America is at an economic crossroads. Our national debt is rising rapidly and nearing a crisis point. While there have been many contributing factors, the rapid growth in federal healthcare spending is one of the largest drivers of the U.S. debt.

Spending for Medicare and Medicaid alone is projected to increase from 21% of non-interest federal spending in 2010 to 31% by 2020. The American economy cannot sustain a healthcare system where costs are growing faster than the economy.

Advancing technology is one component of rising healthcare costs. Unfortunately, there are many cases where new technologies are incorporated into standard practice without evidence that they improve outcomes. The fee-for-service payment system provides strong incentives for providers to increase the volume of tests and procedures to increase revenue, without an increase in the quality of care.

Another key factor is the retirement of the baby boomer generation. The influx of beneficiaries translates into rapidly growing expenditures for Medicare and the federal-state Medicaid program (which provides long-term care for aging Americans).

Rivlin

The Bipartisan Policy Center's Debt Reduction Task Force, which we co-chaired, developed a plan called Restoring America's Future. The major demand-side strategy in our plan is to cap and phase out the tax exclusion of employer-sponsored health insurance benefits beginning in 2018. The current tax exclusion has promoted richer benefits and less cost sharing, with few incentives to deliver care in an efficient manner. Our proposal will result in more cost-conscious choices by employers and employees, leading to more efficient provider practices.

Our plan also would institute major reforms in Medicare. Medicare is on a currently unsustainable path with the Hospital Insurance Trust Fund heading toward insolvency in the next decade, and Medicare Parts B and D (office visits and prescriptions drugs) heavily financed through government borrowing. Our plan presents moderate adjustments to preserve Medicare's coverage of seniors and disabled Americans.

In the short term, our plan would:

Gradually increase (over five years) Medicare Part B premiums from 25% to 35% of program costs in order to improve sustainability.

Use Medicare's buying power to increase rebates from pharmaceutical companies.

Modernize Medicare's benefits package by requiring cost-sharing for home-health and laboratory services, while at the same time reducing the high deductible for hospitalizations and providing—for the first time—catastrophic protection for seniors.

Bundle Medicare's payments for post-acute care to improve coordination and reduce costs.

Our plan would make Medicare sustainable over the long-term by transitioning to a “premium support” model that will restrain growth in support per beneficiary to no more than one percentage point above the growth of the economy. Beginning in 2018, beneficiaries would have a choice of remaining in fee-for-service Medicare or using their Medicare subsidy to enroll in a private plan.

Private plans would build on the current Medicare Advantage program, and choices would be enhanced through a Medicare Exchange, through which plans would compete to offer better quality coverage at lower costs. If the cost of traditional Medicare grows faster than GDP-plus-one percentage point, enrollees would pay an additional premium, or shift to lower-cost plans available on the exchange. Budget savings would result from capping the total subsidy per beneficiary.

Medicaid, similar to Medicare, is also on an unsustainable path because of healthcare costs growing much faster than the economy. In order to maintain Medicaid as an entitlement for low-income Americans, while reducing its growth rate to sustainable levels, our plan proposes both short- and long-term reforms.

In the short term, we would apply managed-care principles to the provision of Medicaid benefits to aged Supplemental Security Income beneficiaries.

In the long term, we aim to reduce the amount by which Medicaid is growing faster than the economy (that is, reduce annual per-beneficiary cost growth by 1%). In order to accomplish this, we propose a federal-state negotiation to de-link the shared financing arrangement (i.e. matching payments) between the federal and state governments, which has led to “gaming” of the system and rising healthcare costs. The federal-state negotiation would allocate program responsibilities between the federal government and the states, so each will fully finance and administer its selected components of the Medicaid program. This will restore incentives for cost containment and slow future program growth.

This bipartisan package of policies will “bend the curve,” significantly reducing the rate at which healthcare costs are rising. We must not shy away from the continued fiscal threat that healthcare poses and take the next step forward toward a sustainable system. We must start phasing these changes in soon, before more drastic reforms become necessary.

Pete Domenici, a Republican from New Mexico, was chairman of the Senate Budget Committee. He co-chairs the Bipartisan Policy Center's Debt Reduction Task Force.

Alice Rivlin was the founding director of the Congressional Budget Office and a director of the Office of Management and Budget during the Clinton administration. She co-chairs the Bipartisan Policy Center's Debt Reduction Task Force.