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Traditional indemnity plans'stronghold on the retiree health care market is crumbling as more employers and retirees discover the cost-saving advantages of Medicare risk health maintenance organizations.

During the past 11 months, nearly 1 million retirees have moved into Medicare risk HMOs and out of the traditional Medicare program. That has swelled enrollment in risk HMOs to about 4.8 million of the nearly 37 million people Medicare covers.

More than 13% of those eligible for Medicare now are enrolled in risk HMOs. With enrollment rising at a clip of a million a year, more than 20% of the Medicare population is likely to be receiving health care benefits through risk HMOs by 2000, experts say.

And that estimate could be conservative if tax legislation, which was expected to receive final approval last week, is enacted.

That legislation would overhaul the payment rates the federal government provides and allow risk HMOs to be established in many parts of the country where they have not been fiscally possible.

"The program should become more widely available than ever before," said Chip Kerby, a principal with William M. Mercer Inc. in Washington.

"We should be able to offer coverage in some areas, especially rural areas, where the rates have been too low," said Craig Schub, senior vp of marketing at Cypress, Calif.-based PacifiCare Health Systems Inc., whose Secure Horizons program is the nation's largest Medicare risk HMO with about 1 million enrollees.

That is good news for employers with retiree health care plans that supplement the traditional Medicare program. As retirees move out of Medicare into risk HMOs that typically offer far richer benefits than Medicare, they no longer need employer supplemental coverage and can drop that coverage, saving employers a considerable amount of money, a point not lost on employers.

"Every day, more employers are beginning to work on how they can get more retirees into risk HMOs," said Joseph Martingale, a principal with Towers Perrin in New York.

Even in the absence of legislation, enrollment in Medicare risk HMOs is surging for an obvious reason: Coverage in the program is too good a deal for retirees to pass up.

Medicare risk HMOs are so named because the HMOs contract with the federal government to provide benefits to Medicare-eligible retirees at a fixed payment rate. The HMO assumes the risk that it can provide what is often greater coverage at less cost than its payment from the government.

In some parts of the country, such as South Florida and Southern California, the government's payment rates to risk HMOs are so high-roughly $750 a month for each retiree that leaves the traditional Medicare program-that HMOs can offer far richer benefits than the traditional Medicare program and charge little if any premiums.

For retirees, especially those without employer-provided health care coverage, the cost advantages of Medicare risk HMOs compared with a combination of traditional Medicare and a supplemental Medigap policy can be immense.

In many parts of Florida, for example, retirees buying Medigap policies supplementing Medicare pay anywhere from $100 to $125 a month for the Medigap policies. And those policies typically don't provide prescription drug coverage, often a vital benefit for retirees.

By contrast, risk HMOs in the state typically do not charge retirees premiums, yet offer rich benefits. For example, in the Tampa area, a $1,000-a-year prescription drug benefit is standard, while in the Miami area, risk HMOs are offering unlimited prescription drug benefits.

"Retirees are getting better benefits and lower costs," said Dwight Frank, director of group Medicare sales at Louisville, Ky.-based Humana Inc., whose Medicare risk HMO product, Humana Gold Plus, has 390,000 enrollees, including 220,000 in Florida.

The economics of enrollment in risk HMOs aren't lost on retirees, who are voting with their feet. For example, enrollment in a Medicare risk HMO product offered by Blue Cross & Blue Shield of Florida over the past 12 months leaped to about 87,000 from 59,000, nearly 48%, said Bill Simek, segment director for BC/BS in Jacksonville, Fla.

Much of this growth, Mr. Simek noted, has occurred as the Blues' Florida risk HMO product, Medicare & More, has moved into new areas of the state, allowing retirees with expensive indemnity plan coverage to join its risk HMO.

Just as more retirees are seeing the economic advantages of risk HMOs, so are employers, who in many cases are giving their retired workers financial incentives to join risk HMOs and drop traditional Medicare and supplemental company-provided Medigap coverage.

For example, Los Angeles County pays premiums charged by risk HMOs for coverage, which average $13 a month, as well as the current Medicare Part B premium-currently $43.80 per month-for retirees who select coverage in risk HMOs.

Even though it picks up those costs, the county still saves more than $1,000 a year for each retiree who enrolls in a Medicare risk HMO compared with what it would spend if the retiree enrolled in the county's traditional retiree indemnity health care plan.

In fact, since 1992, when the county began to offer risk HMOs, it has saved nearly $24 million in retiree health care costs.

"This has been a very good program," said Kathy Migita, director of health care benefits at the Los Angeles County Employees Retirement Assn. in Pasadena, Calif.

Paying for retirees' Part B premium is only one of several incentives employers may offer to encourage their former workers to move into risk HMOs and out of their Medigap plans.

Another popular strategy is to negotiate with HMOs to offer enriched benefits to retirees-such as a high limit of prescription drug benefits-with the company absorbing the additional premium cost of the benefit upgrade.

"If your indemnity plan cost had been $200 a month, paying $50 a month for an enriched benefits package is well worth it for an employer," if significant numbers of retirees move into risk HMOs, said Eileen Settineri, a health care consultant with Buck Consultants Inc. in New York.

Economic incentives, while important, aren't the only way employers are encouraging retirees to move into risk HMOs. Communicating how Medicare risk HMOs work to a population of retired workers that may have had little experience with managed care also is vital, experts say.

For example, Bethlehem Steel Corp. has conducted meetings to explain how Medicare risk HMOs operate.

