(FORTUNE Magazine) – When Ed Baltram retired in 2001 after more than 30 years as a manager at Lucent Technologies, paying for health care was the least of his worries. But then Lucent announced in September that it was slashing retiree health coverage, a move that means his monthly premiums will soar from $140 to $515. For Baltram, 58, it brought home a painful reality: "Lucent could eliminate all my health-care benefits," he says.

In time Lucent, along with the rest of corporate America, probably will. With health costs rising at their fastest rate in a decade, companies are taking an ax to retiree medical coverage. That's because seniors, who tend to have chronic health problems and are big consumers of prescription drugs, are simply more costly to cover than active workers.

The statistics are bleak. The percentage of large firms covering retired employees fell to 38% this year, from 66% in 1988, according to the Kaiser Family Foundation, a nonprofit research group. And large employers will pay just 10% of retirees' medical costs by 2031, according to Watson Wyatt, a consultant. That's down from more than 50% of total retiree medical expenses they pay for today.

Ironically the picture isn't likely to improve with congressional efforts to add a prescription-drug benefit to Medicare. The Congressional Budget Office estimates that as many as one-third of the 12 million Medicare recipients with retiree health insurance could lose their drug coverage under bills passed in June by the House and the Senate. That's because employers--who aren't required to cover prescription drugs for retirees--would have a clear disincentive to supplement the new drug benefit, leaving recipients with inferior coverage from the government, say health experts.

The bottom line? The Employee Benefit Research Institute (EBRI), a nonprofit research organization, figures that a 65-year-old who retires today without employment-based insurance and lives to age 80 can expect to pay well over $100,000 for health care. If that figure sounds too high (or too low), you can estimate your own costs using EBRI's retirement health savings calculator at www.choosetosave.org. Once you've run your numbers, use the following tips to start saving now. Your golden years should be about much more than just paying for the doctor.

Use Uncle Sam

Most large employers offer flexible-spending accounts, which let you contribute a specific amount from your paycheck into an account to pay for out-of-pocket medical and dental expenses. Because the money in a flex account is tax-exempt, the account can cut your medical costs by a third. While the majority of workers don't take advantage of those benefits, recent IRS rulings make them more attractive than ever. Most significantly, the IRS announced in September that money in a flex account can be used to buy nonprescription drugs. The ruling isn't mandatory, so check whether your company has added them to its list of eligible expenses before hoarding aspirin. Another caveat: Any money left in your account at the end of the year goes back to your employer, so plan wisely. Use the cost calculator at www.wageworks.com to help figure out how much to set aside.

Another way to save is to maximize your medical deductions. The IRS lets you deduct health costs as long as they exceed 7.5% of your adjusted gross income. That percentage may seem steep. But when you take into account all the expenses you're allowed to deduct, the bar could be within reach. Weight-loss programs, laser eye surgery, and dental X-rays are all deductible medical expenses. Ditto smoking-cessation programs and even travel costs for medical treatments. For a complete list of what the IRS allows you to count toward your deductions, see Publication 502 at www.irs.gov.

Cut drug costs

Prescription drugs make up the single largest out-of-pocket expense for consumers, so you'll need to attack those costs in several ways. First, ask your doctor or pharmacist for a generic equivalent--it could save you up to 75% off the brand-name price. Surprisingly, many physicians still fail to recommend less expensive alternatives (either because it doesn't occur to them or because they're being wined and dined by pharma reps). When a generic isn't available, ask if there's an older yet comparable brand-name drug that's less expensive. "You may not need the latest whiz-bang wonder drug," says Charles Inlander, president of the People's Medical Society, a patient advocacy group. "Studies show that most new drugs are only a small improvement over the previous generation." To find substitutes to discuss with your doctor, go to www.rxaminer.com.

If you take maintenance medications for a chronic condition such as high blood pressure or diabetes, use your drug plan's mail service. Pharmacy-benefits managers buy those medications in bulk and pass along the savings to you. Purchasing a 90-day supply of a brand-name drug by mail will typically save you $15 to $30, compared with three 30-day retail prescriptions.

Finally, while buying drugs from other countries such as Canada can save you lots of money, the practice is generally frowned upon by consumer advocates. Most imported drugs have not been approved by the FDA, and spot checks by government officials have revealed widespread problems in quality.

Consider long-term-care insurance

If you're over 50 and have between $100,000 and $2 million in assets (including your home), long-term-care insurance could be for you. The policies typically pay for nursing homes, assisted-living facilities, or home health care after you can no longer take care of yourself. While the wealthy may choose to pay for long-term care themselves, and the poor have Medicaid, most middle-class families should give the policies serious consideration, particularly if Alzheimer's or other serious diseases run in your family. After all, the tab for a long-term-care facility can easily run to more than $100,000 a year.

The premiums are far lower if you buy at a relatively young age (50s or 60s), since younger people aren't likely to need long-term care anytime soon. The longer you wait, the higher your premiums and greater the chance that health problems could disqualify you from coverage. Just make sure any policy you purchase adjusts for inflation, says John Rother, policy director at AARP. Otherwise the payout you receive in ten or 20 years won't be worth very much. Also, get a policy that covers you regardless of where you receive the care, whether it's at home from an aide or at a long-term-care facility.

For price quotes, visit www.quotesmith.com and www.ltcq.net. And look into group plans. AARP offers one to members over age 50 at aarphealthcare.com. And a growing number of employers are providing them to workers. Qualifying can be easier, and the premiums may be cheaper than what you'd get on your own.