By Shelley DuBois
December 22, 2011

FORTUNE — These are tough times to run a hospital, especially one that doubles as a major research facility. Uncertainty surrounding the future of health care regulation coupled with slashed government funding for scientific research has put top-tier institutions such as Mt. Sinai Hospital up a financial creek. In 2003, when Dr. Kenneth Davis took over as CEO of Mt. Sinai, the hospital was losing millions of dollars a year. Since then, he has been able to give the institution a new, sustainable business model. Davis talks with Fortune about the science of being a CEO, how to treat the richest and poorest Americans with the same quality of care, and why you shouldn’t treat your surgeon like your golf caddy.

Fortune: How do you think your medical training prepared you to be CEO of a hospital? Did it help at all?

Kenneth Davis: Oddly, what prepared me the most to be an effective CEO here was being a scientist. Because to solve problems, you need data. And I realized that solving business problems was really the same as solving scientific problems: you get a lot of data, you have a hypothesis, you test it, and then you act, based on the information you accumulate. Somewhat less important, but still valuable, was my background in psychiatry.

I watched group meetings led by my predecessor in which there were a lot of people in the room who had different agendas. You could see that some people were motivated by their character flaws when the institution was in trouble. Everyone had a different reaction to a ship that was sinking, but all those reactions in many people didn’t lead to a successful problem-solving approach.

What do you think makes Mt. Sinai different from other hospitals or companies, for that matter?

Mt. Sinai sits on the juxtaposition of the richest and poorest communities in America. There’s no greater socio-economic disparity in America than there is across this campus. Add to that, we’re not a university, we’re a hospital that gave birth to a medical school. Add to that, we don’t have a big alumni following, so what we have are grateful patients and fantastic trustees. You add all of those things together, and you come up with an institution that is absolutely unique.

And unlike most businesses, certain arms of the hospital will never be profitable, right?

Malpractice is so expensive that we lose money on every baby we deliver. But are we going to shut down maternity? No, we have to find a way to cross-subsidize it. The same is true of pediatrics, the same is true of psychiatry. So what are you going to do, shut down those things? Not going to happen.

So how do you make up the money?

We think the answer is putting the doctors you train in practices disseminated throughout the community, or buying practices that you think have decent quality and continuing to improve them.

There’s just not enough money in the health care system. If you’re going to generate the most efficiencies, it’s in this model: high-quality ambulatory facilities all over the region as well as doctors in various practices all over the region.

You also need donations, right?

Right now, we’re in the middle of investing $2.4 billion in a strategic plan that was designed to catapult Mt. Sinai into the echelons of world class hospitals. Of that $2.4 billion, half of it will come from philanthropy, and about half of that philanthropy will come form the board, which is an amazing commitment.

Is there ever a conflict between where donors want the money to go and where it should go to best benefit the hospital?

The tragedy is that a lot of well-meaning people wind up giving philanthropy for the same motivation as you might tip your golf caddy. It’s easy to want to thank the surgeon who just fixed your back so that you can walk again, but that surgeon is being more than adequately compensated by his fees.

Philanthropy is not a gratuity, but it is an investment. A philanthropist should be able to say, “After I give you this money, what will happen at Mt. Sinai? What will I see?” And if we can’t articulate a clear vision for that, this has not been well-spent philanthropy.

How do you handle the fact that money for scientific research is so scarce?

The challenge, when only 7% of NIH [National Institutes of Health] grants are funded, is to keep scientists’ morale high enough that they keep trying. And to convince them that submitting more grants is better than giving up.

I address the whole faculty a couple times a year, and I’m never a Pollyanna, and I’m never a Cassandra. If the situation is challenging, as it certainly is now, and I’m going to give a message that talks about how perilous the times are, I have to also provide a path for how I think we can manage that.

What has surprised you most about your experience as CEO?

How easy it is to do it if you feel the people who are on your senior management team are also your friends. The stresses associated with going to work every day at Mt. Sinai can be pretty enormous. We’re making decisions that are the lifeblood of a place that’s nearly 160 years-old….

It’s a huge responsibility when the entire government sector is aligned to make sure your revenue is decreasing over the years to come and, at the same time, there’s an inevitability to your expenses rising. We’re making decisions every day that are extremely difficult, and it would be almost impossible if you didn’t really like the people in the bunker with you.

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