Oscar Health (OSCR) Q3 2026 Earnings Call Transcript

Image source: The Motley Fool.

DATE

Nov. 5, 2026

CALL PARTICIPANTS

• Chief Executive Officer - Mark Bertolini
• Chief Financial Officer - Scott Blackley
• Vice President of Investor Relations - Chris Potochar

TAKEAWAYS

• Total Revenue -- $5.1 billion, reflecting 70% growth year over year driven by rate increases and higher membership.
• Membership -- 2.7 million, representing a 27% increase year over year despite sequential disenrollments related to regulatory eligibility reviews.
• Medical Loss Ratio -- 84.0%, representing an improvement of 450 basis points year over year due to disciplined pricing and favorable utilization trends.
• SG&A Expense Ratio -- 14.0%, a record low representing a decrease of 350 basis points year over year driven by fixed cost leverage and artificial intelligence efficiencies.
• Earnings from Operations -- $178 million, representing an improvement of $307 million over the prior year period.
• Net Income -- $167.3 million, or $0.49 per diluted share, compared to a net loss of $137.5 million in the third quarter of 2025.
• Adjusted EBITDA -- $207 million, an increase of $308 million over the prior year reflecting improved underwriting performance.
• 2026 Earnings from Operations Guidance -- $850 million to $950 million, representing the third increase to the full-year outlook based on performance during the first nine months.
• 2026 Revenue Guidance -- $19.0 billion to $19.3 billion, an increase of $300 million from the prior outlook due to higher membership and favorable rates.
• 2026 MLR Guidance -- 80.5% to 81.5%, lowered from a previous range of 81.0% to 82.0% reflecting year-to-date utilization results.
• 2026 SG&A Guidance -- 15.1% to 15.6%, improved from the prior range of 15.6% to 16.1% due to disciplined expense management.
• Risk Adjustment Benefit -- $250 million, resulting from favorable development in the company's risk scores relative to the broader market.
• 2026 Risk Adjustment Guidance -- 17% to 18% of premiums, lowered from a previous expectation of 20% based on year-to-date experience.
• 2027 Rate Increase -- 14%, a weighted average increase intended to address medical cost trends and higher market morbidity.
• Cash and Investments -- $9 billion, including $360 million at the parent level as of Sept. 30, 2026.
• Excess Capital -- $1.4 billion, supported by insurance subsidiary capital and surplus totaling $2.3 billion.
• Lucie Platform Target -- 800,000 policies, representing the expected sales volume for the 2027 period driven by broker and consumer demand.
• 2029 EPS Target -- at least $4.00, which management stated remains a long-term financial objective.
• Competitor Exits -- 850,000 lives, representing the addressable market opportunity created by other health insurers leaving specific regions.
• Geographical Footprint -- 713 counties, reflecting a 24% expansion of the company's market reach across 21 states.
• Total Addressable Market -- 10 million consumers, which management indicated is the company's current reach following expansions and new product entries.

Need a quote from a Motley Fool analyst? Email pr@fool.com

RISKS

• Bertolini stated, "There will be a learning curve. It will be something new for them, and it will have an impact on their productivity," in reference to brokers utilizing new CMS verification systems during open enrollment.
• Blackley warned that from "a second smaller CMS review, we expect a small number of additional disenrollments in the fourth quarter," which will impact ending membership counts.

SUMMARY

Oscar Health, Inc. (NYSE:OSCR) reported third quarter results that led to an increase in full-year financial guidance for the third time in 2026. Management reported that the company is on track to meet several 2024 Investor Day commitments one year ahead of schedule, driven by medical cost management and operating efficiency. The company is expanding its geographical footprint to 713 counties across 21 states, including an entry into the South Carolina market for the upcoming period. Strategic initiatives remain focused on capturing market share in the individual Affordable Care Act market through new product launches and the scaling of technology platforms like Lucie.

• CEO Bertolini stated that the company is "building a consumer health care company that meets those expectations and serves a much larger market," referring to consumer demand for simplicity and personalization.
• CFO Blackley indicated that "year-to-date utilization was moderately favorable to our expectations," though elevated outpatient utilization was observed as a result of a rotation from inpatient care.
• The company is launching consumer lifestyle products such as RetireEase to serve a growing segment of 2.5 million early retirees within the ACA marketplace.
• Management stated that Lucie is on track to sell approximately 800,000 new policies in 2027, driven by matching consumers with plans from major ACA carriers and supplemental providers.
• The company's partnership with Allstate Health Solutions pairs Oscar plans with supplemental coverage to help bronze members manage out-of-pocket costs.
• Management noted that CHOICE adoption is growing fastest in the healthcare, technology, construction, and manufacturing sectors across active states.

