Intro: 00:00

Lisa Levy: Hello and welcome. In every episode, I have fantastic conversations with industry leaders who are truly making a difference in the healthcare field. The differences that they're making may be in any part of the patient care continuum, and sometimes it's in places that we as the patients don't necessarily see or understand.

And that's why today I'm really excited to introduce to you Richard Palarea. He's the CEO of Kermit, a Baltimore based healthcare cost reduction and spend management company bringing automation and insight to the high spend categories of implantable medical devices within hospitals and health systems.

Since founding in 2011, Kermit has saved hospitals more than $200 million and manages 40% of the implantable devices in the Baltimore, Maryland area. You'll understand that this may not be something that each of us sees as a patient directly, but the impact is phenomenal. So it is with great enthusiasm that I introduce.

Rich, would you join me in the room please?

Rich Palarea: Thanks, Lisa. It's great to be here today.

Lisa: I am so happy to have you here with us. So I started out and I did the formal introduction that tells a little bit about your company and all of you know what it is that you're doing, which we're going to spend a lot of time on today because it's really cool stuff.

But I would really like the audience to start with getting to know you a little bit. Tell us your story, your background, and how you ended up founding Kermit.

Rich: Okay. I'm an entrepreneur at heart. Although I think you know every entrepreneur has worked for somebody in the past, worked for a small company, a big company. That's how we get to where we are, where we realize this is a better fit for me when I can explore my creativity and work with a team on my own terms and that kind of a thing. I came to this business through a kind of a secures route.

I was a real estate appraiser of all things. Back before the first savings and loan bailout took place, and you didn't have to have a license to appraise real estate. What actually happened in that era was I honed my analytics skills. I really became a lover of spreadsheets, if you will. And I know that probably sounds boring to some people, but that's the existence that I lived.

And really got into that whole thing. And what I realized was that I really enjoyed running my own business. And so, from that point on there were four other businesses I started and a couple that I actually exited before I got to where I am today. The last one that has a relevant impact on what we're doing here at Kermit was exactly the same model we're using here in the implantable medical device space, but I was doing it in logistics spend management, so I was helping some of the nation’s largest shippers negotiate FedEx, UPS and DHL rates and go in and demystify how all that works. And in exchange for getting them some savings, I would keep a portion of that savings as my fee.

What I didn't have was I never had a kind of a really cool piece of software that did a lot of data visualization and analytics and reporting that I could leave behind. I would do my project and then for three years I would collect a portion of the savings. So you can imagine getting into months 24, 28, 30, et cetera. People are wondering, why are we still writing this company a check? That was one of the things I addressed when we started Kermit. I wanted to fill that gap and do something that had some technology involved, and we can get into a little bit more of that in a bit.

Lisa: Absolutely. So how did you actually find your way into healthcare?

Rich: As I said, I was I had this other business and I was doing just fine with that. It was more of a lifestyle business, put enough money into my family's pockets where we were all fine and happy, but I never really had any aspirations of growing it super big. We had about six employees at its height. There was a couple million dollars a year and like I said, it was doing great.

I was introduced to two medical device reps, and what I'm talking about are people who actually work in hospitals. They supply implantable medical devices to surgeons for surgery. Things like knee implants, hip implants, spine, cardiovascular. And they were introduced to me because they had left their organization after spending 10 years a piece. Having their organization tell them, basically how to rip off the hospitals. I'm not putting this in too unkind terms. There's not a lot of transparency in the way they do what they do. So there's a lot of opportunity to upsell things and hide extra screws or drill bits on a paper-based billing system. And so they come in they're working on this business where they want to start and they want to go back into hospitals and help them save. But they want to take a portion of what they save as their fee.

And so their attorney said, aha, I know somebody who does this in a different industry, he has been doing it for 25 years. You might want to go talk to Rich and see what he has to say. And so they came into my office, they told me this crazy tale and I grew up in a healthcare family, Lisa, my dad was a cardiologist, so I knew some of the tricks and traps of healthcare, some of the waste that went on, but I didn't have any idea about surgery.

And when they told me that they stood in the operating room with a surgeon while the patient was under anesthesia ostensibly, and they just tender medical devices, there's no price tag on the box. And the surgeon really doesn't know what it costs, and they're tracking all of this literally on a piece of paper by peeling barcode stickers off of the boxes where the implants are and pasting them onto this piece of paper and using a pen to write down what they want to charge.

And then they march that ticket, basically that invoice down the hallway to purchasing where they turn it in and expect to get a purchase order for everything they sold to the hospital. And my head is spinning, I'm thinking, like you, you rarely find something that has this much waste and also an opportunity to take something into the technology realm that hasn't been digitized before.

