Rich Palarea’s introduction on Twitter reads: “I won’t sleep until I fix $ waste in healthcare.” Cal listens to the story of how Rich became CEO of Kermit, a company that uses technological transparency to reduce costs on surgical implants for hospitals. The conversation reveals how little we know about what goes on behind the scenes in some operating rooms. It also gives us hope that applying transparency across all aspects of healthcare will make life better for everyone.
Cal Fussman: Welcome to Big Questions. This is Cal Fussman. Now, I've been hit by a few epiphanies about healthcare and wellness lately that I was aware of all along, but over time, I'm really getting to the depths of the matter, as you'll hear on today's podcast from my guest named Rich Palarea. Rich is the CEO of a company called Kermit.
It helps control the spending on surgical implants for hospitals, and his Twitter introduction reads, I won't sleep until I fix, and then a big dollar sign, waste in healthcare. I don't want to tip off the story, but it's another example of someone who was outside the healthcare system running a great business that he didn't have to leave, but when the full picture, the lack of transparency in healthcare was presented to him shortly after his own mom's surgery, he just had to start all over again creating a company in healthcare to fix the problem.
And after two years of asking questions about healthcare from all sides and all angles, I have to say, it seems to me that the solution to so many of the problems, is based on bringing in transparency. We go into healthcare, not sure what's going on in our bodies, and we come out not knowing what's going inside the business apparatus of the healthcare system in place.
I'm more and more of the belief that the onus is on us to take care of ourselves. The worst thing we can believe is we can treat our bodies any way we want and then go to healthcare or doctor for a pill to fix it when we break down, especially if we wait too long to have the problem diagnosed. Couple of weeks ago I did a podcast reminding everybody to go in for a checkup.
A lot of people avoided going to the doctor if they didn't have to during Covid, and it's feared that there will be a cancer tsunami soon because so many cases of it were able to avoid early detection. On top of that, there's now a shortage of primary care physicians and the waiting time for appointments has increased, which has frustrated many people.
They've put off these visits for a lot of reasons. So, I'm going to ask you right now, when was the last time you had a colonoscopy? If it's been a while, check out a seven-minute video called leadfrombehind.org. It got 10 million views last week, and if the video reaches a hundred million people, it's conservatively estimated that it will immediately prevent around 6,000 cases of colon cancer.
That's leadfrombehind.org. In case you didn't get it. The video was propelled by Brooks Bell who triumphed over colon cancer. If you didn't hear the podcast I did with Brooks, go back and listen to it. You'll understand how important it is to be proactive. And as long as you're being proactive, please have your parents hearing tested for free from mdhearingaid.com.
Mdhearingaid.com is one of the sponsors of Big Questions, and here's why. As people get older and their hearing slips, they have a tendency to be very cranky when it comes to hearing aids. I don't need a hearing aid, but the fact is the lack of hearing aids leads to a lack of interaction. And that lack of interaction has been connected to Alzheimer's disease and dementia.
Not long ago, I was talking to a guy named Donny in Arkansas, whose hearing was impacted by working in a super loud, soft drink factory for many years. It could cost up to five or six grand for hearing aids back in the day, insurance wasn't going to cover it and he didn't have the cash. Got to a point where he'd be out with his family over dinner, and he couldn't hear what anybody was saying to each other.
So, he would wait for somebody to say something funny, and he could see everybody laughing in order to fake laugh himself, just to be a part of the conversation. I'll let Donny tell the full story down the road, but in the meantime, have your parents hearing tested at mdhearingaid.com and if they need hearing aids, I promise you the price is going to be right.
It was for Donny, and you know what, now he's able to hear the birds sing again. So let's be proactive. Let's take care of ourselves before we need healthcare, and if we do, let's be thankful that there are Rich Palarea's out there to bring transparency to the cost. So, let's get straight to Rich Palarea
Alright. I'm seeing Baltimore behind you.
Rich Palarea: Baltimore is behind me. Yes.
Cal: I hope it's a good sunny day in Baltimore.
Rich: Unfortunately. No, it's rainy. First actually kind of gloomy, rainy day we've had in probably a couple months.
Cal: Well, let's bring the sunshine back in this podcast.
Rich: Okay, let's do it.
Cal: I'm most curious to see how you came into healthcare because you were working in transportation for like 30 years or so, correct?
Rich: That's right, yes.
