Cleveland Clinic chief on the business of health

(Fortune Magazine) -- Health-care reformers should study up on the Cleveland Clinic, and they know it. President Obama, who toured the clinic last July, has praised it for providing "the highest-quality care at costs well below the national norm."

It's easy to be impressed: The clinic is one of the world's most highly regarded medical centers. Patients have included King Khalid of Saudi Arabia, the Prince of Wales, billionaire Al Lerner, Oprah Winfrey, Jack Nicklaus, and many others who could afford to go anywhere. It is always near the top of U.S. News & World Report's annual rankings of America's best hospitals, and in cardiac care it has ranked No. 1 for the past 15 years.

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Cleveland Clinic's Delos Cosgrove

What fans of health-care reform can learn from the famous hospital's CEO. More

Much credit goes to its CEO since 2004, Dr. Delos Cosgrove, known as Toby. An Air Force surgeon in Vietnam, he spent most of his career doing heart surgery at the clinic and has performed over 22,000 operations.

When Dr. Cosgrove and another clinic doctor were hit with conflict-of-interest charges in 2005, the clinic responded by adopting some of the most rigorous transparency rules in the field. Dr. Cosgrove practices what he ardently preaches about diet and exercise, looking and sounding much younger than his 69 years.

He talked with Fortune's Geoff Colvin about why health-care reform won't lower America's medical costs, his decision not to hire smokers, suddenly becoming a CEO after 30 years as a surgeon, and much else. Edited excerpts:

Geoff Colvin: America has the world's highest medical costs by a mile, but we have only mediocre health compared with other developed countries. What's the problem?

Delos Cosgrove: We do not have a system of health-care delivery in the U.S. It's a series of mom-and-pop shops all over the country, and it has not been systematized. In addition, I think we get a bad rap in terms of not having health-care quality comparable to that of other developed countries. When you have a high murder rate and a high traffic accident rate, those all skew the data. Nonetheless, we're not as good as we should be.

GC: But why are the costs so extremely high?

There's a dirty little secret, and I might as well tell you to start with. The secret is that regardless of what happens with health-care reform legislation, the costs are going to go up. We have more elderly people, and we can do more for them. So regardless of what happens, we can really only try to contain the rate of inflation. The cost is going to go up over time.

GC: A lot of people watching the health-care debate are thinking that they're going to see their costs stop rising.

The total bill for health care for the country is going to continue to go up. Individual costs may come down in terms of what people pay for insurance, but they're going to pay for it in a different way -- in taxes, one way or another.

GC: In any other industry, if revenues are rising fast, we think it's growth, and it's exciting. There's only one industry where we say it's a terrible national problem, and that's medical care. Why?

We're only looking at one side of the equation. Look at the other side -- suffering has gone down, diseases have gone down. Deaths from heart disease in the past 15 years have gone down 30%. That's tremendous progress. Health care is the second leading employer in the U.S. after restaurants and the food industry. It does a tremendous amount of research. It makes products. It exports. So it is an economic stimulus at the same time it's a cost.

GC: Is it also significant that people mostly aren't spending their own money? You simply don't spend it the same way if it's your money. Is that a legitimate observation?

It's absolutely legitimate, and on top of that there's no incentive to stay well.

GC: What can be done about that?

Let's take obesity. It accounts for 10% of the cost of health care in the U.S. -- we will never be able to control the cost of health care until we begin to control the epidemic of obesity. Two-thirds of the U.S. is overweight, and one-third is obese. We are the fattest nation in the world. Our rate of obesity is going up so much that probably half the U.S. will be obese in the next 20 years. We have to do something, and there are plenty of things we can do.

GC: Like what?

Industry has a tremendous opportunity. One thing we've done across the Cleveland Clinic is say, "Look, we need to give our employees and patients the right foods." So we took trans fats out of all our foods. We took the fryers out of all our cafeterias. We took the candy bars out. We took the pop out of the vending machines. And then we said, "Let's work on the other end of it. Let's let people get exercise."

