigger real-time interventions at scale. We believe we have built our platform to scale and it is broadly applicable across health care and health insurance in the U.S. and abroad. Competitors who lack this member engagement engine will face significant challenges in replicating our consumer experience; we believe our platform thus forms an important structural moat around the innovations we have developed.

Our Strengths

We believe the following strengths will continue to drive our growth in a substantial market opportunity with powerful tailwinds:

 

   

Member-first philosophy. We founded Oscar with a focus on guiding our members throughout their health care journey. We focus on delivering a better member experience by making health care easier to navigate, more transparent, and more affordable.

 

   

High member engagement and trust drives member satisfaction. Our member-first philosophy allows us to develop and earn trusted relationships with our members. This deep trust drives higher levels of engagement, allowing us to positively influence how our members make decisions about their health and well-being. This ability to engage members and earn their trust also helps drive our member satisfaction.

 

   

Innovative approach to care. We offer high-quality and high-value care to our members. Our innovative virtual care model, for example, acts as a front door for members to the health care system either by handling care directly or helping them find the right doctor at the right time. We also include consumer-focused plan design features like our $3 prescription drug tier.

 

   

Differentiated full stack technology platform. Innovation is core to our DNA. Over the last nine years, we have built a full stack technology platform that combines data science and end-to-end control of the member experience to drive better data, better insights, and better decision-making using a cloud-based platform.

 

   

Powering the broader health care ecosystem. Our goal is to enable health care’s key stakeholders to deliver better care to consumers in innovative ways using our platform. Our full stack technology platform and member engagement engine have been recognized throughout the industry, allowing us to partner with leading health care companies across the ecosystem, including through co-branded, fee-based, and/or risk-sharing arrangements.

Our Growth Opportunities

We are in the early stages of addressing our market opportunity and reimagining health care in the U.S. The key elements of our growth strategy are to:

 

   

Acquire more members in existing markets and states. We believe that we have a significant opportunity to expand and grow share within our current footprint of markets and states as we continue to refine our member engagement engine.



 

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Launch new markets and states. We believe we can substantially grow our member base by launching into new counties and states. Today, we serve members in 291 counties and 18 states in the U.S., and we expect to be able to selectively and strategically expand into new geographies in the future.

 

   

Introduce new products and plans. Our platform is built to be extensible to new products and plans, and we plan to continue investing and scaling to address the needs of consumers and partners. In 2017, we entered the Small Group market, and in 2020, we expanded our presence in this market with Cigna + Oscar co-branded plans. In 2019, we announced that we would be launching Medicare Advantage, and in 2020, we served our first members in that market.

 

   

Develop new partnerships and evaluate potential acquisitions. We believe there is substantial opportunity for us to continue partnering with health care’s key stakeholders through innovative fee-based and/or risk-sharing arrangements that reimagine the way health care is delivered. We will also consider growth through acquisition.

 

   

Monetize our platform. We have made significant investments to build a unique full stack technology platform that enables innovation in the global health care system. We believe we are well-positioned to monetize our platform through risk-sharing partnerships or, even more directly, through fee-based service arrangements. In January 2021, we entered into a services agreement with Health First Shared Services, Inc., for itself and on behalf of certain of its Florida based health plan subsidiaries, or collectively, Health First, pursuant to which we will perform certain administrative functions and services and provide Health First’s individual commercial and Medicare Advantage members with access to our technology platform, largely beginning on January 1, 2022.

Recent Developments

Revolving Loan Facility

On February 21, 2021, Oscar Health, Inc., as borrower, entered into a senior secured credit agreement with Wells Fargo Bank, National Association as administrative agent, and certain other lenders for a revolving loan credit facility, or the Revolving Loan Facility, in the aggregate principal amount of $200.0 million. Our initial borrowings under the Revolving Loan Facility are conditioned upon, among other things, (i) the consummation of this offering that results in at least $800 million of net proceeds to us, (ii) the repayment in full of the Term Loan Facility (as defined herein) and (iii) the execution of customary security documentation. Proceeds are to be used solely for general corporate purposes of the Company.

Management Team Update

On December 3, 2020, we announced our hiring of R. Scott Blackley as our new Chief Financial Officer, effective March 16, 2021. Mr. Blackley will succeed our current Chief Financial Officer, Siddhartha Sankaran, who is leaving Oscar’s management team to become Chairman and Chief Executive Officer of SiriusPoint, a global reinsurance company. Mr. Sankaran has been appointed as a member of our board of directors, effective February 5, 2021, and will continue to provide transitional services through June 30, 2021.

Mr. Blackley has served as Chief Financial Officer of Capital One Financial Corporation, or Capital One, a Fortune 100 tech-enabled financial services firm, since May 2016. Prior to that, he served as Capital One’s Controller and Principal Accounting Officer for five years. Before joining



 

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Capital One, Mr. Blackley held various executive positions at Fannie Mae, the U.S. Securities and Exchange Commission, and KPMG, LLP.

Summary Risk Factors

There are a number of risks that you should understand before making an investment decision regarding this offering. These risks are discussed more fully in the section entitled “Risk Factors” following this prospectus summary. If any of these risks actually occur, our business, financial condition, or results of operations could be materially and adversely affected. In such case, the trading price of our Class A common stock would likely decline, and you may lose all or part of your investment. These risks include, but are not limited to the following:

 

   

failure to retain and expand our member base;

 

   

failure to execute our growth strategy;

 

   

inability to achieve or maintain profitability in the future;

 

   

changes in federal or state laws or regulations, including changes with respect to the ACA and any regulations enacted thereunder;

 

   

failure to accurately estimate our incurred medical expenses or effectively manage our medical costs or related administrative costs;

 

   

failure to comply with ongoing regulatory requirements and applicable performance standards;

 

   

changes or developments in the health insurance markets in the United States, including passage and implementation of a law to create a single-payer or government-run health insurance program;

 

   

failure to comply with applicable privacy, security, and data laws, regulations, and standards;

 

   

incurrence of cyber-attacks or privacy or data breaches;

 

   

inability to arrange for the delivery of quality care and maintain good relations with the physicians, hospitals, and other providers within and outside our provider networks;

 

   

unfavorable or otherwise costly outcomes of lawsuits and claims that arise from the extensive laws and regulations to which we are subject; and

 

   

adverse publicity or other adverse consequences related to our dual class structure or “controlled company” status.

Before you invest in our Class A common stock, you should carefully consider all of the information in this prospectus, including matters set forth under the heading “Risk Factors.”

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of certain reduced reporting and other requirements that are otherwise generally applicable to public companies. As a result:

 

   

we are required to have only two years of audited financial statements and only two years of related selected consolidated financial data and Management’s Discussion and Analysis of Financial Condition and Results of Operations disclosure;



 

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we are exempt from the requirement that critical audit matters be discussed in our independent auditor’s reports on our audited financial statements or any other requirements that may be adopted by the Public Company Accounting Oversight Board, or the PCAOB, unless the SEC determines that the application of such requirements to emerging growth companies is in the public interest;

 

   

we are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of its internal control over financial reporting;

 

   

we are exempt from the “say on pay,” “say on frequency,” and “say on golden parachute” advisory vote requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act; and

 

   

we are exempt from certain disclosure requirements of the Dodd-Frank Act relating to compensation of our executive officers and are permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act.

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the completion of this offering or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company upon the earliest of: (i) the last day of the first fiscal year in which our annual gross revenues are $1.07 billion or more; (ii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities; or (iii) the date on which we are deemed to be a “large accelerated filer,” which will occur as of the end of any fiscal year in which we (x) have an aggregate market value of our Class A common stock held by non-affiliates of $700 million or more as of the last business day of our most recently completed second fiscal quarter, (y) have been required to file annual and quarterly reports under the Exchange Act for a period of at least 12 months, and (z) have filed at least one annual report pursuant to the Exchange Act.

We may choose to take advantage of some but not all of these reduced burdens. We have elected to adopt the reduced requirements with respect to our financial statements and the related selected consolidated financial data and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure. As a result, the information that we provide to stockholders may be different from the information you may receive from other public companies in which you hold an investment.

In addition, pursuant to Section 107 of the JOBS Act, as an emerging growth company, we have elected to take advantage of the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to private companies. As a result, our operating results and financial statements may not be comparable to the operating results and financial statements of other companies who have adopted the new or revised accounting standards. It is possible that some investors will find our Class A common stock less attractive as a result, which may result in a less active trading market for our Class A common stock and higher volatility in our stock price.

Our Corporate Information

Oscar Health, Inc., formerly known as Mulberry Health Inc., is the registrant and the issuer of our Class A common stock in this offering and was incorporated as a Delaware corporation on October 25,



 

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2012. Our corporate headquarters are located at 75 Varick Street, 5th Floor, New York, New York 10013. Our telephone number is (646) 403-3677. On January 4, 2021, we changed our name from “Mulberry Health Inc.” to “Oscar Health, Inc.”

Our principal website address is www.hioscar.com. The information on, or that can be accessed through, our website is deemed not to be incorporated in this prospectus or to be part of this prospectus. You should not consider information contained on our website to be part of this prospectus in deciding whether to purchase shares of our Class A common stock.



 

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THE OFFERING

 

Class A common stock offered by us

   30,350,920 shares.

Class A common stock offered by the selling stockholders

  


649,080 shares.

Underwriters’ option to purchase additional shares of Class A common stock

  


The underwriters have an option to purchase up to 4,650,000 additional shares of Class A common stock from us at the initial public offering price, less underwriting discounts and commissions. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

Class A common stock to be outstanding upon completion of this offering

  


161,921,638 shares (or 166,571,638 shares if the underwriters exercise their option to purchase additional shares of Class A common stock in full).

Class B common stock to be outstanding upon completion of this offering

  


35,115,807 shares.

Class A and Class B common stock to be outstanding upon completion of this offering

  


197,037,445 shares (or 201,687,445 shares if the underwriters exercise their option to purchase additional shares of Class A common stock in full).

Indication of Interest

   One or more funds affiliated with Tiger Global Management, LLC, Dragoneer Investment Group, LLC and Coatue Management LLC, who are all existing investors in the Company, have indicated an interest in purchasing up to an aggregate of $125 million each (up to $375 million in the aggregate) in shares of our Class A common stock in this offering at the initial public offering price. The shares of Class A common stock purchased by such investors will be subject to a lock-up agreement substantially consistent with the lock-up agreement signed by our existing stockholders and described in the section titled “Underwriting.” Because this indication of interest is not a binding agreement or commitment to purchase, one or more funds affiliated with Tiger Global Management, LLC, Dragoneer Investment Group, LLC and/or Coatue Management LLC may determine to purchase more, less or no shares in this offering or the underwriters may determine to sell more, less or no shares to one or more funds affiliated with Tiger Global Management, LLC, Dragoneer Investment Group, LLC and/or Coatue Management LLC. The underwriters will receive


 

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   the same discount on any of our shares of Class A common stock purchased by one or more funds affiliated with Tiger Global Management, LLC, Dragoneer Investment Group, LLC and Coatue Management LLC as they will from any other shares of Class A common stock sold to the public in this offering.

Use of proceeds

  

We estimate that we will receive net proceeds from this offering of approximately $936.3 million (or $1.1 billion if the underwriters exercise their option to purchase additional shares of Class A common stock in full), based upon an assumed initial public offering price of $33.00 per share (which is the midpoint of the price range set forth on the cover page of this prospectus) and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The principal purposes of this offering are to increase our capitalization and financial flexibility and create a public market for our Class A common stock. We expect to use approximately $163 million of the net proceeds of this offering to repay in full outstanding borrowings, including fees and expenses, under our Term Loan Facility (as defined herein), and the remainder of such net proceeds for general corporate purposes, including to fund our growth (including capital contributions to our health insurance subsidiaries), technology development, working capital, operating expenses, and capital expenditures. Additionally, we may use a portion of the net proceeds to acquire or invest in products, services, or technologies; however, we do not have agreements or commitments for any material acquisitions or investments at this time. As of the date of this prospectus, other than repayment of indebtedness under our Term Loan Facility, we do not have a specific plan for the net proceeds to us from this offering and, accordingly, we are not able to allocate the net proceeds among any of these potential uses in light of the variety of factors that will impact how such net proceeds are ultimately utilized by us. We will have broad discretion in the way that we use the net proceeds of this offering. We will not receive any proceeds from the sale of shares of Class A common stock offered by the selling stockholders. See “Use of Proceeds.”

Voting rights

   Upon completion of this offering, we will have two classes of common stock, Class A common stock and Class B common stock. The rights of


 

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holders of Class A common stock and Class B common stock will be identical, except with respect to voting, conversion and transfer rights. Each share of Class A common stock will be entitled to one vote. Each share of Class B common stock will be entitled to 20 votes and will be convertible at any time into one share of Class A common stock and mandatorily convertible upon the occurrence of certain events, as further described in “Description of Capital Stock.”

 

Thrive Capital and our Co-Founders will be the only holders of our Class B common stock, and following the completion of this offering, they will beneficially own 19.5% of our outstanding capital stock and hold 82.9% of the voting power of our outstanding capital stock (19.1% and 82.5%, respectively, if the underwriters exercise their option to purchase additional shares of our Class A common stock in full). These holders of our outstanding Class B common stock will have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of our directors and the approval of any change of control transaction. See “Principal and Selling Stockholders” and “Description of Capital Stock” for additional information.

Controlled company

   Upon completion of this offering, we will be a “controlled company” within the meaning of the corporate governance rules of the NYSE.

Dividend policy

   We do not expect to pay any dividends on our Class A common stock for the foreseeable future. See “Dividend Policy.”

Directed share program

   At our request, the underwriters have reserved for sale at the initial public offering price up to three percent of the shares of Class A common stock offered by this prospectus, to certain individuals or entities, including our provider and distribution partners, and certain other individuals or entities identified by management, through a directed share program. If purchased by these individuals or entities, these shares will not be subject to a lock-up restriction, except in the case of shares purchased by any director or executive officer. The number of shares of Class A common stock available for sale to the general public will be reduced by the number of reserved shares sold to these individuals or entities. Any reserved shares not purchased by these individuals or entities will be offered by the


 

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   underwriters to the general public on the same terms as the other shares of Class A common stock offered under this prospectus. See “Certain Relationships and Related Party Transactions” and “Underwriting—Directed Share Program.”

Risk factors

   Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 21 and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our Class A common stock.

Listing

   We have applied to list our Class A common stock on the NYSE under the symbol “OSCR.”

The historical audited financial statements included elsewhere in this prospectus have not been adjusted for the Stock Split. Unless otherwise indicated, all other share and per share data in this prospectus have been adjusted on a retroactive basis, where applicable, to reflect the Stock Split as if it had occurred at the beginning of the earliest period presented.

The number of shares of our Class A common stock and Class B common stock that will be outstanding upon the completion of this offering is based on 131,350,946 shares of our Class A common stock and 35,335,579 shares of our Class B common stock outstanding, in each case, as of December 31, 2020, after giving effect to the Preferred Stock Conversion, the Series B Conversion, and the Reclassification described below, and includes 429,308 shares of Class A common stock to be issued to certain selling stockholders upon the exercise of options in connection with the sale of such shares in this offering.

Additionally, the number of shares of Class A common stock and Class B common stock to be outstanding upon completion of this offering excludes:

 

   

33,958,817 shares of Class A common stock and 6,534,129 shares of Class B common stock, in each case issuable upon exercise of stock options outstanding as of December 31, 2020 pursuant to the Amended and Restated 2012 Stock Plan, or the 2012 Plan, with weighted average exercise prices of $9.57 per share and $7.82 per share, respectively, except for 429,308 shares of Class A common stock to be issued upon the exercise of options by certain selling stockholders in connection with the sale of such shares in this offering;

 

   

1,555,666 shares of Class A common stock issuable in connection with the vesting and settlement of restricted stock units, or RSUs, outstanding as of December 31, 2020, pursuant to our 2012 Plan;

 

   

2,008,638 shares of Class A common stock available for issuance pursuant to our 2012 Plan as of December 31, 2020, which will become available for issuance pursuant to the 2021 Incentive Award Plan, or the 2021 Plan, upon such plan’s effectiveness (which includes (i) 108,666 shares of Class A common stock issuable in connection with the vesting and settlement of RSUs that were granted after December 31, 2020, pursuant to our 2012 Plan, and (ii) 699,475 shares of Class A common stock issuable upon exercise of stock options granted after December 31, 2020 pursuant to the 2012 Plan);

 

   

282,657 shares of Class A common stock issuable in connection with the vesting and settlement of RSUs, which we refer to as the IPO RSUs, granted pursuant to the 2021 Plan



 

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to employees, named executive officers and directors, which awards will become effective in connection with the completion of this offering;

 

   

6,344,779 shares of Class A common stock issuable in connection with the vesting and settlement of RSUs that were granted to our Co-Founders pursuant to the 2021 Plan and will become effective in connection with the completion of this offering, which we refer to collectively as the Founders Awards (see “Executive and Director Compensation” for additional information regarding the Founders Awards);

 

   

13,255,516 shares of Class A common stock and Class B common stock that will become available for future issuance pursuant to the 2021 Plan (which, for the avoidance of doubt, excludes the Founders Awards and the IPO RSUs), which will become effective in connection with this offering (and which excludes any potential annual evergreen increases pursuant to the terms of the 2021 Plan);

 

   

3,976,590 shares of Class A common stock that will become available for future issuance pursuant to our 2021 Employee Stock Purchase Plan, or the ESPP, which will become effective in connection with this offering (and which excludes any potential annual evergreen increases pursuant to the terms of the ESPP); and

 

   

291,447 shares of Class A common stock issuable upon the exercise of options to purchase shares of Class A common stock that were granted to certain consultants with a weighted-average exercise price of $0.96 per share.

Unless otherwise indicated, all information contained in this prospectus assumes or gives effect to:

 

   

809,792 shares of Class A common stock issuable upon the net exercise of warrants outstanding as of December 31, 2020, with a weighted average exercise price of $11.05 per share, or the Warrants;

 

   

net exercise of call options to purchase 12,732 shares of Class A common stock outstanding as of December 31, 2020, with an exercise price of $18.06 per share, which will result in the net issuance of 5,765 shares of Class A common stock in connection with this offering, or the Call Options;

 

   

the conversion of 133,634,767 outstanding shares of preferred stock into an aggregate of 133,987,269 shares of Series A common stock, which will occur immediately after the pricing of this offering, or the Preferred Stock Conversion;

 

   

the conversion of 3,120,255 shares of Series B common stock outstanding (excluding those beneficially owned by Thrive Capital and our Co-Founders), into 3,120,255 shares of Series A common stock, which will occur prior to the closing of this offering, or the Series B Conversion;

 

   

the filing and effectiveness of our amended and restated certificate of incorporation, or the Amended Charter, which will occur prior to the closing of this offering and which will, among other things, effect (x) (i) the reclassification of all outstanding shares of our Series A common stock, other than shares of Series A common stock beneficially owned by Thrive Capital, into Class A common stock, (ii) the reclassification of all outstanding shares of our Series B common stock, after giving effect to the Series B Conversion, into Class B common stock, and (iii) the reclassification of shares of Series A common stock beneficially owned by Thrive Capital into Class B common stock, which are collectively referred to as the Reclassification, and (y) the Stock Split;

 

   

the adoption of our amended and restated bylaws, or the Amended Bylaws, which will occur immediately prior to the closing of this offering;



 

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no exercise of the outstanding stock options or warrants, or settlement of RSUs (other than the exercise of options to purchase 429,308 shares of Class A common stock by certain selling stockholders), described above subsequent to December 31, 2020;

 

   

no exercise by the underwriters of their option to purchase up to 4,650,000 additional shares of Class A common stock; and

 

   

an initial public offering price of $33.00 per share of Class A common stock, which is the midpoint of the price range set forth on the cover page of this prospectus.



 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables present the summary consolidated financial and other data for Oscar Health, Inc. and its subsidiaries. We have derived the summary consolidated statements of operations data for the years ended December 31, 2019 and 2020 and the summary consolidated balance sheet data as of December 31, 2020 from our audited consolidated financial statements included elsewhere in this prospectus. You should read this data together with our consolidated financial statements and related notes included elsewhere in this prospectus and the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results for any prior period are not necessarily indicative of the results that may be expected in the future.

 

     Year ended
December 31,
 
     2019     2020  
     (in thousands, except share and
per share data)
 

Consolidated Statement of Operations:

    

Revenue:

    

Premiums before ceded reinsurance

   $ 1,041,145     $ 1,672,339  

Reinsurance premiums ceded

     (572,284     (1,217,304
  

 

 

   

 

 

 

Premiums earned

     468,861       455,035  

Investment income and other revenue

     19,327       7,766  
  

 

 

   

 

 

 

Total revenue

     488,188       462,801  

Operating expenses:

    

Claims incurred, net

     408,259       309,353  

Other insurance costs

     167,851       216,534  

General and administrative expenses

     110,682       166,655  

Federal and state assessments

     48,170       81,458  

Health insurance industry fee

     —         19,251  

Premium deficiency reserve expense

     12,615       71,816  
  

 

 

   

 

 

 

Total operating expenses

     747,577       865,067  

Loss from operations

     (259,389     (402,266

Interest expense

     —         3,514  
  

 

 

   

 

 

 

Loss before income tax expense

     (259,389     (405,780

Income tax expense

     1,793       1,045  
  

 

 

   

 

 

 

Net loss

     (261,182     (406,825

Other comprehensive income—net of tax

    

Unrealized gain on investments

     17       906  
  

 

 

   

 

 

 

Comprehensive loss

   $ (261,165   $ (405,919
  

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted (without giving effect to the Stock Split)(1)

   $ (3.02   $ (4.72

Weighted-average common shares outstanding, basic and diluted (without giving effect to the Stock Split)(1)

     86,439,407       87,790,273  

Pro forma net loss per share attributable to common stockholders, basic and diluted(1)

   $ (1.86)     $ (2.54

Pro forma weighted-average common shares outstanding, basic and diluted(1)

     140,688,252       163,250,426  

Consolidated Statement of Cash Flows:

    

Net cash (used in)/provided by operating activities

   $ (165,370   $ 222,732  

Net cash provided by/(used in) investing activities

     150,513       (344,714

Net cash (used in)/provided by financing activities

     (2,119     611,707  


 

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     As of December 31, 2020  
     Actual     Pro Forma(2)      Pro Forma
As Adjusted(3)(4)
 
     (in thousands)  

Consolidated Balance Sheet:

       

Cash and cash equivalents

   $ 826,326     $ 826,326      $ 1,601,892  

Short-term investments

     366,387       366,387        366,387  

Total assets

     2,272,106       2,272,106        3,047,672  

Total liabilities

     1,823,088       1,808,083        1,665,596  

Convertible preferred stock

     1,744,911       —          —    

Total stockholders’ (deficit) equity

     (1,295,893     464,022        1,382,075  

 

     Year ended December 31,  
     2019     2020  

Key Operating and Non-GAAP Financial Metrics:(5)

    

Members

     229,818       402,044  

Direct Policy Premiums (in thousands)

   $ 1,325,760     $ 2,287,319  

Medical Loss Ratio(6)

     87.6     84.7

InsuranceCo Administrative Expense Ratio(7)

     25.5     26.1

InsuranceCo Combined Ratio

     113.1     110.8

Adjusted EBITDA(8) (in thousands)

   $ (222,173   $ (402,447

 

(1)

See note 2 to our audited consolidated financial statements included elsewhere in this prospectus for an explanation and calculation of historical earnings per share, basic and diluted. Historical earnings per share, basic and diluted, and historical weighted average common shares outstanding, basic and diluted, are each presented in this table without giving effect to the Stock Split. After giving effect to the Stock Split, historical earnings per share, basic and diluted, will be $(9.06) for the year ended December 31, 2019 and $(14.16) for the year ended December 31, 2020, and historical weighted average common shares outstanding, basic and diluted, will be 28,813,135 for the year ended December 31, 2019 and 29,263,424 for the year ended December 31, 2020, in each case as if the Stock Split had occurred at the beginning of the earliest period presented. Pro forma earnings per share, basic and diluted, and pro forma weighted average common shares outstanding, basic and diluted, give effect to the (i) Preferred Stock Conversion, (ii) the Series B Conversion, (iii) the Reclassification, (iv) the filing and effectiveness of our Amended Charter, (v) the exercise of the Warrants and Call Options and (vi) the Stock Split, in each case as if it had occurred at the beginning of the earliest period presented.

(2)

The pro forma consolidated balance sheet data as of December, 31, 2020 presents our consolidated balance sheet data to give effect to (i) the Preferred Stock Conversion, (ii) the Series B Conversion, (iii) the Reclassification, (iv) the filing and effectiveness of our Amended Charter, (v) the exercise of the Warrants and Call Options, and (vi) the Stock Split, in each case as if such event had occurred on December 31, 2020.

(3)

The pro forma as adjusted consolidated balance sheet data reflect (i) the items described in footnote (2) above, (ii) the issuance and sale of Class A common stock in this offering at an assumed initial public offering price of $33.00 per share (which is the midpoint of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, (iii) the application of the net proceeds therefrom as described under “Use of Proceeds,” and (iv) the issuance of 429,308 shares of our Class A common stock upon the exercise of options by certain selling stockholders in connection with the sale of shares in this offering, including aggregate proceeds of $2.7 million received by us in connection with the exercise of such options. A $1.00 increase (decrease) in the assumed initial public offering price of $33.00 per share would increase (decrease) each of cash and cash equivalents, total assets and total stockholders’ deficit by



 

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  $28.8 million, assuming that the number of shares offered by this prospectus, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, an increase (decrease) of 1.0 million shares in the number of shares offered in this offering would increase (decrease) each of cash and cash equivalents, total assets and total stockholders’ deficit by $31.4 million, assuming the assumed initial public offering price, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(4)

The pro forma as adjusted data discussed above are illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

(5)

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating and Non-GAAP Financial Metrics” for information on how we define these key operating and non-GAAP financial metrics.

(6)

MLR is calculated as set forth in the table below. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating and Non-GAAP Financial Metrics—Medical Loss Ratio” for more information on MLR.

 

     Year ended December 31,  
     2019     2020  
     (in thousands)  

Claims incurred before ceded quota share reinsurance(a)

   $ 924,403     $ 1,364,724  

XOL ceded claims(b)

     (13,908     (13,633

State reinsurance(c)

     (6,959     (10,026
  

 

 

   

 

 

 

Net claims before ceded quota share reinsurance(A)

   $ 903,448     $ 1,341,065  
  

 

 

   

 

 

 

Premiums before ceded reinsurance(d)

   $ 1,041,145     $ 1,672,339  

Other non-recurring items(e)

     3,240       (64,538

XOL reinsurance premiums(f)

 

     (13,332     (24,066
  

 

 

   

 

 

 

Net premiums before ceded quota share reinsurance(B)

 

   $ 1,031,053     $ 1,583,735  
  

 

 

   

 

 

 

Medical Loss Ratio (A divided by B)

 

     87.6     84.7
  

 

 

   

 

 

 

 

 

 

  (a)

See footnote 4 to our audited consolidated financial statements included elsewhere in this prospectus for a reconciliation of direct claims incurred to claims incurred, net presented on the face of our audited consolidated income statement.

  (b)

Represents claims ceded to reinsurers pursuant to an excess of loss, or XOL, treaty, for which such reinsurers are financially liable. We use XOL reinsurance to limit the losses on individual claims of our members.

  (c)

Represents payments made by certain state-run reinsurance programs established subject to CMS approval under Section 1332 of the ACA.

  (d)

See footnote 3 to our audited consolidated financial statements included elsewhere in this prospectus for an explanation of premiums before ceded reinsurance.

  (e)

Represents a pre-quota share write-off of a NYDFS receivable in 2019 as described in footnote 2 in the reconciliation presented in footnote 8 below, which is offset by proceeds received from the sale of a portion of our risk corridor recovery in 2019. The amount was settled in 2020 and we received proceeds of $64.5 million of premiums earned offset by $12.1 million of legal fees and federal and state assessments. For additional information refer to footnote 3 to our audited consolidated financial statements included elsewhere in this prospectus.

  (f)

Represents XOL reinsurance premiums paid.



 

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(7)

InsuranceCo Administrative Expense Ratio is calculated as set forth in the table below. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating and Non-GAAP Financial Metrics—InsuranceCo Administrative Expense Ratio” for more information on InsuranceCo Administrative Expense Ratio.

 

     Year ended December 31,  
     2019     2020  
     (in thousands)  

Other insurance costs

   $ 167,851     $ 216,534  

Ceding commissions

     65,591       126,840  

Other non-recurring items(a)

     —         (12,102

Stock-based compensation expense

     (17,615     (18,299 )

Health insurance industry fee

     —         19,251  

Federal and state assessment of health insurance subsidiaries(b)

     47,019       81,199
  

 

 

   

 

 

 

Health insurance subsidiary adjusted administrative expenses(A)

   $ 262,846     $ 413,423  
  

 

 

   

 

 

 

Premiums before ceded reinsurance(a)

   $ 1,041,145     $ 1,672,339  

Other non-recurring items(a)

     3,240       (64,538

XOL reinsurance premiums(a)

 

     (13,332     (24,066
  

 

 

   

 

 

 

Net premiums before ceded quota share reinsurance(B)

 

   $ 1,031,053     $ 1,583,735  
  

 

 

   

 

 

 

InsuranceCo Administrative Expense Ratio (A divided by B)

 

     25.5     26.1
  

 

 

   

 

 

 

 

 

  (a)

See footnotes (d) through (f) to footnote 6 above for a description of these line items.

  (b)

Represents federal and state assessments of our health insurance subsidiaries.

 

(8)

Adjusted EBITDA is a supplemental measure of our performance that is not required by, or presented in accordance with generally accepted accounting principles in the U.S., or GAAP. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net loss or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of our liquidity.

We define Adjusted EBITDA as net loss for the Company and its consolidated subsidiaries before interest expense, income tax expense, depreciation and amortization as further adjusted for stock-based compensation, warrant contract expense, changes in the fair value of warrant liabilities, and non-operating litigation reserves/settlements as described below.

We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by our competitors, because not all companies and analysts calculate Adjusted EBITDA in the same manner. We present Adjusted EBITDA because we consider this metric to be an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. Management believes that investors’ understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for comparing our ongoing results of operations.

Management uses Adjusted EBITDA:

 

   

as a measurement of operating performance because it assists us in comparing the operating performance of our business on a consistent basis, as it removes the impact of items not directly resulting from our core operations;

 

   

for planning purposes, including the preparation of our internal annual operating budget and financial projections;



 

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to evaluate the performance and effectiveness of our operational strategies; and

 

   

to evaluate our capacity to expand our business.

By providing this non-GAAP financial measure, together with a reconciliation to the most comparable GAAP measure, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as an alternative to, or a substitute for net loss or other financial statement data presented in our consolidated financial statements as indicators of financial performance. Some of the limitations are:

 

   

such measure does not reflect our cash expenditures, or future requirements for capital expenditures, or contractual commitments;

 

   

such measure does not reflect changes in, or cash requirements for, our working capital needs;

 

   

such measure does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

 

   

such measure does not reflect our tax expense or the cash requirements to pay our taxes;

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measure does not reflect any cash requirements for such replacements; and

 

   

other companies in our industry may calculate such measures differently than we do, limiting their usefulness as comparative measures.

Due to these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using this non-GAAP measure only supplementally. Adjusted EBITDA includes adjustments to exclude the impact of material infrequent items. It is reasonable to expect that these items could occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our business, and may complicate comparisons of our internal operating results and operating results of other companies over time. In addition, Adjusted EBITDA includes adjustments for other items that we do not expect to regularly record following this offering. Each of the normal recurring adjustments and other adjustments described in this paragraph and in the reconciliation table below help management with a measure of our core operating performance over time by removing items that are not related to day-to-day operations.



 

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The following table reconciles Adjusted EBITDA to the most directly comparable GAAP financial performance measure, which is net loss:

 

     Year ended December 31,  
     2019     2020  
     (in thousands)  

Net loss

   $ (261,182   $ (406,825

Interest expense

     —         3,514  

Income tax expense

     1,793       1,045  

Depreciation and amortization

     6,899       11,285  

Stock-based compensation/warrant expense(a)

     34,262       40,970  

Other non-recurringitems(b)

     (3,945     (52,436
  

 

 

   

 

 

 

Adjusted EBITDA

   $ (222,173   $ (402,447
  

 

 

   

 

 

 

 

  (a)

Represents (i) non-cash expenses related to equity-based compensation programs, which vary from period to period depending on various factors including the timing, number, and the valuation of awards, (ii) warrant contract expense, and (iii) changes in the fair value of warrant liabilities.

  (b)

A health insurance subsidiary of the Company had previously recorded a receivable in 2018 of $16,055 from the New York Department of Financial Services, or NYDFS, in connection with the NYDFS’s program to limit federal risk adjustment transfers, which would have allowed us to collect additional funds from the NYDFS that we had previously remitted to CMS. However, this NYDFS program would have resulted in other insurance carriers having to return certain of the funds they received in connection with the federal risk adjustment program to the NYDFS. In 2017, these carriers initiated a lawsuit against the NYDFS to reverse the NYDFS limitations, which was subsequently decided in the carriers’ favor. As a result, we will no longer be entitled to receive the additional funds and we have written off the receivable in 2019. Additionally, the write-off of the receivable in 2019 is offset by proceeds received from the sale of a portion of our risk corridor recovery in 2019. The amount was settled in 2020 and we received proceeds of $64.5 million of premiums earned offset by $12.1 million of legal fees and federal and state assessments. For additional information refer to footnote 3 to our audited consolidated financial statements included elsewhere in this prospectus.



 

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RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including our audited consolidated financial statements and the related notes, before deciding to invest in our Class A common stock. The occurrence of any of the events described below could harm our business, operating results, financial condition, liquidity, or prospects. In any such event, the market price of our Class A common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business. See “Cautionary Note Regarding Forward-Looking Statements.”

Most Material Risks to Us

Our success and ability to grow our business depend in part on retaining and expanding our member base. If we fail to add new members or retain current members, our business, revenue, operating results, and financial condition could be harmed.

We currently derive substantially all of our revenue from direct policy premiums, which is primarily driven by the number of members covered by our health plans. As a result, the size of our member base is critical to our success. We have experienced significant member growth since we commenced operations; however, we may not be able to maintain this growth, and our member base could decrease rapidly or shrink over time.

Attracting new members depends, in large part, on our ability to continue to be perceived as providing a superior member experience, competitive pricing, access to competitive provider networks and quality providers, and competitive insurance coverage relative to other insurers in the same geographic and insurance markets. Some of the health insurers with which we compete have greater financial and other resources, offer a broader scope of products, and may be able to price their products more competitively than ours. Many of them also have relationships with more providers and provider groups than we do, and so are able to offer a larger network and/or obtain better unit cost economics.

Additionally, our ability to attract new members and retain existing members depends in part on the Health Insurance Marketplaces, which we rely on to promote our health plans and increase our membership, and insurance brokers, who help us identify and enroll new members and generally assist with marketing our products and plans.

If we fail to remain competitive on member experience, pricing, and insurance coverage options, our ability to grow our business and generate revenue by attracting and retaining members may be adversely affected. There are many other factors that could negatively affect our ability to grow our member base, including if:

 

   

our competitors or new market entrants mimic our innovative product offerings or our full stack technology platform, causing current and potential members to purchase our competitors’ insurance products instead of ours;

 

   

our digital platform experiences technical or other problems or disruptions that frustrate the member experience;

 

   

we or our partners or other third parties with whom we collaborate sustain a cyber-attack or suffer privacy or data security breaches;

 

   

we experience unfavorable shifts in member perception of our digital platform or other member service channels;

 

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we suffer reputational harm to our brand resulting from negative publicity, whether accurate or inaccurate;

 

   

we are unable to maintain licenses and approvals to offer insurance in our current markets or to expand geographically in an economically sustainable manner;

 

   

we fail to continue to offer new and competitive products;

 

   

our strategic partners terminate or fail to renew our current contracts or we fail to enter into contracts with new strategic partners;

 

   

insurance brokers that we rely on to build our member base are unable to market our insurance products effectively, or if we fail to attract brokers to sell our insurance products, or lose important broker relationships to our competitors or otherwise; or

 

   

our members do not find sufficient value in our virtual care offerings, including primary and urgent care.

Our inability to overcome these challenges could impair our ability to attract new members and retain existing members, and could have a material adverse effect on our business, revenue, operating results, and financial condition.

Our business, financial condition, and results of operations may be harmed if we fail to execute our growth strategy.

Our growth strategy includes, without limitation, the acquisition of additional members in existing and new markets and states, introducing new products and plans, and monetizing our technology.

We are expanding rapidly by entering into new markets and introducing new health plans in the markets in which we currently operate. As of the date of this prospectus, our health insurance subsidiaries operate in 18 states, 15 of which we expanded to since 2017. As our business grows, we may incur significant expenses prior to commencement of operations and the receipt of revenue in new markets or from new plans, including significant time and expense in obtaining the regulatory approvals and licenses necessary to grow our operations. For example, in order to obtain a certificate of authority to market and sell insurance in most jurisdictions, we must establish a provider network and demonstrate our ability to perform or delegate utilization management and other administrative functions. We are also required to contribute capital to fund capital and surplus requirements, escrows, or contingency guaranties, which may, at times, be significant. Even if we are successful in obtaining a certificate of authority, regulators may not approve our proposed benefit designs, provider networks, or premium levels, or may require us to change them in ways that harm our profitability. Further, even if we successfully attract members in sufficient numbers to cover our costs, the new business could fail, which could not only result in financial harm, but also reputational harm to our brand. We may also experience delays in operational start dates. Even if we are successful in establishing a profitable new health plan or entering a new market, increasing membership, revenues and medical costs could trigger increased risk-based capital, or RBC, requirements that could substantially exceed the net income generated by the health plan or in the new market. In such circumstances, we may not be able to fund on a timely basis, or at all, the increased RBC requirements with our available cash resources. As we expand, if competitors seek to retain market share by reducing prices, we may be forced to reduce our prices on similar plan offerings in order to remain competitive, which could impact our financial condition and may require a change in our operating strategies. It is difficult to predict the full effect of pricing changes. Even if we reduce the pricing of our plans, our resulting membership enrollment could be lower than anticipated and our growth could stall. As a result of these factors, entering new markets or introducing new health plans may decrease our profitability. In addition, we are continuously updating and developing new technology for our providers. If our providers do not utilize the technology we deploy to them, we may not be able to efficiently and cost-effectively operate our business.

 

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As we expand our product offerings and enter new markets, we need to establish our reputation and brand with new members, and to the extent we are not successful in creating positive impressions, our business in these newer markets could be adversely affected. There can also be no assurance that we will be able to maintain or enhance our reputation and brand in our existing markets, and failure to do so could materially adversely affect our business, results of operations, and financial condition.

We also pursue opportunistic partnerships and acquisitions to allow us to provide better health care options for our members as well as to augment existing operations, and we may be in discussions with respect to one or more partnerships or acquisitions at any given time. For example, we recently entered into a partnership with Cigna to exclusively provide commercial health plans to small businesses, for which we made a significant investment in financial and other resources. Partnerships or other acquisition opportunities that we enter into may not perform as well as expected, may not achieve timely profitability or expected synergies, may expose us to additional liability, or may limit our ability to offer products in certain insurance markets and geographic regions.

We may also pursue opportunities to monetize our platform, including through platform arrangements, such as our recent arrangement with Health First. We may not be able to perform these platform arrangements as well as expected, and these arrangements may pose operational challenges, may not achieve timely profitability, may expose us to additional liability, or may limit our ability to offer products in certain insurance markets and geographic regions.

We expect that our growth strategy will continue to focus on opportunities in existing and new markets and states for the foreseeable future, which will require significant dedication of management attention and financial resources. If we are unable to effectively execute our growth strategy, our future growth will suffer, and our results of operations could be harmed.

We have a history of losses, and we may not achieve or maintain profitability in the future.

We have not been profitable since our inception in 2012 and had an accumulated deficit of $1,012.9 million and $1,427.1 million as of December 31, 2019 and 2020, respectively. We incurred net losses of $261.2 million and $406.8 million in the years ended December 31, 2019 and 2020, respectively. We expect to make significant investments to further market, develop, and expand our business, including by continuing to develop our full stack technology platform and member engagement engine, acquiring more members, maintaining existing members and investing in partnerships, collaborations and acquisitions. In addition, we expect to continue to increase our headcount in the coming years. As a public company, we will also incur significant legal, accounting, compliance, and other expenses that we did not incur as a private company. The commissions we offer to brokers could also increase significantly as we compete to attract new members. We will continue to make such investments to grow our business. Despite these investments, we may not succeed in increasing our revenue on the timeline that we expect or in an amount sufficient to lower our net loss and ultimately become profitable. Moreover, if our revenue declines, we may not be able to reduce costs in a timely manner because many of our costs are fixed, at least in the short-term. If we are unable to manage our costs effectively, this may limit our ability to optimize our business model, acquire new members, and grow our revenues. Accordingly, despite our best efforts to do so, we may not achieve or maintain profitability, and we may continue to incur significant losses in the future.

