Executive Summary / Key Takeaways

• 2025 is a forced reset, not a breakdown: After achieving first-ever profitability in 2024, Oscar faces a market-wide morbidity crisis from Medicaid redeterminations and program integrity rules that drove MLR to 88.5% in Q3. This is a temporary industry shock, not a structural failure of Oscar's model.

• Technology is the margin lever: Oscar's AI platform, led by the Oswell health agent and two dozen operational AI models, delivered 150 basis points of SG&A ratio improvement in Q3 despite membership growth of 28%. This tech-driven efficiency is the key to managing medical costs and achieving 2026 profitability.

• Pricing power meets market reality: Oscar's 28% weighted average rate increase for 2026 reflects disciplined pricing in response to elevated trends. While this will cause market contraction, it positions Oscar to profitably grow share as competitors retreat from unprofitable geographies.

• Balance sheet strength provides strategic cushion: With $4.8 billion in cash and investments and no revolving credit facility, Oscar can absorb 2025's projected $200-300 million operating loss while executing $60 million in cost cuts and maintaining technology investments.

• Critical execution variables: The thesis hinges on whether Oscar can retain members through 28% price increases and whether its AI platform can materially improve MLR from current elevated levels. Failure on either front threatens the 2026 profitability target.

Setting the Scene: The ACA Individual Market's Tech Disruptor

Oscar Health, founded in 2012 as Mulberry Health and headquartered in New York, operates as a single-segment health insurer focused exclusively on the Affordable Care Act individual and small group markets. This narrow focus is both its greatest strength and vulnerability. Unlike diversified giants UnitedHealth (UNH) and Elevance Health (ELV) that span employer group, Medicare, Medicaid, and commercial lines, Oscar built its business from the ground up for the exchange-based individual market. This specialization forced a technology-first approach from inception—traditional insurance infrastructure simply couldn't support the volatility, seasonality, and consumer-direct nature of ACA enrollment.

The company makes money through two primary channels: direct policy premiums from members and federal Advanced Premium Tax Credits (APTCs), plus a growing but immaterial stream from platform services. Oscar's 2.1 million effectuated members as of Q3 2025 represent a 28% year-over-year increase, outpacing the overall individual market's growth. However, this membership surge coincided with a market-wide deterioration in risk profiles, creating the central tension in Oscar's 2025 story.

Industry structure reveals why this matters. The ACA individual market serves 22 million Americans who lack access to employer-sponsored coverage, representing the only affordable option for service economy workers and small business employees. The market grew 13% in 2024 to a record 24 million lives, fueled by enhanced APTCs from the Inflation Reduction Act and Medicaid redeterminations that pushed previously eligible individuals into the exchanges. This expansion attracted intense competition from incumbent carriers, but also masked underlying structural issues that erupted in 2025.

Oscar sits uniquely in this landscape. While UNH commands 15-20% of the overall commercial market and Centene (CNC) dominates Medicaid with 5.66 million ACA enrollees, Oscar carved out a niche as the tech-native player. Its cloud-native platform and consumer-centric design appeal to younger, digitally-savvy members. However, this positioning faces a brutal test as the market undergoes its most significant reset since the ACA's inception.

Technology, Products, and Strategic Differentiation: The AI Operating System for Insurance

Oscar's core technology advantage lies in its +Oscar platform, a cloud-native infrastructure that integrates claims data, medical records, and care guide notes into a unified ontology. This architecture enabled the launch of Oswell, an industry-first health AI agent powered by OpenAI that personalizes clinical care, streamlines operations, and reduces administrative burden. Unlike competitors that bolt AI tools onto legacy systems, Oscar's platform was designed for real-time data integration from day one.

The financial impact of this technology stack is already visible. In Q3 2025, Oscar's SG&A expense ratio improved 150 basis points year-over-year to 17.5% despite 28% membership growth. Fixed cost leverage explains part of this improvement, but management explicitly credits AI-driven efficiencies. Over 50% of onboarding and post-care instructions in Oscar Urgent Care are now AI-powered, while a live chat feature for Virtual Urgent Care decreased member response times by 90% and boosted provider efficiency by 28%. These aren't incremental improvements—they represent a step-change in administrative productivity that traditional insurers cannot replicate without complete system overhauls.

Product innovation extends beyond cost reduction. Oscar's condition-specific plans for diabetes, asthma, and COPD achieved high retention in 2024, demonstrating that technology-enabled personalization drives member loyalty. The October 2025 launch of HelloMeno, a menopause-focused plan, and the Q1 2026 introduction of HelloMeno for women's health experiences show a pipeline of differentiated products that command pricing power. The Hy-Vee Health with Oscar ICHRA product, offering concierge-type care with in-store healthy food rewards, represents another tech-enabled wedge into the employer market.

