Delos M. “Toby” Cosgrove arrived at the Cleveland Clinic in 1975 as an “incredibly poor” 34-year-old dreaming of a life as a cardiac surgeon. “Heart surgery was the astronaut corps of health care,” he says. He had $3,000 in his bank account, left over from running an Air Force hospital in Vietnam, where he had won the Bronze Star. All his earthly belongings, including a Chevy Vega that was too flimsy to tow, fit in the back of a U-Haul.
During his first year someone was shot dead at the clinic’s front door. The bank in the basement was robbed. To avoid crime, patients were told to take a shuttle bus the half-block back to the hotel where they stayed. The executive offices were all made with bulletproof glass. As the years passed he became well-known for pioneering the replacement of heart valves, eventually assuming the chair of the department of cardiothoracic surgery. Concurrently he created the clinic’s office that oversaw the licensing of medical devices like surgical clamps and spine screws to companies like Medtronic and Boston Scientific. In 2003 he started looking for a second career, maybe as a venture capitalist in California, figuring that at 62 he was too old to operate. “I did not want to come to the end of my career and have someone saying, ‘Toby, it’s time for you to stop. You’re getting a little shaky,’ ” says Cosgrove, now 73. Then he was offered the job as the clinic’s chief executive.
The rough old neighborhood is a distant memory, replaced by a gleaming testament to modern medicine stretching out over 46 buildings and covering 167 acres. Protected by a dedicated 141-trooper force of state police, there is a conference center, a fancy hotel and a farmers’ market. Over Cosgrove’s tenure the clinic’s revenues have nearly doubled to $6.2 billion.
Though the clinic is a nonprofit, its operating income sits comfortably between $250 million and $300 million each year. It has offices in Florida and will soon be operating in a giant steel-frame building in the Middle East in Abu Dhabi. The clinic has $10.5 billion in total assets. Forty-two thousand people–the equivalent of 11% of Cleveland’s population–work there, making it Ohio’s second-biggest employer, after Wal-Mart.
Four minutes down Euclid Avenue from the clinic is University Hospitals of Cleveland, a $2.3 billion facility also ranked among the nation’s finest. University employs 19,000. A third hospital system, MetroHealth, employs another 6,200.
“ The whole corridor between University Hospital and the clinic has regenerated. I barely recognize it,” says Tom Gentile, chief executive of General Electric’s GE Healthcare Systems unit. He lived in Cleveland in the early 1990s. “The clinic has attracted the best physicians in the world. It is a focal point.”
But the city of Cleveland has fared less well. Its population has plummeted 17% to 396,816 between 2000 and 2010, and median income, already low at 66% of the national average, fell to 59.6% over the same period. Eighty-five percent of the city’s income tax revenue now comes from people who live in the suburbs. Health care is the city’s saving grace and a key factor in why Moody’s Investors Service recently kept an A1 rating on the city’s general obligation debt. “Health care has definitely been a stabilizing factor for them,” says Moody’s analyst Hetty Chang.
But stable is not good enough for Cosgrove. True to his venture capitalist ambitions, he’s pushed to spin of f companies from the clinic–60 of them in the past decade. Together they have raised $700 million in outside equity funding and created 1,000 jobs. But it’s nowhere near enough.
His brainstorm: a giant mall for hospital buyers. “Think about the things that go into a hospital. Shades, televisions, chairs, tables, wall coverings, all the medical gear, the operating tables, you name it,” Cosgrove says. He envisioned a single building filled with futuristic showrooms where all of this stuff would be sold to doctors and hospital administrators. This, he hoped, would both lure big health care companies to the region and help jump-start Cleveland’s convention business. County commissioners embraced the idea, and levied a cent sales tax to raise $465 million to create Cosgrove’s medical market and a new, 767,000-square-foot convention center. The medical mart’s grand opening is slated for October, and the convention center has already hosted its first event.