Cal: And then you've co-founded or founded a company in healthcare? My sense is that there's a bit of an outsider influence, something that led you to do that because so many times I'm seeing companies founded by people for a reason that was personal to them and overlap with healthcare.
So, what's your reason?
Rich: Okay. Yeah, those are two very different worlds. I think, you're drawing the line there. There's got to be a story. I'll, tell you briefly what it is. It didn't become personal. It was more happenstance, honestly. And through that chance meeting, it became very personal to me.
I was introduced to two medical device reps who worked for Zimmer Biomet total joint orthopedics. So, these fellows were attending surgery in hospitals in the Baltimore region helping surgeons with knee replacement, hip replacement, things like that.
Cal: These were not doctors, these were salespeople, correct?
Rich: Correct. Salespeople. That's correct. And for your listeners. Let me just paint a quick picture, give you a better backdrop. In orthopedic surgery today in any of our big hospitals or health systems, and this goes for spine surgery, cardiovascular, lots of other categories as well.
Many times, there is a salesperson for the implant company standing in the operating room with the surgeon. They're not there providing patient care. They're not doing the surgery. They're only there to tender medical devices into the sterile field as the surgeon requests them, and then the hospital staff takes it from there.
So, they give the device to the surgeon, the surgeon implants it. The surgeon may think that he needs something, or she needs something different. They call out to the sales rep in the room, hey, I need this. And the sales rep would say, no doc, I think you might need this one. It's a better fit for what you're trying to do.
And the surgeon says, okay fine, let's use that one. There's no price tag on the box. Nobody has any visibility in the operating room as to what the price of that implant costs or the decision being made by the surgeon on his feet.
Cal: Basically, the salesman is telling the surgeon what the surgeon needs in real time and selling a product.
It's like, Okay, this is the car you need. Just take it out with no price tag on it. There's. No, nothing. It's just, here you go. Take it out.
Rich: I'm watching how far your eyebrows have gone up from where they started to where they ended at the end of that question and yes, that was the exact reaction I had.
To these two gentlemen walking into my office, I already had a going entity. I was doing that, as you said, for almost 30 years. We were doing cost reduction and spend management in this really tricky area that had no visibility, no transparency in parcel shipping. So, some of the nation's largest shippers were my customers users of FedEx, UPS, DHL, and they didn't understand if they had the best price, because they had nobody to compare their price to, they only knew that they could negotiate and get better prices year over year.
They didn't know if they were absolutely at the market rate rock bottom. They also didn't really understand or see or know how to estimate what the final price was going to be of a shipment, which is crazy.
You think about kind of the, we're in this whole ".com" era and we have lots of merchants who stand up stores online, and they can't calculate exactly what it's going to cost for them to get that package to their customer because there are Saturday delivery fees, residential fees, all that stuff.
So, what my company was doing is we would come in and help demystify how that works. We would conduct a bid on behalf of that shipper with the vendors, very kind of tight, fair RFP process, receive those bids back, negotiate the price and then ultimately host a meeting, and that was the first time we would allow the supplier and the customer to come together and meet.
By that time, we'd already hammered out all the pricing and that was just a chance for the parties to meet and see culturally are we going to be a good fit. So that was something I was doing, and I get paid out of the savings, by the way. So, there was no risk for my customers. So that was something, as you mentioned, I've been doing for 30 years.
Fast forward to these two folks walking into my office. They were trying to stand up a business kind of doing the same thing for hospitals in the category that they had a lot of knowledge in. For 10 years. They understood medical device implant pricing for knee and hip. They knew what the street price should be.
They knew that most of their customers weren't getting that price. They knew all kind of the tricks and traps that went on because here's something that's fascinating, I didn't share with you before, all of the billing for that surgery, takes place on a piece of paper that the sales rep controls. So, the sales rep brings in a blank piece of paper.
Yes. I'm not kidding you. So they bring in a blank piece of paper, and as the barcode stickers come off the boxes that are being implanted to the patient, they stick those barcode stickers on the paper and they use a pen to write down the price they want to charge, and they walk that piece of paper down to purchasing at the end of the surgery and turn that in to a buyer who doesn't have any clinical understanding of why the surgeon used what he or she did in surgery and they're expected to stroke a purchase order, so they knew about that whole thing and how they were overcharging for implants and items, it's very easy for them to do that.