INDUSTRY GLOSSARY

• ACA: The Affordable Care Act, which established federal health insurance marketplaces for individuals and small groups.
• MLR: Medical Loss Ratio, the percentage of premium revenue spent on medical claims and quality improvement activities.
• SG&A: Selling, General, and Administrative expenses, including marketing, commissions, and corporate overhead.
• Lucie: A proprietary technology platform used to match consumers with health plans from various carriers and guide brokers through eligibility.
• CHOICE: A custom health option allowing employers to provide defined contributions for individual insurance rather than traditional group plans.
• Morbidity: The relative incidence of disease or medical conditions within a specific population, used to estimate risk and pricing.
• CMS: The Centers for Medicare & Medicaid Services, the federal agency responsible for overseeing the ACA marketplace and eligibility reviews.
• NPS: Net Promoter Score, a metric used to measure customer satisfaction and brand loyalty.

Full Conference Call Transcript

Mark Bertolini: [Audio Gap] address consumer needs, including opportunities created by competitor exits. These strengths, combined with our medical cost management, operating efficiency and superior technology will drive sustainable financial performance in 2027 and beyond. Now I will review our business highlights. Oscar Insurance ended the third quarter with 2.7 million members, up 27% year-over-year. We are entering open enrollment with a 24% larger footprint spanning 713 counties. We are also expanding into South Carolina. Our expansion increases our total addressable market to approximately 10 million consumers across 21 states. Oscar is launching a new wave of consumer lifestyle products. Our newest product, RetireEase, is live in select markets and serves a growing segment of 2.5 million early retirees in the ACA.

Members keep their trusted doctors and receive set prices for preventative services, physical therapy and heart, bone and joint care. We are also addressing affordability through bundled benefits. Hundreds of Oscar plans now include dental and vision coverage. In addition, our new Allstate Health Solutions partnership pairs Oscar plans with low-cost supplemental coverage to help bronze members manage out-of-pocket costs. Each product meets a distinct consumer need and extends our reach into high-value underserved segments. Our Oscar team is also scaling CHOICE. Our Hy-Vee Health with Oscar product is expanding from Iowa into Nebraska, Missouri and Kansas. This product's concierge care model earns a 92% satisfaction rate and can now serve more small businesses, part-time employees and gig workers.

We are also launching HelloMeno off-exchange to better serve women across the workforce. Employer demand is building. CHOICE adoption is growing fastest in health care, technology, construction and manufacturing sectors across Oscar states. Oscar's health technology puts consumer in control of their health care decisions across 2 platforms. The Oscar platform now includes new AI capabilities that make our product suite easy to understand. The Lucie platform serves the broader market, personalizing the health care shopping experience at scale. Lucie instantly matches consumers with plans from major ACA carriers and select supplemental carriers and guides broker through CMS eligibility. No other platform brings these capabilities together in one place.

Lucie is on track to sell approximately 800,000 new policies in 2027, driven by growing broker and consumer demand. Oscar Health's third quarter performance puts us on track to deliver strong results 1 year ahead of plan. Our disciplined pricing, product innovation and technology-powered support are delivering superior member experiences and efficiency across the company. The individual market opportunity is growing. People expect health care to work like the best consumer products, simple, transparent and personalized. We are building a consumer health care company that meets those expectations and serves a much larger market. The team is positioned to grow market share [Technical Difficulty].

Richard Blackley: Some technical difficulties with the call. Some of the audience was only able to hear the call after we had started. So we're going to go ahead and start over. I apologize for the challenges, but please bear with us, and we're going to start the call from this point forward.

Chris Potochar: Good morning, everyone. Thank you for joining us for our third quarter 2026 earnings call. Mark Bertolini, Oscar Health's Chief Executive Officer; and Scott Blackley, Oscar Health's Chief Financial Officer, will host this morning's call. This call can also be accessed through our Investor Relations website at ir.oscarhealth.com. Full details of our results and additional management commentary are available in our earnings release, which can be found on our Investor Relations website at ir.oscarhealth.com. Any remarks that Oscar makes about the future constitute forward-looking statements within the meaning of safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our annual report on Form 10-K for the period ended December 31, 2025, and the quarterly report on Form 10-Q for the period ended June 30, 2026, each as filed with the Securities and Exchange Commission and other filings with the SEC, including our quarterly report on Form 10-Q for the period ended September 30, 2026, to be filed with the SEC. Such forward-looking statements are based on current expectations as of today. Oscar anticipates that subsequent events and developments may cause estimates to change.

While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in the third quarter earnings press release available on the company's Investor Relations website at ir.oscarhealth.com. We have not provided a quantitative reconciliation of estimated full year 2026 adjusted EBITDA as described in this call to GAAP net income because Oscar is unable without making unreasonable efforts to calculate certain reconciling items with confidence. With that, I will turn the call over to our CEO, Mark Bertolini.

Mark Bertolini: Good morning. Thank you, Chris, and thank you all for joining us. 2026 is the strongest year in Oscar Health's history. We delivered record profitability for the first 9 months of the year, reporting earnings from operations of $1.3 billion and net income of $1.2 billion. We also expect to achieve several of our 2024 Investor Day commitments 1 year ahead of plan. Based on our performance year-to-date, we are raising 2026 earnings from operations guidance for a third time to a range of $850 million to $950 million. Our strong third quarter performance exceeded our expectations with improvement across all core metrics. Revenue grew roughly 70% year-over-year to $5.1 billion.

