July 26 (Bloomberg) -- The agency overseeing Medicare proposed rules for paying employers such as General Motors Corp. and UAL Corp. as much as $940 per retiree for continuing their drug benefits after the U.S. starts coverage for medicines.

Lawmakers added the subsidies to last year's law creating the retiree drug benefit to discourage employers from dropping their plans in 2006 when the Medicare expansion takes effect. Critics including labor unions and retirees said some employers may claim the subsidy and still cut support for pensioners.

``We intend to give employers and unions a set of subsidized options to help them continue to provide high-quality drug coverage,'' Mark McClellan, administrator of Medicare, said in a statement. ``The result will be a significant increase in the total support for retiree benefits.''

Companies can choose from four options to qualify for the yearly payments, McClellan said at a news conference in Washington. The government estimated payments may total $89 billion over 10 years while the Medicare drug benefit may cost $400 billion.

Before the proposal was published today, No. 1 automaker General Motors said the Medicare drug law may reduce its total future retiree health costs by $4.1 billion. As of February, the automaker had 333,190 retirees and provided coverage for 455,382 pensioners and surviving spouses. The Detroit-based company now spends $5 billion a year in the U.S. on health care.

DuPont, UAL

DuPont Co., the Wilmington, Delaware-based No. 2 U.S. chemical maker, said in regulatory filings the subsidy would be worth $60 million this year and $525 million over 15 years. UAL, the Elk Grove Township, Illinois-based parent of United Airlines, said it would save $280 million.

Under the regulations outlined today, annual subsidies may range from $611 to $940 a pensioner for companies that spend as much as $5,000 a retiree on drugs. Employers can also apply to have their program qualify as a Medicare plan, get a subsidy for retiree-only health plans or collect for providing supplemental coverage in addition to Medicare benefits.

Democrats say the subsidies may reward employers who skimp on retiree coverage, which has been declining for two decades. During debate on the Medicare bill last year, the Congressional Budget Office said 2.7 million retirees who get employer drug insurance may lose it under the new law.

The government said the rules are meant to avoid giving companies a windfall for providing less generous coverage than Medicare does. Still, retirees said they are worried.

Retiree Cutbacks

Lou de Bottari, a Nevada man who runs a group called Fairness for Already Insured Retirees, said the government shouldn't disturb coverage for current retirees.

``There are people my age who can no longer go out and buy insurance,'' said Bottari, 77, who worked for a company that is now part of Boeing Co. ``We took less money in pay with the understanding that health benefits were good. We retired with that in mind.''

The 3 million-member Alliance for Retired Americans wants final regulations to be written tightly so employers have no incentive to cut benefits, said Richard Fiesta, the Washington- based group's director of government and political affairs.

U.S. employers have been cutting back on retiree coverage for more than a decade as medical costs soared. About half as many companies offer benefits now as in 1988, according to surveys by the Henry J. Kaiser Family Foundation, based in Menlo Park, California.

AFL-CIO Comment

One in five companies may eliminate benefits for new retirees in the next three years, Kaiser said in January, and three-fourths of those surveyed made retirees pay more for health care in the last year.

``One of the biggest falsehoods of the Medicare benefit is that you will get to choose,'' said Joanne Volk, a spokeswoman for the AFL-CIO in Washington. ``If the employers choose to dump coverage, it's not the retirees' choice at all.''

In a letter last month, 36 Democratic senators including presidential candidate John Kerry, New York's Hillary Clinton and West Virginia Senator Jay Rockefeller urged the government not to allow employers to use a ``loophole'' in the law to claim a subsidy as they pare benefits or make retirees pay more.

``This subsidy differential creates a strong incentive for employers to drop their existing retiree drug coverage and enroll their retirees in less comprehensive Medicare plans,'' the senators said in the June 18 letter to Secretary of Health and Human Services Tommy Thompson. ``It is imperative that you provide clear guidance that employers who cost-shift to their retirees should not be allowed to receive the full subsidy.''

AMR, Xcel, Delphi

The Democrats also said the new drug benefit penalizes retirees because some contributions by employers won't count toward an out-of-pocket threshold that makes beneficiaries eligible for broader catastrophic coverage.

Supporters of the subsidy said it will stabilize retiree coverage by employers.

``It's really an attempt in the law to make sure that retirees get coverage one way or the other,'' said Paul Dennett, vice president for health policy at the American Benefits Council, which represents companies such as BellSouth Corp., Campbell Soup Co. and Microsoft Corp. ``Right now, 100 percent of the total has to be shouldered by the employer or the retiree.''

Other companies whose regulatory filings said they would benefit from the Medicare subsidy include AMR Corp.'s American Airlines Inc., the biggest U.S. carrier, which said in February the drug law would save it $415 million; Xcel Energy Inc., which owns utilities in Minneapolis and Denver, which said it expects to save $64.6 million; and Delphi Corp., the world's largest auto- parts maker, which estimated total savings of more than $1.5 billion.

Procter & Gamble Co., the biggest U.S. household products maker, No. 3 U.S. local telephone company BellSouth Corp. and German automaker DaimlerChrysler AG said they would benefit and would report the impact of the subsidy later this year.

The government will take comment on the rules through Oct. 4 and plans to issue final regulations in early 2005.

To contact the reporters on this story: Kristen Hallam in Washington at khallam@bloomberg.net. Keith Snider in Washington at ksnider1@bloomberg.net.

Last Updated: July 26, 2004 16:24 EDT