Improve Healthcare: Surgical Cost Reduction and Spend Management

Intro: 00:00

Rich Palarea: But I’ll tell you the one thing you guys did for us that was unexpected and transformational, you have us collaborating with our surgeons.

We’re no longer butting heads about this category; we’re actually sitting down and having meaningful conversations and they’re bringing savings ideas to us. And it’s all because you guys took a different approach to this, one that we didn’t really think of, because it wasn’t available to us.

We didn’t have the data, we couldn’t actually pull it together, we couldn’t inform it with the type of information you have, being experts in this category, and we couldn’t honor the surgeon because we never stood side by side with them in the operating room like you have.

You’ve earned the right to speak to them, and you’ve really made a connection here for us to collaborate. And that’s where this whole idea of collaboration on this category is real. We want to be able to offer that to every hospital who wants to try it in the United States. That’s our goal.

Michael Tetreault: Good morning DocPreneur nation. My name is Michael and you’re listening to the DocPreneur Leadership Podcast. And today our special guest that you just heard from and that you’re going to learn and hear more from is CEO of Kermit, Richard Palarea.

Kermit is an analytics platform that delivers insight into the fragmented spend category of physician preference items. Kermit equips supply chain managers, surgeons, and executives with real-time data on implantable medical device transactions, offering unprecedented visibility that’s saving hospitals millions of dollars.

We’re going to talk about physician ownership and ambulatory surgical centers, we’re going to talk about trends happening within that space and transforming this antiquated paper-based process of surgical billing and saving millions in the process that eventually trickles down to the patients as well.

So, I can’t wait to jump into this conversation with Rich. He is the CEO of Kermit and Kermit is a Baltimore-based Healthcare organization and he’s going to tell you more about it. Let’s get started.

Good morning DocPreneur’s, this is Michael and I am here with a special guest, CEO of Kermit, and here to learn more about that, though it’s not the green frog that we all know and love, but you’re listening to the DocPreneur Leadership Podcast, today our special guest is Rich Palarea, he is the CEO of Kermit, and I am going to let you describe what Kermit is because it’s pretty neat for doctors listening. So, go ahead and lean in, listen, and I think you’re really going to enjoy what Rich has to say.

Rich: Sure, thanks Mike, thanks for having me on.

Kermit is an interesting play; we’ve been around ten years and there really wasn’t another company like this when we decided to start this. I started this company, I already had another company at the time, I started this because two former orthopedic medical device reps, they were in charge of selling implants for Zimmer Biomet, a large global organization that produces many types of implants. They were on the orthopedic reconstruction side, so knees and hips and things like that.

They were introduced to me through a relationship that we both had, our attorney, and she heard the type of business they wanted to set up. They wanted to go back into hospitals that they had served for many years, and they were told to keep the margins high, and how to ostensibly, take money from the hospitals, they wanted to go back into those hospitals and take all of the information that they had about price points, about what was going on in the operating room, about waste, fraud, and abuse, and help hospitals save money in this area.

I already had a business doing this in a different industry, and she just encouraged us to get together and so we met, and I heard the story, and I fell in love with the idea, I sold the other business, and that was ten years ago.

So, Kermit does two main things. We have a piece of software that helps hospitals understand surgical billing for 23 different categories of surgeries, but one thing they all have in common is an implantable medical device. So, it could be cardiovascular surgery, where pacemakers and defibrillators and stents and leads are being placed, it could be, as I mentioned before, total joint reconstruction knee and hip, spine has a lot of this that’s involved, not just the metal in a spine surgery but there are pain management devices, that are alternatives to opiates, that can be implanted into a patient and manage pain. And like I said, 23 categories including very complex areas like biologics and things like that.

So, what we do is we help the hospitals understand the price points, kind of the street price, what’s the best price that you could possibly negotiate, as a supply chain manager, for this very costly area. And the way we do that is, we have negotiated many contracts, we understand in real time what the price points are, we understand what these manufacturers are looking to do in any corner of their earnings quarters if you will, what they’re looking to achieve from a sales standpoint, what the pressures are, etc.

Michael: So, for doctors listening, one of the topics that we want to cover today is, those doctors who are looking, you have entrepreneurial tendencies. You know that you’re driving down the road right now, you’re running on the treadmill or you’re taking a walk with the dog, or maybe it’s a cat, but typically it’s a dog, and you’re looking at ways to become a better entrepreneur.

And you have a background actually, your dad was a physician, we talked off the air, and tell us a little bit about how that experience has kind of led you into having a really unique perspective on how to work with doctors today.

Rich: Yeah, I always kid with my mother, you know she always used to tell me, “You ought to be a doctor, you ought to be a doctor.” My dad really never pushed me into it. But I tell her, this is the closest I will ever get to being a doctor mom, so I hope you’re happy with it.

So, my dad, Mike you’re right, he was a cardiologist in Long Beach California for 34-35 years. Great career loved his patients and was loved by his patients. He, unfortunately, passed away about 15 years ago now. But the one thing I’ll tell you, and I am not going to generalize all doctors, but I’ll tell you about it in my family, while he was a great caretaker of people, one of the best I’ve ever seen, he was a terrible businessman.

