How the AARP scams seniors on health insurance

I feel like I am a fairly cynical person when it comes to government and finance. I enjoy the whodunit aspect of corruption – i.e. the wonky mechanics of some scheme that participants never imagined someone would pay attention to. But corruption itself rarely surprises me anymore. It’s ubiquitous in Washington DC.

Before today, I was passively confused by the political positions of the American Association of Retired Persons (what everyone knows as the AARP). Now that I understand the appalling, anti-social business model behind their politics, I think this organization should not be allowed to exist. Literally all the AARP does is screw old people out of money with their bogus charity.

Most people think of the AARP as a nonprofit organization that lobbies federal policymakers on behalf of seniors. That’s because that’s how the AARP markets itself. When someone mentions the AARP, the first thing that comes to mind is snail mail spam. Apart from the World Wildlife Federation offering you a stuffed tiger from some sweatshop in Asia and a lifetime supply of address stickers with the name of the person who lived in your house 15 years ago in exchange for a $25 donation, seemingly no nonprofit generates as much physical waste as the AARP. I think I started getting junk mailers from the AARP after my 30th birthday. Lavender hair, here I come!

But member donations actually make up a very small fraction of the AARP’s revenues. The AARP cash cow is financial services – specifically insurance services.

The AARP is not benevolently helping seniors manage their financial risks, however. The AARP is using its political connections to create financial risk that seniors have to pay the AARP to manage.

I happened to start looking at the AARP after a conversation I had with a family member about insurance coverage for our parents. An AARP-affiliated plan was one of the options. Said family member remarked that the AARP had turned into a “liberal lobbyist group” and carried on for a while about how the AARP now routinely backs legislation that most seniors in the country vehemently oppose.

He cited the AARP’s support for Obamacare and Nancy Pelosi’s new prescription drug legislation. (Pelosi’s legislation aims to establish federal price controls for prescription drugs – something that any economist will tell you never works out well. Arguably, the countries elsewhere in the world that have imposed price controls have merely been free-riding off of Americans who will pay higher prices for medication and for health insurance to fund research and development enterprises that humanity in general benefits from. They have lower drug costs only because they have passed the costs on to our marketplace. It’s really not all that different than people in high-tax states passing their state and local tax bills on to federal taxpayers prior to tax reform, if you think about it. When everyone has imposed price controls, you will see significantly less R&D and fewer cures for important diseases. But I digress.) I was as puzzled by these policy stances as he was. There are not a lot of cheerleaders for socialized medicine and tax increases in retirement communities. You are talking about people who are living on a fixed income. There’s a reason Alexandria Ocasio-Cortez lives in New York and her retired mother lives in Florida.

Being something of a public policy geek, I wondered why an entity that purportedly lobbied on behalf of seniors would support legislation that hurt seniors financially. Legislation that destabilized Medicare and raised taxes. AARP lawyers obviously aren’t stupid, so they had to have some motivation.

To understand why the AARP takes political positions against its own constituency, you first have to understand what Obamacare does. And I do mean what Obamacare does, in reality, not how it was sold to Americans politically.

From a policy perspective, Obamacare was essentially a giant Medicaid expansion. (For the uninitiated, Medicaid provides health care benefits for low-income households. Medicare provides health care benefits for seniors.) Most Americans probably don’t realize that because politicians on the left talk incessantly about the health care exchanges, which turned out to be epic failures, with major insurers exiting some marketplaces entirely. Obamacare drove rapid consolidation in the health care industry and the creation of geographical health care monopolies. The only real legacy of Obamacare is that there are a lot more people eligible for Medicaid and everyone else’s premiums increased fourfold because that’s what happens to captive consumers. Of course, if universal health care at any cost is your ultimate goal, that’s a feature not a bug.

The Medicaid expansion reduced the number of “uninsured” people in the country by changing the income thresholds at which someone would qualify for entitlement status, among other things.

A Medicaid expansion and all the other mandates the legislation involved were not cheap for federal taxpayers. The Obama administration had to find some way to offset massive new spending in the federal budget, and they accomplished that by raising taxes on various demographics and by cutting funds to Medicare. So the AARP was backing a piece of legislation that adversely impacted their constituents’ financial interests in several ways.

If you are lobbying on behalf of seniors, wouldn’t preserving Medicare be a major concern of yours? Did they get something that otherwise helps seniors in return? Likewise with the concept of imposing federal price controls on prescription drugs. The loss of funding for research and development would have the largest impact on the aging population. Young whippersnappers don’t care about cancer research and less destructive heart medications. Seniors do.

And as the actual execution of Obamacare eventually revealed, young whippersnappers were quite willing to take the financial hit and opt out of the whole Obamacare system altogether, because you can do that when you do not have any immediate ailments. A little over a third of the folks who paid a tax penalty for being uninsured had incomes under $25,000. Almost 80% of the folks taking the penalty had incomes under $50,000 (link takes you to Internal Revenue Service data). It was an unequivocal slap in the face for the working class and younger generations – or, if you prefer, Obamacare is how you got Trump.

So why does the AARP take these positions? The answer is that like most organizations peddling influence in Washington DC, the AARP does not make money the way you probably think they do. Because you associate a charity with donations.