So they wanted to start a business where they could actually put a lid on all that, demystify how that works, make it clear for the hospital, bring them the best price, and then help them hang onto that price long term and take a portion of that savings as their fee, be a very fair split and the majority of it would go to the hospital.
And so, as their attorney was helping them set up their business, she's thinking, this sounds really familiar. I have a client doing this, different industry, but same model. Why don't you guys go talk to Rich and see if you can work something out?
And they walked into my office and told me this tale about how they stand in the operating room. And the first thing I thought was, my mom had her hip done last week, and one of you guys was standing in the OR with her, she had no say in the implant or the price and the surgeon likely didn't really know what it cost.
And once I kind of got past the personal piece of that, I started to kind of think about this as a businessperson and said, wow, it's so rare that you get to the intersection of healthcare and technology and a paper-based process. Most things have been digitized here in the year 2022 where we're talking.
And so, I saw kind of the confluence of all those things, and I said, I could forget we had this conversation, because that sounds really complicated. I go back to my easy life. My business is doing really well, or we could fix this. And I sat with it overnight and over a week and I called them back the next week and said, we've got to fix this.
We can make a lasting change in this industry if we really kind of set our minds to it. And that was 10 years ago.
Cal: How much of this was tethered to the operation that your mom had just gone through?
Rich: Well, I mean, that's what piqued my initial interest because I could immediately relate to the story, they were telling me.
You know, I grew up in a healthcare family. My dad was a cardiologist. But the closest I ever got to anything in the hospital was when I was a young boy. My dad would take me on Sunday to make rounds in the hospital. He'd stick me in the doctor's lounge with a box of donuts and turn on cartoons, he'd come back after making rounds.
He'd come back two hours later, and I was still there. I mean, my parents always used to kid about this. They'd sit me in one place for a period of time, they'd come back, and I was still sitting there so I could occupy myself very easily. Later on in life I helped my father in his medical practice.
I ran his front office. I also did all the billing for him. So, I got a little bit of insight into that, but I didn't understand how all this worked. And when I heard that, you know, that was the picture they gave me in my mind's eye that there's a setting and there's a patient who's under anesthesia and there's a surgeon there, there are nurses, there are different staff.
But then there's also this other person who's not providing patient care. I got the image in my mind very clearly and immediately for whatever reason, Cal, I saw my mom on that table, right? Because it was just a week before that she had had surgery. So yes, it became personal to me.
Cal: I was just flabbergasted when you first told me, and I think I'm still in disbelief that you basically have salespeople in the position to choose the product that is going to be used and then to write the price down and it just gets moved along. And this is just accepted pretty much everywhere?
Rich: Yeah. It's the way this has been done for probably 50 years. One of the reasons why I think, you know, you're having the reaction you are, and most people do when we when I tell this kind of scenario to them the first time is, look, if you were going to sit down as a business engineer, right, somebody who understands business and solving problems and build a process today to solve for this problem, you wouldn't build it this way.
You wouldn't put an interested party who gets paid on commission for what they sell in charge of the billing in a highly technical area where the buyer they eventually work with, doesn't have any understanding of what they're buying.
So, yes, you and I wouldn't design this today, but that's how it maybe came this way as a matter of convenience, or these were the parties. But I'll tell you one thing. I think it's important for our listeners to understand. That sales rep is providing a service. They provide a very important role in the operating room.
Aside from the surgeon, they probably know the most, maybe even more I would say about those implants because they're trained on them, they understand the nuances of length and size and circumference and features and coding’s and all that kind of stuff that make a difference. And so, they're providing advisory services to the surgeon.
You used the car analogy a minute ago, and I would say it this way, the surgeon is a race car driver. They're not just your average Joe who's looking for a car who steps onto the lot and the salesperson says, here's your car. You're taking it no matter what. And I'm not going to tell you what the price is.
The surgeon is highly trained at what they do, and so they understand what's required. But if a race car driver jumps into a car and something goes wrong, they don't fix it. The mechanic and the pits fix it. Right? And so that's kind of the role of the rep. They know all the nuances and they're there to kind of bail the surgeon out.
If we get into kind of a hairy situation and we need an implant, that's, you know, just in time the rep brings in not just the implants. These are put into sterile trays. They're sterilized with the hospital, brought up to the operating room floor and wrapped, and then they're ready for surgery. Not just the trays that are the obvious things that we need for surgery, but a whole bunch of other trays in the eventual, you know, situation that maybe the surgeon needs something that's unforeseen.
