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The AARP Paradox

Friday, October 2, 2009

What explains AARP’s support for Medicare cuts as a means to expand health insurance coverage to the non-elderly, a position that purportedly contributed to thousands of AARP membership cancellations?

The Obama administration and Congressional Democrats continue to press AARP and its CEO, A. Barry Rand, to aggressively support their healthcare reform agenda. While it thus far has disavowed support for any particular legislation, AARP continues to advocate broad healthcare reform that includes a health insurance mandate with subsidized premiums for low-income individuals. The organization supports universal coverage even if it requires cuts in Medicare spending to produce budget-neutral legislation. AARP lobbyists reportedly are not authorized to sign off on cuts in Medicare spending unless legislation includes a health insurance mandate.

What explains AARP’s seemingly paradoxical support for Medicare cuts as a means to expand health insurance coverage to the non-elderly, a position that purportedly contributed to thousands of AARP membership cancellations?

One potential explanation is that proposed health insurance mandates, combined with a prohibition on exclusions for pre-existing conditions and community-rating with caps on age-related differences in health insurance premiums, would benefit many people in the age 50–64 demographic, one of the organization’s target markets. The problem with this explanation is that most of the projected cost of reform proposals is for subsidizing expansions in Medicaid and health insurance premium subsidies for people under age 50. Rather than supporting the broad terms of Democrats’ proposals, AARP could instead press for reforms focusing on problems that confront 50- to 64-year-olds who might lose their jobs and their health insurance. Targeted reforms would not require large cuts in Medicare spending, including the major cuts proposed for the popular Medicare Advantage program, which now enrolls nearly a quarter of all seniors.

Seniors will still be obvious targets in the years ahead for additional cuts to close the deficit, and they would have to compete for scarce dollars with millions of non-elderly people receiving premium subsidies.

Another possibility is that accepting cuts in projected Medicare spending in conjunction with a health insurance mandate could benefit seniors compared to the alternative of no reform. According to the Medicare Trustees, $38 trillion (270 percent of current GDP) would have been needed at year-end 2008 to fund the next 75 years of projected shortfalls for Medicare hospital coverage and to meet the federal government’s statutory obligation to pay its share of other Medicare benefits, including prescription drug coverage.

If, rather than broad reform including a mandate, legislation focused directly on the Medicare deficit, current and pending retirees conceivably might have to bear more pain in the form of higher Medicare premiums and less generous benefits than contemplated in current reform proposals. Enacting Democratic leaders’ broad agenda might marginally reduce seniors’ pain, at least for a time, by pushing more costs on the non-elderly population.  

Perhaps AARP’s reform agenda reflects the progressive/liberal views of a leadership willing to risk alienating many members and prospective members in pursuit of its vision.

Compared with targeting the Medicare deficit directly, legislation that includes a health insurance mandate and expands government control of healthcare might also produce a much larger interest group—most of the adult population—that could attempt to resist future constraints on government authorized medical care to address healthcare spending deficits. Seniors would not have to rely primarily on their own (including concerned children’s) political clout and that of many healthcare providers, however formidable.

The problem with this deficit-based explanation, however, is that projected reductions in Medicare spending under budget-neutral reform legislation will not reduce projected overall deficits for federal healthcare spending. It will just shift projected spending from one program (Medicare) to others (Medicaid expansion and subsidized health insurance for the non-elderly). Even if legislation is budget neutral, the $38 trillion healthcare spending deficit will remain. Seniors will still be obvious targets in the years ahead for additional cuts to close the deficit, and they would have to compete for scarce dollars with millions of non-elderly people receiving premium subsidies.

Enacting Democratic leaders’ broad agenda might marginally reduce seniors’ pain, at least for a time, by pushing more costs on the non-elderly population.

A more cynical explanation of AARP’s position is that the organization hopes to profit financially from a coverage mandate. It might be able to generate significant increases in revenues by partnering with health insurers to sell coverage to people aged 50 to 64, just as it currently partners in selling Medicare supplement coverage and Medicare Advantage plans to the population age 65 and over. According to the Associated Press, $653 million of AARP’s $1.1 billion revenues last year came from royalties from private health insurers and other firms using its name to market products. But the fact that this strategy would require AARP’s leadership to risk alienating large numbers of its core membership of Medicare enrollees, which will grow rapidly in the next 10-20 years, significantly reduces this explanation’s plausibility.

In addition, for several years the organization has supported reduced government payments for Medicare Advantage and “reinvesting the savings” in regular Medicare. The lower government payments for Medicare Advantage proposed in Democrats’ reform agenda would likely reduce sales of AARP-sponsored Medicare Advantage plans, even though some of the loss might be offset by increased sales of AARP-sponsored Medicare supplement coverage.

A final explanation of the AARP paradox is that the organization’s reform agenda reflects the progressive/liberal views of a leadership willing to risk alienating many members and prospective members in pursuing its vision. Given the weaknesses of the alternatives, this explanation seems the most plausible. Or perhaps the paradox is truly inexplicable.

Scott Harrington is a professor of healthcare management and insurance and risk management at the Wharton School of the University of Pennsylvania, and an adjunct scholar at the American Enterprise Institute.

FURTHER READING: Harrington wrote “What the States’ Experience with Mandates Should Tell Us about Universal Healthcare Coverage.”

Image by Darren Wamboldt/Bergman Group.

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