He just wasn’t able to keep up with the daily rigors of running a business and this was back when you had solo practitioners, you didn’t even have medical groups. He had his own office, he went to the hospital, made rounds, and saw patients there, he helped in surgery in different places where he had patients that went into surgery and that kind of a thing.

So, towards the end of his practice, I was between jobs, and I offered to come in and just help him run his front office. At the time we had what we called “The blue hair group.” There were three administrators that helped him in his office, I think the youngest of whom was 60 years old. They used IBM typewriters to type up patient statements and hand them to a patient when they left.

So, I brought him into the era of computers. We put electronic medical records in, and we managed the practice on one of the first electronic systems at the time. So, I had a little bit of insight into what it means to work on the business side of a small practice, interact with the patients, and I got to spend some time with my dad before he passed away which was such a blessing.

Rich: You know, I think there is no shortage of process improvement that can be deployed in healthcare. Even though we have electronic medical records, and I know that is probably a dirty word for many of our listeners, and I kind of agree with them, I mean, I dealt with a friend of mine who was an emergency room doc who says, these forms, these systems are built by software engineers, they’re not built by doctors. There’s no space to put what you see at 2 AM on a Saturday night in an emergency room, what you’re actually dealing with, into the form, there is just no space to put that in, there’s no category for it.

So, I get that, there’s a lot of room for process improvement. I think what I learned is, taking it slow is the best approach, and if you can make small improvements over a period of time, you’ll get doctors, I want to keep saying surgeons because that’s the market that we deal with, but doctors in general, physicians, who are interested in running a very efficient practice, because now they get to take home part of those profits.

They want to know how they can make things very lean and optimized. How can they use the latest technologies? What’s a shiny penny that they shouldn’t bother picking up implementing because they’re being bombarded with marketing messages every day, about how to run the practice and what’s the latest and greatest, and trying to weed all that stuff out is really tough.

So, I really like going to third parties, I think there are people out there, we’re a very niche focus, we help acute care settings and supply chains there that using and leveraging, and not being afraid of using and leveraging consultants, to help you to be better. It’s the responsibility of the business owner, the physician, in this case, to weed through that, but I think you need to have some really good advisors to help you with that because there’s just so much information it would take you forever, how would you even have time to care for patients.

Michael: Yeah, I mean, for those physicians listening I think a good way to summarize what he’s saying also is, the goal isn’t perfection, the goal is just simply, progress.

For those listening, I am not a physician, but I am a patient, and so is Rich, and we know what it’s like to sit on the other side of you.

So, the next question I have for you is, for the surgeons listening in particular, if they’re looking to improve their bottom line, what are some ways that they can do that? Where are some significant wins within your supply chain that you want to reference?

Rich: Well, I can speak directly to the purchase of implantable medical devices. So, we would be looking at only a segment of your listeners that would probably be involved in either, orthopedic surgery, spine surgery, cardiovascular surgery where implants are used, the cath lab, things like that, and this is the most exciting part, might be interested in starting with some ownership in an ambulatory surgical center or a specialty hospital.

There’s this large migration or move right now for surgeons who have this capability to be able to own a piece of the business that they work in. Still practice in the hospital, still see some of the patients with maybe some higher comorbidities or risk, in those settings. But Medicare has really been pushing in their reimbursement models with things like bundled payments, and some of these other moves, to see these patients in an outpatient setting.

So, you have this large migration, you’ve got the market there, you have an aging population, more and more people are going to need hip and knee implants and things like that because they’re living longer, and Medicare is pushing to have it done in that setting. So, one, there’s a big opportunity for surgeons who want to get into the business ownership side of things and have a piece of the business themselves, rather than just the reimbursement that they get for performing the surgery.

Number two, now you have become a business owner. So welcome to the wonderful world of not just taking care of patients, but everything that is involved in running a business, especially profitability. I can speak to hospital supply chain for a moment and tell you that in a typical regional medical center, implantable medical devices account for 60% of the supply chain spend. That’s a huge number!

When you think about all the things supply chain is tasked with negotiating and contracting for including capital equipment, MRI, CT machines, lawn care, landscaping, food services, everything. So, these implants are very expensive, and now if you take this down to an ambulatory surgical setting, that’s one of the primary things you’re going to be buying. You don’t have food service; you don’t have landscaping and lawn care and those types of things.

So, now you have a bigger focus on this, you have to really become well versed on all these implants that you use on a daily basis, but also up to speed on what’s coming out on the market next year. Because the implant salesperson is going to make that new shiny thing very attractive to you, but your real question is ”Does it provide a better outcome for the patient, and at what cost? Do I have to pay more for it? Why?”.

So that’s what Kermit is doing, we’re demystifying that entire world, we’re taking that on, we’re negotiating those prices, we’re providing software for the paper-based billing process that is around today. And this is fascinating to me, Mike, that at the advent of mandated electronic medical records, we still have a paper-based process in many hospitals and specialty surgery centers for the purchase of these implants. A device rep stands in the operating room with the surgeon and tallies everything on a piece of paper, and then hands it in expecting to get reimbursed for that.