Any potential repeal of, changes to, or judicial challenges to the ACA, could materially and adversely affect our business, results of operations, and financial condition.

The enactment of the ACA in March 2010 transformed the U.S. health care delivery system through a series of complex initiatives; however, the ACA continues to face judicial challenges, as well as efforts to repeal or change certain of its significant provisions. For the years ended December 31,

 

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2019 and 2020, approximately 96% and 95%, respectively, of our revenue was derived from sales of health plans subject to regulation under the ACA, primarily comprised of policies directly purchased by individuals and families and secondarily comprised of policies purchased by small employers and provided to their employees as a benefit. Consequently, changes to, or repeal of, portions or the entirety of the ACA, as well as judicial interpretations in response to legal and other constitutional challenges, could materially and adversely affect our business and financial position, results of operations, or cash flows. Even if the ACA is not amended or repealed, elected and appointed officials could continue to propose changes impacting the ACA, which could materially and adversely affect our business, results of operations, and financial condition.

The ACA’s provisions include the establishment of Health Insurance Marketplaces. The ACA also established significant subsidies to support the purchase of health insurance by individuals, in the form of advanced premium tax credits, or APTCs, available through Health Insurance Marketplaces. During the years ended December 31, 2019 and 2020, the direct policy premiums of approximately 43% and 60%, respectively, of our members were subsidized by APTCs. Additionally, the ACA implemented certain requirements for insurers, including changes to Medicare Advantage payments and a minimum MLR provision that requires insurers to pay rebates to consumers when insurers do not meet or exceed specified annual MLR thresholds. The ACA also established anti-discrimination protections on the basis of race, color, national origin, sex, age, and disability, which may impact the manner in which health insurers receiving any form of federal financial assistance design and implement their benefit packages. Further, the ACA imposes significant fees, assessments, and taxes on us and other health insurers, plans and other industry participants. As of December 31, 2020, we offered Individual plans through the Health Insurance Marketplaces in 15 states, which represented approximately 79% of our total membership.

There have been significant efforts to repeal, or limit implementation of, certain provisions of the ACA. Such initiatives include repeal of the individual mandate effective in 2019, as well as easing of the regulatory restrictions placed on short-term limited duration insurance and association health plans, some or all of which may provide fewer benefits than the traditional ACA-mandated insurance benefits. The perceived uncertainty and possible changes in the Health Insurance Marketplaces could result in reduced participation from individuals seeking insurance coverage and possible non-renewal of existing policies. Because we rely on the Health Insurance Marketplaces to promote our Individual and some of our Small Group products and increase membership, reduced participation in such marketplaces could materially and adversely impact our business, financial condition, and results of operations. Also, although individuals would still be able to purchase coverage, possibly through marketplaces that continue to be maintained by certain states or by purchasing coverage directly from an insurer, the elimination of subsidies would make such coverage unaffordable to some individuals and could thereby reduce overall membership. Further, the federal government’s continued refusal to fund cost sharing subsidies and/or withdrawal of APTCs could additionally impact marketplace enrollment, although we may expect some changes to the foregoing with President Biden’s new administration. These market and political dynamics may increase the risk that our Health Insurance Marketplace products will be selected by individuals who have a higher risk profile or utilization rate or lower subsidization rate than we anticipated when we established the pricing for products on Health Insurance Marketplaces, possibly leading to financial losses.

The constitutionality of the ACA itself continues to face judicial challenge. In December 2018, a partial summary judgment ruling by a federal district court in Texas v. United States of America held that the ACA’s individual mandate requirement—which was set to $0 by Congress in 2017—was essential to the ACA, and, without it, the remainder of the ACA was invalid (i.e., that it was not “severable” from the ACA). That decision was appealed to the Fifth Circuit Court of Appeals, which agreed with the district court in December 2019 that the individual mandate was unconstitutional, but remanded the case to the district court for additional analysis on the question of severability of the

 

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remainder of the ACA. In January 2020, both plaintiffs and defendants appealed the Fifth Circuit’s decision to the Supreme Court, which granted a writ of certiorari in March 2020. Oral argument took place on November 10, 2020 in the case now captioned California v. Texas. The Supreme Court’s decision could end the case, or it could result in the case being sent back to the lower courts for continued litigation. The ACA remains in effect until judicial review of the decision is concluded, and the ultimate content, timing, or effect of any outcome of the lawsuit cannot be predicted. In the interim, Congress and President Biden may consider other legislation and/or executive orders to change elements of the ACA, including for example, the January 28, 2021 Executive Order issued by President Biden directing the Secretary of HHS to consider opening a Special Enrollment Period for the Health Insurance Marketplace as well as directing federal agencies to examine all existing regulations, orders, guidance documents, policies and similar agency actions to determine if any such actions are inconsistent with the policy set forth in the Executive Order to protect and strengthen Medicaid and the ACA and make high-quality healthcare accessible and affordable for every American. The Executive Order led CMS to establish a Special Enrollment Period for the federal health insurance marketplace using the HealthCare.gov platform from February 15, 2021 to May 15, 2021.

These changes to the ACA and other potential changes involving the functioning of the Health Insurance Marketplaces as a result of new legislation, regulation, or executive action, could materially impact our business, results of operations, and financial condition.

Failure to accurately estimate our incurred medical expenses or effectively manage our medical costs or related administrative costs could negatively affect our financial position, results of operations, and cash flows.

Our profitability depends, to a significant degree, on our ability to accurately estimate and effectively manage our medical expenses. Because the premiums are set in advance of the policy year based on a projection of future expenses, our overall financial results are sensitive to changes in our medical expenses. For example, if our medical expenses for the policy year 2020 had been one percentage point higher, this would have resulted in an approximately $13.6 million increase in our net loss after taking into account risk adjustment determinations and reinsurance. Changes in health care regulations and practices, the level of utilization of health care services, hospital and pharmaceutical costs, and to the broader competitive landscape, disasters, the potential effects of climate change, major epidemics, pandemics, or newly emergent viruses (such as COVID-19), continued inequity and racial discrimination in the U.S. health care system, and the resulting physical and mental health costs in broader society, new medical technologies, new pharmaceuticals, increases in provider fraud, and other external factors, including general economic conditions such as inflation and unemployment levels, are generally beyond our control and could reduce our ability to accurately estimate and effectively control the costs of providing health benefits.

Due to the time lag between when services are actually rendered by providers and when we receive, process, and pay a claim for those services, our medical expenses include a provision for claims incurred but not paid. We are continuously enhancing our process for estimating claims liability, which we monitor and refine on a monthly basis as claims receipts, payment information, and inpatient acuity information becomes available. As more complete information becomes available, we adjust the amount of the estimate, and include the changes in estimates in expenses in the period in which the changes are identified. Given the uncertainties inherent in such estimates, there can be no assurance that our claims liability estimate will be adequate, and any adjustments to the estimate may unfavorably impact, potentially in a material way, our reported results of operations and financial condition. Further, our inability to estimate our claims liability may also affect our ability to take timely corrective actions, further exacerbating the extent of any adverse effect on our results.

Additionally, when we expand our product offerings, we have limited information with which to develop our anticipated claims liability. Changes to (or new or revised interpretations of) subregulatory

 

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guidance, regulations, or statutes that govern Health Insurance Marketplaces, including, but not limited to, those governing eligibility criteria, Special Enrollment Periods, and minimum benefits requirements, may pose difficulty in estimating our claims liability.

From time to time in the past, our actual results have varied from those expected, particularly in times of significant changes in the number of our members. If it is determined that our estimates are significantly different than actual results, our results of operations and financial position could be adversely affected.

Risks Related to the Regulatory Framework that Governs Us

Our business activities are subject to ongoing, complex, and evolving regulatory obligations, and to continued regulatory review, which result in significant additional expense and the diversion of our management’s time and efforts. If we fail to comply with regulatory requirements, or are unable to meet performance standards applicable to our business, our operations could be disrupted or we may become subject to significant penalties.

We operate in a highly regulated industry and we must comply with numerous and complex state and federal laws and regulations to operate our business, including requirements to maintain or renew our regulatory approvals or obtain new regulatory approvals to sell insurance and to sell specific health plans. The National Association of Insurance Commissioners, or NAIC, has adopted the Annual Financial Reporting Model Regulation, or the Model Audit Rule, which, where adopted by states, requires expanded governance practices, risk and solvency assessment reporting, and filing of periodic financial and operating reports. Most states have adopted these or similar measures to expand the scope of regulations relating to corporate governance and internal control activities of health maintenance organizations, or HMOs, and insurance companies. We are also required to notify, or obtain approval from, federal and/or state regulatory authorities prior to taking various actions as a business, including making changes to our network, service offerings, and the coverage of our health plans, as well as prior to entering into relationships with certain vendors and health organizations. We have in the past, and we may in the future, fail to take actions mandated by federal and/or state laws or regulations with respect to changes in our health benefits, the health insurance policies for which individuals are eligible, proposed or actual premiums, and/or other aspects of individuals’ health insurance coverage. Such failures may result in our having to take corrective action, including making remediation payments to our members or paying fines to regulators, and may subject us to negative publicity.

In each of the markets in which we operate, we are regulated by the relevant insurance and/or health and/or human services, or other government departments that oversee the activities of insurance and/or health care organizations providing or arranging to provide services to Medicare Advantage members, Health Insurance Marketplace enrollees, or other beneficiaries. For example, our health insurance subsidiaries must comply with minimum statutory capital and other financial solvency requirements, such as deposit and surplus requirements, and related reporting requirements. Our health insurance subsidiaries must also comply with numerous statutes and regulations governing the sale, marketing, and administration of insurance. Additionally, our health insurance subsidiaries may be required to maintain dedicated personnel and physical offices in certain jurisdictions where we operate.

The frequent enactment of, amendments to, or changes in interpretations of laws and regulations could, among other things: require us to restructure our relationships with providers within our network; require us to contract with additional providers at unfavorable terms; require us to cover certain forms of care provided by out-of-network providers at rates or levels indicated by rule or statute; require us to implement changes to our health care services and types of coverage, or prevent us from innovating and evolving; restrict revenue and enrollment growth; increase our sales, marketing, and administrative

 

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costs; impose additional capital and surplus requirements; make it more difficult to obtain regulatory approvals to operate our business or maintain existing regulatory approvals; prevent or delay us from entering into new service areas or product lines; and increase or change our liability to members in the event of malpractice by our contracted providers. The evolving regulatory landscape requires a significant investment of time and resources to ensure compliance with new and changing laws and regulations. In addition, changes in political party legislative majorities or executive branch administrations at the state or federal level in the United States may change the attitude towards health care programs and result in changes to the existing legislative or regulatory environment.

The federal government periodically considers reducing or reallocating the amount of money it spends for Medicare. Furthermore, Medicare remains subject to the automatic spending reductions imposed by the Budget Control Act of 2011 and the American Taxpayer Relief Act of 2012, subject to a 2% cap, which was extended by subsequent legislative amendments through 2030. We anticipate this and any future similar initiatives will require government agencies to find funding alternatives, which may result in reductions in funding for programs, contraction of covered benefits, and limited or no premium rate increases, or premium rate decreases.

Additionally, the taxes and fees that we are required to pay to federal, state, and local governments may increase due to several factors, including: enactment of, changes to, or interpretations of, tax laws and regulations, audits by governmental authorities, and geographic expansions into higher taxing jurisdictions.

The governmental health care programs in which we participate are subject to a myriad of rules, regulations, and subregulatory guidance, as well as third party and publicly administered performance standards. For example, a portion of each Medicare Advantage plan’s reimbursement is tied to the plan’s Star Rating, as published by CMS, with those plans receiving a rating of four (4.0) or more stars eligible for quality-based bonus payments. A plan’s Star Rating affects its image in the market, and plans that perform well are able to offer enhanced benefits and market more effectively. Medicare Advantage plans with Star Ratings of five (5.0) stars are eligible for year-round open enrollment; conversely, plans with lower Star Ratings have more restricted times for enrollment of beneficiaries. Medicare Advantage plans with Star Ratings of less than three (3.0) stars for three consecutive years are denoted as “low performing” plans on the CMS website and in the CMS “Medicare and You” handbook. In addition, in 2019, CMS had its authority reinstated to terminate Medicare Advantage contracts for plans rated below three (3.0) stars for three consecutive years. As a result, Medicare Advantage plans that achieve higher Star Ratings may have competitive advantage over plans with lower Star Ratings. As of December 31, 2020, none of our health plans were eligible to receive Star Ratings because of our recent market entry. The Star Rating system is subject to change annually by CMS, which may make it more difficult to achieve and maintain three (3.0) Star Ratings or greater in the future. Our health insurance subsidiaries’ operating results, premium revenue, and benefit offerings will likely depend significantly on their Star Ratings, and there can be no assurances that we will be successful in achieving favorable Star Ratings or maintaining or improving our Star Ratings once achieved. Similarly, health care accreditation agencies such as the National Committee for Quality Assurance, or NCQA, evaluate health plans based on various criteria, including effectiveness of care and member satisfaction. Health insurers seeking accreditation from NCQA must pass a rigorous, comprehensive review, and must annually report their performance. If we fail to achieve and maintain accreditation from agencies, such as NCQA, we could lose the ability to offer our health plans on Health Insurance Marketplaces, or in certain jurisdictions, which would materially and adversely affect our results of operations, financial position, and cash flows.    

Additionally, there are numerous steps federal and state regulators require for continued implementation of the ACA. If we fail to effectively implement or appropriately adjust our operational and strategic initiatives with respect to the implementation of health care reform, or do not do so as effectively as our competitors, our results of operations may be materially and adversely affected.

 

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Although we strive to comply with all existing regulations and to meet performance standards applicable to our business, failure to meet these requirements could result in financial fines, inability to obtain new regulatory approvals to sell insurance or health plans, inability to obtain regulatory approval to expand our geographic service area, inability to obtain new regulatory approvals to offer administrative services, revocation of existing licenses to offer insurance or administrative services, other penalties, and reputational harm.

Changes or developments in the health insurance markets in the United States, including passage and implementation of a law to create a single-payer or government-run health insurance program, could materially and adversely harm our business and operating results.

Our business is within the public and private sectors of the U.S. health insurance system, which are evolving quickly and subject to a changing regulatory environment, and our future financial performance will depend in part on growth in the market for private health insurance, as well as our ability to adapt to regulatory developments. Changes and developments in the health insurance system in the United States could reduce demand for our services and harm our business. For example, there has been an ongoing national debate relating to the health insurance system in the United States. Certain elected officials have introduced proposals to expand the Medicare program, ranging from proposals that would create a new single-payer national health insurance program for all United States residents, replacing virtually all other sources of public and private insurance, to more incremental approaches, such as lowering the age of eligibility for the Medicare program, expanding Medicare to a larger population, or creating a new public health insurance option that would compete with private insurers. Additionally, proposals to establish a single-payer or government-run health care system at the state level are regularly introduced in some of our key states, such as New York and California. At the federal level, President Biden and Congress may consider other legislation and/or executive orders to change elements of the ACA. In December 2019, a federal appeals court held that the individual mandate portion of the ACA was unconstitutional and left open the question whether the remaining provisions of the ACA would be valid without the individual mandate. On November 10, 2020, the U.S. Supreme Court heard oral arguments in this matter, and is in the process of reviewing this case. A decision is expected in 2021. On January 28, 2021, President Biden issued an Executive Order that states it is the policy of his administration to protect and strengthen Medicaid and the ACA, making high-quality healthcare accessible and affordable to all Americans, and directs the Secretary of HHS to consider opening a Special Enrollment Period for Americans to seek Individual market coverage through the Health Insurance Marketplace. On the same day, in response to the President’s Executive Order, the CMS announced a Special Enrollment Period from February 15, 2021 through May 15, 2021, for uninsured and under-insured individuals and families to seek coverage through the federal health insurance marketplace. The Executive Order also directs federal agencies to examine agency actions to determine whether they are consistent with that the Administration’s commitment regarding the ACA, and begin rulemaking to suspend, revise, or rescind any inconsistent actions. Areas of focus include policies or practices that may reduce affordability of coverage, present unnecessary barriers to coverage, or undermine protections for people with preexisting conditions. We continue to evaluate the effect that the ACA and its possible modifications, repeal and replacement may have on our business.

If we fail to comply with applicable privacy, security, and data laws, regulations and standards, including with respect to third-party service providers that utilize sensitive personal information on our behalf, or applicable consumer protection laws, our business, reputation, results of operations, financial position, and cash flows could be materially and adversely affected.

As part of our normal operations, we collect, process, and retain confidential information about individuals. We are subject to various federal and state laws and rules regarding the collection, use, disclosure, storage, transmission, and destruction of confidential information about individuals. For

 

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example, we are subject to the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, which require us to protect the privacy, security, and confidentiality of medical records and protected health information, or PHI, that we collect, disseminate, maintain, and use. HIPAA applies national privacy and security standards for PHI to covered entities, including health insurers and certain types of health care providers, and their service providers that access, create, receive, use, or maintain PHI, known as business associates. HIPAA requires covered entities and business associates to maintain policies and procedures governing PHI that is used or disclosed, and to implement administrative, physical, and technical safeguards to protect PHI, including PHI maintained, used, and disclosed in electronic form. These safeguards include employee training, identifying business associates with whom covered entities need to enter into HIPAA-compliant contractual arrangements, and various other measures. Health insurers and other covered entities are also required to report impermissible uses or disclosures of PHI to affected individuals and the U.S. Department of Health and Human Services, or HHS, unless the covered entity demonstrates through a risk assessment that there is low probability the PHI has been compromised, and to notify the media in any states where 500 or more people are impacted by any unauthorized release or use of or access to PHI. Ongoing implementation and oversight of these measures involves significant time, effort, and expense. While we undertake substantial efforts to secure the PHI that we maintain, use, and disclose in electronic form, a cyber-attack or other intrusion that bypasses our information security systems causing an information security breach, loss of PHI, confidential member information, or other data subject to privacy laws or a material disruption of our operational systems could result in a material adverse impact on our business, along with potentially substantial fines and penalties.

HIPAA and HITECH also established new enforcement mechanisms and enhanced penalties for failure to comply with specific standards relating to the privacy, security, and electronic transmission of PHI. If a person knowingly or intentionally obtains or discloses PHI in violation of HIPAA requirements, criminal penalties may also be imposed. HIPAA authorizes state Attorneys General to file suit under HIPAA on behalf of state residents. Courts can award damages, costs, and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for HIPAA violations, its standards have been used as the basis for a duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI. It is possible that Congress may enact additional legislation in the future to increase the amount or application of penalties, and to create a private right of action under HIPAA, which could entitle patients to seek monetary damages for violations of the privacy rules.

State laws may apply to our collection, use, handling, processing, destruction, disclosure, and storage of personal information as well. States have begun enacting more comprehensive privacy laws and regulations addressing consumer rights to data protection or transparency that may affect our privacy and security practices. For example, the California Consumer Privacy Act of 2018, or the CCPA, effective as of January 1, 2020, gives California residents expanded rights to access and require deletion of their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA also provides for civil penalties for violations, as well as a private right of action for data breaches that may increase data breach litigation.

Additionally, a new California ballot initiative, the California Privacy Rights Act, or “CPRA,” was passed in November 2020. Effective starting on January 1, 2023, the CPRA imposes additional obligations on companies covered by the legislation and will significantly modify the CCPA, including by expanding consumers’ rights with respect to certain sensitive personal information. The CPRA also creates a new state agency that will be vested with authority to implement and enforce the CCPA and the CPRA. The effects of the CCPA and the CPRA are potentially significant and may require us to modify our data collection or processing practices and policies and to incur substantial costs and

 

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expenses in an effort to comply and increase our potential exposure to regulatory enforcement and/or litigation. The CCPA and CPRA contain exemptions for medical information governed by the California Confidentiality of Medical Information Act, and for PHI collected by a covered entity or business associate governed by the privacy, security, and breach notification rule established pursuant to HIPAA and HITECH, but the precise interpretation and application of this exemption by regulators is not yet clear.

Certain other state laws also regulate issues related to privacy, security and use of personal information. In addition, we also expect more states to enact legislation similar to the CCPA, which provides consumers with new privacy rights and increases the privacy and security obligations of entities handling certain personal information of such consumers. The CCPA has prompted a number of proposals for new federal and state-level privacy legislation. Such proposed legislation, if enacted, may add additional complexity, variation in requirements, restrictions and potential legal risk, require additional investment of resources in compliance programs, impact strategies and the availability of previously useful data and could result in increased compliance costs and/or changes in business practices and policies.

With laws and regulations, such as HIPAA and the CCPA, imposing relatively burdensome obligations, and with substantial uncertainty over the interpretation and application of these and other laws and regulations to our business, we may face challenges in addressing their requirements and making necessary changes to our policies and practices, and may incur significant costs and expenses in our effort to do so. For example, the increased consumer control over the sharing of personal information under the CCPA may affect members’ ability to share such personal information with us, or may require us to delete or remove member information from our records or data sets, which may create considerable costs or loss of revenue for our organization.

The regulatory framework governing the collection, processing, storage, use and sharing of certain information, particularly financial and other personal information, is rapidly evolving and is likely to continue to be subject to uncertainty and varying interpretations. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the features of our services and platform capabilities. Any failure or perceived failure by us, or any third parties with which we do business, to comply with our posted privacy policies, changing consumer expectations, evolving laws, rules and regulations, industry standards, or contractual obligations to which we or such third parties are or may become subject, may result in actions or other claims against us by governmental entities or private actors, the expenditure of substantial costs, time and other resources or the incurrence of significant fines, penalties or other liabilities. In addition, any such action, particularly to the extent we were found to be guilty of violations or otherwise liable for damages, would damage our reputation and adversely affect our business, financial condition and results of operations.

We cannot yet fully determine the impact these or future laws, rules, regulations and industry standards may have on our business or operations. Any such laws, rules, regulations and industry standards may be inconsistent among different jurisdictions, subject to differing interpretations or may conflict with our current or future practices. Additionally, our customers may be subject to differing privacy laws, rules and legislation, which may mean that they require us to be bound by varying contractual requirements applicable to certain other jurisdictions. Adherence to such contractual requirements may impact our collection, use, processing, storage, sharing and disclosure of various types of information and may mean we become bound by, or voluntarily comply with, self-regulatory or other industry standards relating to these matters that may further change as laws, rules and regulations evolve. Complying with these requirements and changing our policies and practices may be onerous and costly, and we may not be able to respond quickly or effectively to regulatory, legislative and other developments. These changes may in turn impair our ability to offer our existing or

 

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planned features, products and services and/or increase our cost of doing business. As we expand our customer base, these requirements may vary from customer to customer, further increasing the cost of compliance and doing business.

Our business and operations are also subject to federal, state, and local consumer protection laws governing marketing communications, including the Telephone Consumer Protection Act, or TCPA, which places restrictions on the use of automated tools and technologies to communicate with wireless telephone subscribers or communications services consumers generally and the CAN-SPAM Act, which regulates the transmission of marketing emails.

In addition, certain of our businesses are also subject to the Payment Card Industry, or PCI, Data Security Standard, which is a multifaceted security standard that is designed to protect credit card account data as mandated by PCI entities. We rely on vendors to assist us with PCI matters and to ensure PCI compliance. Despite our compliance efforts, we may become subject to claims that we have violated the PCI DSS or other requirements of the payment card brands, based on past, present, or future business practices, which could have an adverse impact on our business and reputation, subject us to fines and/or have a negative impact on our ability to accept credit card payments.

In addition, any failure or perceived failure by us to maintain posted privacy policies which are accurate, comprehensive and fully implemented, and any violation or perceived violation of our privacy-, data protection-, or information security-related obligations to members, users, or other third parties or any of our other legal obligations relating to privacy, data protection, or information security may result in governmental investigations or enforcement actions, litigation, claims, or public statements against us by consumer advocacy groups or others, and could result in significant liability, loss of relationships with key third parties, including telecommunications carriers, social media networks, and other data providers, or cause our consumers to lose trust in us, which could have material impact on our revenue and operations.

Despite our best attempts to maintain adherence to information privacy and security best practices, as well as compliance with applicable laws, rules, and contractual requirements, our facilities and systems, and those of our third-party service providers, may be vulnerable to privacy or security breaches, acts of vandalism or theft, malware, ransomware, or other forms of cyber-attack, misplaced or lost data including paper or electronic media, programming and/or human errors, or other similar events. In the past, we have experienced, and disclosed to applicable regulatory authorities, data breaches resulting in disclosure of confidential or PHI. Although none of these data breaches have resulted in any material financial loss or penalty to date, future data breaches could require us to expend significant resources to remediate any damage, interrupt our operations and damage our reputation, subject us to state or federal agency review and could also result in regulatory enforcement actions, material fines and penalties, litigation or other actions which could have a material adverse effect on our business, reputation and results of operations, financial position, and cash flows.

We are subject to extensive fraud, waste, and abuse laws that may give rise to lawsuits and claims against us, the outcome of which may have a material adverse effect on our business, financial condition, cash flows, or results of operations.

Because we receive payments from federal governmental agencies, we are subject to various laws commonly referred to as “fraud, waste, and abuse” laws, including the federal Anti-Kickback Statute, the federal Physician Self-Referral Law, or Stark Law, and the federal False Claims Act, or FCA. These laws permit the Department of Justice, or DOJ, the HHS Office of Inspector General, or OIG, CMS, and other enforcement authorities to institute a claim, action, investigation, or other proceeding against us for violations and, depending on the facts and circumstances, to seek treble damages, criminal and civil fines, penalties, and assessments. Violations of these laws can also result

 

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in exclusion, debarment, temporary or permanent suspension from participation in government health care programs, the institution of corporate integrity agreements, or CIAs, and/or other heightened monitoring of our operations. Liability under such statutes and regulations may arise, among other things, if we knew, or it is determined that we should have known, that information we provided to form the basis for a claim for government payment was false or fraudulent, or that we were out of compliance with program requirements considered material to the government’s payment decision. On December 2, 2020, the OIG published further modifications to the federal Anti-Kickback Statute. Under the final rules, OIG added safe harbor protections under the Anti-Kickback Statute for certain coordinated care and value-based arrangements among clinicians, providers, and others. We continue to evaluate what effect, if any, these rules will have on our business. Fraud, waste and abuse prohibitions encompass a wide range of activities, including, but not limited to, kickbacks or other inducements for referral of members or for the coverage of products (such as prescription drugs) by a plan, billing for unnecessary medical services by a health care provider, payments made to excluded providers, and improper marketing and beneficiary inducements.

The DOJ and the OIG have continuously increased their scrutiny of health care payers and providers, and Medicare Advantage insurers, under the FCA, in particular, which has led to a number of investigations, prosecutions, convictions, and settlements in the health care industry. We expect this trend to continue, particularly in light of the HHS’s December 4, 2020 announcement regarding the creation of a new False Claims Act Working Group aimed at enhancing HHS’s partnership with the DOJ to combat fraud and abuse. CMS and the OIG also periodically perform risk adjustment data validation, or RADV, audits of selected Medicare Advantage health insurance plans to validate the coding practices of, and supporting documentation maintained by health care providers. Certain of our health plans may be selected for such audits, which could in the future result in retrospective adjustments to payments made to our health plans, fines, corrective action plans, or other adverse action by CMS. On November 24, 2020, CMS issued a final rule that amends the RADV program by: (i) revising the methodology for error rate calculations beginning with the 2019 benefit year; and (ii) changing the way CMS applies RADV results to risk adjustment transfers beginning with the 2020 benefit year. According to CMS, these changes are designed to give insurers more stability and predictability with respect to the RADV program and promote fairness in how health insurers receive adjustments. However, the future impact of these changes remains unclear, and such changes may ultimately increase financial recoveries from the government’s ability to retrospectively claw back or recover funds from health insurers.

In particular, there has recently been increased scrutiny by the government on health insurers’ diagnosis coding and risk adjustment practices, particularly for Medicare Advantage plans. In some proceedings involving Medicare Advantage plans, there have been allegations that certain financial arrangements with providers violate other laws governing fraud and abuse, such as the federal Anti-Kickback Statute. Health insurers are required to maintain compliance programs to prevent, detect and remediate fraud, waste, and abuse, and are often the subject of fraud, waste, and abuse investigations and audits. We perform ongoing monitoring of our compliance with CMS risk adjustment requirements and other applicable laws. We also monitor our provider payment practices and relationships with other third parties whose products and services we reimburse (e.g., pharmaceutical manufacturers) to ensure compliance with applicable laws, including, but not limited to, the federal Anti-Kickback Statute. While we believe our compliance efforts and relationships with providers and other third parties comply with applicable laws, we may be subject to audits, reviews, and investigations of our practices and arrangements by government agencies.

The regulations, contractual requirements, and policies applicable to participants in government health care programs are complex and subject to change. Moreover, many of the laws, rules, and regulations in this area have not been well-interpreted by applicable regulatory agencies or the courts. Additionally, the significant increase in actions brought under the FCA’s “whistleblower” or “qui tam

 

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provisions, which allow private individuals to bring actions on behalf of the government, has caused greater numbers of health care companies to have to defend a false claim action, pay fines, or agree to enter into a CIA to avoid being excluded from Medicare and other state and federal health care programs as a result of an investigation arising out of such action. Health plans and providers often seek to resolve these types of allegations through settlement for significant and material amounts, even when they do not acknowledge or admit liability, to avoid the uncertainty of treble damages that may be awarded in litigation proceedings. Such settlements often contain additional compliance and reporting requirements as part of a consent decree or settlement agreement, including, for example, CIAs, deferred prosecution agreements, or non-prosecution agreements. If we are subject to liability under qui tam or other actions or settlements, our business, financial condition, cash flows, or results of operations could be adversely affected.

In addition, analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, may be broader in scope than their federal equivalents; state insurance laws require insurance companies to comply with state regulations.

Risks Related to our Business

If we are unable to arrange for the delivery of quality care, and maintain good relations with the physicians, hospitals, and other providers within and outside our provider networks, or if we are unable to enter into cost-effective contracts with such providers, our profitability could be adversely affected.

Our profitability depends, in large part, upon our ability to contract at competitive prices with hospitals, physicians, and other health care providers, such that we can provide our members with access to competitive provider networks. Our provider arrangements with primary care physicians, specialists, hospitals, and other health care providers generally may be terminated or not renewed by either party without cause upon prior written notice. We cannot provide any assurance that we will be able to continue to renew our existing contracts or enter into new contracts on a timely basis or under favorable terms enabling us to service our members profitably. Health care providers within our provider networks may not properly manage the costs of services, maintain financial solvency or avoid disputes with other providers or their federal and state regulators. Any of these events could have a material adverse effect on the provision of services to our members and our operations.

In any particular market or geography, physicians and other health care providers could refuse to contract, demand higher payments, demand favorable contract terms, or take other actions that could result in higher medical costs or difficulty in meeting regulatory or accreditation requirements, among other things. In some markets and geographies, certain health care providers, particularly hospitals, physician/hospital organizations, or multi-specialty physician groups, may have significant positions or near monopolies that could result in diminished bargaining power on our part. In addition, accountable care organizations, clinically integrated networks, independent practice associations, practice management companies (which aggregate physician practices for administrative efficiency and marketing leverage), and other organizational structures that physicians, hospitals and other health care providers choose may change the way in which these providers interact with us, and may change the competitive landscape. Such organizations or groups of health care providers may compete directly with us, which could adversely affect our operations, and our results of operations, financial position, and cash flows by impacting our relationships with these providers or affecting the way that we price our products and estimate our costs, which might require us to incur costs to change our operations. Health care providers in our provider networks may consolidate or merge into hospital systems, resulting in a reduction of providers in our network and in the competitive environment. In addition, if

 

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these providers refuse to contract with us, use their market position to negotiate contracts unfavorable to us or place us at a competitive disadvantage, our ability to market products or to be profitable in those areas could be materially and adversely affected.

From time to time, health care providers assert, or threaten to assert, claims seeking to terminate provider agreements. If a provider agreement were terminated, such termination could adversely impact the adequacy of our network to service our members, and may put us at risk of non-compliance with applicable federal and state laws. If we are unable to retain our current provider contract terms or enter into new provider contracts timely or on favorable terms, our profitability may be harmed. In addition, from time to time, we may in the future be subject to class action or other lawsuits by health care providers with respect to claims payment procedures, reimbursement policies, network participation, or similar matters. In addition, regardless of whether any such lawsuits brought against us are successful or have merit, they will be time-consuming and costly, and could have an adverse impact on our reputation. As a result, under such circumstances, we may be unable to operate our business effectively.

Some providers that render services to our members are not contracted with our health insurance subsidiaries. While our health insurance subsidiaries are required to meet various federal and state requirements regarding the size and composition of our participating provider networks, our business model is based, in the Individual and Medicare Advantage markets, and for certain of our Small Group plans, on contracting with selected health care systems and other providers, not all systems and providers in a given area. This allows us to work more closely with high quality health care systems that engage with us using our technology. That approach, however, makes it possible that our members will receive emergency services, or other services which we are required to cover by law or by the terms of our health plans, from providers who are not contracted with our health insurance subsidiaries. This situation is more likely for our members than for members who choose a plan from a competitor of ours with a broader network. In those cases, there is no pre-established understanding between the provider and our health insurance subsidiary about the amount of compensation that is due to the provider. In some states, and under federal law for our Medicare Advantage business, the amount of compensation is defined by law or regulation, but in most instances, it is either not defined or it is established by a standard that is not unambiguously translatable into dollars. In such instances, providers may claim they are underpaid for their services, and may either litigate or arbitrate their dispute with our health insurance subsidiary. Additionally, many states require us to hold our members harmless for these out-of-network costs, which can be significant. It is difficult to predict the amount we may have to pay to out-of-network providers. The uncertainty of the amount to pay to such providers and the possibility of subsequent adjustment of the payment could materially and adversely affect our business, financial condition, cash flows, or results of operations.

Moreover, the insolvency of one of our partners or providers could expose us to material liabilities. For example, a portion of our specialists and hospitals are paid on a capitated basis. We expect to maintain such arrangements or enter into similar arrangements as we expand. Under certain capitation arrangements, we pay a fixed amount PMPM to the provider without regard to the frequency, extent, or nature of the medical services actually furnished, and such provider is responsible for paying other providers in our network out of the capitation amount. Due to insolvency or other circumstances, such delegated providers with a capitation arrangement may be unable or unwilling to pay claims they have incurred with third party providers in connection with referral services provided to our members. The inability or unwillingness of delegated providers to pay referral claims presents us with both immediate financial risk and potential disruption to member care, as well as potential loss of members. Depending on states’ laws, we may be held liable for such unpaid referral claims even though the delegated provider has contractually assumed such risk. Additionally, competitive pressures or practical regulatory considerations may force us to pay such claims even when we have no legal obligation to do so, or we may have already paid claims to a delegated provider and such payments

 

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cannot be recouped when the delegated provider becomes insolvent. Such liabilities incurred or losses suffered as a result of provider insolvency or other circumstances could have a material adverse effect on our business, financial condition, cash flows, or results of operations.

The result of risk adjustment programs may impact our revenue, add operational complexity, and introduce additional uncertainties that have a material adverse effect on our results of operations, financial condition, and cash flows.

The Individual, Small Group, and Medicare Advantage markets we serve employ risk adjustment programs that impact the revenue we recognize for our enrolled membership. As a result of the variability of certain factors that go into the development of the risk adjustment we recognize, such as risk scores, and other market-level factors where applicable, the actual amount of revenue could be materially more or less than our estimates. Consequently, our estimate of our health plans’ risk scores for any period, and any resulting change in our accrual of revenues related thereto, could have a material adverse effect on our results of operations, financial condition, and cash flows. The data provided to CMS to determine the risk score are subject to audit by CMS even several years after the annual settlements occur. If the risk adjustment data we submit are found to incorrectly overstate the health risk of our members, we may be required to refund funds previously received by us and/or be subject to penalties or sanctions, including potential liability under the FCA, which could be significant and would reduce our revenue in the year that repayment or settlement is required. Further, if the data we provide to CMS incorrectly understates the health risk of our members, we might be underpaid for the care that we must provide to our members, which could have a negative impact on our results of operations and financial condition.

Significant delays in our receipt of direct policy premiums, including as a result of regulatory restrictions on policy cancellations and non-renewals, could have a material adverse effect on our business operations, cash flows, or earnings.

We currently derive substantially all of our revenue from direct policy premiums and recognize premium revenue over the period that coverage is effective. For the years ended December 31, 2019 and 2020, approximately 57% and 40% of our direct policy premiums, respectively, were collected directly from our members, and approximately 43% and 60% of our direct policy premiums, respectively, were collected from CMS as part of the APTC program. There can be no assurance that we will receive premiums in advance of or by the end of a given coverage period. Moreover, actions taken by state and federal governments could increase the likelihood of delay in our receipt of premiums. For example, in response to the COVID-19 pandemic, state insurance departments, including in states in which we operate, issued guidelines, recommendations, and moratoria around policy cancellations and non-renewals due to non-payment. In certain states, departments urged insurers to consider actions that included relaxing due dates for premium payments, extending grace periods, waiving late fees and penalties, and allowing premium payment plans to avoid a lapse in coverage. Certain states also prohibited insurers from terminating plans due to non-payment until a specified date. If such guidelines, recommendations, and moratoria were to remain in place for an extended period of time or if similar measures were introduced due to a resurgence of COVID-19 or for other reasons, including unanticipated public health or economic crises, our receipt of premiums, if any, could be significantly delayed, which could have a material adverse effect on our business, operations, cash flows, or earnings.

 

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We make virtual health care services available to our members through Oscar Medical Group, in which we do not own any equity or voting interest, and our virtual care availability may be disrupted if our arrangements with providers like the Oscar Medical Group become subject to legal challenges.

Our corporate entities are not licensed to practice medicine. Pursuant to state corporate practice of medicine laws, many states in which we operate through our subsidiaries limit the practice of medicine to licensed individuals or professional organizations owned by licensed individuals, and business corporations generally may not exercise control over the medical decisions of physicians. Statutes and regulations relating to the corporate practice of medicine, fee-splitting between physicians and referral sources, and similar issues, vary widely from state to state. Mulberry Management Corporation, one of our subsidiaries, has group participation or management services agreements with three physician-owned professional corporations, known collectively as the Oscar Medical Group. Each of the professional corporations comprising the Oscar Medical Group is wholly owned by one physician licensed in California, Florida, and New York who oversees the operation of the Oscar Medical Group in his capacity as President and sole director of each Oscar Medical Group professional corporation. He also serves as a consultant to Mulberry Management Corporation. Under the terms of the management services agreements between Mulberry Management Corporation and the Oscar Medical Group, the Oscar Medical Group retains sole responsibility for all medical decisions, as well as for hiring and managing physicians and other licensed health care providers, developing operating policies and procedures, and implementing professional standards and controls. We believe that our services operations comply with applicable state statutes and regulations regarding corporate practice of medicine, fee-splitting, and similar issues. However, regulatory authorities and other parties may assert that, despite the management services agreements and other arrangements through which we operate, we are engaged in the prohibited corporate practice of medicine, that our arrangements constitute unlawful fee-splitting, or that other similar issues exist. To that end, many of the laws, rules, and regulations with respect to corporate practice of medicine are ambiguous and have not been well-interpreted by applicable regulatory agencies or the courts. Moreover, we cannot predict whether changes will be made to existing laws, regulations, or interpretations, or whether new ones will be enacted or adopted, which could cause us to be out of compliance with these requirements. If that were to occur, we could be subject to civil and/or criminal penalties, our agreements could be found legally invalid and unenforceable (in whole or in part), or we could be required to restructure our contractual arrangements, any of which could have a material adverse effect on our results of operations, financial position, or cash flows.

Our health insurance subsidiaries have entered into provider participation agreements with the Oscar Medical Group that enable the Oscar Medical Group to participate in Oscar’s provider network. While we expect that our relationship with the Oscar Medical Group will continue, a material change in our relationship with the Oscar Medical Group, whether resulting from a dispute among the entities or the loss of these relationships or contracts with the Oscar Medical Group, may temporarily disrupt our ability to provide virtual health care services to our members and could harm our business.

Our limited operating history makes it difficult to evaluate our current business performance, implementation of our business model, and our future prospects.

