SAY GOODBYE TO MANAGED CARE.

BILL GEORGE SEES THE INTERNET--BY EMPOWERING PATIENTS WITH KNOWLEDGE--PULLING THE PLUG ON CUMBERSOME HEALTH CARE BUREACRACY.

On April 16, 1998, Medtronic CEO Bill George learned to trust has instincts when he shut down Medtronic Micro Interventional Systems. He had discovered that MIS had made fraudulent submissions to the U.S. Food and Drug Administration before its acquisition by Medtronic. "It was a disaster," says George. "We walked away from it."

Before the MIS fiasco, George says he'd always wanted to let principles guide the acquisitions. As long as Medtronic and the target could agree on values, culture, mission, and strategy, he says, "the numbers fall in place." But, he admits, "we haven't been consistent" in applying those standards. After MIS, George stuck to his convictions-with spectacular results, using acquisitions of like-minded companies to drive his strategy of building Medtronic into a broadly based medical technology powerhouse.

When he took over the company in 1991, Medtronic was known primarily as the inventor of the pacemaker. Today, it's the dominant supplier of numerous technologies planted in the human body to deal with many aspects of cardiovascular disease, neurological disorders, and spinal problems. "We're implanting very sophisticated products, like a computer in the heart that tells you every single event that takes place in the heart," says George, who describes a world where medical devices within the body will monitor vital organs, providing diagnostic information and alerting individuals to signs of trouble.

"If you look at the entire industry and ask which has the most defensible franchises," says Glenn Reicin, managing director at Morgan Stanley Dean Witter, "there's no doubt that Medtronic is better than any of its direct competitors."

Medtronic's sales have a 14-year compound annual growth rate of 18.8 percent, finishing out 1999 at $4.1 billion, Even more impressive, 1999 net earnings were $905 million-registering a staggering 25.4 percent CAGR over the same 14 years. "Medtronic has become an Intel of medical technology," says Michael Weinstein senior medical technology analyst at J.P. Morgan.

Like Andy Grove and Bill Gates, George is looking over his shoulder while trying to get to the future before his competitors. He's made Medtronic's stock his currency to purchase leading vendors in deals like the January 1999 pick up of Sofamor Danek Group Inc. By combining Sofamor Danek's spinal technology with its own neurostimulation technology (developed for chronic pain treatment), Medtronic was able to provide the doctors that are its customers with technology to expand their capabilities. "As the neurosurgeon moved from the brain down to the spine," says Weinstein, "Medtronic followed." But not every Medtronic acquisition has won raves. While laudatory of his other acquisitions, analysts have quibbled with George's pick up of Arterial Vascular Engineering Inc., the No. 3 angioplasty supplier. George maintains that Medtronic needs angioplasty to round out its cardiovascular offerings to continue fending off competitor Guidant Corp. Analysts say that angioplasty is not as easily defended as Medtronic's other areas.

To help him react to the strategic implications of developments in the operating room, George, who graduated Georgia Tech with a degree in industrial engineering and later collected an M.B.A. from Harvard, relies on the advice of the four doctors on his board, including Johns Hopkins University president William Brody and American Red Cross president Bernadine Healy. He's also developed a flat organization that keeps management to a minimum and lets ideas bubble up from the 3,000 Medtronic employees who are in the field. "In medical technology," says George, "one engineer sitting with a doctor can come up with an invention. Seven out of every 10 procedures that we do in the world have a Medtronic person in the operating room. And that's the way we stay creative."

But creativity means nothing in business if you don't bring a product to market. George's other big change at Medtronic has been to speed up the pace of the company. The result, says Weinstein, is a rapidly moving giant that is forcing competitors out of business.

Those that remain will have to continue the pace. George, who regularly leads international hiking treks in his off hours, talks about transforming the culture of Medtronic to one where the company reinvents itself every five years. One indication that he's on the right path has been the reduction in time to market for new products. In 1991, Medtronic's product development dragged on for 48 months. Today, it's down to 15. Rapid product turn now allows the company to generate 70 percent of its business from products that it introduced in the past two years.

