Oscar's CEO dissects the weaknesses in the US healthcare system.
From the standpoint of customers, the US healthcare is complex, confusing, and completely opaque with regard to prices, according to Mario Schlosser, CEO and co-founder of Oscar Health.
“The user experience sucks,” he said, speaking at the CB Insights Future of Fintech Conference yesterday. Scholsser gave a sharp-tongued review of the healthcare system’s pain-points and why he thinks his startup Oscar can do something about them.
“Someone ought to do more in a system for which we pay 18% of GDP … ” Schlosser added. The industry has been raising prices by 10% to 15% each year without significant changes in quality, said Schlosser.
“If this keeps going, by 2050 half the GDP would go to healthcare,” he said. “That cannot be a good idea.”
As an example of how confusing the current system can be for end users, Schlosser pointed to the moment when a health insurance customer has to wade through options to select a new insurance plan.
“If you want to feel really stupid, try choosing an insurance plan,” he said.
Schlosser was just as hard on healthcare providers, i.e. hospitals and doctor groups, who he said have more incentive to drive up prices than insurers, who only skim a 2% to 3% margin off the system.
The traditional fee-for-service model — which the system is still pinned to despite the Affordable Care Act’s provisions trying to shift the incentives toward fee-for-results or outcomes — means that prices will keep going up.
“That’s the reason that costs have gone up so much in the last few years,” he said. “They want to milk this thing for all its got.”
Health insurance brokers have also played a role, earning high fees for putting clients in the wrong plans or “overselling” them.
Schlosser said his company had brought brokers in-house and teamed up with providers so that incentives are more aligned.
“If we can get you healthy and keep you healthy we will make more money,” he said, “and I really like that as economic alignment.”
Tech is the answer in Schlosser’s view. He was emphatic in identifying Oscar as a tech company that uses software and data to wring inefficiencies out of the system, not a health company.
In the vein of proving his company had the best data talent out there for figuring out these thorny issues, he also said Oscar Health is a top employer of alumni of Bridgewater Associates, the world’s largest hedge fund, where Schlosser also worked.
Finally, Schlosser cited Oscar’s high word-of-mouth referral rate — the company’s number one channel for customer acquisition — as evidence of his system’s success.
Oscar has faced some serious challenges. Its recent California roll-out attracted just half of its expected sign-ups.
“Getting the narrative out is not an overnight thing,” Schlosser said, mentioning that Oscar started advertising in California too late, and needed to refine its pricing for the new market. “When the word of mouth kicks in, [sign-ups] will keep going up, and if that happens in a year or five years, I’m not worried.”
Peter Rudegeair, Reporter, The Wall Street Journal: All right, thank you Matt, and thanks everybody for sticking around until the end tonight. I don’t know what the level of sophistication on the insurance tech side generally, and in Oscar’s case specifically here, so at the start, I just wanna ask Mario, we’ll talk about the history of Oscar in a second, but maybe you can just give the room a sense for the business today, what states you’re operating in, what services you offer.
Mario Schlosser, CEO, Oscar: Yeah, absolutely. So about the history in a couple minutes, okay, that’s gonna tell the story of what we actually do in a better way. But where we are today is we’re a full stack health insurance company. We currently only sell into the individual markets, a.k.a. the Affordable Care Act markets, or Obamacare markets. We’ve about 135,000 members in four states now, New Jersey, New York, Texas, California. In those states, we’re only in very select cities. New York City, obviously, Long Island, New Jersey kind of upstate area, in San Antonio and Dallas in Texas, and Los Angeles in California.
And why we are in a place like San Antonio out of all the launch places we could go into, we can talk about later as we talk about networks and providers and so on, that translates into revenues of about 650 million or so in annual basis. And we’ve raised from, obviously Joel Cutler, the first guy who gave us money and bought into the idea originally but also Peter Thiel Founder’s Funds, Joe Lonsdale, Google capital’s in there, Fidelity, Goldman, and so on.
Peter: Great, so you mentioned the Affordable Care Act. Why don’t we rewind a couple years and talk about what you, did that kind of was the catalyst for the business idea for you, or how in the wake of that you came up with the idea for Oscar?
Mario: Yeah, business comes really from a conversation. The two cofounders, Josh Kushner and myself, had in early 2012, my wife was going through the first pregnancy and as anybody who’s gone through that, as a husband of a wife who goes through it, of course, or directly, you kind of realize how complicated the health care system is. It does complex things, so it’s no surprise it’s complex as a system. But what really pissed me off at the time was how little the insurance company seemed to care about the complexity. It sends you these confusing statements called EOBs, explanation of benefits, a few months after the fact usually with everything is capitalized in these statements, usually a great sign that there’s no layer between you and a computer or database on the other end. You call them, yet they had no idea of how much this will cost you.
My wife was on the phone, on an app all the time called babycenter.com, chatting with women in Alabama, you know debating how much the pregnancy would throughout the end of the year, and you couldn’t really ask them about things like what C-section rate can I expect if I meet this particular physician or in the delivery room, the maternity ward at the night of delivery, and things like that. All this information was very obviously available somewhere, which physicians, how good at which conditions, and so on, but you certainly wouldn’t get it from the insurance company.