Not everyone is sold on the plan. Most convention centers throw off far less money than their promoters predict, and many cities wind up ?giving away space for free, says Heywood Sanders, an urban planner at the University of Texas at San Antonio who has studied Cleveland’s strategy. “If your downtown doesn’t function as a vibrant, interesting central core, what is going to make it interesting to visitors?” he wonders. “Is this a field in which it makes sense to compete? Is this something that plays to your natural advantages? Or is this something like the Rock and Roll Hall of Fame, a grand development gesture built more on hope than business sense?”
The Cleveland Clinic was founded in 1921 by George Washington Crile, a surgeon known for his work in treating shock, along with three doctors, two of whom he’d served with in the European theater in World War I. At the time, most doctors were–and 40% continue to be–independent businessmen who paid for space and operating time at local hospitals, but Crile was fascinated by the Mayo Clinic in Rochester, Minn., which paid its physicians a salary. The Cleveland Clinic imitated Mayo’s system and also put docs on a yearly contract, making it far easier to let them go. The docs signed up for the relatively high pay and, more important, the opportunity to work with the best minds in their fields.
Salaried physicians have little incentive to order up extra procedures and tests because they don’t get paid by the procedure, as most doctors do. And because they can lose their jobs, they stay on their game and work more closely with one another. “The clinic is special because it has been practicing a style of health care that is more collaborative and more evidence-based for literally a hundred years,” says Bob Kocher, a health care investor at Venrock, the legendary venture capital firm started by Laurance Rockefeller.
Outside data back up the benefits: In the last two years of life Cedars-Sinai Medical Center in Los Angeles spends $146,165 per Medicare patient, according to the Dartmouth Atlas of Health Care. UCLA’s Ronald Reagan Medical Center spends $137,248. The Cleveland Clinic? Just $86,279, even as it treats some of the sickest patients in the country. “We know the incentives of fee-for-service make it hard for physicians to do less because they’ll lose income,” says Elliott Fisher, director of Dartmouth’s Institute for Health Policy & Clinical Practice.
“It’s almost a patriotic obligation to begin to figure out how we do this,” Cosgrove says, “because health care costs are going to eat education and all the social programs in the country if we can’t control the costs going forward. We have to develop a new model for delivering care.” He predicts that the Affordable Care Act, popularly known as ObamaCare, will be “a major step in disrupting the current system,” forcing consolidation of hospitals that, if it is done right, will make health care in the rest of the country look more like Cleveland. Doctors will no longer be individuals but team players, employed by hospitals, just like in Cleveland.
Cosgrove first heard of the medical-mart idea in the late 1990s when he was spending a lot of time in Dubai. (Three thousand two hundred and ninety-five patients visited the clinic from other countries last year; 35% of them came from the Middle East.) But the notion really grabbed hold of him when his wife decided to remodel their house. She took him to the Merchandise Mart in Chicago, a 25-story building on two square city blocks run by the Kennedy family. It’s filled with everything that you could need for a house: lamps, carpets, artwork, faucets, toilets. Other businesses orbited it, including antique stores, more furniture stores, design firms, even burglar-alarm companies. The whole thing made Cosgrove think that a Medical Mart could be the way to transform Cleveland, and he made it part of his pitch when he interviewed for the chief executive job.
Cosgrove had operated on John Cushman, who ran the real estate firm Cushman-Wakefield; through Cushman he was introduced to Christopher Kennedy (the son of Senator Robert F. Kennedy), who still managed Merchandise Mart Properties despite its sale to Vornado Realty Trust for $625 million in cash, stock and debt in 1998. In 2005 Kennedy and Cosgrove brought the med mart idea to Cleveland’s mayor, who introduced them to his bosses, the county commissioners.
At the time, Cuyahoga County, of which Cleveland is part, was run by a committee of three equally powerful executives. They embraced the idea in part because it allowed them to attach the mart to building a new convention center, something they thought the city needed but which had proved politically unpopular. They selected Vornado’s Merchandise Mart Properties to run the project.