Our SG&A expense ratio improved 350 basis points year-over-year to 14%, another record low, reflecting the disciplined execution, greater fixed cost leverage and AI-driven efficiencies. MLR improved 450 basis points over the prior year period to 84%. Earnings from operations increased $307 million year-over-year to $178 million and adjusted EBITDA increased $308 million to $207 million. Before I turn to our business highlights, I will share our perspective on current market trends. The ACA is the foundation of a rapidly developing individual market. Americans are building careers on their own terms. They are starting businesses, combining part-time work, participating in the gig economy and retiring early.

More than 19 million people rely on the ACA, yet 28 million American workers remain uninsured. Affordable coverage gives people greater financial security to pursue new opportunities and helps employers build a more stable workforce. Both parties understand health care is a priority for the American people. We have a significant opportunity to expand the ACA into a competitive marketplace that improves affordability and supports a resilient economy. Our 2026 performance demonstrates the strength of our operating model. We remain focused on growing market share and expanding margin in 2027. Our weighted average rate increase of approximately 14% for 2027 open enrollment period reflects elevated trend and higher market morbidity. Pricing is one lever of our growth model.

We also target markets where our products and distribution network address consumer needs, including opportunities created by competitor exits. These strengths, combined with our medical cost management, operating efficiency and superior technology will drive sustainable financial performance in 2027 and beyond. Now I will review our business highlights. Oscar Insurance ended the third quarter with 2.7 million members, up 27% year-over-year. We are entering open enrollment with a 24% larger footprint spanning 713 counties. We are also expanding into South Carolina. Our expansion increases our total addressable market to approximately 10 million consumers across 21 states. Oscar is launching a new wave of consumer lifestyle products.

Our newest product, RetireEase, is live in select markets and serves a growing segment of 2.5 million early retirees in the ACA. Members keep their trusted doctors and receive set prices for preventative services, physical therapy and heart, bone and joint care. We are also addressing affordability through bundled benefits. Hundreds of Oscar plans now include dental and vision coverage. In addition, our new Allstate Health Solutions partnership pairs Oscar plans with low-cost supplemental coverage to help bronze members manage out-of-pocket costs. Each product meets a distinct consumer need and extends our reach into high-value underserved segments. Our Oscar team is also scaling CHOICE. Our Hy-Vee Health with Oscar product is expanding from Iowa into Nebraska, Missouri and Kansas.

This product's concierge care model earns a 92% satisfaction rate and can now serve more small businesses, part-time employees and gig workers. We are also launching HelloMeno off-exchange to better serve women across the workforce. Employer demand is building. CHOICE adoption is growing fastest in health care, technology, construction and manufacturing sectors across Oscar states. Oscar's health technology puts consumer in control of their health care decisions across 2 platforms. The Oscar platform now includes new AI capabilities that make our product suite easy to understand. The Lucie platform serves the broader market, personalizing the health care shopping experience at scale.

Lucie instantly matches consumers with plans from major ACA carriers and select supplemental carriers and guides broker through CMS eligibility. No other platform brings these capabilities together in one place. Lucie is on track to sell approximately 800,000 new policies in 2027, driven by growing broker and consumer demand. Oscar Health's third quarter performance puts us on track to deliver strong results 1 year ahead of plan. Our disciplined pricing, product innovation and technology-powered support are delivering superior member experiences and efficiency across the company. The individual market opportunity is growing. People expect health care to work like the best consumer products, simple, transparent and personalized.

We are building a consumer health care company that meets those expectations and serves a much larger market. The team is positioned to grow market share and expand margin in 2027. We are also on track to deliver our long-term targets, including at least $4 earnings per share by 2029. Thank you to the Oscar Health team for giving people power over their health care. With that, I will turn the call over to Scott. Scott?

Richard Blackley: Thank you, Mark, and good morning, everyone. Sorry for the voice. I'm recovering from a cold today. Through the first 9 months of 2026, we delivered net income of approximately $1.2 billion or $3.59 per diluted share. Earnings from operations were approximately $1.3 billion. Based on these strong results and underlying trends, we are raising our full year 2026 outlook. Turning now to third quarter results. We ended the quarter with approximately 2.7 million members, an increase of 27% year-over-year. Sequential decline in membership primarily reflects disenrollments from CMS' industry-wide eligibility review, which was in line with expectations. From a second smaller CMS review, we expect a small number of additional disenrollments in the fourth quarter.

Total revenue increased approximately 70% year-over-year to $5.1 billion, driven by rate increases and higher membership. During the quarter, we received updated risk adjustment data. We saw significant improvement in Oscar's risk relative to the market and market morbidity was modestly favorable to our expectations. These factors drove a $250 million revenue benefit in the quarter. Risk adjustment as a percentage of premiums was 11.8% in the third quarter and 17.2% through the first 9 months. While the additional data gives us greater visibility and more confidence in our risk adjustment accruals, we continue to take a cautious approach to our risk adjustment reserves. The third quarter medical loss ratio was 84%, an improvement of 450 basis points year-over-year.