And so what we said is if we could create an insurance company that really makes use of its own data in a way that simplifies that experience of getting health care, not just insurance but health care for the member, that would be a winning proposition.
Now there is a reason why insurers work the way they do, and the reason is that they don’t actually sell to you or myself, or any other average person on the street. They sell to HR departments. You know, the name of the game over the past decade in US health care has been you essentially get insurance if you’re employed somewhere, and your HR department makes the decision as to who you go with. And then when you leave the employer, you have you leave your insurance company. It’s a little bit like, I don’t know, like changing hairdressers and changing from an iPhone to an Android. Two things have nothing to do with each other are weirdly, artificially connected.
And so then along came the ACA. In mid-2012, the Supreme Court reaffirms the Affordable Care Act, and for the first time, created this market really overnight. So we could go out as a health insurer and sell to individuals, and convince them we have the products, we’ll take care of you, we can build a brand around it. We can tell people go tell your friends, they should also sign up for Oscar, etc. And that was a big catalyst, but it was not the starting point. The starting point was really the user experience sucks, somebody ought to do more in a system that we pay 18% GDP for in making it simple and accessible.
Peter: Okay, now Joel, let’s rewind to that time for you. Were you thinking about insurance before…
Joel Cutler, Managing Director, General Catalyst: I hate following Mario.
Peter: It’s a tough act, but it’s up to you.
Joel: No. No, our job’s pretty simple. We look for really big industries that, and this one is gigantic, and you pay them all sorts of money and they’re supposed to take care of you when really bad things happen, right? And it’s really old, like makes me look young, like the industry’s really, the systems are really old, the business model’s really old. And consumers aren’t anymore. And it doesn’t match, like the business model doesn’t match. Then you’ve got this enormous marketing costs, and these enormous sales and distribution costs, so like the backdrop made all sort of sense, and Josh Kushner deserves a gigantic amount of credit here along with Mario. These two guys really did all the smart thinking.
My job is just to find sort of people to think in first principles and to give them as much money as we can as fast as we can. And that was Mario. And he said, “This is really broken. You’re a consumer guy and you love, look at these businesses you’ve invested in that are in the consumer space, and we can make this so much better from the bottom up. And we can build this, and this, and this, and this, and this, and this. It’s not we’re gonna borrow somebody else’s balance sheet. We’re not gonna borrow somebody else’s systems. We’re gonna build every system from the bottom up sooner or later, and we’re gonna make this experience wonderful.” It’s pretty easy.
And at the time, we had this great guy who was an executive in residence in our shop, and he and Mario since become good friends. He ran a good sized health insurance business, now the governor of Massachusetts. But at the time, I remember Mario coming in and pitching the business with Josh, and everybody…and the guy stands up in the middle and goes, “This is exactly what healthcare should be. This is exactly…” he starts making their pitch for them. Basically kicks Mario off the slide deck and says, “This is what it should be, blah, blah, blah, blah, blah. So that’s how it’s happened.
Peter: Now Mario, it seems like what Joel was saying, one of the things that he really liked about Oscar was your kind of full stack approach. So, you know, there’s lots of ways you could’ve gone that wasn’t full stack. So why don’t you tell the audience a little bit about why you think that’s the best way, at least in the health insurance market?
Mario: I shouldn’t show you some of the slides we had in the investment presentation. Very early on I think we didn’t have them in anymore when we talked to Joel over at Catalyst, but in the very early design slides for Oscar, we actually said some, “Oh, we should be an asset light insurance company.” So originally, the idea was always we wanna be on our paper, as the industry calls it, meaning we wanna have our own capital, our own balance sheet, and so on, to be able to make decisions more quickly and decide when we wanna reimburse, and pay for, and so on. But the idea was like you’re building a software project. Let’s get the best APIs, let’s get the best platforms to connect to, and work on, etc. We thought that how you can build an insurance company very early on.
And that decidedly is not the case. And there’s really two reasons for it, and we had to learn some of these over the years. Reason one is sort of obvious. When you go and work with vendors that attach themselves to payers in the industry, whether it’s a pharmacy, benefits manager that negotiates drug prices for you, whether it’s a network of physicians sometimes, whether it is, you know, other things like a utilization management vendor. These are the guys sort of like use standardized metrics of medical decision making to determine whether to say yes or no to a procedure request, and so on. You wouldn’t expect these guys to be particularly technical. I can tell you some hilarious stories about the lack of technicality with some of these vendors.
We had one vendors actually very early on. We told him beforehand, I won’t tell you who it is and what they did for us at the time. They’re not a vendor anymore. Been a long time. But we flew out there. It was in 2013, early 2013, and we said, “Bring your technology guys. We wanna talk about how to tap into your systems and get real-time data exchange between your systems and our systems.” We go into the room, and the two guys who are the technology guys is the guy who plugs in the network cables, and the guy installs Microsoft Outlook on your PC. Those were the two guys that were called technology guys, and they both fell asleep during the meeting. They both, by the way, flew to the meeting from somewhere else in the US, like gigantic waste of money and time.
