Photo: Cleveland Clinic
We’ve already pulled some highlights from our extended conversation with Cleveland Clinic CEO Dr. Delos “Toby” Cosgrove on consolidation, cutting costs, and how health care will be disrupted.There was plenty of other great material, so we wanted to provide the Q&A in its entirety.
Here’s a lightly edited transcript of our full conversation:
Business Insider: What was it like being CEO of a big hospital when a law changed your entire industry?
Dr. Cosgrove: The law has changed the industry completely, and I think the entire health care industry is anxious at this point, the anxiety is palpable. We’re in an enormous period of change, and I think that period of change gives us tremendous opportunity. You’ve seen by the recent shout-outs we got in the presidential debates that we’re being looked at a model as how to go forward, and I really think our model is our secret sauce.
What is it about the model that’s made you successful?
I think that there are a number of things that allow us to change as we need to. First of all, we’re a medical group, we’re physician- led, we make our decisions about how we’re going to rule ourselves, what sort of facilities we’re going to do, etc. The second thing is that all the physicians are salaried. We have no financial incentives to do more or to do less. We just try to look after what the needs are for a patient because it doesn’t make a difference to us personally. The third thing is that we all have one year contracts, there’s no tenure, and we have annual professional reviews. I don’t know of another institution that has annual professional reviews and one year contracts. In the annual professional review we go over all individuals’ contributions to the organisation and that contributes to our decisions about what we do about salary and whether we reappoint or don’t.
I’ve had 37, by the way, 37 one-year contracts.
Do people find that nerve wracking and do they adapt?
No, I think people adapt quickly. You stop and think, almost every major business I can think of has annual reviews. And health care traditionally has not. You got privileges at a hospital and they were yours for life unless you committed murder or something. So, very seldom do people look at the qualities and the outcomes for the individual.
A lot of the provisions of the Affordable Care Act aren’t in place yet, have you made changes in advance?
Well we’ve really been thinking that this is coming for a very long time. Even before the health care act was enacted we began to see the changes in health care. We thought, we’re going to be under significant financial pressure and that health care has to change, and I think that’s probably a point that’s worth making with you. I think frankly there are huge changes that are going on in the health care business right now.
One of those is the consolidation of providers, and by consolidation of providers I mean that hospitals are coming together in systems, right now we’re talking to three facilities in our immediate area about potentially joining the Cleveland Clinic. Hospitals are coming together in systems and the systems are beginning to talk to systems, and if you stop and think about it, industry in the United States, particularly low margin businesses and health care is clearly a low margin business, and you figure that 25 per cent of the hospitals right now are in the red, so very low margin. If you look at what happened in airlines, what happened in supermarkets, what happened in bookstores etc., they all consolidated, they brought scale so they could drive efficiency, I think that’s what’s happening in health care right now.
Just because of the nature of the business, do you think that’s going to be more difficult?
It’s going to be more difficult because of the nature of the business, but I think that the financial pressures of the Affordable Care Act is going to drive this increasingly. You see the for profits for example, HCA has 160 hospitals, Community Health System has 136 hospitals, Tenet has 60 hospitals, the Catholics now are coming together and putting together big systems across the country. 60 per cent of the hospitals now are part of a system, systems are talking to systems, we’re talking to other systems and I think you’re going to see an increasing amount of consolidation, and I think the reasons are pretty clear.
If you look at the back office, what it takes to drive a hospital now or even a doctor’s office, the IT, the contracting, the purchasing etc. you get advantages from scale, I think that’s going to happen and I think, if you look at the consolidation, it was big news when the airlines started to consolidate. This is a much bigger industry.
Especially in terms of employment, right?
I mean, its 24 per cent of the federal budget, this is a huge industry. After restaurants and hospitality, this is the biggest industry in the United States. And so we’ll start to see consolidation and it’s big business news. And the other thing that will consolidate is providers, in the past most docs were sort of independent physicians who practiced either with two or three other guys or in small groups.
What you’re seeing now is that hospitals are coming together and docs are joining hospitals. Now 60 per cent of the doctors in the United States are salaried, and we get inquiries every day from somebody who wants to come and join us. Simply put, the dynamics are driving it, because it’s so complicated to do it in private practice. Think about the explosion of knowledge there’s been in health care. Can you imagine trying to scrounge everything, all the knowledge there was in oncology without colleagues? So docs don’t want to practice by themselves anymore, they simply can’t scrounge all of the knowledge, so they’re looking to team up with other people to do it.