Improvement was primarily driven by our disciplined pricing strategy. Overall, year-to-date utilization was moderately favorable to our expectations. By category, inpatient, professional and pharmacy utilization were favorable, while outpatient was elevated. We believe some of the elevated outpatient utilization reflects a rotation from inpatient to outpatient care, driven in part by our affordability initiatives. Switching to administrative costs. The third quarter SG&A expense ratio was 14%, the lowest in the company's history. The approximately 350 basis point year-over-year improvement was driven by lower risk adjustment as a percentage of premium, higher fixed cost leverage and disciplined expense management, including an increasing impact from technology and AI initiatives.

We reported earnings from operations of $178 million in the third quarter, a $307 million year-over-year improvement. Operating margin was 3.5%, an improvement of approximately 780 basis points year-over-year. Net income was $167 million, a $305 million increase year-over-year. Adjusted EBITDA was $207 million in the quarter, an increase of $308 million year-over-year. Shifting to the balance sheet. We ended the third quarter with approximately $9 billion of cash and investments, including $360 million of cash and investments at the parent. The sequential decline in cash and investments primarily reflect the payment of our 2025 risk adjustment payable during the third quarter.

As of September 30, our Insurance subsidiaries had approximately $2.3 billion of capital and surplus, including $1.4 billion of excess capital, which was driven by our strong operating performance. Turning now to our 2026 full year guidance. Based on our results through the first 9 months, we are raising our full year earnings from operations guidance to a range of $850 million to $950 million. At the midpoint, this is $200 million above our prior outlook and $550 million above our original guidance. Our improved outlook reflects favorable risk adjustment and utilization that was moderately favorable to our expectations.

We now expect total revenue in the range of $19 billion to $19.3 billion, an increase of $300 million from our prior outlook. We expect to end the year with approximately 2.5 million members, which reflect the additional disenrollments from the second CMS review. We expect risk adjustment as a percentage of premiums to be between 17% and 18% compared with our prior expectation of 20%, which is based on year-to-date risk adjustment experience. Turning to the medical loss ratio. We now expect a full year MLR in the range of 80.5% to 81.5%. On administrative expenses, we expect our SG&A expense ratio to be in the range of 15.1% to 15.6%.

We expect adjusted EBITDA to be roughly $110 million higher than earnings from operations. Our performance this year positions us well for 2027. We will provide formal guidance on the fourth quarter earnings call, but let me spend a moment on our buying assumptions. We expect overall ACA marketplace membership to be stable compared with year-end 2026, and we are positioned to gain market share. We continue to take a disciplined approach into pricing, balancing growth and profitability. As Mark mentioned, our weighted average rate increase for 2027 is approximately 14%. Our pricing reflects an incremental increase in medical cost trends and higher market morbidity from ongoing program integrity initiatives.

Our competitive positioning, differentiated products and strong member experience gives us confidence as we head into 2027. We expect improved medical cost performance and administrative efficiency to drive further margin expansion next year. In closing, we are on track to deliver a strong financial performance in 2026, and we remain focused on driving sustainable earnings growth and achieving our long-term target of at least $4 of earnings per share by 2029. With that, I'll turn the call over to the operator for the Q&A portion of our call.

Operator: [Operator Instructions] And we'll take our first question from Andrew Mok with Barclays.

Andrew Mok: G&A came in meaningfully better in the quarter, but updated guidance appears to imply a 400 basis point sequential increase. Can you elaborate on the drivers of the strong 3Q outperformance? And what's driving the higher-than-normal step-up for 4Q?

Richard Blackley: So on SG&A, I think that in Q3, you're seeing the benefit of our continuous disciplined expense management, growing impact of AI that we're deploying across the business and those are the themes that I would call out. We're also picking up a pretty healthy amount of fixed cost leverage. So that -- those are the drivers of Q3 performance. As you think about Q4, there is a step-up in the Q4 SG&A ratio. A portion of that is being driven by things like -- I would say these are Q4 specific spend, things like OE ramp, some of our risk adjustment operations where we do a lot of our chart collection activity in the fourth quarter.

And then we've got some typical investments that we make for '27 growth in the fourth quarter. So I would say these are kind of seasonally expected spend, but we like the trajectory of SG&A.

Andrew Mok: Great. And I think I heard you say membership is expected to be stable with year-end 2026 results while you take market share. Can you flesh out a little bit more how you're thinking about your share gains in the context of how market growth might play out for 2027?

Mark Bertolini: Sure. Thanks, Andrew. This is Mark. So we'll start with the market growth that both Scott and I highlighted, where we've -- we're now going to be 713 markets. We've added South Carolina. Secondly, I would offer new program extensions and products into the marketplace like RetireEase, where we tend to have very high retention and opportunistic growth in those marketplaces. And then finally, there's about 850,000 lives coming to market as a result of competitor exits. So all of that, as we add that into our mix and our ability to price appropriately disciplined and competitively in the marketplace, we believe that we'll pick up share.

Operator: And our next question comes from Jessica Tassan with Piper Sandler.

Jessica Tassan: Congratulations on the phenomenal results. So our estimates imply, I think, that year-over-year MedEx PMPM increased 19.9% in 3Q from down 1.5% in 2Q. So can you maybe just give us some color on the utilization behavior you're observing by metal level? Curious to know how MLR seasonality is evolving both for bronze members and then also whether you're observing any changes in silver member to your historical -- relative to historicals or relative to expectations and why that might be?

