AARP Profits From Medigap Insurance Fees, Class Action Lawsuit Claims

A class action lawsuit claims AARP illegally profits as a broker for seniors needing Medigap insurance. 

California residents Jeremy Nichols and Leon Wade say AARP “orchestrated an elaborate scheme” with UnitedHealth to help sell Medigap insurance plans, earning an “illegal” 4.95% commission with every policy sold. 

Since at least 1997, AARP has worked with UnitedHealth, Inc. to sell “AARP-branded” Medigap insurance plans, including “Part D prescription drug insurance, Medicare Advantage, and Medicare Supplement” policies. 

An estimated 14 million Americans were enrolled in various Medigap insurance plans in 2018,  according to the American Association for Medicare Supplement Insurance.  

As one of the some 40 million members of AARP, Nichols and Wade say they bought a UnitedHealth Medigap insurance policy in 2013. Both claim they’ve paid nearly 5% more than they should have on these plans since. 

The class action lawsuit alleges AARP is “unjustly enriched” and practices “unfair competition” with these Medigap insurance fees, violating California insurance laws. 

“Defendants’ illegal scheme takes advantage of unsuspecting senior citizens who all put their trust in the AARP name,” the plaintiffs said. 

Nichols and Wade say the 4.95% commissions were funneled into an AARP trust to buy a “wide range of securities” netting nearly a billion dollars in gains just last year.

The class action lawsuit claims in 2019 AARP pulled in $900 million in revenues from these commissions, an amount “more than three times higher than income generated from membership dues.”

California insurance law forbids these kinds of practices, the plaintiffs contend, but AARP skirts regulations by referring to the commission as “royalties” instead. 

This is how AARP, “despite its ‘non-profit’ status … reaps substantial income through business partnerships with large insurance companies like defendants UnitedHealth,” the plaintiffs said. 

“Calling the commission a ‘royalty’ is merely a fiction created by Defendants to further their illegal scheme,” the class action lawsuit states. “Other associations similar to AARP do the right thing and acquire a license to act as an agent, subjecting themselves to regulatory oversight, and paying taxes.”

For four years starting in 2009, “AARP earned $89,985,195, $56,668,525, $14,484,000 and $59,191,000, respectively, on the investment of premiums,” the class action lawsuit details. 

Plaintiffs allege this scheme allows for profit-making because AARP “bifurcates” payments their members send for Medigap insurance before remitting them to UnitedHealth. Only 8% of the commissions are sent to AARP’s taxable division, AARP Services Inc. (ASI), according to the class action lawsuit. 

Nichols and Wilde point to AARP creating ASI as part of a settlement with the Internal Revenue Service in 1999 over its “substantial” income as a non-profit. 

“Even with the creation of ASI as a taxable entity, however, AARP still retains the vast majority of its income, tax-free,” the plaintiffs claim.

The agreements between AARP and UnitedHealth were scrutinized by Congress, according to the class action lawsuit, in 2011. The House Ways and Means committee, investigating AARP’s tax status, identified contracts granting AARP full control over these Medigap insurance policies. This resulted, among other things, in changing the term “allowance” to “royalty” in contract semantics, the plaintiffs said. 

“Defendants do not disclose that in addition to paying for the actual insurance coverage, and the administrative expenses incurred by the AARP Trust, 4.95% of the insured’s payment is diverted to AARP as an illegal commission,” according to the class action lawsuit. 

Furthermore, the plaintiffs allege AARP is an active promoter and marketer of these policies, despite not being a licensed broker in the state of California. 

This class action lawsuit joins at least two others AARP faces against its Medigap insurance policy practices. U.S.District Judge Beryl Howell ruled Krukas v. AARP Inc., et. al can proceed after dismissing AARP’s motion.

Alternatively, in another case, U.S. District Court Judge Dean Pregerson summarily dismissed with prejudice Levay v. AARP, noting AARP’s use of the term “best for seniors” in marketing language amounted to “puffery,” not fraud. 

Those on Medicare and using Medigap insurance plans rely on UnitedHealth, Nichols and Wilde said. 

Some 34% of all Medicare recipients are enrolled in a UnitedHealth plan, according to the class action lawsuit, adding its Medicare supplement has three times as many people signed up than its closest competitor, Mutual of Omaha. 

An estimated 57% of AARP’s total operational revenue came from sales of these Medigap policies in 2018, according to the plaintiffs. 

Have you enrolled into a Medigap plan with AARP? Let us know in the comments below. 

Counsel representing the plaintiffs in this class action lawsuit are L. Timothy Fisher and Scott A. Bursor of Bursor & Fisher PA.

The AARP Medigap Insurance Class Action Lawsuit is Nichols, et al. v. AARP Inc. et al., Case No. 4:20-cv-06616, in the U.S. District Court for the Northern District of California.

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