So I went home that evening and I thought about it, What do I do with this problem? I love my business. I don't want to sell it. I don't want to get into something new, let alone something messy like healthcare. But I came back a couple days later and I thought, rarely do you get an opportunity to really change an industry, really make a difference and really leave an impact and a legacy.

And I thought, if we don't try this, I'll be kicking myself wondering what if. So I went back to them and said, you guys got a deal. Let's set up kind of a joint partnership and see how it works. And very quickly, we landed a couple of interested hospitals and it took off from there. That was 12 years ago.

Lisa: That's absolutely fantastic. And as you're talking through that, you know the scenario of, surgery in progress and there's a rep in the room in the OR with them. That's one scenario. The other side of that coin is right when things are just sitting there, they're on consignment.

And again, right? You still don't know what the price is, but the surgeon has their favorite product because, I'll say this and be flippant about it, right? Because the rep takes them out golfing or does whatever it is that they do and however those decisions are made. What you've described is a scenario where the surgeon is picking the hospital's pay and the patient doesn't know anything about what's being chosen.

What's that real impact from that experience for the pay continuum and the experience?

Rich: I think you summarized it really well in those three key areas. And whenever you have this kind of asymmetrical buying situation where somebody chooses and somebody else pays, and you also have this other participant as you mentioned, is the patient. Our business doesn't even touch that side of the hospital. We don't deal with the revenue side. And so you've got patient billing and insurance and reimbursement and Medicare rules and bundle payments and all kinds of really, complex things on the revenue side. So, we're on the cost side.

We deal with supplies. We're trying to get that supply price down to what I call the street price. What do we know that price to be? What's the best price in the marketplace nationally at this point today that we can get for that particular sku, that item? Then how do we negotiate that on behalf of the hospital as an unemotional, uninterested party, we're incentivized to get the best price because we're going to keep part of the savings. So it's a very interesting setup that works really well. When you find a hospital partner who says, look, we don't have the time or the know-how, or really the aptitude to even do this the right way.

Why don't you guys do it? I like the bet of paying you a portion of what you save because there's no risk for me. As long as you don't break what my doctors are doing, I'm fine with it. And that's the big message in what we do, is we allow this, what you reference as physician preference. That curious middle P and the physician preference items. Why do physicians have a preference? So, it's all the things you mentioned. They've been fellowship trained on a set of instrumentation when they first come out. They're taken to lots of really nice steak dinners and golf outings and trips to Mexico and Hawaii.

So that's all part of the pressure that healthcare sees today. If I can say to them, I don't care what implant you use from which manufacturer, if it all has the same outcome, it should be priced at $800 or a thousand dollars or whatever. Let's get the price all there. Choose whatever you want, and it's a really nice thing for the surgeons to say. Ah, okay. I was worried you were going to take all my toys away. This I can deal with. I will support you in this. So, you get surgeon alignment, you get hospital support. And then they align and they face their vendors and say, this is untenable. This that we're in today is not sustainable. We have to have price reduction because we're not making any money on some of these cases. We're actually losing money with this reimbursement scheme. So that's the role we're playing and that's the big theme to answer. Like, why is it so important that all of those pieces align? Because when they do, the hospital is the buyer. They should be able to dictate, what's going on to their supplier.

Lisa: Absolutely. And we've been talking around this, right? It's an old process. It's a broken process and it's one of those that I like to joke that, why do we do it this way? And the answer is because that's the way we've always done it. No thought, no care, heaven forbid any look at effectiveness or efficiency and you're looking then coming in from a cost savings perspective, which you know, lets that process be, reconsidered reimagined and definitely improved. How does your technology play into that in supporting that longer than when you're actually there doing work?

Rich: Yeah, so I mentioned this kind of paper-based billing process and as you said, it has been going on for a long time. When we started Kermit, it had already been in place for about 50 years, been going this way. So when we looked at that process and we started to save hospitals money, one of the things we had to do was produce an invoice that was very reliable. Where you could track back all the calculations on the savings. And what I realized in the very, very early days of this, we outstripped the ability of anything in the Microsoft Office desktop family to calculate these enormous amounts of data that was coming through and hugely complex types of cases.

So we set about to develop a piece of software that originally was just going to replace the paper-based bill. We just wanted to digitize that process. We needed to capture the sku the part number. We needed to capture what was the old price that was there when we first arrived, what was the new price that we negotiated? And each time it's used, increment that and take the difference between the two. And then our fee is in there. So in building that whole process, what we realized was, Yes, it was self-serving for us. But what we didn't realize was nobody's collecting this data because it's on paper and it's very valuable, right?