Thanks, in part, go to the company's lobbying efforts. Working with Steve Kelmar, a former assistant secretary of Health and Human Services from the Bush Administration, George helped push the FDA Modernization Act through Congress in 1997. Five years ago, approvals took an average of three years; these days Medrronic can expect a decision on a new therapy within six to nine months. Still, he views the process as more cumbersome in the U.S. than in other countries, which account for 40 percent of the company's sales.

Faster approval helps the company's $500 million in R&D spending make a difference in a hurry. George contrasts his company's efforts with those of pharmaceutical manufacturers. Where drug companies toil for years running down technologic dead ends, Medtronic turns about 70 percent of its projects into products by using much of its money to fund devel opment of university research.

George has also cultivated and maintained an executive staff that wins kudos from Wall Street. "They are great at execution and depth of management," says Morgan Stanley's Reicin. And unlike some talent-stuffed organizations--think Disney-- Medtronic will not likely suffer a succession battle when its 57-year-old CEO steps aside in 2001. "You have to give him credit," says Reicin, "you know who's going to be at the helm once he leaves. That's [COO] Art Collins."

George feels that he's accomplished his primary goal. "The major acquisitions are in place that give us the breadth that we need to go forward," he says. "The company has never been better positioned strategically." That's a heck of a time to take your bow.

CURING THE HEALTH CARE SYSTEM

The U.S. system of health care is frequently compared with European systems, where virtually everything is covered. Who's really ahead, the European citizen, the Canadian citizen, or the U.S. citizen?

The U.S. system is the best health care system in the world, but the administrative system needs a lot of work. It's still the highest quality health care, people get the best coverage, and there's less bizarre aberrations in the U.S. system than there are in Europe by far. The U.S. is once again going to lead the way in terms of the consumer-empowered health care, and Europe will probably follow. In Europe today, the most rapidly growing form of health care is private insurance and private health care.

In Great Britain, because the national health care system broke down, citizens are going to private health care, where they pay 100 percent. There's a huge emerging market in India for private health care.

In the big millennial political campaign, health care is now back to center stage, with one putative nominee talking about healthcare legislation under which 95 percent of people would be covered. Is this realistic?

Politically, it's not realistic. Personally, as a citizen, I'd like to see 100 percent of the people covered in some way. Why should you want to become an employee just to get health care on a pretax basis? I would define a minimal catastrophic plan for all citizens and an equitable tax plan, so that because I work for a corporation I should not get better treatment than someone who works as an independent contractor or someone who works for McDonald's and doesn't get any coverage at all. (See sidebar, page 30.)

I also don't think Medicare [coverage] should be 100 percent. When I retire I will have adequate resources not to have to depend entirely on Medicare. People who have adequate income should pay for either 100 percent or a significant portion of their own health care. If I want to buy a prescription plan, I can, Why should it be free? Why do we think it's bad if people spend money on health care, but if they buy an automobile or a vacation in Hawaii, it's good? It's good if people spend money on health care. Your health is the most important thing you have.

The unemployed uninsured should be covered by a Medicaid kind of plan. Because otherwise, by the time they get into the system they're so far down the road that they cost the system a lot.

What's wrong with managed care?

Managed care has become a price negotiation system. The old idea was a health maintenance organization where you went three times a year to check up on your health and talk about exercise and diet. But the plans are negotiating with the hospitals to get lower rates, and lower reimbursement for doctors. It has not resulted in the reorganization of care or in the consumer or patient taking more responsibility for their own health care.

Far too many drugs are being put out by primary care doctors without referrals because of managed care's [philosophy]: "Let's see if we can get physician time per patient down to 8.5 to 10 minutes," which is crazy. There's no way to deal with anyone in that amount of time. The skewed incentives dampen it in the sense that patients don't see the right person.

The idea that people can be bottled up in primary care pools and not be able to get to a specialist is an anathema--only a specialist can give them the proper diagnosis and the proper treatment. For example, 70 percent of the antiarrhythmic drugs are prescribed by primary care doctors, who are not really in a position to ascertain what kind of arrhythmia a patient has. You've got totally different diseases that are like night and day to a cardiologist. One is life threatening; one is not life threatening, but very debilitating. And if somebody prescribes antiarrhythmic drugs without knowing which one they're giving them for, the patient is liable to have an adverse reaction.

