Thomas Catenacci, DCNF
- Although AARP is a 501(c)(4) non-profit organization, it has been consistently racking in large profits.
- AARP’s 4.95% fee that it charges members who enroll in Medigap policies has resulted in a House investigation and lawsuits.
- The Affordable Care Act awarded Medigap policies a series of favorable exemptions from key provisions in the bill.
AARP finances its operations by overcharging members for health care policies and through its billion-dollar relationship with UnitedHealth Group, according to a new public policy report.
Despite its “non-profit” status, AARP’s profits have been increasing for years largely due to the organization’s practices of marketing of products and services, the report. The report, published by public policy think tank American Commitment, mainly examined AARP’s source of revenue since the passage of The Affordable Care Act in 2010.
“AARP works against its members in many respects,” Chris Jacobs, founder of consulting and analytics firm Juniper Research Group and author of the report, told The Daily Caller News Foundation.
He continued: “They’ve built a marketing empire that they use for compensation for their executives and their staff.”
AARP reported $1.6 billion of revenue and $246.4 million of profit in 2018, the most recent year in which data was available, according to Jacobs’ report. That means AARP reported a surplus of 13.4%.
Membership dues were just 18% of AARP’s revenue in 2018 and since 2000 have increasingly made up a smaller portion of revenues, according to Jacobs. More than half of the organization’s 2018 revenue, or roughly 57%, derived from “royalty fees,” which are payments for the use of its brand.
“Royalty fees are more than three times larger than membership fees,” Jacobs said.
In the past four years, AARP has been sued three times by its own members over its royalty fee policy, which they argued was deceptive, according to court filings. However, AARP ultimately won each of the cases.
The Daily Caller News Foundation contacted the AARP multiple times seeking comment for this article, but the organization never responded.
The biggest contributor to the AARP royalty fee revenue comes from health insurance giant UnitedHealth Group, the American Commitment report said. One of the drivers of AARP’s revenue growth has been UnitedHealth.
AARP received $283.7 million from UnitedHealth in 2007, accounting for 57% of its royalty fee income, according to the report. In 2017, the most recent year this data was available, that number had risen to $627.2 million or 69% of royalty fee income.
The income AARP received from UnitedHealth in 2017 was double the amount it received from membership dues, according to Jacobs. While membership dues accounted for 18.3% of total income, UnitedHealth revenue accounted for 38.2%.
The organization offers three AARP-branded health care plans to its members via its marketplace: Medicare Advantage, Medicare Part D and Medigap, according to the report. UnitedHealth, which is the main insurance provider on the marketplace, pays a royalty fee to AARP since it is using its brand to sell these health plans.
While UnitedHealth pays a flat royalty fee to AARP for the ability to sell Medicare Advantage and Medicare Part D to AARP members, it charges a 4.95% fee to every member that purchases Medigap coverage, according to Jacobs. That royalty, which has been in place since at least 1997, has been the subject of a congressional investigation and multiple lawsuits.
Members enrolled in Medicare Advantage and Part D pay premiums directly to UnitedHealth who then pays the flat royalty fee to AARP, whereas members with Medigap coverage pay AARP who takes a percentage and gives the rest to UnitedHealth, according to Jacobs.
“That 4.95% ‘royalty fee’ represents a sizable share of premium dollars paid,” the report said.
It continued: “To put the figure into perspective, it exceeds the 2018 profit margins of five major health insurers (Anthem, Centene, Humana, WellCare, and Molina), and approaches the profit margins of the other two (UnitedHealthGroup and Cigna).”
Further, AARP takes the revenue that it receives from members with Medigap insurance and makes interest on it before giving it to UnitedHealth, according to the report. Jacobs laid out an example in which a member had a $100 premium and $5 royalty fee.
“They will get $105 from the senior on the first of the month, but they may not pay UnitedHealth the $100 until the 20th of the month,” Jacobs said. “They make interest and they make money on that money.”
The 4.95% fee has faced scrutiny because it represents an upcharge on premiums, which directly affects members who enroll in Medigap coverage through the AARP marketplace, according to Jacobs.
