Ever since the passage of ObamaCare, I’ve been perplexed by a lingering question: Why did AARP so aggressively lobby for passage of the law? After all, the plan was built on $500 billion in cuts to Medicare. Even in Washington, half a trillion dollars is still a ton of money. Medicare is sacrosanct among America’s senior citizens. It was unfathomable to me that the nation’s largest membership association of seniors would, not just not oppose the cuts, but would actively lobby for them. It didn’t make any sense.
Mostly, I just chalked up AARP’s actions to its general leftist, partisan leanings. Medicare cuts by Republicans are bad, but cuts by Democrats to increase government involvement in health care are okay. Boy, was I wrong.
According to this blockbuster report, released today by the House Ways and Means Committee, AARP’s support of ObamaCare and, specifically, the Medicare cuts was entirely rational and self-serving. The Committee found, after an 18 month investigation, that AARP stands to reap an extra billion dollars in profits from ObamaCare. (Yes, that is billion with a B.) Worse, this extra profit is largely BECAUSE of the Medicare cuts.
AARP’s members may face uncertainty over their future health care because of the cuts, but AARP faces certain windfall profits for itself.
To understand how this is, you have to understand something about AARP. It makes money by licensing its name to insurance companies to ‘brand’ their products. When you see an ad on TV for AARP insurance, it isn’t actually AARP offering the policy, but an insurance company who has rented AARP’s name.
We’re talking a lot of money. In 2009, the last year information is available, AARP collected almost $700 million in such licensing fees. (This amount is almost TRIPLE what it collected in licensing fees just a few years ago.)
AARP rents its name for three main products; Medicare Advantage policies, prescription drug coverage and Medi-Gap policies. Medicare Advantage policies are an alternative to traditional Medicare. With it, senior citizens can choose to receive their Medicare benefits from private health insurers. It provides a great amount of choice for seniors and gives them the flexibility to tailor plans that fit their health care needs. In the last few years it has become very popular, now reaching about 25% of Medicare recipients. Medi-Gap policies insure the difference between what traditional Medicare covers and what it doesn’t.
Almost half of the $500 billion in ObamaCare’s Medicare cuts come out of Medicare Advantage. The cuts don’t kill the program, but they mortally wound it. CBO estimates that the Medicare Advantage program will be cut in half, causing over 7 million seniors to lose their health care coverage. They will be forced to return to traditional Medicare and, in most cases, will need to purchase Medi-Gap coverage.
Using very conservative assumptions (AARP keeps its current share of the Medi-Gap market and premiums don’t rise), this increase in the Medi-Gap market will generate more than $100 million a year in additional license fee revenue for AARP. Over a billion dollars every decade. Keep in mind, this revenue is simply for using AARP’s name, so it is almost pure profit.
Wait, you may be thinking, won’t AARP lose a lot of money from the deep cuts in Medicare Advantage? They sell their name for those policies too, after all, and that program is getting cut in half. Well, license fees for Medicare Advantage policies are a flat, negotiated rate, irrespective of how many people buy the policies. AARP gets paid the same amount, whether one person buys a policy or 100,000 buy a policy. These fees are set by long-term contract. AARP’s current fees came into affect in 2008. So, for very many years, AARP will make the same amount from Medicare Advantage, even if the program shrinks 50%, 60% or even 95%.
In contrast, for Medi-Gap policies insurance companies pay AARP 4.95% of all premiums collected as a license fee. Every new Medi-Gap enrollee brings AARP another cut of premiums.
So, the exact Medicare cuts are structured in such a way that the cuts hit a product line where AARP’s fees are already set for years and boosts a product line where AARP can reap windfall profits.
I can’t say that AARP explicitly lobbied for these Medicare cuts, but you’d be hard-pressed to design Medicare cuts that rewarded AARP more handsomely. And considering the fact that AARP spends more lobbying than PhRMA, it does beg the question.
Oh, and a little lagniappe: You don’t have to be an AARP member to purchase its Medicare Advantage policy, but you DO have to be a member to buy its Medi-Gap policy. So, the Medicare cuts will actually increase AARP’s membership. That was a nice touch, AARP.