Also, tremendous amounts are being spent on complementary therapies, herbal medicines, special diets, acupuncture, massage. In the system, you get to see someone for 8.5 minutes. If you go to a chiropractor or a therapist, you get to see that person for a whole hour. People want that time and attention with someone concerned about their health.

To what degree are the incentives in the current system askew?

They're totally skewed. Health care is free, so use more of it. If Medtronic told all our employees, here's a voucher, you can go to any restaurant in Minnesota you want to for dinner every night, people would spend a lot of money.

I'm not suggesting it's going to be 100 percent consumer-paid in the future, but patients will have to pay for a bigger share of their health care. They may get a voucher from their company, they may have a medical savings account, but they're going to have to make economic decisions that either benefit them or don't benefit them. This patient empowerment is going to have significant impact.

When is that coming?

Now. Corporations are going from defined-benefit plans to defined-contribution plans and moving away from post-retirement medical care because of the cost, so a lot of people, especially those who retire early, have no health care in retirement.

We need people to understand the ramifications of what they're doing. That leads to prevention. If you or I have angioplasty, we have had a $15,000 procedure, but we are not cured of heart disease. The only way to avoid being back in six months or six years is to go on a regular low-fat diet and exercise and stress reduction plans.

How do all these forces play into your business?

We are in the business of chronic disease management. Everything we treat is a chronic disease, whether it's heart disease, Parkinson's, epilepsy, cerebral palsy, and a wide variety of degenerative spinal diseases, neurological disease. Our heart implant monitors events in the heart and also acts as a control system, so if you have a life-threatening arrhythmia, it will start pacing your heart out of the arrhythmia within milliseconds.

We see ourselves facilitating the direct connectivity between the patient and the doctor, a lot of which is done electronically. You're moving around the country or the globe, but you can go right back to the same doctor. You use videoconferencing and your PC over the Internet--not an open Internet, but a private system--and he can tell everything about you.

We are also putting monitoring devices in people, such as Reveal, which looks at people who faint. The No. 1 cause of broken hips is fainting episodes. But you don't know what's causing the fainting, and this device will tell you. If someone passes out, when they go to the hospital they'll do an EKG, but by then it may be normal. But if you had taken one when it happened you would've seen what happened, then you could know what's wrong and treat it. It's the first in a whole family of diagnostics.

So the human body, like a modern Cadillac or Mercedes, will have computer devices monitoring all these processes?

Right. Another company we're working with is treating diabetes. They have an implantable sensor that can tell you when your glucose is our of line and your insulin counts automatically. You don't have to go prick your finger and find out.

There's a remarkable story of a woman with Parkinson's whose life was transformed with a deep brain implant that takes away the symptoms of her Parkinson's. She still has Parkinson's, though. Hopefully, by 2010-2015, we'll be having curative solutions.

You've gone through many acquisitions. You've got a stated goal of being No. 1 in each of these businesses, and yet you acquired Arterial Vascular Engineering Inc., the No. 3 player. What goes into decisions about which companies to acquire?

In this case the No. 1 position was held by a major competitor. The No. 2 company had a lot of internal problems--a weak management structure and problems with the Department of Justice and the S.E.C. We felt the No. 3 company had the best technology and product development system. It's a fairly young company with strong top management.

When we do an acquisition, the CEO of the other company and I sit down first thing and talk about values, culture, mission, strategy. You can make a computer model show whatever you like on these deals, but what really determines how well an acquisition goes are those things. Our recent ones were excellent. Some of the ones we did early in the '90's were not as good, because we were doing a lot of Silicon Valley start-ups where the culture and orientation was so different. We learned that the hard way from a couple of acquisitions in Silicon Valley that didn't work out. But those things weren't in place.

What businesses do you see as significant in your 2049 projection?

We will focus on how we can connect patients to their doctors and to their healthcare systems. We want consumers to know their options. We also see that the healthcare system will have to reorganize the treatment of chronic disease so that you have the same team of doctors working with the patient throughout the treatment of their chronic disease, which is probably the rest of their life if they have heart disease. Transforming the treatment of heart failure will have the most transforming effect on our society. It's the most prevalent and highest cost disease in the U.S. It's the one everyone winds up with if they don't die of cancer first.

