Paul Ryan's proposal to reform Medicare is our best hope for protecting seniors against the rising cost of healthcare and putting the program on a sound financial footing for generations to come. It is also our best hope for converting our uncoordinated and wasteful healthcare delivery system into one that delivers high value at reasonable cost. Traditional fee-for-service Medicare dominates the health sector, and its structural inefficiencies adversely affect the cost and quality of healthcare for all Americans. Open-ended subsidies in fee-for-service Medicare reward more spending, not better spending.

The premium support concept advanced by Ryan relies on informed consumer choice of competing health plans, including traditional Medicare. Seniors would receive a fixed subsidy, higher for those with low incomes and greater needs. To attract enrollees, health plans and providers would seek ways to increase efficiency, lower cost, and reduce premiums while improving quality and customer service. Traditional Medicare, with its price controls and government micromanagement, remains an option. This does not "end Medicare as we know it" but it changes the financial incentives that have long made U.S. healthcare costs grow substantially faster than those of any other developed country.

Premium support does not simply shift costs to seniors. It creates an economic framework that relies on functioning markets to improve healthcare delivery and reduce costs. Assertions that seniors would pay thousands more for their coverage assume that the health sector is incapable of adopting new and better practices in the face of a sea change in its financing. Policies, such as those included in the president's plan, that attempt to re-engineer the health system without changing the underlying financial incentives that drive spending will ultimately fail.

Can premium support work? David Cutler, health adviser to the White House, recently examined actual plan bids in Medicare Advantage, the private plan alternative in today's Medicare. He found that Ryan's proposal would result in private plans offering the full package of benefits for 9 percent less than traditional Medicare—an underestimate of the savings possible with full competition. No wonder more than 25 percent of seniors have opted for private plans that offer better value at lower cost.