Class Accuses AARP of Deceptive Trade
GALVESTON, Texas (CN) - AARP defrauded senior citizens of millions of dollars by adding illegal commissions to their health insurance bills, a federal class action claims.
Lead plaintiff John Milton Peacock sued AARP, a nonprofit, and the nation's largest health insurer, UnitedHealthCare Insurance Co.
The American Association of Retired Person, AARP, claims to have 40 million members, half of them older than 65. It had operating revenues of more than $1.3 billion in 2012, according to the complaint.
Peacock claims AARP made $704 million in 2012 on "royalties" from its sale of AARP-branded Medicare supplement insurance.
He claims that UnitedHealth and AARP "have orchestrated an elaborate scheme" whereby AARP makes an illegal 4.95 percent commission from each new Medigap policy it sells or gets renewed for UnitedHealth. (Graph 4)
AARP also administers the AARP-branded policies it sells for UnitedHealth, Peacock says.
"While defendants disclose the existence of a payment in general that goes from UnitedHealth to AARP, which they call a 'royalty' ... defendants hide the fact that the payment to AARP is actually a percentage of premium commission that is charged to unsuspecting seniors and the disabled in addition to their insurance premium paid to UnitedHealth for coverage," the complaint states.
"Defendants' motive to term a commission payment a 'royalty' is twofold: it allows AARP to avoid oversight by insurance regulators, and it allows AARP to avoid paying taxes on the income it generates through insurance sales."
The setup is illegal in Texas, Peacock says, because AARP is not licensed as an insurance agent there, though it "regularly acts as the de facto agent for UnitedHealth by helping market, solicit and sell AARP Medigap policies."
Medigap plans supplement Medicare insurance and include coverage for hospital stays and to reduce seniors' out-of-pocket medical costs.
Medigap insurance has been lucrative for AARP, Peacock says.
"AARP Medigap is the dominant player in the Medigap market," the complaint states. "Nationwide, AARP has over three times as many Medigap enrollees as its closest competitor, Mutual of Omaha. As of December 2012, 32 percent of all Medicare beneficiaries enrolled in a Medigap insurance plan were enrolled in AARP Medigap."
UnitedHealth customers have no choice but to buy Medigap insurance through AARP, Peacock says.
"Any consumer who wants to purchase Medigap coverage from UnitedHealth must purchase the AARP Medigap plan, and thereby unknowingly fund the 4.95 percent illegal commission to AARP," he claims.
Peacock says he bought an AARP Medigap policy in 2007, but allowed it to lapse in 2012 when the premium increased.
He wants the lawsuit certified as a class action and damages for deceptive trade and Texas Insurance Code violations.
If the allegations are not resolved in 31 days, he wants AARP and UnitedHealth ordered to disgorge "all sums taken from consumers by means of deceptive trade practices."
Peacock is represented by Jeffrey Raizner with Doyle Raizner of Houston.