All the utilization for doctors A through F that might be in that particular practice is all just getting put into a file cabinet and nobody knows. Nobody can quantify. If a surgeon comes in and says, Hey, I want to help us save money, tell me how many cases I did last year. They would say, we don't know.

So what we realized was all this transactional data, while it was useful to manage, is the rep charging the right amount? Were there three screws, but only a two hole plate. Why was there a third screw? Was something wasted? Was it dropped on the floor? We were doing all of that really well, but then we took all this transactional data and wrapped it up into data visualizations, dashboards, reports, and the like and KPIs, and then spun that back out to the hospital so that the surgeon could see. Oh, that is the impact of kind of me thinking on my feet, but being influenced by somebody else. Now I have an awareness not only of what this thing costs, which I never knew before, but also this interesting dance that goes on that I never think about because I'm there to provide patient care, but I've got a bunch of other people in the room including an interested party who's trying to sell me things.

So the software is actually doing two really important things. It's policing in real time, whether or not the suppliers are charging the right price. And all of the terms of the contract, which we read those and distill them down into business rules inside of the software are executing every time a bill comes in and it checks lots of different really complex things and then it packages up that data, like I said, and presents it as analytics.

But I call it a technology enabled service. This technology can't really stand on its own because there's nobody in a hospital whose sole job is to manage just the implantable med device spend. We give that to supply chain and then we burden them with, oh, go and negotiate lawn service and food services and linen and capital equipment like MRI machines. And it's just way too much for them to be an expert on these really technical implants. So, we have advisors, strategic advisors. Who were former executives in hospitals. They were former med device reps, former supply chain folks, and they use all that data to come alongside and inform what could happen by looking at these trends and run those meetings in monthly business review style to tell the hospital, look, if we make this small change, it won't impact anybody's practice, but it'll save a huge amount of money. Would you like to do it? And we model that for them. So, the software is very powerful for that reason, but mainly because we're capturing the data in the operating room. Which is something none of our competitors do. That's a tough thing to do.

Lisa: And as you're describing through that the value of the data right, is huge for the hospital, but I have to imagine future looking that you have a play where that data could be valuable to the manufacturer as well.

Rich: It could that's a really astute question, Lisa, and I think there are probably other factions who would want to get their hands on that data. Maybe the payer, somebody in the insurance side of things right now we just serve the hospital. That's our focus. And it always has been. I do think though, when you build a piece of software like this and interesting data, you squirrel it away in the database, not knowing if you're ever going to use it again. So we have lots of those kind of data points but it would be interesting to explore some of those other areas that you're thinking about.

I tend to agree with that. I think there's a lot of value in this data.

Lisa: And, sorry, I totally this just popped into my head. Sometimes these thoughts do, and I go with me on it for a moment. But, for a business model for Kermit, diversifying and getting and empowering the payer. The manufacturer with all of these things, obviously new revenue streams for Kermit, which is always cool and good to grow business. But then the overall impact to the continuum of care is that much more impactful. So you're already helping the hospitals drive down the costs, you're helping payers potentially understand and so that the charges are more realistic and the reimbursements are more realistic.

And the manufacturer can get a hold of really what the pricing is and what they're mucking up along the way. Because let's face it, they are because they don't know what they don't know. And at the end, right? For me, it's always very passionate for me to get to that patient whose, what their copay is, what it is that's coming out of their pocket is now actually minimized.

And I think that's a really cool. Big vision. That has nothing to do with what you're doing today, as I like to think big and dream big. The implications. I think you've just started down a path.

Rich: Yeah. Look, that, that's huge. That what you just that picture you just painted is the utopia of how it should work. And I think one of the things that we deal with which you know, is one of the reasons why I love the title of your show is that here in the United States, things just work differently. It's a very capitalistic, very opportunistic kind of setup.

When you go into other countries and you look at this particular spend, you'll see there's a lot of transparency. There's no secretiveness around pricing. That data that you just mentioned is used by all those parties. They've democratized the whole thing because there are other ways that people are making money. It's not just if we have lots of middlemen and everybody has a hand in the deal, everybody's going to make a buck. That's how we construct things here. That's a United States construct.

Lisa: It absolutely is. And as I'm thinking back on work that I've done with my clients in the hospital space, when we talk about opportunities to improve things, starting with something like a total knee replacement is always top of mind for, that opportunity to be more effective, to be more efficient, to reduce cost.

And so I think that, Kermit, you're really specialized in a market right now, but the growth potential for this is so huge and so impactful that I can't wait to see in another five or 10 years what it's grown into. It's very exciting.

