Sen. Tom Coburn, R-Okla., left, and Sen. Richard Burr, R-N.C.,

Senators Richard Burr (R–NC) and Tom Coburn (R–OK) have just unveiled a bold Medicare reform proposal based on the free-market forces of choice and competition. The Senators’ proposal adds further momentum to the effort to reform and improve America’s largest and most challenging entitlement program.

“Premium support” is at the heart of the Burr–Coburn proposal: a financing arrangement where Medicare would make a generous contribution to health plans chosen by Medicare beneficiaries. The result would be an intense competition among health plans for enrollees’ business, just as there is today in Medicare Advantage, the Medicare Drug Program, and the 51-year old Federal Employees Health Benefits Program (FEHBP) that covers federal workers and retirees.

The Burr– Coburn proposal is very similar in many respects to the Heritage proposal outlined in Saving The American Dream. For example, beginning in 2016, the government would annually calculate its contribution based on regional, market-based bids for the provision of traditional Medicare benefits, and the traditional Medicare fee-for-service (FFS) program would be forced to compete directly with private health plans. Likewise, following current law, the government contribution would be adjusted for income, with greater assistance going to lower-income people and less to higher-income people. The government contribution would also be adjusted for risk, as it is today in the Medicare Advantage program, to account for the varying costs attributable to health conditions among enrollees.

Finally, in a fashion similar to Heritage’s plan, Burr–Coburn creates a Medicare Consumers’ Protection Agency to ensure a level playing field for plan competition, as well as to administer the bidding process, to conduct an annual open enrollment, and to enforce rules for consumer protection.

While Medicare would fully transition to premium support in 2016, Burr–Coburn would make a variety of changes to the current program right away. While differing in certain details, many of the policy changes go in the same direction Heritage recommended. First, Burr–Coburn adds a catastrophic benefit, with a limit on out-of-pocket costs at $7,500, meaning that retirees would pay no additional health bills once they reached that threshold.

Cost sharing and deductibles for hospitalization and physicians would be unified and made more sensible, while Medi-gap plans would be restricted in providing the “first dollar” coverage that drives up Medicare premium costs. Second, Burr–Coburn also increases cost sharing for wealthier seniors (starting with individuals with an annual income of $85,000 annually and $170,000 for retired couples), while requiring millionaires to pay full premiums. Third, with a provision identical to the Heritage proposal, Burr–Coburn would raise the Medicare Part B premiums from 25 percent to 35 percent of total premium costs over five years. Fourth, also with a provision identical to the Heritage proposal, Burr–Coburn would freeze the sustainable growth rate (SGR) for physician payment for five years and end it with a transition to the new Medicare premium support program.

Finally, Burr–Coburn would gradually raise (by two months annually) the normal age of eligibility from 65 to 67. (The Heritage proposal would follow the same process and raise it to 68.)

Beyond catastrophic protection, Burr–Coburn adds interim benefit. This voluntary care coordination benefit would be targeted to high-risk seniors who need special case or disease management because of chronic or debilitating conditions. While The Heritage Foundation has adopted a Medicare budget as a backup to the competitive system to ensure cost control and facilitate Congressional Budget Office scoring of savings, Burr–Coburn eschews any fixed spending targets based on inflation or economic growth. Powerful new economic incentives and intense competition in an environment of informed patient choice, the Senators insist, will guarantee significant savings, anywhere from $200 billion to $500 billion over 10 years.

The Burr–Coburn proposal is a welcome addition to the emerging consensus on Medicare reform. Baby boomers—the next generation of retirees—need the guarantee of higher quality of care at competitive prices. The alternative is current law: guaranteed Medicare payment cuts, reduced access to doctors and hospitals, and dangerous levels of debt.