New Drug Program Is a Benefit for AARP

In late 2003, when the Bush administration was struggling to get its Medicare prescription drug program through Congress, a timely endorsement by AARP helped turn the tide in its favor. But the program has become more than just a legislative victory for the influential lobbying group and its pro-senior-citizen agenda.

The private insurance plan carrying AARP’s label is emerging as the leading choice of Medicare beneficiaries signing up for drug coverage. With at least 1.8 million members and counting, the AARP plan has the potential to generate royalty revenues amounting to tens of millions of dollars for the organization.

Before this year, Medicare did not cover outpatient prescriptions. Now seniors can buy coverage through dozens of private plans -- 47 in California alone -- each with its own list of preferred drugs and coverage policies. Medicare pays about three-fourths of the cost of the insurance, and monthly premiums, averaging $25, cover the rest.

The success of the AARP plan is understandable in a market where seniors face new, often confusing, choices and many beneficiaries are unsure which to trust. But it has revived charges of a conflict of interest between AARP’s roles as a public policy advocate and a private business enterprise.

“They can’t have it both ways,” said Rep. Pete Stark (D-Fremont). “It would be like Consumer Reports investing trust fund money in Chrysler and then promoting Chrysler cars. You can’t claim to be a disinterested advocate if you’re peddling insurance to make a profit and pay your overhead.”

AARP spokesman Steve Hahn rejects such criticism. “There are no limos in the garage,” he said. “Any money AARP makes will get plowed back into the services our members want.”

AARP, a nonprofit organization, is the largest, most influential body in Washington representing seniors. It provides a range of services to its members, including tax preparation assistance and safe driver education.

To help finance its activities, the organization long has sold various types of insurance. It derives more income from its businesses than from the $12.50 annual dues paid by each of its 35 million members.

Medicare has not released a breakdown of drug-benefit enrollment by plan, but evidence suggests seniors have gravitated to a few plans -- either those bearing recognizable names such as AARP and Blue Cross-Blue Shield, or plans with very low monthly premiums, such as those offered by Humana.

Thanks in no small part to its partnership with AARP, UnitedHealth has built a commanding lead in enrollment, according to preliminary figures from major insurers and an analysis by Lehman Brothers’ Equity Research.

The AARP MedicareRx plan has at least 1.8 million members, according to UnitedHealth and AARP, making up more than half of the total enrollment of 3.2 million in all the Medicare-related plans offered by UnitedHealth.

After the AARP beneficiaries, the largest UnitedHealth contingent comes from the 840,000 members enrolled under PacifiCare. UnitedHealth, based in Minnesota, recently acquired the California insurer.

Humana, based in Louisville, Ky., ranks second in overall enrollment, and has 1.7 million members in its plans.

The success of the AARP MedicareRx plan “is something to be very proud of,” said UnitedHealth spokesman Dominick Washington. “AARP is a brand and an organization that people trust.”

However, neither UnitedHealth nor AARP would disclose the terms of their deal. Hahn, the AARP spokesman, said no royalty checks had arrived because the government had to approve the financial arrangements of the plan.

During the congressional debate about the Medicare drug benefit, AARP said it had not decided whether it would sponsor a plan. The decision was announced last year, and Hahn said it reflected the wishes of AARP members.

UnitedHealth has a long-standing relationship with AARP, managing its mail-order pharmacy and underwriting so-called “Medigap” policies that supplement Medicare benefits.

AARP usually charges such insurers annual fees; these amount to about 4% of the premiums collected, according to the organization’s financial statements.

If that’s also the case with the drug plan, AARP’s income could range well into the tens of millions of dollars, according to Robert Laszewski, a former insurance executive who is now a consultant on health policy. “It ain’t nickels and dimes,” said Laszewski, who noted that the deal could involve advertising fees and other payments in addition to royalties.

AARP should make a full disclosure, said Larry Noble, executive director of the Center for Responsive Politics, a nonpartisan group that tracks the influence of money in the political system.

“This is something they are going to have to face,” he said. “Usually, interest groups are lobbying for legislation that will financially assist their members. Here, you have a situation where a group is lobbying for legislation that they argue benefits their members, and as it turns out it’s also going to benefit them.”

A Medicare spokesman said the agency did not want to release plan-by-plan enrollment figures yet because it did not want to be seen as steering seniors to any particular insurer. This year’s open enrollment period ends May 15.

However, the lack of official enrollment data has made it more difficult for consumer groups to do side-by-side comparisons of the leading plans.

Despite dozens of drug plans available to seniors, the Lehman Brothers analysis showed that two-thirds had enrolled in the top three plans: UnitedHealth, Humana and WellPoint, which is affiliated with Blue Cross & Blue Shield.

“If we had to characterize the main determinants of success of these three [companies], we would suggest Humana is winning on price and United and WellPoint are winning on brand,” wrote Lehman Brothers analyst Joshua Raskin. “Humana maintains some of the lowest-priced options on the market. United is partnering with AARP and WellPoint uses the Blues brand in 14 states.”

Humana’s low-cost plan features a monthly premium of $1.87 in some states. The AARP plan premium averages $27, although the amount varies from state to state.

Health economist Marilyn Moon, former director of AARP’s public policy office, said that in her years with the organization she saw little coordination between AARP’s advocacy side and its profit-making side. However, the organization has gradually become more entrepreneurial.

“It wasn’t like a gigantic conspiracy,” Moon said. “But it’s awfully difficult to demonstrate or prove that when you have such a financial stake in this stuff.”

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The leading plans

AARP MedicareRx, offered under UnitedHeath, is the largest single Medicare prescription drug plan, with 1.8 million enrollees.

Largest Medicare prescription drug plan insurers

(In millions of enrollees)

AARP MedicareRX: 1.8

UnitedHealth: 3.2

Humana: 1.7

WellPoint: 1.2

WellCare: 0.6

Coventry: 0.9

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Data for January and February.

Sources: Lehman Brothers Equity Research, AARP, UnitedHealth Group

Graphics reporting by Ricardo Alonso-Zaldivar