The new plan proved unpopular, too. Then, in July 2008, the offices of one county commissioner, Jimmy Dimora, were raided by the feds in an anticorruption investigation. He was accused of accepting free meals, expensive liquor, sex with prostitutes, gambling junkets and home improvements from people seeking political favors, and was eventually convicted and sentenced to 28 years in prison.
In the wake of the Dimora scandal, a vote was held to completely overhaul the structure of the government, putting a single county executive in charge. In 2010 Edward FitzGerald, a JFK-esque Democrat who as an FBI agent had investigated relationships between the Mafia and local politicians in the Chicago suburbs, was elected to that job. It was unclear if the medical mart or the convention center would ever be built. “The facility had been designed and was starting the construction phase, there were virtually no tenants, and there was a real question about whether or not the business model itself was going to work,” says FitzGerald. One problem immediately jumped out at him: Cosgrove, the Cleveland Clinic and University Hospitals had been locked out of the process. FitzGerald’s first move: Call Toby.
Cosgrove called in an old friend, 30-year McKinsey veteran James Bennett. They’d raised their kids together, chatting about business at birthday parties and barbecues. Bennett, a silver-haired executive’s executive, became a senior vice president at Merchandise Mart Properties, calling the work a civic service to a city he loves.
Bennett found that not only had the project lost touch with the Cleveland Clinic and University Hospitals but also with the companies that it was supposed to entice. He convened a committee, including top executives from Cardinal Health, Johnson & Johnson and Medtronic: What did they want? They started with the name, which is how Cosgrove’s Medical Mart was transformed into the Global Center for Health Innovation. But they also wanted more than mere showrooms; they wanted flexible spaces that simulated things like operating rooms. And they wanted to help design them. Cosgrove got them involved–and turned them into likely tenants.
“We didn’t have a space for demonstrations without taking customers to a working hospital, which is pretty disruptive and expensive,” says Jim Dagley, a vice president at Johnson Controls, which outfits operating rooms with air ventilation and low-voltage electricity systems.
A stroke of luck came from another city’s stumble. The Healthcare Information & Management Systems Society (HIMSS), a big industry trade group, had been planning to create a showcase for its work in Nashville, but the project fell through. Cosgrove got on the case. Says FitzGerald: “It’s one thing for Merchandise Mart Properties or for a county executive to try to pitch this project to HIMSS, it’s another thing for the CEO of the Cleveland Clinic to do it.” The HIMSS Innovation Center now takes up 30,000 square feet of the Med Mart, the entire fourth floor.
What is emerging is an Epcot Center for med tech. GE Healthcare, Siemens, Philips Health Care and Cardinal Health are among the 22 confirmed tenants in the soon-to-be-completed center. Next door Bennett has already booked conventions that will bring 89,395 attendees this year and 100,400 next. By the end of 2016, he says, bookings should be enough to pay back the $465 million it took to construct both buildings.
It’s understandable that Cleveland would bet so heavily on health care. As Kocher, the venture capitalist, puts it: “Playing off Cleveland’s strength, which is the Clinic, makes a lot more sense than playing off another industry.” But Sanders, the skeptic, says that may not be enough to beat the downward trends in the convention business. Attendance nationwide is shrinking or just barely up: According to Sanders’ numbers, New York City’s Javits Center had 1.3 million trade show visits in 2000 but only 533,700 in 2012; Orlando, Fla. doubled the size of its convention center but saw the number of attendees increase only 17% over the same period. Fitz?Gerald, now running for governor of Ohio, proudly points out the project came in $93 million below budget, and the unspent money will turn adjoining county offices into a hotel. Sanders questions the need: “Convention centers have been underperforming and failing from one end of the country to the other. They are doubling down on the bet.”
Cosgrove is hoping for an economic spark. “It will begin to influence the city as it comes back and make it a destination medical city,” he predicts. Still, any good surgeon will tell you it takes a while to see if an operation was successful. Cleveland isn’t out of the woods just yet.
forbes.com
No comments:
Post a Comment