AARP- Should it Lose Its Tax Exempt Status?

Representative Wally Herger ( R-CA) and Dave Reichert ( R-WA) released a report entitled “Behind the Veil- The AARP America Doesn’t Know”, which is a critical account of AARP and the role it played in supporting Obamacare while benefitting a great deal ( financially ) from its passage.
AARP was and is one of the biggest supporters of Obamacare. Many were puzzled why AARP was so supportive of a new law that cut Medicare by $500 Billion, when AARP is also in the business of selling Medicare products to seniors. Why would AARP support a bill that was projected to force its members to pay more insurance premiums for less coverage? The answer may be in the way it’s paid for selling certain products ( more on this later).
The AARP mission is to “enhance the quality of life for all as we age, leading positive social change, and delivering value to members through information, advocacy and service.” However, approximately 46% of AARP’s revenues now come from the sale of health insurance products from various health insurers. This type of financial arrangement for a charitable organization such as AARP prompted a former AARP board member, Marilyn Moon, to state the following: “ The new arrangements with insurance companies create a tremendous number of potential conflicts for AARP, which is a powerhouse, perceived as the most important voice for older people. AARP will not be perceived as a truly independent advocate on Medicare if it’s making hefty profits by selling insurance products that provide Medicare coverage.”
Here are the key reasons why many believe AARP may be in jeopardy of losing its tax-exempt status as a charitable organization by straying from its original mission over 50 years ago:
1. AARP is paid a monthly royalty from United Health Care ( UHC ) for allowing UHC to use its branding to sell Medicare Advantage ( MA ) products. MA products are offered to seniors whereby Medicare outsources the cost and care to insurance companies in exchange for a monthly reimbursement. MA plans are generally HMO, PPO and Private Fee Service (PFFS) plans that offer additional benefits ( such as Dental, Vision, Health Club membership discounts, etc.) at lower costs than traditional Medicare Supplements or “Medigap” Plans. The amount of this royalty for MA plans is a flat amount and will not vary based on how many individuals enroll in MA plans. This current agreement is in effect from 2008 through 2014.
2. AARP also contracts with UHC to sell Medicare Supplements to seniors to help fill in the gaps ( hence the name Medigap ) in Medicare coverage. The current contract runs from 2007 through 2017. However, there are two key differences ( benefits to AARP) with these Medigap policies vs. MA plans. First, the premiums for Medigap plans are collected by AARP, which then takes a percentage ( approximately 4.9% per this report) for its own financial benefit. After a certain period of time, the balance of this money is forwarded to UHC. It should be noted that AARP has been reluctant to share the details of their financial arrangements with UHC for both MA and Medigap policies. However, they may be forced to do so now due to a congressional hearing on the matter which took place in early April, 2011.
3. So, AARP clearly benefits more when more individuals choose a Medigap plan, but it doesn’t benefit any more when more individuals choose an MA plan. Or, stated differently, AARP will benefit financially for every person that switches from an MA plan to a Medigap plan. This is the strategy that some in Congress are alleging of AARP for their own book of insurance business. Is it really in the best interest of AARP’s members to remove them from the MA plan they prefer and into a Medigap plan they didn’t want before, with AARP benefitting financially from this marketplace disruption? The answer appears to be that it doesn’t benefit the senior, but it financially benefits AARP.
4. Because of over $200 Billion in estimated cutbacks ( from 2010-2019) to MA plans due to Obamacare, it is estimated that about 90% of the MA beneficiaries who will either 1) lose MA plans or 2) have their prices increased will want to purchase Medigap coverage.
5. With an estimated 7 Million MA beneficiaries expecting to switch to a Medigap plan in the next few years ( for the reasons cited above), AARP ( with about 25% Medigap market share) is projected to earn an additional $110 Million per year ( $1.1 Billion over the next ten years) due to this migration from MA plans to Medigap plans. Much of this migration is likely to take place within its own enrollment. And, if they stand to benefit financially from this migration, one can assume that they will implement a well coordinated marketing strategy to shift its own MA beneficiaries into Medigap plans over the next few years.
Finally, as a health insurance broker/consultant of many years, I find it interesting that AARP allowed agents ( for the first time, to my knowledge ) like myself to also market their products starting in 2010. Previously, AARP dealt directly with seniors and did not use agents to market their products. Why the change? Could it be that AARP expects a large number of potential customers ( MA beneficiaries) in the next few years and is relying on agents to help them capture all the new business ( i.e. migration from MA plans to Medigap plans)? It sure looks that way.
With AARP’s unwavering support of Obamacare, they may have focused much more on the financial benefits than their own mission and the satisfaction of their own members.