Richard Blackley: Yes, Jess. Let me start with the claims PMPM. So one of the challenges that you guys have this year in looking at claims PMPM is that we do have our member months because of some of these CMS-driven disenrollments. Member months are -- reported are a little bit different than those that are actually generating claims. So there is a little bit of a skew in that. So when I unpack that and kind of put Humpty Dumpty back together, what I see is that from Q1 to Q2, there's a meaningful step-up in claims PMPM. We see another step-up in Q3 from there.

And in Q4, we're anticipating, and this has historically been the case that there's less movement, a fairly stable Q3 to Q4 PMPM support. When I look at utilization, we're seeing utilization across the metals, which is consistent with the risk that we see there. We're not seeing any specific thing that I would call out from one metal to the next. I think that the risk that we have in the book is being supported by the claims that we're seeing. And we're -- as you think about the MLR that we've got embedded for our fourth quarter, we are expecting a normal seasonal uptick in MLR into the fourth quarter from where we are in Q3.

Jessica Tassan: Got it. That's really helpful. And then I appreciate that the midterm has changed the eAPTC outlook considerably for '28, but maybe hoping you can help us better understand just the membership outlook for 2027. Where are we in terms of CMS' fraud and marketplace integrity efforts? And how do you expect those efforts to evolve in '27? And then can you just clarify that despite the expectation for flat enrollment year-over-year in 2027, you all are priced for an increase in market morbidity within that 14%.

Mark Bertolini: Yes, Jess, I'll start, and then I'll turn it over to -- I'll turn it over to Scott on market morbidity. So we do expect stable membership year-over-year. We do still see more program integrity programs coming through. We believe that will have an impact on the marketplace. Obviously, as I said before, it's going to be offset by some of the other things, new markets entered, new products and other competitors leaving. So overall, we see the whole market being relatively stable.

I don't think the midterms are going to have much of an effect, if anything, in the near term because there's a lot of bargaining that would need to go on given that the administration still will hold the veto pen. And so getting the kind of things we would need to get done to, for example, reintroduce enhanced subsidies and others would have to be part of a grander deal, and we're not quite sure how the dynamics of that will move forward. We always plan for these things in our operating plans and risks and opportunities. And we always see what we would need to do should these things begin to happen.

But right now, I don't know that much of anything is going to happen over the next year at least. Scott?

Richard Blackley: Yes. So Jess, with respect to market morbidity, I have a couple of thoughts there. One is, we are seeing and expecting to see a stable ACA in '27. A lot of the big change events happened in '26, and we expect fewer going into '27. We are expecting that program integrity will have an impact, and we have built that into our pricing. So I would comment that on our average 14% rate increase, the 3 things that are really driving that 14% kind of in rank order of impact, number one is trend, which is in the, call it, high single digits and then market morbidity coverage is second.

And then we also have built in a little bit of margin expansion into pricing. So we feel like we've got a very competitive price and some really terrific products in markets. So we're optimistic about our ability to grow share next year.

Operator: And we'll take our next question from Parker Snure with Raymond James.

Parker Snure: Yes. So just kind of piggybacking on the previous few questions. Just curious on your view for this annual enrollment period. There's some additional friction that's being added to the enrollment process, some enhanced social security verification, broker consent, tax verification, things like that. I understand that you think the market will be flat, but just curious if you view these procedural measures as being a material driver in this year's annual enrollment process? And could this lead to some people being thrown off? And I guess just kind of general expectations in terms of market morbidity. I know you touched on that, but just related to that specific dynamic.

Mark Bertolini: Parker, I'll start by describing -- obviously, we've had a lot of preparation to try and get in front of the things for brokers in the enrollment program this year. So it will slow down the start. These systems are new to them. We did a lot of training over the summer. We even built our own capabilities on our own platform to help them as they navigate through this. But there will be a learning curve. It will be something new for them, and it will have an impact on their productivity. But I think that is something that they will pick up quickly enough. We're watching it every day and watching how it evolves.

And obviously, we only have 4 or 5 days under our belt anyway from the standpoint of enrollment. Scott, do you want to talk about market morbidity?

Richard Blackley: Yes. I would maybe call out 2 things. So first of all, just to reiterate, we're expecting that '27 will be flat to year-end '26. We do expect that some of these enhanced eligibility checks will result in some of the membership from '26 not being able to continue into '27. But we also anticipate that we're going to see a continuation of new people coming into the marketplace. We saw that in '26. We expect to see similar types of drivers for '27. So net-net, we expect the market overall to be flat to the '26 standpoint.

Parker Snure: Okay. That's super helpful. And if I can just get one more. Just curious on the fourth quarter guidance as it pertains to medical costs and MLR, it appears that it implies actually a decline in actual medical costs sequentially. I understand you'll have fewer members in the fourth quarter. But if I look back over the last 5 years or so, I don't know if 4Q medical costs have actually declined sequentially ever. So just curious if you can give more color on that dynamic, if there were some onetime items in the third quarter or fourth quarter? Or is it just simply lower enrollment that's driving that?