So that wasn’t so surprising, you know, that these vendors were not gonna be particularly technology oriented, and we generally can overcome those issues by just telling them, “Okay, just drop stuff on secure FTP servers, whatever, or give us a raw data feed. We’re sort it out ourselves,” and so on. But the second piece to me was surprising that health care vendors don’t live in environments where they get beaten down on the error rates. Health care tends to have a really 10% to 15% error rate where claims are wrongly coded, where transmissions get dropped, and so on, in ways that are very core to the way the business works.
And nobody seems to really care all that much because, again, you and I as the end user of this thing are not the end customers. We don’t make decisions. We get pissed off, we call our broker, we call the insurance company, complain about this stuff, but because of the complaining, an HR department’s not gonna drop Aetna/United, or whatever for the 40,000 members that they have. And so that’s why we in essence said, we gotta be full stack. We gotta do everything ourselves, and we gotta rebuild the systems from the ground up first so that we now have our own claim system. We have our own processes around anything from utilization managements, to clinical research, to obviously member services. Even inside sales, and so on. And you see the impact from that when one little data point, for example…not surprisingly there, you can make good decisions or not so great decisions when you select an insurance plan. And we really wanna feel stupid once your life. And I’m sure people in this audience don’t feel stupid all the time, all that much you know, because we’re all pretty smart here. Try to select an insurance plan. It makes you really feel like an idiot. You know, deductibles, and copays, and all these things, and all these giant tables and everything.
But there is like an economically optimal choice you can make if you sort of know what your projected utilization will be, okay? When we look at who ends up in the optimal economical choice among our members selecting insurance plans, when they call our team, our sales teams, or people on the phone you know, when you buy insurance plan from Oscar, we make better decisions for them than if you go through brokers, which is sort of hilarious because brokers get paid shit tons of money for making decisions on your behalf, and don’t end up making particularly smart decision oftentimes.
And so long story short, this sort of like full stack approach, I think is the way to go. It’s the harder way to go for sure, but it is the way to go. And the trajectory looks a little more like this, but then it gets more exponential the farther you go down the curve.
Joel: I think the other thing is talk about the size of the investment in technology. And it’s just how many of the smartest people you know said they wanna go work for a big insurance company? Mario says this all the time, really not that many. How many of the smartest people you know in New York say they wanna go work for Oscar? Quite a few. And that’s to a large degree because sort of the audacity of what he just said. It’s just a ridiculously hard task, and talk a little bit about the talent that you’ve been able to attract.
Mario: Yeah, as it happens, we’re the biggest alumni shop of Bridgewater Associates people, what you said, the smartest hedge fund in the world. I was there myself, which is why I can it’s the smartest in the world. But no, very smart hedge funds, you know, very systematic thinkers. Look at the global economy, try to derive how you trade the markets based on really first principles again. And really in the founding story of Oscar is the sort of like insight that if there’s one entity in US health care that sees the entirety of the data flowing through the system and also controls the money flow, it is the insurance company. So we really thought if you wanna have really impact using data and deeper insights in how the health care system overall works, you gotta be the insurance company. And so as a result, lots of Bridgewater people, lots of other hedge fund people, lots of people from Facebook, Google, and so on coming over. Our CTO and S&P engineering is Alan Warren. He used to run the Google engineering team in New York. Came over a couple months ago actually. Joel Kline from School Chancellor’s on board running policy and strategy. So really people who just wanna do ground up stuff that’s important and has an impact, and not sort of like worry about getting your pizza delivered 10 seconds earlier, as what seems to be the goal with AI and messengers these days, you know?
Peter: Now in addition to your full stack approach, you know, you decided to go direct to consumer from very early on. And the ACA created this moment in time where you could sell directly to individuals. But there are other verticals in insurance, auto, where you know, that has been around for a long time. So why I guess healthcare and why not try the model in a different vertical instead at first at least?
Mario: Well honestly, I could say we had a grand plan. We looked at all the insurance companies and we decided this is the way to go. Well that wasn’t the case. It was my wife’s pregnant, damn it, this isn’t work. Let’s do that. But I do think in hindsight it was a very lucky choice in a sense because the big difference between any other insurance vertical in health is the number of interaction points you have. In auto insurance, in home insurance, in property and casualty, and so on, you don’t crash your car all the time, you know? Your auto insurer does not pay, at least from what I know, for your like car checkup, you know, every few months or so. There is no preventative care in cars, at least from what I know. You don’t go there and somebody strokes the car, whatever, and say run a little bit longer.
But these are all interaction points we have in health. I mean, health insurance companies, the way health insurance, the way it’s set up nowadays is worrying about more than just when you get sick, you know? We have preventative care built in, not just us, but every insurance company. We didn’t invent this. We actually, in a very unique way, are economically very aligned with a member. If we can get you healthy or keep you healthy, we will make more money, and I honestly like that as an economic alignment. And the average member has four doctor visits a year, has eight prescription drug refills a year, and so on. So you have these interaction points, and so that’s a very important difference because if we were in a situation where the only thing we could do is after the fact, after something bad happens to you, we then sometime later jump in, oftentimes two months later after the insurer hears about it, the only conversation we can have is saying no. It’s really the only conversation you have, and that’s why you don’t generally like your insurance company all that much.