"Medicare HMOs can be very confusing to retirees. They want to know what rules to follow and how to use primary care physicians. They need some hand-holding," said Thomas Broderick, Bethlehem's manager of benefits administration in Bethlehem, Pa.

Those educational efforts, along with economic incentives, such as typically paying any premiums charged by risk HMOs, are paying off. Since Bethlehem first began to offer risk HMOs in 1995, enrollment has climbed to more than 10,000 retirees from 4,400, saving the big steel manufacturer several million dollars a year in retiree health care costs.

Employers' educational efforts are necessary for another reason: Many retirees distrust any program connected to the federal government.

Clearly informing retirees of risk HMOs benefits can ease that suspicion. "The No. 1 sales point for retirees tends to be the richness of the benefits," said Jack Doerr, national practice leader for Sedgwick Noble Lowndes in Chicago.

In some cases, retirees are approaching employers about offering Medicare risk HMOs. For example, in 1992, AlliedSignal Inc. first began to offer Medicare risk HMOs after retirees in the Phoenix area expressed an interest in the program because of their own positive experiences with managed care as active employees, noted Stacey Houston, a health and welfare specialist with AlliedSignal in Morristown, N.J.

Since that initial rollout in Phoenix five years ago, AlliedSignal now offers Medicare risk HMOs to retirees in 14 states. About 20% of AlliedSignal's Medicare-eligible population is enrolled in risk HMOs.

And that percentage is likely to increase as AlliedSignal adds risk HMOs to areas in which it already offers them as well as offering them in parts of the country where they are not yet an option.

"Risk HMOs fit well in our philosophy that managed care works well, be it for employees or retirees," Ms. Houston said.

Just as employers are encouraging retirees to consider and enroll in risk HMOs, the plans themselves are offering new programs to attract retirees.

For example, earlier this year United HealthCare Corp., which has about 450,000 retirees in risk HMOs it owns or operates, launched a new program geared to so-called snowbirds. Under that program, dubbed Passport, retirees can enroll in one United HealthCare HMO and receive coverage from another United HealthCare HMO for up to nine months. That allows them to spend part of the year in other places, such as Sunbelt states during the winter.

Offering a portable benefits program is striking a responsive chord with retirees. One retiree in a United HealthCare risk HMO in Chicago was thrilled to learn she could live part

of the year in Florida without giving up coverage, said Tom Anderson, vp of Medicare programs for United HealthCare in Minneapolis.

And Congress is doing its part to expand enrollment in Medicare risk HMOs by overhauling what many health care experts say is a severely flawed payment structure.

Under a 1982 law, risk HMOs receive from the government 95% of the cost Medicare thinks it would have to pay to provide Medicare benefits to retirees living in a given county. The basic community rate then is adjusted for the age and gender of each retiree.

In coming up with payment rates for HMOs, Medicare looks at its own costs on a county-by-county basis over the previous five years in providing coverage to retirees.

That basis of rate-setting, critics of the current formula say, has a terrible

public policy result: HMOs in areas of the country that have done the least to control costs receive the highest rates, while HMOs operating in parts of the country that have been most successful in holding down costs receive the lowest rates.

That, in turn, means HMOs in high-payment areas can provide a rich array of benefits, charge no premiums and still make a profit, while HMOs in low-payment areas can't even enter the Medicare market.

"This is virtually the only program where the benefits provided are based on ZIP code. Two seniors can have the same income and the same status. One lives in Dade County and the other lives in Chippewa, Minn. The government says the retiree in Dade County is worth $748 a month (to a risk HMO), while the retiree in Chippewa is worth only $227," complains Tom Lehman, director of legislative affairs with Blue Cross & Blue Shield of Minnesota in St. Paul.

"In some areas HMOs get so much and can offer so much. In other areas, there is no economic incentive for HMOs to enter the Medicare market because the rates are so low. If you are a senior, whether you are a winner or loser depends on ZIP code," Mr. Lehman adds.

"We acknowledge the current model is broke and needs to be fixed," said Dick Anderson, vp-health policy at Kaiser Permanente in Oakland, Calif.

Congress is about to do something about the rate system. Instead of basing payment rates to risk HMOs solely on Medicare costs on a county by county basis, the rates would become a blend of Medicare's local and national costs. By 2004, the payment rate would be a 50-50 blend of local and national costs. In addition, a minimum monthly rate of $367 would be set in 1998.

These changes would produce three effects:

Rates in extremely low payment areas, such as rural areas, would immediately climb by more than 50%.

Rates in areas of the country where costs are somewhat lower than the national average also would gradually increase.

Rates in high-payment areas would increase, though the increases would be much smaller compared with current law.

The next effect of these changes will be an expansion of risk HMOs to areas of the country where low payment rates kept HMOs out of the Medicare market.

"In many areas of the country, risk HMOs will become a reality because the payment rates will be sufficient," said Susan Foote, president of Durenberger/Foote, a Washington-based health policy consulting firm.

"This is a step in the right direction. There were so many areas of the country where we and others could not enter because the rates were so low," said Eugene Scanzera, director of National Medicare Managed Care Networks for Blue Cross & Blue Shield Assn. in Chicago.

While risk HMOs in high-payment areas will receive smaller rate increases than under current law, they still should be able to offer rich benefit packages.

"There may be some trimming of benefits or slight premium increases, but they will be viable and attractive" to retirees, said Mary Harrison, director of client services at The MEDSTAT Group in Stamford, Conn.

And with so many current employees already most likely covered by managed care plans, many of them will want to stay in HMOs when they retire, assuring even more growth for risk HMOs.