We launched our business in 2012 and have a limited operating history. Today, our insurance subsidiaries operate in 18 states, 15 of which we expanded to since 2017. Due to our limited operating history and the rapid growth we have experienced since we began operations, there is greater uncertainty in estimating our operating results, and our historical results may not be indicative of, or comparable to, our future results. In addition, we have limited data to validate key aspects of our business model, including our growth strategy. For example, we recently entered into an exclusive strategic partnership with Cigna to offer differentiated health solutions to small businesses. As a

 

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relatively new entrant in this market, we have limited experience and are unable to predict whether we will be able to effectively and consistently provide solutions that are tailored to the budgets of small businesses and to the health needs of their employees. We cannot provide any assurance that the data we collect will provide useful measures for evaluating our business model. Moreover, we cannot provide any assurance that partnerships or joint ventures we enter into in the future will perform as well as historical partnerships or expectations. Our inability to adequately assess our performance and growth could have a material adverse effect on our brand, reputation, business, financial condition, and results of operations.

Our revenue depends on the direct policy premiums we collect from members who obtain health care services from a limited number of in-network providers, and the loss of any of these providers could result in a material reduction of our membership, which would adversely impact our revenue and operating results.

Almost all of our revenue depends on the direct policy premiums we collect from members or from the federal government on behalf of our members who obtain health care services from a limited number of providers with whom we contract. We generally manage our provider contracts on a state-by-state basis, entering into separate contracts in each state with local affiliates of a particular provider, such that no one local provider contract receives a majority of our allowed medical costs for services rendered to our members. When aggregating the payments we make to each provider through its local affiliates, however, AdventHealth, Tenet Healthcare Corporation, and HCA Healthcare accounted for a total of approximately 11%, 9%, and 7%, respectively, of total allowable medical costs for the year ended December 31, 2020. We believe that a majority of our revenue will continue to be derived from direct policy premiums obtained from members who receive services from a concentrated number of providers. These providers may terminate or seek to terminate their contracts with us in the future. The sudden loss of any of our providers or the renegotiation of any of our provider contracts could adversely impact our reputation or the quality of our provider networks, which could result in a loss of a membership that adversely affects our revenue and operating results. In the ordinary course of business, we engage in active discussions and renegotiations with providers in respect of the terms of our provider contracts. Certain of our providers may seek to renegotiate or terminate their agreements with us for a variety of reasons, including in response to higher-than-expected health care costs and other market dynamics or financial pressures. These discussions could result in reductions to the fees and changes to the scope of services contemplated by our original provider agreements and, consequently, could negatively impact our revenues, business, and prospects.

Unanticipated changes in population morbidity, including those affecting areas where we are geographically concentrated, could significantly increase utilization rates and medical costs.

Large-scale changes in health care utilization or increases in medical costs can take many forms and may be associated with widespread natural disasters, illness, or medical conditions. The states in which we operate that have the largest concentrations of revenues include Florida, California and Texas. Due to the geographic concentration of our business, we are exposed to heightened risks of potential losses resulting from regional factors. For example, natural disasters, such as a major earthquake, wildfire, or hurricane, affecting regions or states in which we operate, could have a significant impact on the health of a large number of our covered members. Other conditions that could impact our members include a virulent influenza season or epidemic or pandemic, newly emergent mosquito-borne illnesses, such as the Zika virus, the West Nile virus, or the Chikungunya virus, or new viruses such as COVID-19. In addition, federal and state law enforcement officials have issued warnings in the past, and may do so in the future, about potential terrorist activity involving biological or other weapons of mass destruction.

All of these conditions, and others, could have a significant impact on the health of the population of wide-spread areas. We seek to ensure our premiums appropriately account for anticipated changes

 

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in utilization, including seasonal items, such as the flu. However, if any of the regions or states in which we operate were to experience a large-scale natural disaster, a viral epidemic or pandemic, a significant terrorism attack, or some other large-scale event affecting the health of a large number of our members, utilization rates and our covered medical expenses in such regions or states would rise, which could have a material adverse effect on our business, financial condition, cash flows, or results of operations. Additionally, such natural disasters, epidemics, or pandemics could lead to regulatory changes which may force us to cover health care costs for members for which we would not typically be responsible. For example, states experiencing pandemics or natural disasters such as wildfires and hurricanes may promulgate emergency regulations requiring insurers to relax prior authorization requirements, remove prescription drug refill limitations, and cover out-of-network care.

The ongoing COVID-19 pandemic could significantly increase our costs of operation due to unanticipated changes in law or regulation, population morbidity, or utilization behaviors, adversely impact our operational effectiveness, and heighten the risks we face in our business, including those discussed in this prospectus.

In December 2019, a novel strain of coronavirus, SARS-CoV-2, was identified in Wuhan, China.

Since then, SARS-CoV-2, and the resulting disease, COVID-19, has spread rapidly to almost every country in the world and all 50 states within the United States. The COVID-19 pandemic continues to evolve and the impact of COVID-19, and the actions taken to contain its spread or address its impact, could have a material adverse effect on our operations and financial results.

We seek to ensure our direct policy premiums appropriately account for anticipated changes in utilization. However, our ability to do so accurately is limited by the changing nature of COVID-19 infection rates, the mutation of the COVID-19-causing virus into more infectious strains, the uncertain time frame to widespread availability and adoption of COVID-19 vaccines, the effectiveness of those vaccines against novel virus strains, and the evolving clinical understanding of COVID-19’s post-acute, long-term impacts on health. Governmental authorities have recommended, and in certain cases, required, that elective or other medical appointments be suspended or canceled to avoid non-essential patient exposure to medical environments and potential infection. In addition, some individuals have delayed or are not seeking routine medical care to avoid such exposure. We have experienced depressed non-COVID-19 related medical costs as a result and, as the pandemic continues to affect the United States and as our members continue to change the way they utilize care, this trend may continue. Some of these costs will likely be incurred at a later date, resulting in increased medical claims expenses in the future. Additionally, as a result of these measures and trends, we may be unable to fully implement clinical initiatives to manage health care costs and chronic conditions of our members and appropriately document their health risks and diagnoses to substantiate payments we may be entitled to under federal and state risk adjustment programs. The reduced demand for certain routine and non-critical medical services has also created financial stress for certain of our providers and could result in providers leaving our network, the insolvency of such providers, increased provider payment disputes, and less favorable payment terms from providers.

Additionally, the long-term health impacts of SARS-CoV-2 infection causing COVID-19 are not yet well known or understood. If a large-scale COVID-19 outbreak resulted in a significant number of our members needing unanticipated ongoing post-acute care, such as regular physical, occupational, or respiratory therapy, additional pharmaceutical intervention, or care for increased frequency of other illness resulting from a COVID-19-weakened immune system, our business could be materially adversely impacted due to an unanticipated increase in covered medical expenses.

State and federal governments have promulgated regulatory changes requiring us to relax premium collection practices, and cover health care costs for members for which we would not typically be responsible. For example, the Families First Coronavirus Response Act (the FFCRA), as amended

 

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by the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), requires member health care expenses incurred during a visit to evaluate the need for or obtain COVID-19 diagnostic testing to be borne entirely by us. Certain states, such as New York and New Jersey, require us to cover all costs of members’ receipt of medical care via telemedicine from any in-network provider. New large-scale COVID-19 outbreaks may result in additional regulation in our states of operation, which could limit our ability to collect unpaid premiums. In addition, we have expanded benefit coverage in areas such as COVID-19 care and testing, telemedicine, and pharmacy benefits; offered additional enrollment opportunities to those who previously declined employer-sponsored offerings; extended certain premium payment terms for customers experiencing financial hardship; simplified administrative practices; and accelerated payments to care providers, all with the aim of assisting our customers, providers and members in addressing the impacts of the COVID-19 pandemic. Such measures and any further steps taken by us, could adversely impact our financial results.

The spread and impact of COVID-19, or actions taken to mitigate this spread, could also have a material and adverse effect on our ability to operate effectively, including as a result of the complete or partial closure of facilities or labor shortages. Disruptions in public and private infrastructure, including communications, availability of in-person sales and marketing channels, financial services and supply chains, could materially and adversely disrupt our normal business operations. We have transitioned most of our employee population to a remote work environment in an effort to mitigate the spread of COVID-19, as have a number of our third-party service providers, which may exacerbate certain risks to our business, including increased risk of phishing and other cybersecurity attacks, and increased risk of unauthorized dissemination of sensitive personal information or proprietary or confidential information about us or our members or other third-parties.

The outbreak of COVID-19 has also severely impacted global economic activity, which may adversely impact our members, partners and service providers, and caused significant volatility in the financial markets. These developments may adversely affect the timing of member premium or commercial service fee collections and corresponding payments, the ability of third parties to provide services to us, the value of our investment portfolio, and our access to capital.

We are continuing to monitor the spread of COVID-19, changes to our covered services, the ongoing costs and business impacts of dealing with COVID-19, including the potential costs and impacts associated with lifting, or reimposing restrictions on movement and economic activity and related risks. The extent of this impact will depend on future developments, which are highly uncertain and cannot be predicted at this time, including, but not limited to, the transmission rate, introduction of new strains of COVID-19, duration and spread of the outbreak, its severity, the extent and effectiveness of the actions taken to contain the spread of the virus and address its impacts, including vaccine approval, effectiveness, availability and adoption, and how quickly and to what extent normal economic and operating conditions can resume. The ultimate impact of the COVID-19 pandemic on our business, results of operations, financial position, and cash flows is uncertain as the pandemic continues to evolve globally, but such impacts could be material to our business, results of operations, financial position and cash flows.

We utilize quota share reinsurance to reduce our capital and surplus requirements and protect against downside risk on the ceded claims. If regulators do not approve our reinsurance agreements for this purpose, or if we cannot negotiate renewals of our quota share arrangements on acceptable terms, or at all, enter into new agreements with reinsurers, or otherwise obtain capital through debt or equity financings, our capital position would be negatively impacted, and we could fall out of compliance with applicable regulatory requirements.

In 2020, we utilized quota share reinsurance arrangements with two other insurance companies, Axa France Vie and Berkshire Hathaway Specialty Insurance Company, or Berkshire Hathaway, to

 

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reduce our capital and surplus requirements, which enables us to more efficiently deploy capital to finance our growth. In the ordinary course of evaluating our annual reinsurance program and after conducting a competitive bidding process, we have terminated our agreements with Berkshire Hathaway effective as of December 31, 2020, and have entered into, and are in the process of finalizing other, new quota share reinsurance arrangements with certain other reinsurance companies that will be effective for this calendar year 2021. In connection with our quota share reinsurance arrangements, which in the past have had terms of two or three years, reinsurers are entitled to a portion of our premiums, but also share financial responsibility for health care costs incurred by our members. All premiums and claims ceded under our quota share arrangements are shared proportionally with our reinsurers, up to a limit specified in each agreement, which varies from 100% to 105% of ceded premiums for the agreements applicable to the years ended December 31, 2019 and 2020. These reinsurers have the unilateral right to extend certain of our arrangements if certain profitability limits are not met. Our decisions on claims payments are binding on the reinsurer with the exception of any payments by us that are not required to be made under the member’s policy. During the years ended December 31, 2019 and 2020, approximately 55% and 77% of our premiums before ceded reinsurance, respectively, were ceded under quota share reinsurance arrangements, with approximately 33% and 32% of our premiums before ceded reinsurance, respectively, ceded to Axa France Vie and approximately 22% and 45% of our premiums before ceded reinsurance, respectively, ceded to Berkshire Hathaway Specialty Insurance Company. We entered into statutory trust agreements with Axa France Vie in compliance with the credit for reinsurance laws and regulations of the state of domicile of each ceding company in connection with reinsurance ceded to an unauthorized reinsurer. Each trust account is funded at 102% of the ceding entity’s health care costs incurred but not yet reported, or IBNR. Acceptable assets deposited into the trust accounts include cash, certificates of deposit, and instruments that are acceptable to the commissioner of the insurance department of the ceding entity’s state of domicile.

Because reinsurers are entitled to a portion of our premiums under our quota share reinsurance arrangements, changes in the amount of business ceded under these arrangements directly impacts our net premium and net income estimates.

We also had XOL reinsurance arrangements for 2020 that covered claims on individuals in excess of $500,000, and anticipate entering into XOL reinsurance arrangements for 2021 to cover claims on individuals in excess of $750,000. We pay approximately 1% of premiums for this coverage to our reinsurer. The amount of business ceded under our reinsurance arrangements can vary significantly from year to year. Further, if our reinsurers consistently and successfully dispute our obligations to make a claim payment under a given policy, if we cannot renegotiate renewals of any of our quota share reinsurance arrangements (all of which are slated for negotiation in 2021) on acceptable terms, if we are unable to enter into such arrangements with additional reinsurers or, if such arrangements are not approved by any of our regulators (or if our regulators take a different view, whether prospectively or retroactively, with respect to the capital treatment of our reinsurance agreements), we may not have sufficient capital and surplus to comply with applicable regulatory requirements, and we would have to enter into a corrective action plan or cease operations in jurisdictions where we could not comply with such requirements.

These arrangements also subject us to various obligations, representations, and warranties with respect to the reinsurers. Reinsurance does not relieve us of liability as an insurer. We remain obligated to pay our members’ health care claims, even if a reinsurer defaults on obligations to us under the reinsurance arrangement. Although we regularly evaluate the financial condition of reinsurers to minimize exposure to significant losses from reinsurer insolvencies, reinsurers may become financially unsound. If a reinsurer fails to meet its obligations under the reinsurance contract or if the liabilities exceed any applicable loss limit, we remain responsible for covering the claims on the reinsured policies.

 

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We also rely on debt and equity to help fund subsidiary surplus requirements, as well as pay our operating expenses and capital expenditures or fund acquisitions. In the event we need access for such purposes, our ability to obtain such capital may be limited and it may come at significant cost.

We are subject to risks associated with outsourcing services and functions to third parties.

We contract with third-party vendors and service providers who provide services to us and our subsidiaries to help with our internal administrative functions, as well as third-party vendors and service providers who help us administer our products and plans. For example, CaremarkPCS Health provides certain prescription benefit management, disease management, and specialty pharmacy services with respect to our health plans. In New Jersey, we contract with QualCare, which provides us with access to its network, which represents a significant portion of our medical network in New Jersey, and various network management services. The partial or complete loss of a vendor or other third-party relationship could cause a material disruption to our business and make it difficult and costly to provide services and products that our regulators and members expect, which could have a material adverse effect on our financial condition, cash flows, and results of operations.

Some of these third-parties have direct access to our systems in order to provide their services to us and operate the majority of our communications, network, and computer hardware and software. For example, we currently offer our products through our website and online app using Amazon Web Services, Inc., or AWS, platforms for cloud computing, a provider of cloud infrastructure services, and the Google Cloud Platform, or GCP. Our operations depend on protecting the virtual cloud infrastructure hosted in AWS and GCP by maintaining its configuration, architecture, and interconnection specifications, as well as the information stored in these cloud platforms and which third-party internet service providers transmit. In the event that either our AWS or GCP service agreement is terminated, or there is a lapse of service, interruption of internet service provider connectivity, or damage to such facilities, we could experience interruptions in meeting key service obligations to our members and business partners, as well as delays and additional expense in arranging new facilities and services, which could harm our business, results of operations, and financial condition.

Other third-parties that have access to our systems and member information, or provide services that help with our administrative functions include Atlassian Corporation Plc, or Atlassian, which provides a reporting and project management tool called Jira for certain of our health insurance subsidiaries to launch and track investigations, make changes to member information, and communicate efficiently with departments within Oscar, and inContact, Inc., or inContact, which provides cloud-based contact center software solutions that we use to engage with members. The Oscar platform also integrates various third-party applications, including Google LLC, or Google, Workplace applications, such as Gmail, Hangouts, Calendar, and Drive.

Our arrangements with third-party vendors and service providers may make our operations vulnerable if those third parties fail to satisfy their obligations to us, including their obligations to maintain and protect the security and confidentiality of our information and data, or the information and data relating to our members or customers. We are also at risk of a data security incident involving a vendor or third party, which could result in a breakdown of such third party’s data protection processes or cyber-attackers gaining access to our infrastructure through the third party. To the extent that a vendor or third party suffers a data security incident that compromises its operations, we could incur significant costs and possible service interruption. In addition, we may have disagreements with our third-party vendors or service providers regarding relative responsibilities for any such failures or incidents under applicable business associate agreements or other applicable outsourcing agreements. Any contractual remedies and/or indemnification obligations we may have for vendor or service provider failures or incidents may not be adequate to fully compensate us for any losses

 

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suffered as a result of any vendor’s failure to satisfy its obligations to us or under applicable law. Our vendor and service provider arrangements could be adversely impacted by changes in vendors’ or service providers’ operations or financial condition, or other matters outside of our control. Violations of, or noncompliance with, laws and/or regulations governing our business or noncompliance with contract terms by third-party vendors and service providers could increase our exposure to liability to our members, providers, or other third parties, or could result in sanctions and/or fines from the regulators that oversee our business. In turn, this could increase the costs associated with the operation of our business or have an adverse impact on our business and reputation. Moreover, if these vendor and service provider relationships were terminated for any reason, we may not be able to find alternative partners in a timely manner or on acceptable financial terms, and may incur significant costs and/or experience significant disruption to our operations in connection with any such vendor or service provider transition. As a result, we may not be able to meet the full demands of our members or customers and, in turn, our business, financial condition, and results of operations may be harmed. In addition, we may not fully realize the anticipated economic and other benefits from our outsourcing projects or other relationships we enter into with third-party vendors and service providers, as a result of unanticipated delays in transitioning our operations to the third-party vendor or service provider, such third-party vendor or service provider’s noncompliance with contract terms, unanticipated costs or expenses, or violations of laws and/or regulations, or otherwise. This could result in substantial costs or other operational or financial problems that could have a material adverse effect on our business, financial condition, cash flows, or results of operations.

Adverse market conditions may result in our investment portfolio suffering losses or reduce our ability to meet our financing needs, which could materially and adversely affect our results of operations or liquidity.

We maintain a significant investment portfolio of cash equivalents and primarily short-term investments in a variety of securities, which are subject to general credit, liquidity, market, and interest rate risks and will decline in value if interest rates increase or one of the issuers’ credit ratings is reduced. As a result, we may experience a reduction in value or loss of our investments, which could have a materially adverse effect on our results of operations, liquidity, and financial condition.

In addition, during periods of increased volatility, adverse securities and credit markets may exert downward pressure on the availability of liquidity and credit capacity for certain issuers. We need liquidity to pay our operating expenses, make payments on our indebtedness and pay capital expenditures. The principal sources of our cash receipts are premiums, administrative fees, investment income, proceeds from borrowings and proceeds from the issuance of capital stock. Our access to additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the volume of trading activities, the availability of credit to our industry, our credit ratings and credit capacity, as well as the possibility that customers or lenders could develop a negative perception of our long- or short-term financial prospects. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. If one or a combination of these factors were to occur, our internal sources of liquidity may prove to be insufficient and, in such case, we may not be able to successfully obtain additional financing on favorable terms, or at all.

If state regulators do not approve payments of dividends and distributions by our subsidiaries to us, we may not have sufficient funds to implement our business strategy.

As we operate as one or more holding companies and we principally generate revenue through our health insurance subsidiaries, we are regulated under state insurance holding company laws. Although most of our subsidiaries are not currently profitable, in the future, if they become profitable or if our current levels of reserves and capital become excessive, we may make requests for dividends

 

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and distributions from our subsidiaries to fund our operations. In addition to state corporate law limitations, these subsidiaries are subject to more stringent laws and regulations that may restrict the ability to pay or limit the amount of dividends and distributions that can be paid to us without prior approval of, or notification to, state regulators, including mandatory statutory capital and surplus requirements. As we become profitable, we may increasingly rely on distributions from our subsidiaries, and if regulators were to deny our subsidiaries’ requests to pay dividends, the funds available to us would be limited, which could harm our ability to implement our business strategy.

If we are unable to integrate and manage our information systems effectively, our operations could be disrupted.

Our operations depend significantly on effective information systems. The information gathered and processed by our information systems, assists us in, among other things, monitoring utilization and other cost factors, processing provider claims, and providing data to our regulators. Our health care providers also depend upon our information systems for membership verifications, claims status, and other information. We partner with third parties, including Amazon, Atlassian, inContact, and Google, to support our information technology systems. Our information systems and applications require continual maintenance, upgrading, and enhancement to meet our current and expected operational needs and regulatory requirements. If we underestimate the need to expand or experience difficulties with the transition to or from information systems or do not appropriately plan, integrate, maintain, enhance, or expand our information systems, we could suffer, among other things, operational disruptions, loss of existing members and difficulty in attracting new members, regulatory enforcement, and increases in administrative expenses. In addition, our ability to integrate and manage our information systems may be impaired as the result of events outside our control, including acts of nature, such as earthquakes or fires, or acts of terrorists. Also, we may from time to time obtain significant portions of our systems-related or other services or facilities from independent third parties, which may make our operations vulnerable if such third parties discontinue such services or fail to perform adequately.

From time to time, we may become involved in costly and time-consuming litigation and regulatory actions, which require significant attention from our management.

From time to time, we are a defendant in lawsuits and the subject of regulatory actions, and are subject to audits and investigations relating to our business, including, without limitation, claims by members alleging failure to pay for or authorize payment for health care, claims related to non-payment or insufficient payments for out-of-network services by providers, claims of trademark and other intellectual property infringement, claims alleging bad faith, inquiries regarding our submission of risk adjustment data, enforcement actions by state regulatory bodies alleging non-compliance with state law, and claims related to the imposition of new taxes, including, but not limited to, claims that may have retroactive application. We also may receive subpoenas and other requests for information from various federal and state agencies, regulatory authorities, state Attorneys General, committees, subcommittees, and members of the U.S. Congress and other state, federal, and international governmental authorities. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have a material adverse impact on our business and financial position, results of operations, and/or cash flows, and may affect our reputation and brand. In addition, regardless of the outcome of any litigation or regulatory proceedings, investigations, audits, or reviews, responding to such matters is costly and time consuming, and requires significant attention from our management, and could, therefore, harm our business and financial position, results of operations or cash flows. Insurance may not cover such claims, may not provide sufficient payments to cover all of the costs to resolve one or more such claims, and may result in our having to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments, and settlements exceed

 

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insured levels, could adversely affect our results of operations and cash flows, thereby harming our business. See “Business—Legal Proceedings.”

The regulations and contractual requirements applicable to us and other market participants are complex and subject to change, making it necessary for us to invest significant resources in complying with our regulatory and contractual requirements. Ongoing vigorous legal enforcement and the highly technical regulatory scheme mean that our compliance efforts in this area will continue to require significant resources, and we may not always be successful in ensuring appropriate compliance by our Company, employees, consultants, or vendors, for whose compliance or lack thereof we may be held responsible and liable. Regulatory audits, investigations, and reviews could result in changes to our business practices, and also could result in significant or material premium refunds, fines, penalties, civil liabilities, criminal liabilities, or other sanctions, including marketing and enrollment sanctions, suspension or exclusion from participation in government programs, imposition of heightened monitoring by our federal or state regulators, and suspension or loss of licensure if we are determined to be in violation of applicable laws or regulations. Any of these audits, reviews, or investigations could have a material adverse effect on our financial position, results of operations, or business, or could result in significant liabilities and negative publicity for our Company.

We rely on the experience and expertise of our Co-Founders, senior management team, highly-specialized technology and insurance experts, key technical employees, and other highly skilled personnel.

Our success depends upon the continued service of Mario Schlosser, our Co-Founder, Chief Executive Officer and a member of our board of directors, and Joshua Kushner, our Co-Founder, Vice Chairman and a member of our board of directors, the members of our senior management team, highly-specialized insurance experts, and key technical employees, as well as our ability to continue to attract and retain additional highly qualified personnel. Our future success depends on our continuing ability to identify, hire, develop, motivate, retain, and integrate highly skilled personnel for all areas of our business. If we are unable to attract the requisite personnel, our business, and prospects may be adversely affected. Each of our Co-Founders, members of our senior management team, specialized technology and insurance experts, key technical personnel, and other employees could terminate their relationship with us at any time. The loss of our Co-Founders or any other member of our senior management team, specialized technology and insurance experts, or key personnel might significantly delay or prevent the achievement of our strategic business objectives and could harm our business. In addition, much of our essential technology and infrastructure are custom-made for our business by our personnel. The loss of key technology personnel, including members of management, as well as our engineering and product development personnel, could disrupt our operations and harm our business. We also rely on a small number of highly-specialized insurance experts, the loss of any one of whom could have a disproportionate impact on our business. Competition in our industry for qualified employees is intense. Our compensation arrangements, such as our equity award programs, may not always be successful in attracting new employees, and retaining and motivating our existing employees. Moreover, if and when the stock options or other equity awards are substantially vested, employees under such equity arrangements may be more likely to leave, particularly when the underlying shares have seen a value appreciation.

We face significant competition for personnel, particularly in New York, where our headquarters is located. To attract top talent, we have to offer, and believe we will need to continue to offer, competitive compensation and benefits packages. We may also need to increase our employee compensation levels in response to competitor actions. If we are unable to hire new employees quickly enough to meet our needs, or otherwise fail to effectively manage our hiring needs or successfully integrate new hires, including our recently hired management team members, our efficiency, ability to meet forecasts and our employee morale, productivity, and retention could suffer, which in turn could have an adverse effect on our business, results of operations, and financial condition.

 

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If we or our partners or other third parties with whom we collaborate sustain a cyber-attack or suffer privacy or data security breaches that disrupt our information systems or operations, or result in the dissemination of sensitive personal or confidential information, we could suffer increased costs, exposure to significant liability, adverse regulatory consequences, reputational harm, loss of business, and other serious negative consequences.

As part of our normal operations, we and our partners and other third parties with whom we collaborate routinely collect, process, store, and transmit large amounts of data, including PHI subject to HIPAA, as well as proprietary or confidential information relating to our business or third parties, including our members, providers, and vendors. Information security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks, as well as a result of an increase in work-from-home arrangements due to the COVID-19 pandemic. Hackers and data thieves are increasingly sophisticated and operating large-scale and complex automated attacks. As cyber threats continue to evolve, we may be required to expend additional resources to further enhance our information security measures, develop additional protocols and/or investigate and remediate any information security vulnerabilities.

Our information technology systems and safety control systems are subject to a growing number of threats from computer programmers, hackers, and other adversaries that may be able to penetrate our network security and misappropriate our confidential information or that of third parties, create system disruptions, or cause damage, security issues, or shutdowns. They also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our systems or otherwise exploit security vulnerabilities. Because the techniques used to circumvent, gain access to, or sabotage security systems, can be highly sophisticated and change frequently, they often are not recognized until launched against a target, and may originate from less regulated and remote areas around the world. We may be unable to anticipate these techniques or implement adequate preventive measures, resulting in potential data loss and damage to our systems. Our systems are also subject to compromise from internal threats such as improper action by employees, including malicious insiders, or by vendors, counterparties, and other third parties with otherwise legitimate access to our systems. Our policies, employee training (including phishing prevention training), procedures, and technical safeguards may not prevent all improper access to our network or proprietary or confidential information by employees, vendors, counterparties, or other third parties. Our facilities may also be vulnerable to security incidents or security attacks, acts of vandalism or theft, misplaced or lost data, human errors, or other similar events that could negatively affect our systems, and our and our members’, data. Additionally, our third-party service providers who process information on our behalf may cause security breaches for which we are responsible.

Moreover, we face the ongoing challenge of managing access controls in a complex environment. The process of enhancing our protective measures can itself create a risk of systems disruptions and security issues. Given the breadth of our operations and the increasing sophistication of cyber-attacks, a particular incident could occur and persist for an extended period of time before being detected. The extent of a particular cyber-attack and the steps that we may need to take to investigate the attack may take a significant amount of time before such an investigation could be completed and full and reliable information about the incident is known. During such time, the extent of any harm or how best to remediate it might not be known, which could further increase the risks, costs, and consequences of a data security incident. In addition, our systems must be routinely updated, patched, and upgraded to protect against known vulnerabilities. The volume of new software vulnerabilities has increased substantially, as has the importance of patches and other remedial measures. In addition to remediating newly identified vulnerabilities, previously identified vulnerabilities must also be updated. We are at risk that cyber-attackers exploit these known vulnerabilities before they have been addressed. The complexity of our systems and platforms, the increased frequency at which vendors

 

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are issuing security patches to their products, our need to test patches, and, in some instances, coordinate with third-parties before they can be deployed, all could further increase our risks.

Any compromise or perceived compromise of the security of our systems or the systems of one or more of our vendors or service providers could damage our reputation and brand, cause the termination of relationships with our members, result in disruption or interruption to our business operations, marketing partners and carriers, reduce demand for our services, and subject us to significant liability and expense, as well as regulatory action and lawsuits, which would harm our business, operating results, and financial condition. The CCPA, in particular, includes a private right of action for California consumers whose CCPA-covered personal information is impacted by a data security incident resulting from a company’s failure to maintain reasonable security procedures and, hence, may result in civil litigation in the event of a data breach impacting such information. Although we maintain insurance covering certain security and privacy damages and claim expenses, we may not carry insurance or maintain coverage sufficient to compensate for all liability and, in any event, insurance coverage would not address the reputational damage that could result from a security incident or any regulatory actions or litigation that may result. In addition, in the event that additional data security laws are implemented, we may not be able to timely comply with such requirements, or such requirements may not be compatible with our current processes.

Real or perceived errors, failures or bugs in our systems, website, or app could impair our operations, damage our reputation and brand, and harm our business and operating results.

Our continued success is dependent on our systems, applications, and software continuing to operate and to meet the changing needs of our members and users. We rely on our technology and engineering staff and vendors to successfully implement changes to, and maintain, our systems and services in an efficient and secure manner. Like all information systems and technology, our website and online app may contain material errors, failures, vulnerabilities, or bugs, particularly when new features or capabilities are released, any of which could lead to interruptions, delays, or website or online app shutdowns, or could cause loss of critical data, or the unauthorized disclosure, access, acquisition, alteration or use of personal or other confidential information.

A significant impact on the performance, reliability, security, and availability of our systems, software, or services may harm our reputation and brand, impair our ability to operate, retain existing members, or attract new members, and expose us to legal claims and government action, each of which could have a material adverse impact on our financial condition, results of operations, and growth prospects.

We may not be able to utilize our net operating loss carryforwards, or NOLs, to offset future taxable income for U.S. federal income tax purposes, which could adversely affect our cash flows.

As of December 31, 2020, we had federal income tax NOLs of $1.05 billion available to offset our future taxable income, if any, prior to consideration of annual limitations that may be imposed under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, or otherwise. Of our NOLs, approximately $792.1 million of losses will expire between 2032 and 2039, and $253.9 million of losses can be carried forward indefinitely.

We may be unable to use our NOLs, as we do not have a history of positive earnings. In addition, under Section 382 of the Code, if a corporation undergoes an “ownership change” (very generally defined as a greater than 50% change, by value, in the corporation’s equity ownership by certain shareholders or groups of shareholders over a rolling three-year period), the corporation’s ability to use its pre-ownership change NOLs to offset its post-ownership change income may be limited. We

 

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completed an analysis under Section 382, and determined that our NOLs are subject to limitations based on changes in ownership that occurred in 2016, and we may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, including this offering, some of which may be outside of our control. If we undergo another ownership change, we may incur additional limitations on our ability to utilize our NOLs existing at the time of the ownership change prior to their expiration. Future regulatory changes could also limit our ability to utilize our NOLs. To the extent we are not able to offset future taxable income with our NOLs, our cash flows may be adversely affected.

Failure to secure, protect, or enforce our intellectual property rights could harm our business, results of operations, and financial condition.

Our commercial success is dependent in part on protecting our core technologies, intellectual property assets, and proprietary rights (such as source code, information, data, processes, and other forms of information, know-how, and technology). We rely on a combination of copyrights, trademarks, service marks, trade secret laws, and contractual restrictions to establish and protect our intellectual property. However, there are steps that we have not yet taken to protect our intellectual property on a global basis. For example, we do not have any patents, which limits our ability to deter patent infringement claims by competitors and other third parties who may hold or obtain patents. Additionally, the steps that we have already taken to protect our intellectual property may not be sufficient or effective, and our confidentiality, non-disclosure, or invention assignment agreements with employees, consultants, partners, or other parties may be breached and may otherwise not be effective in establishing our rights in intellectual property and in controlling access to our proprietary information. Even if we do detect violations, we may need to engage in litigation to enforce our rights.

We currently hold various domain names relating to our brand, including HiOscar.com. We also engage a third-party vendor to monitor fictitious sites that may purport to be us. Failure to protect our domain names could adversely affect our reputation and brand, and make it more difficult for users to find our website and our online app. We may be unable, without significant cost or at all, to prevent third parties from diverting traffic from or acquiring domain names that are similar to, infringe upon, or otherwise decrease the value of our trademarks and other proprietary rights.

While we take precautions designed to protect our intellectual property, it may still be possible for competitors and other unauthorized third parties to copy our technology and use our proprietary brand, content, and information to create or enhance competing solutions and products, which could adversely affect our competitive position in our rapidly evolving and highly competitive industry. Some license provisions that protect against unauthorized use, copying, decompiling, transfer, and disclosure of our technology may be unenforceable under the laws of certain jurisdictions and foreign countries, and the remedies for such events may not be sufficient to compensate for such breaches. We enter into confidentiality and invention assignment agreements with our employees and consultants, and enter into confidentiality agreements with our third-party providers and strategic partners. We cannot assure you that these agreements will be effective in controlling access to, and use and distribution of, our platform and proprietary information. Further, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our offerings. Such arrangements may limit our ability to protect, maintain, enforce, or commercialize such intellectual property rights. If we are unable to prevent the unauthorized use or exploitation of our intellectual property, the value of our brand, content, and other intangible assets may be diminished, competitors may be able to more effectively mimic our service and methods of operations, the perception of our business and service to members, and potential members, may become confused, and our ability to attract customers may be adversely affected. Any inability or failure to protect our intellectual property could adversely impact our business, results of operations, and financial condition.

We have filed, and may continue in the future to file, applications to protect certain of our innovations and intellectual property. We do not know whether any of our applications will result in the

 

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issuance of a patent, trademark, or copyright, as applicable, or whether the examination process will require us to narrow our claims. In addition, we may not receive competitive advantages from the rights granted under our intellectual property. Our existing intellectual property, and any intellectual property granted to us, or that we otherwise acquire in the future, may be contested, circumvented, or invalidated, and we may not be able to detect or prevent third parties from infringing our rights to our intellectual property. Therefore, the exact effect of the protection of this intellectual property cannot be predicted with certainty. In addition, given the costs, effort, and risks of obtaining patent protection, including the requirement to ultimately disclose the invention to the public, we may choose not to seek patent protection for certain innovations. Any failure to adequately obtain such patent protection, or other intellectual property protection, could later prove to adversely impact our business.

We may be required to spend significant resources in order to monitor, protect, and defend our intellectual property rights, and some violations may be difficult or impossible to detect. Litigation to protect and enforce our intellectual property rights could be costly, time-consuming, and distracting to management, and could result in the impairment or loss of portions of our intellectual property. Our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could impair the functionality of our platform, delay introductions of enhancements to our platform, result in our substituting inferior or more costly technologies into our platform, or harm our reputation or brand. In addition, we may be required to license additional technology from third parties to develop and market new offerings or platform features, which may not be on commercially reasonable terms, or at all, and could adversely affect our ability to compete or require us to rebrand or otherwise modify our offerings, which could further exhaust our resources. Furthermore, we may also be obligated to indemnify our members or business partners in connection with any such litigation and to obtain licenses.

Risks Related to our Indebtedness

Our debt obligations contain restrictions that impact our business and expose us to risks that could materially adversely affect our liquidity and financial condition.

As of December 31, 2020, on a pro forma basis, after giving effect to the application of the net proceeds of this offering as described in “Use of Proceeds,” we would have had no outstanding indebtedness. We may incur additional indebtedness in the future, including borrowings under the Revolving Loan Facility. Our future indebtedness, including borrowings, if any, under the Revolving Loan Facility, could have significant effects on our business, such as:

 

   

limiting our ability to borrow additional amounts to fund capital expenditures, acquisitions, debt service requirements, execution of our growth strategy and other purposes;

 

   

limiting our ability to make investments, including acquisitions, loans and advances, and to sell, transfer or otherwise dispose of assets;

 

   

requiring us to dedicate a substantial portion of our cash flow from operations to pay principal and interest on our borrowings, which would reduce availability of our cash flow to fund working capital, capital expenditures, acquisitions, execution of our growth strategy and other general corporate purposes;

 

   

making us more vulnerable to adverse changes in general economic, industry and competitive conditions, in government regulation and in our business by limiting our ability to plan for and react to changing conditions;

 

   

placing us at a competitive disadvantage compared with our competitors that have less debt; and

 

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exposing us to risks inherent in interest rate fluctuations because our borrowings are at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates.

In addition, we may not be able to generate sufficient cash flow from our operations to repay our future indebtedness when it becomes due and to meet our other cash needs. If we are not able to pay our borrowings under future indebtedness as they become due, we will be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our indebtedness or selling additional debt or equity securities. We may not be able to refinance our future debt or sell additional debt or equity securities or our assets on favorable terms, if at all, and if we must sell our assets, it may negatively affect our business, financial condition and results of operations. In addition, we may be subject to prepayment penalties depending on when we repay our future indebtedness, which amounts could be material.

Restrictions imposed by our Revolving Loan Facility may materially limit our ability to operate our business and finance our future operations or capital needs.

The terms of our Revolving Loan Facility may restrict us and our subsidiaries from engaging in specified types of transactions. These covenants, subject to certain limitations and exceptions, restrict our ability, and that of our subsidiaries, to, among other things:

 

   

incur indebtedness;

 

   

incur certain liens;

 

   

enter into sale and lease-back transactions;

 

   

make investments, loans, advances, guarantees and acquisitions;

 

   

consolidate, merge or sell or otherwise dispose of assets;

 

   

pay dividends or make other distributions on equity interests, or redeem, repurchase or retire equity interests;

 

   

enter into transactions with affiliates;

 

   

alter the business conducted by us and our subsidiaries; and

 

   

change our or their fiscal year.

A breach of any of these covenants, or any other covenant in the documents governing our Revolving Loan Facility, could result in a default or event of default under our Revolving Loan Facility. In the event of any event of default under our Revolving Loan Facility, the applicable lenders or agents could elect to terminate borrowing commitments and declare all borrowings and loans outstanding thereunder, if any, together with accrued and unpaid interest and any fees and other obligations, to be immediately due and payable. In addition, or in the alternative, the applicable lenders or agents could exercise their rights under the security documents to be entered into in connection with our Revolving Loan Facility. We will pledge substantially all of our assets as collateral securing our Revolving Loan Facility and any such exercise of remedies on any material portion of such collateral would likely materially adversely affect our business, financial condition or results of operations.

If we were unable to repay or otherwise refinance these borrowings and loans when due, and the applicable lenders proceeded against the collateral granted to them to secure that indebtedness, we may be forced into bankruptcy or liquidation. In the event the applicable lenders accelerate the repayment of any future borrowings, we may not have sufficient assets to repay that indebtedness. Any acceleration of future borrowings under our Revolving Loan Facility or other outstanding indebtedness would also likely have a material adverse effect on us.

 

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Pursuant to our Revolving Loan Facility, we are required to comply with certain financial covenants to maintain a minimum dollar threshold of direct policy premiums (as defined in the Revolving Loan Facility), a maximum combined ratio (as defined in the Revolving Loan Facility) and minimum liquidity (as defined in the Revolving Loan Facility) as further described in “Description of Certain Indebtedness.” Our ability to borrow under our Revolving Loan Facility depends on our compliance with these financial covenants. Events beyond our control, including changes in general economic and business conditions, may affect our ability to satisfy the financial covenants. We cannot assure you that we will satisfy the financial covenants in the future, or that our lenders will waive any failure to satisfy the financial covenants.

Changes in the method pursuant to which the London Interbank Offered Rate, or LIBOR, is determined and the transition to other benchmarks may adversely affect our results of operations.

LIBOR and certain other “benchmarks” have been the subject of continuing national, international, and other regulatory guidance and proposals for reform. These reforms may cause such benchmarks to perform differently than in the past or have other consequences which cannot be predicted. In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. To identify a successor rate for U.S. dollar LIBOR, the Alternative Reference Rates Committee or ARRC, a U.S. based group convened by the Federal Reserve Board and the Federal Reserve Bank of New York, was formed. The ARRC is comprised of a diverse set of private sector entities and a wide array of official-sector entities, banking regulators, and other financial sector regulators. The ARRC has identified the Secured Overnight Financing Rate, or SOFR, as its preferred alternative rate for LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. Financial regulators in the United Kingdom, the European Union, Japan, and Switzerland also have formed working groups with the aim of recommending alternatives to LIBOR denominated in their local currencies. Although SOFR appears to be the preferred replacement rate for U.S. dollar LIBOR, it is unclear if other benchmarks may emerge or if other rates will be adopted outside of the United States.

