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Hundreds of thousands of retired workers who used to have generous health benefits from large companies are digging deeper into their own pockets this year. Surging inflation in medical costs is draining hundreds of millions of dollars from corporate profits, and many large employers are responding by cutting back on health care benefits for retirees or requiring them to pay more for coverage.

The reductions in health benefits stem mainly from sudden sharp increases in employer spending on prescription drugs last year. Drugs account for 40 to 60 percent of employers' overall spending on Medicare-age retirees' health care. At the same time, far-reaching cutbacks by Medicare health maintenance organizations — which used to provide generous benefits, including drug coverage — are forcing employers to pay for retirees' drug coverage, since traditional Medicare does not cover the cost of most drugs.

As a result, current health care costs for retirees are soaring 18 percent a year, on average, according to the United States Chamber of Commerce. And large companies' liabilities for future health care costs for retirees are rising as much as 34 percent.

Margaret Cleary, 80, who retired from the Morgan Guaranty Trust Company unit of J. P. Morgan & Company in 1986, is well aware of the effect of rising drug costs on retiree benefits. The monthly deduction for her Medicare H.M.O. from her $550 pension check jumped to $128.74 from $50 this year, she said, more than she could afford.

She dropped the H.M.O. and chose a less expensive plan even though it had no coverage for the prescription drugs she said she needed to control diabetes and problems with her blood pressure and cholesterol levels. Medicare recipients like Mrs. Cleary can select traditional Medicare coverage or join a Medicare H.M.O, where they are available.

A spokesman for J. P. Morgan Chase said a retiree in her position could have selected a new company-subsidized policy that would cover only drugs, instead of the more comprehensive coverage she had. But Ms. Cleary said that when she renewed her health plan last December, she did not understand that her H.M.O. would raise its rates. "I was paying $50 a month," she said. "I didn't think they were going to make it $129."

The soaring costs for employers are reflected in enormous charges recorded recently by large companies in the annual spring crop of reports to shareholders. The Ford Motor Company, for example, said in its latest annual report that it subtracted $1.92 billion from last year's pretax income to reflect expected payments for 150,000 retirees in the United States, mostly for medical costs. That was an increase of 24 percent, or $370 million, from $1.55 billion the year before.

General Electric, General Motors, Verizon, Boeing and other companies that long have provided extremely generous health plans for tens of thousands of retirees are also especially vulnerable, as their recent annual reports make clear.

Many large companies are increasing their forecasts of future health care liabilities because their current costs are rising more rapidly than they expected, according to Richard Ostuw, a health care expert at the benefits consulting firm Towers Perrin. And since accounting rules require companies to reflect their future health care liabilities as a reduction in current earnings, just as Ford has, companies are trying to limit the damage to profits by demanding larger co-payments, raising deductibles and limiting coverage for retirees.

The prospects for retiree health benefits are even dimmer for younger workers at medium-size companies, with several hundred to a few thousand employees. Many of these companies have stopped promising retiree health care coverage to new hires. Small companies rarely pay for any health care at all for retirees.

Several health care experts say costs for retirees will keep rising, unless the government provides tax relief for the employers or a taxpayer-financed drug benefit.

Lorraine Sablan, 70, a retired aerospace worker at Allegheny Teledyne in San Diego, said the premiums subtracted from her $669 a month pension rose 80 percent on Jan. 1, to $90.16. The company shut the plant where she worked in 1994.

"If it keeps going up, we won't have a pension," she said.

Dan Greenfield of Allegheny Technologies, the parent company, which has 20,000 retirees but only 10,700 active workers, said, even though his company was relatively small, "health costs are a big number, and even in a low inflationary environment, it continues to rise."

Trying to rein in health care costs for its retired workers, Ford recently informed the 50,000 retirees not covered by union contracts that beginning next month they will pay premiums of $5 to $150 a month, depending on the size of family covered and the retiree's eligibility for Medicare. If they do not want to pay a premium, they can still choose a plan with a high deductible.

Ford also estimated that its commitments were $25.43 billion on Dec. 31 for the full extent of its future costs for retiree health care and other nonpension benefits, including life insurance.

Altogether, companies reported total liability for future retiree health care costs of $400 billion, said Laura Champagne, a senior consultant on benefits for the United Automobile Workers union. For some companies, she said, their future liability for retiree health care was greater than their net worth, before they began cutting back on benefits.

Almost two-thirds of companies with 5,000 or more employees still provide some health benefits for retirees, according to the latest Kaiser Foundation-Commonwealth Fund study. But only 3 percent of small companies with fewer than 200 workers do so.

Retirees now pay all or part of the costs in 8 out of 10 company health plans, according to a national survey of costs in 2001 by Mercer Human Resource Consulting. In the mid-1980's, about half of all companies covered all their retirees' premiums.

"Companies are concerned about how their balance sheets are going to look after two down quarters last year and the events of Sept. 11 and the big increases we've been seeing in health care costs," said Kate Sullivan, a health policy expert at the United States Chamber of Commerce. "Employers are looking at any way they can to shave off some of those costs," she said.

James Foreman, a health care expert at Towers Perrin, said companies "tend to be somewhat optimistic" when they put together their estimates of the future cost of benefits. "Then they are under pressure to manage the plans to produce the savings," often by limiting benefits, he said.

Mr. Foreman said 4 in 10 companies that pay for retirees' health needs have said they will not go above a ceiling, or cap, in payments. These limits have not affected coverage at many companies in the past, but this year, many are reaching their limits for the first time.

Alan Sefcik, a vice president for human resources at AT&T, said that management retirees who were hired after March 1, 1990, hit the company's spending limits this year. The caps were $3,950 for those over 65 with families and $1,725 for individuals in that age bracket. Retirees under age 65 had a limit of $7,550 for families and $3,700 for individuals. As a result, management retirees now pay monthly premiums of $21 for health insurance for families and $14 for individuals.

The company's union retirees have a different deal. In recent negotiations, AT&T, which is struggling with financial losses, and the Communications Workers of America and the International Brotherhood of Electrical Workers tentatively agreed to open new health care savings accounts for retired union members to help them if their costs reach their cap during the next 18 months.

Some company officials do not hide their frustration with rising health care costs. "Our high cost per retiree is really driven by the fact that the health care industry does not have a focus on quality or cost," said Tom Croskey, an executive director of labor relations at General Motors. G.M. reported $3.72 billion as its net expense for retiree health and life insurance obligations for 2001, a $600 million increase from 2000.

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