Behind the Veil: The AARP America Doesn’t Know

That is the the title of a new investigative report prepared by Reps Wally Herger (R-CA) and Dave Reichert (R-WA) in which they look into the conflict of AARP’s For-Profit and Non-Profit entities and their cozy, some would say financially beneficial, relationship with the Democrats Health Care Bill (aka ObamaCare™)

Details and the report itself are below, meanwhile, Chairmen Herger and Boustany Announce Hearing on AARP’s Organizational Structure and Finances:

House Ways and Means Health Subcommittee Chairman Wally Herger (R-CA) and Oversight Subcommittee Chairman Charles Boustany, Jr, MD (R-LA) today announced that the Subcommittees on Health and Oversight will hold a hearing on AARP’s organizational structure, management, and financial growth over the last decade. The hearing will take place on Friday, April 1, 2011, in 1100 Longworth House Office Building, beginning at 9:00 A.M.

In view of the limited time available to hear from witnesses, oral testimony at this hearing will be from invited witnesses only. However, any individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing. A list of invited witnesses will follow.

Here are the charts from the report:

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AARP_Charts

Here are the KEY FINDINGS from the report:

AARP Structure

AARP, Inc., the 501(c)(4) tax-exempt social welfare organization, is run by 22 board members. However, in 2010, seven of these board members also composed the entire board of the “for-profit” AARP Insurance Plan which funnels money derived from UnitedHealth Group’s (“United”) AARP-endorsed insurance policies back to AARP, Inc.

AARP Revenues

AARP has four primary revenue sources: royalty payments (primarily from insurance companies), membership dues, publication advertising, and grants (governmental and non-governmental). In 2009, AARP revenues from royalties were two and half times higher than its membership dues. Since 2002, income generated from AARP membership dues has increased 32%, or $60 million. However, during this same period, income derived from AARP’s business relationships, primarily with insurance companies, nearly tripled, increasing by $417 million. Royalty payments from for-profit companies comprised nearly 46% of AARP’s revenue in 2009, while membership dues totaled just 17% of total revenues.

AARP’s Health Insurance Business

AARP endorses just about every type of insurance product under the sun, including three types of Medicare-related insurance products: Part D prescription drug insurance, Medicare Advantage (MA) insurance, and Medicare supplemental insurance, often referred to as “Medigap.”

United is AARP’s largest business partner. As part of the United and AARP business agreement all three of the Medicare insurance product lines are marketed under the AARP brand name. From 2007 to 2009, United’s royalty payments to AARP have grown from $284 million in 2007 to $427 million in 2009, a 50% increase.

State insurance rate filings show that, in 2010, AARP retained 4.95% of seniors’ premiums for every Medigap policy sold under its name. Therefore, the more seniors enroll in the AARP branded Medigap plan, the more money AARP receives from United. Unlike AARP’s MA policies, in addition to paying the Medigap premium, those wishing to purchase an AARP Medigap policy must also join and pay membership dues to AARP.

Enrollees in AARP’s MA plan pay their monthly premiums directly to United. United pays AARP a fixed amount, on a monthly basis, for the use of the AARP name. Therefore, whether there are 5 million or 500 seniors enrolled in an AARP MA plan, AARP is still paid the same amount of money by United.

Effect of the New Health Care Law on AARP’s Insurance Business

The health care law affects both MA and Medigap insurance products and AARP’s royalties.

According to the Congressional Budget Office (CBO), funding for MA plans will be reduced by $206 billion from 2010 to 2019. Cuts to the MA program and the resulting declining enrollment in those plans are, as the Washington Post reported, “widely expected to drive up demand for private Medigap policies like the ones offered by AARP, according to health care experts, legislative aides, and documents.”

In a recent Committee on Ways and Means hearing, Rick Foster, the Chief Actuary for the Centers for Medicare and Medicaid Services (CMS), reinforced this finding in stating: “Well, I think that if our projection ends up being correct, as I have every reason to expect, and something like 6 to 7 million people, beneficiaries, leave Medicare Advantage plans, many of them, perhaps most of them, will want auxiliary coverage and Medigap will be the most straightforward way to get it.”

In United’s 2010 first quarter earnings call with investors, held after the health care law was enacted, a United executive agreed that future reductions in MA enrollment will create business opportunities in other Medicare products, namely Medigap.

Based on low, mid, and high-range estimates, AARP stands to financially gain, over and above the millions of dollars they currently receive from United, between $55 million and $166 million in 2014 alone as a result of new Medigap enrollees stemming from the health care law’s cuts to MA, which AARP strongly endorsed. Under the midrange estimate and under their current contract, AARP’s financial gain from the health care law could exceed $1 billion during the next 10 years. Again, this is because AARP will see their royalty payments increase as seniors are forced out of MA plans and buy AARP Medigap plans instead.

Other Financial Practices at AARP (Charitable Activities, Compensation,and Travel)

Despite a massive increase in revenues, AARP’s cash and in-kind contributions to the AARP Foundation only increased 11% ($3.1 million) while cash and inkind contributions to AARP’s Legal Counsel for the Elderly actually decreased 9% ($300,000) from 2004 to
2008 (the only years for which AARP provided data). Meanwhile, the AARP Foundation recently committed an estimated $14 million in each of the next three years to become the primary sponsor of NASCAR driver Jeff Gordon.