So, the rep is playing a very important role. Now, not all of them are bad citizens. Most of them are really good people who want to do a good job and want to keep their job, keep their business, do a great job for the surgeon and all of that. Yes, there is a lack of transparency. And yes, in every marketplace where you have a lack of transparency, you have an opportunity for somebody to take advantage of that.
And it does happen. We not only do negotiate on the front end for these implants, but we also have software that monitors and digitizes the billing process. And adjudicates that in real time and tells the hospital what's okay to pay him what isn't. So, we catch that kind of stuff. We see where reps maybe are doing something either on accident or on purpose, but it's happening, and we clean that up.
Cal: Okay. So, it actually makes sense how it got to be this way because otherwise the hospital would've had to fund their own pit crew. When you think about it, I get it. If you are selling these parts [00:18:00] and you're watching these surgeries day after day, and probably nobody's going to have more experience at dealing with something that goes wrong with the car in an extreme way and has to be corrected in a minute.
So now I see, okay, there's a need. There's a need for these people to be there. It just comes down to fixing up the transparency end of it.
Rich: That's right. That's it. And also, I would say it this way, you think about your best salespeople you've ever worked with in all your careers and different walks of life.
You know, you want them out providing service. You want them out selling. You want them making relationships, you really don't want them doing paperwork. And a really good salesperson doesn't really like doing paperwork. It's kind of the bane of their existence. This stuff is all about documentation, and it happens multiple times a day for a sales rep, you know, upwards of maybe 3, 4, 5 surgeries a day.
If they're a really busy sales rep and so they're documenting [00:19:00] this stuff all the time, if you can take that paperwork out of their hands, you create a win for them as well. Because they really don't like doing it. They don't want to be doing it. And so, what we do in our process is we give them a mobile app.
It's called Case Snap. It's in all the app stores. They download the app, we give them a login to our system, and then they document everything on the mobile app. And they take a picture of that piece of paper, and they don't turn it in. We just then digitize everything, and they push submit, it goes up to the cloud and it gets them paid on the day of surgery when many of them aren't getting paid until days or sometimes even weeks after the surgery.
So, it's all electronic.
Cal: What I'm hearing here, and this is interesting to me because I'm starting to see a pattern of companies that are being paid from the money that they're saving. I just had this a couple of weeks back with Glen Toman at Transparent. And it really does seem like the wave of the future. Because, and same with Glen's company.
They're paying up front so everybody's happy. Everyone doing the surgery is getting paid immediately and they don't have to wait weeks or months to get the money and there's savings. It costs less for everybody. Is this the way to reshape the system because, as you were saying, nobody would create a system like the one we have now, but we can't just step out of it.
People are getting these surgeries and its life changing for them. There's a lot of good that's being done. But do you see this model? Maybe it's obvious question because you're using it as something that can be applied across the arc of healthcare?
Rich: You know, I didn't come right out and give you an answer and I'm hesitating a little bit.
I would like to say yes. I think what we do is very value based. One of the reactions that I typically have, and maybe you would agree with this, when I kind of tell the story and talk about the service we provide and the fact that it's all out of savings is, people shake their head and say, this is a no brainer.
Why aren't you in every hospital across the nation? Why isn't everybody wanting to do this? And I think that is the obstacle that may keep us Cal, from getting this to be ubiquitous across all of healthcare is this is a highly transparent, highly disruptive way of addressing the problem. And I say that in the best way, it's disruptive because we're picking up a stone off the ground and we're looking underneath that stone, that rock to see what's underneath.
And rather than finding something ugly and putting that back and walking away and just leaving it for the next person, we're actually going to turn it over on purpose, but we have an entire crew and a kit and the right instruments and the right devices to come in and clean all that up. And we do that as a third party.
So, I say that because a hospital or anybody, any industry, any buyer of these services has to be willing to embrace a third party and say you're the expert. Don't make us look bad. Don't change anything. Just keep everything the same. Let us keep using our vendors. We like the people servicing the accounts.
We don't want to upset the surgeons. Please don't take anything away from them. Work with everybody. But let's level the pricing where it ought to be. Let's get the market pricing where it ought to be, and then bring us a purpose-built system to manage this category. It's not enough to just drop off and you take a piece of the savings, and you go off into the sunset and leave us alone, stay with us, provide advisory services, help us understand in real time what's happening.