The Revolving Loan Facility has interest rate payments determined directly or indirectly based on LIBOR. Uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could adversely affect the performance of LIBOR relative to its historic values. The Revolving Loan Facility contains “hardwired” benchmark replacement provisions with “early opt-in” triggers that permit the replacement of LIBOR prior to the phasing out of published LIBOR rates. The benchmark replacement language contemplates the use of an alternative benchmark rate to be selected by the Administrative Agent. Even if financial instruments are transitioned to alternative benchmarks, such as SOFR, successfully, the new benchmarks are likely to differ from LIBOR, and our interest expense associated with our outstanding indebtedness or any future indebtedness we incur may increase. Further, transitioning to an alternative benchmark rate, such as SOFR, may result in us incurring significant expense and legal risks, as renegotiation and changes to documentation may be required in effecting the transition. Any alternative benchmark rate may be calculated differently than LIBOR and may increase the interest expense associated with our existing or future indebtedness.

Any of these occurrences could materially and adversely affect our borrowing costs, financial condition, and results of operations.

 

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Risks Related to this Offering and Ownership of Our Class A Common Stock

Our management team will have immediate and broad discretion over the use of the net proceeds from this offering and may not use them effectively.

The principal purposes of this offering are to increase our capitalization and financial flexibility and create a public market for our Class A common stock. We expect to use approximately $163 million of the net proceeds of this offering to repay in full outstanding borrowings, including fees and expenses, under our Term Loan Facility and the remainder of such net proceeds for general corporate purposes, including to fund our growth (including capital contributions to our health insurance subsidiaries), technology development, working capital, operating expenses, and capital expenditures. Additionally, we may use a portion of the net proceeds to acquire or invest in products, services, or technologies; however, we do not have agreements or commitments for any material acquisitions or investments at this time. See “Use of Proceeds.” As of the date of this prospectus, other than repayment of indebtedness under our Term Loan Facility, we do not have a specific plan for the net proceeds to us from this offering and, accordingly, we are not able to allocate the net proceeds among any of these potential uses in light of the variety of factors that will impact how such net proceeds are ultimately utilized by us. Our management will have broad discretion in the application of the net proceeds. Our stockholders may not agree with the manner in which our management chooses to allocate the net proceeds from this offering. The failure by our management to apply these funds effectively could have a material adverse effect on our business, financial condition, and results of operation. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income. The decisions made by our management may not result in positive returns on your investment and you will not have an opportunity to evaluate the economic, financial, or other information upon which our management bases its decisions.

Our Class A common stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

Prior to this offering, there has not been a public trading market for shares of our Class A common stock. It is possible that after this offering an active trading market will not develop or continue or, if developed, that any market will be sustained, which could make it difficult for you to sell your shares of Class A common stock at an attractive price or at all. The initial public offering price of our Class A common stock will be determined by negotiations between us and the representatives of the underwriters based upon a number of factors and may not be indicative of prices that will prevail in the open market following the consummation of this offering. See “Underwriting.” Consequently, you may not be able to sell shares of our Class A common stock at prices equal to or greater than the price you paid in this offering.

Many factors, some of which are outside our control, may cause the market price of our Class A common stock to fluctuate significantly, including those described elsewhere in this “Risk Factors” section and this prospectus, as well as the following:

 

   

our operating and financial performance and prospects;

 

   

our quarterly or annual earnings, or those of other companies in our industry, compared to market expectations;

 

   

conditions that impact demand for our offerings and platform, including demand in our industry generally and the performance of the third parties through whom we conduct significant parts of our business;

 

   

future announcements concerning our business or our competitors’ businesses;

 

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the public’s reaction to our press releases, other public announcements, and filings with the SEC;

 

   

the market’s reaction to our reduced disclosure and other requirements as a result of being treated as an “emerging growth company” under the JOBS Act;

 

   

coverage by or changes in financial estimates by securities analysts or failure to meet their expectations;

 

   

market and industry perception of our success, or lack thereof, in pursuing our growth strategy;

 

   

strategic actions by us or our competitors, such as acquisitions or restructurings;

 

   

changes in laws or regulations which adversely affect our industry or us;

 

   

changes in accounting standards, policies, guidance, interpretations, or principles;

 

   

changes in our board of directors, senior management, or key personnel;

 

   

issuances, exchanges or sales, or expected issuances, exchanges, or sales of our capital stock;

 

   

changes in our dividend policy;

 

   

adverse resolution of new or pending litigation, or other claims against us; and

 

   

changes in general market, economic, and political conditions in the United States and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, global pandemics, acts of war, and responses to such events.

As a result, volatility in the market price of our Class A common stock may prevent investors from being able to sell their Class A common stock at or above the initial public offering price, or at all. These broad market and industry factors may materially reduce the market price of our Class A common stock, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading volume of our Class A common stock is low. As a result, you may suffer a loss on your investment.

One or more funds affiliated with Tiger Global Management, LLC, Dragoneer Investment Group, LLC and Coatue Management LLC, who are all existing investors in the Company, have indicated an interest in purchasing up to an aggregate of $125 million each (up to $375 million in the aggregate) in shares of our Class A common stock in this offering at the initial public offering price. The shares of Class A common stock purchased by such investors will be subject to a lock-up agreement substantially consistent with the lock-up agreement signed by our existing stockholders and described in the section titled “Underwriting.” Because this indication of interest is not a binding agreement or commitment to purchase, one or more funds affiliated with Tiger Global Management, LLC, Dragoneer Investment Group, LLC and/or Coatue Management LLC may determine to purchase more, less or no shares in this offering or the underwriters may determine to sell more, less or no shares to one or more funds affiliated with Tiger Global Management, LLC, Dragoneer Investment Group, LLC and/or Coatue Management LLC. If such funds are allocated all or a portion of the shares in which it has indicated an interest in this offering or more, and purchase any such shares, such purchase could reduce the available public float for our shares if such entities hold these shares long term.

 

 

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The dual class structure of our common stock will have the effect of concentrating voting control with Thrive Capital and our Co-Founders for the foreseeable future, which will limit the ability of our other investors to influence corporate matters, including the election of directors and the approval of any change of control transaction.

Upon completion of this offering, our Class B common stock will have 20 votes per share, and our Class A common stock will have one vote per share. Following this offering, and without giving effect to any purchases that may be made through our directed share program or otherwise in this offering, the holders of our outstanding Class B common stock, which consist of Thrive Capital and our Co-Founders, will beneficially own 19.5% of our outstanding capital stock and hold 82.9% of the voting power of our outstanding capital stock (or 19.1% and 82.5%, respectively, if the underwriters exercise their option to purchase additional shares of our Class A common stock in full). Thrive Capital and Joshua Kushner (as the sole managing member of the Thrive General Partners), in particular, will beneficially own 16.5% of our outstanding capital stock and hold 75.9% of the voting power of our outstanding capital stock immediately following this offering (or 16.1% and 75.5%, respectively, if the underwriters exercise their option to purchase additional shares of our Class A common stock in full). Because of the 20-to-one voting ratio between our Class B common stock and Class A common stock, the holders of Class B common stock, in particular Thrive Capital and Joshua Kushner (as the sole managing member of the Thrive General Partners), collectively will control over a majority of the combined voting power of all of our Class A common stock and Class B common stock and therefore will be able to control all matters submitted to our stockholders for approval until a significant portion of such shares of outstanding Class B common stock have been converted to shares of Class A common stock as further described in “Description of Capital Stock.” This concentrated control will limit or preclude the ability of our other investors to influence corporate matters for the foreseeable future. For example, Thrive Capital and our Co-Founders will have sufficient voting power to determine the outcome with respect to elections of directors, amendments to our certificate of incorporation, amendments to our bylaws that are subject to a stockholder vote, increases to the number of shares available for issuance under our equity incentive plans or adoption of new equity incentive plans, and approval of any merger, consolidation, sale of all or substantially all of our assets or other major corporate transaction requiring stockholder approval for the foreseeable future. In addition, this concentrated control may also prevent or discourage unsolicited acquisition proposals or offers for our capital stock that you may feel are in your best interest as one of our stockholders. This control may also adversely affect the market price of our Class A common stock.

Because Thrive Capital’s and our Co-Founders’ interests may differ from those of our other stockholders, actions that Thrive Capital and our Co-Founders take with respect to us, as significant stockholders, may not be favorable to our other stockholders, including holders of our Class A common stock.

Thrive Capital and its affiliates engage in a broad spectrum of activities. In the ordinary course of its business activities, Thrive Capital and its affiliates may engage in activities where their interests conflict with our interests or those of our other stockholders. Thrive Capital or one of its affiliates may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, Thrive Capital may have an interest in us pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment, even though such transactions might involve risks to you. See “Description of

Capital Stock—Corporate Opportunities.”

Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions. As among the individual holders of Class B common stock, the conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock

 

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who retain their shares in the long term (and decreasing the relative voting power of those holders of Class B common stock who transfer their shares). See “Description of Capital Stock—Anti-Takeover Provisions” for additional information.

We cannot predict the effect our dual class structure may have on the market of our Class A common stock.

We cannot predict whether our dual class structure will result in a lower or more volatile market price of our Class A common stock, in adverse publicity, or in other adverse consequences. For example, certain index providers, such as S&P Dow Jones, have announced restrictions on including companies with multiple-class share structures in certain of their indices, including the S&P 500. Accordingly, our dual class share structure would make us ineligible for inclusion in certain indices and, as a result, mutual funds, exchange-traded funds, and other investment vehicles that attempt to passively track those indices may not invest in our Class A common stock. These policies are relatively new and it is unclear what effect, if any, they will have on the valuations of publicly-traded companies excluded from such indices, but it is possible that they may depress valuations, as compared to similar companies that are included. Because of the dual class structure of our common stock, we will likely be excluded from certain indices and we cannot assure that other stock indices will not take similar actions. Given the sustained flow of investment funds into passive strategies that seek to track certain indices, exclusion from certain stock indices would likely preclude investment by many of these funds and could make our Class A common stock less attractive to other investors. As a result, the market price of our Class A common stock could be adversely affected.

We anticipate incurring substantial stock-based compensation expense related to the Founders Awards, which may have an adverse effect on our financial condition and results of operations and may result in substantial dilution.

In light of the 6,344,779 long-term performance-based RSUs, or PSUs, that have been granted in connection with this offering, which we refer to as the Founders Awards, we anticipate that we will incur substantial stock-based compensation expenses and may expend substantial funds to satisfy tax withholding and remittance obligations related to the Founders Awards.

The Founders Awards will be effective upon the completion of this offering. Mr. Schlosser’s Founders Award consists of PSUs that cover 4,229,853 shares of Class A common stock, and Mr. Kushner’s Founders Award consists of PSUs that cover 2,114,926 shares of Class A common stock. Each Founders Award will be eligible to vest based on the achievement of five pre-determined stock price goals ranging from $90.00 to $270.00 per share over a seven-year period following the closing of this offering. Half of each Founders Award will become earned based on the achievement of such stock price goals (measured as a volume-weighted average stock price over 180 days) at any time between the second and seventh anniversaries of the closing of this offering. The remaining half of each Founders Award also will become earned based on achieving the same stock price goals, but the period for measuring the achievement of those goals will be scaled between the second and seventh anniversaries of the closing of this offering. Any PSUs that become earned PSUs will vest on an applicable vesting date between the third and seventh anniversaries of the closing of this offering. Any PSUs that do not vest prior to or on the seven-year anniversary of the grant date automatically will be terminated without consideration. The PSUs are subject to certain vesting acceleration terms. For additional information regarding the Founders Awards, please see the section titled “Executive Compensation.” We will record substantial stock-compensation expense for the Founders Awards. The aggregate grant date fair value of the Founders Awards is estimated to be $68.4 million, which we estimate will be recognized as compensation expense over a weighted average period of 4.72 years.

In addition, any PSUs subject to the Founders Awards that are earned and vest will be settled in shares of Class A common stock as soon as practicable after becoming vested. As a result, a potentially large number of shares of Class A common stock will be issuable if the applicable vesting conditions are satisfied, which would dilute your ownership of us.

 

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We will be a “controlled company” within the meaning of the rules of NYSE and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

Upon completion of this offering, Thrive Capital and Joshua Kushner (as the sole managing member of the Thrive General Partners) will control approximately 75.9% of the combined voting power of our outstanding capital stock (or 75.5% if the underwriters exercise their option to purchase additional shares in full). As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the NYSE. Under these rules, a listed company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

   

the requirement that a majority of the board of directors consist of independent directors;

 

   

the requirement that our nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the requirement that our compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement for an annual performance evaluation of our nominating and corporate governance and compensation committees.

Following this offering, we do not intend to rely on these exemptions, except for the exemption from the requirement that each of our nominating and corporate governance committee and compensation committee be composed entirely of independent directors. However, as long as we remain a “controlled company,” we may elect in the future to take advantage of any of these other exemptions. As a result of any such election, our board of directors may not have a majority of independent directors, our compensation committee may not consist entirely of independent directors, and our directors may not be nominated or selected by independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

We do not intend to pay dividends on our Class A common stock for the foreseeable future.

We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. As a result, we do not anticipate declaring or paying any cash dividends on our Class A common stock in the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors, subject to applicable laws, and will depend on, among other things, our business prospects, results of operations, financial condition, cash requirements and availability, industry trends, and other factors that our board of directors may deem relevant. Any such decision also will be subject to compliance with contractual restrictions and covenants in the agreements governing our current indebtedness. In addition, our ability to pay dividends in the future depends on the earnings and distributions of funds from our health insurance subsidiaries. Applicable state insurance laws restrict the ability of such health insurance subsidiaries to declare stockholder dividends and require our health insurance subsidiaries to maintain specified levels of statutory capital and surplus. The Revolving Loan Facility contains restrictions on our ability to pay dividends. Moreover, we may incur additional indebtedness, the terms of which may further restrict or prevent us from paying dividends on our Class A common stock. As a result, you may have to sell some or all of your Class A common stock after price appreciation in order to generate cash flow from your investment, which you may not be able to do. Our inability or decision not to pay dividends could also adversely affect the market price of our Class A common stock.

 

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We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our Class A common stock, which could depress the price of our Class A common stock.

Our Amended Charter will authorize us to issue one or more series of preferred stock. Our board of directors will have the authority to determine the powers, designations, preferences, and relative, participating, optional or other special rights, and the qualifications, limitations, or restrictions thereof, of the shares of preferred stock and to fix the number of shares constituting any series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend, and other rights superior to the rights of our Class A common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discouraging bids for our Class A common stock at a premium to the market price, and may materially and adversely affect the market price and the voting and other rights of the holders of our Class A common stock.

Future sales and issuances of our Class A common stock or rights to purchase our Class A common stock, including pursuant to our equity incentive plans, or other equity securities or securities convertible into our Class A common stock, could result in additional dilution of the percentage ownership of our stockholders and could cause the stock price of our Class A common stock to decline.

In connection with this offering, we intend to file a registration statement with the SEC on Form S-8 providing for the registration of shares of our Class A common stock issued or reserved for issuance under the 2012 Plan, 2021 Plan, and ESPP. Subject to the satisfaction of vesting conditions and the expiration of lock-up agreements, shares issued pursuant to or registered under the registration statement on Form S-8 will be available for resale immediately in the public market without restriction. From time to time in the future, we may also issue additional shares of our Class A common stock, Class B common stock or securities convertible into Class A common stock pursuant to a variety of transactions, including acquisitions. The issuance by us of additional shares of our Class A common stock or securities convertible into our Class A common stock would dilute your ownership of us, and the sale of a significant amount of such shares in the public market could adversely affect prevailing market prices of our Class A common stock.

Future sales, or the perception of future sales, by us or our existing stockholders in the public market following this offering could cause the market price for our Class A common stock to decline.

The sale of substantial amounts of shares of our Class A common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our Class A common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. Upon completion of this offering, based on the shares outstanding as of December 31, 2020, we will have a total of 161,921,638 shares of our Class A common stock outstanding (or 166,571,638 shares if the underwriters exercise their over-allotment option in full) and 35,115,807 shares of Class B common stock outstanding.

All of the shares of Class A common stock sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except that any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act, or Rule 144, may be sold only in compliance with the limitations described in “Shares Eligible for Future Sale.” The remaining outstanding shares of Class A common stock held by our existing owners after this offering will be subject to certain restrictions on resale.

 

 

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We, our executive officers, directors, and the holders of substantially all of our outstanding stock will sign lock-up agreements with the underwriters that will, subject to certain exceptions, restrict the sale of the shares of our Class A common stock and certain other securities held by them until the earlier of 180 days following the date of this prospectus and the opening of trading on the second trading day immediately following our public release of earnings for the second quarter following the most recent period for which financial statements are included in this prospectus, as further described in “Shares Eligible for Future Sale.” Notwithstanding the foregoing, as further described in the section titled “Shares Eligible for Future Sale,” (A) up to 2,857,434 shares of our Class A common stock and securities directly or indirectly convertible into or exchangeable or exercisable for our Class A common stock held by Employee Stockholders (as defined in the section titled “Shares Eligible for Future Sale”) may be sold for a 7-trading day period beginning at the commencement of trading on the first trading day on which our Class A common stock is traded on the NYSE, and (B) up to an additional 2,857,434 shares of our outstanding Class A common stock and securities directly or indirectly convertible into or exchangeable or exercisable for our Class A common stock held by Employee Stockholders, plus any shares eligible for sale during the window described in clause (A) above that were not previously sold, may be sold beginning at the opening of trading on the second trading day immediately following our public release of earnings for the first quarter following the most recent period for which financial statements are included in this prospectus, provided that the closing price of our Class A common stock on NYSE is at least 33% greater than the initial public offering price per share set forth on the cover page of this prospectus for the periods described in the section titled “Underwriting.”

Upon the expiration of the lock-up agreements described above, substantially all such shares will be eligible for resale in the public market subject, in the case of shares held by our affiliates, to volume, manner of sale, and other limitations described in “Shares Eligible for Future Sale.” Goldman Sachs & Co. LLC may, in its sole discretion and at any time without notice, release all or any portion of the shares or securities subject to any such lock-up agreements. See “Underwriting” for a description of these lock-up agreements.

As restrictions on resale end, the market price of our shares of Class A common stock could drop significantly if the holders of such restricted shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of Class A common stock or other securities.

The JOBS Act will allow us to postpone the date by which we must comply with certain laws and regulations intended to protect investors, and to reduce the amount of information we provide in our reports filed with the SEC. We cannot be certain if this reduced disclosure will make our Class A common stock less attractive to investors.

The JOBS Act is intended to reduce the regulatory burden on “emerging growth companies.” As defined in the JOBS Act, a public company whose initial public offering of common equity securities occurs after December 8, 2011, and whose annual net revenues are less than $1.07 billion will, in general, qualify as an “emerging growth company” until the earliest of:

 

   

the last day of its fiscal year following the fifth anniversary of the date of its initial public offering of common equity securities;

 

   

the last day of its fiscal year in which it has annual gross revenue of $1.07 billion or more;

 

   

the date on which it has, during the previous three-year period, issued more than $1.07 billion in nonconvertible debt; and

 

   

the date on which it is deemed to be a “large accelerated filer,” which will occur at such time as the company (1) has an aggregate worldwide market value of common equity securities held by

 

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non-affiliates of $700 million or more as of the last business day of its most recently completed second fiscal quarter, (2) has been required to file annual and quarterly reports under the Exchange Act for a period of at least 12 months, and (3) has filed at least one annual report pursuant to the Exchange Act.

Under this definition, we will be an “emerging growth company” upon completion of this offering and could remain an “emerging growth company” until as late as the fifth anniversary of the completion of this offering. For so long as we are an “emerging growth company,” we will, among other things:

 

   

not be required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, or Section 404(b);

 

   

not be required to hold a nonbinding advisory stockholder vote on executive compensation pursuant to Section 14A(a) of the Exchange Act;

 

   

not be required to seek stockholder approval of any golden parachute payments not previously approved pursuant to Section 14A(b) of the Exchange Act;

 

   

be exempt from the requirement of the PCAOB regarding the communication of critical audit matters in the auditor’s report on the financial statements; and

 

   

be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. This permits an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use this extended transition period and, as a result, our consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. We cannot predict if investors will find our Class A common stock less attractive as a result of our decision to take advantage of some or all of the reduced disclosure requirements above. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.

The obligations associated with being a public company require significant resources and management attention, and we have and will continue to incur increased costs as a result of becoming a public company.

After completion of this offering, as a public company, we will face increased legal, accounting, administrative, and other costs and expenses that we did not incur as a private company, and which have not been reflected in our historical consolidated financial statements included elsewhere in this prospectus. We have already started to incur, and expect to continue to incur, significant costs related to operating as a public company. Upon the completion of this offering, we will be subject to the Exchange Act, the rules and regulations implemented by the SEC, the Sarbanes-Oxley Act, the Dodd-Frank Act, the PCAOB, and the rules and standards of the NYSE, each of which imposes additional reporting and other obligations on public companies. As a public company, we will be required to, among others:

 

   

prepare, file, and distribute annual, quarterly, and current reports with respect to our business and financial condition;

 

   

prepare, file, and distribute proxy statements and other stockholder communications;

 

   

expand the roles and duties of our Board and committees thereof, and management;

 

 

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hire additional financial and accounting personnel and other experienced accounting and finance staff with the expertise to address complex accounting matters applicable to public companies;

 

   

institute more comprehensive financial reporting and disclosure compliance procedures;

 

   

involve and retain to a greater degree outside counsel and accountants to assist us with the activities listed above;

 

   

enhance our investor relations function;

 

   

establish new internal policies, including those relating to trading in our securities and disclosure controls and procedures;

 

   

comply with our exchange’s listing standards; and

 

   

comply with the Sarbanes-Oxley Act.

These rules and regulations and changes in laws, regulations, and standards relating to corporate governance and public disclosure, which have created uncertainty for public companies, have and will continue to increase our legal and financial compliance costs and make some activities more time consuming and costly. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Our investment in compliance with existing and evolving regulatory requirements has and will continue to result in increased administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities, which could have a material adverse effect on our business, financial condition, and results of operations.

In addition, the need to establish the corporate infrastructure demanded of a public company may also divert management’s attention from implementing our business strategy, which could prevent us from improving our business, financial condition, and results of operations. If we do not continue to develop and implement the right processes and tools to manage our changing enterprise and maintain our culture, our ability to compete successfully and achieve our business objectives could be impaired, which could negatively impact our business, financial condition, and results of operations. In addition, we cannot predict or estimate the amount of additional costs we may incur to comply with these requirements. We anticipate that these costs will materially increase our general and administrative expenses.

We also expect that being a public company and complying with applicable rules and regulations will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage, or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees, or as executive officers.

As a public reporting company, we will be subject to rules and regulations established from time to time by the SEC regarding our internal control over financial reporting. If we fail to establish and maintain effective internal control over financial reporting and disclosure controls and procedures, we may not be able to accurately report our financial results, or report them in a timely manner.

Upon consummation of this offering, we will become a public reporting company subject to the rules and regulations established from time to time by the SEC and the NYSE. These rules and regulations will require, among other things, that we establish and periodically evaluate procedures

 

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with respect to our internal control over financial reporting. Reporting obligations as a public company are likely to place a considerable strain on our financial and management systems, processes, and controls, as well as on our personnel.

In addition, as a public company, we will be required to document and test our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act so that our management can certify as to the effectiveness of our internal control over financial reporting. Section 404(a) of the Sarbanes-Oxley Act, or Section 404(a), requires that, beginning with our second annual report following our initial public offering, management assess and report annually on the effectiveness of our internal control over financial reporting, and identify any material weaknesses in our internal control over financial reporting. Although Section 404(b) requires our independent registered public accounting firm to issue an annual report that addresses the effectiveness of our internal control over financial reporting, we have opted to rely on the exemptions provided in the JOBS Act and, consequently, will not be required to comply with SEC rules that implement Section 404(b) until such time as we are no longer treated as an “emerging growth company.” We could potentially qualify as an “emerging growth company” until as late as the fifth anniversary of the completion of this offering.

If our senior management is unable to conclude that we have effective internal control over financial reporting, or to certify the effectiveness of such controls, and our independent registered public accounting firm cannot render an unqualified opinion on management’s assessment and the effectiveness of our internal control over financial reporting at such time as it is required to do so, and material weaknesses in our internal control over financial reporting are identified, we could be subject to regulatory scrutiny, a loss of public and investor confidence, and to litigation from investors and stockholders, which could have a material adverse effect on our business and our stock price. In addition, if we do not maintain adequate financial and management personnel, processes, and controls, we may not be able to manage our business effectively or accurately report our financial performance on a timely basis, which could cause a decline in our Class A common stock price and adversely affect our business, financial condition, and results of operations. Failure to comply with the Sarbanes-Oxley Act could potentially subject us to sanctions or investigations by the SEC, the exchange upon which our securities are listed or other regulatory authorities, which would require additional financial and management resources.

Anti-takeover provisions in our governing documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management, and depress the market price of our Class A common stock.

Our Amended Charter, Amended Bylaws, and Delaware law contain, or will contain, provisions that could have the effect of rendering more difficult, delaying or preventing an acquisition deemed undesirable by our board of directors. Among others, our Amended Charter and Amended Bylaws will include the following provisions:

 

   

a dual class structure that provides our holders of Class B common stock with the ability to control the outcome of matters requiring stockholder approval;

 

   

limitations on convening special stockholder meetings, which could make it difficult for our stockholders to adopt desired governance changes;

 

   

advance notice procedures, which apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders;

 

   

a prohibition on stockholder action by written consent, which means that our stockholders will only be able to take action at a meeting of stockholders;

 

   

a forum selection clause, which means certain litigation can only be brought in Delaware;

 

 

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no authorization of cumulative voting, which limits the ability of minority stockholders to elect director candidates;

 

   

certain amendments to our certificate of incorporation will require the approval of two-thirds of the then outstanding voting power of our capital stock, voting as a single class;

 

   

amendments to our bylaws by our stockholders will require the approval of two-thirds of the then outstanding voting power of our capital stock, voting as a single class;

 

   

the authorization of undesignated or “blank check” preferred stock, the terms of which may be established and shares of which may be issued without further action by our stockholders and which may be used to create a “poison pill”;

 

   

newly created directorships are filled by a majority of directors then in office; and

 

   

the approval of two-thirds of the then outstanding voting power of our capital stock, voting as a single class, is required to remove a director.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, or the DGCL, which prevents interested stockholders, such as certain stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations for a period of 3 years following the time that such stockholder became an interested stockholder, unless (i) prior to the time such stockholder became an interested stockholder, the board approved the transaction that resulted in such stockholder becoming an interested stockholder, (ii) upon consummation of the transaction that resulted in such stockholder becoming an interested stockholder, the interested stockholder owned 85% of the voting stock of the Company outstanding at the time the transaction commenced (excluding certain shares) or (iii) following board approval, the business combination receives the approval of the holders of at least two-thirds of our outstanding common stock not owned by such interested stockholder.

The insurance laws in most states requires regulatory review and approval of a change in control of our domestic insurers. “Control” generally means the possession, direct or indirect, of the power to direct, or cause the direction of, the management and policies of an insurer, whether through the ownership of voting securities, by contract, or otherwise. The state statutes usually presume that control exists if a person or company, directly or indirectly, owns, controls, or holds with the power to vote ten percent (10%) or more of the voting securities of an insurer or a parent company, but some states may presume control at a lower percentage. This presumption can then be rebutted by a showing that control does not exist. Accordingly, a change in control could trigger regulatory review and approval in one or more states in which we operate.

Any provision of our Amended Charter, Amended Bylaws, Delaware law, or applicable state insurance law that has the effect of delaying, preventing, or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our Class A common stock, and could also affect the price that some investors are willing to pay for our Class A common stock.

Our Amended Charter will provide that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for substantially all disputes between us and our stockholders, and federal district courts will be the sole and exclusive forum for Securities Act claims, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.

Our Amended Charter will provide that, unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for: (a) any derivative action, suit, or proceeding brought on our behalf; (b) any action, suit, or proceeding asserting

 

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a claim of breach of fiduciary duty owed by any of our current or former directors, officers or other employees or stockholders to us or to our stockholders, creditors, or other constituents; (c) any action, suit, or proceeding asserting a claim arising pursuant to the DGCL, our Amended Charter or Amended Bylaws, or as to which the DGCL confers exclusive jurisdiction on the Court of Chancery of the State of Delaware; or (d) any action, suit, or proceeding asserting a claim governed by the internal affairs doctrine; provided that the exclusive forum provisions will not apply to suits brought to enforce any liability or duty created by the Exchange Act, or to any claim for which the federal courts have exclusive jurisdiction.

Our Amended Charter will further provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts are the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. We note that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. The choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our current or former directors, officers, or other employees or stockholders, which may discourage such lawsuits against us and our current or former directors, officers, and other employees or stockholders. Alternatively, if a court were to find the choice of forum provisions contained in our Amended Charter to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, financial condition, and results of operations.

An active trading market for our Class A common stock may never develop or be sustained.

Although we have applied to have our Class A common stock listed on the NYSE, an active trading market for our Class A common stock may not develop on that exchange or elsewhere or, if developed, that market may not be sustained. If an active trading market for our Class A common stock does not develop or is not maintained, the liquidity of our Class A common stock, your ability to sell your shares of our Class A common stock when desired, and the prices that you may obtain for your shares of Class A common stock will be adversely affected.

If securities analysts do not publish research or reports about our company, or if they issue unfavorable commentary about us or our industry or downgrade our Class A common stock, the price of our Class A common stock could decline.

The trading market for our Class A common stock will depend in part on the research and reports that third-party securities analysts publish about our company and our industry. We may be unable to attract research coverage, and if one or more analysts cease coverage of our company, we could lose visibility in the market. In addition, one or more of these analysts could downgrade our Class A common stock or issue other negative commentary about our company or our industry. As a result of one or more of these factors, the trading price of our Class A common stock could decline.

If our operating and financial performance in any given period does not meet the guidance that we provide to the public, the market price of our Class A common stock may decline.

We may, but are not obligated to, provide public guidance on our expected operating and financial results for future periods. Any such guidance will be comprised of forward-looking statements subject to the risks and uncertainties described in this prospectus, and in our other public filings and public statements. Our actual results may not always be in line with or exceed any guidance we have provided, especially in times of economic uncertainty. If, in the future, our operating or financial results for a particular period do not meet any guidance we provide or the expectations of investment analysts,

 

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or if we reduce our guidance for future periods, the market price of our Class A common stock may decline. Even if we do issue public guidance, there can be no assurance that we will continue to do so in the future.

Investors in this offering will experience immediate and substantial dilution of $26.08 per share.

Based on an assumed initial public offering price of $33.00 per share (the midpoint of the range set forth on the cover of this prospectus), purchasers of our Class A common stock in this offering will experience immediate and substantial dilution of $26.08 per share in the pro forma as adjusted net tangible book value per share of Class A common stock from the initial public offering price, and our pro forma as adjusted net tangible book value as of December 31, 2020 after giving effect to this offering would be $6.92 per share. This dilution is due in large part to earlier investors having paid substantially less than the initial public offering price when they purchased their shares. In addition, you may also experience additional dilution if options, RSUs, or other rights to purchase our Class A common stock and Class B common stock that are outstanding or that we may issue in the future are exercised, vest, or are converted or we issue additional shares of our Class A common stock or Class B common stock at prices lower than our net tangible book value at such time. See “Dilution.”

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus may be forward-looking statements. Statements regarding our future results of operations and financial position, business strategy, and plans and objectives of management for future operations, including, among others, statements regarding the offering, expected growth, and future capital expenditures are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other similar expressions. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:

 

   

the impact of COVID-19 on global markets, economic conditions, the healthcare industry and our results of operations, and the response by governments and other third parties;

 

   

failure to retain and expand our member base;

 

   

failure to execute our growth strategy;

 

   

failure to maintain or enter into new partnerships or collaborations with healthcare industry participants;

 

   

negative publicity, unfavorable shifts in member perception of our digital platform or other member service channels;

 

   

inability to achieve or maintain profitability in the future;

 

   

changes in federal or state laws or regulations, including changes with respect to the ACA and any regulations enacted thereunder;

 

   

failure to accurately estimate our incurred claims expenses or effectively manage our claims costs or related administrative costs, including as a result of fluctuations in medical utilization rates due to the impact of COVID-19;

 

   

failure to comply with ongoing regulatory requirements and applicable performance standards, including as a result of our participation in government-sponsored programs, such as Medicare;

 

   

changes or developments in the health insurance markets in the United States, including passage and implementation of a law to create a single-payer or government-run health insurance program;

 

   

failure to comply with applicable privacy, security, and data laws, regulations, and standards;

 

   

loss of key in-network providers or an inability to maintain good relations with the physicians, hospitals, and other providers within and outside our provider networks, or to arrange for the delivery of quality care;

 

   

unfavorable or otherwise costly outcomes of lawsuits and claims that arise from the extensive laws and regulations to which we are subject;

 

   

unanticipated results of risk adjustment programs;

 

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delays in our receipt of premiums;

 

   

disruptions or challenges to our relationship with the Oscar Medical Group;

 

   

cyber-security breaches of our and our partners’ information and technology systems;

 

   

unanticipated changes in population morbidity and large-scale changes in health care utilization; and

 

   

the other factors set forth under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this prospectus. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Many of the important factors that will determine these results are beyond our ability to control or predict. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and, except as otherwise required by law, we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus forms a part with the understanding that our actual future results, levels of activity, performance, and achievements may be materially different from what we expect.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately $936.3 million (or approximately $1.1 billion if the underwriters exercise their option to purchase additional shares of Class A common stock in full), based upon an assumed initial public offering price of $33.00 per share (which is the midpoint of the price range set forth on the cover page of this prospectus) and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of Class A common stock offered by the selling stockholders.

The principal purposes of this offering are to increase our capitalization and financial flexibility and create a public market for our Class A common stock. We expect to use approximately $163 million of the net proceeds of this offering to repay in full outstanding borrowings, including fees and expenses, under our Term Loan Facility, under which $150.0 million in principal amount was outstanding and which had an interest rate of adjusted LIBOR plus 11.75% as of December 31, 2020. The Term Loan Facility matures on October 30, 2024 and the proceeds from such facility were used for general corporate purposes. The remaining net proceeds from this offering will be used for general corporate purposes, including to fund our growth (including capital contributions to our health insurance subsidiaries), technology development, working capital, operating expenses, and capital expenditures. Additionally, we may use a portion of the net proceeds to acquire or invest in products, services, or technologies; however, we do not have agreements or commitments for any material acquisitions or investments at this time. As of the date of this prospectus, other than repayment of indebtedness under our Term Loan Facility, we do not have a specific plan for the net proceeds to us from this offering and, accordingly, we are not able to allocate the net proceeds among any of these potential uses in light of the variety of factors that will impact how such net proceeds are ultimately utilized by us. We will have broad discretion in the way that we use the net proceeds of this offering. See “Risk Factors—Risks Related to this Offering and Ownership of Our Class A Common Stock—Our management team will have immediate and broad discretion over the use of the net proceeds from this offering and may not use them effectively” for additional information.”

Each $1.00 increase (decrease) in the assumed initial public offering price of $33.00 per share (which is the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) the net proceeds to us from this offering by approximately $28.8 million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each 1,000,000 share increase (decrease) in the number of shares offered in this offering would increase (decrease) the net proceeds to us from this offering by approximately $31.4 million, assuming that the price per share for the offering remains at $33.00 (which is the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital and surplus requirements, contractual restrictions, general business conditions, and other factors that our board of directors may deem relevant.

Additionally, we are a holding company that transacts a majority of our business through operating subsidiaries. Consequently, our ability to pay dividends to stockholders is largely dependent on receipt of dividends and other distributions from our subsidiaries. Applicable insurance laws restrict the ability of our health insurance subsidiaries to declare stockholder dividends and require our health insurance subsidiaries to maintain specified levels of statutory capital and surplus. Regulators have broad powers to prevent reduction of statutory surplus to inadequate levels, and there is no assurance that dividends of the maximum amounts calculated under any applicable formula would be permitted. State insurance regulatory authorities that have jurisdiction over the payment of dividends by our health insurance subsidiaries may in the future adopt statutory provisions more restrictive than those currently in effect. See “Business—Government Regulation—State Regulation of Insurance Companies and HMOs.” In addition, some of our health insurance subsidiaries may have entered into specific commitments not to pay dividends.

Our ability to pay dividends is also restricted by the terms of the Revolving Loan Facility, any future credit agreement or any future debt, or preferred equity securities of us or our subsidiaries. See “Risk Factors—Risks Related to this Offering and Ownership of Our Class A Common Stock—We do not intend to pay dividends on our Class A common stock for the foreseeable future.”

 

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CAPITALIZATION

The following table sets forth our cash, cash equivalents and short-term investments and capitalization as of December 31, 2020 on:

 

   

an actual basis;

 

   

a pro forma basis to give effect to (i) the Preferred Stock Conversion, (ii) the Series B Conversion, (iii) the Reclassification, (iv) the filing and effectiveness of our Amended Charter, (v) the exercise of Warrants and Call Options, and (vi) the Stock Split, in each case as if such event had occurred on December 31, 2020; and

 

   

a pro forma as adjusted basis to give effect to (i) the pro forma adjustments described in the preceding clause, (ii) the issuance and sale of Class A common stock in this offering at an assumed initial public offering price of $33.00 per share (which is the midpoint of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, (iii) the application of the net proceeds therefrom as described under “Use of Proceeds,” and (iv) the issuance of 429,308 shares of our Class A common stock upon the exercise of options by certain selling stockholders in connection with the sale of shares in this offering, including aggregate proceeds of $2.7 million received by us in connection with the exercise of such options.

The pro forma and pro forma as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this information in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial information contained in this prospectus.

 

    As of December 31, 2020  
    Actual     Pro forma     Pro forma
as
adjusted(1)
 
    (in thousands, except share and
per share data)
 

Cash and cash equivalents

  $ 826,326   $ 826,326     $ 1,601,892  
 

 

 

   

 

 

   

 

 

 

Indebtedness

     

Term Loan Facility(2)

  $ 142,487     $ 142,487        

Revolving Loan Facility(3)

                 

Convertible preferred stock, par value $0.00001; 407,156,831 shares authorized, actual and 400,904,302 shares issued and outstanding, actual; no shares authorized, pro forma and no shares issued and outstanding, pro forma; no shares authorized, pro forma as adjusted and no shares issued and outstanding, pro forma as adjusted

    1,744,911              

Total (deficit) equity(4):

     

Stockholders’ (deficit) equity:

     

Preferred stock, par value $0.00001; no shares authorized, actual and no shares issued and outstanding, actual; 82,500,000 shares authorized, pro forma and no shares issued and outstanding, pro forma; 82,500,000 shares authorized, pro forma as adjusted and no shares issued and outstanding, pro forma as adjusted

                 

Class A Common stock, $0.00001 par value; no shares authorized, actual and no shares issued and outstanding, actual; 825,000,000 shares authorized, pro forma and 130,921,638 shares issued and outstanding, pro forma; 825,000,000 shares authorized, pro forma as adjusted and 161,921,638 shares issued and outstanding, pro forma as adjusted

          1       1  

Class B Common stock, $0.00001 par value; no shares authorized, actual and no shares issued and outstanding, actual; 82,500,000 shares authorized, pro forma and 35,335,579 shares issued and outstanding, pro forma; 82,500,000 shares authorized, pro forma as adjusted and 35,115,807 shares issued and outstanding, pro forma as adjusted

                 

 

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    As of December 31, 2020  
    Actual     Pro forma     Pro forma
as
adjusted(1)
 
    (in thousands, except share and per
share data)
 

Series A common stock, $0.00001 par value; 680,000,000 shares authorized, actual and 24,875,753 shares issued and outstanding, actual; no shares authorized, pro forma and no shares issued and outstanding, pro forma; no shares authorized, pro forma as adjusted and no shares issued and outstanding, pro forma as adjusted

    1       —         —    

Series B common stock, $0.00001 par value; 69,487,963 shares authorized, actual and 69,487,963 shares issued and outstanding, actual; no shares authorized, pro forma and no shares issued and outstanding, pro forma; no shares authorized, pro forma as adjusted and no shares issued and outstanding, pro forma as adjusted

    1       —         —    

Series C common stock, $0.00001 par value; 10,000,000 shares authorized, actual and no shares issued and outstanding, actual; no shares authorized, pro forma and no shares issued and outstanding, pro forma; no shares authorized, pro forma as adjusted and no shares issued and outstanding, pro forma as adjusted

    —         —         —    

Treasury stock

    (2,923     (2,923     (2,923

Additional paid-in capital

    133,255       1,905,018       2,843,993  

Accumulated deficit

    (1,427,106     (1,438,953     (1,459,875)  

Accumulated other comprehensive loss

    879       879       879  
 

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

    (1,295,893     464,022       1,382,075  
 

 

 

   

 

 

   

 

 

 

Total capitalization

    $591,505     $ 606,509     $ 1,382,075  
 

 

 

   

 

 

   

 

 

 

 

(1)

Each $1.00 increase or decrease in the assumed initial public offering price of $33.00 per share (which is the midpoint of the price range set forth on the cover page of this prospectus) would increase or decrease each of cash, cash equivalents and short-term investments, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization on a pro forma as adjusted basis by approximately $28.8 million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each 1,000,000 share increase or decrease in the number of shares offered in this offering would increase or decrease each of cash, cash equivalents and short-term investments, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization on a pro forma as adjusted basis by approximately $31.4 million, assuming that the price per share for the offering remains at $33.00 (which is the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(2)

Net of $7.5 million of original discount and debt issuance costs. We expect to use approximately $163 million of the net proceeds of this offering to repay in full outstanding borrowings, including fees and expenses, under the Term Loan Facility. In connection with repayment of the Term Loan Facility, we will pay a prepayment premium equal to 6.50% of the principal amount of the Term Loan Facility plus accrued and unpaid interest through the six-month anniversary of the closing date of the Term Loan Facility.

