Was struck today that I have heard very little about the role of Medigap in the current health insurance debate…despite massive discussion of Medicare, Medicare Advantage, payment reform…etc.  In addition, it highlights how difficult it is to sort through the tangled web of money and influence…not sure how much I believe it, but its certainly food for thought.

This thought was triggered by Michelle Milkin’s post on AARP’s dependance on royalties from selling sponsored insurance plans:

A Hill source summed it up for me this way: “AARP has endorsed a huge reduction in funding of Medicare Advantage, which touches over 10 million middle-lower income seniors. If Medicare Advantage funding is reduced, and seniors are forced out of the program, they become potential buyers of the heavily-promoted and very profitable Medicare Supplement program sponsored by AARP (MediGap is 70% of AARP’s annual income). Medicare Supplement is a huge source of revenue to AARP. At a minimum, AARP should be required to disclose this every time they discuss Medicare Advantage.

Since AARP makes a substantial amount of money on a competing product that serves to drive up demand by eliminating co-pays, deductibles, and other elements of cost-sharing for a flat premium; it would make a bit more sense as to why they’re willing to sacrifice the Medicare Advantage improvement in benefits.  Per Bloomberg:

Laupus stumbled onto something that many members of the world’s largest seniors’ organization don’t know: The group, formerly called American Association of Retired Persons, collects hundreds of millions of dollars annually from insurers who pay for AARP’s endorsement of their policies.

The insurance companies build the cost of these so-called royalties and fees, which amounted to $497.6 million in 2007, into the premiums they charge AARP members, according to AARP’s consolidated financial statement for that year.

AARP uses the royalties and fees to fund about half the expenses that pay for activities such as publishing brochures about health care and consumer fraud — as well as for paying down the $200 million bond debt that funded the association’s marble and brass-studded Washington headquarters.

In addition, AARP holds clients’ insurance premiums for as long as a month and invests the money, which added $40.4 million to its revenue in 2007.

‘Fatting the Coffers’

“At the end of the day, it’s all about fattening the coffers of the organization,” says Thomas Orecchio, who was chairman of the Arlington Heights, Illinois-based National Association of Personal Financial Advisors until September. AARP, he says, is sponsoring insurance for its members at inflated prices.

“It’s the dirty little secret,” he says.

During the past decade, royalties and fees have made up an increasing percentage of AARP’s income, rising to 43 percent of its $1.17 billion in revenue in 2007 from 11 percent in 1999, according to AARP data.

So what of Medigap?  Here’s a comparison to Medicare Advantage in terms of how each may add upon the basic Medicare entitlement.

Medicare Advantage vs. Medigap

Members pay an upfront premium with Medigap to eliminate co-pays, co-insurance, deductibles, and other financial restraints on services.  This seems a little odd, when you think that the reason these were put in place was to reduce unnecessary utilization.

So why then isn’t Medigap part of the overall health reform debate in addition to Medicare Advantage?

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