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IN THE FIGHT AGAINST the rising cost of retiree medical benefits, more and more companies are finding an ally in Medicare HMOs for group retirees.

Medicare HMOs save companies money by dramatically reducing or even eliminating the need for supplemental Medigap insurance. They do this by offering retirees services that go way beyond what traditional Medicare covers.

A Medicare HMO is like getting Medicare and Medicare supplements combined -- and for less money.

The challenge

The costs of retiree health benefits are growing in more ways than one. Not only are rising medical costs making it more expensive to insure retirees, but there also are simply a lot more of them to insure. By the year 2030, retirees will account for 22% of the nation's population.

Add to that new accounting requirements that force companies to account for the future expense of retiree health care on their financial statements, and there is a potentially huge drain on a company's bottom line.

Typical retiree medical plans rely on two sources of coverage to meet retirees' health care needs: Medicare and some form of supplemental "Medigap" insurance. A 1996 A. Foster Higgins & Co. Inc. report of employer-sponsored health plans found that the average cost of providing Medicare supplemental coverage was $1,874 per retiree per year. And many services Medicare doesn't cover are the ones seniors care about most, including:

Most routine and preventive health care.

Eyeglasses and hearing aids.

Most outpatient drugs.

Most services outside the United States.

You keep paying and paying

Not only are companies seeing the direct cost of retiree medical benefits go up year after year, but also -- thanks to the Financial Accounting Standards Board, which issued Financial Accounting Standard 106 a few years ago -- companies no longer can account for their costs on a pay-as-you-go basis; they must accrue the present value of all future retiree health care liability on their financial statements. That doesn't look so good on a company's balance sheet.

Companies are looking for ways to get this situation under control. One obvious way is to scale back coverage offered to retirees, or to stop promising to cover future retirees. These "solutions" are fraught with risk for employees and employers, but companies have had a hard time coming up with a better answer.

A sensible solution

That was before Medicare HMOs came along. While Medicare covers some of the basic necessities of health care, Medicare HMOs cover a lot more. From preventive care to prescription drugs to eyeglasses, group Medicare HMOs cover more of the services seniors really use.

Most Medicare HMOs offer comprehensive benefits for no premium. These benefits are funded by the federal government, which pays HMOs to provide Medicare benefits, and by a retiree's Part B premium. Although comprehensive, some employers found that HMOs' limitations on benefits, such as annual prescription drug limits, did not meet the needs of their retirees. Now many Medicare HMOs are willing to offer unlimited prescription drug benefits designed exclusively for group retirees in exchange for a small premium.

From an employer's point of view, Medicare HMOs offer a clear advantage. All these additional services come at a price substantially lower than a Medicare supplement that would provide similar coverage. That means less money going out, and less FAS 106 liability to report.

Here's an example:

An average employer pays about $1,800 per retiree per year for coverage beyond Medicare. With a Medicare HMO, employers can reduce that payout to only about $400 without decreasing coverage the retiree enjoys.

Not only does that save the company about $1,400 per retiree per year, it also can reduce its FAS 106 liability substantially.

Expanded benefits

In a Medicare HMO, the government pays the HMO to provide health care coverage, rather than directly paying a portion of retirees' medical bills.

The HMOs' ability to provide more services at a lower cost enables them to offer benefits that typically would require coverage by a Medigap policy.

What do retirees get when they are enrolled in a group Medicare HMO? Quite a lot, actually.

In most respects, it's just like being in any other HMO. While details differ from plan to plan, basically everything is paid for, except for nominal copayments for office visits and prescriptions. Routine preventive care is covered, as are the basics of Medicare, including hospital stays, diagnostic tests and durable medical equipment.

In addition, retirees enjoy reduced paperwork and a system focused on helping them get the care they need. Some Medicare HMOs offer special benefits designed exclusively for seniors, such as travel benefits for "snowbirds," so their coverage goes wherever they do, and personal service representatives who are always there to answer retirees' questions.

Everybody wins

With Medicare HMOs, everybody wins.

Employers win because they are getting more for less: richer benefit packages, substantial cost savings, and greatly reduced FAS 106 liability.

Just as important, employers win by being able to continue offering retiree medical benefits. By honoring this commitment to past employees, the company gains the respect and loyalty of its present workforce.

So far, most employers offering Medicare HMOs are doing so on an optional basis. Retirees can choose to stay in their indemnity plans or join the HMOs. However, as managed care gains more acceptance and Medicare HMOs become available to a greater percentage of the population, more employers may make this their only option.

Retirees win by gaining convenient access to medical benefits far beyond what they would get under traditional Medicare. With the additional services many HMOs offer, retirees are finding ways to enjoy healthier, more active retirements.

The high cost of health care for those over 65 is one of the greatest challenges facing industry and government. Medicare HMOs take the best principles of managed care and apply them to this problem. The results so far -- better care at a lower cost -- have been extraordinary.

Tom Anderson is vp of Medicare programs for United Healthcare Corp. in Minneapolis.