And we try to get out in front of it, we try to teach people from the very beginning, Oscar is your entry point to health care, whether you do it through the mobile application, through the website, through just calling us, it doesn’t frankly matter as long as we insert ourselves in the conversation and can keep you out of the traps that are laid out for you everywhere in health care.
Joel: Like Mario’s done an extraordinary job here. Like the only thing we hate more than our insurance company is our carrier, our cell phone carrier. Like if you look at the most hated industry, insurance is right there. And if you look at Oscar, everything is built to make us like Oscar. Now it’s a difficult time in our life, we’re sick, claims are difficult, etc. etc., but it’s call us. Let us help you, tele-visits. Talk about like tele-visits and talk about some of the things you’ve done to help us sort of find who we need to better, measuring outcomes so that we go to the right providers, etc. Like really…
Mario: Let me just, exactly, just a few…What is different actually in the experience we have. So it’s not one algorithmic deep insight. It’s a lot of various reinventions in a way that you experience health care. For example, we became the first insurer really across the country that said let’s tele-visits totally free. So you push a button, and a physician will call you back. And that never costs you anything. It’s 24/7. About a third of those phone calls happen outside of office hours where the only alternative you would have had is to either sweat it out, or tell your three-year-old kids to sweat it out, which is hard to do, or go to the ER. You know, and now you can push a button, doctor will call you back. Why do we do this? Well, because it does reduce ER utilization.
And we also, when the physician on the phone then takes notes on what is wrong with you, scan those notes, and look for certain keywords that indicate that you may have some other things going on with you. One of the things we launched just a couple weeks ago, very simple thing and didn’t really take us longer than a month or so to implement is when you hang up the phone after one of those tele-visit phone calls, the doctor mention to you urgent care, ER, something along those lines, we send a fax. Yeah, healthcare is a hilarious retro-future kind of thing, you know? Like in Back to the Future Part II, the move where he’s in the future, right? Remember everything was a fax machine. It’s sort of like health care nowadays.
So we send actually a fax to the physician that we have detected as having been the most involved in your care, which we know because we have all your claims, right? And the fax simply says, one-page fax that says, Mario is about to go to the ER. Call this number, or urgent care or whatever. Call this number, type in this PIN, and then my cell phone will ring because we have your phone obviously, you’re our member. When we detect that phone call, because it runs through our systems, we pay the doctor $25. Very simple thing. Very straightforward. The physicians like it because they don’t get paid for phone calls typically, and they don’t usually have this real-time handler when you go to the ER. Doctors do not know when you went to the ER. They just don’t unless you tell them that you went a while later. And so that’s kind of a unique thing.
We have our own team of nurses internally that reaches out proactively if we see you doing certain things on the website, and not being able to find a physician. We do a lot of work on algorithmic physician discovery. I think we’re the only insurer that shows you physicians that you can go to, what do the over index on patient that look like you. So if I wanna see a pulmonologist, I’d likely probably see a guy who sees a lot of patients in their 30s. I’m 37, so ideally he often is in those kind of guys, and so we can show you that. We can route you there. We make those appointments for you. Again, we try to be the entry points and encapsulate the whole thing.
It’s still very, very hard. There’s no question. We still have to say no sometimes. It is an industry where in particular with high deductible plans, which is just the new reality of health care going forward, the deductibles are a thing of reality. It is still very easy to have a surprise [inaudible 00:18:42] we wanna keep you out of. But as Joel was saying, about a third of our membership now comes through word of mouth. We seem to be doing something right.
Peter: On that note, I think any of us who’ve ridden the subway in New York City have probably seen one of the Oscar ads down there. Talk about word of mouth versus some of the other marketing channel you use, how those have changed over the years, and where you’re seeing most effectiveness today.
Mario: Yeah, the subway ads are kind of a funny story. I actually think, not to claim too many firsts here, but I actually think we’re kind of the first technology company putting subway ads. Now it’s a bit more. But why we do this, it’s a bit of an odd choice.
Joel: Just by the way, notice he defines the company as a technology company, not an insurance company.
Mario: Exactly, that’s why and usually you don’t have that. You don’t do subway ads. You know, doctors is more popping of pimples to subway ads. It wasn’t really sort of tech companies in a sense. But this was the very simple insight. We started running search ads, you know, the usual or whatever, search engine optimization, and you know, banner ads and so on. We just noticed we didn’t get members out of it. We didn’t get members out of it very early on in kind of late 2013, we first opened our gates in the first open enrollment period for the first Obamacare year. And we kind of looked into it and asked some people, and it just turns out that people didn’t know us. And buying something as heavy as insurance, you kind of do wanna have an idea of what this company is you’re about to buy insurance from.