So we gave free Curves memberships, free Weight Watchers memberships, free access to our gyms, pedometers to our employees. In the first year they lost 120,000 pounds.

GC: So why aren't more companies doing what you're doing?

It's always been a question of "What's the ROI on this?" Until very recently, people didn't realize the ROI is probably 3 to 1: For every dollar invested, you get three back in terms of employees being better. Let me tell you what we did in smoking. First we said, "No smoking on our campus." Then we offered all employees free smoking-cessation classes. Then we went out and pushed hard for a law banning smoking in public places in Ohio, which got passed. Then we offered free smoking cessation to everybody in Cuyahoga County, where the Cleveland Clinic is. Then we stopped hiring smokers. And you know what happened? In four years the smoking rate in Cuyahoga County went from 28% to 18%. The national average is 20%. So you can make a difference.

GC: Not only did you stop hiring smokers, but I gather that sometimes people get tested.

Yes, they do. We test all new employees for nicotine, as well as drugs, as part of their employment physical. It's very interesting what you can do with that sort of thing, and it's completely legal.

GC: If we could get obesity and smoking under control, how much would it reduce the nation's health-care bill?

It would be tremendous. Three things -- smoking, diet, and lack of exercise -- cause 40% of premature deaths in the U.S. They contribute to 70% of the chronic diseases, things like emphysema and heart disease. And that's 75% of the cost of health care. It's huge!

GC: In health-care reform, one concern for hospitals and doctors is that Medicare and Medicaid will reduce what they pay. If that happens, will hospitals and doctors be more reluctant to treat Medicare and Medicaid patients?

That remains to be seen. Right now hospitals lose about 5% on treating Medicare patients and about 14% on Medicaid patients. If we push more people into the Medicare and Medicaid categories and decrease the amounts that private insurers pay, that's going to be a problem for hospitals. I tell people at our hospital that we have to figure out how to treat people more efficiently with a higher quality. At the end of the day, quality always brings down cost.

GC: That was an early lesson of the quality movement that's often forgotten or overlooked in health care.

That's true. And part of the problem in health care is we really didn't have the numbers. We still don't have the numbers in lots of ways.

GC: Meaning that measuring quality is not easy?

It's very difficult. It was easy in cardiac surgery -- you either survived or you didn't. It's a lot harder in rheumatology or dermatology or something of that sort. What are the endpoints that we're going to measure to see if you really get great treatment?

At the Cleveland Clinic we've asked all of our departments to measure quality and report it on a regular basis. We're getting better and better, but the most important thing we learned was that every time you look at yourself and at your outcomes, you find that there are problems, and then you can go fix them. That is really what the quality movement is all about.

GC: The Cleveland Clinic is always ranked among the very best medical centers in America. In your specialty, cardiac care, it has been No. 1 every year for the past 15 years. At the same time, it is also by some measures the most efficient of the top-ranked medical centers. How do you manage to do that?

Most people don't realize that we are organized in a very different way -- very few hospitals are organized the way we are. First, all of us have salaries. It doesn't make any difference, if I'm a cardiac surgeon, whether I do two heart operations a day or four. I take home the same amount of money at the end of the week. So there's no incentive to do extra tests or any of that.

Second, we all have one-year contracts, and we have annual professional reviews. So the quality of the doctors is controlled, there's no tenure, and if you don't make it, you don't get a pay raise or you may not stay. That is one of the most important things we do. It's quite different from most places, where doctors can practice for as long as they want to practice.

Also, interestingly, we are physician-led, which is quite different from most medical organizations, which may have an administrator running the hospital and a dean running the medical school. This is more like a corporation, and the CEO is a doctor. The chief of staff is a doctor, and the CIO is a doctor.

GC: How do you get the best doctors in the world to come work for a salary?