And that's super important because this is a category where you're not just buying the implants and then receiving them through a shipping dock and putting them on the shelf and then using them as a surgery happens this category, and 21 other categories that we manage in this surgical area, are what we call trunk stock.
It's a crude way of saying this stuff is not inventoried. When there's a patient on the table and a surgeon has scheduled a surgery, they've contacted the sales rep to say, Mr. Fussman is ready for surgery. We're going to need this type of knee. Be ready and here are the x-rays, everything you need to template the case, be ready with the implants that I need.
You and I have been working together a long time. You know what I need. And so, the rep brings all that stuff into the room. What we need is a purpose-built system to ensure that you're getting exactly what you need and you're paying the right price for it. And that's what we've built. Can't be a paper-based process.
So, the third party or the customer, I guess I'll say it this way, has to be willing to embrace a consultant and they want to get better. They want to hand this off to somebody who understands how to do it. We've done a disservice to our hospitals in asking them to be an expert in this category. We want them to purchase capital equipment like X-ray machines and CT and MRI machines.
We want them to handle laundry and food services and lawn care and all the disposables in a hospital, everything. And be an expert in these implants that are highly technical. It's a great place to outsource to an expert, and especially one that has a value-based model. Like, hey, we'll just take a portion of the savings.
So many CFOs we talk to of hospitals will say, we absolutely need the savings. Our top line revenues have really fallen off due to covid, because we had to shut our operating rooms down. We couldn't service those patients who needed surgery. And even at this point, Cal, they're not really coming back to the hospital just yet.
There's some pent-up backlog still in the system of people who maybe are afraid, honestly to go to a hospital to get surgery. Because all they remember is seeing that on TV as ground zero where it was all going down. I don't want to go back in that environment right now. So, you know, hospitals have to do a very good job of getting the message out.
It's safe. Our ORs, our operating rooms are open, our surgeons and our nurses are ready to help. We'll do a really good job. Come on in. Have your knee down, your hip done, your spine surgery, anything you've been putting off. And those patients are at home and they're in pain likely. And so, we have to kind of connect all that back together and get back to normal.
But those CFOs, they need that savings, and they need it now. Where I get some resistance to answer your question directly, is from the ultimate people we will work with in the project. That would be a supply chain team who's responsible in the eyes of, I guess any of their managers, to negotiate these prices and have those vendor relationships.
And so, if we walk in and find, I don't know, $10-$15 million, that's not out of the question. That's typically what we'll find, you know, 30% of their annual spend is savings that we can drive back. On average, that's our track record over the past 10 years. So that's a sizeable amount. If we find $10 million on somebody's watch, they're probably not going to be pleased about it unless they see us as a partner and can take credit.
But if they don't, they may see us as a threat and they may not be willing to have a third party come in. And so, you have this cultural fit that needs to happen and that's the biggest thing for somebody in my place to overcome.
Cal: Are people more open to change after Covid, do you think? Or is it the status quo?
Rich: I think that's one of the positive things about this. Couple things that have kind of put a light and kind of changed things. Covid has kind of like shaken everybody and woken them up to supply chain issues for one. I think that's been a big factor. No longer I think do supply chains want to rely on foreign supply chains and foreign sources of materials.
But also, yes, in healthcare. I mean, a lot of these hospitals are on razor thin margins. They were before Covid, so before we put the stress of that onto our financial part of the healthcare system, they were already on very thin margins. Those margins have become even more thin now. So yes, it's a spotlight, but again, you would think there'd be just a rush. People banging our doors down. It's a process to take somebody through this.
Cal: This is what is startling to me. Like you hear that the hospital is on razor thin margins. It needs all the savings it can get and yet they're basically have people in their operating rooms like writing out the charge of a product and just passing it on for payment when they leave the operating room.
That just is mind boggling to me why the hospital would want that or, it sounds to me like the surgeon has no idea of the cost. Does the surgeon know the difference in the prices or at that point? The surgeon as a race car driver just needs to win the race. So, it's made this car go as fast and as safe as possible.
I get that, but wouldn't it be better if the surgeons knew what they were being charged for the products?
Rich: Yeah. So, let's stick with our race car analogy for a moment. There was a scene in the movie, I'm going to go back a little bit Days of Thunder with Tom Cruise, if you remember that gem. I just like auto racing and I wouldn't say I'm a huge fan of Tom Cruise, but I like the stuff he does.
