Rising Medical Losses And Regulatory Risks Will Erode Future Margins

Key Takeaways

• Heavy dependence on the ACA individual market and cost-saving technology exposes Oscar Health to revenue pressure from regulatory, competitive, and policy risks.
  
• Persistent medical cost increases and industry consolidation threaten profitability, market share, and the company's long-term earnings outlook.
  
• Robust membership growth, strategic cost cuts, and diversified partnerships position Oscar Health for improved profitability and broader revenue streams amid strong access to capital.

Catalysts

Operates as a healthcare technology company in the United States.

• Persistently high and rising medical loss ratios, now over 91 percent, coupled with a market-wide morbidity increase, threaten Oscar Health's path to sustainable profitability, eroding net margins and driving recurring net losses far beyond 2025.
  
• Anticipated double-digit premium rate hikes in 2026 to address risk pool deterioration face mounting long-term regulatory scrutiny, risking outright price controls or outright rejection of needed increases, thus limiting the company's ability to offset rising costs and suppressing revenue and earnings growth.
  
• Oscar Health's overreliance on technology-driven cost reduction and limited proven diversification outside the ACA individual market leaves it especially vulnerable if adverse selection and risk pool volatility persist, exposing future revenue and operating margins to further unexpected pressure.
  
• Policy uncertainty around ACA enrollment growth, especially if enhanced premium tax credits are not renewed or are diminished by political decisions, could trigger a substantial market contraction and shrink Oscar Health's core addressable market, jeopardizing future top-line growth.
  
• The industry's accelerating consolidation by national insurers with greater scale and bargaining power may leave Oscar Health at a permanent disadvantage in negotiating provider rates and withstanding cost inflation, placing downward pressure on market share, net margins, and long-term earnings potential.

Oscar Health Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Oscar Health compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Oscar Health's revenue will decrease by 0.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -1.5% today to 4.2% in 3 years time.
• The bearish analysts expect earnings to reach $455.9 million (and earnings per share of $1.34) by about August 2028, up from $-161.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.7x on those 2028 earnings, up from -25.1x today. This future PE is lower than the current PE for the US Insurance industry at 14.4x.
• Analysts expect the number of shares outstanding to grow by 6.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Oscar Health Future Earnings Per Share Growth

Risks

• Oscar Health's rapidly growing membership base and strong 29% year-over-year revenue increase indicate significant demand and market share gains, suggesting future revenue may continue to expand as secular trends drive more consumers to ACA and digital health solutions.
  
• The company is implementing double-digit rate increases for 2026 and reports productive engagement with state regulators, signaling a high likelihood these price hikes will be approved, which may restore medical margins and accelerate a return to profitability.
  
• Oscar is substantially reducing fixed costs, rightsizing its workforce, and leveraging AI and technology to cut administrative expenses by $60 million in 2026 and improve the SG&A ratio, which would have a direct positive impact on net margins.
  
• Strategic acquisitions such as a nationwide individual market brokerage, a CMS-approved direct enrollment technology, and a new ICHRA partnership with Hy-Vee provide diversified growth levers and access to broader revenue streams beyond traditional ACA markets.
  
• Despite current losses, Oscar holds over $5 billion in cash and investments, is largely unlevered, maintains strong access to capital, and forecasts a return to profitability and margin expansion in 2026, with management reaffirming its 2027 5% margin and $2.25 EPS targets, all pointing to improving earnings potential.

Valuation

• The assumed bearish price target for Oscar Health is $8.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Oscar Health's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $14.0, and the most bearish reporting a price target of just $8.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $11.0 billion, earnings will come to $455.9 million, and it would be trading on a PE ratio of 6.7x, assuming you use a discount rate of 6.8%.
• Given the current share price of $15.64, the bearish analyst price target of $8.0 is 95.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.