It's the environment the doctors come to work in. They've got colleagues that they respect, and they are supported, so they can do doctor work. I mean, most of us didn't sign up to fill out insurance forms. The wonderful thing I found when I came here was that I had incredible support and didn't have to do the mundane things -- like go and find the X-ray. I've never sent a bill. It's all done for me. So I did doctor work, and I think that's what most doctors want to do, in an environment with equal-quality physicians.

GC: What about the information issues in health care? Even the Cleveland Clinic has to spend a huge amount of money dealing with incompatible forms of data that come from insurance companies, other health providers, other companies. Is there an opportunity there?

I think there's a big opportunity. We're starting to talk with insurance companies about taking some of the friction out of the business deal that goes on between the hospitals and the insurance companies.

For example, every time we send in a claim, they have a group of people who look over the claim. And every time they pay us, we look and see if they paid us what we're supposed to be paid. Couldn't we come to an agreement that says, "Look, the average of what a hip costs is this, and let's take all that friction out."

GC: President Obama has to some extent demonized the insurance companies. What's their proper role in the system?

We're going to have to have some form of insurance, whether it's run by the government or run privately. Insurance runs on the basis that everybody contributes, whether you're sick or not, and it's there for you when you are sick, and the people who are well help support the people who are not. We're going to have to have some sort of pooling of financial support.

Most countries have a two-part system: They have a government program, and on top of that they have the ability to have private insurance. I hate to think that we're going to have a two-tiered system in the U.S., but we may well.

GC: The Cleveland Clinic is not-for-profit. Is that model the future for big health-care institutions?

There are a lot of very successful for-profit hospitals. I think what we're going to see is a roll-up of hospitals. I don't think it's reasonable anymore to think that each hospital can be independent -- have its own financial support, its own purchasing, its own back office. You need efficiency.

You cannot expect every hospital to do great heart surgery or to put probes in people's brains for Parkinson's disease with pacemakers attached to them. It's too high tech. We're trying to build the health-care delivery system for the 21st century so that there'll be family health centers where you get your flu shots and your checkup and your mammograms.

At our community hospitals the babies are delivered and the gall bladders taken out and the hernias fixed and the pneumonias taken care of. And then you have a very high-tech hospital that looks after the really tough stuff. Right now the Cleveland Clinic has the highest acuity patients of any hospital in the country.

GC: Which means what?

They're the sickest group of patients of any hospital in the country.

GC: How did that come to be?

We did 4,000 heart operations last year, which is more than anybody else in the country. We did 170 lung transplants. A third of the hospital is intensive-care units.

GC: You do something at the Cleveland Clinic that I've never heard of elsewhere -- you let patients look at their own charts. What led you to do that, and what have the effects been?

I thought, "If I'm in the hospital, I want to know what those guys are writing about me." Why should it be the hospital's chart, as opposed to the patient's chart? It's really about the patient. So I said, "Why can't we do this?" So we did.

We have an electronic thing called MyChart, where you can go on the Internet and read your record. Few other hospitals around the country have done it. But we think it's the patients' information. It's about them. We're working for them. Why shouldn't they have the data?

GC: Inside the organization what were the fears about this?

The fears were that patients would get information they weren't ready for -- diagnosis of cancer, for example, or psychiatric information. So we put filters on that; the doctor has a week to get to the patient and let them know about this sort of thing. But what happened was doctors then improved their communication with patients, and patients got the information better, and it worked well all the way around.

GC: You spent most of your career as a heart surgeon. In business terms, you were a technician, a producer. Then you were made CEO. When that kind of move happens in business, it doesn't always work out. What did you learn that helped you make the transition successfully?

I went to school when I realized I was going to have this opportunity. I studied. I would work a day, and then I'd go home and hit the books at night. I had a lot of people who were very generous with their advice. They didn't sit down and draw it out on a blackboard, but they gave me little pieces of information, and they were kind and supportive in tough times -- everybody from [Harvard business professor] Michael Porter to [GE CEO] Jeff Immelt and [former GE chief] Jack Welch and [Boeing CEO] Jim McNerney. They were very generous with their time and their suggestions, and I'm grateful for that.