Tax-exempt organizations are prohibited generally from providing unreasonable compensation to executives, board directors, and, in some cases members. AARP generally compensates their executives more generously than similarly situated non-profits surveyed.
For example, in 2009, then-AARP CEO William Novelli received $1,647,419 in total compensation, including a severance payment of $350,657.

AARP’s travel policy will pay for first-class accommodations for board directors on flights exceeding five hours when business class is not available. However, AARP’s CEO is allowed to travel first class on any flight that exceeds one hour.

AARP’s National Policy Conference New Member Orientation and 2010 Summer Meeting were held at the Hotel Del Coronado in San Diego, CA. This resort describes itself as “… the definitive example of what a luxury resort should be.”

This following is the summary of that report:

AARP, formerly known as the American Association of Retired Persons, is a tax-exempt non-profit membership organization for those aged 50 years and older. As such, AARP has long been regarded as a protector andadvocate of the nation’s senior community.

What is less known is the extent to which AARP operates as a massive for-profit enterprise and how that conflicts with its legal requirements to “primarily operate to promote the common good and social welfare of a community of people.”

This report highlights AARP’s increasing reliance on the “for-profit” sale of insurance, particularly health insurance, and the underlying implication for this storied “non-profit” organization. In conducting the research, one of the central questions became: Why would AARP
aggressively advocate for the Democrats’ health care law last year which contained nearly one half-trillion dollars in cuts that independent analysts said would negatively impact seniors’ access to affordable health care services?

As the facts set forth in this report reveal, AARP is not simply a non-profit entity claiming to advocate on behalf of America’s seniors. AARP is in fact a large, complex and sophisticated organization with over $2.2 billion in total assets and had revenues in excess
of $1.4 billion in 2009 alone. When measured by the products it endorses and profits it derives from those deals, AARP is one of the nation’s largest insurance companies and by far the largest provider of Medicare plans to seniors. AARP is also one of the most powerful
and active lobbying groups (in terms of dollars spent) in the country. Further clouding AARP’s image is a tangled relationship between the board members of its “for-profit” subsidiaries and the parent “non-profit” AARP which establishes AARP’s policy positions – often
making it impossible to tell the two sides, and their competing agendas, apart. The mission of the twoappear in direct conflict with one another and, as such, it is very difficult to determine which interests are being represented – those of the “non-profit” or the “for-profit” arm of AARP.

The report also details the Democrats’ health care law’s significant cuts to Medicare Advantage (MA) and how the interplay in the marketplace between MA and Medigap will increase Medigap sales. This will have a direct, significant, and positive impact on future profits
at AARP. Also troubling is the report’s central finding:

The Democrats’ health care law, which AARP strongly endorsed, could result in a windfall for AARP that exceeds over $1 billion during the next 10 years.

It should be noted that this report is not the first time AARP’s commercial activities have been the focus of federal government actions seeking to address a range of improprieties which appear to conflict with the organization’s 501(c)(4) tax-exempt status. In 1994,
AARP paid the Internal Revenue Service (IRS) a onetime settlement payment of $135 million in lieu of taxes, resolving an audit over tax returns for years 1985 through 1993 for failure to fully pay unrelated business income tax (UBIT) on its commercial activities. Also
in 1994, AARP agreed to pay the U.S. Postal Service $2.8 million to settle allegations that AARP improperly mailed health insurance solicitations at non-profit rates in 1991 and 1992. In 1999, the IRS and AARP once again reached a settlement to conclude an IRS audit
of the organization covering tax years 1994 through 1998 with respect to the treatment of revenues AARP received from licensing and selling its name and logo to insurance companies.

More than a decade later, AARP activities and business arrangements continue to raise concerns about which interests are being served at AARP – those of its 40 million members or the AARP business portfolio.

This information calls to mind two specific questions. First, if as its website notes, the mission of AARP 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,” is that
mission being advanced on behalf of its 40 million members or the community at large? Or are those 40 million members, many of whom are seniors and consider AARP-endorsed Medicare Advantage, Medigap and Part D prescription drug plans as something akin
to the ‘Good Housekeeping seal of approval,’ being shortchanged at the expense of AARP’s ever-increasing insurance royalties?

Second, given AARP’s significant financial interests in the business of insurance, should the organization continue to enjoy its tax-exempt status derived under section 501(c)(4) of the Internal Revenue Code (IRC)? Such a privilege means that, in exchange for operating
primarily to promote the common good and general welfare of the community, including its members, AARP is not subject to federal income taxes, with the exception of unrelated business income tax. The report is based on a thorough review of public state insurance departments’ filings, AARP’s consolidated financial statements, AARP’s IRS Form 990s, a compilation of media accounts, and other public documents resulting from Congressional inquiries. It should be noted that AARP refused to comply with repeated requests to share with Members of Congress its tax filings and other financial documents, beyond those that AARP is legally required to make available upon request.

While the report shines a bright light on the business activities of AARP, this is just a first look, and the findings included in this report require greater examination. In accordance with the oversight authority of Congress, a copy of this report will be submitted to the IRS so that it can consider further examinations of AARP and its tax-exempt status under IRC section 501(c)(4) and AARP Foundation’s tax-exempt status under IRC section 501(c(3).

Here’s Behind the Veil: The AARP America Doesn’t Know an investigative report prepared by Reps Wally Herger (R-CA) and Dave Reichert (R-WA) in it’s entirety: