Trustee Toby Cosgrove ’62 is mentioned in a New York Times article (also here) on “Patient Care vs. Corporate Connections” that focusses on the Cleveland Clinic (CC). Interesting reading. To anyone with a more than basic understanding of the business world, Cosgrove is made to look like either a fool or a scoundrel. (I blame unsympathetic reporters.) Understanding why requires a short detour into the world of venture capital and start-up companies.

The Cleveland Clinic, one of the most entrepreneurial and prestigious medical institutions in the country, for one, is struggling to revamp rules intended to ensure that corporate connections do not lead to bias in patient care or academic research. But it is far from willing to sever all ties.

The clinic, a nonprofit health system with nearly $4 billion a year in revenue, has in recent years become the epitome of Medicine Inc., where doctors and researchers are encouraged to develop new drugs, devices and medical treatments.

It is hardly alone in confronting these ethical questions. But the aggressive and freewheeling capitalist spirit that has taken it to the top of the medical profession has also made conflicts of interest more visible than at many other institutions.

Nothing wrong with capitalism, of course. Consider Foundational Medical Partners (FMP), a private equity firm “focused solely on health care with a special interest in medical devices, biopharmaceutical platforms and products, and other opportunities in health care including diagnostics, health care services, and health care information systems” and Coapt Systems, a company that “that designs, develops, manufactures and markets bioabsorbable implants specifically to provide surgeons with the next generation of soft tissue fixation technology.”

FMP provides funding to companies, one of which is Coapt, in exchange for an ownership stake. The current owners give up some equity but get the cash they need to sustain and, everyone hopes, expand the business. FMP makes money when those companies grow and its ownership stake becomes more valuable. Venture firms like FMP cash out after several years when Coapt becomes successful — i.e., develops a product that lots of people want to buy — and is either bought buy a larger company or does an IPO.

But where does FMP get the money that it gives to Coapt from? Investors, of course. Wealthly people and organizations invest their money with FMP, which probably charges them both a fixed fee and a percentage of the profits on the investments. More here and here on details of the process.

So far, so good. Note that the key for Coapt to become successful — and, therefore, for FMP (and its investors) to make money on its investment — is sales. They must find lots of people willing to buy their products. Now, to generate sales, it helps to have outstanding products. Coapt no doubt spends a lot of money on research and development. But you can have the best products in the world and, if no one buys them, it doesn’t matter. You still go bankrupt.

Delos M. Cosgrove, for one, who took over as the clinic’s chief executive last October, says he does not believe that across-the-board restrictions are desirable. “What we want to do is encourage innovation,” Dr. Cosgrove said. “There are always going to be conflicts in the world.”

Perhaps. But those conflicts can be large or small, disclosed or secret. The details matter. This is all the more so true for a non-profit like the Cleveland Clinic.

Note that Cosgrove was paid more that $1.8 million in 2002 by the clinic, ostensibly for “full-time” work. Cosgrove isn’t the highest paid CEO of a non-profit hospital, but he is not, uh, going to have a good excuse for failing to contribute to the alumni fund. [At the time of this filing, Cosgrove had not yet taken over as head of the Cleveland Clinic, but the prior head, Floyd Loop, was also paid about this much, so I expect the number is more or less the same today.]

So, it may be true that there are always conflicts in this imperfect world. But I do not know of a single Eph who is more conflicted than Cosgrove.

This is more than just a complaint about high salaries paid at non-profits. Maybe the Cleveland Clinic should pay Cosgrove $70,000; maybe it should pay him $7,000,000. It is not for me to say. As long as Cosgrove’s salary is disclosed so that potential donors know where (a portion of) their money is going, I have no objection. But the Cleveland Clinic is certainly not going to be at the top of my charitable gift giving list this year.

Dr. Cosgrove is particularly familiar with the interplay between industry and medicine.

“Interplay” is an interesting choice of words here.

He personally holds nearly 20 patents and developed a new catheter that reduced the number of strokes in patients undergoing heart surgery. He also sits on the board of medical device companies like AtriCure and Novare Surgical Systems and serves as a general partner in the venture fund started by the Cleveland Clinic.

And here the Form 990 for Cleveland Clinic says that Cosgrove works there “full-time”! Younger Ephs should consider getting involved with private equity. Any field that allows you to be a general partner — read: boss — in, essentially, your spare time is a field they might want to be in.

The venture fund is independent of the clinic, though the clinic has provided about a third of its financing to date.

There are many words to describe the relationship between a venture fund and the organization that put up 1/3 of its financing (especially if that financing came ahead of other investments); “independent” is not one of them.

The fund makes its own investment decisions, but the clinic is a special limited partner that receives a share of the profits in return for access to the doctors’ expertise.

I understand that the fund — almost certainly FMP, although the article never confirms this — makes its own investment decisions. I am sure that the general partners, i.e., the people who run the fund, are thoughtful folks who take their responsibilities to their investors seriously.

But all of the investors in a venture fund receive “a share of the profits.” That is, after all, the whole reason for investing. The question is, does the Cleveland Clinic get more of a share of the profits than other investors. If I were one of those other investors, I would want to know this.

Moreover, what does “access to the doctors’ expertise” mean? Are other venture funds prevented from talking to doctors from CC? Are Cleveland Clinic doctors forbidden to talk to anyone not associated with FMP? Must they keep the research that they do — using money donated for non-profit use — secret so that FMP can have special access?

What it means, dear readers, is that FMP is trading off the well-deserved fame and reputation of the world-class researchers at the Cleveland Clinic. Whether this is an example of innovative synergies between academia and business or sleazy name-dropping depends on your point of view.

Dr. Cosgrove says he does not plan to sever his outside relationships anytime soon unless the clinic’s board determines that these relationships are inappropriate.

These relationships are the very definition of “inappropriate”! If these do not constitute an unacceptable confict of interest in the business world, then nothing ever would. Let us count the conflicts between Cosgrove’s job as CEO of the Cleveland Clinic and his job as general partner at FMP:

  1. Fees paid to FMP. In Cosgrove’s position as head of CC, he should negotiate the best deal with FMP. Instead of paying FMP a fixed fee of 2% (or whatever), CC would be better off paying it 1%. But, in his role as a general partner of FMP, Cosgrove is supposed to negotiate the highest possible fees. He (and his partners) are much better off if the fixed fees paid to FMP from CC are 2% rather than 1%.
  2. Intellectually property introduced to FMP. Note that, like all venture funds, FMP is always looking for new investment opportunities. It is, like all such firms, especially interested in opportunities that not too many other venture funds are aware of and/or knowledgeable about. The more that other venture funds are involved in the process — i.e., the more competitors there are to provide funding — the tougher things are for FMP. As a CEO of Cleveland Clinic, Cosgrove wants to introduce ideas/people/companies that come out of CC to the widest variety of venture funds available. This maximizes the chance and the amount that CC will get paid for its intellectual property (mainly patents and the like). As a general partner at FMP, Cosgrove wants to minimize the number of other venture funds looking at company X until FMP and company X have struck a deal. The more other funds that company X can talk to, the less lucrative the deal that FMP can strike with it.
  3. Products purchased from FMP companies like Coapt. As CEO of Cleveland Clinic, Cosgrove should be ensuring that all purchases made by CC are for the best products at the most attractive prices. As a general partner at FMP, Cosgrove wants the companies that he invests in to be successful. In order to be successful, they must sell their products to places like . . . the Cleveland Clinic. The more products that Coapt is able to sell to the Cleveland Clinic, the more successful it will be.
  4. Cosgrove’s time/money. All good Ephs hope that Cosgrove makes a ton of money and that he donates some of that money to Williams. To the extent that Cosgrove enters the ranks of the truly rich, it will not be via his salary from the Cleveland Clinic. It will be from his share of the profits generated by FMP. Every minute that Cosgrove spends on FMP business is a minute that he doesn’t spend working toward the greater glory of the Cleveland Clinic. Of course, all of us face a conflict between our work and our personal life. There are only so many hours in the day. But assume for a second that home-run success for FMP might generate tens of millions of dollars, or even more, for Cosgrove personally. (This sort of pay-out is not uncommon for the general partners in a venture fund.) If you were him, would you worry more about how the Cleveland Clinic or FMP is doing when you woke up each morning?

In all these cases, when Cosgrove does what is best for the Cleveland Clinic he is unavoidably doing something that is less than the best for FMP and/or Coapt. Not every deal in the business world is a zero-sum game, but enough of them are that conflicts like the one that Cosgrove is in the middle of are avoided if at all possible.

Much of these conflicts would still exist even in the absence of Cosgrove’s dual role. As soon as an organization like the Cleveland Clinic (for profit or not) invests in a venture fund like FMP that invests in companies like Coapt that do business with the original company, you have a problem. What is best for one specific part of Cleveland Clinic — which products should be purchased for a given purpose— may not be best for another part of Cleveland Clinic, i.e., the endowment. Other Ephs have recently discovered that “independent” venture funds controlled by senior executives (which then do business with the company that those senior executives are supposed to be running) are not always the best way to run the railroad.

“I spent 30 years developing relationships with industry,” he said. “I was an inventor and an entrepreneur and asked to be a venture capitalist by the institution.”

Ahhh. The Board made him do it. Of course, it could be that, in a sense, the Board did make him do it. The exact timeline is difficult to follow, but it seems clear that FMP has been around for several years. In other words, Cosgrove was a general partner at FMP well before he became the CEO of CC. Perhaps it was actually the Board’s idea to found FMP in the first place. Cosgrove was just doing them a favor.

Whatever. The point is that, at present, the conflicts between Cosgrove’s job as CEO of the Cleveland Clinic and his job as general partner at FMP are overwhelming. He can serve one master or he can serve the other. He can’t serve them both.

The clinic, even in its new policies, will not prohibit financial relationships that give rise to conflicts. Most medical centers refuse to take this step because they rely on money from private industry, and they argue that any prohibition on outside business ventures would cause the best researchers to flee to institutions that allow them to profit more from their inventions.

Maybe. I am not aware of a single “medical center” at which the CEO is also a general partner in a venture fund, much less a venture fund that invests in companies that turn around and do business with the medical center.

Dr. Cosgrove said these kinds of relationships have all been scrutinized by the board, and that he plays no role in any decisions involving the use of devices from these companies.

“There’s a difference between being conflicted and the appearance of conflicts,” Dr. Cosgrove said.

This is just embarassing. Note that FMP claims that:

The Cleveland Clinic’s reputation and status in health care make it a highly desired partner for many companies developing new technologies for the health care marketplace. Its prominence and prestige, as well as its size, prompts many entrepreneurs in health care-related fields to seek to develop a relationship with this institution as either a development partner, beta site, site for clinical trials or as a reference customer.

FMP is positively advertising the conflict that Cosgrove insists on describing as a mere appearence. FMP boasts on its website that if you, hard-charging entrepeneur with a company in need of funding, come to FMP for that funding — as opposed to the hundreds of other venture funds that might be interested in you — FMP will use its influence to see to it that the Cleveland Clinic will become a “reference customer” for you.

In other words, sign up with FMP and the Cleveland Clinic will not only buy your stuff but will recommend that others do so as well. If I were a medical entrepeneur, I would find this to be a very appealing proposition, even if the actual financial terms offered me by FMP (how much cash it gave me for what percentage of the company) were less good than the ones offered by other venture firms. The opportunity to get the Cleveland Clinic as a “reference customer” is worth a great deal of money.

Now, it is inconceiveable that Toby Cosgrove does anything as unethical as calling down to the purchasing department and ordering someone to buy products from Coapt or AtriCure or CardioMEMS or any other FMP company. Cosgrove isn’t, by all accounts, that kind of guy. But just because he wouldn’t do it is no reason to pretend that the conflicts don’t exist. They do.

Moreover, the problem is not that Cosgrove will make that call. The potential for abuse lies elsewhere. Imagine that you are the sales person for Coapt. Your job (and paycheck) depend on your ability to sell. You need Cleveland Clinic to buy some of your product. Now, you may passionately believe that your product is the best available, that CC would be better off for having bought it, and that you and Coapt are making the world a better place. But, in your conversations with the people at CC who actually make the buy/no-buy decision, you are going to be cognizant of the fact that they work for Toby Cosgrove and that Toby Cosgrove will make a lot of money (both personally and for the Cleveland Clinic) if your company does well.

Do you think you might let the low level folks at the Cleveland Clinic know about these “synergies”? Do you think that you might urge them to get with the program? Do you think that you might hint to them that your “buddy Toby” thinks that Coapt’s products are wonderful?

Now, imagine that you are the purchasing person at the Cleveland Clinic. Do you think that, even though Cosgrove has never called you, you might feel a bit of pressure to choose Coapt over another supplier? I know that I would. After all, doing so helps the Cleveland Clinic!

It could very well be that

Notwithstanding The Cleveland Clinic Foundation’s sponsorship, the fund [FMP] is independently managed by a General Partnership with the independent investment discipline resident in a traditional venture capital structure. In this way it is a unique and constructive blending of the best of both worlds.

Perhaps the Cleveland Clinic and Foundation Medical Partners and Coapt Systems operate in the best of all possible worlds. Perhaps having someone like Toby Cosgrove involved at the very nexus of non-profit research/care-giving and for-profit product development/deployment makes for better health care for all of us. I don’t know. I also agree with Cosgrove that “There’s a difference between being conflicted and the appearance of conflicts.” But his problem is the former, not just the latter.

Complete Article

Like many prominent researchers at the nation’s major medical centers, Eric J. Topol, the chief academic officer of the Cleveland Clinic Foundation, has over the years had consulting and financial ties with numerous drug and medical device companies.

Dr. Topol, an outspoken cardiologist who frequently opines on the medical issues of the day, has done work for drug companies like Eli Lilly, the Medicines Company and a partnership of Bristol-Myers Squibb and Sanofi-Aventis.

Recently, however, as he has come under the spotlight for potential conflicts of interest, he said in a letter to one company that he had decided to end most of his relationships to “maintain my academic credibility.”

The decision follows a report in December by Fortune magazine that Dr. Topol, a leading critic of the painkiller Vioxx, was a paid consultant to a hedge fund that had made money betting that shares of Merck, Vioxx’s maker, would fall. Dr. Topol severed his ties with that firm, though he said he had no knowledge of the firm’s investment position.

His voluntary move to end most of his corporate ties comes as drug makers find themselves under greater scrutiny for their relationships to researchers. At the same time, medical centers are trying to deal with doctors who are increasingly entangled with companies whose primary goal is to make money, not necessarily to deliver the most appropriate care.

The Cleveland Clinic, one of the most entrepreneurial and prestigious medical institutions in the country, for one, is struggling to revamp rules intended to ensure that corporate connections do not lead to bias in patient care or academic research. But it is far from willing to sever all ties.

The clinic, a nonprofit health system with nearly $4 billion a year in revenue, has in recent years become the epitome of Medicine Inc., where doctors and researchers are encouraged to develop new drugs, devices and medical treatments.

It is hardly alone in confronting these ethical questions. But the aggressive and freewheeling capitalist spirit that has taken it to the top of the medical profession has also made conflicts of interest more visible than at many other institutions.

Many of Dr. Topol’s colleagues on this sprawling 130-acre campus are starting companies and serving as consultants and board members. In some cases, they may use their patients in clinical trials to test new treatments in which they have a financial stake.

“All of these financial arrangements with industry yield various kinds of conflicts,” said Dr. Jerome P. Kassirer, a former editor in chief for The New England Journal of Medicine, who recently wrote a book, “On the Take” (Oxford, 2004), about the undue influence of business on medicine.

To address those concerns, the Cleveland Clinic says it is overhauling its ethics policies, and will present them to the board for approval, perhaps within weeks.

“We want to protect data from money,” said Guy M. Chisolm III, a cell biologist who is spearheading the effort. “Money has no role to play in validating and directing data.”

But getting consensus on solutions is no easy matter, Dr. Chisolm said. “We’ve grappled with them, we’ve debated them.”

Delos M. Cosgrove, for one, who took over as the clinic’s chief executive last October, says he does not believe that across-the-board restrictions are desirable. “What we want to do is encourage innovation,” Dr. Cosgrove said. “There are always going to be conflicts in the world.”

The clinic, even in its new policies, will not prohibit financial relationships that give rise to conflicts. Most medical centers refuse to take this step because they rely on money from private industry, and they argue that any prohibition on outside business ventures would cause the best researchers to flee to institutions that allow them to profit more from their inventions.

A few academic centers go as far as preventing researchers from studying a drug or a device from a company in which they have any financial interest. Harvard Medical School, for example, does not allow its researchers to receive significant compensation from serving as consultants or holding equity in private companies if they are studying anything related to those companies.

But like most institutions, the Cleveland Clinic is trying to avoid outright bans by asking researchers to disclose their ties and trying to minimize the effect of the conflicts.

Dr. Mildred K. Cho, a medical ethicist at Stanford University, however, argues that managing conflicts, especially when the institution is itself involved, is “unlikely to be very effective, given all the pressures that are pushing in one direction.”

Situated in a dismal area of Cleveland, the clinic, which was founded by four doctors in 1921, essentially operates as a gigantic group medical practice. It takes immense pride in its delivery of cutting-edge medicine, having pioneered angiography and coronary bypass surgery.

Under the direction of its former chief executive, Floyd D. Loop, also a cardiac surgeon, the clinic amassed more than a dozen hospitals and focused its attention on one of the most profitable areas of medicine – cardiac care. Within the last few years, it has started both a medical school and a venture capital fund called the Foundation Medical Partners, which invests in companies founded both on campus and outside.

Though it sits in a gritty urban center, the medical center fairly gleams with freshness and wealth. Its paying customers – patients with insurance – are able to help finance the clinic’s constant expansion and renovation. “Our facilities are second to none,” boasted Michael O’Boyle, the system’s chief financial officer.