Rich: Yeah. When you think about things like three 40 B or pharmaceuticals, there's lots of different applications where this basic premise of transparency can produce significant savings.

So yeah, I'm with you on that. I'm excited about it.

Lisa: Simple idea, basic premise transparency. We say it like it's an exciting thing and it's so sad because it should not be something that we get excited about because it simply should be. With all of this kind of future talk, what opportunities do you see for Kermit for the future?

Rich: I think a lot of those things you're talking about, that would be big idealistic themes would be great to transform, but there's so much waste right now that even if we just take a small step to the left or to the right of what we do we step in a pile of it and then we're there to clean it up.

Now, I think. Figuratively, maybe. I think that that's a good thing for a hospital who wants a partner, but this is a cultural fit. Not every hospital wants a partner like us to come in and turn every rock over. So you've got to find a cultural fit. You've got to find somewhere where you're welcome and if they will let you do that, we literally have taken just one step to the left and one step to the right. If you think about where we are, we're in the operating room, in the intraop space. If we go periop and we say, Pre-op and post-op, and let's see what the opportunities are in each of those. We have identified areas where we want to get into things like the management of surgical trays when they arrive for sterile processing and why, when we only need typically use, one or two trays worth of stuff. Do we have to sterile process 23 trays and wrap 23 trays and send them up to the floor. It's a lot of wasted time and energy. So we've identified using this theme of cost reduction, spend, management, other opportunities that are very close to what we do without getting out of the core of what we do.

But I think to explore some of those bigger ideas you're talking about, we would probably have to be part of a larger organization that has a larger footprint inside of healthcare, inside of a hospital. We deal with supply chain and costs. So, we're a mile deep and probably an inch wide. And so we'd like to have, be with a larger organization, a parent company, an acquirer, somebody who says we can do all these things. And we do them in a specialty way with high impact. And when it comes to implant device manufacturers and all that kind of stuff, it's Kermit. That's our approach. And after 10 plus years of growing the business, we're now at scale where we can start to entertain some of those bigger ideas of what would it look like if we had a larger partner come alongside us and help us grow the business to that eventuality you're talking about.

Lisa: Yeah. And I appreciate your wisdom in knowing that, one step to the left, one step to the right, and those are big impacts. And once you get that another step to the left and another step to the right and taking it in those consumable pieces where you're showing the value, you're showing the impact, and then that next group over is oh, I want in on that too. Build the momentum internally and organically that's absolutely critical for long-term success.

Rich: That's an antithetical to an entrepreneur's thinking. We all want to go big and go for the brass ring right from the very beginning. But what I've learned when you're in a space like healthcare, and there are probably other industries like this, where there is so much opportunity to make an impact, just take those baby steps, you will eventually get there because you'll deal with people who really become fans of yours and they trust you and then they're asking you. You did such a good job in this. Can't you do these other things? We get asked to do really crazy stuff and I look at, we look at our customers and say I don't know why you would want us touching that stuff because we don't know anything about it. What they're saying is, we like you, you buying from people that you like, and so we like you and we trust you. And that's a big hurdle to get over it inside of healthcare. For a vendor to be a supplier, to be trusted by the hospital.

Lisa: Absolutely. And in discussing that, you hit on a couple of things, right? You are naturally an entrepreneur, but where you're at with Kermit is your well past startup, right? You are in growth and scale and organizational maturity, which is all of those things that are those smaller bits and bytes to get to where you want to go because you are building that trusted relationship and that is the impact of time and results. So it is, we're through that entrepreneurial journey and we're into going from new too big to scale, to actually disrupting the cost model, right? And getting things dialed in so that it is effective and efficient and they're paying the right amount for their supplies in this case, starting with implantable devices.

Rich: And sometimes we still have some small thinking that we do that's very startup ish around here, around innovation culture, having fun and doing all that kind of stuff. But yeah, there, there are so many opportunities in this area that to go really big, you can miss out on the stuff that's right there. And I've seen some people we've both competed against who are no longer here, who did that, and also friends of mine who had started things in healthcare that just thought, gosh, in two years I'm going to start this thing up, we'll sell it for $250 million. It's going to be a home run, but it's a long slog If you've never been in healthcare before, it takes a while. Our average sales cycle, when we present this no-brainer thing that everybody should want to do, it literally can be over a year, sometimes 18 months.

Lisa: I have no problem seeing that. And I sell into the same places and it does take a while because trust is that one thing that you can't sell in. And that comes with some time. So Rich, this is a great conversation and I'm having so much fun. I want to wrap up with one last final thing. I ask everybody this question because this is where the fun actually happens.

If I gave you a magic wand, and it's purely magical. It removes the constraint of time, cost, regulatory concerns, right? You have free reign; you have this magic wand. What would you do to impact in the healthcare space?

