Medicare and Medicaid are 40-year-old systems created in 1965. The world has changed a lot in those 40 years, and it is time to modernize and improve both programs. America needs a 21st century intelligent health system. Medicare and Medicaid should be part of that more effective system.

In essence, Medicare and Medicaid must evolve into individual-centered health systems that emphasize healthy living, early detection and the kind of patient self-knowledge that will be a radical departure from current best practices. The latest health information technology will allow everyone to have a comprehensive, personal electronic health record that updates in real time in a paper-free environment. Patients will emerge the biggest winners.

The more important reason to transform Medicare and Medicaid is that both programs shortchange beneficiaries. They rely on outdated third-party payment and rigidly defined government benefits and prices that are biased in favor of reactive and episodic acute care. Medicare, for example, sets prices for more than 10,000 procedures in 3,000 counties. Such a system would have devastating effects on innovation and customer service if it were applied to supermarkets or car repair shops.

Beneficiaries do not realize that the information they get about their particular ailment tends to be limited to what is paid for by Medicare. It is impossible for a centrally planned bureaucracy to keep up with the most cutting-edge knowledge and treatments, especially when there are no financial incentives for it to do so. Provider withdrawal from both programs continues unabated.

This transformation will take place because good health is not only the right moral goal-it is cheaper. Fully one-quarter of the entire federal budget is being spent on health in 2005. Both Medicare and Medicaid have grown exponentially, beyond original fiscal projections, and their trajectories pose a serious threat to other budgetary priorities and to overall long-term economic growth. Our economic future is bleak if we as a nation do not get a handle on runaway health expenditures.

Transformed Medicare and Medicaid programs will maximize individual choice by providing clear and understandable information about quality, outcomes, best practices and prices. They will create the right incentives for individuals and health plans to achieve optimum health outcomes. This will require not only wise policy decisions by our elected officials but entrepreneurial management by committed public servants.

There are 40 years of accumulated bureaucracy, rules and regulations anchoring the current systems to the past that must be circumvented. The plan of the best chief executive officer is of no value if his or her lieutenants do not follow through on the vision.

Florida is leading the way on Medicaid transformation. In June, Gov. Jeb Bush signed into law a Medicaid reform package that opens the door to greater patient empowerment. The state will soon request a waiver from the federal government that, if approved, will allow Medicaid beneficiaries to be assigned a risk-adjusted amount based on their health status.

Participants, with the help of a counselor, will then select from the range of provider networks in their area. They could also take their money and buy into an employer's plan. This is consistent with CMS Administrator Mark McClellan's vision for a Medicaid program where the ``money follows the person.''

One particularly promising piece of the Florida plan is the enhanced benefits feature. Individuals who meet various metrics or demonstrate healthy lifestyle choices will be able to accrue bonus dollars available to purchase health benefits not covered by their plan.

Smoking-cessation, weight-loss and exercise programs cost very little but promise significant savings. The diabetes-care component of Bridges to Excellence, a coalition to improve healthcare quality, is saving $350 per participant per year by delivering better care. The Asheville Project in North Carolina has cut the annual cost of caring for a person with diabetes by a third while increasing employee productivity.

Medicare must shift to supporting long-term living that emphasizes capabilities instead of disabilities. Look for Medicare Advantage plans to offer heavy incentives for seniors to participate in fitness programs such as Silver Sneakers. Seniors who are active and social are considerably better off physically and emotionally.

Medicare beneficiaries will become more Internet-savvy every year. They will demand quality information about physicians, hospitals, drugs, treatments and devices.

The Medicare.gov Web site has a new section, Hospital Compare, that allows users to see how their hospital of choice stacks up against the national average. The sophistication of this site will grow every year. There are dozens of similar sites, such as HealthGrades.com, that do the same thing. Information on drug interactions, prices and recalls will become ubiquitous, as well.

Medicare could also allow beneficiaries to opt into a private health-insurance plan of their choice partially subsidized by Medicare dollars. A voucher in the amount of $2,500 annually (roughly one-third of what Medicare spends for the average beneficiary per year) would stimulate a tidal wave of innovative plan arrangements and therefore promote consumer choice. For many Americans, especially those arriving at age 65 with significant balances in their health savings accounts, or HSAs, this option might be very attractive.

A 25-year-old who contributes $2,000 annually to an HSA beginning in 2005 will have $127,000 accumulated in 40 years, provided he or she earns 5% interest and withdraws an average of $1,000 per year for medical expenses. Even adjusting for inflation, that is a tidy sum. Lawmakers also should consider repealing Section 4507 of the Balanced Budget Act of 1997 that bans private contracting between doctors and Medicare beneficiaries. This provision has a considerable chilling effect on patient choice.

Tomorrow's Medicare and Medicaid programs will emphasize health, diet and exercise as much as they will emphasize acute care. Both programs will do so because it makes the most economic sense. Unlike during the managed-care era, this kind of economic sense will be in the patient's best interest. Saving lives and saving money need not be mutually exclusive.

Newt Gingrich is a senior fellow at AEI and is founder of the Center for Health Transformation. James Frogue leads the center’s Medicaid Transformation Project.