 

(3)

On February 21, 2021, we entered into the Revolving Loan Facility, in the aggregate principal amount of $200.0 million. See “Description of Certain Indebtedness—Revolving Loan Facility.” Our initial borrowings under the Revolving Loan Facility are conditioned upon, among other things, (i) the consummation of this offering that results in at least $800 million of net proceeds to us, (ii) the repayment in full of the Term Loan Facility and (iii) the execution of customary security documentation.

 

(4)

Actual share amounts do not give effect to the Stock Split to be effected after the effectiveness of the Registration Statement of which this prospectus forms a part and prior to the closing of this offering.

The number of shares of our Class A common stock and Class B common stock that will be outstanding upon the completion of this offering is based on 131,350,946 shares of our Class A common stock and 35,335,579 shares of our Class B common stock outstanding, in each case, as of December 31, 2020, after giving effect to the Preferred Stock Conversion, the Series B Conversion, the exercise of the Warrants and Call Options, and the Reclassification described below, and includes 429,308 shares of Class A common stock to be issued to the selling stockholders upon the exercise of options in connection with the sale of such shares in this offering.

 

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The number of shares of Class A common stock and Class B common stock to be outstanding upon completion of this offering excludes:

 

   

33,958,817 shares of Class A common stock and 6,534,129 shares of Class B common stock, in each case issuable upon exercise of stock options outstanding as of December 31, 2020 pursuant to the 2012 Plan with weighted average exercise prices of $9.57 per share and $7.82 per share, respectively, except for 429,308 shares of Class A common stock to be issued upon the exercise of options by certain selling stockholders in connection with the sale of such shares in this offering;

 

   

1,555,666 shares of Class A common stock issuable in connection with the vesting and settlement of RSUs outstanding as of December 31, 2020, pursuant to our 2012 Plan;

 

   

2,008,638 shares of Class A common stock available for issuance pursuant to our 2012 Plan as of December 31, 2020, which will become available for issuance pursuant to the 2021 Plan upon such plan’s effectiveness (which includes (i) 108,666 shares of Class A common stock issuable in connection with the vesting and settlement of RSUs that were granted after December 31, 2020, pursuant to our 2012 Plan, and (ii) 699,475 shares of Class A common stock issuable upon exercise of stock options granted after December 31, 2020 pursuant to the 2012 Plan);

 

   

282,657 shares of Class A common stock issuable in connection with the vesting and settlement of IPO RSUs granted pursuant to the 2021 Plan to employees, named executive officers and directors, which awards will become effective in connection with the completion of this offering;

 

   

6,344,779 shares of Class A common stock issuable in connection with the vesting and settlement of RSUs that were granted to our Co-Founders pursuant to the 2021 Plan and will become effective in connection with the completion of this offering, which we refer to collectively as the Founders Awards (see “Executive and Director Compensation” for additional information regarding the Founders Awards);

 

   

13,255,516 shares of Class A common stock and Class B common stock that will become available for future issuance pursuant to the 2021 Plan (which, for the avoidance of doubt, excludes the Founders Awards and the IPO RSUs), which will become effective in connection with this offering (and which excludes any potential annual evergreen increases pursuant to the terms of the 2021 Plan);

 

   

3,976,590 shares of Class A common stock that will become available for future issuance pursuant to the ESPP which will become effective in connection with this offering (and which excludes any potential annual evergreen increases pursuant to the terms of the ESPP); and

 

   

291,447 shares of Class A common stock issuable upon the exercise of options to purchase shares of Class A common stock that were granted to certain consultants with a weighted-average exercise price of $0.96 per share.

 

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DILUTION

If you invest in our Class A common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma as adjusted net tangible book value per share of our Class A common stock immediately after this offering. Dilution in pro forma as adjusted net tangible book value per share to new investors represents the difference between the amount per share paid by purchasers of shares of our Class A common stock in this offering and the pro forma as adjusted net tangible book value per share of our Class A common stock immediately after completion of this offering.

As of December 31, 2020, our historical net tangible book value (deficit) was $(1,314) million, or $(13.92) per share of common stock (without giving effect to the Stock Split). Historical net tangible book value (deficit) per share represents our total tangible assets less total liabilities and redeemable convertible preferred stock, divided by the number of shares of common stock outstanding as of December 31, 2020.

As of December 31, 2020, our pro forma net tangible book value was $446.1 million, or $2.68 per share. Pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our Class A common stock and Class B common stock outstanding as of December 31, 2020 after giving effect to (i) the Preferred Stock Conversion, (ii) the Series B Conversion, (iii) the Reclassification, (iv) the filing and effectiveness of our Amended Charter, (v) the exercise of the Warrants and Call Options, and (vi) the Stock Split, in each case as if such event occurred on December 31, 2020.

After giving further effect to (i) the issuance and sale by us of 30,350,920 shares of our Class A common stock in this offering at an assumed initial public offering price of $33.00 per share (which is the midpoint of the price range set forth on the cover page of this prospectus), and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, (ii) the application of the net proceeds therefrom as set forth under “Use of Proceeds,” and (iii) the issuance of 429,308 shares of our Class A common stock upon the exercise of options by certain selling stockholders in connection with the sale of shares in this offering, including aggregate proceeds of $2.7 million received by us in connection with the exercise of such options, our pro forma as adjusted net tangible book value as of December 31, 2020, would have been $1,364.2 million, or $6.92 per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $4.24 per share to our existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of $26.08 per share to investors purchasing shares of our Class A common stock in this offering. The following table illustrates this dilution:

 

Assumed initial public offering price per share of Class A common stock

      $ 33.00

Pro forma net tangible book value per share as of December 31, 2020

     2.68     

Increase in pro forma net tangible book value per share attributable to new investors purchasing shares of Class A common stock in this offering and the exercise of options by certain selling stockholders in connection with this offering

     4.24     
  

 

 

    

Pro forma as adjusted net tangible book value per share immediately after this offering

        6.92  
     

 

 

 

Dilution in pro forma as adjusted net tangible book value per share to new Class A common stock investors in this offering

      $ 26.08  
     

 

 

 

 

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The dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms determined at the time of pricing of this offering. Each $1.00 increase (decrease) in the assumed initial offering price of $33.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value after this offering by approximately $28.8 million, or $0.15 per share, and would increase (decrease) the dilution per share to new investors purchasing our Class A common stock in this offering by $0.85 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions, and estimated offering expenses payable by us. Each increase (decrease) of 1.0 million shares in the number of shares sold in this offering, as set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value after this offering by approximately $31.4 million, or $0.12 per share, and would increase (decrease) the dilution per share to new investors by $(0.12) per share, assuming that the assumed initial public offering price of $33.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions, and estimated offering expenses payable by us.

The following table presents, on a pro forma as adjusted basis as of December 31, 2020, after giving effect to the pro forma adjustments described above, the difference between the existing stockholders of our Class A common stock and Class B common stock and the investors purchasing shares of our Class A common stock in this offering with respect to the number of shares of our Class A common stock purchased from us, the total consideration paid or to be paid to us, and the average price per share paid or to be paid to us, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration        
     Number      Percent     Amount      Percent     Average
price per
Share
 

Existing stockholders

     166,686,525        85   $ 1,782,419,949        64   $ 10.69  

New investors

     30,350,920        15     1,001,580,360        36     33.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     197,037,445        100   $ 2,784,000,309        100   $ 14.13  
  

 

 

    

 

 

   

 

 

    

 

 

   

Each $1.00 increase (decrease) in the assumed initial offering price of $33.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by new investors, total consideration paid by all stockholders and average price per share paid by all stockholders by $28.8 million, $28.8 million and $0.15 per share, respectively, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions, and estimated offering expenses payable by us. Each increase (decrease) of 1.0 million shares in the number of shares sold in this offering, as set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by new investors, total consideration paid by all stockholders and average price per share paid by all stockholders by $31.4 million, $31.4 million and $0.09 per share, respectively, assuming that the assumed initial public offering price of $33.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise in full their option to purchase 4,650,000 additional shares of our Class A common stock in this offering, the pro forma as adjusted net tangible book value (deficit) per share after this offering would be $7.56 per share and the dilution to new investors in this offering would be $25.44 per share. If the underwriters exercise such option in full, the number of shares held by new investors will increase by approximately 4,650,000 shares of our Class A common stock, or approximately 2% of the total number of shares of our Class A common stock outstanding after this offering.

 

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The number of shares of our Class A common stock and Class B common stock that will be outstanding upon the completion of this offering is based on 131,350,946 shares of our Class A common stock and 35,335,579 shares of our Class B common stock outstanding, in each case, as of December 31, 2020, after giving effect to the Preferred Stock Conversion, the Series B Conversion, the Reclassification, the exercise of the Warrants and Call Options, and the Stock Split, and includes the 429,308 shares of Class A common stock to be issued to the selling stockholders upon the exercise of options in connection with the sale of such shares in this offering.

The number of shares of Class A common stock and Class B common stock to be outstanding upon completion of this offering excludes:

 

   

33,958,817 shares of Class A common stock and 6,534,129 shares of Class B common stock, in each case issuable upon exercise of stock options outstanding as of December 31, 2020 pursuant to the 2012 Plan with weighted average exercise prices of $9.57 per share and $7.82 per share, respectively, except for 429,308 shares of Class A common stock to be issued upon the exercise of options by certain selling stockholders in connection with the sale of such shares in this offering;

 

   

1,555,666 shares of Class A common stock issuable in connection with the vesting and settlement of RSUs outstanding as of December 31, 2020, pursuant to our 2012 Plan;

 

   

2,008,638 shares of Class A common stock available for issuance pursuant to our 2012 Plan as of December 31, 2020, which will become available for issuance pursuant to the 2021 Plan upon such plan’s effectiveness (which includes (i) 108,666 shares of Class A common stock issuable in connection with the vesting and settlement of RSUs that were granted after December 31, 2020, pursuant to our 2012 Plan, and (ii) 699,475 shares of Class A common stock issuable upon exercise of stock options granted after December 31, 2020 pursuant to the 2012 Plan);

 

   

282,657 shares of Class A common stock issuable in connection with the vesting and settlement of IPO RSUs granted pursuant to the 2021 Plan to employees, named executive officers and directors, which awards will become effective in connection with the completion of this offering;

 

   

6,344,779 shares of Class A common stock issuable in connection with the vesting and settlement of RSUs that were granted to our Co-Founders pursuant to the 2021 Plan and will become effective in connection with the completion of this offering, which we refer to collectively as the Founders Awards (see “Executive and Director Compensation” for additional information regarding the Founders Awards);

 

   

13,255,516 shares of Class A common stock and Class B common stock that will become available for future issuance pursuant to the 2021 Plan (which, for the avoidance of doubt, excludes the Founders Awards and the IPO RSUs), which will become effective in connection with this offering (and which excludes any potential annual evergreen increases pursuant to the terms of the 2021 Plan);

 

   

3,976,590 shares of Class A common stock that will become available for future issuance pursuant to the ESPP which will become effective in connection with this offering (and which excludes any potential annual evergreen increases pursuant to the terms of the ESPP); and

 

   

291,447 shares of Class A common stock issuable upon the exercise of options to purchase shares of Class A common stock that were granted to certain consultants with a weighted-average exercise price of $0.96 per share.

To the extent any options, warrants or RSUs are granted and exercised in the future, there may be additional economic dilution to new investors.

In addition, we may choose to raise additional capital due to market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity, as Class A common stock, or other securities that are convertible into our Class A common stock, such as convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following tables present the selected consolidated financial data for Oscar Health, Inc. and its subsidiaries. We have derived the selected consolidated statements of operations data for the years ended December 31, 2019 and 2020 and the selected consolidated balance sheet data as of December 31, 2019 and 2020 from our audited consolidated financial statements included elsewhere in this prospectus. You should read this data together with our consolidated financial statements and related notes included elsewhere in this prospectus and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results for any prior period are not necessarily indicative of the results that may be expected in the future.

 

     Year ended December 31,  
               2019                         2020            
     (in thousands, except share
and per share data)
 

Consolidated Statement of Operations:

    

Revenue:

    

Premiums before ceded reinsurance

   $ 1,041,145     $ 1,672,339  

Reinsurance premiums ceded

     (572,284     (1,217,304
  

 

 

   

 

 

 

Premiums earned

     468,861       455,035  

Investment income and other revenue

     19,327       7,766  
  

 

 

   

 

 

 

Total revenue

     488,188       462,801  

Operating expenses:

    

Claims incurred, net

     408,259       309,353  

Other insurance costs

     167,851       216,534  

General and administrative expenses

     110,682       166,655  

Federal and state assessments

     48,170       81,458  

Health insurance industry fee

     —         19,251  

Premium deficiency reserve expense

     12,615       71,816  
  

 

 

   

 

 

 

Total operating expenses

     747,577       865,067  

Loss from operations

     (259,389     (402,266

Interest expense

     —         3,514  
  

 

 

   

 

 

 

Loss before income tax expense

     (259,389     (405,780

Income tax expense

     1,793       1,045  
  

 

 

   

 

 

 

Net loss

     (261,182     (406,825

Other comprehensive income—net of tax

    

Unrealized gain on investments

     17       906  
  

 

 

   

 

 

 

Comprehensive loss

   $ (261,165   $ (405,919
  

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and Diluted (without giving effect to the Stock Split)(1)

   $ (3.02   $ (4.72

Weighted-average common shares outstanding, basic and diluted (without giving effect to the Stock Split)(1)

     86,439,407       87,790,273  

Consolidated Balance Sheet:

    

Cash and cash equivalents

   $ 336,644     $ 826,326  

Short-term investments

     333,753       366,387  

Total assets

     1,346,914       2,272,106  

Total liabilities

     996,308       1,823,088  

Convertible preferred stock

     1,295,744       1,744,911  

Total stockholders’ (deficit) equity

     (945,138     (1,295,893

 

(1)

See note 2 to our audited consolidated financial statements included elsewhere in this prospectus for an explanation and calculation of historical earnings per share, basic and diluted. Historical earnings per share, basic and diluted, and historical weighted-average common shares outstanding, basic and diluted, are each presented in this table without giving effect to the Stock Split. After giving effect to the Stock Split, historical earnings per share, basic and diluted, will be $(9.06) for the year ended December 31, 2019 and $(14.16) for the year ended December 31, 2020, and historical weighted average common shares outstanding, basic and diluted, will be 28,813,135 for the year ended December 31, 2019 and 29,263,424 for the year ended December 31, 2020, in each case as if the Stock Split had occurred at the beginning of the earliest period presented.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties about our business and operations. Our actual results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those we describe under “Risk Factors” and elsewhere in this prospectus. See “Cautionary Note Regarding Forward-Looking Statements.” Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future.

Overview

Oscar is the first health insurance company built around a full stack technology platform and a relentless focus on serving our members. We started Oscar over eight years ago to create the kind of health insurance company we would want for ourselves—one that behaves like a doctor in the family, helping us navigate the health care system in our moments of greatest need. In the years since, we have built a suite of services that permit us to earn our members’ trust, leverage the power of personalized data, and help our members find quality care they can afford. We call this our member engagement engine, and it is powered by a differentiated full stack technology platform that will allow us to continue to innovate like a technology company and not a traditional insurer in the years ahead. As we continue to bring the Oscar experience to new members, new states, and new markets, our goal will remain the same: to build engagement, earn trust, and help our members live healthier lives.

Our experience over the past few years tells us that our strategy is working and that there is substantial demand for the member-first experience that Oscar was founded to create. We have grown our membership to 529,000 members as of January 31, 2021, representing a CAGR of 59% since 2017, while keeping insurance premiums affordable for our members and maintaining industry-leading engagement, trust, and member satisfaction metrics. Our use of quota share reinsurance arrangements has helped us grow in a sustainable and capital-efficient manner. We have achieved approximately 10% market share based upon membership across the counties we serve in the Individual market. Simultaneously, we have extended our offerings into new insurance markets, including Small Group and Medicare Advantage. In parallel, we have been able to meaningfully lower our MLR by 12 points from the year ended December 31, 2017 to the year ended December 31, 2020, to a healthy and economically sustainable level of 84.7%. We have also been able to drive our InsuranceCo Administrative Expense Ratio lower, from over 50% in 2017 to 26.1% in 2020, with increased scale and technological efficiencies. Throughout this period, we have continued to enhance our members’ experience by consistently deploying new features that help simplify and improve their health care journey. As a result, some of the most sophisticated participants in the health care ecosystem have recognized the power of our full stack technology platform and have formed innovative partnerships with us.

For the years ended December 31, 2019 and 2020, after taking into account reinsurance premiums ceded, premiums earned were $468.9 million and $455.0 million, respectively. Additionally, our members generated $1,325.8 million and $2,287.3 million of direct policy premiums for the years ended December 31, 2019 and 2020, respectively, an increase from $390.7 million for the year ended December 31, 2017, representing a CAGR of 80% between 2017 and 2020. There can be no assurance that such premium growth will continue. In 2020, we achieved an MLR of 84.7%, as compared to an MLR of 87.6% in 2019. For the years ended December 31, 2019 and 2020, due to our

 

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continued investment in our technology, product development, and market expansion, we generated a net loss of $261.2 million and $406.8 million, respectively, and Adjusted EBITDA losses of $222.2 million and $402.4 million, respectively. See “Prospectus Summary—Summary Consolidated Financial and Other Data” for more information and for a reconciliation of non-GAAP metrics to the most directly comparable financial measure calculated and presented in accordance with GAAP.

Our Business Model

Our business model is built around our member engagement engine and full stack technology platform, which drive high engagement and trust among our members, collect and integrate data to produce real-time personalized insights, and help our members find high quality care options, including innovative virtual care solutions that we develop in partnership with the Oscar Medical Group. We believe the investments we have made to date lead to better outcomes and a better experience for our members, and that our competitors will not be able to replicate our differentiated suite of services without access to a full stack technology platform such as ours. As we continue to invest in our technology, we expect the following impact:

 

  1.

Continued Membership Growth:     We believe our member engagement engine will attract and retain members across our existing and new products over time. Additionally, our members who engage more frequently with their dedicated Care Teams have higher retention rates than our non-engaged members, which should drive increasing retention rates over time. We have a significant opportunity to expand our offerings beyond our current geographic and insurance market footprint as well as grow share in our existing offerings. We have a proven track record of success in growing our membership. Out of the 15 states we served as of December 31, 2020, we expanded to 12 of those states in the preceding three years. The following tables set forth our members by state and insurance market as of December 31, 2019 and 2020.

Member by State

 

     As of
December 31,
 
     2019      2020  

Arizona

     1,775        4,344  

California

     55,914        103,834  

Colorado

     —          1,221  

Florida

     29,667        115,171  

Georgia

     —          426  

Kansas

     —          327  

Michigan

     592        2,059  

Missouri

     —          934  

New Jersey

     14,862        12,936  

New York

     51,296        39,275  

Ohio

     14,723        16,238  

Pennsylvania

     —          3,283  

Tennessee

     9,805        8,126  

Texas

     51,184        93,164  

Virginia

     —          706  
  

 

 

    

 

 

 

Total

     229,818        402,044  
  

 

 

    

 

 

 

 

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Member by Offering

 

     As of
December 31,
 
     2019      2020  

Individual and Small Group

     229,818        400,120  

Medicare Advantage

     —          1,924  
  

 

 

    

 

 

 

Total

     229,818        402,044  
  

 

 

    

 

 

 

Our membership increased 75% to 402,044 as of December 31, 2020 compared to 229,818 as of December 31, 2019. There are a number of drivers that caused our membership to increase by 75% over this period, including (i) geographic expansion within our existing states, (ii) geographic expansion to new states, and (iii) improvement in our competitive position within our existing markets. Specifically, we grew our geographic presence in Florida and Texas between 2019 and 2020 to offer Individual plans in more counties, which drove increased membership in those states. This growth in geographic presence included expansion into large metropolitan areas like Miami in Florida and Dallas and Houston in Texas. Additionally, we entered six new states in 2020: Colorado, Georgia, Kansas, Missouri, Pennsylvania, and Virginia. Finally, in California, our competitive position improved in key geographies between 2019 and 2020, which drove more individuals to buy our plans in Southern California. Separately, we entered the Medicare Advantage market in 2020 and had 1,924 members in this market as of December 31, 2020.

From time to time, our membership in particular states may contract. For example, our membership in New Jersey, New York, and Tennessee decreased as of December 31, 2020, as compared to our membership levels in those states as of December 31, 2019. Whether we experience membership growth or contraction in a given state depends on numerous factors, including our premium rates as compared to those of our competitors, in each case, as approved by state regulators, and other factors, such as plan design and provider network changes that impact the desirability of our health plans to consumers. We expect our overall geographic expansion in new and existing states as well as improvements in our competitive position within existing markets to continue to offset limited declines in membership in certain states.

 

  2.

Improved Unit Economics:     Our technology investments and scale have helped us meaningfully reduce our MLR and administrative expense ratios over the past several years and we expect they will continue to do so. Specifically, we expect many elements of our member engagement engine and full stack technology platform, including our real-time interventions and virtual care will help us achieve a better MLR over time. We also expect other elements of our platform, including our modern claims system, will drive administrative efficiencies over time. Finally, we expect to achieve increased operating leverage as we scale our fixed costs over a growing membership base.

 

  3.

Increased Platform Opportunities:     Recognition of our innovative model has already enabled partnerships with other payers and providers in which health plans and products are powered by our platform. The attractive economics of these deals often include both risk-sharing and/or fee-based compensation for use of our innovative technology. In the future, we may continue to pursue such deals, including through fee-based licensing arrangements involving our integrated platform and engine or modules thereof. We believe the health care of the future is consumer-oriented, digitally-enabled, data-driven, and value-conscious and that we are well-positioned to power stakeholders in that future.

Our revenue largely consists of premiums that we receive from our members, which we receive as a fixed amount PMPM. In each of the three insurance markets we serve—Individual, Small Group,

 

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and Medicare Advantage—we establish our PMPM premium rates on either an annual or quarterly basis through a process of actuarial estimation and regulatory approval from state and/or federal agencies. Our estimates reflect a variety of factors, including our members’ expected utilization of medical services, expected member risk acuity, and expected non-benefit administrative expenses including distribution and personnel costs. Other revenue consists primarily of investment income. In the future, we may also derive fee-based as well as risk-sharing revenue from partnerships with other entities in the health care ecosystem.

Our use of reinsurance enables us to scale rapidly in a sustainable and capital-efficient manner and offers greater predictability in earnings in the event of unexpected significant fluctuations in our MLR. We cede a specified percent of our premiums and claims to our third-party reinsurers under a quota share reinsurance arrangement. In return, the reinsurers must meet the risk and capital requirements associated with the premiums we cede to them. Under our 2020 XOL reinsurance contracts, the reinsurer is paid to cover claims related losses over a $500,000 attachment point, which mitigates catastrophic risk.

Our claims incurred consists of costs of care for the health services incurred by our members including inpatient, outpatient, physician and pharmacy costs. These may also include amounts under risk-sharing agreements with some of our provider partners. The amount of these costs are impacted by our contracted unit costs and members’ utilization of such services. We believe our differentiated member engagement engine and full stack technology platform, including care routing, Care Team interventions, our evolving virtual care solutions, and our innovative plan designs should help lower these costs over time for us and our members. Our other insurance costs are comprised of fixed and variable costs associated with running our insurance subsidiaries. The operating costs of our subsidiaries consist of distribution and marketing costs to sell our plans, vendor costs, compensation and benefits, and taxes and fees. Our general and administrative expenses include development costs associated with building our technology and certain other administrative expenses. Our development costs are largely made up of employees in our product and engineering teams that are focused on extending the capabilities of our full stack technology platform.

Insurance Premiums

We generate a substantial majority of our total revenue from premiums we receive from serving members in the geographies in which we operate. Direct policy premiums are received on a PMPM basis from our members. For the years ended December 31, 2019 and 2020, 57% and 40% of our direct policy premiums, respectively, were collected directly from our members, while the rest were collected from the CMS as part of the APTC program, collectively referred to as direct policy premiums. We recognize premiums before ceded reinsurance revenue over the period that coverage is effective and bill our members on a monthly basis, with billings due at the beginning of the service period. CMS engages in a monthly reconciliation and payment process for its portion of direct policy premiums.

Individual and Small Group

The Individual market primarily consists of policies purchased by individuals and families through Health Insurance Marketplaces. The Small Group market consists of employees of companies with up to 50 full-time workers in most states and up to 100 full-time workers in California, Colorado, New York, and Vermont.

In the Individual market, our PMPM premium rates become applicable at the beginning of a calendar year and are developed during the prior year based on our estimates of a variety of factors, including our members’ utilization of medical services, the unit cost for such services, estimated member risk acuity, and non-benefit administrative expenses including distribution and personnel

 

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costs. In the Small Group market, the process is substantially similar except that in some states we may file rates on a quarterly basis. We offer health plans in the Individual market on exchange and off-exchange under the five “metal” plan categories—Catastrophic, Bronze, Silver, Gold, and Platinum. These differ based on the size of the monthly premium and the level of sharing of medical costs between Oscar and our members, with the Catastrophic and Bronze plans having the highest level of sharing. Both Individual and Small Group PMPM premium rates are required to be approved by applicable state and federal regulatory agencies in accordance with the ACA, as well as any premium rate changes by age, geography, and plan design, amongst others. Additionally, various federal and state laws have minimum MLR requirements. We elect to participate in a given Individual or Small Group market on an annual basis. In substantially all cases, our base premiums are subject to a risk adjustment based on the health status of our members relative to the overall health status of all individuals in a given state or market.

Medicare Advantage

We began providing plans in the Medicare Advantage program in 2020 to adults who are age 65 and older and eligible for traditional Medicare but who instead select coverage through a private market plan.

We enter into contracts with CMS under the Medicare Advantage program to provide health care benefits to Medicare beneficiaries. In exchange, we receive a fixed PMPM premium that varies based on a variety of factors, including the CMS Star ratings of our health plans as well as member geographic location, demographics, and health status. CMS also uses a risk adjustment system to adjust the premiums paid to Medicare Advantage plans that reflects the predicted health care costs of their members compared to an “average” beneficiary based on health status and other factors. Medicare Advantage premiums paid to us under our CMS contracts are subject to annual review by CMS as well as federal government reviews and audits. We elect to participate in a given Medicare geographic region on an annual basis.

 

 

LOGO

Innovative Partnerships

As we have built our full stack technology platform, we have started to monetize the platform we have built through co-branded partnerships with leading providers, payers and other innovators. Our co-branded partnerships, which grew to four in 2020 from one in 2019, are proof points of our

 

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ability to deploy our technology to support innovative health care use cases and create value by enabling other payers and providers to leverage the strength of our full stack technology platform to power health plans. We currently have co-branded partnerships with (1) the Cleveland Clinic in the Individual market, which launched in 2018, (2) Montefiore in the Medicare Advantage market, which launched in 2020, and (3) Cigna in the Small Group market, which launched in 2020. We also announced a co-branded plan with Holy Cross and Memorial in the Medicare Advantage market, which began selling in 2020 for enrollment in 2021. Our platform helps power the plans of each of these co-branded partnerships. In addition, in January 2021, we entered into a new partnership with Health First, where we will provide certain administrative services and provide their individual commercial and Medicare Advantage members with access to our full stack technology platform largely beginning on January 1, 2022. While the economics of a partnership may vary, we often monetize through a risk-sharing or fee-based arrangement, depending on the services we are performing.

Reinsurance

We believe our reinsurance agreements help us achieve important goals for our business, including risk management, capital efficiency, and greater predictability in our earnings in the event of unexpected significant fluctuations in MLR. Specifically, reinsurance is a financial arrangement under which one insurer, which we refer to as the “primary insurer,” enters into a reinsurance contract with a reinsurance company, which covers a portion of the medical claims or ceded claims of the primary insurer in return for a portion of their premium, or premiums ceded. Some reinsurance agreements include a ceding commission payment from the reinsurer to the primary insurer to cover administrative costs. We currently use quota share agreements with certain partners to reduce our capital and surplus requirements, which enables us to grow in a capital-efficient manner and better manage risk. During the years ended December 31, 2019 and 2020, approximately 55% and 77% of our premiums before ceded reinsurance, respectively, were ceded under quota share reinsurance arrangements, with approximately 33% and 32% of our premiums before ceded reinsurance, respectively, ceded to Axa France Vie and approximately 22% and 45% of our premiums before ceded reinsurance, respectively, ceded to Berkshire Hathaway Specialty Insurance Company. We entered into statutory trust agreements with Axa France Vie in compliance with the credit for reinsurance laws and regulations of the state of domicile of each ceding company in connection with reinsurance ceded to an unauthorized reinsurer. Each trust account is funded at 102% of the ceding entity’s IBNR. Acceptable assets deposited into the trust accounts include cash, certificates of deposit, and instruments that are acceptable to the commissioner of the insurance department of the ceding entity’s state of domicile. Because reinsurers are entitled to a portion of our premiums under our quota share reinsurance arrangements, increases in the amount of premiums ceded under these arrangements reduce our revenue. Premiums for quota share insurance are based on a percentage of premiums earned before ceded reinsurance. Claims ceded under these quota share arrangements are limited to an amount specified in each agreement proportional to the MLR of ceded business and subject to a maximum MLR, which varies from 100% to 105% of ceded premiums for the agreements applicable to the years ended December 31, 2019 and 2020. To the extent ceded premiums exceed ceded claims and commissions, we typically receive an experience refund. Reinsurance recoveries are recorded as a reduction to claims incurred, net. We also use XOL reinsurance to limit our exposure to large catastrophic risk from individual claims of members. Reinsurance premiums are based on enrollment calculated on a PMPM basis. Our quota share and XOL reinsurance treaties do not relieve us of our primary medical claims incurred obligations.

Key Operating and Non-GAAP Financial Metrics

We regularly review a number of metrics, including the following key operating and non-GAAP financial metrics, to evaluate our business, measure our performance, identify trends in our business, prepare financial projections, and make strategic decisions. We believe these operational and financial

 

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measures are useful in evaluating our performance, in addition to our financial results prepared in accordance with GAAP.

 

     Year ended December 31,  
             2019                     2020          

Members

     229,818       402,044  

Direct Policy Premiums (in thousands)

   $ 1,325,760     $ 2,287,319  

Medical Loss Ratio

     87.6     84.7

InsuranceCo Administrative Expense Ratio

     25.5     26.1

InsuranceCo Combined Ratio

     113.1     110.8

Adjusted EBITDA(1) (in thousands)

   $ (222,173   $ (402,447

 

(1)

Adjusted EBITDA is a non-GAAP measure. See “Prospectus Summary—Summary Consolidated Financial and Other Data” for information regarding our use of Adjusted EBITDA.

Members

Members are defined as any individual covered by one of our health plans. We view the number of members enrolled in our health plans as an important metric to help evaluate and estimate revenue and market share. Additionally, the more members we enroll, the more data we have which allows us to improve the functionality of our platform.

Membership increased 75% to 402,044 as of December 31, 2020 compared to 229,818 as of December 31, 2019. The increase is primarily attributable to growth in key existing states, especially in California and Florida due to as well as intra-state and new state expansion, new plan offerings, and the introduction of Medicare Advantage plans.

Direct Policy Premiums

Direct policy premiums are defined as the premiums collected from our members or from the federal government during the period indicated, before risk adjustments and reinsurance. These premiums include APTC, or premium subsidies, which are available to individuals and families with annual income between 100% and 600% of the federal poverty level in California and 100% and 400% of the federal poverty level in all other states under the ACA. We believe direct policy premiums are an important metric to assess our growth. We expect direct policy premiums will increase over time as we increase membership and continue to diversify our member mix more towards higher value metal tiers like Silver and across our lines of business.

Direct policy premiums increased 73% to $2,287.3 million for the year ended December 31, 2020 compared to $1,325.8 million for the year ended December 31, 2019. The increase is primarily attributable to the significant growth in our membership in existing and new states, as described above, and further increased by changes in membership mix towards higher value plans.

Medical Loss Ratio

Medical loss ratio is calculated as set forth in the table below. Medical claims are total medical expenses incurred by members in order to utilize health care services less any member cost sharing. These services include inpatient, outpatient, pharmacy, and physician costs. Medical claims also include risk sharing arrangements with certain of our providers. The impact of the federal risk adjustment program is included in the denominator of our MLR. We believe MLR is an important metric to demonstrate the loss ratio of our costs to pay for health care of our members to the premiums before ceded reinsurance. We believe our member engagement engine and full stack technology

 

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platform will allow us to more efficiently manage total claims incurred. MLRs in our existing products are subject to various federal and state minimum requirements. Below is a calculation of our MLR for the periods indicated.

 

     Year ended December 31,  
             2019                     2020          
     (in thousands)  

Claims incurred before ceded quota share reinsurance(1)

   $ 924,403     $ 1,364,724  

XOL ceded claims(2)

     (13,908     (13,633

State reinsurance(3)

     (6,959     (10,026
  

 

 

   

 

 

 

Net claims before ceded quota share reinsurance(A)

   $ 903,448     $ 1,341,065  
  

 

 

   

 

 

 

Premiums before ceded reinsurance(4)

   $ 1,041,145     $ 1,672,339  

Other non-recurring items(5)

     3,240       (64,538

XOL reinsurance premiums(6)

     (13,332     (24,066
  

 

 

   

 

 

 

Net premiums before ceded quota share reinsurance(B)

   $ 1,031,053     $ 1,583,735  
  

 

 

   

 

 

 

Medical Loss Ratio (A divided by B)

     87.6     84.7
  

 

 

   

 

 

 

 

(1)

See footnote 4 to our audited consolidated financial statements included elsewhere in this prospectus for a reconciliation of direct claims incurred to claims incurred, net appearing on the face of our audited consolidated income statement.

(2)

Represents claims ceded to reinsurers pursuant to an XOL treaty, for which such reinsurers are financially liable. We use XOL reinsurance to limit the losses on individual claims of our members.

(3)

Represents payments made by certain state-run reinsurance programs established subject to CMS approval under Section 1332 of the ACA.

(4)

See footnote 3 to our audited consolidated financial statements included elsewhere in this prospectus for an explanation of premiums before ceded reinsurance.

(5)

Represents a pre-quota share write-off of a NYDFS receivable in 2019 as described in footnote 2 in the reconciliation presented in the section titled “—Adjusted EBITDA” below, which is offset by proceeds received from the sale of a portion of our risk corridor recovery in 2019. The amount was settled in 2020 and we received proceeds of $64.5 million of premiums earned offset by $12.1 million of legal fees and federal and state assessments. For additional information, refer to footnote 3 to our audited consolidated financial statements included elsewhere in this prospectus.

(6)

Represents XOL reinsurance premiums paid.

MLR decreased to 84.7% for the year ended December 31, 2020 compared to 87.6% for the year ended December 31, 2019. The decrease is primarily attributable to the impact of COVID-19 as elective or other medical appointments that were deferred, suspended or canceled to avoid non-essential patient exposure to medical environments. Some of the decrease was also driven in part by pricing margin improvements, operational improvements, and product enhancements. These benefits were partially offset by negative prior period development and reserve estimates reflecting uncertainty around COVID-19.

InsuranceCo Administrative Expense Ratio

InsuranceCo Administrative Expense Ratio is calculated as set forth in the table below. The ratio reflects the costs associated with running our combined insurance companies. We believe InsuranceCo Administrative Expense Ratio is useful to evaluate our ability to lower our expenses as a percentage of premiums before ceded quota share reinsurance. Expenses necessary to run the insurance company are included in other insurance costs and federal and state assessments. These expenses include variable expenses paid to vendors and distribution partners, premium taxes and exchange fees, employee-related compensation, benefits, marketing costs, and other administrative

 

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expenses. We believe that the combination of our technology and scale will allow us to achieve efficiencies in our variable costs as well as increased operating leverage over time. Below is a calculation of our InsuranceCo Administrative Expense Ratio for the periods indicated.

 

     Year ended December 31,  
             2019                     2020          
     (in thousands)  

Other insurance costs

   $ 167,851     $ 216,534  

Ceding commissions

     65,591       126,840  

Other non-recurring items(2)

     —         (12,102

Stock-based compensation expense

     (17,615     (18,299

Health insurance industry fee

     —         19,251  

Federal and state assessment of health insurance subsidiaries(1)

     47,019       81,199  
  

 

 

   

 

 

 

Health insurance subsidiary adjusted administrative expenses (A)

   $ 262,846     $ 413,423  
  

 

 

   

 

 

 

Premiums before ceded reinsurance(2)

   $ 1,041,145     $ 1,672,339  

Other non-recurring items(2)

     3,240       (64,538

XOL reinsurance premiums(2)

     (13,332     (24,066
  

 

 

   

 

 

 

Net premiums before ceded quota share reinsurance(B)

   $ 1,031,053     $ 1,583,735  
  

 

 

   

 

 

 

InsuranceCo Administrative Expense Ratio (A divided by B)

     25.5     26.1
  

 

 

   

 

 

 

 

(1)

Represents federal and state assessments of our health insurance subsidiaries.

(2)

See footnotes 4 through 6 to the calculation presented in the section titled “—Medical Loss Ratio” above for a description of these line items.

The Administrative Expense Ratio increased to 26.1% for the year ended December 31, 2020 compared to 25.5% for the year ended December 31, 2019. The increase is mostly attributable to the health insurance industry fee of $19.3 million as well as expansion investments to launch our Medicare Advantage and our Cigna + Oscar offering. These were partially offset by operational efficiencies and scale benefits.

InsuranceCo Combined Ratio

InsuranceCo Combined Ratio is defined as the sum of MLR and InsuranceCo Administrative Expense Ratio. We believe this ratio best represents the current overall performance of our insurance business for activities that can be compared to peers.

InsuranceCo Combined Ratio decreased to 110.8% for the year ended December 31, 2020 compared to 113.1% for the year ended December 31, 2019. The improvement in the InsuranceCo Combined Ratio was driven by the same factors that drove our MLR and InsuranceCo Administrative Expense Ratio; including deferred care from COVID-19, medical and administrative operational improvements, and scale. These improvements were partially offset by prior year development and the health insurance industry fee.

Adjusted EBITDA

Adjusted EBITDA is defined as net loss for the Company and its consolidated subsidiaries before interest expense, income tax expense, depreciation and amortization as further adjusted for stock-based compensation, warrant contract expense, changes in the fair value of warrant liabilities, and non-operating litigation reserves/settlements as described below. We present Adjusted EBITDA because we consider it to be an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our

 

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industry. Adjusted EBITDA is a non-GAAP measure. See “Prospectus Summary—Summary Consolidated Financial and Other Data” for information regarding our use of Adjusted EBITDA.

 

     Year ended December 31,  
             2019                     2020          
     (in thousands)  

Net loss

   $ (261,182   $ (406,825

Interest expense

     —         3,514  

Income tax expense

     1,793       1,045  

Depreciation and amortization

     6,899       11,285  

Stock-based compensation/warrant expense(1)

     34,262       40,970  

Other nonrecurring items(2)

     (3,945     (52,436
  

 

 

   

 

 

 

Adjusted EBITDA

   $ (222,173   $ (402,447
  

 

 

   

 

 

 

 

(1)

Represents (i) non-cash expenses related to equity-based compensation programs, which vary from period to period depending on various factors including the timing, number, and the valuation of awards, (ii) warrant contract expense, and (iii) changes in the fair value of warrant liabilities.

