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Employers and retirees can expect higher premiums, skimpier benefits and fewer Medicare risk HMOs in certain markets as managed care plans face higher medical and drug costs and only slight increases in government payment rates.

But even with cutbacks, Medicare risk HMOs are likely to grow, because retirees who opt into the plans still enjoy richer benefits than under the traditional Medicare program.

That is good news for employers that have encouraged retirees to leave the traditional Medicare program and opt for Medicare risk HMOs. As a result of such a migration, employers will have much smaller numbers of retirees to cover and pay for in their own health care plans that supplement Medicare.

In recent weeks, the Medicare risk HMO market has been buffeted by reports that some of the largest players are curtailing operations, cutting benefits and raising rates.

For example, Foundation Health Systems of Woodland Hills, Calif., will exit the Medicare market in 10 rural counties in Northern California and intends to cut benefits in Medicare risk HMOs in the Northeast, where it has been experiencing higher-than-expected losses.

In addition, United HealthCare Corp. of Minnetonka, Minn., is curtailing Medicare risk HMO startup efforts in some markets, while PacifiCare HealthCare Systems is getting out of the Medicare market in Utah, southern Oregon and parts of Washington state.

Medicare risk HMOs in Massachusetts -- risking a fight with state regulators -- intend to slash prescription drug benefits for retirees next January (see story, page 1).

Medicare risk HMOs across the country "are eliminating zero premium plans, cutting benefits and increasing premiums," said Nancy Dapper, director of Medicare Programs for Kaiser/Group Health Northwest, an HMO in Seattle.

But these cutbacks are not a sign that the Medicare risk HMO market is unraveling, experts say.

Retirees, at the rate of roughly 80,000 a month, have been opting into Medicare risk HMOs from the traditional Medicare program. Enrollment in Medicare risk HMOs has swelled to more than 5.8 million, up from 4.8 million a year ago.

And even while complaining about inadequate increases in government payment rates, far more HMOs want to enter the Medicare market than exit it. The number of plans entering in the market now stands at 347, up from 287 last July, with more than five dozen applications from HMOs to the Health Care Financing Administration, which administers the program.

"This still is a growing market," said Edward Susank, a consultant with William M. Mercer Inc. in Washington.

"Some HMOs are pulling out of small markets. Overall, I think there is a correction, not a wholesale pullout. The overall impact is minor," said Michael Winter, a consultant with Watson Wyatt Worldwide in Dallas.

"In some markets, there will be fewer choices, but there still will be choices," added Tom Beauregard, a consultant with Hewitt Associates L.L.C. in Rowayton, Conn.

While rate hikes and benefit cutbacks have made headlines, those premium increases and benefit cutbacks generally have been modest.

For example, benefit consultant Towers Perrin said the premiums charged to employers it works with that directly negotiate with Medicare risk HMOs to provide enhanced benefits generally are going up only a few dollars a month next year.

"That is the story that is not being told," said Joseph Martingale, a Towers Perrin principal in New York.

HMOs themselves say they are committed to the Medicare market and emphasize that withdrawals and benefit cutbacks are modest.

"There will be some belt-tightening and fine-tuning, but nothing dramatic. And in many states, we still are a zero premium plan," said a spokeswoman for PacifiCare, the nation's largest risk HMO with about 1 million enrollees.

Some HMOs, in fact, are expanding their programs. Wauwatosa, Wis.-based PrimeCare Health Plan Inc., which until recently has sold Medicare risk HMO coverage only to individual retirees, now is targeting the employer market.

"This is too big a market to ignore," said Kevin Meyers, director of PrimeCare's Medicare insurance sales and marketing.

Similarly, Kaiser Permanente, which holds 11% of the Medicare risk HMO market with more than 670,000 enrollees, intends to step up marketing efforts to employers, said Nick Richardson, national director for its Medicare program in Oakland, Calif.

"We have a very strong commitment to the employer market," he said.

Even if reports about problems in the Medicare market have been overstated, HMOs warn that a continuation of what they call inadequate government payment rates will likely mean deep cutbacks down the road.

Currently, HCFA pays a flat fee to Medicare risk HMOs for each Medicare eligible-retiree they cover. These fees, which are based on Medicare's traditional costs by geographic region, range from a minimum of $367 a month to more than $700 a month.

But provisions in a 1997 budget law limited increases of those payments this year to less than 2% for HMOs in many parts of the country. And while 1999 payment rates have not been finalized, those also are not expected to rise more than 2%.

With their own costs going up substantially more than that, Medicare risk HMOs say they can't maintain current benefit levels with such small increases in government payment rates.

"With costs going up 5% to 6%, a 2% increase in rates is not realistic. Everyone is hurt by a rate update that is not realistic," said Deborah Glass, vp-government programs at Blue Cross & Blue Shield of Minnesota in St. Paul.

"A 1.5% increase is not keeping up with inflation and isn't enough to sustain the current level of benefits," said Charles Scott, the over- 65 market segment champion with Blue Cross & Blue Shield of Florida in Jacksonville, which has more than 100,000 enrollees in its Medicare risk HMO.

Stingy government rate increases aren't the only problem facing Medicare risk HMOs. In addition, risk HMOs are finding it difficult to offer profitable plans in rural areas, where there is less competition among hospitals and doctors.

"It is a lot harder to complete competitive contracts with pro-viders when there is only one hospital in town or one physician group," said Mr. Richardson of Kaiser Permanente.

Another problem bedeviling Medicare risk HMOs is that while government payment rates are based on where enrollees live, many enrollees, such as those residing in suburban or rural areas, receive services in more expensive urban facilities, said Rich Stover, a principal with Buck Consultants Inc. in Secaucus, N.J.