There are classes of heart failure from one to four, class three and four are bedridden; and 50 percent of them will die in the next five years from sudden cardiac arrest or heart failure. We are working to give those people higher quality of life and extend their mortality.

This is where we can do the most in terms of connecting them with their doctors, and have them treated from their homes. That's the highest cost to the system--more than $75 billion a year. The average cost is $25,000 per year for the 3.6 million Americans in class three or class four heart failure. These people are in and out of hospitals. They show up on Saturday night and get thrown in an intensive care unit until the cardiologist shows up, when they can be treated from home.

You spend about 10.4 percent of your revenue on R&D. How do you satisfy yourself that you get more bang for the R&D buck than a Pfizer or Merck?

We don't run down a lot of blind alleys. Our R&D is so focused with physicians that when we get going on a project we will wind up with a product on the market. By the time a product comes to market, it's had the best doctors in the world in that field looking. And they know it's going to work, and they've done several hundred or several thousand patients in clinical trials.

We obviously can't do all these things ourselves, so we work with academic and medical centers that are right on the leading edge. The same is true for every country in Europe, and in places like Australia and Japan. For example, we're the world's leader in a device that holds the heart with a suction cup, so the doctor can work on it while the heart is still beating, so the blood is circulating through the heart. People get out of the hospital much faster. They don't have a neurological deficit, costs go way down, and it's a much gentler procedure for the patient. That came out of work with the University of Utrecht in the Netherlands.

We're working on tissue engineering--redesigning the tissues inside your body to reform the heart--with a doctor down in Capetown, South Africa, right now. Ours is a company where it doesn't take 50, 100, or 500 people to make a difference. In medical technology it takes just one engineer or one creative person sitting with a doctor and coming up with an invention--like one of our people did with deep brain implants for Parkinson's disease. It's totally different from the pharmaceutical business, where you can have 1,000 people working in the labs. If we had 1,000 people working in labs, we'd come up with nothing, because the ideas come from interaction with physicians.

What's your biggest worry?

That we'll become internally focused. Become big, like J&J or some company, and lose our compassion for the patients. If we lose that, we'll lose the culture we have. We need a company culture where we can empower people to continue to reinvent the company. It sounds like a cliche, but it's really not. We transform Medtronic every five years. Five years ago the company didn't look anything like it does today. Five years from now it won't look anything like it does now.

We are a mission-driven company. We focus on the patient as the ultimate recipient of our products, on restoring people to whole life and health and partnering with the doctors to get them the products. Our people are passionate about that, and we try to have the kind of a structure where people can be empowered by that.

We use e-mail and the Internet to collapse the hierarchy so that we have about 3,000 people out in the field. That's the way we continue to be outward looking, focused on the patient. If we ever start focusing on our internal policies and procedures we fail. That's what's driven Medtronic over the years.

               Medtronics' Performance Under George's Watch
                              (5/91 to 11/99)
Medtronic            971.4%
S&P 500              263.0
Dow                  268.4
S&P Healthcare Index 283.4
All return numbers stated above reflect capital
appreciation only and do not include dividends.

FIXING HEALTH CARE

Medtronic's Bill George has witnessed American doctors introduce wonders that have made chronic diseases treatable. But he's equally passionate about how the administrative side of the medical system has skewed delivery of treatment.

In handling heart disease, for example, misplaced priorities result in lower quality care-- and higher overall treatment costs. "Of all the aspects of the body," points out George, "I think we understand the heart better than anything else." Despite this understanding of how to treat chronic heart problems, health systems often refuse treatment until the disease has progressed. "Heart disease is progressive, so if it's not treated early, it gets worse," says George. "It's like a tumor; if you catch it early you can treat it, if you don't it'll spread.

"It's kind of a perverse thing," he adds. "People are a lot sicker when they get to a person who can help them. If they got there early, they'd be treated in a more cost-effective manner"

By dulling awareness of medicine's costs, corporate health insurance coverage with minimal co-payments contributes to the problem. "People look at health care as a free commodity. If they paid for it, they would look at it totally differently," he says. For example, HMO patients might opt for a sixmonth prescription for the allergy medicine Claritin rather than buying Tylenol Sinus. "The Claritin only costs a $10 co-pay for what may be $200 worth of drugs. It's not cheaper to the system; it's cheaper to you."

