Editor's note: This story has been updated to include AARP's comment to FierceHealthcare.
The country's largest Medigap insurer and an interest group for the elderly have been hit with a lawsuit accusing them of illegally diverting hundreds of millions of dollars a year.
A class action lawsuit (PDF) was filed on Wednesday on behalf of "a nationwide class of Medicare-eligible individuals" who claim the insurer and AARP are diverting part of their Medigap payments to fund an illegal "rebating scheme."
Led by Connecticut resident Mark Dane, who purchased AARP Medigap coverage in 2014, the suit alleged that UnitedHealth allows AARP to take a 4.9% rebate from monthly beneficiary payments in exchange for AARP sponsoring UnitedHealth's Medigap plan.
AARP then uses those rebates to pay for the monthly collective group plan premium in order to bind coverage, according to the complaint filed in a Connecticut U.S. District Court.
The suit claims an agreement between UnitedHealth and AARP violates Connecticut law by disguising the rebates as an "allowance" or "royalty" payment for AARP's sponsorship of the plan to avoid paying taxes. The lawsuit claims the payments actually serve as inducements so AARP will continue using UnitedHealth as the carrier of Medigap Plans.
"The motive for terming the hundreds of millions of dollars a year reaped pursuant to this scheme as royalty payments is to assist AARP in avoiding taxation," the suit alleged, adding that the scheme ultimately increases the cost of insurance for all beneficiaries.
The plaintiff is seeking an end to the alleged practices, and recoup all rebates, which is allegedly more than $400 million per year. In 2016, AARP earned nearly $600 million in royalty payments from UnitedHealth across all insurance products, up from 561.9 million in 2015, according to the complaint.
In a comment to FierceHealthcare, AARP said it was in the process of reviewing the lawsuit details, but "it is immediately apparent that the allegations are meritless.”