That’s true even in specialties?
The example I always use is myself. I started out as a chest surgeon. I used to do esophagus, lungs, coronary bypasses, aortic aneurysms, and valve surgery. Now you have doctors who just do esophageal surgery or lung surgery, I did just valve surgery by the end of my career. The knowledge and the expertise needed has gotten so big that you’ve got to narrow your field.
Why is the pace of innovation so slow, if what you’ve done at the Cleveland Clinic’s been so successful?
I have to tell you a cute story that I think speaks to your point. About two years ago, I was invited to the White House and I’m there with nine other CEOs of hospital systems, you know there’s Columbia, the New York hospital system, Penn — hospital CEOs from all over the place. Everybody’s given three or four minutes to tell their story of what they can do to improve health care delivery. I’m the last guy to talk and I described our system, how we’re integrated and how we’re all employed etc. And everybody says “Oh we couldn’t do that.” I said “wait a minute guys. How many of you would like to have that system?” Everybody raised their hand.
So the point is that we’re entrenched in a different system and we’re going from an individual sport to a team sport, Getting everybody to change their head space is a big deal. And I think we’re getting there now. Particularly because docs coming out of medical school, they want to be employed, they want to work for a big organisation. 75 per cent of them want to be salaried and as that changes, the individual entrepreneur doctor is going to be part of a system.
I think the pendulum is moving fast, it’s really amazing how fast things are changing.
What was the particular change that your doctors and organisation were most resistant to?
Most hospitals are organised around the department of surgery, the department of medicine, the department of pediatrics — there was essentially a guild system for whatever your profession was. And what we said is, wouldn’t it be nice to organise a hospital around what a patient needs? Novel idea, have a hospital organised around patients. If you’ve got a headache you don’t know whether you need to see a psychologist, a neurologist, or a neurosurgeon. So let’s put everybody who deals with a neurology system in a neurological institute, and we’ll have one head. So if you go in for your headache, you can see whomever, right in that one location. Everybody whom you could potentially need to see is right there in one location and they talk to each other, they’re physically proximate to each other.
As opposed to bouncing around from department to department?
Right. So what happened out of this is, I went to the Head of Surgery and the Head of Medicine, and I said that I think we need to change the system so we’re organised around organ systems, so we’ve got somebody in cardiovascular, head and neck, neurologic, we put dermatology and plastic surgery together because they deal with the skin, urologists and neurologists together in the urological institute. So you guys are out of a job. There’s going to be no Chief Of Medicine and no Chief of Surgery anymore. They said ok, we agree. I told them that they were great guys and that there was going to be a place in the organisation for them and that they’d have an important leadership job, but that we were going to do away with those jobs.
So the whole organisation was anxious, and we stared one by one to move people to various locations, and finally everybody was so nervous that we said we’re just going to do the whole thing. In one year we changed the whole organisation, so there’s no more department of surgery, no more department of medicine, it’s all by institutes.
And I think that’s an example not of beating guys over the head, this was an example of, nobody came to me and said that’s a terrible idea not one person but everybody was anxious. And nobody not one person has come to me and said we have to go back.
So everybody could see the value of doing it, but it created tremendous anxiety.
How did you change when you transitioned from being a surgeon to a CEO?
I had to change my clothes. I had to go out and buy a suit. I had to go from surgical scrubs to suits and ties, it was very expensive. Anyhow, everything in my life changed. I changed where I lived, I went from the operating room where I used to spend 12 hours a day to the boardroom. I changed who I talked to, it was not patients anymore it was whole constituencies of people.
And I had to change what I read, I went from the New England Journal of Medicine to the Harvard Business Review. But the biggest change of all was the change in the immediacy of decisions. I made a decision in the operating room, and you know right away if it was a good decision or a bad decision. Now you make a decision and you may find out two years later. So I had to learn to live with ambiguity better than I had in the past.
It was also a huge change in my personal and public persona. I used to go places for a dinner party with my wife and people would say “Oh, you’re Anita Cosgrove’s husband.” Now you know I remember that this struck me instantly, right after it was announced I went to buy a Christmas present, and by the time I got from picking it up to paying for it and getting out of there I got stopped four times. Somebody wanted a job, somebody wanted to complain, somebody wanted to thank me, somebody wanted to congratulate me. I’d go to a basketball game and I’m busted for eating a hot dog and they blog about it. I became a very public figure which was a big change.
So I don’t go to any restaurants in Cleveland without talking to three or four people.