The May 2025 acquisition of INSXCloud, IHC Specialty Benefits, and Healthinsurance.org—while immaterial to near-term results—provides critical infrastructure for Oscar's consumer marketplace vision. INSXCloud is one of only 11 CMS-approved enhanced direct enrollment platforms, creating a digital storefront for all health products. This positions Oscar to capture distribution economics beyond its own insurance products, a capability none of its traditional competitors possess.

Financial Performance & Segment Dynamics: The Reset in Numbers

Oscar's Q3 2025 results illustrate the reset moment in stark detail. Revenue grew 23% year-over-year to approximately $3 billion, driven by 28% membership expansion to 2.1 million. Yet this top-line growth masked severe margin compression. The medical loss ratio spiked 380 basis points to 88.5%, primarily from a $130 million increase in risk adjustment payables reflecting higher market morbidity. This was partially offset by $84 million in favorable prior period development, but the underlying trend is clear: 2025's member mix is significantly sicker than 2024's.

The SG&A ratio improvement to 17.5% provides crucial evidence that Oscar's technology strategy works. In a year when medical costs are surging, holding administrative expenses flat as a percentage of premium demonstrates operational leverage. Selling, general, and administrative expenses increased only 19% year-over-year for the nine-month period despite 32% premium growth, with lower exchange fee rates and disciplined cost management offsetting volume-driven costs like broker commissions.

Cash flow tells a more nuanced story. Net cash from operations was $423 million for the nine months ended September 30, 2025, down from $631 million in the prior year period due to higher claim disbursements and risk adjustment payments. However, the company still generated positive operating cash flow while reporting an operating loss, reflecting the timing differences between premium collections and medical expense payments.

The $4.8 billion cash and investments position, including $541 million at the parent, provides ample cushion for 2025's projected $200-300 million operating loss.

The Cigna (CI)Oscar small group partnership runoff illustrates portfolio discipline. Membership collapsed from 51,291 in Q3 2024 to 5,168 in Q3 2025 as Oscar exited this unprofitable channel. While this reduced absolute revenue, it improved overall margin mix and freed resources for the higher-growth individual market. This strategic pruning is exactly what a capital-efficient insurer should do.

Risk adjustment dynamics represent the single largest financial uncertainty. Oscar's risk transfer accrual reached high mid-teens as a percentage of premium in 2025, up from historical levels in the low teens. The $130 million Q3 increase reflects Wakely data showing continued market morbidity from Medicaid redeterminations and program integrity efforts. This variability is inherent to ACA markets but hits Oscar harder than diversified peers because it lacks other business lines to offset exchange volatility.

Outlook, Management Guidance, and Execution Risk

Management's 2025 guidance, reaffirmed in Q3, signals confidence that the reset is manageable. Total revenue toward the low end of $12-12.2 billion implies Q4 sequential decline from historical churn patterns as the continuous SEP for low-income members ended in September. The MLR guidance of 86-87% suggests Q4 improvement from Q3's 88.5%, but still represents a 400-500 basis point deterioration from 2024's 81.7%. The operating loss guidance of $200-300 million confirms that 2025 will be a loss year, but the $60 million planned administrative cost reduction for 2026 shows a clear path to breakeven.

The 2026 plan hinges on three pillars: disciplined pricing, cost efficiency, and market share gains from competitor retrenchment. The 28% weighted average rate increase—two points above the 26% national average—reflects Oscar's confidence that its technology and product differentiation justify premium pricing. Management expects to be the lowest or second-lowest silver plan in 30% of its markets in 2026, up from 15% in 2025, suggesting that even with higher rates, Oscar remains price competitive.

Execution risk centers on member retention. A 28% rate increase in a market facing APTC expiration and program integrity rules could drive significant churn, particularly among healthier members who can find cheaper alternatives. Oscar's strategy of directing members to $0 gold and bronze plans aims to ease this transition, but the company must prove it can retain enough lives to maintain a viable risk pool. The Q4 membership decline guidance already shows this dynamic playing out.

Management's commentary on AI provides reason for optimism. With "well over two dozen models on the back end" and a second agentic AI launching soon, Oscar expects AI to "streamline our operating costs" further in 2026. This isn't speculative—Q3's SG&A ratio improvement demonstrates tangible results. If AI can also impact medical costs through better care navigation and earlier interventions, the 2026 MLR could improve beyond current guidance.