(2)

A health insurance subsidiary of the Company had previously recorded a receivable in 2018 of $16,055 from the New York Department of Financial Services, or NYDFS, in connection with the NYDFS’s program to limit federal risk adjustment transfers, which would have allowed us to collect additional funds from the NYDFS that we had previously remitted to CMS. However, this NYDFS program would have resulted in other insurance carriers having to return certain of the funds they received in connection with the federal risk adjustment program to the NYDFS. In 2017, these carriers initiated a lawsuit against the NYDFS to reverse the NYDFS limitations, which was subsequently decided in the carriers’ favor. As a result, we will no longer be entitled to receive the additional funds and we have written off the receivable in 2019. The write-off of the receivable is offset by proceeds received from the sale of a portion of our risk corridor recovery in 2019. The amount was settled in 2020 and we received proceeds of $64.5 million of premiums earned offset by $12.1 million of legal fees and federal and state assessments. For additional information, refer to footnote 3 to our audited consolidated financial statements included elsewhere in this prospectus.

Adjusted EBITDA losses increased to $402.4 million for the year ended December 31, 2020 compared to $222.2 million for year ended December 31, 2019. The increase in losses was driven primarily by an increase in our premium deficiency reserve and the cost of the health insurance industry fee levied in 2020. We increased our premium deficiency reserve expense to account for growth in 2021 membership as we invest in markets and products. We expect this premium deficiency reserve will be released into earnings over the course of 2021 as we incur the related contract losses. The health insurance industry fee increased year over year as it was suspended for 2019 but resumed in 2020. The fee was eliminated for 2021.

In addition, general and administrative expenses increased as we made investments to enhance our technology platform, launch our Medicare Advantage plans and our Cigna + Oscar offering, and incurred costs to support requirements to operate as a public company. Increased losses were partially offset by improvement in our net underwriting margin due to higher reinsurance experience refunds and lower claims incurred, which was primarily driven by the impact of COVID-19 as elective or other medical appointments that were deferred, suspended or canceled to avoid non-essential patient exposure to medical environments. In addition, net underwriting margin benefited from pricing margin improvements, operational improvements, and product mix enhancements.

 

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Key Factors Affecting Performance

Our financial condition and results of operations have been, and will continue to be, affected by a number of factors including the following:

Our Ability to Acquire New Members and Retain Existing Members

Our long-term growth depends in large part on our continued ability to acquire new members and retain existing members. We believe that we have significant opportunity to expand and grow market share within our current geographic footprint. We typically enter new counties with a 7% to 8% average market share in year one and are typically able to grow our penetration over time. Today, we estimate our market share in the Individual market has grown to approximately 15% in counties where we have been operating for three years or more, based on membership within the market. Our ability to continue acquiring members in existing markets and states is driven by our combination of innovative plan design and data-driven pricing. Members find value in the differentiated offerings in our health plans, such as virtual care at no additional cost, wellness incentives, and dedicated Care Teams.

We believe our member engagement engine is the start of how we retain members. On average, our members who engage more frequently with their dedicated Care Teams have higher retention rates than members who are less engaged. Our increased engagement allows us to provide our members with even better guidance through the health care system, creating a virtuous cycle that benefits our members, our partners and increases the value of our platform. Our ability to retain our members is also driven by our ability to competitively price our products each year. We have developed a digital platform and in-depth approach to pricing that takes a balanced view of growth, profitability, and risk that allows us to remain affordable and competitive within our markets. We believe it would be difficult for incumbent insurance providers to emulate this model without access to a full stack technology platform such as ours.

Our Ability to Expand into New Geographies

Our continued success also depends on our ability to expand into new geographies. Our existing geographic footprint today represents a fraction of our addressable market opportunity. Today, we serve members in 291 counties and 18 states in the U.S. Based upon our experience, we believe our innovative care model can scale nationally. We therefore expect to be able to selectively and strategically expand into new geographies.

In order to expand into a new market or state, we start planning 10 to 18 months prior to target launch date, depending on the insurance market and whether we are operating through a partnership or not. Our goal in selecting markets is to maximize return on investment over the long term. We typically enter into markets with Individual plans and offer our health plans in limited geographic areas. Over time, we seek to expand into other insurance products, plans, and coverage areas. We believe that the scalable economics of the Individual plans alone make it likely that we will have a positive return on investment. As we continue our expansion, our success will depend on the competitive dynamics in our new markets, and our ability to attract members and deploy our care model in those markets.

Our Ability to Enter into New Partnerships and Offer New Products and Plans

Our growth depends on our ability to enter into new partnerships and offer new products and plans that attract new members. We currently operate in the Individual, Small Group, and Medicare Advantage markets, and our modernized approach has been designed with flexibility to more easily add new plans and end markets. As we further scale our business, we will be able to leverage our

 

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existing regulatory infrastructure, strong brand name, and full stack technology platform into developing new plans for existing markets and growing membership through enhanced plan designs. Our continued success is dependent on our ability to maintain our competitive position as a technology-driven, direct-to-consumer health insurance company.

We plan to continue to invest in and scale our offerings to address the needs of consumers and our partners. We believe opportunities exist to expand in commercial, government, and other ancillary benefits markets, amongst others. Our expansion into new products and plans may come through partnerships with other health insurers or providers. These innovative partnerships, which often feature risk-sharing economic arrangements, allow us to leverage the strengths of legacy health care stakeholders while reimagining the way health care is delivered.

Our Ability to Manage Our Medical Expenses

Our business performance and growth depends, in large part, on our ability to accurately estimate and effectively manage our MLR. Historically, our MLR has fluctuated substantially, and has also varied across our state health plans. Over the last four years, we have improved our MLR from 96.8% for the year ended December 31, 2017 to 84.7% for the year ended December 31, 2020 by focusing on improving our plan design and pricing, our risk adjustment operations, and other operational efficiencies. We believe our differentiated member engagement engine and full stack technology platform, tools including care routing, Care Team interventions, our evolving virtual care solutions, and our innovative plan designs and our claims engine should help lower these costs over time for us and our members.

Our Ability to Achieve Efficiencies in our Other Insurance Costs and General and Administrative Expenses

Our results depend on our ability to manage our other insurance costs along with general and administrative expenses. While we expect other insurance costs and general and administrative expenses to increase as we grow the business and incur additional expenses of being a public company, we do not expect our expenses to grow at the same pace as our direct policy premiums because we do not require a proportional increase in the size of our headcount or technology infrastructure to support our growth. We are focused on leveraging the operational efficiencies created by our innovative cloud-based platform, which is scalable, flexible, and purpose-built, spanning all critical health care insurance and technology domains, including member and provider data, utilization management, claims management, billing, and benefits. Our existing full stack technology platform will help us run our operations efficiently at scale, delivering better outcomes, and cost savings for our members.

We use our technology to drive efficiency across all functions, including underwriting, plan administration, and claims. We are beginning to realize operating efficiencies as we scale against our fixed expense base. We believe that as we continue to scale, we will be able to achieve efficiencies in our other insurance costs and general and administrative expenses to drive profitability. Our administrative infrastructure has significant expansion capacity, allowing us to integrate new members from expansion within existing markets and to enter new markets at lower incremental cost.

Our Ability to Grow in a Capital-Efficient Manner

Each of our health insurance subsidiaries that is operated by the Company is subject to laws and regulations that, among other things, require the maintenance of a minimum amount of statutory capital. Our ability to continue to grow depends on effective balance sheet management. We utilize quota share reinsurance and XOL reinsurance to help improve capital efficiency of the balance sheet and to protect potential tail risk exposures, respectively. The structure of our reinsurance contracts is

 

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consistent with our long-term risk strategy, which is designed to (1) optimize capital efficiency, (2) provide a buffer from adverse deviations in claims, and (3) allow us to grow sustainably and profitably.

We must comply with regulatory constraints on our minimum capital position and have entered into a number of parental guarantees with our health insurance subsidiaries as part of the certificate of authority application process in various states. Actual capital levels are monitored on a regular basis, and we believe we will have access to sufficient capital and liquidity sources to satisfy future regulatory requirements. We believe our investment strategy is conservative given our growth trajectory and short-term liabilities.

Seasonality

Our business is generally affected by the seasonal patterns of our enrollment and medical expenses and, to a lesser extent, marketing spend in advance of an Open Enrollment Period or Annual Election Period. Direct policy premiums earned are historically highest in the first quarter primarily due to the annual enrollment cycles and the enrollment of our members.

Members

In the Small Group market, approximately 40% of membership is acquired between December 1 and January 1; with the remaining members acquired throughout the balance of the year. For Individual and Medicare Advantage products, the majority of our member growth occurs in connection with the annual Open Enrollment Period and Annual Election Period. We also add members throughout the year, including during Special Enrollment Periods when certain eligible individuals can enroll.

Claims Incurred

Our medical expenses are generally expected to be highest in the fourth quarter of the year and are impacted by seasonal effects of medical costs such as the flu season, the utilization of deductibles and out-of-pocket maximums over the course of the policy year which shifts more costs to us in the fourth quarter as we pay a higher proportion of claims. As a result, we typically have higher levels of medical costs in the third and fourth quarters of a calendar year. Our medical costs can also vary according to the number of days and holidays in a given period.

Impact of COVID-19

In December 2019, a novel strain of coronavirus, SARS-CoV-2, was identified in Wuhan, China. Since then, SARS-CoV-2, and the resulting disease, COVID-19, has spread rapidly to almost every country in the world and all 50 states within the United States. Global health concerns relating to the outbreak of COVID-19 have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders, and business shutdowns.

In particular for our business, governmental authorities have also recommended, and in certain cases, required, that elective or other medical appointments be suspended or canceled to avoid non-essential patient exposure to medical environments and potential infection. In addition, some individuals have delayed or are not seeking routine medical care to avoid such exposure. These and other responses to the COVID-19 pandemic have meant that our MLR has improved as members have fewer medical expenses and providers make fewer claims against members’ health insurance.

 

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To date, we have experienced or expect to experience the following impacts on our business

model due to COVID-19:

 

   

Virtual Care. The utilization of telehealth in primary care visits for Oscar’s subscribing members increased by more than 50%, from 21% of total primary episodes in 2019 to 33% in 2020. We intend to continue to offer our members flexible options when seeking care, including our Oscar virtual care solutions. In 2021, we launched innovative virtual primary care plan designs in three key states for a more convenient, efficient, and cost-effective doctor experience.

 

   

Medical Loss Ratio. Because of the suspension of many elective medical appointments and procedures due to COVID-19, we have experienced a decrease in our MLR from 2019 as compared to 2020. We also have experienced and may continue to experience depressed non-COVID-19 related medical costs, as the pandemic continues to affect the United States, and our members continue to change the way they utilize care. Some of these costs will likely be incurred at a later date, resulting in increased medical claims expenses in the future. We cannot accurately estimate the future net potential impact, positive or negative, to our medical claims expenses at this time.

 

   

Work From Home Arrangements. We have taken significant steps to support our employees to protect their health and safety, while also ensuring that our business can continue to operate and that services continue without disruption. We have implemented our business continuity plans and have taken actions to support our workforce. We have transitioned the vast majority of our employees to work from home, allowing us to continue to operate at close to full capacity, while continuing to maintain our internal control focus. As a result, we have experienced and expect continued incremental costs due to investments and actions we have already taken and continued efforts to protect our members and employees and the communities we serve.

 

   

Member Solutions. We have expanded benefit coverage in areas such as COVID-19 care and testing, telemedicine, and pharmacy benefits; offered additional enrollment opportunities to those who previously declined employer-sponsored offerings; extended certain premium payment terms for customers experiencing financial hardship; simplified administrative practices; and accelerated payments to care providers, all with the aim of assisting our customers, providers and members in addressing the impacts of the COVID-19 pandemic.

Overall measures to contain the COVID-19 outbreak may remain in place for a significant period of time, as certain geographic regions have experienced a resurgence of COVID-19 infections and new strains of COVID-19 that appear to be more transmissible have developed. The duration and severity of this pandemic is unknown and the extent of the business disruption and financial impact depends on

factors beyond our knowledge and control.

Components of our Results of Operations

Premiums Before Ceded Reinsurance

Premiums before ceded reinsurance primarily consist of premiums received, or to be received, directly from our members or from CMS as part of the APTC program, net of the impact of our risk adjustment payable. Premiums before ceded reinsurance are generally impacted by the amount of risk sharing adjustments, our ability to acquire new members and retain existing members, and average size and premium rate of policies.

Reinsurance Premiums Ceded

Reinsurance premiums ceded represent the amount of premiums written that are ceded to reinsurers either through quota share or XOL reinsurance. We enter into reinsurance agreements, in

 

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part, to limit our exposure to potential losses as well as to provide additional capacity for growth. Reinsurance premiums ceded are recognized over the reinsurance contract period in proportion to the period of risk covered. The volume of our reinsurance premiums ceded is impacted by the level of our premiums earned and any decision we make to increase or decrease limits, retention levels, and co-participations.

Investment Income and Other Revenue

Investment income and other revenue primarily includes interest earned and gains on investments in U.S. Treasury and agency securities, corporate notes, certificates of deposit, and commercial paper.

Claims Incurred, Net

Claims incurred, net primarily consists of both paid and unpaid medical expenses incurred to provide medical services and products to our members. Medical claims include fee-for-service claims, pharmacy benefits, capitation payments to providers, and various other medical-related costs. Under fee-for-service claims arrangements with providers, we retain the financial responsibility for medical care provided and incur costs based on actual utilization of hospital and physician services. Medical claims are recognized in the period health care services are provided. Unpaid medical expenses include claims reported and in the process of being settled, but that have not yet been paid, as well as health care costs incurred but not yet reported to us, which are collectively referred to as benefits payable or claim reserves. The development of the claim reserve estimate is based on actuarial methodologies that consider underlying claim payment patterns, medical cost inflation, historical developments, such as claim inventory levels and claim receipt patterns, and other relevant factors. The methods for making such estimates and for establishing the resulting liability are continuously reviewed and any adjustments are reflected in the period determined. Claims incurred, net also reflects the net impact of our ceded reinsurance claims.

Other Insurance Costs

Other insurance costs primarily include wages, benefits, marketing, rent, costs of software and hardware, distribution costs, unallocated claims adjustment expenses, and administrative costs associated with functions that are necessary to support our health insurance business and are net of ceding commissions we receive from our reinsurance partners. Such functions include, but are not limited to, information systems, legal, finance, compliance, concierge, and claims processing. Other insurance costs will increase over time as we support a larger membership base but we expect our ability to leverage our technology and member engagement will decrease the magnitude of the increase in costs.

General and Administrative Expenses

General and administrative expenses primarily include wages, benefits, research and development, costs of software and hardware, and administrative costs for our corporate and technology functions. Such functions include, but are not limited to information systems, executive management, legal, and finance. Research and development expenses include expenses related to developing our platform. General and administrative expenses will increase over time following the closing of this offering due to the additional legal, accounting, insurance, investor relations, and other costs that we will incur as a public company.

 

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Federal and State Assessments

Federal and state assessments represent non-income tax charges from federal and state governments, including but not limited to Exchange user fees, premium taxes, franchise taxes, and other state and local non-premium related taxes.

Health Insurance Industry Fee

The ACA includes an annual, nondeductible insurance industry tax that is levied proportionally across the insurance industry for risk-based health insurance products, which we are subject to. It is calculated based on a ratio of our applicable net premiums written, compared to the total U.S. health insurance industry applicable net premiums written during the previous calendar year. We record the health insurance industry fee, or HIF, liability in accounts payable and accrued liabilities at the beginning of the calendar year. A corresponding deferred cost is recorded in receivables and other assets that is amortized to HIF in the consolidated statement of operations and comprehensive loss using a straight-line method of allocation over the calendar year. There was a one year suspension of HIF for 2019, but HIF resumed in 2020. The HIF has been permanently repealed for calendar years beginning in 2021.

Premium Deficiency Reserve Expense

Premium deficiency reserve expense is the year over year change in the premium deficiency reserve liability. Premium deficiency reserve liabilities are established when it is probable that expected future claims and maintenance expenses will exceed future premium and reinsurance recoveries on existing medical insurance contracts without consideration of investment income. For purposes of determining premium deficiency losses, contracts are grouped consistent with the Company’s method of acquiring, servicing, and measuring the profitability of such contracts which is generally on a line of business basis.

Income Tax Expense

Income tax expense consists primarily of changes to our current and deferred federal and state tax assets and liabilities. Income taxes are recorded as deferred tax assets and deferred tax liabilities based on differences between the book and tax bases of assets and liabilities. Our deferred tax assets and liabilities are calculated by applying the current tax rates and laws to taxable years in which such differences are expected to reverse.

We continually review the need for, and the adequacy of, valuation allowances, and recognize benefits from our deferred tax assets only when an analysis of both positive and negative factors indicates that it is more likely than not such benefits will be realized.

 

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Results of Operations

Year Ended December 31, 2020 compared to the Year Ended December 31, 2019

The following table sets forth our results of operations for the years indicated:

 

     For the years ended December 31,     % change  
(in thousands)    2019     2020     $ Change  

Premiums before ceded reinsurance

   $ 1,041,145     $ 1,672,339     $ 631,194       60.6

Reinsurance premiums ceded

     (572,284     (1,217,304     (645,020     112.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Premiums earned

     468,861       455,035       (13,826     (2.9 )% 

Investment income and other revenue

     19,327       7,766       (11,561     (59.8 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     488,188       462,801       (25,387     (5.2 )% 

Operating Expenses:

        

Claims incurred, net

     408,259       309,353       (98,906     (24.2 )% 

Other insurance costs

     167,851       216,534       48,683       29.0

General and administrative expenses

     110,682       166,655       55,973       50.6

Federal and state assessments

     48,170       81,458       33,288       69.1

Health insurance industry fee

           19,251       19,251       NM  

Premium deficiency reserve expense

     12,615       71,816       59,201       469.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     747,577       865,067       117,490       15.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (259,389     (402,266     (142,877     55.1

Interest expense

           3,514       3,514       NM  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expense

     (259,389     (405,780     (146,391     56.4

Income tax expense

     1,793       1,045       (748     (41.7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (261,182   $ (406,825   $ (145,643     55.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Premiums Before Ceded Reinsurance

Premiums before ceded reinsurance increased $631.2 million or 61% to $1.7 billion for the year ended December 31, 2020, from $1.0 billion for the year ended December 31, 2019, which was primarily driven by higher membership in existing markets as well as expansion into six new states and the introduction of Medicare Advantage. Additionally, we benefited from the one-time ACA risk corridor settlement of $64.5 million in 2020. These amounts were partially offset by an increase of $330.2 million in risk adjustment payments required to be made under the ACA driven primarily by our increase in membership that have healthier risk profiles within respective geographies where we operate.

Reinsurance Premiums Ceded

Reinsurance premiums ceded increased $645.0 million or 113% to $1,217.3 million for the year ended December 31, 2020 from $572.3 million for the year ended December 31, 2019, which was primarily attributable to an increase in the amount the Company ceded through its quota share contracts due to an increase in cession rates from 55% in 2019 to 77% in 2020 and an increase in premiums subject to reinsurance.

Investment Income and Other Revenue

Investment income and other revenue decreased $11.6 million or 60% to $7.8 million for the year ended December 31, 2020 from $19.3 million for the year ended December 31, 2019, which was primarily attributable to lower interest rates.

 

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Claims Incurred, Net

Claims incurred, net decreased $98.9 million or 24% to $309.4 million for the year ended December 31, 2020 from $408.3 million for the year ended December 31, 2019, which was primarily driven by an increase in average quota share cession rates and decreased utilization of medical benefits by our members due to COVID-19, which was partially offset by higher claim volume due to increased members. Reinsurance losses ceded was 77% of claims as compared to only 55% in 2019.

Other Insurance Costs

Other insurance costs increased $48.7 million or 29% to $216.5 million for the year ended December 31, 2020 from $167.9 million for the year ended December 31, 2019. The increase of insurance related costs, net of ceding commissions, supported our growth and retention efforts in existing markets, expansion into the Medicare Advantage market and launch of new Small Group offerings. Additionally, increased member-driven administrative costs included claims processing, variable compensation and benefits, premium taxes, and network administrative costs. For our new Medicare Advantage and Small Group product launches, we invested in our marketing and outreach efforts. Additionally, we incurred $10.5 million in class-action legal counsel fees related to the one-time ACA risk corridor settlement.

General and Administrative Expenses

General and administrative expenses increased $56.0 million or 51% to $166.7 million for the year ended December 31, 2020 from $110.7 million for the year ended December 31, 2019. The increase is due to higher compensation and benefits expense to grow our technology teams to support strategic partnerships, platform technologies, and our member experience. Additionally, accounting, legal, and other professional fees increased in order to support requirements to operate as a public company.

Federal and State Assessments

Federal and state assessments increased $33.3 million or 69% to $81.5 million for the year ended December 31, 2020 from $48.2 million for the year ended December 31, 2019, which was primarily attributable to higher exchange fees due to an increase in membership.

Health Insurance Industry Fee

HIF was $19.3 million for the year ended December 31, 2020, which has been repealed effective 2021.

Premium Deficiency Reserve Expense

Premium deficiency reserve expense increased $59.2 million or 469% to $71.8 million for the year ended December 31, 2020 from $12.6 million for the year ended December 31, 2019, which was attributable to higher expected future losses in certain states for 2021.

Income Tax Expense

Income tax expense decreased $0.7 million or 42% to $1.0 million for the year ended December 31, 2020 from $1.8 million for the year ended December 31, 2019, which was primarily attributable to one profitable subsidiary which had an increase in pretax income and is not included in the consolidated federal tax return.

 

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Liquidity and Capital Resources

Overview

We maintain liquidity at two levels of our corporate structure, through our health insurance subsidiaries and through Holdco.

The majority of the assets held by our health insurance subsidiaries is in the form of cash and cash equivalents and investments. For the years ended December 31, 2019 and 2020, cash and cash equivalents and investments of the health insurance subsidiaries were $504.0 million and $1,271.3 million, respectively, of which $15.4 million and $16.8 million, respectively, was on deposit with regulators as required for statutory licensing purposes and is classified as restricted deposits on the balance sheet.

Our health insurance subsidiaries’ states of domicile have statutory minimum capital and surplus requirements which are intended to measure capital adequacy, taking into account the risk characteristics of an insurer’s investments and products. The combined statutory capital and surplus of our health insurance subsidiaries was $135.7 million and $199.1 million at December 31, 2019 and 2020, respectively, which was in compliance with and in excess of the minimum capital and surplus requirements for each period. The health insurance subsidiaries historically have required capital contributions from Holdco to maintain minimum levels. Our health insurance subsidiaries also utilize quota share reinsurance arrangements to reduce our minimum capital and surplus requirements, which enables us to more efficiently deploy capital to fund our growth. For the years ended December 31, 2019 and 2020, Holdco made $73.5 million and $366.2 million of capital contributions, respectively, to the health insurance subsidiaries. See “Risk Factors—Risks Related to Our Business—If state regulators do not approve payments of dividends and distributions by our subsidiaries to us, we may not have sufficient funds to implement our business strategy.”

The majority of the assets held by Holdco are in the form of cash and cash equivalents and investments. Cash and cash equivalents and investments of Holdco for the years ended December 31, 2019 and 2020, were $177.8 million and $264.4 million, respectively, of which $6.5 million were restricted for each year. Since inception, Holdco has financed its operations primarily through private sales of equity securities. For the year ended December 31, 2019, Holdco also had access to a revolving credit facility, which terminated by its terms in July 2019. No borrowings were drawn under this facility for the year ended December 31, 2019. In October 2020, we entered into a Term Loan Facility, as further described below, which we intend to repay in full using a portion of the proceeds of this offering. As of December 31, 2020, $142.5 million, net of unamortized discount and debt issuances costs was outstanding.

Our cash flows used in operations may differ substantially from our net loss due to non-cash charges or due to changes in balance sheet accounts. The timing of our cash flows from operating activities can also vary among periods due to the timing of payments made or received. Some of our payments and receipts, including risk adjustment and subsequent reinsurance receipts, can be significant. Therefore, their timing can influence cash flows from operating activities in any given period which would have a negative impact on our operating cash flows.

Our Revolving Loan Facility will, subject to certain conditions including the repayment of our Term Loan Facility, become available upon completion of this offering. See “Description of Certain Indebtedness—Revolving Loan Facility” for additional information. We may be required to seek additional equity or debt financing. Our future capital requirements will depend on many factors, including the pace of new member growth. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition, and results of operations would be harmed.

 

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Term Loan Facility

On October 30, 2020, we entered into the term loan credit agreement with HPS Investment Partners, LLC, as administrative agent, and certain other lenders for the term loan facility, or Term Loan Facility, in the aggregate principal amount of $150.0 million. The Term Loan Facility is guaranteed by Mulberry Management Corporation and all of our future direct and indirect subsidiaries (subject to certain permitted exceptions, including exceptions guarantees that would require material governmental consents or in respect of joint ventures). The Term Loan Facility is secured by a lien on substantially all of our and the guarantors’ assets (subject to certain exceptions).

The Term Loan Facility requires us to comply with certain restrictive covenants, including but not limited to covenants relating to limitations on indebtedness, liens, investments, loans and advances, restricted payments and restrictive agreements, mergers, consolidations, sale of assets and acquisitions, sale and leaseback transactions, affiliate transactions, and certain specified financial covenants. The Term Loan Facility contains other customary covenants, representations, and events of default. As of December 31, 2020, we were in compliance with the loan covenants.

In connection with this offering, we expect to repay in full outstanding borrowings, including fees and expenses, under our Term Loan Facility. In connection with repayment of the Term Loan Facility, we will pay a prepayment premium equal to 6.50% of the principal amount of the Term Loan Facility plus accrued and unpaid interest through the six-month anniversary of the closing date of the Term Loan Facility.

Revolving Loan Facility

On February 21, 2021, Oscar Health, Inc., as borrower, or the Borrower, entered into a senior secured credit agreement, or the Revolving Credit Agreement, with Wells Fargo Bank, National Association as administrative agent, and certain other lenders for a revolving loan credit facility, or the Revolving Loan Facility, in the aggregate principal amount of $200.0 million. The Revolving Loan Facility is guaranteed by Mulberry Management Corporation, a wholly owned subsidiary of Oscar, and all of the Borrower’s future direct and indirect subsidiaries (subject to certain permitted exceptions, including exceptions for guarantees that would require material governmental consents or in respect of joint venture). Our Revolving Loan Facility will be secured by a lien on substantially all of the Borrower’s and the guarantors’ assets (subject to certain exceptions).

Our initial borrowings under the Revolving Loan Facility are conditioned upon, among other things, (i) the consummation of this offering that results in at least $800 million of net proceeds to us, (ii) the repayment in full of the Term Loan Facility (as defined herein) and (iii) the execution of customary security documentation. Proceeds are to be used solely for general corporate purposes of the Company.

The Revolving Credit Agreement will permit the Borrower to increase commitments under the Revolving Loan Facility by an aggregate amount not to exceed $50 million. The incurrence of any such incremental Revolving Loan Facility will be subject to the following conditions measured at the time of incurrence of such commitments: (i) no event of default, (ii) all representations and warranties must be true and correct in all material respects immediately prior to, and after giving effect to, the incurrence of such incremental Revolving Loan Facility and (iii) and any such conditions as agreed between the Borrower and the lender providing such incremental commitment.

Interest Rate, Commitment Fees

The interest rate applicable to borrowings under our Revolving Loan Facility is determined as follows, at our option: (a) a rate per annum equal to the Adjusted LIBO Rate plus an applicable margin of 4.50% (Adjusted LIBO Rate is calculated based on one-, three- or six-month LIBO rates, or such

 

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other period as agreed by all relevant Lenders, which is determined by reference to ICE Benchmark Administration London Interbank Offered Rate, or LIBO, but not less than 1.00%) or (b) a rate per annum equal to the Alternative Base Rate plus the applicable margin of 3.50% (the Alternative Base Rate is equal to the highest of (i) the prime rate, (ii) the federal funds effective rate plus 0.50%, and (iii) the Adjusted LIBO Rate based on a one-month interest period, plus 1.00%). A commitment fee of 0.50% per annum is payable under our Revolving Loan Facility on the actual daily unused portions of the Revolving Loan Facility. The Revolving Credit Agreement also contains LIBO rate replacement provisions in the event LIBO rate becomes unavailable during the term of this facility.

The Revolving Loan Facility requires us to comply with certain restrictive covenants, including but not limited to covenants relating to limitations on indebtedness, liens, investments, loans and advances, restricted payments and restrictive agreements, mergers, consolidations, sale of assets and acquisitions, sale and leaseback transactions and affiliate transactions.

In addition, the Revolving Loan Facility contains financial covenants that require us to maintain specified levels of direct policy premiums and liquidity and require compliance with a maximum combined ratio.

See “Description of Certain Indebtedness” for further information about the terms of the Revolving Loan Facility.

Investments

We generally invest cash of our health insurance subsidiaries in investment-grade, marketable debt securities to improve our overall investment return. We primarily invest cash of the Company in U.S. Treasury and agency securities. These investments are purchased pursuant to board approved investment policies which conform to applicable state laws and regulations.

Our investment policies are designed to provide liquidity, preserve capital, and maximize total return on invested assets, all in a manner consistent with state requirements that prescribe the types of instruments in which our subsidiaries may invest. These investment policies require that our investments have final maturities of a maximum of three years from the settlement date. Professional portfolio managers operating under documented guidelines manage our investments and a portion of our cash equivalents. Our portfolio managers must obtain our prior approval before selling investments where the loss position of those investments exceeds certain levels.

Our restricted investments are invested principally in cash and cash equivalents and U.S. Treasury securities; we have the ability to hold such restricted investments until maturity. The Company maintains cash and cash equivalents and investments on deposit or pledged to various state agencies as a condition for licensure. We classify our restricted assets as long-term given the requirement to maintain such assets on deposit with regulators.

Summary of Cash Flows

Our cash flows used in operations may differ substantially from our net loss due to non-cash charges or due to changes in balance sheet accounts.

The timing of our cash flows from operating activities can also vary among periods due to the timing of payments made or received. Some of our payments and receipts, including loss settlements and subsequent reinsurance receipts, can be significant. Therefore, their timing can influence cash flows from operating activities in any given period. The potential for a large claim under an insurance or reinsurance contract means that our health insurance subsidiaries may need to make substantial payments within relatively short periods of time, which would have a negative impact on our operating cash flows.

 

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The following table shows summary cash flows information for the periods indicated:

 

     Year ended December 31,        
             2019                     2020             Change  
     (in thousands)        

Net cash (used in)/provided by operating activities

   $ (165,370   $ 222,732     $ 388,102  

Net cash provided by/(used in) investing activities

     150,513       (344,714     (495,227

Net cash (used in)/provided by financing activities

     (2,119     611,707       613,826  
  

 

 

   

 

 

   

 

 

 

Net (decrease)/increase in cash and cash equivalents and restricted cash equivalents

   $ (16,976   $ 489,725     $ 506,701  

Operating Activities

Net cash provided by operating activities increased $388.1 million to $222.7 million for the year ended December 31, 2020 compared to $(165.4) million for the year ended December 31, 2019, primarily due to membership growth driving the change in receivables due from reinsurance programs and benefits payable. Our risk adjustment transfer payable significantly increased as our members continue to have lower than average risk scores. In addition, we received $52.4 million in net proceeds in 2020 due to the risk corridor claims settlement.

Investing Activities

Net cash used in investing activities decreased $495.2 million to $344.7 million for the year ended December 31, 2020 compared to $150.5 million for the year ended December 31, 2019. The decrease was primarily attributable to the growth of the investment portfolio, as purchases more than offset sales and maturity of investments in 2020.

Financing Activities

Net cash provided by financing activities increased $613.8 million to $611.7 million for the year ended December 31, 2020 compared to $(2.1) million for the year ended December 31, 2019. The increase was primarily attributable to the issuances of preferred stock in 2020, $210.9 million of Series A11 Preferred Stock and $151.2 million of Series A12 Preferred Stock, and net proceeds from the Term Loan Facility of $142.2 million. In addition, $87.0 million and $19.3 million of convertible preferred stock warrants and stock options, respectively, were exercised.

Contractual Obligations and Commitments

The following table sets forth our contractual obligations and commitments as of December 31, 2020:

 

     Payments Due by Period  
     Total      Less
than
1 Year
     1 to 3
Years
     4 to 5
Years
     More
than
5 Years
 
     (in thousands)  

Term Loan Facility(1)

     152,417        —          152,417        —          —    

Interest on long-term debt(1)

     87,811        19,949        67,862        —          —    

Operating lease obligations(2)

     116,462        12,863        40,950        24,938        37,711  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 356,690      $ 32,812      $ 261,229      $ 24,938      $ 37,711  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Relates to borrowings under the Term Loan Facility and assumes quarterly interest payments of which 50% will be paid-in-kind through stated maturity of the Term Loan Facility by applying the

 

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  interest rate of 12.75% in effect as of December 31, 2020 under our Term Loan Facility. Payments herein are subject to change, as payments for variable rate debt have been estimated. As of December 31, 2020, the total principal amount of debt outstanding under our Term Loan Facility, excluding unamortized debt discount and deferred issuance costs, was $142.5 million. In connection with this offering, we expect to repay in full outstanding borrowings, including fees and expenses, under our Term Loan Facility.
(2)

We lease office space under operating leases that are non-cancellable and expire on various dates through 2032.

Our Revolving Loan Facility will, subject to certain conditions including the repayment of our Term Loan Facility, become available upon completion of this offering. Obligations under this Revolving Loan Facility are not included in the table above. See “Description of Certain Indebtedness” for further information about the terms of the Revolving Loan Facility.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets, and liabilities and disclosure of contingent assets and liabilities in our financial statements. We regularly assess these estimates; however, actual amounts could differ from those estimates. The most significant items involving management’s estimates include estimates of benefits payable, reinsurance, premium deficiency reserve, risk adjustment, stock-based compensation, and income taxes. The impact of changes in estimates is recorded in the period in which they become known.

An accounting policy is considered to be critical if the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and the effect of the estimates and assumptions on financial condition, or operating performance. The accounting policies we believe to reflect our more significant estimates, judgments and assumptions that are most critical to understanding and evaluating our reported financial results are: benefits payable, reinsurance, premium deficiency reserve, risk adjustment, stock-based compensation, and income taxes.

Benefits Payable

Benefits payable includes estimates of our obligations for health care services that have been rendered on behalf of members, but for which claims have either not yet been received or processed. Depending on the health care professional and type of service, the typical billing lag for services can be up to 90 days from the date of service. Approximately 90% of claims related to health care services are known and settled within 90 days from the date of service and substantially all within 12 months from the accepted claims submission.

In each reporting period, our operating results include the effects of more completely developed benefits payable estimates associated with previously reported periods. If the revised estimate of prior period health care claims is less than the previous estimate, we will decrease reported health care

 

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claims in the current period (favorable development). If the revised estimate of prior period health care claims is more than the previous estimate, we will increase reported health care costs in the current period (unfavorable development). Health care costs in the years ended December 31, 2019 and 2020 included favorable health care claim development related to prior years of $10.3 million (net of reinsurance) and unfavorable development of $1.0 million (net of reinsurance), respectively.

In developing our benefits payable estimates, we apply different estimation methods depending on the month for which incurred claims are being estimated. For example, in recent months, we estimate claim costs incurred by applying assumed medical cost trends to the PMPM medical costs incurred in prior months for which more complete claim data is available, supplemented by a review of near-term completion factors. Additional consideration is also given to settled claims that may reopen as a result of provider disputes.

Completion Factors

A completion factor is an actuarial estimate, based upon historical experience and analysis of current trends, of the percentage of incurred claims during a given period that have been adjudicated by us at the date of estimation. Completion factors are the most significant factors we use in developing our benefits payable estimates. For periods prior to the three most recent months, completion factors include judgments related to claim submissions such as the time from date of service to claim receipt, claim levels, and processing cycles, as well as other factors. If actual claims submission rates from providers (which can be influenced by a number of factors, including provider mix and electronic versus manual submissions) or our claim processing patterns are different than estimated, our reserve estimates may be significantly impacted. For the most recent three months, the completion factors are informed primarily from forecasted per member per month claims projections developed from our historical experience and adjusted by emerging experience data in the preceding months which may include adjustments for known changes in estimates of recent hospital and drug utilization data, provider contracting changes, changes in benefit levels, changes in member cost sharing, changes in medical management processes, product mix, and workday seasonality.

The following table illustrates the sensitivity of the estimated potential impact on our benefits payable estimates gross of reinsurance, for those periods as of December 31, 2020 to an increase (decrease) in the underlying completion factors:

 

Changes in Estimates

   Increase
(Decrease) in
Benefits Payable

(in thousands)
 

(1.00)%

   $ 27,673  

(0.75)%

     20,702  

(0.50)%

     13,767  

(0.25)%

     6,866  

0.25%

     (6,832

0.50%

     (13,630

0.75%

     (20,394

1.00%

     (27,125

Management believes the amount of benefits payable is reasonable and adequate to cover our liability for unpaid claims as of December 31, 2020; however, actual claim payments may differ from established estimates as discussed above. Assuming a hypothetical 1% difference between our December 31, 2020 estimates of benefits payable and actual benefits payable, excluding any potential offsetting impact from premium rebates, net earnings for the year ended December 31, 2020 would have increased or decreased by approximately $3.0 million.

 

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For more detail related to our medical claims expenses, see note 2 of the audited consolidated financial statements included elsewhere in this prospectus.

Reinsurance

The Company is party to quota share reinsurance agreements with two reinsurers under which the reinsurers assume an agreed percentage of the underlying policies. During the years ended December 31, 2019 and 2020, approximately 55% and 77% of our premiums before ceded reinsurance, respectively, were ceded under quota share reinsurance arrangements, with approximately 33% and 32% of our premiums before ceded reinsurance, respectively, ceded to Axa France Vie and approximately 22% and 45% of our premiums before ceded reinsurance, respectively, ceded to Berkshire Hathaway Specialty Insurance Company. In the ordinary course of evaluating our annual reinsurance program and after conducting a competitive bidding process, we have terminated our agreements with Berkshire Hathaway effective as of December 31, 2020, and have entered into, and are in the process of finalizing, new quota share reinsurance arrangements with certain other reinsurance companies that will be effective for this calendar year 2021. All premiums and claims ceded under our quota share contracts are shared proportionally with our reinsurers up to a limit specified in each agreement, which varies from 100% to 105% of ceded premiums for the agreements applicable to the years ended December 31, 2019 and 2020. We are entitled to experience refunds for premiums for quota share insurance if our MLR is below certain specified thresholds. We also receive a ceding commission, which is reflected in other insurance costs. Reinsurance recoveries are recorded as a reduction to claims incurred, net. We entered into statutory trust agreements with Axa France Vie in compliance with the credit for reinsurance laws and regulations of the state of domicile of each ceding company in connection with reinsurance ceded to an unauthorized reinsurer. Each trust account is funded at 102% of the ceding entity’s IBNR. Acceptable assets deposited into the trust accounts include cash, certificates of deposit, and instruments that are acceptable to the commissioner of the insurance department of the ceding entity’s state of domicile. The Company also has a reinsurance assumed agreement, which is included as an addition to premiums earned in the accompanying consolidated statement of operations and comprehensive loss. The Company stopped assuming reinsurance on the Tennessee Small Group market for contracts written in 2018. These contracts have since ended and any activity is related to the adjudication of claims which may follow the policy for up to four years.

The Company regularly evaluates the financial condition of its reinsurers to minimize exposure to significant credit losses. For our unauthorized reinsurers, the Company strives to maintain sufficient qualifying assets of the reinsurer in trusts or collateral, mostly in excess of net reinsurance recoverables.

The Company has other reinsurance agreements to limit its losses on individual claims of enrolled members. Premiums for these reinsurance agreements are based on enrollment calculated on a per member, per month basis. Reinsurance recoveries are recorded as reductions to claims incurred, net. The reinsurance coverage does not relieve the Company of its primary obligations. Our 2020 reinsurers had ratings from A++ to AA-.

Premium Deficiency Reserve Expense

Premium deficiency reserve expense is the year over year change in the premium deficiency reserve liability. Premium deficiency reserve liabilities are established when it is probable that expected future claims and maintenance expenses will exceed future premium and reinsurance recoveries on existing medical insurance contracts without consideration of investment income. For purposes of determining premium deficiency losses, contracts are grouped consistent with the Company’s method of acquiring, servicing, and measuring the profitability of such contracts which is generally on a line of business basis.