I know you have a system that helps doctors patent their inventions, could you tell me a bit more about that?
It’s a very long journey actually. The journey started when, in my first five years at the Clinic which was 30 years ago now, I developed with another guy a closed loop system for giving a drug. So, we essentially learned about how to keep a patient’s blood pressure at a certain level by putting a drug in. We developed it, we found a patent lawyer to do it, I negotiated with companies and convinced a company to manufacture it, put together a payment program, and one day I walked in and gave the CEO a check for 50 grand. That was more than my salary at the time, I thought it was a really big deal.
And he said, “Jeez, we could make some money out of this,” and I said, “Yeah, we probably could.” We started out at that point with a guy named David Morganthaler, who was one of the original venture capitalists with Morganthaler Partners and was on the board, and we started to vet all of the stuff that doctors would suggest. For 20 years we couldn’t quite get it right.
About 10 years ago we put a bit more emphasis on it and went out and hired a guy by the name of Chris Colburn and he’s really developed the tech transfer arm of the Cleveland Clinic. We own all of our intellectual property, all of my patents and devices are owned by the Clinic. So he is charged with taking the tech that the doctors think about and develop with the Clinic and commercializing it. That may be licensing, that may be a startup, and so on. In the last 10 or 12 years we have gotten almost 500 patents, another 1400 filed for, and 52 companies spun out.
Now the interesting sort of validation of this idea was that other people have started to realise how hard this is to do. You have to get the lawyers, the financing, the vetting figured out, you have to figure out how to do negotiations with business and so on. That’s not stuff that comes naturally to a doc. They’re now bringing the model to other institutions. Long Island Jewish signed up, Medstar in Washington has signed up, Ohio State has signed up, Notre Dame signed up, and there are about six others that have signed up.
They’ve decided to essentially rent rather than build, and we do the tech transfer for those orgs. Medstar is a great example. The year before we started representing them, they had no disclosures of potential ideas from their staff, the next year they had more than 100. They’re getting their first patents and starting to get their first set of royalties. So it works. It’s been a very long, painful process and it’s taken a lot of failures to get this set up, but now we have something that works for us and works for other people as well.
You mentioned, in reference to the Affordable Care Act that those cost pressures are going to drive consolidation. Usually when we talk about cost pressures in business it’s with horror in our voices. But it sounds like, if it drives towards more efficiency, it might be a net positive in this case?
I think that’s a very good observation and it probably could be a net positive. We’re really moving to trying and drive value, and as you know, value comes from measuring quality and cost. We haven’t had very good measurements of either one of those in the past. On the quality thing, we really started measuring quality in cardiac surgery 30 years ago or more and that was pretty easy because people either did or didn’t, they walked out or got carried out. So the endpoints were pretty easy, but what we found out as we measured it, is that the more we measured the more we found problems. And when you found a problem you could really sort of screw down into it and find out what the root of it was, and begin to deal with that particular issue. And what resulted is that we got better and better as we went along.
So then we did the same thing starting 8 years ago for each one of our institutes, saying that now you have to start to make your costs transparent and measurable. So now each one of our institutes has an outcomes book, it’s on the web. Each year they’ve gotten a little bit better in what they report and the sophistication of what they report. Each year they’re able to look at their own results and say, we can do better.
On the cost end of things, it’s a lot easier to measure dollars than it is outcomes, but cost has almost been looked at as what you get paid to do something, not what it costs to do it. Over the years we’ve begun to understand how much it costs to do each one of our procedures. For example, we’ve asked each of our institutes to go and look at the cost of their number one, or two, or three thing that they do. The urologists looked at prostetectomies, they looked at the cost of the sutures, how many instruments they had on the table, how long the patients stay in the recovery room, etc. and they were able to take 25 per cent out of the actual cost of what they did. We did the same thing for cardiac surgery, did the same thing for liver transplants, and so on.
So now that we really have a capacity to look at each one of the issues and how much it costs, we’re able to really begin to reduce the costs and we have to do that as an industry, just because of the importance of that for the United States.
And if we don’t, we’re not going to be able to avoid the financial problems that we have as far as debt is concerned unless we control health care costs.
Increasing costs are sort of a demographic inevitability, right?
It’s interesting, I looked at a graph the other day of about 6 countries around the world. Every one of their curves of cost escalation mimics ours. They’re all advancing faster than GDP is, they’re all going faster than the increase in salaries. So everybody’s got the same problem. They may start from a lower level, but they’re all headed in the same direction. It’s demographics, and its also, think about what we can do now that we couldn’t 50 years ago. That’s not free.