So, you know, I watched that movie and now that it's on almost every single channel, late night, you can find it again, right? So, there was a scene in that movie where they're doing some testing and the gentleman played by Robert Duvall, who is kind of his coach, his pit crew manager if you will, sends him out onto the track.
Now, Cole Trickle the character played by Tom Cruise only knows one thing. He only knows how to go fast. And so, he gets around the track as fast as he can, but the problem is he's burning up tires like crazy. And so, what he doesn't realize is he's going to end up in the pit and that's going to take away a lot of time.
And the style that he's using to drive the car fast. And so then, you know, Harry, the is the guy played by Robert Duvall, sends him back out onto the track, says now you're going to do it my way. And he coaches him on the radio about how to do it. And he comes in and the manager of the team comes down, the team owner and Robert Duvall says, his way, my way. And he puts a hand on each tire, and you can see, and he was three seconds faster or something like that with the coach's way. And so that's kind of the role that gets played. The surgeon wants to do it as safely and as fast as they can, but we're missing the element of the cost piece of it.
And some surgeons will say, especially those who've been around a long time and say, look, we're not going to mess around with patient care and cost, that gets to be a dangerous place. I'm not going to do something that's going to provide a lesser outcome for the patient just because you want me to save money, and I totally agree with that.
But there's such a margin, there's such a delta between that mentality and what's possible before we start to impact the patient quality, where we can reduce the cost and measure the outcome of the patient. So, we don't have a poor outcome, but we have the rock bottom cost still with the same outcome that you would get with the better product.
And so, the surgeon is tasked with getting out of the operating room as quickly as they can having as low blood loss and as low supply use as they can and doing it safely and effectively. The last thing they want to be burdened with is the cost. If the supply chain manages that on behalf of the surgeon, they don't really ever need to worry about that.
And so, when we can bring surgeons to the table and provide them visibility about here's what the cost is today and here's what the market pays for the same part for the guys down the street who are doing less surgery than you are, are paying this lower rate. Is that something you can help us with?
And typically, they'll say, no one ever shared that data with me. Why am I just now hearing this? Yes, that makes sense. Let me help you. Let's get the price where it ought to be. That's typically what you get. They're very good corporate citizens, I'll say it that way. And they want to be invested, but nobody ever brings them in.
Cal: You know, now that you explain it to me that way, like I can understand. You probably wouldn't task the driver of the race car, to know how much the tires cost or all the different possibilities of tires would cost. So, it makes sense to me. I'm just taking in all this information and wondering, okay, if this model was applied and it was extrapolated all over healthcare, what it might do, the savings that it might bring.
What's the savings you've brought to the hospitals you've worked with? And, you know, we started this conversation with me looking out your window and seeing Baltimore. Is that where most of your work is done?
Rich: Yes. So, we're located in Hunt Valley, Maryland, the Baltimore suburbs Northern Baltimore County.
Where we started the company here initially got our start here with a couple of hospitals. I realized very quickly that I wasn't being an effective CEO of two companies. We ramped up much more quickly than I thought we would, and we were profitable in the first quarter of our existence, so that's when I sold my other business and started this.
So, over the 10-year period, our average savings has been 30% of the annual implant spend in any one of 21 categories. Implant spend comprises 60% of the supply chain spend in a healthcare organization. So, it's a very large amount of money that's being spent. It's a sizeable category. So, if we're driving 30% over the past 10 years, we don't have a lot of customers.
We do manage 40% of the implant spend that transacts in our state of Maryland today. Over the last two years, we've put together a growth plan for the company to kind of go national. So, we've hired a chief growth officer, we've staffed a national sales force, you have a marketing department. We have all the service people we need.
We're ready to go. We just so happened to build all that on the front edge of a pandemic that we didn't know it was coming. So, we've done that for the past two years. We did pledge to our employees that nobody would be let go during that period. I'm very proud to say that we kept that promise to them and we're ready to go.
But during the 10-year ride, even with just a handful of customers, we've saved our hospital customers over $200 million. It's a sizable amount of money. Of course, we've done that without changing the type or style or vendor of implant that they use. They get to keep all their implants.
