Startup insurer Oscar Health is at an impasse

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High-flying US digital health darling Oscar Health slashed its losses from $131 million in 2017 to $57 million in 2018 - but the startup insurer's underwhelming membership growth for 2019 hints at a potential roadblock.

Oscar's membership numbers for 2019 ticked up just 8% year-over-year (YoY) to 257,000 members - a far cry from the 170% YoY increase in enrollees it registered last year. And the firm's muted membership growth comes despite expanding into six new markets across Arizona, Florida, and Michigan this year. Oscar's lackluster growth may stem from the significant regulatory headwinds it faced coming into 2019.

Namely, the repeal of the individual mandate - effective January 1 - was expected to decrease the number of consumers who signed up for health insurance, according to CNBC; for context, the individual mandate was a government program that imposed a fee on consumers who could afford health insurance but chose not to buy it.

Here's what it means: Stunted membership growth in the individual market likely spurred Oscar's decision to leap into the lucrative Medicare Advantage (MA) market in 2020. MA is a type of health insurance offered by private insurers to consumers over the age of 65 as an alternative to the government's traditional Medicare program. And it makes sense for Oscar to move into MA: The number of MA enrollees is expected to grow steadily due to the booming US senior population, and MA tends to offer insurers better profit margins than the rest of the industry.

The bigger picture: It's uncertain whether Oscar's move into the MA market will pay off.

• Oscar faces stiff competition in an increasingly saturated Medicare Advantage market. There are an estimated 2,700 MA plans available for individual enrollment in 2019 - 18% more than the 2,300 offered in 2018. Over the same period, MA enrollment is projected to grow 11.5%. If growth in new plans continues to outpace growth in new enrollees, Oscar may struggle to find significant growth as the market becomes more crowded. Oscar also has to contend with large incumbents, which already dominate the private Medicare market: The nation's five largest insurers account for about half of MA enrollees.
• A forthcoming tax on private Medicare plans may limit the market's profitability. A tax on health insurers that could cut into the margins insurers make on MA plans is likely to be reinstated in 2020, according to Modern Healthcare. If passed, the tax could undermine the financial boon Oscar reaps from expanding into the MA market.

An industry take on the unique challenges startups face in Medicare Advantage:

"This is a heavily regulated market and understanding [the Centers for Medicare and Medicaid Services] requirements and building the compliance regime takes time and effort - the downside of not getting this right could be catastrophic for new plans." - Sean Creighton, VP and Managing Director, Avalere Health

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