 

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Risk Adjustment

The risk adjustment programs in the Individual, Small Group, and Medicare Advantage markets we serve are designed to mitigate the potential impact of adverse selection and provide stability for health insurers. Under the Individual and Small Group risk adjustment program, each plan is assigned a risk score based upon demographic information and current year claims information related to its members. Plans with lower than average risk scores will generally pay into the pool, while plans with higher than average risk scores will generally receive distributions. This amount is calculated based on the risk score of the Company’s members. The Company refines its estimate as new information becomes available and the Company receives the final report from CMS in August of the following year. In the Medicare Advantage risk adjustment program, each member is assigned a risk score that reflects the member’s predicted health costs compared to an average member. Plans receive higher payments for members with higher risk scores than members with lower risk scores.

Stock-Based Compensation

The Company accounts for stock-based awards to employees in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, Compensation - Stock Compensation (“ASC 718”). Employee options are valued on the date of grant and are expensed on a straight-line basis over the related service period (generally the vesting period) of the award. We estimate the fair value of each stock option grant using the Black-Scholes-Merton option-pricing model, which uses the underlying fair value of our Class A common stock as the most critical input for the estimate. Both option and stock awards, generally vest over a period of four years and are exercisable up to 10 years from the date of grant. The Company modified certain awards in conjunction with employee terminations. The modifications provided for the extension of the post-employment exercise period. For the years ended December 31, 2019 and December 31, 2020, the modifications resulted in $8.7 million and $6.4 million of stock-based compensation expenses, respectively, of which $3.5 million and $3.3 million was recognized in general and administrative expenses, respectively, and $5.2 million and $3.1 million was recognized in other insurance costs, respectively.

Income Taxes

The Company records deferred tax assets, or DTAs, and deferred tax liabilities or DTLs, based on differences between the book and tax bases of assets and liabilities. The deferred tax assets and liabilities are calculated by applying enacted tax rates and laws to taxable years in which such differences are expected to reverse.

The Company evaluates the need for a valuation allowance considering all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and the Company’s recent operating results. The Company established a valuation allowance of $296.9 million because it does not consider it more likely than not that these deferred tax assets will be recovered, as the Company does not have a history of positive earnings.

The Company files a consolidated federal income tax return on behalf of itself and substantially all of its various operating subsidiaries. The Company’s Ohio entity is considered outside of the US Consolidated group and files tax returns separately. The Company files as part of a unitary group in various states. Often, application of tax rules within the various jurisdictions is subject to differing interpretation. An analysis is performed of the amount at which each tax position meets a “more likely than not” standard for sustainability upon examination by taxing authorities. Only tax benefit or provision amounts meeting or exceeding this standard will be reflected in the tax expense and deferred tax balances. At present, the Company has not recorded any tax amounts which fail to meet this

 

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standard. Any differences between the amounts of tax benefits reported on tax returns and tax benefits reported in the financial statements will be recorded as a liability for unrecognized tax benefits. Any liability for unrecognized tax benefits would be reported separately from deferred tax assets and liabilities. For additional information, see note 17 of the audited consolidated financial statements included elsewhere in this prospectus.

Quantitative and Qualitative Disclosures of Market Risk

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of exposure due to potential changes in interest rates and/or inflation and the resulting impact on investment income and interest expense. We do not hold financial instruments for trading purposes.

Interest Rate Risk

We are subject to interest rate risk in connection with the fair value of our investment portfolio, which consists of U.S. Treasury and agency securities, corporate notes, certificates of deposit, and commercial paper. Our primary market risk exposure is changes to prime rate-based interest rates. Interest rate risk is highly sensitive due to many factors, including U.S. monetary and tax policies, U.S. and international economic factors, and other factors beyond our control. Assuming a hypothetical and immediate 1% increase in interest rates at December 31, 2020, the fair value of our investments would decrease by approximately $5.7 million. Any declines in interest rates over time would reduce our investment income.

Inflation Risk

Inflationary factors such as increases in health care costs may adversely affect our operating results. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial. We cannot assure you, however, that our results of operations and financial condition will not be materially impacted by inflation in the future.

Recent Accounting Pronouncements

For a discussion of new accounting pronouncements recently adopted and not yet adopted, see note 2 to the audited consolidated financial statements included elsewhere in this prospectus.

JOBS Act

We qualify as an “emerging growth company,” as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS

 

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Act, if as an emerging growth company we choose to rely on such exemptions, we may not be required to, among other things, (1) provide an auditor’s attestation report on our systems of internal controls over financial reporting pursuant to Section 404, (2) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Act, (3) comply with the requirement of the PCAOB regarding the communication of critical audit matters in the auditor’s report on the financial statements, and (4) disclose certain executive compensation related items, such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptions will apply until we no longer meet the requirements of being an emerging growth company. We will remain an emerging growth company until the earlier of (a) the last day of the fiscal year (i) following the fifth anniversary of the completion of our initial public offering, (ii) in which we have total annual gross revenue of at least $1.07 billion, or (iii) in which we are deemed to be a large accelerated filer, which means the market value of our Class A common stock that is held by non-affiliates exceeds $700.0 million as of the last business day of our prior second fiscal quarter, and (b) the date on which we have issued more than $1 billion in non-convertible debt during the prior three-year period.

 

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BUSINESS

Our Purpose

At Oscar, we make a healthier life accessible and affordable for all.

Our Business

Oscar is the first health insurance company built around a full stack technology platform and a relentless focus on serving our members. We started Oscar over eight years ago to create the kind of health insurance company we would want for ourselves—one that behaves like a doctor in the family, helping us navigate the health care system in our moments of greatest need. In the years since, we have built a suite of services that permit us to earn our members’ trust, leverage the power of personalized data, and help our members find quality care they can afford. We call this our member engagement engine, and it is powered by a differentiated full stack technology platform that will allow us to continue to innovate like a technology company and not a traditional insurer in the years ahead.

After eight years of selling health insurance, we are proud to have earned industry-leading levels of trust, engagement, and customer satisfaction from the 529,000 members who, as of January 31, 2021, have chosen Oscar. At the same time, we have achieved positive unit economics through an MLR of 84.7% while generating direct policy premiums of $2.3 billion for the year ended December 31, 2020. We serve 291 counties across 18 states, and our members had over 5 million health care visits in 2020. They include families seeking coverage that works for toddlers and their busy parents, adults with chronic conditions who know their care providers by their first names, and seniors choosing a benefits package that will serve them throughout their retirement years. As we continue to bring the Oscar experience to new members, new states, and new markets, our goal will remain the same: to build engagement, earn trust, and help our members live healthier lives.

Hi, We’re Oscar

The Problem

We created Oscar because of our own frustrations with U.S. health care. The U.S. health care system is the world’s largest and most expensive—estimated to have cost over $4 trillion in 2020—yet health outcomes are worse than in other advanced economies. Costs are so out of control that medical bills contribute to around 66% of all personal bankruptcies in the United States. It doesn’t have to be this way. According to a report published in the Journal of the American Medical Association in 2019, nearly 25% of health care spending in the U.S. is wasted, the result of a system plagued by misaligned incentives, lack of coordination, and administrative complexities.

Health insurers have substantial influence over the health care ecosystem because they disburse 75 cents of every health care dollar. Despite decades of effort, however, incumbent insurers have made little progress in reigning in health care costs or incentivizing key stakeholders to produce better outcomes. According to the Harris Poll, U.S. consumers give health insurers the lowest rating of any sector of the health care system when it comes to making a positive difference. Instead, for far too many consumers, health insurance adds an additional layer of complexity to an already complex system. According to another survey, fewer than 4% of Americans could accurately define the four basic health insurance terms: Deductible, Co-Insurance, Co-Pay, and Out-of-Pocket Maximum. With an average NPS of three, according to Forrester Research, customer satisfaction for health insurers ranks among the lowest of any industry.

 

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Our Solution

We founded Oscar to solve these problems and to provide consumers with access to the affordable, high-quality health care they deserve. We recognized that doing so would require reorienting how customers see their health insurer and what they expect from it. Too often, customers view legacy insurers as entities that merely take in monthly premiums and pay medical claims. We aimed instead to serve as their guide to a confusing and fragmented system, helping them save money by optimizing their spending. In order to achieve all of this, we would need to earn something that is all too rare in the health insurance industry: member trust. We would need to build a technology platform that provides an intuitive, seamless customer experience, and we would need to leverage the power of personalized data. Though our member experience would begin with trust, engagement, and the smart use of data, our ultimate goal would be to bend the cost curve by guiding members to the right care at the right time and at the right value.

Our experience to date reaffirms our view that real change in health care can only come from the use of personalized data to drive real-time actionable insights and recommendations, such as guiding members to the right doctor, hospital, or site-of-care through what we call care routing. We know we are on the right track when 68% of surveyed members indicate that they trust Oscar to advise them on how and where to get the health care they need and 75% of subscribing members with a medical visit use our tools to search for a provider. This compares to an industry-wide average of only 45% of surveyed customers who trust their insurer for health care advice, and no comparable or available statistics from our competitors when it comes to care routing. Given the central role that primary care providers, or PCPs, play in managing care, it is especially meaningful that once our members join Oscar nearly half of their first-time PCP visits are to a doctor Oscar has recommended to them. It is the ongoing engagement and trusted relationship we have with our members that drives our NPS score of 30, which is in a different ballpark altogether than the average score of three among other health insurers.

Our Differentiated Full Stack Technology Platform

From the outset, we recognized the importance of building a full stack technology platform for three reasons. First, existing health care administration technologies were too fractured and antiquated to simply reconfigure them for the 21st century consumer. Second, if we wanted to create a modern member-first health insurance company, we would need access to the right data at the right time for all of our members. Third, change would not come in one fell swoop but through daily iteration and trial and error on multiple fronts, which is difficult or impossible on legacy systems. To overcome these limitations, we would need to own the entire insurance operations infrastructure and build our own full stack technology platform. This led us to create our own policies and procedures around claims and service, which allowed us to make faster decisions and deliver better member service. It also led us to build our own cloud-based technology platform, which allows for greater scalability and flexibility, and spans all critical health care insurance and technology domains, including member and provider data, utilization management, claims management, billing, and benefits. The resulting technology platform, which we update through code deployments more than 50 times per day, makes it easier for providers to work with us, accelerates our ability to identify patterns in our members’ data, improves payment accuracy to reduce frustration across the system, and streamlines regulatory reporting. We believe we have built our platform to scale and it is broadly applicable across health care and health insurance in the U.S. and abroad. Competitors who lack this member engagement engine will face significant challenges in replicating our consumer experience; we believe our platform thus forms an important structural moat around the innovations we have developed.

 

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Our Member Engagement Engine

In addition to a digital platform, we knew that we would need to develop a simple and intuitive consumer experience that would enable our members to take control of their health care decisions. That experience begins with trust and engagement, which we earn by providing our members with features that help them navigate the many disconnected elements of the health care ecosystem. When our members adopt these tools, we not only streamline their day-to-day interactions with the health care system and improve member satisfaction, we also obtain valuable data that lets us better understand their unique health care needs. Trust, engagement, and personalized data allow us to help route our members to the providers that can give them the right care, including virtual care, at the right time and right cost. Our full stack technology platform also permits us to offer personalized insights and benefits. It is the combination of all these factors—trust, engagement, care routing, and personalized insights—that allows us to help our members find quality care at rates they can afford. Our ability to deliver a high-value product, in turn, engenders more trust, engagement, and ability on our part to provide personalized, data-driven insights. We refer to this virtuous cycle as our member engagement engine.

 

 

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An important aspect of our approach to building trust and engaging members is to engage with them through whatever channel is most comfortable for them. Whether it is a secure in-app message to answer coverage and benefit questions, a consultation with a board-certified doctor in the middle of the night through our $0 virtual care solution, or finding the right in-network provider and scheduling an in-person appointment through our app or website, we are there for our members when they need us most. In this way, we are building a product experience more similar to what consumers experience from a best-in-class technology or consumer products company than from a traditional health care organization.

We also maintain a consistent focus on bringing our brand to life for our members through materials, communications, and interactions. We want every experience that our members have with us to reinforce our values and approach to health care. From the first touchpoint we have with a new member, we emphasize our commitment to delivering a differentiated experience that focuses on them as the end user. We strive to simplify the often complex language used in health care and insurance so

 

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that our members feel comfortable accessing their care. We carefully adjust the language we use through A/B testing to increase engagement and utilization.

Our new members begin their Oscar journey with a welcome kit delivered in the mail to explain their benefits and highlight important plan features. Our new members also receive a message from their personalized Care Team to welcome them to Oscar. Each Care Team is typically composed of five Care Guides and a registered nurse known as a Case Manager, supported by a regional team of additional nurses and social workers. Care Teams serve as our members’ guides throughout their health care journey and have access to a broad array of personalized data, allowing them to provide real-time guidance in English or Spanish.

 

 

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We encourage our members to interact regularly with us through our mobile app and website, which make it easy for them to search for and access their medical history, lab tests, and various care options, as well as to refill prescriptions through our virtual care solution. We also assign each member a dedicated Care Team, typically composed of five Care Guides and a registered nurse known as a Case Manager,

 

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who build trust and engagement by providing personalized insights and real-time guidance through the health care system. As of December 31, 2020, 89% of our subscribing members have interacted with our digital or Care Team channels, 81% have a digital profile, 45% have downloaded our app, and our per member app download rate as of December 31, 2020 is approximately nine times higher than for other insurers. Almost half (47%) of our subscribing members are monthly active users.

Additionally, since 2014, all of our members have had 24/7 access to our Oscar virtual care offerings, in nearly all cases at no additional cost. These include urgent care through our Virtual Urgent Care service, and since January 1, 2021, primary care through our Virtual Primary Care service. Of our subscribing members who have had one or more medical visits, 37% used our in-house virtual offering in 2020. Even before the ongoing COVID-19 pandemic, in the three-month period ended December 31, 2019, the total number of visits through our Oscar virtual program represented nearly one out of five (19%) of the total number of PCP, urgent care, and outpatient ER visits by our subscribing members. Use of virtual care by our members has further increased during the COVID-19 pandemic.

Saving Money on Health Care

The combination of our full stack technology platform and member engagement engine allows us to help our members find quality providers, but we understand that value is just as important. Over the next five years, health care costs are expected to grow at 5% to 6% per year, outstripping both inflation and GDP growth estimates. Whether our members are spending their own out-of-pocket dollars before a deductible is reached or contending with rapid medical cost inflation, we are acutely aware of the need to make sure every consumer health care dollar is well spent. Our fully integrated systems and data infrastructure enable us to efficiently and effectively identify higher quality, lower cost health care providers in our network, and our levels of trust and engagement earn us the ability to help our members find the right care.

During the year ended December 31, 2020, 46% of our first-time doctor visits as a member to major specialties—Family Medicine, Pediatricians, OBGYNs, Cardiologists, Dermatologists, and Psychologists—were guided by an Oscar recommendation from our app or a member’s Care Team. This care routing resulted in estimated median member savings of approximately 7% during the year ended December 31, 2020, for members who accepted our top recommendations and member satisfaction levels of 92%.

Cost savings estimates are based on allowed visit costs for major specialties (Primary Care, OBGYN, Pediatrics, Dermatology, Cardiology, and Psychology), compared to the allowed visit costs for the same services in the same region for our members that do not use our care routing technology or accept our recommendations. Our popular $0 virtual care options also help our members avoid unnecessary and costly in-person visits to the doctor. We have also created a $3 prescription drug tier made up of approximately 300 drugs that treat our members’ most common conditions. Our ability to better manage the cost for members is evidenced by our improving MLR over time.

Our Growing Plan Portfolio

When we started Oscar, we were the first standalone, for-profit health insurer in 25 years to enter the Individual market in New York. We began by offering health plans in the Individual market because we believed it was where our member-first approach would set us apart. When the ACA created new direct-to-consumer channels in 2014, we knew that we would be competing with some of the nation’s largest health insurers. But we also knew we would have a unique window when a new entrant could gain market share rapidly by creating a superior product—one that could ultimately be extended to other insurance markets. After only eight years of selling health insurance in the Individual market, our strategy has proved out. We are the third largest for-profit national insurer in the Individual market in the United States based on publicly reported membership figures for insurers serving the Individual market during plan year 2020, and we expanded to Small Group in 2017 and Medicare Advantage in 2020.

 

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Today, we have at least one health plan in 291 counties across 18 states and expect to expand in the years ahead both geographically and with respect to insurance markets.

Our Innovative Partnerships

The value of our proprietary insurance platform has been recognized across the industry as leading health care providers and insurers, including the Cleveland Clinic and Cigna, have chosen to form innovative partnerships with us. While each of these arrangements have unique elements, the common thread is that they are built on our full stack technology platform and member engagement engine. Many of our partnerships feature co-branding and/or risk-sharing in addition to fee based revenue or value based reimbursement, underscoring the distinctive value that our contributions add. In some of our partnership arrangements, our partners have the option to purchase 50% of the equity of the relevant Oscar health plan entity. We believe our investment in deeply differentiated technology provides a foundation that will enable us to monetize our platform and diversify our revenue streams over time, if we choose to do so.

 

   

Cleveland Clinic + Oscar.    In 2018, we launched a groundbreaking partnership with Cleveland Clinic to merge our consumer interface with their world-renowned provider network. Today, every Cleveland Clinic + Oscar plan member has access to the prestigious Cleveland Clinic provider network in combination with the powerful member engagement tools of Oscar.

 

   

Montefiore + Oscar.    In 2019, we announced a partnership in Medicare Advantage with Montefiore Health System to offer the first co-branded plan in New York. Members of the Montefiore + Oscar plan get access to high quality affordable doctors from Montefiore’s first-class team through our platform when and where it’s convenient.

 

   

Oscar + Holy Cross + Memorial Health.    In 2020, we expanded our presence in Medicare Advantage by announcing a co-branded health plan with Holy Cross Health and Memorial Healthcare System in Florida, where our platform powers an Oscar + Holy Cross + Memorial Health product that combines our platform with our partners’ extensive physician networks.

 

   

Cigna + Oscar.    In 2020, we also announced a Cigna + Oscar partnership with Cigna to exclusively serve the Small Group employer market, which includes approximately 15 million consumers. Our partnership unites Oscar’s highly-differentiated member experience with Cigna’s broad provider networks.

 

   

Health First.    In 2021, Health First, a Florida-based insurer, announced that Oscar would provide administrative services to its individual and Medicare Advantage members, largely beginning on January 1, 2022. The partnership will give Health First members access to Oscar’s member engagement platform along with the same high quality providers and clinical resources that they have access to today.

Our Financials

Since our inception, we have experienced significant member growth while keeping insurance premiums affordable for our members. We have also achieved high levels of member satisfaction while still managing to keep premiums at a level our members can afford. By 2020, our seventh year of serving members in the Individual market, we had achieved an estimated 10% of market share based on membership within the market, and an MLR of 84.7%. As of January 31, 2021, we had 529,000 members, up from 82,000 as of January 31, 2017, representing a compound annual growth rate, or CAGR, of 59%, and we had a PMPM, direct policy premium rate of $515 for the month ended January 31, 2021, a 9% increase from $473 for the month ended January 31, 2020. There can be no assurance that such member growth and premium will continue. For the years ended December 31, 2019 and 2020, after taking into account reinsurance premiums ceded, premiums earned were $468.9 million and $455.0 million, respectively. Our direct policy premiums for the years ended December 31, 2019 and 2020 were $1.3 billion and $2.3 billion, respectively. Due to our

 

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continued investment in our technology, product development, and market expansion, for the years ended December 31, 2019 and 2020, we generated net losses of $261.2 million and $406.8 million, respectively, and Adjusted EBITDA losses of $222.2 million and $402.4 million, respectively. See “Prospectus Summary—Summary Consolidated Financial and Other Data” for more information and for a reconciliation of non-GAAP metrics to the most directly comparable financial measure calculated and presented in accordance with GAAP.

Health Care Needs to be Reimagined

Though affordability and poor outcomes are the most visible problems with U.S. health care from the consumer perspective, all of the ecosystem’s key stakeholders—consumers, employers, payers, and providers—face serious challenges when it comes to improving the system. As U.S. health care spending approaches 18% of GDP—more than twice the average of other OECD countries—the need for creative solutions from the private sector has never been greater.

Lack of Consumer-Centric Solutions

Even though health care decisions are among the most important any consumer will make, it is easier to research the right auto mechanic online than the right oncologist and more convenient to make a restaurant reservation on a smartphone than to book something as simple as an annual physical. The reason has little to do with what is technologically feasible and everything to do with the skewed incentives created by the U.S. health care system. The tax treatment of employer-sponsored health insurance that ties coverage to employment, the fee-for-service payment structure that incentivizes providers to focus on episodic and reactive care, and a web of archaic regulations that were not designed with modern technology in mind all have traditionally conspired to make the largest and arguably most important sector of the economy the least responsive to consumer demands. In recent years, as health care costs continue to skyrocket, the burden has gradually but significantly shifted to the consumer. According to the Kaiser Family Foundation, the average employee premium contribution for family health insurance coverage for 2020 was over $5,500, an increase of approximately 40% in the last decade, while the average annual deductible among covered employees rose by approximately 80% to $1,644 in the last decade. In most sectors of the economy, this would lead to enhanced competition that benefits consumers. Yet in health care, even as consumers have become more financially responsible for their decisions, they still lack access to basic data—such as price and quality—that would enable them to make informed choices. As a result, many consumers have lost trust in the U.S. health care system. According to the American Board of Internal Medicine, confidence in the medical system fell from 80% in 1975 to 38% in 2019—the most dramatic decline for any American institution in the same period.

Lack of Coordination and Interoperability

The health care industry is fragmented and inefficient, with different legacy health insurers, hospital systems, provider groups, and pharmacy networks each possessing distinct incentive structures—some or all of which may diverge from consumers’ interests. It is no wonder individual consumers feel lost or overlooked within this system. To make matters worse, each of these industry actors have traditionally maintained separate, often antiquated, technological systems with rigid architecture and siloed data. Even as consumer demand for greater coordination grows, inflexible and disparate legacy technological systems present a significant barrier to meeting consumers’ wants and needs.

Lack of Innovation

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care delivery models—such as virtual, home and mobile—has only accelerated due to the ongoing COVID-19 pandemic. According to a McKinsey & Company report, only 11% of consumers used telehealth in 2019, whereas 46% of consumers used telehealth to replace cancelled health care visits in April 2020 (for Oscar members, 57% of primary care visits in April 2020 were conducted virtually). Consumer adoption of telehealth has clearly been accelerated by COVID-19, with 76% of consumers indicating they are likely to use telehealth where available going forward. Despite the surge in consumer demand, however, the existing fee-for-service reimbursement model and fragmented legacy technology systems present serious hurdles for telehealth when it comes to addressing anything other than the most basic health issues. Only entities who are incentivized to lower total cost of care and who have access to end-to-end platforms that incorporate real-time, personalized patient data will be able to realize the full potential of this potentially transformative technology. We built Oscar to move health care forward and enabling innovative virtual care has been part of our DNA since the beginning.

We Have a Massive Opportunity

The U.S. health care industry is a massive and growing market in the middle of a paradigm shift that creates substantial opportunities for private sector innovation. According to CMS, health care spending in the U.S. is estimated to have been over $4 trillion in 2020 and is projected to grow to over $6 trillion by 2028. Of the $4 trillion in health care spending, $3 trillion of that amount is estimated to have passed through health insurers in 2020, an amount that is expected to grow to nearly $5 trillion by 2028. Public and private health insurance companies today represent over $1 trillion of enterprise value in the United States alone. The secular shifts toward consumerization, technological innovation, and personalization in health care, along with the accelerating demand for value and accountability, have raised the stakes for health insurers when it comes to providing lasting value to their consumers. As the first technology-driven, direct-to-consumer health insurance company, we have built an innovative full stack technology platform that is uniquely positioned to deliver against this challenge. Our member experience begins with trust, engagement, and the smart use of data, but our ultimate goal is to bend the cost curve by guiding members to the right care at the right time and at the right value.

We currently sell health plans in three markets—Individual, Small Group, and Medicare Advantage—which, in aggregate, serve more than an estimated 50 million Americans and represent an estimated $450 billion in direct policy premiums.

 

   

The Individual market primarily consists of policies purchased by individuals and families through the Health Insurance Marketplaces. These marketplaces, established in 2014, grew rapidly, following the 2010 enactment of ACA provisions that today, require health insurance companies not to discriminate against pre-existing medical conditions in coverage decisions and provide for premium subsidies for middle and low-income Americans through tax credits. Rules enacted in 2019 provide for Individual Coverage Health Reimbursement Arrangements, or ICHRAs, which enable employers to make tax-favored contributions towards their employees’ purchase of Individual plans. The Departments of Labor, Treasury, and HHS estimate that approximately 800,000 employers will use ICHRAs to pay for insurance for more than 11 million employees and family members in the Individual market. We expect employers will embrace this trend for the same reasons they have shifted away from pensions to 401(k) accounts and agree with the many experts who believe that the decoupling of health insurance from employment would be socially beneficial. On January 28, 2021, President Biden issued an Executive Order which led CMS to establish a Special Enrollment Period for the federal health insurance marketplace from February 15, 2021 to May 15, 2021. All state-based exchanges we serve have announced similar Special Enrollment periods for their state-based exchanges.

 

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The Small Group market consists of employees of companies with up to 50 full-time workers in most states and up to 100 full-time workers in California, Colorado, New York, and Vermont. Small businesses are not required to provide health insurance coverage, but those that do are interested in attracting and retaining talented employees and conferring a benefit that is subject to significant tax incentives. Small Group represented a market size of $76 billion of premiums in 2019, and is a part of the broader employer-based insurance market that accounted for an estimated $1.2 trillion of premiums in 2020 and is expected to grow at a 4% CAGR to approximately $1.7 trillion by 2028.

 

   

Medicare Advantage plans are a type of Medicare health plan offered by private companies that contract with the federal government to provide benefits to consumers over 65 years old, giving them the option between traditional Medicare or low- or zero-cost federally-subsidized Medicare Advantage plans. As of December 31, 2020, there were approximately 25 million Medicare Advantage enrollees, and they are estimated to spend approximately $290 billion in annual premiums according to HHS. By 2025, Medicare Advantage enrollment could represent approximately 38 million members, according to LEK Consulting.

While we will continue to focus on bringing the Oscar platform to new members within our existing markets, we also expect to expand into new insurance markets where our member-first approach will add value. These may include the U.S. self-funded employer and international markets.

Our platform partnerships with payers and providers show that we can provide technology solutions to a variety of sophisticated stakeholders across the health care system. As we scale, our addressable market will continue to expand due to our ability to enable new innovative models of integrated care. Our platform is increasingly modular and able to address large adjacencies within health care technology spend including telemedicine, care concierge, claims management and population health. Our member engagement tools and insurance operations infrastructure have the ability to be deployed alongside other provider and payer networks to enable new risk-based models. Collectively, we estimate these addressable markets represent an additional opportunity of $123 billion, including $40 billion in telemedicine, $20 billion in care concierge, $12 billion in claims management, and $51 billion in population health.

We Are a Differentiated Full Stack Technology Platform

When we launched Oscar as a technology-driven, full stack, direct-to-consumer health insurance company, we knew that tackling the challenges of the U.S. health care system would be ambitious. It would take collaboration with players across the system, investment in the resources needed to develop our own infrastructure, and the ability to convince people that their insurer could do more for their health than just pay medical claims. We recognized early on that health care was too broken to fix by simply reconfiguring existing technologies, and we understood that our ability to bend the cost curve would require us to control all of our data and processes before we could empower members with real-time actionable insights. This meant purpose-building a platform from the ground up that we update through code deployments more than 50 times per day. This platform enables us to run nearly 80 automated population health programs, or campaigns, as of December 31, 2020, that allow us to collect data and trigger real-time interventions at scale. We believe we have built our platform to scale and it is broadly applicable across health care and health insurance in the U.S. and abroad. Competitors who lack this member engagement engine will face significant challenges in replicating our consumer experience; we believe our platform thus forms an important structural moat around the innovations we have developed.

 

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We Intervene in Real-Time

Our Care Teams are a critical entry point for our members in navigating and accessing care through Oscar. Through our member engagement, we are able to form a relationship with our members over time that allows us to recommend and ultimately shift members to better and more affordable care. Members are paired with their own Care Team of five dedicated Care Guides and a registered nurse known as a Case Manager, supported by a regional team of licensed nurses and social workers. This team acts as a consistent resource to build a long-term relationship and continuity with a member. A member’s Care Team can answer questions about benefits, upcoming care, prescriptions, and much more, as well as help them find high quality providers. When a Care Guide is unable to answer a member’s question, instead of transferring that member to another department, the Care Guide will take on the responsibility of tracking down the answer and delivering it personally to the member. We believe our Care Team approach is one of the core reasons our member satisfaction is so high.

 

 

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Not only do our members get a dedicated Care Team, they get a Care Team that understands their particular needs and situation. Our proprietary algorithm uses location, predicted Care Team engagement, language preference, and plan type to assign members automatically to the right Care Team. This enables our Care Guides to better understand the needs of our members’ in each of their respective communities—which may vary in terms of housing, income, education, and other social indicators—while becoming experts in the health care landscape of a given market. We also have dedicated teams to assist members with specialized medical needs, including those in need of a transplant, behavioral health treatment, or other forms of complex care management.

Our Care Teams can also offer personalized guidance because of their access to all of our members’ longitudinal data on our full stack technology platform. It is our differentiated platform that makes it possible for us to train and enable our Care Guides to be efficient and effective as they provide customized insights to our members and serve as our first line of response for intervening in real-time in members’ care events. Our Care Teams have a bird’s-eye view of a member’s journey through the health care system, including claims and authorization history, past appointments, and in some cases, appointments scheduled in the future. Our proprietary clinical segmentation model prompts Care Guides and nurses to reach out to members with more complex health needs to make sure they are getting the care they need, particularly if we notice events such as the member being

 

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admitted to the hospital, or a lapse in medication adherence. During the COVID-19 pandemic, for example, our Care Teams were able to identify members who were at special risk or had delayed important care and to intercept them before their health worsened. After we reached out to members taking maintenance medications or using durable medical equipment, or DME, for conditions highlighted by CDC as higher risk for COVID-19, 70% of survey respondents indicated that they refilled or renewed their prescriptions or DME after receiving Oscar’s messages. Members in this category who engaged with their Care Teams on this issue had 127% higher conversion to prescription delivery or delivery-by-mail than those who did not.

When our platform detects that members are seeking information about emergency care, we can put them in immediate touch with doctors on our virtual platform, showing a relative reduction in ER visits of 13% between our target and control groups. When members are admitted into certain ERs, our platform notifies their Care Teams in real-time to enable follow-up as needed to help arrange discharge to an appropriate facility or to ensure home health care. With access to member data on our platform, Care Teams are also able to proactively reach out to schedule follow-ups, help with prescriptions, or connect our members with necessary virtual care. As of December 31, 2020, we are running nearly 80 campaigns simultaneously that allow us to collect data and trigger real-time interventions at scale. All of this is made feasible and cost-efficient by our full stack technology platform that allows us to make full use of available data, has the machine learning to interpret and drive actionable insights from that data, and then empowers members to make better decisions through our easy-to-use front end.

 

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In this illustrative example, Cristina is a woman in her late 40s who lives in Los Angeles. She suffers from asthma and has experienced mild symptoms. Recently, her symptoms seem to be getting more serious and shes running low on her inhaler. How it works How Oscar is Different H I O S C A R . C O M Our Member Cristina At Oscar, we use technology to make healthcare more accessible and affordable for our members while still reducing total cost of care. The difference between Oscar and a typical insurer is exemplified by our efforts to reduce avoidable ER visits, or trips to the emergency room for a condition that can be treated by a primary care provider. Some studies estimate these account for up to two-thirds of total ER visits or $32 billion in total avoidable health care costs each year. 1 2 If Cristina had a typical insurer, she would likely search for a nearby doctor and may end up at the ER to see someone closeby for her increasingly urgent symptoms. There, based on median ER wait times, she may wait up to 5 1/2 hours to see a physician. This visit would cost her around $1,000 in out-of-pocket costs and cost her insurance company around an additional $1,000. 3 Cristinas experience with Oscar is very different. When she searches in our app for an ER, our data-driven platform will recognize patterns in her search and pull in information about her asthma diagnosis from her claims history. 4 Our tech platform will send Cristina an automated message from the nurse on her Care Team, asking her if she would like to speak to a doctor virtually, at no additional cost. If she opts to do so, the doctor will typically call her back within 15 minutes. 5 If, during the consultation, the doctor and Cristina decide that an in-person visit is unnecessary, the refill for Cristinas inhaler can be handled virtually. Cristina can even use our app to have the inhaler delivered to her door that day at no additional cost. 6 With the Oscar experience, Cristina avoids a trip to the ER and pharmacy and saves around $1,000 in out-of-pocket costs and Oscar saves around $1,000, reducing the total cost of care by approximately $2,000. 7 Our full stack technology platform allows us to use A/B testing to understand the effects of specific campaigns and programs, including this one. As a result, we know that this approach reduces emergency room visits by 13% for those in the campaign compared to a control group. This is just one example of how our investment in a full stack technology platform, and all the steps in our member engagement engine, translate into concrete benefits for our members as well as allow us to bend the overall cost curve in health care. Oscar

 

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As of December 31, 2020, 71% of Oscar subscribing members have turned to their Care Team for help in navigating the health care system, making it a core piece of our member experience that we believe increases retention and serves as a primary avenue for influencing health care spend. Strong engagement with our Care Team also extends across the spectrum of our members’ health care needs. Over 90% of our subscribing members with a chronic disease have interacted with their Care Team as of December 31, 2020. When members do have acute needs, the Care Team relationship amplifies our ability to use traditional case management techniques to drive results. For Oscar members who are engaged with their Care Teams through our case management program, our 30-day hospital readmission rate is 6.2%—a 55.4% reduction relative to the industry average of 13.9% as estimated by the Agency for Healthcare Research and Quality.

We Help our Members Find the Right Doctor

Finding the right care at the right time can be complicated. While many consumers turn to their friends and families for provider recommendations, these and similar channels lack a data-informed view on cost and quality. At Oscar, we want to serve as our members’ first point of contact as they navigate the health care system. Our ranking algorithm uses artificial intelligence to match members to the best doctors for them, driven by sophisticated cost and quality algorithms. This technology saves both Oscar and members money by routing care to “high value” providers, which we define as providers who, based primarily on Oscar’s proprietary cost estimate tool, historical claims data, provider location information, and survey data from Oscar members following an appointment with a provider, have lower costs and higher rated reviews from our members, in each case relative to the other providers on our network, and meet certain widely accepted performance benchmarks, such as the Healthcare Effectiveness Data and Information Set, or HEDIS.

Members can search directly on the Oscar app or website, or if they prefer, in consultation with their Care Team, for the right provider. Approximately three out of four of our subscribing members who have a medical visit use our care routing tools to search for a provider each year. Among care router users, over two-thirds end up visiting one of the top five providers recommended through the care router and 92% have a positive review for the doctors they find through Oscar. Members who use our care routing technology and accept our care router suggestions experience median cost savings of approximately 7%. Cost savings estimates are based on allowed visit costs for major specialties (Primary Care, OBGYN, Pediatrics, Dermatology, Cardiology, and Psychology), compared to the allowed visit costs for the same services in the same region for our members that do not use our care routing technology or accept our recommendations.

 

 

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We Help our Members Get Virtual Care

At Oscar, facilitating virtual care delivery is a continuation of our commitment to personalized solutions that meet the unique health care needs of each of our members. We offer flexible options when our members seek care through a broad platform tailored to solving specific member needs, whether through Virtual Urgent Care or Virtual Primary Care, staffed by the Oscar Medical Group, which was founded in 2017. Since 2014, all of our members have had access to telemedicine 24/7.

Of our subscribing members who have had one or more medical visits, 37% have used our virtual offering. We are taking a virtual-first approach to reimagine the way care is delivered and have built a proprietary infrastructure integrated with Oscar claims and data management systems focused on the consumer. With Virtual Urgent Care, members can talk to or message a provider and get a diagnosis, a new prescription, or a last-minute refill in as little as 15 minutes. Our proprietary infrastructure ensures that data is appropriately shared between Care Teams, virtual urgent care providers, and members.

 

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LOGO

Oscar Virtual Primary Care provides simple, convenient and free primary care to our members, at no additional cost, delivered by a doctor they choose from the cloud. Members simply login to their account and can book an appointment to talk to a provider via their phone or mobile app. They can follow up with this same provider as many times as they need to, just like with a traditional PCP. Oscar Virtual Primary Care was rolled out for plan year 2021. We believe that the addition of primary care to our suite of virtual services - which today includes urgent and related forms of care - will allow us to maximize the potential of telemedicine for our members. Because we are an insurer, our incentive is to deliver quality care at a cost our members can afford. This is distinct from the incentives of fee-for-service providers, who earn more as costs increase. As an insurer with a full stack technology platform, we also are involved with every interaction our members have with the health care system and can use that data to help them make the informed health care decisions. Compared to providers of virtual care point solutions, or to insurers with legacy technology systems, we thus have a broader array of levers to help our members optimize their overall use of health care. This is an advantage that we can use to benefit both members and the Oscar business model alike. Our end-to-end control of our full-stack technology platform allows us to roll out innovative features like this very quickly. We were able to configure our systems in a matter of months to roll out this feature to provide our members in Houston and Dallas with early access to the offering in 2020. To date, nearly 50% of the members who used the offering have a diagnosis for a chronic condition. Members love the program, as demonstrated by an NPS score of 78 for the limited offering, based on survey responses provided by participating members since September 2020. H I O S C A R . C O M Virtual Primary Care To explain how this offering works in concrete terms, lets consider the illustrative example of Louis, a 45-year-old Oscar member who lives in Dallas. In searching for a new doctor, he found Virtual Primary Care in the Oscar Care Router. After some research about the available providers, Louis chose a provider from Oscar Medical Group that had an appointment the following week. How it works 1 2 Based on a real-time analysis of Louiss health data in the Oscar platform, an automated message from the Care Team was sent to confirm his mailing address to ship him an at-home vitals kit for no additional cost. Because the analysis identified that Louis has claims related to a diabetes diagnosis and high blood pressure, the vitals kit included a thermometer and cellularly-connected blood pressure cuff. 3 Louis provider was able to review his full claims history, patient-reported information, and medication adherence charts in the Oscar electronic health record prior to his visit. The review also pulled in data that highlighted gaps in care and identified that the patient was overdue (relative to care standards from CMS) for an eye exam. Based on this review, the provider offered diabetes education and developed a treatment plan to get Louis diabetes under control. The provider also ordered a $0 in-home blood draw to be scheduled at a time that was convenient for Louis. She also shared with Louis that his blood sugar was unmanaged, based on lab data in the EHR, and gave him a new prescription for insulin. The provider also suggested that she see Louis in-person so that she could conduct a foot exam and eye exam, again for $0. 4 During the in-person visit, the Oscar Virtual Primary Care provider suggested that Louis see an endocrinologist within the next 7 days and gave Louis a cost estimate for his first visit with the specialist based on the information provided by Oscar. In the consultation notes emailed to him after, Louis receives a list of high-value, in-network specialists near him. 5 All of this is made possible because of the con_gurability of our claims system and Oscars full stack technology platform on which it was built. We are using this highly nimble system to enable the dynamic incentives which are intended to bring more a_ordable care to our members. When an Oscar Virtual Primary Care doctor prescribes certain things through our care delivery tooling, we are able to waive cost shares for the member in real-time. We believe that Oscar is the only insurer currently positioned to deliver this level of quality care and cost-savings to its members. oscar

 

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We expanded our virtual platform in 2020 by launching plans, effective as of January 1, 2021, offering virtual primary care for a more convenient and efficient provider experience. Through Oscar Virtual Primary Care, primary care from select providers—as well as downstream care in some instances—is included at no cost and is unlimited to our members. Virtual Primary Care unlocks new ways to improve clinical outcomes and member experience while reducing cost.

We Have Built an End-to-End Platform

Product features such as Care Teams, care routing, and virtual care are our way of building the trust, engagement, and relationship that gives us the ability to help members bend the cost curve in health care. Owning the technologies that power our business from end-to-end lets us pioneer new ways of addressing frictions in the health care system and is the foundation for Oscar’s vision to make a healthier life accessible and affordable for all. Using artificial intelligence throughout our platform, we have built a predictive and user friendly back end. An example is our fully-built claims system. This is the underlying technology that insurers use to process member care events for eligibility and payment. We recognized that rebuilding this part of the stack would be critical to our long-term success and scalability, so at the beginning of 2017 we began the process of building our own claims system. Today, this platform provides the foundation for our personalized data insight and analysis as well as our critical cost structure savings. For example, in 2020, 92% of our claims below $30,000 were auto-adjudicated without human intervention. Our claims system and other internal tools also power our cost estimates tool: when a member contacts our Care Team for an estimate of what a particular service or item will cost, the result is calculated in real-time by our claims engine. Unlike most cost estimates within the industry, which reflect average cost for an average provider, our estimates reflect the rate of an actual provider for an actual procedure and also the member’s personalized plan details, such as their deductible and out-of-pocket spending for the year. This functionality is also available to members directly on the web.

