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This small, wonky Obamacare program saved $384 million over 2 years

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Obamacare took what an economist once described to me as the "spaghetti approach" to reducing health-care costs: throwing a bunch of different experiments at the wall and seeing what stuck.

Today, the law arguably had its first success: Medicare's independent actuary has certified that an Obamacare program has saved money — $384 million over the past two years, to be exact. And the Obama administration is now eying how to make this program bigger — and, ideally, generate even more savings.

The big question, however, is whether America's health-care system is ready. We don't know if the savings reflect the fact Obamacare has found a better way to deliver medicine — or if they show us that a handful of go-getter, entrepreneurial hospitals were able to innovate in ways other systems can't replicate. But we're about to find out.

Obamacare punishes hospitals who provide bad care — and rewards doctors who do better

doctor

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The best way for a doctor to make money in the United States right now is simple: prescribe treatments.

The American health-care system by and large runs on what experts describe as a "fee-for-service" system. For every service a doctor provides — whether that's a primary care physician conducting an annual physical or an orthopedic surgeon replacing a knee — the doctor typically gets a lump sum of money.

American doctors aren't paid on whether they deliver that improved health. Their income largely just depends on whether they performed the surgery, regardless of patient outcomes. Their patient's knee could be good as new or busted as before at the end — but in most cases, that doesn't factor into the surgeon's ultimate pay.

In 2012, the Obama administration launched a plan to change that. The Pioneer Accountable Care Organization, or Pioneer ACO, rewards hospitals that deliver high-quality care at lower-than-expected costs — and punishes high spenders.

If hospitals in the Pioneer ACO program covered Medicare patients at lower-than-expected costs, they kept 70 percent of the savings in 2014 (the other 30 percent went back to the federal government). But if they spent more than expected, they would have to pay the feds back the difference.

All of a sudden, the Pioneer ACO program gave doctors a reason to spend less in a system that typically rewards anyone who spends more.

Obamacare actually found a way to save money. That's huge.

Thirty-two hospital systems signed up to become Pioneer ACOs in 2012 (13 have since dropped out; you can read more about that, and what it means, here). And two papers reviewing the program's performance — published today here and here — are largely positive in their findings.

The Pioneer ACO hospitals saved $384 million in two years — $280 million in the first year and $105 million in the second. This worked out to a savings, on average, of about $300 per patient each year.

This wasn't because doctors skimped on care: quality metrics show that patients in and outside the Pioneer ACO program generally reported similar satisfaction rates. And in some ways, the Pioneers did better: patients in those programs reported more timely access to their doctors, perhaps because hospitals wanted to put more effort into preventing costly complications down the line.

The big question: are other hospitals ready to save money, too?

The Pioneer ACO program was always meant as an experiment. Once it started, new hospitals couldn't join even as some participants dropped out. The Obama administration did launch other ACO programs in the meantime, but they were generally less aggressive, with smaller rewards for the doctors who did the best (and, in tandem, smaller penalties for those who screwed up). And those programs really haven't saved much money at all — not nearly as much as the Pioneers.

With these new, positive results in hand, the Obama administration now says it wants to expand the Pioneer approach to other hospitals. And of course it does: if hospitals can deliver better care at a lower cost, that's pretty much delivering on the holy grail of health care right now.

The challenge is whether the health-care system is ready. The systems that decided to sign up for the Pioneer program back in 2012 were, in fact, pioneers: they were generally bigger, more advanced hospital systems that felt they were ready to manage patients' care in a new way.

"We're talking about larger, more sophisticated health systems," says Chas Roades, chief research officer at the hospital consulting firm the Advisory Board. "For those who don't have any experience in managing risk, I don't think you'd want to leap in at the Pioneer scale."

And there are questions about whether the Pioneers themselves can keep delivering savings. Hospitals can typically make easier changes at the beginning to save money; they can switch patients to generic drugs, for example. But as they get further along in the experiment, it can get harder. The Pioneer ACOs, for example, saved twice as much money in their first year as they did in their second.

"The hard stuff is really managing patients, and helping improve their health," says Roades. "Those savings are more difficult."