Probe of Seniors Lobby to Open Tuesday : Congress: Nasty fight shaping up between Sen. Simpson and the top AARP executive over politics, tax exemptions. Medicare is key issue.

After years of unfettered growth and unquestioned clout, the American Assn. of Retired Persons, the 800-pound gorilla of the seniors lobby, is suddenly running into political and financial controversy.

On Tuesday, Sen. Alan K. Simpson (R-Wyo.), who has complained that the AARP has “intimidated the hell out of Congress,” will begin the first congressional hearings devoted to the activities and finances of the 32-million member organization.

A nasty fight is shaping up, with AARP Executive Director Horace Deets accusing Simpson of using McCarthyite tactics to bully the AARP and prevent it from challenging Republican plans to trim nearly $300 billion from future growth in Medicare spending.

At stake is not just the AARP’s reputation and its influence but also the shape of the emerging national debate over Medicare, which is the real cause of the faceoff with Simpson. He has strong words for the AARP: “To say I am intimidating them--me, a single senator from Wyoming, that sends me into paroxysms of laughter. Old Horace Deets is losing his cool, and a man who makes $350,000 a year should keep cool.”

On the financial front, the AARP is jousting with the Internal Revenue Service, which contends that the nonprofit organization owes taxes on the part of its income that comes from the sale of billions of dollars worth of health and automobile insurance to its members. But the AARP contends that virtually all its income, regardless of whether it is from money-making activities or membership dues, is exempt because the group is legally a nonprofit organization.

Simpson’s Social Security subcommittee, part of the Senate Finance Committee, will look at the tax dispute, the AARP’s lobbying and advocacy pursuits, and the federal contracts under which the organization receives more than $85 million a year to run job-training and community service programs for poor people over the age of 55 as well as to provide tax counseling. A selection of critics will testify Tuesday. The AARP will respond at a second day of hearings on June 20.

Deets said in an interview there is no justification for the hearings because there is “no scandal, and no laws have been broken.”

“If [Simpson] is interested in the issues involving lobbying, tax-exempt and nonprofit organizations, why look only at the AARP?” Deets asked.

Other organizations representing senior citizens have offered support to the AARP, which they expect to take the leading role in the bitter battle coming over GOP efforts to slow Medicare spending by nearly $300 billion.

At a recent meeting of the 41-member Leadership Council of Aging Organizations, “there was a unanimous feeling Sen. Simpson was picking on the AARP because they were the biggest and most powerful aging organization,” said Lawrence T. Smedley, executive director of the National Council of Senior Citizens, which represents 500,000 retired union members. “People felt Sen. Simpson had singled them out because they are leading the fight against Medicare and Medicaid cuts.”

The use of the word cuts enrages Simpson, who says the GOP effort to slow Medicare’s rate of spending would still provide about $6,000 per Medicare beneficiary in the year 2002, compared to $4,000 now. “If that’s a cut, I will eat crow from the top of their $17-million leased building,” he said, talking about the AARP’s elaborate Washington headquarters complex.

The AARP is “lying when they talk about Medicare being cut,” he said in an interview.

If no changes are made in Medicare, total spending would rise by $623 billion over the next seven years, according to an analysis by the independent Kaiser Family Foundation. If the GOP majorities succeed in cutting $250 billion from that, that would still leave a total growth of $373 billion in the popular program.

For Deets and the AARP, however, a spending slowdown of this magnitude would impose a heavy financial burden on the 36 million Medicare enrollees, making them pay substantially more for the benefits they receive, not to mention the increasing number of enrollees. It would mean such things as higher monthly premiums for Part B coverage for doctor bills, and 20% co-payments for home health care and laboratory fees. For health care providers--hospitals and doctors--Medicare reimbursement also would be reduced.

“It is a reduction in the amount of money that was intended to be there . . . the shorthand for that is a cut,” Deets said.

The AARP backed President Clinton’s health care proposal last year, which included $118 billion in reductions from future spending. In return, however, the organization would have gotten two long-cherished goals: Medicare coverage for prescription drugs and the start of a long-term care health benefit.

Simpson says the AARP specializes in pressuring public officials who want to talk rationally about changing Social Security or Medicare. AARP lobbyists talking to government executives “smile and then ram it in their ear,” said the acerbic senator, who describes himself as a lonely cowboy struggling against the massed legions of the AARP, which has 17 full-time Washington lobbyists.

Deets, a former Jesuit priest, said in response: “Sen. Simpson has lost his cool in the way he characterizes us. This organization has been around 37 years and done a tremendous amount of good. We’ve worked so hard to earn our reputation, and when a senator makes allegations, that makes front-page news.”

Originally created in 1958 to provide health insurance for retired teachers at a time when the commercial insurers avoided older customers, the AARP has a vast range of activities. There are more than 4,000 local chapters, a volunteer talent bank, driver education classes, financial workshops, programs to help older people file income taxes, pay bills and manage their money. Membership dues are $8 a year, and anyone age 50 or older is eligible to join.

The organization’s dispute with the IRS centers on whether it owes taxes on $137 million earned last year through its health, automobile and auto insurance programs, and through a car rental program. The bulk of the money, $101 million, was an “administrative allowance” from Prudential Insurance, the exclusive provider of group health insurance to AARP members.

This insurance-related income was a significant share of the AARP’s operating revenues of $343.5 million. As a nonprofit group whose mission is the welfare of older people, the AARP pays no federal income tax. The dispute with the IRS is whether the insurance-related income is separate from its basic mission and therefore taxable.