Rich: What we’re doing is not terribly unique and its not rocket science, but you have to scratch your head and wonder why nobody has tried to do this in the past. It’s a very messy, delicate process.

If you’re going to insert yourself into the intraoperative workflow, and I am talking about a closed, sterile operating room where a patient is under anesthesia already, you can not be intrusive, you cannot change that workflow in any way. Because if you change that workflow that impacts any one of the nurses in the room, or God forbid the surgeon, you’re not going to be there very long.

So, what we have done is sort of an elegant way to do this, like I mentioned we have a mobile app, its available in the iTunes store and the google play store, we give that for free to the implant rep and it takes the place of their paper. They document what’s used on the case on their phone, they bring their own device, and then they’re connected securely to our cloud infrastructure. At the end of the case, they just send that up to our cloud and we adjudicate it in real-time.

Why do the reps love this if we’re taking the margin out of their backside? They love it because, in the world of HCA and other large acute care settings, it typically takes them sometimes three to four weeks to get paid, to get a purchase order, so they can send an invoice to the hospital for what is used in surgery.

With Kermit, they actually can get a purchase order on the day of surgery. So, we largely don’t find the vast majority of reps doing anything untoward, and stealing anything from the hospitals, but they’re out there because there isn’t a lot of transparency in this transaction. There’s a lot of areas to cut corners and kind of pad things. So, we’re taking all of that out, we’re also taking away all of the manual review of a piece of paper.

So, think for a moment, even taking it back to the HCA scale, how large and massive that organization is. If you had all of the surgeries in 23 categories, every single day, being submitted to purchasing by a piece of paper, you’d have a stack of paper on anybody’s given desk. You’d have to pick up the first one off the top, and you’d have to compare it on the other hand to the contract, and you have to do that one for one until you get to the bottom of the stack around 5:30 pm, only to show up the next day and do it all over again. This is the existence of a lot of these folks. So, they’re really not checking this stuff in the way that maybe we hope that they do and it’s just because it would create an absolute work stoppage if they did it. So, this is a great thing to hand off to a piece of technology, that doesn’t need a coffee break, that doesn’t need vacations, and gets it right every single time.

So, that’s what we’re doing, we’re adjudicating that bill, telling the hospital what’s ok to pay and what is not. Then we give them a dashboard, we can even automate the payment process, if they want to do an integration, between their enterprise resource planning system, and Kermit, to automate that P.O. Then we electronically transmit that to the vendor, so they’re not in the office of a hospital asking for, “Hey where’s my P.O.?”.

We’re taking FTEs and partial FTEs out of the equation, so there’s additional cost savings on that area too. But really the reason why we love the data collection in the operating room, is because we are making that clean capture and we can turn that into really interesting analytics to show a surgeon, are you aware that you had $100,000 worth of waste last year? They would say, I certainly am not. I don’t waste that much stuff in the operating room. Let me look at the data. And they’re able to click through and see the actual case, with Mrs. Greenhill’s name on it, and they say, oh I remember that case. I dropped a screw on the floor, and I told the rep you aren’t charging us for that? And they said no doc I got it don’t worry. And doggonit they charged us for it.

So, that visibility to that data for the person providing the care, and the person writing the check in the hospital, is brand new. We have never seen that before and that’s an area we ventured into. And we did it because, we’ve got this interested party in the room, the sales rep, who’s willing to track this data for us. So, again, it’s not rocket science, but it is a very delicate balance that if you were to upset that by putting that burden on anyone else in that room, it probably wouldn’t work.

Rich: Absolutely, Rich. We’ve measured this. In a less than empirical way, we actually put this into a blind study, so we can actually document this well.

In ten years of looking at these cases and over 150,000 individual surgical cases, we believe that the waste, fraud, and abuse number, if you did nothing else but police the billing coming out of the operating room, is about 7% in overcharges.

Now the single digit might make the audience feel like that can’t be a whole lot. But when you think about this spend category in a small community or regional medical center, just knee and hip alone, you could be spending $50M a year. So, if you do the math on that, Kermit pays for itself in a very short period of time with the subscription fee that we charge, and then it’s basically making money after that.

Rich: To the lay people out there I would encourage them to go look at the website for one reason only. I mean we have a great blog out there that we write articles about every two weeks. We really kind of put this into a perspective that the average person can understand and begin to scratch their head if they’re a patient and go, “If I were to devise or design a process today, it wouldn’t look anything like this process you’re telling me about. This is completely backward”. We author those articles in a way that everybody can understand them.

But more than anything, there’s a little two-minute animated video, I think you may have seen it already when you visited the site. Talks about why we do what we do and why there is a problem and how we solve it. And in a matter of two minutes, even my kids understood what is it that dad does for a living. But it really puts it into perspective where you scratch your head and go, “Wow this is a no brainer, why isn’t everybody doing this?”

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