More than 400,000 medicare beneficiaries received a "Dear John" letter last month, but it wasn't from their sweethearts. It was from their HMOs. Thanks to increasing medical costs and decreasing federal reimbursements, taking care of patients over 65 is not so profitable a business as it was in the early 1990s. So as of Dec. 31, more than 90 HMOs across the U.S.--including Aetna, Humana and Oxford--will stop serving Medicare customers in certain regions around the country.

What you do next, if you're caught in this scramble, can save you thousands of dollars. And even if you're not getting the boot this time around, there are lessons to be learned.

If you are being dropped from your Medicare HMO, you have basically two options: you can enroll in another HMO, or you can opt for "traditional" Medicare coverage, in which you choose your doctor and pay certain deductibles for hospitalization and a 20% co-payment on other services. By law, your soon-to-be-ex HMO must inform you of alternative HMOs. But it's still up to you to call those HMOs and see whether they offer a plan that's right for you--say, one that covers prescription drugs (as traditional Medicare does not). Don't wait until the last minute to do this because the best HMOs are likely to fill up fast.

If you can't find a replacement HMO that fits your needs, you're still covered under traditional Medicare. But there are a few wrinkles to consider.

First, stay enrolled with your current HMO until Dec. 31. Why? That's the only way to guarantee you will have access to four types of supplemental, or "Medigap," insurance (Plans A, B, C and F) that helps pay for some expenses Medicare doesn't cover. (More than 60% of Medicare patients have some sort of supplemental insurance.) If you leave your old HMO before Dec. 31, however, your withdrawal is considered voluntary and will jeopardize your ability to get Medigap insurance.

Second, do your Medigap paperwork now, so that your new policy will take effect Jan. 1. Otherwise you risk having a break in your coverage.

Third, understand that if you entered a Medicare HMO for the first time in the past 12 months, and your old Medigap insurer still offers the policy that you carried, the insurer is required to take you back.

Which HMO or Medigap policy should you choose? The most comprehensive ranking of Medicare HMOs and Medigap policies I've seen was in the September issue of Consumer Reports (a copy is available for $3 from Consumers Union Reprints, 101 Truman Avenue, Yonkers, N.Y. 10703-1057). Or for $49, you can get a customized report from Weiss Ratings (800-289-9222) on the Medigap and HMO options in your area. The reports also include an evaluation of the plans' financial health and therefore their ability to make good on their promises.

Beware of "attained age" policies, which automatically increase in price as you get older. So-called community-rated policies may be more expensive at the outset, but they usually provide better value.

Finally, if you need more help, contact your state insurance-advice group (most Medicare programs are administered under state, not federal, laws). It is listed at the back of the Medicare handbook (to get yours, call 800-638-6833).

Take two aspirin...
...and follow this advice

--Start shopping now if you plan to switch HMOs

--Stay with your old HMO until Dec. 31 if you want traditional Medicare

--Check Consumers Union for ratings of HMOs and Medigap insurance

Cover Date: December 7, 1998

• If you can't beat 'em...
• The woman in Starr's trap
• Should there be static on a $17 billion hot line?
• Medicare woes

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