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9th Circuit Reinstates AARP Medigap Suit

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Here’s how our colleagues at FC&S, a sister publication, have reported on a major federal health insurance case in California.

The U.S. Court of Appeals for the 9th Circuit has reinstated a complaint alleging that AARP, through its arrangement with UnitedHealthcare Insurance Company for Medicare supplement insurance, or Medigap coverage, is transacting insurance without a license in violation of the California Insurance Code.

The Case

In 2011, Jerald Friedman, a Medicare beneficiary, purchased Medigap health insurance through a group Medigap policy held by AARP Insurance Plan and underwritten and sold by UnitedHealthcare. Medigap policies offer supplemental private health insurance to cover costs not covered by Medicare.

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AARP and UnitedHealthcare’s Medigap arrangement was governed by a 1997 joint venture agreement. The AARP-UnitedHealthcare agreement required that individuals wishing to purchase Medigap coverage from UnitedHealthcare do so through AARP’s group policy. The AARP-UnitedHealthcare agreement also required that AARP administer key aspects of the program, which involved two principal tasks.

First, AARP solicited its members’ enrollment in the Medigap program. An agreement between AARP and its subsidiary trust, AARP Insurance Plan (the “AARP Trust”) contractually obligated AARP to “solicit member participation in the [Medigap] Plan by direct mail and otherwise.”

AARP discharged this duty through television commercials, its website, and other forms of advertisements. For example, a website owned by AARP Services, Inc., a for-profit, wholly-owned subsidiary of AARP, explained why AARP members should “get an AARP Medicare Supplement Plan.” It emphasized that:

  • AARP Medicare Supplement Plans were the “only Medicare Supplement plans endorsed by AARP”;

  • The plans were “[i]nsured by UnitedHealthcare Insurance Company, the insurer serving the most Medicare supplement enrollees nation wide”; and

  • There was a “94% Customer Satisfaction Rate of those surveyed.”

Many of the marketing materials owned and controlled by AARP stated in bold font, “This is a solicitation of insurance.”

Second, AARP collected insurance premiums from members through the AARP Trust and remitted the appropriate payment to UnitedHealthcare. The AARP-UnitedHealthcare agreement also allowed AARP to invest the collected payments prior to remittance to UnitedHealthcare.

Significantly, AARP deducted and retained 4.95% of each dollar paid by UnitedHealthcare Medigap enrollees prior to remitting the premiums to UnitedHealthcare.

George Washington on a dollar (Image: Thinkstock)

The initial version of the AARP-UnitedHealthcare agreement referred to this retained amount as an “allowance.” However, following settlement of a dispute with the Internal Revenue Service, AARP and UnitedHealthcare amended their agreement to provide that the “allowance” would be referred to as a “royalty.”

Friedman filed a putative class action against AARP and UnitedHealthcare alleging, in essence, that AARP, through its arrangement with UnitedHealthcare, was transacting insurance without a license in violation of the California Insurance Code. Friedman alleged, in short, that the 4.95% retained by AARP was a commission on the sale of insurance that was charged over and above the actual monthly premium that UnitedHealthcare charged for Medigap coverage that AARP was not entitled to collect because it was not licensed to transact insurance in California.

AARP and UnitedHealthcare asserted that the 4.95% retention was a permissible royalty payment made by UnitedHealthcare in exchange for its use of AARP’s intellectual property (i.e., its logo) in connection with the Medigap program.

The U.S. District Court for the Central District of California dismissed the complaint with prejudice, concluding that Friedman had “not plausibly alleged that AARP acted improperly as an ‘unlicensed insurance agent’ who was paid a ‘commission’ for the ‘sale’ of insurance.” Rather, it concluded that AARP’s actions were “entirely consistent with [a] permissible arrangement.” The district court rejected Friedman’s allegation that the 4.95% fee was an improper commission, concluding that the “payment, labeled a ‘royalty’ by the agreements between AARP and UnitedHealth, is not a ‘commission’ under the facts alleged.” The court also rejected Friedman’s allegation that AARP had “solicited” insurance, reasoning that none of the marketing materials identified by Friedman permitted “an individual to purchase insurance coverage or submit an application for insurance.”

Friedman appealed to the 9th Circuit.

The 9th Circuit’s Decision

The circuit court reversed.

In its decision, the 9th Circuit ruled that Friedman had adequately pleaded that AARP both “transacts” and “solicits” insurance without a license in violation of the California Insurance Code.

It explained that his complaint alleged that AARP “transacts” insurance by charging a “commission” to its members who signed up for UnitedHealthcare Medigap coverage. The circuit court noted that the California Insurance Code did not define “commission,” but it stated that if, as Friedman alleged, the 4.95% fee was an insurance “commission” and not a royalty, its retention by AARP “could plausibly violate California law.”

The circuit court was not persuaded by the argument put forth by AARP and UnitedHealthcare that the fee to AARP was not a “commission” because it was “calculated as a percentage of all premiums paid in connection with the program, regardless of their source.” The circuit court said that, at the motion to dismiss stage of the litigation, it appeared “that, in practice, the fee received by AARP is directly tied to the portion of policies ‘sold’ by AARP, and is, in effect, a ‘percent of the price of the product.’”

The 9th Circuit next ruled that Friedman also had adequately alleged that AARP “solicits” insurance in violation of the California Insurance Code. “Most significantly,” it said, AARP’s marketing materials expressly stated in bold font: “This is a solicitation of insurance.”

It also observed that the AARP Trust’s governing document contractually obligated AARP to “solicit” its members’ participation in the UnitedHealth Medigap program. The circuit court stated:

In light of AARP’s direct financial incentive in securing additional enrollees in UnitedHealth’s Medigap program, we have little difficulty in concluding that these representations support plausible allegations of solicitation.

The case is Friedman v. AARP, Inc., No. 14-56765 (9th Cir. May 3, 2017). Attorneys involved include: Andrew S. Love (argued) and Susan K. Alexander, Robbins Geller Rudman & Dowd LLP, San Francisco, California; Kevin K. Green, Frank J. Janecek, Jr., and Christopher Collins, Robbins Geller Rudman & Dowd LLP, San Diego, California; Stuart A. Davidson, Mark J. Dearman, and Christopher C. Martins, Robbins Geller Rudman & Dowd LLP, Boca Raton, Florida; Sean K. Collins, Boston, Massachusetts; Michael F. Ghozland, Ghozland Law Firm, Los Angeles, California; for Plaintiff-Appellant. Brian D. Boyle (argued) and Meaghan VerGow, O’Melveny & Myers LLP, Washington, D.C.; Christopher B. Craig, Los Angeles, California; for Defendants-Appellees UnitedHealth Group, Inc. and United HealthCare Insurance Company. Douglas E. Winter, Bryan Cave LLP, Washington, D.C.; Jeffrey S. Russell and Darci F. Madden, Bryan Cave LLP, St. Louis, Missouri; for Defendants-Appellees AARP, Inc., AARP Services, Inc., and AARP Insurance Plan.

FC&S Legal Comment

It is worth noting that one of the principal contentions raised by AARP and UnitedHealthcare in the district court was that Friedman’s claim was barred by the “filed-rate” doctrine, under which “rates duly adopted by a regulatory agency are not subject to collateral attack in court.” The district court did not reach this issue, but it likely will have to do so on remand. Stay tuned.


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