Risks and Asymmetries: What Could Break the Thesis

The expiration of enhanced APTCs at year-end 2025 represents the most material policy risk. If Congress fails to renew these subsidies, coverage could become unaffordable for millions, contracting the market by an estimated 10-20% according to analyst projections. Oscar's exposure is total—100% of its business depends on exchange participation. While management has priced for this scenario, a larger-than-expected contraction would make the 2026 profitability target unattainable.

Program integrity rules and the One Big Beautiful Bill Act (OBBBA) create additional headwinds. Stricter eligibility verification and shorter enrollment periods will disproportionately remove healthier, lower-cost members who can more easily navigate alternative coverage options. This "adverse selection on exit" could worsen Oscar's risk pool even beyond current morbidity levels. The company's proactive broker validation and fraud reporting to CMS mitigate some risk but cannot change the underlying policy direction.

Market morbidity from Medicaid redeterminations may persist longer than expected. While CMS announced the SEP ended November 2024, states continue processing redeterminations into 2025, and the members entering the market exhibit persistently higher utilization. Oscar's Q2 and Q3 risk adjustment increases suggest this trend is worsening, not stabilizing. If 2026 pricing fails to fully capture this elevated cost trend, margins will remain compressed.

Competitive dynamics pose a subtle but serious threat. UNH and ELV have begun retreating from unprofitable ACA markets, creating Oscar's expected share gain opportunity. However, these same competitors could re-enter with aggressive pricing once market conditions stabilize, using their superior scale and diversified profits to undercut Oscar. Centene's expansion into new ACA markets for 2026 demonstrates that not all competitors are retreating—some are doubling down on volume.

On the positive side, Oscar's technology moat creates meaningful asymmetry. If the Oswell AI agent and care navigation tools can demonstrably reduce readmission rates and emergency utilization, medical costs could improve faster than guidance suggests. The 10% readmission rate reduction achieved for a major health system client provides a template. At scale, such improvements could drive 200-300 basis points of MLR improvement, turning 2026's projected breakeven into meaningful profitability.

Valuation Context: Pricing a Turnaround

At $16.77 per share, Oscar trades at a market capitalization of $4.83 billion and an enterprise value of $2.53 billion, reflecting net cash of approximately $2.3 billion. The enterprise value-to-revenue multiple of 0.22x sits well below UnitedHealth's 0.80x and Elevance's 0.36x, but above Centene's 0.09x. This discount reflects Oscar's current unprofitability and market concentration risk.

Price-to-sales of 0.43x appears reasonable for a company growing revenue 23-32% annually, though the path to profitability remains uncertain. The absence of debt and substantial cash position—$4.8 billion total, $541 million at parent—provides significant downside protection. Even if 2025's projected $200-300 million operating loss materializes, Oscar has over 15 years of runway at current burn rates.

Comparing unit economics reveals Oscar's potential. While UNH generates 4.04% profit margins and 17.48% ROE, and ELV delivers 2.84% margins and 12.57% ROE, Oscar's -2.16% profit margin and -22.24% ROE reflect its growth-stage losses. The critical metric is SG&A ratio: Oscar's 17.5% compares favorably to traditional insurers' 15-20% range, and its 150 basis point improvement in Q3 shows the technology leverage that could drive margins toward the 5% operating target by 2027.

Valuation hinges entirely on 2026 execution. If Oscar achieves breakeven as guided and returns to the 81-82% MLR levels of 2024, the stock would trade at approximately 0.3x 2026 revenue—cheap for a tech-enabled insurer. If losses persist or membership collapses under price increases, the cash cushion provides a floor but the growth premium evaporates.

Conclusion: A Credible Path Through the Reset

Oscar Health's 2025 reset, while painful, represents a necessary recalibration to market realities rather than a breakdown of its core strategy. The company's technology platform, evidenced by Q3's SG&A ratio improvement and AI deployment across care navigation, provides a durable cost advantage that traditional insurers cannot easily replicate. This tech leverage is the key to achieving 2026 profitability targets.

The central thesis depends on two variables: retention of enough members through 28% rate increases to maintain a viable risk pool, and material MLR improvement from AI-driven care management. Oscar's balance sheet strength provides the time needed to execute this transition, while competitor retrenchment creates market share opportunities.

For investors, Oscar offers a rare combination of growth, technology differentiation, and near-term catalyst in the 2026 profitability pivot. The risks are material—policy changes, persistent morbidity, competitive re-entry—but the valuation discount to traditional peers and the demonstrated SG&A leverage suggest the market has already priced in significant execution risk. If management delivers on its cost reduction and medical cost management promises, Oscar will emerge from this reset as a structurally more profitable and competitively advantaged player in the individual market.