The AARP has a partnership with UnitedHealth such that the AARP receives a kickback for selling Medigap insurance policies to seniors, which supplement the health benefits provided by the underfunded Medicare program. UnitedHealth, which is based in Minnesota, is the largest health insurance company in the world, with annual revenues of over a quarter-trillion dollars. When the AARP threw its support behind Obamacare as it was drafted, they were in fact actively lobbying to prevent Medigap reform. They were making sure seniors had to seek additional coverage over the program they had paid their entire working lives to fund. Your Medigap policy is a paycheck to the folks at the AARP, so there better be a funding gap. And Obamacare made one.

In its financial statements, the AARP likes to call these kickbacks “royalties,” as if receiving a kickback is a form of intellectual property. I imagine that is no accident, either. I am sure they are counting on the semantics to make what they are doing seem legal-ish.

The Obamacare legislation included language providing a specific carve-out for the UnitedHealth / AARP arrangement. It also exempted the AARP arrangement from other provisions that made competing health plans less competitive, like not rejecting someone for pre-existing conditions. In fact, Obamacare had harsh implications for a specific population of seniors – disabled seniors who were over the age of 65, who qualified for Medicare because of their disability, but the disability would have counted as a pre-existing condition, which would not be covered by gap insurance.

Yet you never hear Elizabeth Warren, Bernie Sanders, or Nancy Pelosi bitching about the AARP though, because the AARP supports liberal policy ideas while engaging in blatant rent-seeking behavior. (In economics, rent-seeking behavior refers to manipulating public policy in order to profit from artificial circumstances.) In fact, Senate Democrats have routinely tried to shut down inexpensive short-term insurance plans which would compete with the AARP’s kickback scheme. Because they care so deeply about your access to health care.

The AARP’s kickback scheme is nothing to shrug at either. Since Obamacare was enacted, the AARP has collected over $4.5 billion in “royalties” from UnitedHealth. In case you didn’t make the connection there, that’s $4.5 billion that the AARP has taken from the savings of seniors. Did I mention that the umbrella entity here is a tax-exempt organization? Oh, and they get investment income from those payments. I’m sure the 25% return on the S&P 500 has been gooooood to the AARP.

It turns out, member donations account for only around a fifth of the AARP’s funding. The lion’s share comes from this insurance kickback scheme.

When people ask me why I oppose socialized medicine, I can name a lot of reasons. I have had three medical emergencies in my family, and I cannot conceive of how those events would have proceeded if the government was in 100% control of my loved one’s fates, applying some fucked up cost-benefit analysis to every line of treatment they were receiving along the way. Beyond that, as someone who has worked in finance and economics my entire life, these programs are not the kind of thing any economically literate person should support.

But the best argument against letting politicians run the health care industry is that they simply do not have your best interests in mind. They care a million times more about some trampy female lobbyist covering their steak dinner than they ever will about your kid who was just in a car accident. Most people could not invent the elaborate schemes DC folks come up with to steal money from ordinary people if they tried. They do this over and over and over again, and then they go on television in committee hearings and on debate stages, and they cry crocodile tears and they speak with dramatic pauses and they wag their finger at The Man. And some people will be dumb enough not to realize that they are looking at The Man. And the charlatans can park their asses in DC for four decades and send their kids to the very best schools so their kids can then do the same thing to another generation. All on your dime.

Probably the easiest reform that would revolutionize how our country operates is fixing how the federal tax code defines a charitable organization. Right now, we have shit like local authorities that operate sports stadiums for highly profitable teams being classified as a charity. We have “charities” dropping hundreds of millions of dollars in elections. Special interest groups have produced more fake news than the most aspiring Russian troll farm ever will. But it will never happen. Because influence has created both a wage bubble and a real estate bubble in Washington DC, Maryland, and Virginia. They’ll never let the music stop.

5 thoughts on “How the AARP scams seniors on health insurance

  1. AARP is making “commissions” (or kickbacks) on “sales.” They are sales agents on behalf of the insurance company and possibly in breach of a fiduciary duty that they give every public timpression to their membership of owing solely to the AARP member. Not to the insurance entity. You would want express consent to the conflict of interest from the member, and not wadded down upon that member in unreadable contract boilerplate.

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    1. I gave some thought to the semantics here before I called it a kickback. My initial impression was the same as yours.

      In a commission arrangement, a commission would go to an individual agent who is responsible for brokering a transaction. For example, if you are a real estate agent, you get a commission as an individual agent for selling a property. In the AARP arrangement, these transactions are taking place at the company level. UntiedHealth the entity is making payments to AARP the entity. That’s a kickback, in my opinion.

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  2. And maybe there is disclosure of this arrangement to some extent. But I doubt that most seniors understand that when the buy this product through AARP, they are buying it from a political force that made sure they had a financial need for it in the first place. It’s like a real estate agent telling you that you need to provide sellers insurance for the house you are selling because the real estate agent smashed your air conditioning unit when you weren’t looking.

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  3. Nice commentary. When selecting a medigap policy last year when I went on Medicare I did not select United Healthcare specifically for this reason. You cannot get a United policy without also joining AARP. That’s a shame, because my former employer had used United and I had been generally pleased with their plan and service. But the link with AAPR steered me away.

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