I think there are two aspects to this, and I don’t think we’ve really put our emphasis on exactly the right things. Really everything we talked about is making the delivery of care to sick people more efficient. Consolidating hospitals, buying better, avoiding waste, all that sort of stuff.
The only other way we’re going to be able to reduce the cost is by reducing chronic illness. And that’s smoking, that’s obesity. Obesity now accounts for 10 per cent of health care costs and will go to 20 per cent over the next 10 years. We’re not going to control costs unless we deal with that.
If you could go back to the beginning of your tenure, what would you do differently?
“I was incredibly naive when I started. The funniest part of my naïveté is when I stood up in my first speech to the Clinic, and I said that I thought the most important asset to the Cleveland Clinic was all of you employees, that we had to take good care of you, and we had to get you good food, even if that meant we had to get rid of the McDonald’s. That precipitated a huge fight with McDonald’s, it resulted in me being on the front page of the Washington Post above the fold being referred to as the “big mac attacker.” It gets even funnier in retrospect, at the time it wasn’t very funny at all.
So I didn’t realise that the franchise for the Cleveland Clinic had a very long contract and this became a very public fight, so I decided that we had to have some sort of reconciliation. I was introduced through a mutual friend to the chairman of the board at McDonald’s.
So I went out to Hamburger University in Chicago to talk with them, I walk in to this conference room and there’s the CEO, the chairman of the board, the head chef with his hat, about 10 people, and me! And they said, “Well Dr. Cosgrove, what can we do for you?” And I say, “Well, you seem like very nice people, and you obviously have a lot of great stores all over the place, and I’d love to have you at the Cleveland Clinic, if you’d just get rid of the Big Mac and the French Fries.”
Well, you should have seen the expressions on their faces.
We ended up having a serious discussion of trans fats, they were in the process of taking the trans fats out of their fried foods and the french fries, which they’ve subsequently completely done. They took the cheeseburger out of our cafeterias, they brought in apple slices and they changed the advertising, so we made some progress and we probably added our voice to changing McDonald’s in a good way in the right direction
But I don’t think knowing what I know now that I would do that again.
What about the idea that we’re going to have a shortage of doctors?
I don’t there’s a question that there aren’t going to be enough docs. We’re going to have to employ people like physician’s assistants and nurse clinicians who work to the top of their licenses. And we’re going to have to figure out how to make docs more efficient in the way they see people. We’ve done this, for example, with group visits where you can see 10 people with the same problem at the same time so you don’t have to repeat the advice to a diabetic 10 times; you can do it all at once the patients love it, the doctors like it, and for a long time we’ve had doctors supported by nurse clinicians and PAs.
We have about 80 physician extenders in cardiac surgery alone, and they allow for really great practices. For example, they allow the surgeon to stay in the operating room. Instead of running all over the hospital finding x-rays, taking out stitches, pulling out chest tubes, and changing dressings, you get to spend your time where it really counts, in the operating room and they do the other things. It’s great for the surgeon, it’s also great for the patient because [the assistants] know exactly how I want it done and they do it time after time after time that way because that’s their job. And as a result, the patient gets better care. So it improves the quality of the care. We’re going to see more and more of that.
I think we’re going to see more virtual visits come in, tele-health being employed because there’s not going to be a primary care physician in “East Overshoot.” That’s not going to be big enough. So there’ll be some sort of way that you can connect with either a medical centre or caregiver some place to get that sort of advice.
Right now, we think everybody needs to see a doctor every time. We’ve got nurses at CVS in the Cleveland area and they have 450 or 470 where they do that. I talked to the CEO of Walgreens the other day and they have 8,000 facilities across the United States, their pharmacists have come out from behind the counter, they’re now giving flu shots. I think that you’re going to see a disruption in the primary care from those locations.
That’s where the next disruption health care is going to come from?
Disruption always starts at the bottom end of the food chain. Look at the mini mills that started doing rebar. Honda started making motor cycles, then cheap cars, then very sophisticated cars, Clay Christensen talks about that all the time, disruption starts where you don’t expect to see it, at the low end of things.
I think that’s going to happen in health care and I’ve been looking for it. Disruption is going to happen at the pharmacy rather than the teaching hospital. It’s going to be hard to change heart surgery or neurosurgery very fast. But you can change that primary care stage, and you’re going to be able to do more and more things at that primary care level as you disperse the care to where the population is.