The institution is now pouring some $500 million – $300 million of which is expected to come from charitable donations – into a new heart center, intended to showcase the latest in cardiac care and to treat the tens of thousands of heart patients who visit the clinic each year. The expansion comes on the heels of the construction of a new stem-cell research center.

All of this display of financial resources has drawn criticism among some in the community that the Cleveland Clinic has provided very little charity care to patients without insurance. It is among a group of hospitals being sued by plaintiffs’ lawyers across the country contending that the hospitals violated their obligation as charities by overcharging people without insurance. Some community leaders have mounted legal challenges to the clinic’s moves to exempt certain operations from local taxes.

The clinic argues that it does its fair share and that any profit goes into areas like research and education. “We have no shareholders, we have no market capitalization,” said Mr. O’Boyle. “What we make we re-invest.” The clinic also says the lawsuit is without merit.

Yet the clinic is unabashed in its push to capitalize on the medical expertise of its 1,400 doctors to increase its revenue to finance research. In 2003, the clinic says it filed for more patents per research dollar than the Mayo Clinic, Johns Hopkins Medical Center or Massachusetts General Hospital, the Harvard-affiliated Boston hospital.

“I think they’re a lot more entrepreneurial than many of the others,” said Martin D. Arrick, an analyst with Standard & Poor’s, who follows the debt of tax-exempt hospitals. He praises the Cleveland Clinic for investing in those areas where it excels. “They’ve followed a strategy of making their core asset shine, and you can see that.”

Dr. Cosgrove is particularly familiar with the interplay between industry and medicine.

He personally holds nearly 20 patents and developed a new catheter that reduced the number of strokes in patients undergoing heart surgery. He also sits on the board of medical device companies like AtriCure and Novare Surgical Systems and serves as a general partner in the venture fund started by the Cleveland Clinic.

The venture fund is independent of the clinic, though the clinic has provided about a third of its financing to date. The fund makes its own investment decisions, but the clinic is a special limited partner that receives a share of the profits in return for access to the doctors’ expertise. Dr. Cosgrove says he does not plan to sever his outside relationships anytime soon unless the clinic’s board determines that these relationships are inappropriate.

“I spent 30 years developing relationships with industry,” he said. “I was an inventor and an entrepreneur and asked to be a venture capitalist by the institution.”

Similar ties abound at the clinic. For example, the venture capital fund has invested in CardioMEMS, a device company in Atlanta started by a clinic doctor. The clinic recently started patient studies of an implantable sensor made by CardioMEMS used in surgery to repair an aortic aneurysm. Dr. Topol also served as a consultant to CardioMEMS.

AtriCure, a small Cincinnati company making an atrial fibrillation device, has also received financing from the venture fund. At the same time, the clinic is conducting a clinical trial of a new AtriCure treatment and the clinic’s atrial fibrillation center often uses AtriCure products.

The clinic has also invested in Novare Surgical Systems. The first use in the United States of Novare’s device, an alternative to traditional methods of surgical clamping in beating-heart bypass surgery, was at the clinic.

Dr. Cosgrove said these kinds of relationships have all been scrutinized by the board, and that he plays no role in any decisions involving the use of devices from these companies.

“There’s a difference between being conflicted and the appearance of conflicts,” Dr. Cosgrove said. But managing the appearance of conflicts, as Dr. Topol learned after Fortune magazine revealed his involvement with the hedge fund, can be difficult.

“I think there’s a real problem in academics today,” Dr. Topol said. “There’s a very close-knit relationship with industry, and it’s too close when any individual can derive a profit from that relationship.”

Indeed, Dr. Kassirer said it was often quite difficult to discern the subtle factors that affected decisions about patient care. Research has suggested that doctors who invent a medical device tend to use that device even where there are better alternatives available.

“It has an influence on what you do,” he said.

The Cleveland Clinic says it is currently reviewing some of the potential conflicts related to its own investments. Under the clinic’s current rules, situations that create the potential for conflict of interest for an individual doctor must be approved by a special committee. The proposed policies – which would also apply to the clinic’s own financial relationships – would lower the amount of the financial benefit that would set off a review to $10,000 from $25,000, with increased involvement by the clinic’s Institutional Review Board, which oversees research involving patients.

When there are institutional conflicts, including conflicts involving clinic executives, the clinic plans to propose a separate review process that would include members of the clinic’s board.

In recent months, the clinic has had its statisticians or outside specialists review data independently when a study involves a researcher with a potential conflict of interest.

Dr. Chisolm acknowledges that these strategies are works in progress. The question raised by ethicists like Dr. Kassirer and Dr. Cho is whether it can be done effectively, if at all.

“The ideal of handling these conflicts of interest,” Dr. Kassirer said, “is not to have them at all.”

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