And so that’s where we thought is there a way to make us look for solid? And doctors is a wrong example, but there are also banks and whatever thing else in the subways, so we thought, let’s put out of home ads. And that made a huge difference. Subway ads consistently, we asked members, are the second biggest channel that people describe is this is the reason why I joined Oscar in New York. The first, the biggest, is word of mouth. It’s 35%. We then took this, by the way, to other markets, Los Angeles…
Joel: How many people have chosen their health care insurance company because of word of mouth? No seriously, I mean, this is really different. This is upside down.
Mario: Yeah, because it wasn’t possible before. I mean literally. Nobody probably ever bought insurance because you all have good employers. But we took it other markets as well out of home, and it doesn’t work there. It never worked in Los Angeles. It never worked. We had a bunch of billboard in New Jersey. That stuff never worked, so it’s…
Peter: What works out there?
Peter: What works out there?
Mario: Radio works better. Radio, in particular, these sort of like DJ reads where the DJ talks a bit more about the story because, again, you need an authority figure. In New York, the subway’s very egalitarian. Head shop managers and people building your furniture or whatever alike ride the subway and radio may be a bit more like that in other places.
Anyhow it’s never over. We try to sort of like always straddle the line between creating awareness for the fact that we’re a new kind of insurance company, but also still coming across as solid. One of our most ever tweeted and whatever ads was a guy pulling his pants up and taking a picture down his pants basically saying, “Talk to a doctor anytime you want,” was a big hit, but it’s doesn’t necessarily create sort of like solidity that you sometimes want in an insurance company. But then you gotta follow it up with immediately a good conversation. People actually call you, you know? And that is then usually when we kind of hammer it home. When you have a guy on the phone who knows how to talk about Oscar plans and is not a call center somewhere else and outsourced, but really in-house.
Peter: Joel, you know, in terms of Fintech businesses, do you have general advice that you give portfolio companies in terms of customer acquisition? I know it’s a little bit different in insurance given the ACA kind of created this pool that was available for the first time, but it’s where a lot of folks are spending a lot of their dollars and…
Joel: I try never to give portfolio companies too much advice. When I’m giving them advice, it’s going in the wrong direction, like they’re the ones supposed to be the expert in everything. So that’s just a general belief I have about venture, it’s that my job is to pick people like Mario and then enable them into try to provide advice not to hit the rails.
But generally speaking, I think with regard to like…I think there’s just a transparency that’s required to sell in the consumer space today. There’s an honesty. If you look at the insurance business at large, and like Mario suggested, outside of health one of the problems is lack of frequency of interaction. And you look at how you buy indemnity insurance. It’s really opaque. There are no… you know, like CHECK24 or something in Germany. But there aren’t very many comparison, sort of transparency tools in the United States. Everything is designed to…it’s designed by like knuckle dragging insurance companies that sort of, you know, wanna keep everything a little bit grey, and so on and so forth.
So I think today, in any consumer space, particularly if you’re selling to sort of younger consumers, use of technology, just full transparency, just put it out there, tell everybody what you’re doing. In the insurance business, we also over-insure. Consumers probably over-insure. I don’t think that consumers should ever buy more insurance…you should only insure up to the point that you can’t afford to pay for the loss. And I think that that’s one of the problems with the sort of lack of…there’s no normal dialogue. If you’re sold by a broker, you’re heavily sold. The broker’s heavily incented, there’s enormous marketing behind it that sort of creates this air cover. And if you’re sold direct, you can’t figure out what the hell you’re buying.
So I think in general today in the consumer space, transparency, lack of opacity is required in the insurance space, because I do think you…there are a lot of people that are interested in what are the other categories of insurance that are sort of VC backable. And I think there are a lot. But I think a modern company has to start with, I’m gonna put it out there. I’m gonna tell everybody exactly what I’m doing. I’m going to make my pricing really clear. I’m gonna make my benefits really clear. I’m gonna make it easy to talk to me and so on and so forth. Does that answer your question? Was I…
Peter: No, I think so.
Peter: But you mentioned insurance companies that are VC back-able. I think in general, the space is way capital intensive than a lot of other consumer tech companies. Mario…
Joel: That’s a good thing. Like you know, because if you’re the best at it, and if you’re the first out of the chute and you’re the best at it, and you actually find a fair contract with consumers, makes it really hard for people to copy you. If, you know, if you’re delivering pizzas 10 seconds shorter than the other, to use Mario’s sort of pejorative comparison, it’s not hard to copy you. If you’ve got a reasonably difficult industry to enter, there’s regulatory barriers, which are difficult to understand, there’s capital requirements that seem pretty steep, and you get good at it, and you find a contract with consumers that’s based on trust and transparency, it’s hard to compete with you. That’s a good thing. I like that.
Peter: So the moat is pretty thick once you reach that kind of scale. But I guess talk a little bit about, you know, how much time I guess you see yourself, or you thought you would spend raising capital versus you know, how much time you actually spend today, and how much energy is required on that side of the house?
Mario: For raising capital?