As a result, HMOs have begun squeezing doctors to become more cost-efficient--often at the price of patient care. "Managed care has become a price negotiation system," says George, who chairs the board of Minnesota's Allina Health System as a side gig "We don't manage any care."

To address the issue, George favors several primary changes:

1. Moving from defined-benefit plans to defined-contribution plans. "Companies are already doing this, saying, in effect, 'Here's $3,000 and here are seven plans we've qualified; you can choose whichever one you want,' " he says. "It's a fairly modest step, but fit's a way for corporations to say to their employees, 'If you want to buy a more specific plan, you can do that.'"

2. Patient incentive. "Patients with adequate income should pay for a significant portion of their health care," says George, who argues that paying 20 percent to 25 percent of their own health care costs would let patients see the financial ramifications of their health-care decisions. "People make intelligent decisions about buying computers; why shouldn't they make intelligent decisions about their health? Or if they don't, live with the consequences."

3. Moving from a use-it-or-lose-it system where all money must be spent within a single calendar year to a cumulative medical savings account program. "In this liberalized system, you would make decisions yourself and if you don't spend the money that year, it rolls over into a medical savings account and at the end of your career, you can take it as your medical retirement," George explains. Accumulations could total $100,000 for an individual entering his or her 50s and 60s--prime disease years.

3. Equitable taxing of insurance. To address the difficulties faced by uninsured part-time workers and the self-employed, the self-insured should get to deduct their insurance just as corporate America currently deducts its health costs, rather than pay for insurance with after-tax dollars.

4. A minimal catastrophic health plan. "I'd like to see 100 percent of the people covered in some way," says George, who suggests that Congress set a dollar definition of castastrophic--$10,000 or $12000, for example--and provide insurance for amounts over that. "Then, up to that level, if you want to go uninsured, be my guest."

George argues that major health care policy changes can get through Washington with vigor. One problem: "Democrats and Republicans have tried to play with that very unsuccessfully," says Steve Kelmar, George's public policy advisor and a former assistant secretary for legislation at the Department of Health and Human Services. "It's a gridlock and nothing's on the horizon to make it go away."

Kelmar and his boss agree that some things will happen, but Kelmar views the changes as evolution, not revolution. He lists defined benefits and MSAs as market and policy changes that are likely--just don't count on a universal catastrophic coverage. "When you have a good economy," he says, "it's not the time for changes like this."

HEALTH ON THE NET

DON'T THINK THAT THE INTERNET CHANGES EVERYTHING? SPEND A FEW MINUTES TALKING ABOUT ITS IMPACT ON HEALTH CARE WITH BILL GEORGE.

The Medtronic CEO will begin by recounting how he and his wife researched her breast cancer over the Web. With the help of a friend, they were able to track down some new studies from Sweden that allowed them to ask informed questions about her treatment. "After initially dealing with the emotional side, the first thing I did was go on the Internet," he recalls. "It gave us a whole different view of her ability to heal, the odds of recurrence, and how to reduce those odds."

George sees patients increasingly turning to the Net for information and taking control of their health-care decisions. "People particularly those with life-threatening diseases, go to the Internet, learn about their options, and ask their doctors about them," he says. "Or they get the diagnosis and go to the Internet before they get therapy."

Beyond research capabilities, the Internet offers connectivity. Doctors already implant Medtronic devices with millions of transistors--some with twice the transistor count of a Pentium II, says George, who Suggests such chips could easily contain an individual's entire medical history. Similar chips can monitor and record events in the body--such as watching the heart and recording an EKG during events sun stroke. With knowledge about what occurred during that traumatic moment, a doctor can tailor a treatment to the individual's needs.

What's more, all this information can also be viewed from a distance, with the Internet as the communication link that keeps patients in touch with their doctors. George sees patients being able to download information from implants to a laptop and send them to a doctor, letting a patient in Tokyo be treated by his or her doctor back in New York--or a Chicago physician consult with a specialist in Seattle on symptoms. "We'd like your doctor to be able to deal with you wherever you are in the world," says George. "If you're in Florida and your doctor is here in New York, we need to put virtual reality into play.

"The focus with the Internet today has been on information and e-commerce--and that's great," he adds, "but our interests will be more on electronic connectivity."