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A strong economy and a big shift to managed care are helping hold down employers' retiree health care plan costs.

In 1996, retiree health care plan costs for employers with at least 500 employees inched up just 1.6%, increasing to an average of $3,182 per retiree from $3,131 in 1995, according to the A. Foster Higgins & Co. Inc. survey.

That's a big change from 1995, when retiree health care plan costs surged ahead 9.5%, an increase attributed largely to the relatively low number of retirees then in cost-effective managed care plans.

The strong economy is one reason for the dramatic slowdown in retiree health care plan costs, said John Erb, a Foster Higgins principal in Miami.

Because many companies are operating at full tilt, they have had less need for downsizing programs in which older workers are encouraged to retire early, such as by offering them enhanced benefits.

Providing health care benefits to early retirees is especially costly because retired workers only become eligible for Medicare at age 65.

Medicare pays roughly 60% of retiree health care costs, taking a big burden off employers. Indeed, in 1996, health care costs for early retirees averaged $5,210 per retiree, compared with an average of $1,874 per retiree for retired workers age 65 and older.

Another key reason health care cost increases also have slowed for retiree health care plans is that more employers are offering retired workers the opportunity to enroll in Medicare risk contract health maintenance organizations.

Employers clearly see the potential managed care, especially HMOs, has in controlling retiree health care costs. Last year, the number of employers offering so-called Medicare risk HMOs to retired workers leaped to 38% from 21% in 1995.

Under a Medicare risk HMO contract, Medicare will pay an HMO 95% of what Medicare thinks it would cost to provide the retiree with benefits covered by Medicare.

Because HMOs generally can operate far more efficiently than Medicare, a traditional indemnity plan, HMOs often can offer benefits not covered by the federal program-like vision care and prescription drugs-to attract retirees and still make a significant profit.

With Medicare risk HMOs providing more benefits, that leaves a reduced role for employers and a lower liability for employers' retiree health care plans that supplement Medicare.

If employers can persuade more retirees to move into managed care programs, like Medicare risk HMOs, the cost savings could be significant, Mr. Erb said.

"Employers are seeing the light to these programs. Retirees get better benefits and the employer reduces its retiree health care liability," Mr. Erb said.

Retiree health care costs, not surprisingly, are strikingly lower in those parts of the country where employers have had the most success in moving retired workers out of expensive traditional indemnity plans and into lower-cost managed care plans, like HMOs.

For example, in the West, where 83% of retirees under 65 and 68% of retirees 65 and older are in managed care plans, health care costs averaged $2,704 per retiree. By contrast, in the Midwest, where just 49% of retirees under 65 and 20% of retirees 65 and older were enrolled last year in managed care plans, health care costs averaged $3,291 per retiree, or nearly $600 per retiree higher than in the West.

While some employers have taken the ultimate step to control retiree health care costs by terminating the plans, that trend is slowing down.

In 1996, 33% of employers offered health care coverage to retired workers eligible for Medicare, down just slightly from 35% in 1995. By contrast, 40% of employers in 1993 offered a health care plan for retired workers eligible for Medicare.

Similarly, in 1996, 40% of employers offered health care coverage to retirees under age 65, a slight drop from 41% in 1995. In 1993, 46% of employers offered health care coverage to employees who retired before they were eligible for Medicare.

But most employers now require retirees to pay at least a portion of the premium. For example, just 16% of employers pay the full premium for retirees under 65 who opt for coverage for themselves and a dependent, while 48% of employers share the cost with retired workers and 36% of employers require the retiree to pay the full premium.

For employers that require premium contributions from retirees, retired workers under 65 pay an average of 63% of the premium for retiree and dependent coverage.