Mario: Yeah, as you were saying, it’s a very capital intensive business. I mean, there’s no question. And to some degree, also we as a company, were a startup within a startup. The ACA itself is a startup that only over the years is getting better and better understood. ACA, again, Affordable Care Act, right? When you look at some of the big insurance carriers selling into individual markets, and you sort of like look at how did some of the government programs affect them? Federal reinsurance, federal risk adjustments, risk quarters, and all these things, you had very, very big swings on a percentage basis in the P&L for all the financials over the last couple of years. And so we have to be able to withstand some of the same swings until the market has oscillated itself to a point where it is stable. Normal time, couple of years to go through any new insurance market launching was the same in Medicare Part D, Medicare Advantage, and kind of Medicaid started getting privatized somewhat increasingly.
But you have to be able to withstand that. And so we had raise a good amount of capital. I do not like spending time on it. I mean, there’s no question. We like spending time on obviously great conversations like this one, but also mostly building the business, you know? I absolutely…I shouldn’t say I hate it, but I really don’t think it’s time invested in trying to build the company if you have to go out and talk to investors all the time. No offense, Joel. But we were fortunate and also have a fantastic fundraiser on our team, Josh Kushner, that we were able to…we were the first out of the gates in this, and almost the only one out of the gates. There still really isn’t any insurance company that’s technology driven, selling to individual markets across the country. It still doesn’t exist that’s active actually. There’s some people raising money, but not that’s active.
And so that led to a good amount of fundraising. We raised to now about $720 million or so in the last four years, the vast majority of which is still in the balance sheets, over 600 of those in the balance sheet still. And that’s certainly a good thing. But it’s also a very top line business, of course, so I think over the next two years or so, we should get from a position where we still fund the business through venture capital to a point where it actually carries itself.
Joel: So Mario, why do large insurance carrier…why is everybody else running away from the individual market and we’ve got capital, time, energy, physics, running towards it?
Mario: Yeah, so I don’t think anybody…
Peter: You took my job here.
Mario: Sorry Peter, you got better questions than Joel, just let me know. I don’t think everybody is running away. There are some people making very good business. For example, the Medicaid plans that are used to more hands-on medical management that are used to actually working with individuals in different income levels. But conceptually sort of like a similar business. They have actually had very good results for the past couple of years. It’s not a story I hear people talk about all the time, but the big insurance carriers, they have been sort of complaining about this.
But again, why is it the case? Well because this is not their market. If you look at the P&L of the big insurance carriers, they aren’t even in the business of taking risk on health care anymore. They’re in the business of running a so called TPA business, third part administrator business. They go to self-insured companies, they pay the claims, they pay the management fee for that, and that’s the end of it. And so if you’re in that business, the shift you have, the incentives you have is get people off the phone. Don’t get them to ever call you. The incentive you have is satisfy the HR departments, you know? The incentive you have is build the biggest network possible so that nobody in the company complains. And the incentive eventually also is not really all that much around managing your cost down.
If you think about a business where 85% of your costs, so called medical loss ratio expands at a constant rate of between 6% and 10% every year. That’s health care inflation in this country over the past 30 years or so, right? And all you do is you mark this up by a constant 15%. That’s an awesome business. I mean, I don’t wanna be in that business. We are in the business in a sense, but I would not like to be in that business. Because if we keep being in that business all of us together, by 2050, I just did the math recently, half of our GDP will go to health care. That cannot be a good idea.
And so to your question, Joel, some of the big carriers running away from it because they realize they gotta shift from a business where it’s all about HR departments, all about sort of like not managing costs that closely, to what’s pitching to individuals, having people walk out on you potentially in this new business where people can vote with their feet. And they don’t like that all that much. And I think much of what’s been made of the financial results in the markets is, in my opinion, overblown because again, in every other launch of insurance markets, that has been the case. It’s difficult to launch these markets, for insurers to price right.
Give you one statistic. If you look at the congressional budget office projections for where individual market premiums, they thought were going to be in 2016, they thought back in 2012 where they’re gonna be. We’re still 16% below that. Collectively the individual market probably lost about that much on a medical loss basis which means, lo and behold, a new market where there’s competition, people underprice a little, and now we’re gonna have to come up with a little bit, and then it’s gonna be a good business.
Joel: Can I ask him one more question for you?
Joel: Oh come on, it’s a good one.
Peter: Okay. It better be good.
Joel: It’s reasonable. It can’t be that good. But so part of building a successful business was sort of looking at this from a consumer. Part of this was building a technology stack that was differentiated to support that consumer sort of center look. The other part of it is defining a product and creating a product that we can afford to deliver, and the breadth of product that we can afford to deliver and be highly competitive. You wanna talk about that a little bit?
Joel: The integration with the provider network, and the technology it takes to do all that too.
Mario: Very important point. We, if you look at the way we rolled out in all of the cities we’ve been in since the very early days, we always basically said, we’re only gonna…this is San Antonio, the solution of the San Antonio riddle in essence. We said, “We only can go into cities where we can build a unique relationship with a provider system. If we go into the select business of just getting everybody in the network, then you have, then you are building a system where there is correlation between quality and costs. If you look at health care nowadays, we did that math almost since the beginning on all kind of, our own claims data. There’s academic research on the same question. There is no correlation between quality and cost in health care.
