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Oscar Health, Josh Kushner's health insurance start-up, raises $165 million from Alphabet and others

  • Oscar Health's valuation is now at more than $3 billion, sources say, after it raised another big round from Alphabet, Founders Fund and others.
  • It hopes to expand to more than 250,000 members in 2018.
  • The company says profitability is "around the corner."
Oscar Health leaders Josh Kushner and Mario Schlosser.
Oscar Health leaders Josh Kushner and Mario Schlosser.

Disrupting health insurance is no easy feat, but the investors behind Oscar Health, the start-up co-founded by Joshua Kushner, believe the company has got the model right and is poised for massive growth.

Oscar Health has raised $165 million in new funding in a round led by Founders Fund, with participation from two branches of Google's parent company Alphabet: the Capital G growth investment arm, and the Verily life sciences segment.

The company shared the news in a blog post, which it shared exclusively with CNBC.

That brings the insurer's valuation to $3.2 billion, according to sources familiar, a jump from its last-reported valuation of $2.7 billion from 2016.

Oscar was founded in 2012 by current CEO Mario Schlosser, Kevin Nazemi (who is no longer with the company), and Joshua Kushner, brother of senior Trump advisor Jared Kushner. Its mission was to take advantage of the new marketplaces for individuals to buy health insurance created by the Affordable Care Act (Obamacare). It started out in New York, but has now expanded to five other states.

The company believes it can beat larger insurers like UnitedHealth and Aetna through its focus on customer service and technology, which includes a mobile app for booking appointments and consulting with a physician. It's geared toward individual insurance buyers rather than company insurance plans.

Schlosser told CNBC that Oscar has the "highest member engagement" of any insurer.

Profitability: "Around the corner"

Investors have become interested in the company again after a recent shift in business model.

In the past few years, Oscar has started charging higher premiums, and it is now offering a so-called "narrower network," which encourages members to access a curated list of high-quality medical providers.

It also has tight relationships with health systems, notably Cleveland Clinic, which allows it to get its costs under control by negotiating more competitive pricing with hospitals.

The company told CNBC it achieved "gross margin profitability" in 2017, meaning it generated more money from premiums than it paid out in members' medical claims. That follows years of losses in the tens of millions of dollars across several states, including New York, Texas and California. But it means the company is poised for profitability, as each additional member should help the bottom line.

"And before you know it, we'll be profitable," said Brian West, the company's chief financial officer. "It's around the corner."

The company says its medical loss ratio in 2018 should be in line with broader industry targets of spending about 85 percent of premiums on claims, down about 10 percentage points from 2017. (Anything over 90 percent typically means the company is losing money on each claim.) It also says it's on track for $1 billion in gross premium revenue by year's end.

The company says it plans to grow at a measured rate of four to five cities per year, and is expecting to reach 260,000 members in 2018, up from a peak of 100,000 in 2017.

"Hockey stick business models don't work in health care," said Brian Singerman, an investor at Founders Fund, who led the round.

"Mario and Josh knew that Oscar had to earn the trust of patients and rebuild each piece of the insurance stack with technology, completely from scratch," he said.

Proving its valuation

Health insurance experts say Oscar still has a long road ahead to prove its valuation.

"While start-up insurers have the potential to show massive revenue growth, underlying profitability for companies that actually have viable businesses is limited through market forces and regulatory requirements," said Ari Gottlieb, a consultant who specializes in health insurance.

"(Oscar's) valuation per member is six to eight times that of established, publicly traded health plans that have actually achieved consistent profitability."

Oscar's Schlosser says the company's valuation is warranted, given that it has built "everything in house," including technology for processing claims and managing its members, which it describes as unique.

Down the road, he described Oscar as having big plans to move into other markets, like Medicare, and he didn't rule out a partnership with the company's newest investor: Verily. Alphabet, as CNBC recently reported, is considering its own move into a lucrative corner of the health insurance market.

Other investors that participated in the round include Joe Lonsdale's 8VC, Fidelity, General Catalyst, Khosla Ventures and Thrive Capital, among others.