Richard Blackley: Yes. I think you and I probably don't have the same math because when I look at implied fourth quarter MLR, it's in the range of, let's call it, low 90s. And we finished the third quarter with an MLR of 84%. If you add back PPD, that gets you to something like 84.8%. I think it's important when you think about the $250 million benefit of risk adjustment, all of that doesn't fall to the bottom line. It comes with claims. And so the -- you really -- you shouldn't be taking the risk adjustment out of the numbers. Like I think that's fundamental to the business, and it is offsetting the actual claims volumes that we're getting.

So I think of -- if you want to think of a comparison, I would say I would start with an MLR in the third quarter of roughly 84.8%. And you can add a couple of points, if you want to kind of say some of that favorable risk adjustment related to the first half of the year. But from there, it is still a step-up into Q4 based on everything we're seeing around people reaching their maximum out-of-pockets, utilization, that continues to be favorable to our expectations. We feel like the step-up in Q4 MLR makes sense to us and is consistent with the trends we're seeing through this part of the year.

Operator: And we'll take our next question from Stephen Baxter with Wells Fargo.

Stephen Baxter: Kind of a similar theme question. So you're lowering the risk adjustment payable expectation by 200 or 300 basis points. You're improving the MLR by 50 basis points. And then you're pointing to medical costs that I think that you're saying are modestly favorable to your expectations. So it seems like there's a pretty big difference there. And I know that you're a conservative company. But just thinking about the difference between those 2 items, if you could maybe help us bridge that, that would be super helpful.

Richard Blackley: Yes. So Steve, I would say a few things. So we have $250 million of favorable risk adjustment. And then we've got $45 million of PPD. As I talked about, not all of that favorable risk adjustment drops to the bottom line. There's a portion that's being offset by claims, which are appropriate given the risk of the book but are creating higher claims costs for us. When I think about full year guidance that we just put out, I would say we're being -- we've only got Wakely through July. We're being prudent in making sure that we are thoughtful about the continued morbidity risk that's inherent in this marketplace.

We feel like we have more than adequately covered for that in the guidance, and we're walking into good news. So we feel like we've got a very balanced target for full year operating earnings.

Stephen Baxter: Got it. Okay. And then, yes, I'd just be curious on your latest thinking on the latest CMS regulation governing 2028 open enrollment. I mean I think this was mostly codifying changes that were already made by OB3. But I would just love your feedback on that potential dynamic around maybe having less of an ability to utilize auto enrollments in 2028.

Mark Bertolini: Yes. Steve, we're working on that for our 2027 plan, and we'll prepare ourselves to handle those new provisions and believe it's in the guidance that -- it will be in the guidance that we provide going forward. But it's just -- from our perspective, program integrity is really important because it stabilizes the risk pool. And we want to keep those programs moving forward. Our biggest fear is that we make sure that the people who should be excluded are excluded and that the people who need coverage get coverage.

And so that work with CMS, because the sort of eligibility and enrollment responsibilities are split between CMS and the plans, we have to make sure that our data synchronizes. And so in our latest review of this information, we have information going back and forth between CMS and us, and I'm sure our competitors as well and say, well, wait a minute, let's look at this population and talk about what you see versus what we see and what we need to do to make sure these people, if they are eligible, get access to coverage.

So that's an ongoing, I would call it, a flaw in the system is that we have dispersed eligibility too far between plans and CMS. You don't see that much anywhere else. And so we're working through those changes as we go through program integrity. But we support program integrity and we believe it's important.

Operator: And our next question will come from Scott Fidel with Goldman Sachs.

Scott Fidel: Mark, I thought it might be helpful just given the midterm elections results yesterday. If you want to, one, talk us through like in terms of as -- now as you go to the hill and sort of speak with members and the expanded Blue Caucus, from a policy perspective, what, in particular, you'll maybe be advocating for the ACA? I know that in the prepared comments, you talked about opportunity to expand the ACA. But just curious in terms of -- is it -- I don't think it's probably as simple as you'll just advocate for sort of renewing the enhanced subsidies.

I would assume that there's probably suggestions that you want to make as well around strengthening the foundation of the program longer term. And then from a timing perspective, do you think that '28 would be possible in terms of potentially getting the subsidies restored? Or curious just on your thoughts on timing as the Congress sort of start to '27.

Mark Bertolini: So I think the first thing, Scott, you should know is that we have been working both at the state level and at the federal level. And we've actually made a lot of progress at the state level around things like CHOICE, and -- I mean, at the state level versus federal. And at the federal level, we've been pushing through CMS and through the administration ideas about how do we best support the changes that we need to make to make the ACA TAM bigger. And part of that is this whole eligibility issue. How do we get that right?

And one of our suggestions has been that we create wallets, enhanced HSAs, if you will, that will allow people by having KYC criteria will allow them to be more sure of eligibility as people come into the program. We can stabilize that piece of the business that does great things for the risk pool and for growth and for our distribution channel that has to work through all these issues. Piecemeal every so often, as it has happened over the last couple of years is difficult. On the enhanced subsidies, we shall see. That's a financial discussion. We shall see how much of that comes back in. Will it change in form?

