Even if your employer offers health-care coverage to retired employees, you still need Medicare.

Think you can ignore Medicare reform just because you spent the last 30 years toiling away for a Fortune 500 company that promises generous retiree health benefits? Think again. Once you hit 65, you too will go on Medicare. The exceptions to this rule are quite rare.

Here's how it works. Unless you or your spouse is employed full-time when you reach age 65, Medicare Part A and Part B will become your primary health-insurance plans. (For more on Medicare basics, click here.) You'll still keep your employer's plan, but it's now considered your secondary policy and acts as supplemental insurance for the Original Medicare Plan (also known as "traditional Medicare"). So every time you go to the doctor, Medicare picks up its portion of the tab. Any amount not covered by Medicare is then submitted to your employer's plan.

This might sound like a hassle, but it's still a pretty good deal. After all, traditional Medicare doesn't cover all of one's health-related expenses, so without your employer's heavily subsidized health benefits, you'd be stuck paying the out-of-pocket costs yourself, or would have to purchase some form of supplemental insurance. (For more on supplemental insurance, read our story.) Such plans are typically more expensive than employer-sponsored health insurance and they also tend to cover fewer services, says Tricia Neuman, a Medicare expert with the Kaiser Family Foundation, a nonprofit focused on health-care policy. So if you have a group plan, hold on to it.

Playing by the Rules
While you might be tempted, don't try to outsmart your former employer by failing to sign up for Medicare coverage. With the cost of health care soaring, corporations are tracking birthdays more closely than former debutantes search for new wrinkles. So even if you neglect to sign up for Medicare on your 65th birthday, your employer's insurance company will treat you as if you had.

Here's what would happen: After you turn 65, your group plan assumes you signed up for Medicare. Since Medicare payments are standardized, the group plan calculates how much Medicare would have paid for a particular service and then covers the remaining portion of the bill. In many cases the group plan's payment is minimal. You'd then be on the hook to pay your doctor the amount that Medicare would have covered if you had signed up for the program. So unless you like wasting money, don't mess this up.

Another costly error: dumping your employer's plan in favor of a cheaper HMO. The cheaper Medicare Advantage plans may sound attractive, but they typically offer less coverage than an employer plan, says Irene Card, a Medicare expert and president of MIC Insurance Services. At those HMO bargain-basement prices, you can also kiss any drug coverage goodbye. And once you give up your group insurance, it's too late to change your mind, warns Card. The group plan no longer has any obligation to offer you coverage. Employer plans are also expected to be more generous than the new Medicare Advantage plans and drug benefits offered in 2006.

Sick Employers
Unfortunately, rising health-care costs are forcing companies to cut or scale back their retiree benefits. Eight percent of large employers say they eliminated subsidized health benefits for future retirees, according to a recent survey by the Kaiser Family Foundation and Hewitt Associates. Some 85% of companies in that same survey said they expect to increase retiree premiums, and 51% plan to raise prescription-drug co-payments or co-insurance over the next three years.

"As health-care costs are rising, employers have some tough decisions to make," says Ron Pollack, executive director for nonprofit Families USA. "When companies are paring back cost, the retirees are the ones who bare the brunt of those changes."

Hopefully, Medicare reform and the $89 billion the government plans to give employers will help U.S. businesses keep their retiree benefits. But should you lose your employer health-care benefits, you won't be completely left out in the cold. For starters, you'll still have the traditional Medicare coverage in force. The government will also grant you an open-enrollment period to apply for other supplemental insurance policies, although you won't have as many options as someone who's just turning 65.

But you had better act quickly. According to the Centers for Medicare and Medicaid Services, you'll have just 63 days from the time your employer coverage ends to apply for a Medigap policy. If you find yourself in this situation, you can contact your local Social Security office or your local State Health Insurance Counceling and Assistance Program for advice.