Commentary: Defined-contribution model would improve care

Modernizing Medicare and Medicaid should be the highest domestic policy priority. These programs have an obligation to provide high-quality care to America's seniors and low-income beneficiaries, and they must be made financially sustainable.

The first priority is to improve the quality of care. It is now widely recognized that fee-for-service medicine promotes the inappropriate use of services. Both programs should be moved away from siloed payments to providers and toward coordinated care that incorporates prevention and rewards quality outcomes.

For Medicare, that means building on the success of the Medicare Advantage program and improving its associated star-rating program for health plans. In Medicaid, it means greater reliance on managed care in the near term, and, ultimately, a move to portable private coverage enabling beneficiaries to keep the same plan and provider network as their circumstances change.

Ultimately, Medicare must be configured to take advantage of private market innovation, delivering a mix of medical and long-term-care services in the most cost-effective setting. By moving long-term care into Medicare, states will be relieved of the budgetary burden of nursing home coverage. Then Medicare can integrate the delivery of these services.

The second priority is to make the two programs financially sustainable. Medicare and Medicaid spending already accounts for over a quarter of total federal spending, and that will reach 30% in the next 10 years.

In both programs, increasing amounts of general revenue must be used to cover these commitments. Taking advantage of market-driven efficiencies can control excess spending and, ultimately, permit these entitlement programs to be transformed into defined-contribution models.

The scale of Medicare and Medicaid make them the most powerful force for U.S. delivery-system reform. Unlike top-down regulatory models such as the Affordable Care Act, the use of bidding, decentralized coordinated-care plans and other competitive features permit success and failure on small scales to identify the most advantageous routes to the future.

Douglas Holtz-Eakin is president of the American Action Forum. He previously served as director of the Congressional Budget Office and chief economist of the President's Council of Economic Advisers under George W. Bush.