It's going to have to be a deal before '28 between the administration and the new caucus. And we don't know how that's going to work. The President has made comments that he can work with the caucus. We have -- the caucus has been talking about the things that they want to have happen. We need to see how that relationship is actually going to work and evolve into legislation and then regulation. So I'm not holding out a whole lot in '27 toward '28 at this moment other than we will keep going forward. We continue to work with the administration on working on the eligibility piece.

And on regulations like tax treatment for HSA purchases and defined contribution for employers, where we see a huge opportunity if we can clear some of that road blockage out of the way for them in the future. That makes the TAM bigger. That makes the ACA framework work. And we've also been talking to the Democrats as well while we've been talking to the administration about what we could do to make CHOICE a reality. In a lot of ways, my point of view is that what we are talking about in making a bigger individual market is very much what some of the aims of the ACA were in its initial construction.

So I think we have a lot of common ground there. It could be a great place for both parties to get together and actually do something that could advantage the American public and more importantly, our economy.

Scott Fidel: That's helpful. And for my follow-up question, I wanted to toggle just over to pricing and it sounds like the average rate increases that you talked about are right in line with the market. I'm curious just from the average perspective, obviously, every pricing MSA is going to be different. But sort of a general sort of breakdown as you think about those sort of mid-teens, 14% or so sort of pricing, how are you -- how would you say that sort of breaks down between like underlying cost trend versus morbidity versus any other sort of key actuarial underwriting factors? And that's it for me.

Mark Bertolini: I'll start off and then I'll pass it to Scott on the morbidity stuff. So the very basis of our network -- of our pricing structure and our plan design in every market starts with the network. And so where we have a great network relationship, and where we can -- again, all the most successful players in the ACA use narrow networks. And so you get a discount and that passes through to the customer, number one. Number two, what are your distribution relationships like? And what can you rely on in getting distribution done? Those are the 2 first most important requirements we assess when we go into the market.

And then we look at the competitive framework, the pricing tolerance in the marketplace and then we build our models. But think of it as us underwriting that network and distribution model first as a way of deciding where our price points need to be in the market. Relative to morbidity and the intricacies of pricing, Scott, I'll just toss it over to you to add anything that you would.

Richard Blackley: Yes. Scott, a few other thoughts. So first off, we are starting from a position of strength in '26. Our relative price increase this year was probably a bit lower than some of our competitors. So we've already got a very advantaged price position, then you go to a 14% price increase from there. So we think that from a competitive position, our pricing looks -- as you said, it's an MSA by MSA game, but we like how we look on the book in aggregate. When you think about the buildup of that 14%, again, it's in rank order starts with trend, which we've built in something that's in the high single digits for trend.

Then you've got that impact from market morbidity related to some of the PI initiatives that we've discussed. And then on top of that, we've got a bit of margin enhancement that we also built into price. So those are the building blocks on the pricing.

Operator: [Operator Instructions] And we'll go next to the line of Jonathan Yong with UBS.

Jonathan Yong: I guess just based on the landscape file, it does look like one of your competitors has gotten a little bit more, I'll call it, aggressive in terms of how they're pricing and coming in as the cheapest option in the market. I guess from your perspective, how do you consider your pricing relative to that? And is it most important to be at the cheapest end of the market? Or how are you viewing that alongside metal tier mix for 2027?

Richard Blackley: I'll start on price.

Mark Bertolini: Go ahead, Scott.

Richard Blackley: Okay, go ahead, Mark.

Mark Bertolini: I was just going to say that, obviously, metal mix that matters very much, number one. Number two, we believe that it's not just price, it's the quality of the product, quality of customer service. We tend to have higher retention than our competitors do as a result. We have higher NPS scores. So as we look at all of that, it's a mix of capability and our relationship with our customers and our distribution channel that matter. It's not just a price point. Scott?

Richard Blackley: Yes, I think you hit on it. The point I was going to make, Mark, is that it's really a question of -- you have to be within a relatively reasonable range of the lowest. We feel like we've got really strong price positions in our markets and Mark talked about the distribution and the right products. And we feel like we've got great relationships with our distribution partners, and we have a product that -- we're a member-centric company. We've got a very good brand when it comes to supporting members, and that's a big part of our selling package. And that -- we think that matters beyond just price.

Jonathan Yong: Okay. Great. And then just going back to the proposed rules for payment year or for 2028. I guess in relation to the pre-verification open enrollment period that is being proposed, do you see this as kind of a benefit in terms of making sure members get enrolled given the pressure on auto enrollment? And then similarly, does this create pressure on G&A from your perspective where brokers may ask for more in terms of commissions, et cetera? Just curious how you're thinking about that.

Mark Bertolini: We solve that problem first, Jonathan, by going after -- I always like to say brokers like to maximize revenue per joule of energy expended. And so if we can provide tools to them, which we have through Lucie and our EDE, the opportunity is for them to be able to keep their productivity while being able to go through each of these steps. And so that's part of what we've been doing all along. That's what we did when the enhanced subsidies went away. We made it easy for them to move people to new products. And they moved some of our competitors' people to our new products as a result.

