In health care, sometimes it actually pays money to save money—at least if you're one of the participating practices in Medicare's Physician Group Practice Demonstration.

The program is designed to reward physician groups by coordinating care to improve patient outcomes, while reducing overall costs—particularly for those with chronic conditions like heart disease and diabetes. Physician groups that are able to generate savings of more than 2 percent compared to what it would cost Medicare to pay for the treatment of similar patients on average, are eligible to receive performance bonuses. The payments are based on a group's improved cost efficiency (the savings generated) and its performance on 32 evidence-based quality measures. Since the groups share in the savings of improved care, CMS claims, they have an incentive to invest in things like care management and health IT.

So far, the results are encouraging. Marshfield Clinic—one of 10 physician groups participating in the demonstration—was featured in today's Milwaukee Journal Sentinel. The physician group saved Medicare more than $25 million in the first two years of the demonstration and received close to $10 million in performance bonuses—which it claims will be reinvested in programs to improve patient care.

Theodore Praxel, the medical director of quality improvement and care management for Marshfield Clinic, praised the clinic's system of electronic medical records, Cattails, for reducing unnecessary treatments and improving the coordination of care. But, he emphasized that electronic medical records alone were not enough. Some of Marshfield's other innovations include a 24-hour nursing line to help reduce unnecessary visits to the ER and a care management program for patients with congestive heart failure.

Earlier this year, the GAO released a report also recognizing the potential of the program to save money through the coordination of care. But as Medicare Update noted, the report questioned the project's wider application. The participating practices were all relatively large with over 200 doctors, while only one percent of physician practices in the U.S. have more than 150 doctors. Large practices, the GAO notes, have some inherent advantages over small firms—like access to capital and existing electronic medical record systems—which make the large upfront costs of such programs possible (Marshfield spent more $2.9 on new or expanded programs during the first year of the project).

Still, you can accomplish a great deal in health reform just by getting the incentives right. Programs like Medicare's Physician Group Practice Demonstration prove it's possible to improve outcomes while reducing costs. The key is finding ways to pay for value, not volume in health care and sharing the savings of more effective and effecient care with all parties: payers, providers, and patients.