U.S. District Court of Washington D.C. Judge Beryl Howell ruled in favor of AARP in May dismissing the plaintiffs’ class action lawsuit. The plaintiffs, led by AARP member Helen Krukas, argued that the organization misrepresented its Medigap royalty fee structure, according to Forbes.
The plaintiffs specifically argued that AARP was “micromanaging the sale of Medigap and therefore [the 4.95% fee] is not really a royalty fee for its intellectual property. They are a salesman. This is a commission and it’s taxable,” Jacobs said.
Howell originally rejected AARP’s motion to dismiss the case in March 2019 giving credence to Krukas’ argument. Krukas “sufficiently and plausibly alleged that the defendants engaged in unfair trade practices…by materially misrepresenting information about the 4.95% charge,” Howell wrote.
But, in May Howell ruled that Krukas’ argument misses the mark. She said Krukas failed to prove that AARP has a fiduciary relationship with its members.
Similarly, U.S. District Judge Dean D. Pregerson of Los Angeles dismissed two separate AARP class action lawsuits, Forbes reported. Pregerson ruled against plaintiff Simon Levay in November 2018 and against Jerald Friedman in November 2019.
The second dismissal came after the three-judge panel Ninth Circuit Court of Appeals ruled in favor of the plaintiffs. The panel ruled that AARP “transacts” and “solicits” insurance without a license and engaged in fraud by calling the 4.95% commission a “royalty,” according to Forbes.
Pregerson didn’t agree, however, saying the plaintiffs failed to prove they suffered economic harm, Forbes reported
Further, the House Ways and Means Committee investigated AARP in 2011. The investigation pointed out several potential issues with AARP’s structure including its royalty fee practices and concluded with a series of suggestions for the Internal Revenue Service to consider.
“As this report has shown, AARP may be in violation of a number of the requirements imposed on organizations operating under a federal tax exemption,” the committee’s report said.
It continued: “In particular, one might question whether AARP is primarily operating to promote the common good and general welfare given the fact that AARP has become increasingly dependent on hundreds of millions of dollars in royalty revenue from insurance companies.”
The requirements of AARP as a 501(c)(4) organization are that it must operate to promote the common good, must be organized as a non-profit, may engage in political activity as long as it’s not the organization’s main activity and may engage in legislative lobbying to further its social welfare purposes, according to the committee’s report.
The Affordable Care Act (ACA)
The AARP has a long history of spending a large amount of money lobbying a variety of legislation on Capitol Hill, according to the U.S. Senate lobbying database. For example the non-profit organization has spent about $4 million in 2020 so far, according to its first and second quarter lobbying reports.
“My favorite issue that they were lobbying on was the cost of an annual fee, each annual passes to the national parks,” Jacobs said of past lobbying reports. “They were lobbying on anything and everything.”
Jacobs said AARP doesn’t just use its profits for large executive payouts, but for lobbying many “liberal causes.”
AARP was particularly active during the ACA debate in 2009 and 2010, according to data compiled by the Center for Responsive Politics. The ACA, which passed in 2010, was very favorable to the AARP, according to Jacobs’ report.
“Medigap insurance received a host of exemptions in the law,” the report said.
One exemption in the ACA saved UnitedHealth and therefore AARP $14 billion in taxes on Medigap, according to the report. This exemption was repealed in 2019.
The ACA also exempted Medigap from the medical loss ratio provision, according to Jacobs. That provision forces insurance companies to spend a minimum of 80% of income made from premiums on health care, according to the Centers for Medicare and Medicaid Services.
Rather, the ACA lowered the ratio for Medigap policies to 65% meaning AARP is able to spend 35% of its income from such policies on administrative costs like executive salaries and marketing, according to the report.
Finally, the 2010 health care bill exempted Medigap policies from “rate review,” according to Jacobs. “Rate review” requires insurance companies to publicly explain premium rate hikes of 15% or more, according to HealthCare.gov.
“AARP infamously endorsed Obamacare notwithstanding the vocal objections of their members, the overwhelming objections of their members,” Jacobs said. “AARP works against its members in many respects.”
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