The other thing while we’re talking about this is really the question of access. And you stop and think about what they talk about in Washington about access, it’s about insurance. That’s not actually getting in to see somebody to look after you. What access is, is getting in to see somebody.
Over time, what we have done is we’ve increased our ability to be responsive to demands for access. The first thing we did is have a nurse on call so if your kid gets a fever of 103 in the middle of the night, you can call our nurse on call and get advice, and they have a whole protocol for various things. The second thing we learned was from a patient who called up for an appointment to see a urologist and got one in two weeks. It turns out the patient was in acute urinary retention and couldn’t pee and needed to be seen right away. What we learned from that is when a patient calls up for an appointment, you don’t know what they’ve got. And so we ask them all, would you like to, or do you need to, be seen today? And so we put a same-day access policy across our entire organisations.
So last year we saw 1 million same-day appointments, and 98 per cent of the people who asked for a same-day appointment got one. Then we went to our emergency rooms. Emergency rooms are traditionally known for making you wait forever. Our waiting time on average across all of our hospitals is 20 minutes and we did that by changing how you entered.
When people came into an emergency room, they all used to get treated the same way. You’d take your clothes off and get in bed. A lot of people would walk in and say I’ve got a sore throat or I’ve got wax in my ear or something like that. What we do is say, “OK, you go over here and sit in this chair and we’ll do the throat swab or clean your ear out and you’re gone.” And the people who come in and say “I’m having a heart attack” or I’m coughing up blood,” they get in bed. So the time from the door to the doctor has been compressed.
Another big trend in health care is our ageing population, how do we address that?
First of all, the diseases have changed. If you look at the top causes of death in the United States, six out of the seven are chronic diseases. Chronic diseases are not going to be taken care of in a hospital. They’re going to be taken care of as outpatients or through home care. We’ve done two things in that respect. Last year we added three more outpatient facilities, we’re not building more hospital beds, we’re building outpatient facilities to take care of the chronic diseases. The second thing is that we’ve vastly increased our home care. Increasingly we’ve gone from hospice in-facility to hospice at home, and added more and more home care, and we’re able to do more and more things.
Another issue is people who get readmitted. They leave the hospital, then they go to the nursing home and so we are now moving into increasing our concentration on interfacing with our nursing homes. We’re selecting a few nursing homes and sending our patients there, and having our doctors visit them and bring the electronic medical record there so we have continuous care.
There are two things that happen there. One it’ll reduce the readmissions that come back from the nursing homes because they haven’t been looked after, and the second thing it’ll do, traditionally, people went to the nursing home and stayed 29 days whether they needed it or not. Now we’ll get them out of there sooner, which will reduce the cost cycle.
What would you like to see next from Washington?
I’d like to see more emphasis on wellness. And that’s a really tough one for a country, but I think if we don’t address it, health care costs are just going to keep going up. One of my concerns, just look at obesity. One of the most powerful lobbyist groups in Washington is the sugar industry. I think we’re going to need some help from Washington, but I don’t think they’ll be able to do it entirely. They’re going to have to have a coalition of government, health care providers, educators, food providers and food manufacturers.
We have to do the same thing for obesity that we did for smoking, but it took us 50 years for smoking. We can’t afford to do that — we have to have it happen and we have to raise the consciousness about the epidemic of this disease.
What’s your advice for CEOs who want to, or needs to, dramatically change their company?
I think the most important thing you have to do is communicate. One of the things I read about Jack Welch, he said when he became the head of GE he grabbed the microphone. And I grabbed the microphone right after I became CEO. I probably spent half of my time talking to people. I think when people begin to understand the issues they’re more willing to change.
Four times a year we have what we call Connections that I televise to all of our locations and talk to them for an hour about all of the issues. The second thing that we do is that we’ve doubled the number of staff meetings we have a year for docs to come and hear the message. Then I go and I meet with each institute, I do one a week, I go to each one of our locations once a month, we blog, we have weekly papers, we take every opportunity we can.
I think part of my obligation as a CEO is to talk about the Cleveland Clinic outside and talk to the people at the Cleveland Clinic about what’s going on in the rest of the world. There is a unique opportunity for a CEO to bridge that gap of communication back and forth. When people understand what the forces are, they’re more willing to change. If you talk to them and if you listen to them about their concerns and address them in a very straightforward manner and don’t try and B.S. them, then they are much more responsive. I think that communication is vital and you can’t do it enough, it’s amazing.
You just can’t do it enough.
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