Smoke on the Water: Fireworks at the Cleveland Clinic Medical Innovation Summit

10/10/11Follow @venturevalkyrie

(Page 2 of 3)

comes back to bite them in the form of higher health benefit costs, which are eating into profits. Health benefit expenses for large companies are growing at around 9 percent per year. By contrast, Pfizer’s profits are down over 4 percent from two years ago, by way of example. For US Corporations, that is the very definition of a Kobayashi Maru, as they say on Star Trek.

I heard two very poignant discussions of this issue from speakers. GE’s CEO Jeff Immelt said that GE’s massive healthcare division makes approximately $3 billion a year in profits and GE, as an employer, spends over $3 billion a year on health benefits for it’s employees. Thank goodness GE has a jet turbine division, because 100 percent of the health division’s profits are, ironically, unavailable for anything other than to pay for the health requirements of GE employees.

Xerox’s CEO Ursula Burns said that she is allowed to suggest nicely to employees that they stop smoking because it costs Xerox 40 percent more to pay for the health benefit costs of a smoker than a non-smoker over their career at Xerox. She is prevented by law, however, from demanding employees stop smoking or, god forbid, discriminating against smokers, yet she is being forced by economic necessity to find ways of reducing healthcare costs to remain viable as a company. It is an interesting conundrum that can put Xerox in a situation where they have to cut elsewhere because of skyrocketing healthcare expenses they can’t control through more direct means. She pointed out the critical need to educate employees to make good healthcare decisions through transparency of costs, and financial incentives for wellness.

Toby Cosgrove, CEO of Cleveland Clinic, echoed the sentiment by saying, “we can’t afford to protect obese patients from themselves anymore” and “we must manage insurance company profits.” Notably he did not explicitly state that providers’ economic incentives must also be brought into alignment with economic reality, leaving out the the third leg of that stool, though he did say that overall systemic financial incentives are “out of whack”. I’m sure he’d prefer to find a way out for the providers in this since that is how his bread gets buttered, but I’m sure he knows what has to get done–he also acknowledged that, with 68% average occupancy, Cleveland has too many hospital beds.

America’s declining leadership in innovation was another big theme of the conference. One of the barometers for innovation used was the number of new companies funded in the cardiology sector. It was noted that data from Windhover, a medical device research group, shows that there were a relatively low number of newly-funded cardiology ventures since 2008 (22 companies as measured by Series A financings) but that of those, only 4 such companies received first round funding in the past 2 years. This is a pretty sharp fall-off from the days when cardiology deals were quite plentiful, probably to the point of excess. The reasons given for America’s declining innovation leadership were manyfold: the FDA has become a barrier to the introduction of new technologies in the US; the patent office is inefficient and has a backlog of over 700,000 applications; comparative effectiveness has a chilling effect on investment and reimbursement; torts and malpractice lawsuits prevent new technology adoption; and, a big one, US tax policy is driving business to countries that are courting the medical device industry.

Harry Rein, General Partner of Foundation Medical Partners, commented that the incentives to test new technologies overseas are so strong (and the barriers to do so in the US have become so high) that “before long the US won’t be the most skilled in new medical technologies anymore. Physicians and surgeons overseas are getting skilled at US expense because … Next Page »

Lisa Suennen is Managing Partner at Venture Valkyrie Consulting, a firm providing advisory services to companies, organizations, and private equity firms in the healthcare field, and the co-author of Tech Tonics: Can Passionate Entrepreneurs Heal Healthcare With Technology? Follow @venturevalkyrie

Single Page Currently on Page: 1 2 3 previous page

By posting a comment, you agree to our terms and conditions.

  • Bob Kocher

    Really interesting summary!

    Pretty shocking that Toby Cosgrove, CEO echos the myth that payors are highly profitable, “we must manage insurance company profits.” his margins are certainly higher than most of the plans reimbursing him.

  • http://www.thehealthcareblog.com Matthew Holt

    That’s because Toby understands monopoly better than the Ohio Payers do, Bob!

    Meanwhile, it makes sense for GE’s Immelt to be wondering if they should make profit in health care to stave off their health care costs, but the rest of the device manufacturers there make bundles more than the cost of health care for their employees–so it’s clearly better for them for overall costs to rise.

    The question for our Venture Valkyrie is why Xerox and the others are such a bunch of pussies and why they haven’t done the rational thing that Chrysler talked about in the 1980s and handed over the responsibility for their employees health care to the government.

    My guess? Most businesses are run by people who cant do math.

  • David Miller

    I wonder what a clinical site in, say, Argentina or Brazil charges per patient for a clinical trial versus American sites like Cleveland Clinic?

  • http://venturevalkyrie.com Lisa Suennen

    Yeah, it was an interesting meeting guys. I think that we will see a profound transition of employees into defined contribution plans (as compared to the defined benefit current status quo) at companies like Chrysler, which has already done this with their retirees. It gives them a way to be insulated from healthcare inflation by indexing the defined contribution accounts to “regular” inflation and get out of the medical business. As for Cosgrove, you would have to be crazy to offer up your own profits as a sacrifice!

  • http://payer-strategies.blogspot.com/ Torsten Bernewitz

    Thanks for the great summary! The employers’ voice regarding healthcare costs is interesting, as recently many payers seem to refocus their attention on the individual consumer (and may thus be distracted from employers).
    In this light it is perhaps no wonder that no payers were present at the conference. This could be a strategic mistake as there are a lot of changes in the employers segment. Employers’ priorities and benefit strategies will change and diverge significantly. Health insurers must keep the pulse on their evolving needs, create stronger differentiation through products and services, tailor their offering, and become more impactful in bringing the value proposition across. In many cases this means that insurers must get much closer to employers than they currently are. Seems in Cleveland they missed a chance to do this.

  • JP

    The repeated digs against Cleveland were unnecessary and distracting from the purpose of the piece. You spent more time snarking on the completely irrelevant 40-year-old river fire than you did on the “top 10 innovations.” Next time, leave the cheap shots aside and spend your words on thoughtful analysis.

  • http://venturevalkyrie.com Lisa Suennen

    Torsten, thanks for the note. I agree: the employers are a key part of the push for change and will continue to play a key role in the market dynamic, particularly as the Health Insurance Exchanges come to the fore in a greater way.

  • Nicholas Parmelee

    A nice overview of what sounded like a very interesting conference. It is an unfortunate development that one of the more progressive provider organizations in the country totally left payers out. This is concerning and does not bode well for the ACO model.

    The writer Lisa Suennen appears to be an individual of great knowledge and intellect. I was saddened to see her devalue the hard work she put into this piece by loading it with smears of a very proud community.

    I love when some from the coasts site the supposed close mindedness and dated thinking of people in the American Midwest, especially in regard to the electorate. These are the same open minded intellectuals that will strike at the first bate to call Cleveland “the mistake by the lake” or classify all of the American Midwest as “fly over states”. Talk about close mindedness and dated thinking.

    Sounds like it was a good conference. Ah the rants of a proud Clevelander, but frankly we are tired of the jokes. I just want someone to write a review of something progressive that occurred in Cleveland without the mention of something that occurred 40 years ago (polluted river on fire). I don’t see bussing and all of the racial undertones surrounding that black eye mentioned in every article about an occurrence in Boston.

  • http://www.claimppi.co.uk ryan

    Quite an interesting take on the role taht empliyes generally play.