 

 

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Further, as noted above, many of our most sophisticated population health tools are closely integrated with our claims system, so that when a particular claim indicates a member is facing a significant health issue, our Care Teams can reach out proactively to help.

 

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Our platform is built to scale and its integration and configurability will enable us, in the years ahead, to make previously impossible things simple. These include features such as paying providers immediately through real-time claims adjudication, providing real-time prior-authorizations for Oscar members, automating the application of dynamic incentives for members and providers based on actions they take, and making health care more transparent for consumers through even more personalized and accurate cost estimates. Our powerful full stack technology enables us to be differentiated in what we offer members and we believe that over time it will continue to allow us to be innovative in ways our competitors cannot match.

 

 

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What We Offer Our Members

Our technology gives us the flexibility to launch new features, enter new geographic and product markets, and enter into innovative partnerships in ways traditional insurers cannot. Today, we offer health plans in three insurance markets: Individual, Small Group, and Medicare Advantage, across 291 counties and 18 states.

 

LOGO

Our Health Plans

We began Oscar by offering health plans within the Individual market, one of the few direct-to-consumer insurance markets in health care. The Individual market is built for those who do not have access to employer-sponsored or government-sponsored insurance. As part of the Individual market, health plans are named after metal tiers—for example, Catastrophic, Bronze, Silver, Gold, and Platinum—to make it easy for consumers to compare options. Each health plan offers a different level of coverage and suits members’ needs depending on their circumstances.

For our products and plans in the Small Group market, our digital platform and member engagement engine allow us to add new dimensions to traditional plan offerings that have struggled to keep up with the demands of an increasingly consumer-focused market. In January 2020, we announced our Cigna + Oscar partnership to exclusively deliver a Small Group plan offering in certain markets that combines the strengths of both our organizations. Through Cigna + Oscar, we provide business owners and their employees with access to member-first health care coverage and physician networks that provide personalized care.

We also operate in the Medicare Advantage market, which provides a private-sector alternative to traditional fee-for-service Medicare by allowing individuals 65 and older to apply their Medicare entitlement to obtain free or low-cost health plans that offer richer benefits and lower out-of-pocket expenses than the public alternative. This high growth market is forecast to grow from approximately 25 million enrollees as of December 31, 2020 to approximately 38 million enrollees in 2025, reflecting a CAGR of approximately 8.7%. In Medicare Advantage, CMS pays health insurers a PMPM premium to manage the health care and associated expenses of a participating member. Health insurers are

 

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therefore incentivized to manage the care of a given member with a focus on improving health outcomes and quality of care while lowering costs. We believe our singular focus on the consumer and the technology platform we have built uniquely position us in this important and growing consumer-focused market.

Our Members

With 529,000 members as of January 31, 2021 across 18 states and 291 counties, our membership base reflects the diversity of the broad range of geographies that we serve. As of December 31, 2020, we had more members who were between 56- to 64-years-old than between 27- to 35-years-old, and 31% of our members were part of families with dependents on their plans. The counties we serve range from ones with high median household incomes such as Orange County in California ($90,234) and New York County in New York ($86,553), to much lower income ones such as Marion County in Florida ($45,371) and El Paso County in Texas ($46,871). 16% of our subscribing members as of December 31, 2020 spoke Spanish as their first language, which is higher than the U.S. population as a whole, and these Spanish-speaking members’ NPS scores were over 25 points higher than our average.

 

 

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Not only do our members reflect the diversity of the geographies we serve, but engagement with our technology platform and customer satisfaction remains high, relative to industry average, across different cohorts such as age. For example, Oscar subscribing members who are over 55 years old engage with our digital or Care Team channels at roughly the same rate as our average subscribing member. When it comes to NPS, our scores are actually highest among our members who are 55 years and older, and the group with the next highest NPS is those 18- to 26-years-old. This is one reason why we believe that our product is a good fit for the rapidly-growing Medicare Advantage market.

 

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LOGO

 

 

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Our Network

Our health plans include access to a network of high-quality physicians and hospitals, as well as a personalized Care Team that supports members every step of the way, from finding a doctor to navigating costs. We believe the era in which broad, overbuilt provider networks are the principal option is over. To reduce health care costs, certain individuals and employers may move away from broad, national networks to localized program designs. In broad networks, where every hospital and doctor is part of every insurer’s network, there is limited direct competition on cost and quality between hospitals. The result is widely diverging prices in the same markets, with little to no correlation with quality.

As portions of the health care system increasingly shift towards offering more selective networks, we believe the insurers that will thrive are those that can consistently deliver a high-quality experience by engaging their members and routing care to in-network facilities and physicians that offer quality

 

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care at affordable rates. Oscar has EPO or similar networks in all of our markets for our Individual and Medicare Advantage products. The Cigna + Oscar Small Group products use Cigna’s network to offer PPO and EPO plans. We selectively work with technology-forward, high brand-recognition health systems and are proud to say that 9 of the 10 largest health systems in the U.S. are a part of our network (HCA Healthcare, Ascension, Tenet Healthcare Corporation, Community Health Systems, Trinity Health Corporation, Catholic Health Initiatives, Providence Health and Services, Dignity Health, and Prime Healthcare Services).

We optimize our networks for quality and cost by building algorithmically and our proprietary model is able to score the quality and completeness of a network in real-time, based on contract inputs and what we know about the region’s member base.

Our Growth Opportunities

We are in the early stages of addressing our market opportunity and reimagining health care in the U.S. We are focused on a clear strategy with multiple levers of growth:

Acquire more members in existing markets and states

We believe that we have a significant opportunity to expand and grow share within our current footprint of markets and states. We typically enter new counties with a 7% to 8% average share in year one and are typically able to grow our penetration over time. Today, we estimate our market share in the Individual market has grown to approximately 15% in counties where we have been operating for three years or more, based on membership within the market. Our ability to continue acquiring members in existing markets and states is driven by our combination of innovative plan design and data-driven pricing, as well as growing brand recognition through word of mouth from satisfied members. Our member base has continued to evolve as we have invested in our plan design and pricing. Members find value in the differentiated offerings in our health plans, such as virtual care at no additional cost, wellness incentives, and dedicated Care Teams.

We have also established an in-depth approach to the pricing process with a balanced view of growth, profitability, and risk amidst the competitive backdrop. Since launch, we have continued to refine our data-driven pricing process which allows us to assemble deep market-level insights that we enhance over time. In the 2021 open enrollment period, we were the lowest price plan in our markets only 10% of the time, down from 33% in the 2020 open enrollment period, yet still grew our membership to 529,000 as of January 31, 2021. This is an important proof point that our differentiated model is succeeding in the marketplace and we are able to grow while maintaining price discipline.

Launch new markets and states

We believe we can substantially grow our member base by launching into new counties and states. Today, we serve members in 291 counties and 18 states in the U.S. We will focus on markets where we can offer competitively priced premiums over the long term and thus drive consistent member retention. Our platform allows us to expand into new counties and states efficiently with limited incremental spend. We have a unique opportunity to leverage our technology to rapidly and seamlessly reach consumers in new geographies.

Introduce new products and plans

Our platform is built to be extensible to new products and plans, and we plan to continue investing and scaling to address the needs of consumers and partners. In 2017, we entered the Small Group market, and in 2020, we expanded our presence in this market with Cigna + Oscar co-branded plans. In 2019, we announced that we would be launching Medicare Advantage, and in 2020, we served our first members in that market. We will continue to evaluate opportunities to bring Oscar’s mission of making a healthier life accessible and affordable to all to health insurance markets such as the expanded Individual market through ICHRA, the U.S. employer self-funded market, and international markets.

 

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In our existing insurance markets, innovative plan designs enable us to acquire new members and grow our market share. In 2020, we announced that as part of our Oscar health plans in select markets, we would offer members Virtual Primary Care (including downstream care in some instances) at $0 for unlimited virtual primary care visits from select providers. We will continue to develop new plan designs that meet the evolving needs of our members and the health care ecosystem.

Our ability to evaluate opportunities, to leverage our existing regulatory framework, technology and brand, and to launch efficiently will continue to create value for us. We anticipate that our ability to quickly expand into new products and plans will help contribute to our growth in the future.

Develop new partnerships and evaluate potential acquisitions

We believe there is substantial opportunity for us to continue partnering with the health care industry’s key stakeholders through innovative fee-based and/or risk-sharing arrangements that reimagine the way health care is delivered. We will also consider growth through acquisition. Our Cigna + Oscar exclusive partnership in Small Group; Montefiore + Oscar partnership in Medicare Advantage; and Cleveland Clinic + Oscar partnership in Individual are proof points of our ability to deploy our technology to support innovative, value-oriented approaches to health care.

In addition to continued partnerships both regionally and nationally across our several product lines, we may selectively pursue acquisitions. These acquisitions may include new geographies and insurance offerings as well as complementary capabilities we can integrate into our existing product offerings to better engage members, improve health outcomes, and lower costs.

Monetize our platform

We have made significant investments to build a unique full stack technology platform that enables innovation in the global health care system. The fact that leading health care organizations in both the payer and provider sectors want to share risk, co-brand with us, and offer attractive economics—speaks volumes about market perception of the potential of our platform. As a result, we believe we are well-positioned to monetize our platform through risk-sharing partnerships, where we take risk for provider claims on behalf of our members, or, even more directly, through fee-based service arrangements where we charge a fee per member or other fee structure. As consumers take increasing control of their health care, we believe our differentiated member engagement and end-to-end member experience can and will create value in multiple sectors of the health care ecosystem. As care shifts towards virtual delivery, we also believe there are more opportunities to deploy our digital, telehealth capabilities to enable other innovative care models.

Our platform today also has the ability to deliver solutions that represent multi-billion dollar industries, such as telemedicine, benefits management, claims processing and health care data and analytics. By leveraging our technology in areas such as machine learning, predictive analytics, and multimodal communication, we have built technology that is both member-first and helps lower costs. We believe that we have the ability to power these adjacent industries with our member engagement engine and full stack technology platform.

Our People, Vision, and Values

As of December 31, 2020, we had 1,839 employees, 617 of whom were based in our New York headquarters, 1,032 based in Tempe, Arizona, 75 based in Los Angeles, California, and the remaining 115 based in smaller regional offices or working remotely. We compete to hire and retain highly-talented and diverse individuals, and we offer our employees competitive compensation packages that typically include base salary, performance bonus, and equity components. Our employees have backgrounds as engineers, doctors, nurses, actuaries, data scientists, and insurance experts.

 

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Oscar attracts employees because we are a mission-driven company. We view it as a privilege and a responsibility to serve our 529,000 members—and we take the responsibility very seriously. We also see it as our responsibility to fundamentally change the industry in which we are operating. As such, Oscar engenders a culture of discovery, analysis, collaboration, and perseverance. This is reflected in our vision and values.

Our Vision.    We refactor health care to make good care cost less.

Refactor is a term used in software engineering that means to improve the design, structure, and implementation of the software, while preserving its functionality. At Oscar, we take this definition a step further. We improve our members’ experience by building trust through deep engagement, personalized guidance, and rapid iteration.

Our Values.    We live by the following seven precepts:

 

  1.

What we do is a big deal.  We’re solving problems that change lives. Respect the rules, but fight for better ones.

 

  2.

Powered by people.  Members above all else. Machines augment us; they don’t replace us. Differences strengthen us. Developing and growing others is what raises the bar.

 

  3.

Seek the truth but never assume you’ve found it. Be scientific. Don’t simply believe what you’re told. Conventional wisdom is always conventional, but not always wise.

 

  4.

No genius without grit.  Be relentless. Be scrappy. Trying and failing beats not trying and changing nothing.

 

  5.

Inspire and provoke.  Develop and display leadership at all levels. Never stop being an individual contributor. Lead others by inspiring with your craft.

 

  6.

Be transparent.  Give and ask for direct feedback. Be grateful for and excited by the help of others. Don’t talk about people behind their backs. Publish, even when it hurts.

 

  7.

Make it right.  Admit your mistakes. Then, learn from them. Teach us what you’ve learned. Use what you make. Never build alone.

Competitive Conditions and Environment

We operate in a highly competitive environment in an industry subject to significant and ongoing changes, including business consolidations, new strategic alliances, market pressures, scientific and technological advances in medical care and therapeutics, and regulatory and legislative challenges and reform both at the federal and state level. This reform includes, but is not limited to, the federal and state health care reform legislation described under “—Government Regulation.” In addition, changes to the political environment may drive additional shifts in the competitive landscape.

We compete to enroll and retain new members and employer groups, as we currently derive substantially all of our revenue from direct policy premiums, which is primarily driven by the number of members covered by our health plans. Employer groups choosing a health plan for their employees and individuals who wish to enroll in a health plan or to change health plans typically choose a plan based on price, the quality of care and services offered, ease of access to services, a specific provider being part of the network, the availability of supplemental benefits, and the reputation or name-recognition of the health plan. We believe that the principal competitive features affecting our ability to retain and increase membership include the range and prices of health plans offered, diversity of coverage, benefits and wellness programs, breadth and quality of provider network, quality of service and member experience, responsiveness to member demands, financial stability, comprehensiveness of coverage, market presence, and reputation.

 

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As attracting new members depends in part on our ability to provide access to competitive provider networks, we compete in establishing such provider networks. We believe that the factors providers consider in deciding whether to contract with a health insurer include existing and potential member volume, reimbursement rates, timeliness and accuracy of claims payment and administrative service capabilities. While our health insurance subsidiaries are required to meet various federal and state requirements regarding the size and composition of our participating provider networks, our business model is based on contracting with selected health care systems and other providers, not all systems and providers in a given area. This allows us to work more closely with high quality health care systems that engage with us using our technology and to receive more favorable reimbursement rates from these health care systems. For additional information on risks associated with the competitive environment in which we operate and a list of factors that could negatively affect our ability to grow our member base, see “Risk Factors—Most Material Risks to Us—Our success and ability to grow our business depend in part on retaining and expanding our member base. If we fail to add new members or retain current members, our business, revenue, operating results and financial condition could be harmed” and “Risk Factors—Risks Related to our Business—If we are unable to arrange for the delivery of quality care, and maintain good relations with the physicians, hospitals, and other providers within and outside our provider networks, or if we are unable to enter into cost-effective contracts with such providers, our profitability could be adversely affected.”

The relative importance of each of the competitive factors mentioned in the above paragraphs and the identity of our principal competitors for members, employer groups, and providers varies by market and geography. In the Small Group market, for example, our principal competitors include plans offered by national carriers and local Blue Cross plans, while our principal competitors in the Individual market primarily consist of plans offered by national carriers, regional carriers, Medicaid-focused insurers offering Health Insurance Marketplace products, local Blue Cross plans, and start-up carriers. In the Medicare Advantage market, our principal competitors include Original Medicare fee-for-service plans managed by the federal government and Medicare Advantage plans offered by national, regional, and local managed care organizations and insurance companies, and accountable care organizations.

Additionally, we face significant competition for personnel, particularly in New York, where our headquarters is located. We rely on a small number of highly-specialized insurance experts, and competition in our industry for qualified employees is intense. Our compensation arrangements, such as our equity award programs, may not always be successful in attracting new employees and retaining and motivating our existing employees.

Sales and Marketing

Our marketing and sales initiatives focus on member growth through four primary avenues: acquiring members through Health Insurance Marketplaces, acquiring members through brokers, acquiring members directly through our digital platform and internal sales team, and signing agreements with small businesses that provide employee coverage as part of their benefits packages. We use marketing and sales strategies and various channels, including the internet, which we use on a selected basis to promote our advertisements through social and other media platforms, to reach consumers as well as enterprise benefits leaders. Enterprise marketing and sales strategies also include account-based marketing, business development initiatives, and client service teams focused on member acquisition, employee enrollment, and member engagement. We also use the data generated in member support interactions to constantly refine and improve our marketing campaign.

 

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Reinsurance

We enter into reinsurance agreements to help us achieve important goals for our business, including capital efficiency and greater predictability in our earnings in the event of unexpected significant fluctuations in MLR. Our reinsurance is contracted under two different types of arrangements: quota share reinsurance contracts and XOL reinsurance contracts. In quota share reinsurance, the reinsurer agrees to assume a specified percentage of the ceding company’s losses arising out of a defined class of business in exchange for a corresponding percentage of premiums (in some cases, net of a ceding commission). In XOL reinsurance, the reinsurer agrees to assume all or a portion of the ceding company’s losses in excess of a specified amount. Under XOL reinsurance, the premium payable to the reinsurer is negotiated by the parties based on losses on an individual member in a given calendar year and their assessment of the amount of risk being ceded to the reinsurer because the reinsurer does not share proportionately in the ceding company’s losses.

Our reinsurance contracts generally have a duration of one to three years, and we review them in advance of the contract’s expiration to negotiate terms for new reinsurance contracts. During each renewal cycle, there are a number of factors we consider when determining our reinsurance coverage, including (1) plans to change the underlying insurance coverage we offer, (2) trends in loss activity, (3) the level of our capital and surplus, (4) changes in our risk appetite, and (5) the cost and availability of reinsurance coverage. There can be no assurance that we will be able to renew our reinsurance contracts on similar or attractive terms, or at all, and no assurance that we will be able to negotiate reinsurance coverage with another reinsurance carrier if we are unable to renew our existing reinsurance contracts.

Certain Contracts

Provider Contracts

We contract with hospitals, physicians, and other health care providers in order to provide our members with access to provider networks. While we generally have a standard set of terms that we propose for our provider contracting relationships, each health market in which we operate is unique, and therefore our negotiated contract terms are specific to each market and health provider. For instance, the fee structures for these contracts vary, and can include fee for service arrangements, value based incentives and payment structures, or payments on a capitation basis. Our provider arrangements also generally may be terminated or not renewed by either party without cause upon prior written notice (the specific terms of which will vary). Some of our provider contracts may also contain exclusivity provisions, which either restrict our ability to contract with certain providers, permit the provider to terminate the contract or raise the compensation paid if we contract with certain other providers, and/or restrict our ability to offer certain benefits and plans. However, in all instances we maintain the right to contract with health systems that are necessary in order to meet federal and state requirements for network adequacy. For information on risks associated with our provider contracts, see “Risk Factors—Risks Related to our Business—If we are unable to arrange for the delivery of quality care, and maintain good relations with the physicians, hospitals, and other providers within and outside our provider networks, or if we are unable to enter into cost- effective contracts with such providers, our profitability could be adversely affected” and “Risk Factors—Risks Related to our Business—From time to time, we may become involved in costly and time-consuming litigation and regulatory actions, which require significant attention from our management.”

Contract with Health First

On January 21, 2021, through a subsidiary, we entered into a services agreement with Health First, pursuant to which we will provide certain administrative functions and services to Health First’s

 

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individual commercial and Medicare Advantage health plans in Florida. As of December 31, 2020, Health First had approximately 38,207 members in its Medicare Advantage plan and approximately 17,730 members in its individual commercial plans. The primary services to be provided under the contract will commence on January 1, 2022, which includes providing Health First’s members with access to Oscar’s platform, claims management services, concierge services and utilization review services. We will provide some limited services in 2021, including risk adjustment services and support for open enrollment. The services agreement has an initial five year term, with automatic extensions for successive three year terms unless such successive terms are terminated earlier. The services agreement (i) may be terminated at any time upon mutual written consent of the parties or if either party fails to perform or is in breach of its material obligations and (ii) contains other customary termination rights, representations, covenants and indemnification obligations.

Intellectual Property

We believe that our intellectual property rights are important to our business, and our commercial success depends, in part, on our ability to protect our core technologies and other intellectual property assets. We rely on a combination of copyrights, trademarks, service marks, trade secret laws, technical know-how, confidentiality procedures, and other contractual restrictions to establish and protect our intellectual property. As of December 31, 2020, we exclusively owned two registered trademarks in the United States, the Oscar and Oscar Health marks. While trademark registrations in the United States have terms of limited duration, there is no limit on the number of times that the registrations may be renewed if they remain in use in commerce and if all required filings and payments are made with the United States Patent and Trademark Office. Further, even if a federal registration of a trademark in the United States is not renewed, the owner of the trademark may retain its common law trademark rights thereafter, for as long as the mark remains in use in commerce in the applicable state or states. In addition, we have registered domain names for websites that we use or may use in our business. As of December 31, 2020, we had no issued patents and no pending patent applications anywhere in the world, and therefore, we do not have patent protection for any of our proprietary technology, including our full stack technology platform, proprietary software, mobile app, or web portal. However, our software and other proprietary information are protected by copyright on creation. Copyright registrations, which have so far not been necessary, may be sought on an as-needed basis.

We seek to control access to and distribution of our proprietary information, including our algorithms, source and object code, designs, and business processes, through security measures and contractual restrictions. We seek to limit access to our confidential and proprietary information to a “need to know” basis and enter into confidentiality and nondisclosure agreements with our employees, consultants, members, and vendors that may receive or otherwise have access to any confidential or proprietary information. We also obtain written invention assignment agreements from our employees and consultants that assign to us all right, interest, and title to inventions and work product developed during their employment or service engagement, respectively, with us. In the ordinary course of business, we provide our intellectual property to external third parties through licensing or restricted use agreements. For information on risks associated with our intellectual property rights, see “Risk Factors—Risks Related to our Business—Failure to secure, protect, or enforce our intellectual property rights could harm our business, results of operations, and financial condition” and “Risk Factors—Risks Related to our Business—If we are unable to integrate and manage our information systems effectively, our operations could be disrupted.”

 

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Information Technology

Our business is dependent on effective, resilient, and secure information systems that assist us in, among other things, monitoring utilization, and other cost factors, processing provider claims, providing data to our regulators, and implementing our data security measures. Our members also depend upon our information systems for enrollment, primary care and specialist physician roster access and other information, while our providers depend upon our information systems for eligibility verifications, claims status, and other information.

We partner with third parties, including Amazon, Atlassian, inContact, and Google, to support our information technology systems. This makes our operations vulnerable to adverse effects if such third parties fail to perform adequately. We have entered into agreements with third-party vendors who manage certain of our information technology infrastructure services including, among other things, our information technology operations, end-user services, and platforms for cloud computing. As a result of such agreements, we have been able to reduce our administrative expenses over time, while improving the reliability of our information technology functions, and maintain targeted levels of service and operating performance. A segment of the infrastructure services is managed within our cloud platform, while other portions of the infrastructure services are managed externally by vendors. Our use of cloud service providers in particular is intentionally and inherently resilient, with platform level redundancy in networking and computer hardware. As an example, we distribute our AWS services across multiple availability zones to reduce the likelihood of infrastructure failure.

We have established a program of security measures to help protect our computer systems from security breaches and malicious activity and have implemented controls designed to protect the confidentiality, integrity, and availability of data, including PHI, and the systems that store and transmit such data. We have employed various technology and process-based methods, such as network isolation, intrusion detection systems, vulnerability assessments, penetration testing, use of threat intelligence, content filtering, endpoint security (including anti-malware and detection response capabilities), email security mechanisms, and access control mechanisms. We also use encryption techniques for data at rest and in transit.

Our information systems and applications require continual maintenance, upgrading, and enhancement to meet our current and expected operational needs and regulatory requirements. We regularly upgrade and expand our information systems’ capabilities. For information on risks associated with our information technology systems, see “Risk Factors—Risks Related to our Business—If we are unable to integrate and manage our information systems effectively, our operations could be disrupted” and “Risk Factors—Risks Related to our Business—If we or our partners or other third parties with whom we collaborate sustain a cyber-attack or suffer privacy or data security breaches that disrupt our information systems or operations, or result in the dissemination of sensitive personal or confidential information, we could suffer increased costs, exposure to significant liability, adverse regulatory consequences, reputational harm, loss of business, and other serious negative consequences.”

Government Regulation

General

Our operations are subject to comprehensive and detailed federal, state, and local laws and regulations throughout the jurisdictions in which we do business. These laws and regulations, which can vary significantly from jurisdiction to jurisdiction, restrict how we conduct our businesses and result in additional burdens and costs to us. Further, federal, state, and local laws and regulations are subject to amendments and changing interpretations in each jurisdiction. The application of these myriad, detailed legal and regulatory requirements to the complex operation of our businesses creates areas of

 

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uncertainty. In addition, there are numerous proposed health care laws and regulations at the federal, state, and local levels, some of which could materially adversely affect our businesses if they were to be enacted. See “Risk Factors—Risks Related to the Regulatory Framework that Governs Us—Changes or developments in the health insurance markets in the United States, including passage and implementation of a law to create a single-payer or government-run health insurance program, could materially and adversely harm our business and operating results.”

Supervisory agencies, including federal and state regulatory and enforcement authorities, have broad authority to:

 

   

grant, suspend, deny, and revoke certificates of authority to transact insurance;

 

   

regulate our products and services;

 

   

regulate, limit, or suspend our ability to market products, including the exclusion of our products from Health Insurance Marketplaces;

 

   

approve premium rates;

 

   

monitor our solvency and reserve adequacy;

 

   

scrutinize our investment activities on the basis of quality, diversification, and other quantitative criteria; and

 

   

impose criminal, civil, or administrative monetary penalties, and other sanctions for non-compliance with regulatory requirements.

In particular, we are subject to comprehensive oversight from CMS related to our Medicare Advantage plans. CMS regulates the Medicare Advantage payments made to us and the submission of information relating to the health status of members for purposes of determining the amounts of those payments. Additional CMS regulations govern Medicare Advantage benefit design, eligibility, enrollment and disenrollment processes, call center performance, plan marketing, record-keeping and record retention, quality assurance, timeliness of claims payment, network adequacy, and certain aspects of our relationships with and compensation of providers.

To carry out the above tasks, CMS and other agencies periodically examine our current and past business practices, accounts and other books and records, operations and performance of our health plans, compliance with contracts, adherence to governing rules and regulations, and the quality of care we provide to our members. This information and these practices may be subject to routine surveys, mandatory data reporting and disclosure requirements, regular and special investigations and audits, and from time to time, we may receive subpoenas and other requests for information from government entities. For example, CMS currently conducts RADV audits of a subset of Medicare Advantage contracts for each contract year. The RADV program audits diagnosis codes submitted in support of enhanced payments by Medicare Advantage organizations to ensure such diagnosis codes are valid and supported by medical record documentation. In addition, the OIG also audits risk adjustment of companies offering Medicare Advantage plans, and we anticipate this remaining a focus of government investigations in the next few years.

The health insurance business also may be adversely impacted by court decisions that expand or invalidate the interpretations of existing statutes and regulations. It is uncertain whether we can recoup, through higher premiums or other measures, the increased costs caused by potential legislation, regulation, or court rulings.

State Regulation of Insurance Companies and HMOs

Our insurance and HMO subsidiaries must obtain and maintain regulatory approvals to sell specific health plans in the jurisdictions in which they conduct business. The nature and extent of state

 

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regulation varies by jurisdiction, and state insurance regulators generally have broad administrative authority with respect to all aspects of the insurance business. The Model Audit Rule, where adopted by states, requires expanded governance practices, risk and solvency assessment reporting and the filing of periodic financial and operating reports. Most states have adopted these or similar measures to expand the scope of regulations relating to corporate governance and internal control activities of HMOs and insurance companies. Health insurers and HMOs are subject to state examination and periodic regulatory approval renewal proceedings. Some of our business activity is subject to other health care-related regulations and requirements, including utilization review, pharmacy service, or provider-related regulations and regulatory approval requirements. These requirements differ from state to state and may contain network, contracting, product and rate, licensing and financial and reporting requirements. There are laws and regulations that set specific standards for delivery of services, appeals, grievances, and payment of claims, adequacy of health care professional networks, fraud prevention, protection of consumer health information, pricing and underwriting practices, and covered benefits and services.

In addition, we are regulated as an insurance holding company and are subject to the insurance holding company laws of the states in which our health insurance subsidiaries are domiciled. These laws and other laws that govern operations of insurance companies and HMOs contain certain reporting requirements, as well as restrictions on transactions between an insurer or HMO and its affiliates, and may restrict the ability of our health insurance subsidiaries to pay dividends to our holding companies. Under New York law, for example, Oscar Insurance Corporation, or OIC, our New York-domiciled insurance subsidiary, may not declare or distribute a dividend to shareholders except out of earned surplus (as defined under New York law). Additionally, absent prior approval of the Superintendent of the Department of Financial Services, or the Superintendent, OIC may not declare or distribute any dividend to shareholders which, together with all dividends declared or distributed by us during the preceding 12 months, exceeds the lesser of (a) ten percent of OIC’s surplus to policyholders as shown by its last statement on file with the Superintendent, or (b) one hundred percent of adjusted net investment income (as defined under New York law) during such period. Holding company laws and regulations generally require registration with applicable state departments of insurance and the filing of reports describing capital structure, ownership, financial condition, certain intercompany transactions, enterprise risks, corporate governance, and general business operations. In addition, state insurance holding company laws and regulations generally require notice or prior regulatory approval of certain transactions including acquisitions, material intercompany transfers of assets, and guarantees and other transactions between the regulated companies and their affiliates, including parent holding companies. Applicable state insurance holding company acts also restrict the ability of any person to obtain control of an insurance company or HMO without prior regulatory approval. These acts generally define “control” as the direct or indirect power to direct or cause the direction of the management and policies of a person and is presumed to exist if a person directly or indirectly owns or controls 10% or more of the voting securities of another person. Some state laws have different definitions or applications of this standard. Dispositions of control generally are also regulated under applicable state insurance holding company laws.

The states of domicile of our health insurance subsidiaries have statutory RBC requirements for insurance companies and HMOs based on the Risk-Based Capital For Health Organizations Model Act. These RBC requirements are intended to assess the capital adequacy of life and health insurers and HMOs, taking into account the risk characteristics of a company’s investments and products. In general, under these laws, an insurance company or HMO must submit a report of its RBC level to the insurance regulator of its state of domicile each calendar year. These laws typically require increasing degrees of regulatory oversight and intervention if a company’s RBC declines below certain thresholds. As of December 31, 2020, the RBC levels of our insurance and HMO subsidiaries met or exceeded all applicable mandatory RBC requirements. For more information on RBC capital and additional liquidity

 

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and capital requirements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Overview.”

Further, almost all states require insurers and HMOs to comply with the standards set forth in the Model Audit Rule, which imposes financial reporting, independent audit, and corporate governance requirements. Additionally, as a company that directly or indirectly controls insurers, we have an obligation to adopt a formal enterprise risk management, or ERM, function and file enterprise risk reports on an annual basis. The ERM function and reports must address any activity, circumstance, event, or series of events involving the insurer that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or liquidity of the insurer, including anything that would cause the insurer’s RBC to fall below certain threshold levels or that would cause further transaction of business to be hazardous to policyholders or creditors, or the public. Similarly, in accordance with NAIC’s Risk Management and Own Risk Solvency Assessment Model Act, we must complete an annual “own risk and solvency assessment,” which is an internal assessment, appropriate to the nature, scale, and complexity of our company, of the material and relevant risks associated with the current business plan, and of the sufficiency of capital resources to support those risks.

Ongoing Requirements and Changes Stemming from the ACA

The ACA significantly changed the United States health care system. While we anticipate continued changes with respect to the ACA, either through Congress, court challenges, executive actions, or administrative action, we expect the major portions of the ACA to remain in place and continue to significantly impact our business operations and results of operations, including pricing, minimum MLRs, and the geographies in which our products are available.

The ACA prohibits annual and lifetime limits on essential health benefits, member cost-sharing on specified preventive benefits, and pre-existing condition exclusions. Further, the ACA implemented certain requirements for insurers, including changes to Medicare Advantage payments and the minimum MLR provision that requires insurers to pay rebates to members when insurers do not meet or exceed the specified annual MLR thresholds. In addition, the ACA required a number of other changes with significant effects on both federal and state health insurance markets, including strict rules on how health insurance is rated, what benefits must be offered, the assessment of new taxes and fees (including annual fees on health insurance companies), the creation of public Health Insurance Marketplaces for Individuals and Small employer group health insurance and the availability of premium subsidies for qualified individuals. The ACA allows individual states to choose to enact additional state-specific requirements that extend ACA mandates and some of the states where we operate have implemented higher MLR percentage requirements, lower tobacco user rating ratios, and different age curve variations. Changes to our business environment are likely to continue as elected officials at the national and state levels continue to enact, and both elected officials and candidates for election continue to propose, significant modifications to existing laws and regulations, including changes to taxes and fees. Also, legal challenges regarding the ACA could have a material adverse effect on our business, cash flows, financial condition, and results of operations. See “Risk Factors—Most Material Risks to Us—Any potential repeal of, changes to, or judicial challenges to the ACA, could materially and adversely affect our business, results of operations, and financial condition.”

In general, the individual market risk pool that includes public Health Insurance Marketplaces has become less healthy since its inception in 2014 and continues to exhibit risk volatility. Based on our experience in public Health Insurance Marketplaces to date, we have made adjustments to our premium rates and participation footprint, and we will continue to evaluate the performance of such products going forward. In addition, insurers have faced uncertainties related to federal government funding for various ACA programs. These factors may have a material adverse effect on our results of

 

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operations if premiums are not adequate or do not appropriately reflect the acuity of our member population. Any variation from our expectations regarding acuity, enrollment levels, adverse selection, or other assumptions utilized in setting premium rates could have a material adverse effect on our results of operations, financial position, and cash flows.

Further, implementation of the ACA brings with it significant oversight responsibilities by health insurers that may result in increased governmental audits, increased assertions of alleged FCA liability, and an increased risk of other litigation.

Federal regulatory agencies continue to modify regulations and guidance related to the ACA and markets more broadly. Some of the more significant ACA rules are described below:

 

   

The minimum MLR thresholds by market, as defined by HHS, are as follows:

 

    

 

 

Small Group

     80

Individual

     80

 

   

Certain states require us to meet more restrictive MLR thresholds. For example, New York state law requires an 82% MLR for both Small Group and Individual products and plans.

 

   

The minimum MLR thresholds disclosed above are based on definitions of an MLR calculation provided by HHS, or specific states, as applicable, and differ from our calculation of “benefit expense ratio” based on premium revenue and benefit expense as reported in accordance with GAAP. Definitions under applicable MLR regulations also impact insurers differently depending upon their organizational structure or tax status, which could result in a competitive advantage to some insurance providers that may not be available to us, resulting in an uneven playing field in the industry. Failure to meet the minimum MLR thresholds triggers an obligation to issue premium rebates to members.

 

   

The ACA also imposed a separate minimum MLR threshold of 85% for Medicare Advantage plans. Medicare Advantage plans that do not meet this threshold will have to pay a member MLR rebate. If a plan’s MLR is below 85% for three consecutive years, enrollment will be restricted and the plan will be prohibited from accepting new members. A Medicare Advantage plan contract will be terminated if the plan’s MLR is below 85% for five consecutive years.

 

   

All of our premium revenue and medical membership was subject to the minimum MLR regulations as of and for the year ended December 31, 2020.

 

   

The ACA created an incentive payment program for Medicare Advantage plans. CMS has developed the Medicare Advantage Star Ratings system, which awards between 1.0 and 5.0 stars to Medicare Advantage plans based on performance in several categories, including quality of care and customer service. The Star Ratings are used by CMS to award quality-based bonus payments to plans that receive a rating of 4.0 stars or higher. The methodology and measures included in the Star Ratings system can be modified by CMS annually. As of December 31, 2020, none of our Medicare Advantage plans were eligible to receive Star Ratings because of our recent market entry.

 

   

Further, the ACA directed the HHS Secretary to develop a system that rates qualified health plans, or QHPs, certified by the Health Insurance Marketplace based on relative quality and price. As a QHP issuer, we must submit quality rating information in accordance with CMS guidelines as a condition of certification and participation in the Health Insurance Marketplaces. Our overall ratings, represented on a scale of 1.0 to 5.0 stars, are based on three categories: member experience, medical care, and plan administration. As of 2020, quality rating information for QHPs is publicly displayed and accessible to consumers on all Health Insurance Marketplaces.

 

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Federal regulations require premium rate increases to be reviewed for Small Group and Individual products above specified thresholds that may be adjusted from time to time and enrollees to be notified of the premium rate increase in advance. The regulations provide for state insurance regulators to conduct the reviews, except in cases where a state lacks the resources or authority to conduct the required rate reviews, in which cases HHS will conduct the reviews.

 

   

Prior to the implementation of the ACA, health insurers were permitted to use differential pricing based on factors such as health status, gender, and age. The ACA prohibits health insurers selling ACA-regulated plans in the Individual and Small Group markets from using health status and gender in the determination of the insurance premium. In addition, age rating under the ACA is limited to a 3:1 ratio for adults age 21 and older, and tobacco use rating is limited to a 1.5:1 ratio. States also may choose to enact more restrictive rules than the federal minimum standards.

 

   

Medicare Advantage reimbursement rates will not increase as much as they would have, absent the ACA, due to the payment formula promulgated by the ACA that continues to impact reimbursements. We also expect further and ongoing regulatory guidance on a number of issues related to Medicare Advantage, including evolving methodologies for ratings and quality bonus payments. CMS also recently finalized various technical proposed changes to the methodology and processes applied as part of its RADV program. While the changes to the RADV program are in part intended to provide health insurers with greater stability and predictability, and promote fairness in the RADV program’s administration, such changes may ultimately increase the government’s ability to retrospectively claw back or recover funds from health insurers.

 

   

On January 28, 2021, President Biden issued an Executive Order expressing his administration’s commitment to protecting and strengthening Medicaid and the ACA. Federal agencies must examine agency actions to determine whether they are consistent with that commitment, and begin rulemaking to suspend, revise, or rescind any inconsistent actions. Areas of focus include policies or practices that may reduce affordability of coverage, present unnecessary barriers to coverage, or undermine protections for people with preexisting conditions. The Executive Order also led CMS to establish a Special Enrollment Period for the federal health insurance marketplace from February 15, 2021 to May 15, 2021.

Privacy, Confidentiality and Data Standards Regulation

HIPAA and the administrative simplification provisions of HIPAA impose a number of requirements on covered entities (including health insurers, HMOs, group health plans, providers, and clearinghouses) and their business associates relating to the use, disclosure and safeguarding of PHI. These requirements include uniform standards of common electronic health care transactions and privacy and security regulations; and unique identifier rules for employers, health plans, and providers.

In addition, HITECH and corresponding implementing regulations have imposed additional requirements on the use and disclosure of PHI such as additional breach notification and reporting requirements, contracting requirements for HIPAA business associate agreements, and strengthened enforcement mechanisms and increased penalties for HIPAA violations. Federal consumer protection laws may also apply in some instances to our privacy and security practices related to personally identifiable information. We maintain an internal HIPAA compliance program, which we believe complies with HIPAA privacy and security regulations, and have dedicated resources to monitor compliance with this program.

In addition, Health Insurance Marketplaces are required to adhere to privacy and security standards with respect to personally identifiable information and to impose privacy and security standards that are at least as protective as those the marketplaces must follow. These standards may differ from, and be more stringent than, HIPAA.

 

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The use and disclosure of certain data that we collect or process about or from individuals are also regulated in some instances by other federal laws, including the Gramm-Leach-Bliley Act, or GLBA, and state statutes implementing GLBA, in connection with insurance transactions in the states where we operate. Additionally, in response to the growing threat of cyber-attacks in the insurance industry, certain jurisdictions, including New York, have begun to consider new cybersecurity measures, including the adoption of cybersecurity regulations. In March 2017, the NYDFS promulgated Cybersecurity Requirements for Financial Services Companies, which require covered financial institutions to establish and maintain a cybersecurity program and implement and maintain cybersecurity policies and procedures that meet specific requirements.

There are also numerous state and federal laws and regulations related to the privacy and security of health information. Laws in all 50 states require businesses to provide notices to affected individuals whose personal information has been disclosed as a result of a data breach, and certain states require notifications for data breaches involving individually identifiable health information. Most states require holders of personal information to maintain safeguards and take certain actions in response to a data breach, such as maintaining reasonable security measures and providing prompt notification of the breach to affected individuals and the state’s attorney general. For further discussion, see “Risk Factors—Risks Related to the Regulatory Framework that Governs Us.”

Furthermore, states have begun enacting more comprehensive privacy laws and regulations addressing consumer rights to data protection or transparency that may affect our privacy and security practices. This includes, for example, the CCPA, which governs the collection, use, handling, processing, destruction, disclosure, storage, and protection of California residents’ data and imposes additional breach notification requirements. The CCPA requires new disclosures, imposes new rules, and affords California residents new abilities to seek access and deletion of their