Oregon Gov. John Kitzhaber (D). (Rick Bowmer | AP)

Oregon is in the middle of a multibillion-dollar Medicaid experiment. It has promised the Obama administration it can slow the program’s growth to a rate comparable to the rest of the economy over the next two years. That means reducing Medicaid cost growth, on a per capita basis, by 2 percent.

If Oregon can’t pull it off, the state stands to lose $1.9 billion in federal funds meant to jump start that process. As Oregon Gov. John Kitzhaber (D) put it, his state has “to change how you do business in order to survive.”

The new business plan, he says, is to pay doctors for the quality of health care they provide, rather than the quantity. The idea is to eliminate expensive care that doesn’t improve health care - a readmission, for example, for an issue that should have been solved on a first hospital visit. The structure is similar to the Accountable Care Organizations that the Affordable Care Act created in Medicare.

Oregon’s revamped Medicaid program launched at the start of this month. We spoke at length about the risks involved in the new project, how it’s going and whether it can be expected to improve the health of Oregon’s Medicaid recipients. What follows is a transcript, lightly edited for grammar and content.

Sarah Kliff: What’s changing on the ground right now in Oregon about how Medicaid patients receive their care?

Gov. John Kitzhaber: The Coordinated Care Organizations have only been up since Sept. 1, but essentially the model is a patient-centered medical home. Each person will have a single point of contact with the delivery system, some sort of a care manager. We’ll increase our use of home health workers to essentially try to manage chronic conditions at home. Then there will be financial incentives. If hospitals can, for example, reduce admission rates by five per thousand, those cost savings get shared within the system. They don’t go off to a third party.

SK: The Obama administration has given you an additional $1.9 billion to put toward improving your system for this project. How is that money being spent?

JK: We had a big hole in our budget. Providers did take an 11 percent cut, notwithstanding this money. This basically prevents any further cuts to the system. It gives us five years to get the delivery model up and running and realize the savings. It’s like changing a car tire while you’re driving down the road. You have to maintain the current delivery system while changing it. It gives us the resources to do that.

SK: What’s at stake for Oregon here? If you don’t hit the cost metrics that you’ve promised, what happens?

JK: The $1.9 billion is contingent on this gradually ramping down of costs. Chunks of those resources go away if we don’t achieve those cost metrics. There will be resources pulled out of the system which will make it more difficult. The real incentive is if we don’t transform the system, we go back to the 40 percent cut. There’s no more money. This is one where you really have to change how you do business in order to survive. I think the system appreciates that.

The grand bargain was they give us the flexibility, they give us $1.9 billion, we reduce the Medicaid cost trend by 2 percent points per member by the end of the second year and improve health outcomes. That’s the grand bargain.

SK: How will the administration measure what counts as higher quality care? How do you safeguard against providers skimping on care?

JK: There are metrics we’re developing with [the Center for Medicare Services] about patient outcomes and population health metrics. So this is clearly unlike an old HMO, which could save costs by skimping on care.

There will be some things we won’t do, but they will be things that don’t have an impact on health outcomes. If you can manage someone with congestive heart failure in their home, which is not that hard to do, you save $50,000 every time you avoid them going into the hospital.

There will be clear, specific outcome measures and they’re around access, they’re around relationship to outcomes. Right now, payment is all about quantity. The more you do, the more you get paid. We’re shifting to outcomes-based and performance based-funding.

SK: You’re looking at a two-year timeline that you’ll be measured on both spending reductions and quality improvements. What kind of health care outcomes can you change in that relatively short time span?

JK: I think what you’re going to see is some significant improvements in access. You may see some reductions in low-birth weight infants. If you provide good prenatal care, you can actually see that return pretty quick. Hopefully we’ll see an increase in the number of kids who are immunized.

The real big cost savings we’re probably not going to see until the end of the second year. Those will be the results of reducing hospitalizations and better managing chronic conditions at home. One of the metrics might be how many times someone with a chronic condition has come had to go to the hospital.

SK: I want to talk a bit about how your proposal compares to the idea of a block grant that some of your Republican counterparts have proposed. Both essentially make a trade off, saying the state could spend less if it’s given more flexibility. What do you see as the key differences?

JK: Let’s say you have 100 people and a block grant that allows you to spend $100 per person. Let’s say the auto industry goes belly-up and now instead of 100 people, you’ve got 200 people. Now you’re only spending $50 per person.

There’s no relationship between the block grant and the cost of the care you’re trying to provide. It’s a meat ax approach that just saves money. It’s not designed to improve health outcomes.

What we’re doing is we’re establishing a per person, per year amount that will grow at a fixed rate. If you add 10 people, they still get that amount. The cost savings are in the rate of inflation. The only way you can achieve that is change your delivery model.

One of the conversations we had at the White House, was they said, ‘let’s say we give Oregon this $1.9 billion and increased flexibility. What’s to keep us from giving this to other states?’ I said, “well, if another state came to you - lets say New Jersey.”

Let’s say Gov. [Chris] Christie came you and said, "We will promise you that if you give us X amount of money, we will reduce our medicaid inflation rate to 3.5  percent. We’ll increase access, we’ll improve outcomes." I’d say, give them the money because if every state did what Oregon is doing, the total saving is $1.5 trillion over five years.

SK: Have you heard from other states who want to try the approach you’re taking?

JK: Right after we got the money, we had about 10 states call us up and say how’d you get that money. We haven't had anyone else follow up and say, we want to do it too. I think part of it is due to the election cycle. After the election, when states are faced again with dealing with stuff, I think a lot of states will look at what we’re doing. It’s actually up now.

Part of this is just good communication. This is hard. It’s a big paradigm shift. You need to sit down together so you don’t feel like you’re all by yourself. You need to figure out what’s working and what isn’t. What can the state do to facilitate this.

SK: What are the biggest obstacles to making this work?

The biggest challenge is the old business model. People are used to having this unfettered flow of cash that increases every year coming into the health care

What we’ve signed up for is basically a cap on spending. Even if you figure out a way to raise more money, you can’t spend it in the Medicaid program. We’re getting there slowly with that. The other big piece is making sure that the private sector knows its in their interest to align their purchasing power with the 900,000 people we have or else some of this is going to be a cost-shift onto them.

SK: How did you get hospitals on board with this? Why should they get behind the idea of essentially capping the amount they can earn from Medicaid?

JK: At the end of the day, they know this isn’t working...The lack of resources is what’s really driving and motivating people to change. They know the alternative is worse than this.

The interesting thing is, I have to remind them of this all the time, and say let’s not do this, then what’s your world like? It doesn’t look good at all. You have to continually remind them that the alternative is just a whole lot worse for them.