This approximation when you buy a good wine, must be expensive, must be good, or whatever else, or buy a good car, must be expensive, must be good, does not hold in health care. If you have a guy who puts a sign on Park Avenue, cancels all his insurance contracts, everybody kind of thinks, oh that guy must be great. He doesn’t take insurance, must be a great guy. Not the case, just not the case. Be very careful about this.
What the future of healthcare delivery is, in my opinion, is an unbundling of the system where you can really go to the highest quality providers for particular issues you have, where then someone like us can orchestrate the experience across the boards, you know? And that’s what we basically do when we went to San Antonio and made a big deal with a hospital called Tenants, for example. They own the so called Baptist system there, a system of hospitals and physicians, and we said, “Let’s tap into your systems. Let’s make sure we have more data about your physicians than any other insurance company has. Let’s make sure we can route more quickly to your physicians. Let’s make sure we can appointments there more quickly. As a result, you get a better experience for a lower price because we sort of like tightened these relationships more and get a better product experience.
Health care is the only industry, I think, where you can actually say without blushing you could get a lower priced product at a better quality because the US is such an insane outlier in terms of what we spend on health care collectively. Switzerland, Germany, Japan, 10%, 11% of GDP goes to health care, you know, and they have good health care systems I can tell you that. I’m from Germany. US, 18% of healthcare, of GDP goes to health care. The only rich country in the world where you have such a big gap. That needs to come out of the system and these more concentrated curated networks is really an important part of the whole, of the puzzle there in a very important way.
Joel: And the contract with the consumers, you explain exactly what that is. It’s straightforward.
Mario: Exactly, yeah. We get you in with lower wait times than you otherwise would get. Providence in Los Angeles, the other system we did this with, and you’re gonna see us doing this in other places as well. Very important part of the overall story.
Peter: Okay, I’m sure there might be some questions from the audience. Maybe give me and Joel a break from moderating here with Mario. But are those coming?
Man: Yeah, we have questions here. Do you think the ACA is working, and is there any worry that if Trump becomes president that Oscar’s business might take a hit should they impede or repeal the ACA?
Mario: Yes, that’s always a great question. So I think the ACA is absolutely working. I think if you look at the positives, okay, in 10 years from now, 15 years from now, we haven’t shifted healthcare and health insurance towards individuals making decisions, I honestly think we’re screwed as a country. I really think we are. The US, the only one where through weird historical legacy, World War II, freezing of salaries and so on, employers got into the business of deciding on your benefits basically. If you compare the sort of defiance benefits, pensions shifting your defined contribution over the past 40 years or so, the same will have to happen in health insurance and health care. We’ll have to get individualized.
The ACA is our biggest foot in the door of that happening. And I actually think that the fact that insurance companies all collectively underprice in this market, which explains the sort of shaky medical loss ratios you’ve seen across the country, is a sign that for the first time when you get to lay bare your pricing, holy crap, they price competitively, you know? They couldn’t get away with pricing all over the place as you sort of like have if you kind of picture it in our department in a sense, you know? So I think those aspects of the ACA are working. Insurers all have to come out, do more direct marketing, build more of a brand directly, worry more about the customer service, and we just really see this, I mean, in every market we’re competing, you see the other insurers waking up and saying, oh yeah, I should [inaudible 00:36:15] on my website, you know? As long as they’re only doing that, I think, I’m fine for a while.
But those are very aspects of the ACA. Certainly, the medical loss ratios have to become more sustainable, and the pricing become more sustainable. That will happen, in my opinion, the risk pools will stabilize. If anybody becomes president, I think in my opinion, economic sanity will win out over time. You can’t turn back the clock on 12.7 million now newly insured Americans. That will never happen no matter who becomes president. And even Trump has indicated already that he doesn’t want to let people die on the streets. And so one way or the other, whether through tax credits, or through subsidies we have it now, or through other means, I think this market will continue to be the case. If you look at health care inflation over the past few years, it’s been much lower that it has been before. Whether you can fully put this on the ACA, I don’t know. But there must be some correlation there for sure. So long story short, yes, it’s a good idea to survive.
Joel: Yeah leaving aside politics, the Act is a few years old. It’s epic in its sort of impact on the healthcare industry. And this is three years in the beginning of a long experiment.
Mario: It’s definitely stuff you gotta fix. I mean, right now there’s this thing called special enrollments. You essentially can wait until you’re sick and then buy insurance. If you write yourself a letter that Mario Schlosser Incorporated just dropped my own health insurance. You know, it’s like a weird sort of like loophole you can create. And that honestly has to stop. We have to make sure people understand that they have to enroll in open enrollments whether they’re sick or not. Otherwise, you can take advantage of the system and the money we’re all paying into it. That’s the way insurance works. But CMS, and HHS, and so on, they are on top of these things. And these kinks will get worked out.
Man: You talk a lot about the carriers. What role do you think providers play in the problem of health care costs and what have your experiences been with some of the larger provider systems?
