Easing pressure with Medicare-risk HMOs.

Do you worry about paying too much for retiree health benefits? About meeting your funding obligations under FAS 106? Medicare-risk HMOs may give you and your retirees a break.

Gone are the days when American companies could reward their retirees with a gold plaque and a cornucopia of health-care benefits. Today, soaring health-care costs, a steadily growing pool of retirees, the burgeoning health-care reform debate and Financial Accounting Standard 106 have clouded the retiree health-care picture. American companies are in a quandary. Many can no longer afford to pay for these benefits and have been forced to eliminate them, even in the face of threatened lawsuits. Other companies are shifting benefits costs to retirees, paying them a fixed monthly amount, charging higher deductibles, eliminating ancillary benefits or laying off workers.

Medicare-risk plans can help relieve the pressure. For seniors who have Medicare, these plans provide comprehensive health-care benefits through a health maintenance organization at a very low employer cost. First approved and implemented in 1985, Medicare risk plans have grown steadily from 950,000 members in 1987 to more than 1.6 million people currently enrolled in 96 plans nationwide.

Under Medicare risk, the federal government, through the Health Care Financing Administration, estimates its cost to cover an average Medicare beneficiary in a geographic area. The numbers are based on the cost for beneficiaries who are not in an HMO, also known as fee-for-service cost. The government then contracts with an HMO that has met certain eligibility requirements, agreeing to pay it 95 percent of the estimated fee-for-service amount for each enrollee. Each enrollee assigns his or her Medicare benefits to the HMO.

In return, the HMO agrees to provide comprehensive health care benefits to the Medicare recipient under an annually renewable contract. These benefits, which surpass traditional Medicare coverage, do not require deductibles, coinsurance payments or time-consuming paperwork. A typical plan includes hospitalization (100 percent coverage for an unlimited number of days); physician visits ($5 to $10 copayment charge); annual physical exams; hearing and vision exams ($5 to $10 copayment charge); and prescription drug benefits.

For the employer, cost is the biggest draw of a Medicare-risk HMO. Because the government is already paying the HMO for basic services, you can offer a Medicare-risk plan for as little as $30 to $45 per month per person. This lets you customize the plan by offering benefit upgrades or enhancements to meet retirees' special needs or to match the company's regular indemnity plan. You could adopt lower or no copayments; additional benefits, such as hearing aids, chiropractic care, or dental care; and expanded prescription-drug coverage.

Medicare-risk plans also reduce liability under FAS 106. You can decrease the amount of money you need to set aside for Financial Accounting Standards Board compliance by more than 50 percent, depending on the coverage and the employee contribution you select. In fact, a 1992 Ernst & Young study, which compares a company's FAS 106 liability under a Medicare-risk HMO with that of a typical indemnity plan, TABULAR DATA OMITTED clearly demonstrates the potential savings, as shown in the box below.

WHAT WILL RETIREES THINK?

A Medicare-risk plan can be a good deal for the retiree. Although the government pays for Medicare Part A, a retiree faces additional fees under conventional Medicare coverage, including Medicare Part B, currently $36.60 per month; a $652 deductible fee for the first 60 days of hospitalization; a $100 annual deductible for medical care; and a 20-percent coinsurance charge on all covered costs. In addition, to safeguard against conditions and charges that Medicare doesn't cover, retirees often purchase supplemental policies, commonly known as Medigap, to the tune of $50 to $300 per month.

Not all employers, however, are sold on Medicare-risk HMOs for their retirees. In most cases, the number one drawback is availability. While Medicare-risk plans are expanding at a fast clip -- and will probably figure significantly in health care reform -- they simply are not yet operating in many regions.

Also, many employers are reluctant to encourage their retirees to join a Medicare-risk HMO. They sense their retirees' apprehension about HMOs, which stems from unfamiliarity and fear of change. Once retirees get better acquainted with HMOs, they often change their minds. In fact, a 1991 Gallup Poll survey reports that more seniors are "very or somewhat satisfied" with their managed-care plans than with traditional indemnity plans.

To help you determine whether a Medicare-risk HMO is right for your retirees, here are some guidelines:

* The HMO should be federally qualified and financially stable. The Health Maintenance Organization Act of 1973 and subsequent amendments established federal qualifications for HMOs. Has it been accredited by the National Committee for Quality Assurance, an independent, nonprofit organization that evaluates the quality of HMO care?

* For how long has the HMO provided Medicare-risk programs? Ask how many members are enrolled and whether the providers and administrators are experts in understanding and meeting seniors' needs.

* Find out how large the plan's provider network is and which physicians and hospitals belong to it. The physician roster should encompass all specialties, and all physicians should be credentialed and board-certified. Are the provider hospitals well-established? Consider the geographic area the Medicare-risk plan covers and whether it will be convenient for most of your retirees.

* How easily can you and your retirees participate? What administrative work is required? Does the plan offer benefit flexibility and comprehensive administrative assistance? Check the disenrollment rate and member satisfaction surveys, which are often revealing.

KNOWLEDGE IS POWER

To save money with Medicare-risk HMOs, you must be committed to educating your retirees about all aspects of the program and to working actively to enroll them. You should work closely with the HMO to inform potential members about the advantages of the plan. Be particularly sensitive to the requirements and adjustments that may be necessary for retirees whose past experience has been with indemnity plans rather than managed care. Video presentations, discussions and printed materials have all been used successfully to educate retirees.

