On Thursday, the Obama administration made a $1.9 billion bet that Oregon can dramatically reduce health costs in an unprecedented way.

Oregon Gov. John Kitzhaber thinks he can save the federal government $11 billion in Medicaid costs over a decade. (Bruce Ely/AP)

If Oregon can make good, it will save the federal government $11 billion over the course of a decade — even counting Medicaid’s initial, $1.9 billion investment made Thursday. Gov. John Kitzhaber (D) calls it a “defining moment for health care transformation in Oregon, and the Obama administration.”

It all, however, does hinge on a very big “if”: No other state has ever tried what Oregon is about to try. It is, however, an approach many health care payers are thinking about: It’s how Massachusetts wants to bring down health costs in private insurance, and the federal government’s plan rein in Medicare spending. Oregon could, in many ways, serve as a test case for other cost control efforts.

Oregon wants to move its 600,000 Medicaid populations into “Coordinated Care Organizations.” These are health care systems that will accept a flat fee for all care delivered. While remaining within that budget, they will have to hit certain quality metrics, ideally creating financial incentives to deliver the most cost-effective care that can deliver good results.

If this idea sounds familiar, that’s because it shows up in the Affordable Care Act: Accountable Care Organizations will use a similar structure within the Medicare program (albeit with some differences in oversight and governance).

If the Coordinated Care Organizations, or CCOs, can hit the metrics and stay within the budget, they will net the savings. If care costs more than the flat fee, the health care system will be on the hook for additional spending.

“We don’t think there’s anyone else out there has done this,” says Bruce Goldberg, director of the Oregon Health Authority, which oversees the state Medicaid program. “We’re going to be held accountable for getting results. And we’ll be holding our delivery system accountable.”

The Oregon experiment just got its initial federal sign-off, but many of its parts are already in place. As negotiations were underway with the federal government, Oregon was already laying groundwork for Medicaid reform.

It solicited applications from health care systems that wanted to participate in the new payment scheme. So far, 14 health care systems applied who could, if all approved, cover about 90 percent of Oregon’s 600,000 Medicaid populations.

“Oregon providers understand that the current health care trends aren’t sustainable, and they want to get ahead of that,” Goldberg says. “The traditional way government has dealt with rising costs is by slashing payment rates. What Oregon providers get is there’s a better way to do that.”

Now, the hardest part gets underway: Oregon needs to start approving applicants and getting the CCOs going, figuring out where to set global caps and how to ensure that will keep costs down. Goldberg, the man who will oversee the effort, admits that there’s little evidence to look to from other states making such approaches work. But that does not mean Oregon couldn’t be the first.

“We believe, in our little state, that we can save $11 billion over the next decade,” he says. “The federal investment phases out after five years, and after that it will be all return. And we’re confident we can get there.”