So I think you have to look at it from the -- again, from the perspective of what do they need to do, how can we help them with tools. And it doesn't necessarily mean that we have to have the highest commissions. As a matter of fact, and Scott, I check with you on this. I believe we are not the highest commission program in the country.

Richard Blackley: That's right. I mean our commission strategy generally is to be competitive, but we don't feel like we need to be the highest. I think that the products and the service sells itself.

Operator: And we'll take our next question from Michael Ha with Baird.

Hua Ha: As you look at '27, I know you're expecting stabilizing metal mix next year. But I wanted to ask your thoughts on like a potential scenario where bronze members could trade up into gold, meaning like could there be an environment where bronze members, maybe they deferred care this past year because of the higher deductibles? Could that have worsened their health or acuity? And so next year, then they shift to gold, lower deductibles, unlock care for members that previously deferred. Like how are you thinking about the possibility of that happening? How much of that migration have you assumed?

Like what allowance would you build in your '27 pricing that has some sort of catch-up utilization beyond your normal gold plan assumptions?

Richard Blackley: Well, I will start off by saying you are correct. We do expect a similar metal mix. We're not seeing any kind of thematic things that would suggest that there's some delay in utilization, right? It's not like 2026 where we were worried, and then we built in an expectation of higher fourth quarter utilization because people knew they were losing their subsidy. I don't think that's quite what we're seeing. And on the MOOP side, at maximum out-of-pockets, we are seeing a progression there, which looks to us like behavior that we have seen over a longer period.

So again, it doesn't look like people are not using care because they've got a deductible that they have to cover a portion of those costs. So when I kind of pull back and I look at the pricing build that we did for '27, we think we've done the appropriate amount of risk analysis of where in the metals do we see people growing, what does utilization look like? And we're excited about the products we've got out in the market and about our opportunity for the year.

Mark Bertolini: Michael, I would add just one thing about Lucie. So Lucie helps people find the right plan in the ACA, not necessarily an Oscar plan, but also connects them to a thing called Allstate Health Solutions that offer coverage for higher deductibles on a premium basis. So people can actually buy protection based on that underlying cover. So they have more than an option of just going up to gold, they could consider a plan like Allstate Health Solutions that helps cover some of those expenses when they occur.

Hua Ha: Interesting. Helpful. And my next question, just the one key remaining question to me after your ID was really the latest Wakely data that confirms the stabilizing risk pool even after all these CMS lives were removed, identified lives. I just wanted to ask if you could provide a bit more detail on what that Wakely file showed about market morbidity relative to your assumptions. And also of all the new integrity measures, all the verification checks, everything new happening next year, curious, which one do you think has the biggest range of uncertainty and how it could impact membership into next year?

Richard Blackley: Yes. Well, a lot to unpack there. I would say that with respect to Wakely, latest Wakely white paper shows market morbidity moving as we would have anticipated. And I think that it just reaffirms the estimates that we've been making are appropriate, slightly favorable to our pricing expectations. I do think it's important to note that the first Wakely risk report we got in the first quarter was quite favorable. We got that in the second quarter. And then the report that we received in the third quarter is now moderately favorable. We think that is the effect of the CMS program integrity efforts and removing some lives and those are mainly non-utilizers.

So we still believe, though, that market morbidity continues to be moderately favorable to where we priced and we're -- we think that gives us a good position for closing out '26.

Operator: And we'd like to take our next question from Kevin Fischbeck with Bank of America.

Joaquin Eduardo Martinez: This is Joaquin Arriagada Martinez on for Kevin. I just wanted to ask about on the 17% to 18% risk adjustment range that you guys gave, is this something that will continue in 2027? Or does that reset back to the 20% range?

Richard Blackley: Yes. I would say that the 17% to 18% for this year is specific to the risk of the book. And so we'll give you guidance on where we think next year is going to come out. And it really depends on the books and the markets and the metal mix. So I wouldn't want to get ahead of our full year guidance.

Joaquin Eduardo Martinez: All right. And could you give us some more color on the trend commentary? What specifically in outpatient is higher? And how are you translating that to your initiatives?

Richard Blackley: Yes. We do see a bit of a trade-off between inpatient and outpatient, which is honestly beneficial for the cost of the member. It's beneficial to us. It's a lower -- typically a lower cost of care. And this is really doing things that are -- some of it is being driven by affordability initiatives that we're executing, which is really kind of just the fundamental blocking and tackling of how you run a health plan. It's things like making sure that we're doing clinical reviews that are looking at distinguishing observation from inpatient admissions, things like discharge planning, making sure that, that is done in appropriate time frames.

So nothing that I think is out of the ordinary in terms of what we see with the health plan. We're just -- as Mark likes to say, we're constantly trying to progressively eliminate failure. And we're seeing the benefits of that strong operating cadence in both the results on the MLR side, on lower DCPs. So overall, I think that you can see the evidence that we're running a very effective health plan in the numbers.

Operator: At this time, we have reached our allotted time for questions. We'd like to thank everybody for joining today's conference call. Please feel free to disconnect at any time.

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.