Mario: They play a huge role. I mean, the reason why we have 6% to 10% health cost inflation are because of the insurance companies. I mean, they make 2%, 3% margins, and price may be, again, 10%, 15% on top of the health care costs. It is provider pricing. That’s the reason why costs have gone up so much over the past couple of years. When we interact with them, and again as Joel prompted me to say, they play a hugely important role in the way we think about the world. I see a huge bifurcation there. And I don’t know if it’s 50/50, or what the split is, but there are some hospital COs that basically want to ride the fee for service gravy train all the way against the wall. And whether the wall will be anti-trusts, or regulation, or consumers voting with their feet because they had enough of these health care cost inflations, I don’t know. But that wall’s gonna be there. But they wanna milk this thing for all it’s got.
And there’s another class of hospitals COs that basically says, “I wanna be at risk for the health care deliverer.” Almost nobody has risk in this country on the provider side. Like it’s all mostly fee for service, right? You get paid for every service you deliver. That’s where you get the $35 aspirin, and all these things that people have written about. So this class of the hospital Cos, these are the guys we wanna work with, and we consistently work with. They’re the ones who say, “Oscar, put me at risk in this. Let me tap into your premium flow so I can keep my ER empty, and actually get paid for that. Now I get paid for an empty bed as opposed to only for filling a bed. That’s fantastic.” Member loves it, provider loves it, Oscar loves it, right? And that class of COs basically is the one we’re building with in San Antonio, and Dallas, and LA, and increasingly also wherever else we go.
Joel: But talk about what needs to be done with the information stacked in order to get there too.
Mario: Yeah, you can’t just sort of like say, oh I only work with one hospital network. What I hear, health care is one of these hilarious places where people really [inaudible 00:40:13] time periods. When we have that conversation with providers, the pushback we sometimes get is like, “Oh yeah, we tried this in the mid-90s with HMOs, and people didn’t like it.” Like mid-90s, that’s when Apple launched a Newton, you know? Since then they actually have built a tablet that we wanna use, you know?
So but there’s sort of like this thing like 25 years ago, it didn’t work. Yeah, it didn’t work for good reasons, because made a deal with one provider network, and then you didn’t tell anybody of your members where they can go, you know? And they had to wait much longer to see a physician and to go to a PCP with six years wait time, six weeks wait time to then see the dermatologist, and all that crap. So that doesn’t work.
But if you go and build a more deeply integrated product where you literally tell the provider networks, hey, give me some appointments that also can use to scale appointments very quickly. Let me use your nurses to answer phone calls or doctors to answer phone calls. The stuff we actually try to build for these provider systems, then you can make it work very nicely.
When we talk to members on the phone, way more than them saying I wanna go to this exact doctor because I have a very good scientific reason, they say, I need a colonoscopy. My child is sick with this…I have this literally a couple weeks ago, my son’s had his tonsils taken out, who do I go to? I want somebody to answer these questions using good data, using good narrative. And we can do that for you if you work more deeply with the network. So play a big role.
Peter: That guy over there.
Man: Oh great. This will be the last question. You’ve talked a little bit about Oscar’s plan to grow into 30 markets. But given the sort of lower than expected turnout in California, what is the plan going forward and why do you think the turnout was lower than markets like New York?
Mario: Yeah, so what you mean is in California, we had about 5,000 in Los Angeles and Orange County. That’s out of the 135,000 members. Not the majority even though California’s big. That was a bit below expectations. We sort of thought we get maybe to 10,000 or so in the first year there. It came mostly from, I think, two things.
One is pricing. It’s always difficult to get the pricing right when you go into a new market. And it is just a case that’s the monthly premium we charge is a big sort of like signal people look at and say, can I afford this or is somebody else much cheaper than we are? So we came a little bit too high in price, and that will, I expect that to be the case when we go into new markets. We’ll sometimes come in too low, sometimes come in too high. It is difficult to understand exactly where the medical risk and utilization will be in a new market. I can give you some preview for Orange County next year, we’re gonna come down in price, for example, because we now know better where our risk is in that market, what the reimbursement rates are, and so on.
The second reason was that we started actually advertising way too late. We do have to get out there and tell people the story that what they’re buying with us isn’t traditional insurance coverage. It is that end and orchestration of health care for you. You know, call us as your entry point to your health care system. We will do a lot of the work for you that you either had to do yourself through stacks of papers and faxing, or that somebody like us can do for you. And getting that narrative out is not an overnight thing. Getting the narrative to actually the partners we do with sell with, we do work with a select number of brokers as well who can tell the story well, and so on, take some time.
And so in a place like California, if we come in with a low membership on the first year, I really don’t sweat it at all. When the word of mouth starts kicking in, that number will go up. Whether it takes a year or more is of no concern to me. In New Jersey, we were at 2,000 members in the first year in 2015. And then to 30,000 the second year. So as long as we repeat kind of like that steady growth of market share, we’re totally…I’m very, very happy. And frankly, we don’t wanna grow too quickly either because this is an insanely complicated industry and business where you really wanna make sure you get your systems totally right and your data totally right before you start offering plans.
Peter: Okay, and like that, we are out of time. So I wanna thank Mario. I wanna thank my co-moderator Joel. And I wanna thank all of you for sticking around at the end of the day. Thanks.