Also, financial incentives often increase retiree enrollment. Many companies pay 100 percent of the least expensive plan, which is usually a Medicare-risk HMO, requiring the retiree to pay the difference between that and a more costly option. This method steers retirees to the most cost-effective plan.

The selection of the Medicare-risk plan plays a large part in overcoming retiree doubts. A Medicare-risk plan with a large network of physician and hospital providers helps increase membership because it offers retirees the choice and convenience they want. In fact, they may not even have to change doctors. Once the plan is in place, you should continue responding to members' needs by ensuring immediate and helpful customer assistance, prompt answers to inquiries, periodic telephone follow-up calls, formal satisfaction surveys and member education.

If you like what you're reading about these plans, the next question is where to find one. The states with the highest enrollment (15 percent or more) are Arizona, California, Colorado, Minnesota, Nevada, New Mexico and Oregon. States with 5 percent to 10 percent of the total Medicare population in risk plans are Alabama, Florida, Kentucky, Massachusetts, New York, Washington and Wisconsin. California or Florida, which both have large numbers of Medicare beneficiaries, will probably grow the fastest.

Medicare-risk HMOs are not a panacea for the retiree benefits crisis, but as they become increasingly widespread, employers and retirees may find they're just what the doctor ordered.

LOOK BEFORE YOU LEAP 

Although Medicare-risk HMOs can be a good benefits strategy, they won't solve all your retiree benefits problems, so proceed with caution. Just ask Janine Devera-Amico, senior benefit analyst at Florida Power & Light Co. in Juno Beach, Florida. She says the company intends to eventually adopt a Medicare-risk HMO as part of its gradual shift to managed care, provided it can iron out the wrinkles in the plan.

Until 1991, FP&L's 15,000 employees had a traditional indemnity plan. Then astronomic health-care costs forced the company to reexamine its benefits. After adopting a flexible benefits plan for active employees in 1992, the company installed a point-of-service plan for active and retired employees last March, which had a 73-percent enrollment rate, she reports.

FP&L hopes to implement Medicare-risk HMOs in 1995. Why the delay? "We needed to keep things simple this year -- to offer the same plan to everyone," Devera-Amico explains. Before it makes any more health-care moves, the company wants all of its employees and especially its retirees to adjust to the idea of managed care, she says.

Once retirees become more comfortable with HMO concepts and processes, the company will begin educating them about the Medicare-risk plan. Fortunately, FP&L already has well-established communications channels. Retirees are organized into nine chapters, each with its own lead coordinator. And each of the company's five regional offices has a human resources representative whose job, among other things, is to work with retirees to answer benefits questions.

Although cost savings are an advantage of Medicare-risk HMOs, it's not a major consideration for FP&L. "The over-65 people don't cost much, because Medicare is the primary coverage for them," Devera-Amico explains. And the company had already reduced its FAS 106 liability through other means. The real problem was public relations. Retirees believed the company was reneging on their benefits. "We've got a lot of retirees who devoted 25 or 30 years of their lives to this company. Their attitude is 'I did for you; now you take care of me,'" she says. So the company's interest in a Medicare-risk HMO stemmed from a need to demonstrate its commitment to its retirees rather than to save money, she says.

Nevertheless, she concedes the biggest problem will be overcoming retirees' dislike of managed care. "Retirees are a skeptical group," Devera-Amico observes. They often believe the quality of HMOs is low and balk at being limited to a set pool of physicians. To ease the transition, the company will search hard for a good Medicare-risk HMO plan. "It would have to be a quality program with a lot of doctors and locations," she stipulates.

If retirees still aren't convinced, they will be able to choose one of several other plans the company will offer, Devera-Amico notes. But this could open yet another can of worms for FP&L. Most healthy retirees probably would opt for the cheaper Medicare-risk plan, while the retirees with the biggest medical bills would stick to traditional indemnity.

Despite the risk of adverse selection, some element of choice is necessary, because Medicare-risk HMOs are unavailable in North Carolina and Georgia, two of the company's major locations. And although the plans are much more common in Florida than in other states, many retirees live in the northern, more rural parts of the state, where HMOs haven't yet penetrated.

The plans have some other drawbacks. Under federal law, patients enrolled in a Medicare-risk HMO must be permitted to opt in and out of the plan. But some retirees travel for months at a time or stay with family in other states. According to Devera-Amico, FP&L is concerned that allowing such individuals to move in and out of the plan several times a year would create a huge administrative burden.

Also, retirees may have spouses who are under age 65 and therefore ineligible for Medicare benefits. Devera-Amico says the company may solve that problem by permitting the spouse to enroll in the HMO as a regular patient. The individual would have the same benefits as the retiree, and the HMO would bill FP&L for the spousal coverage.

Although Florida Power & Light has yet to resolve all of its concerns, it's moving ahead with its plans. Devera-Amico believes the debate on national health-care reform will help broaden retiree awareness and defuse any lingering resistance. "People hear about it all the time," she says. "Eventually, they'll begin to accept it."

Mr. Barr is CFO and senior vice president of finance and strategic planning at PacifiCare of California in Cypress, California.