Rich: Wow. I'm going to answer that question from the point of view of where I stand today and all the opportunity I see. But I mentioned the cultural fit to you a little bit ago, and I think you probably understand that. I wonder if some of our audience understands that too, or maybe they don't. But if I could just wave a magic wand and everybody would let their guard down and realize that we're here to help. And there is an incentive for us in doing so, the way we set up our payment model.

But we're not here to make anybody look silly. We're not here to show you up. We just want the big win on your watch and you to take credit for it. And it's just we're dealing with human beings and they all have a turf to protect and an interest to protect. And a person to look out for, which is themselves.

So my magic wand would be waved and everybody would be in this utopia of, oh, I'm so glad you're here. Where have you been all my life? Come on in and help me. I love this. Because we have, that is the spirit of, that's why we have a fun name for the company. Even, Kermit, it's the spirit of who we are. We love to help. I'm very proud of the fact we still have our very first customer12 years after we've launched. And that says a lot about our caring and our team and the fact that we're trustworthy and easy to work with, but not everybody gets that. Actually it's probably fewer than 50% of the people we encounter are willing to let us in and give us the data and are excited about going after this effort.

Lisa: It's really, it's interesting that you say that. And cultural fit from a leadership, team perspective is so critical. And when I talk about, who my ideal clients are, right? It's leaders who are willing to consider that tomorrow will be different than today. And that's a good thing, right? You have to have an open mind and that willingness to know that whatever it is that we're going to find, it isn't personal. It shouldn't be personal. Sometimes it is a person, but let's not go there. But I love the fact that you get that it is, it's a cultural obstacle that needs to be removed because everybody is in that CYA mode. And if you're going to find all of these savings fearful, that people are going to think why didn't you already do that on your own?

Rich: It may not even be that individual, Lisa. It could be, yeah, their executive management who just doesn't have a culture of allowing them to explore neat, new, innovative things.

Lisa: Yes. And isn't that sad that in the healthcare space we'd have an issue wanting to explore and be innovative? Mind boggling to me.

Rich: I think we're getting there. I start to see things turning a little bit in our favor. I think COVID was a big wake up call. I think the staffing shortage and the nursing fees and the cost reduction efforts and half of the hospitals in the US posting and operating loss in 2022. I think all these big themes are pushing us in the right direction to make a difference. And for such a time as this I'm glad I'm in this space right now.

Lisa: The show is titled to Break Everything in Healthcare because let's own that most everything is broken and really what we want to do is fix everything in healthcare. And I love that.

I guess one last question that popped in as you were describing the cultural piece. And I don't know if your experience will inform this or not, but is there a difference in the for-profit versus the not-for-profit mindset?

Rich: Very interesting question. Yes. One of our first customers was actually a private equity backed group of surgicenters that's now been acquired by one of the big ones.

And yes. They were geeked out on the analytics. They loved it and they wanted to deploy it across their entire system. And when we wondered why they were so eager about it, we were seeing the parent the headquarter office who wasn't getting good data, was pouring over this stuff, trying to figure out what was going on, and they found some stuff going on in some of their hospitals that just wasn't right and they ended up firing some people and doing some other things.

I think this data, to your point earlier, can be used for lots of different things. That's where you see that for-profit mentality that I think every hospital has to get to, which is what Medicare is trying to do with reimbursements run your hospital, like every other business has to run in the United States.

Manage your costs and have great outcomes, you'll have repeat business and everybody will pay what you're asking for. But until that time you can't keep doing things in this broken way and expect the government to just keep shoveling money your way. So it's a very crude way of saying, I think the payers will probably lead the revolt because they're much more business minded and everybody else is going to be drug along.

I think our hospital CFOs and CEOs already know that. I think they were just waiting for the reckoning and I think it's coming now.

Lisa: Yeah. The reckoning. I think that's absolutely great. I love that in that description, you distilled down to fixing healthcare into one simple statement, control your costs and have great outcomes.

It's that simple, and yet the complexity to get to that is like horrendous. Rich, I have had so much fun with this conversation today. Thank you for your time. Thank you for sharing a little bit about what Kermit is doing and the very real impact that you're making for your clients.

And I wish you nothing but success and growth, and I love that we actually had a little visioning future session about the potential. That is the pure joy of why we do these conversations and why I have the podcast is so that we can have these moments and then share them out with everybody.

So for all of you in the audience, that concludes the show. And, you can find this on YouTube and all of the other streaming platforms. Look forward to seeing you again.

You have just experienced break everything with Lisa L. Levy. Critical conversations on directed disruption that.