This is just about getting the price down to where it ought to be, and then bringing in software so that we can hold onto that savings. I mean, one of the things that we have is because we have this trunk stock issue that I mentioned before. The stuff is not inventoried. So, if you build a measure to actually bring visibility to this category and you shut down kind of an action that's been going on for a long time on this paper-based process, you have a person on the other end who's smart, who's going to try to get that margin back.
So, countermeasure and they come in and try to do something, game the system, the software catches that. We build a new countermeasure to take care of that, and the game just keeps going. So, you do need people on both sides because there are people behind this transaction to build the software, to put new rules in place and do all of that.
So, over the 10 years we've actually been perfecting that software. It never existed when we started, we were the first ones to bring this product to market. There are a couple of other imitators who are trying to catch up to us. But we have the market leading product in this category, and now we're ready to take this out nationally.
So, I think you'll see a lot of growth from not just our company in the next few years, and this model you're talking about, but a widespread adoption of this approach using a third party, using this savings model. And it's not projected savings. It's not, we don't predict what we will save a hospital.
They have to actually save money in an operating room, and I have to point to the date and the patient. And the products used and do a calculation and put that all on a report and attach that to an invoice before I'm able to send that to a customer so they can really sit down and say, Okay, we really did save this money.
It's an impact to our bottom line. Let's go ahead and write the commission check to Kermit, and then let's go redeploy that money back into the system someplace.
Cal: Is that why you were able to make a profit so quickly? Because you were immediately able to show people that this payment through savings works. And who would be against that? You're saving me money. Okay. Of course, I'm going to give you a little piece of that or whatever piece that you take.
Rich: Yes, you're correct about that. That was an easy model to put in front of somebody. It didn't take a long sales process to walk them through that and get them to sign up and say yes.
And then, when they say, Okay, let's look at the project. What's this going to look like? When can we start? Well, it's about a 90-day project or so to get from you hired us to, here are your final prices. And typically, a hospital may take upwards of 12 months to do that on their own. So, it's a much faster, easier, efficient process when they do it with us.
But we're also in that 90-day window. We're standing up the software right away. So, the software is doing its job of policing the billing, and it's driving between 5% and 10% savings every single day while we're doing the big project to get the big 30% savings. So, there are immediate savings generated from day one out of the box.
No integrations needed. No fancy customizations to the software. It's all cloud based. We manage the whole thing and [00:36:00] then within 90 days we're up and running. So, I can bankroll that 90-day project. There's no problem with that. And then from day 91 for the next two years, we're sharing in the savings and then we can go do another project.
So that's kind of how we ramped up very quickly.
Cal: Okay. So, let's look at everybody involved. The surgeon is happy because surgeon is getting what surgeon needs to get the job done. Same as always. Nothing lost there, right?
Rich: That's right.
Cal: And not only that, but their savings to the hospital. So that's, that's good for the surgeon. Is there any way that the surgeon is being, I don't want to say hurt, but where the surgeon's looking over and saying, hey, you know what? There's a better way to do this.
Rich: The surgeon can be a detractor from the project in the event that there is some kind of other relationship set up. I'll give you an example of a few, and these would be very rare.
The rep who works with the surgeon is a relative. It’s happened. In 10 years, I’ve seen it a couple times. They're relative or a very close friend. You have to realize too, that surgeons, they're doing this for a living, and they're very true to their craft. They want the best outcome for the patient, and they're very good providers of care in that area.
But they have a heavy reliance on the sales rep. The sales rep knows what the surgeon likes. So maybe I'm going to take you out for your favorite steak dinner at Capital Grill, and we're going to have that bottle of wine that you told me you collect, and I'm going to make sure I order it for you. So, there's some of that that goes on.
We play golf together at your favorite course. So, if you think about the way that we've made changes in that part of healthcare over many years, I remember when I was working for my dad in his practice, we will close the office at noon and that was our quiet time.
From noon to one, we would have lunch. Now patients would come in and we'd sit down, and we would eat. I'd get some busy work done. He'd be dictating some charts.12:15-12:20 every single day. There was always a knock at the door, and it was a pharmaceutical rep, and they knew that's when we closed the office, and they knew they could get some quiet time with my dad if they came in.
Now, we would go on trips all the time. We'd go to Puerta Vallarta and Maui and these great places growing up as a kid, and my dad would have to disappear for two hours during the day and he would have to go to a meeting and I'd say, why do you have to go to these meetings, dad? He said, how do you think we got here? Who do your think's paying for this trip?
And so, the influence that pharmaceutical companies had over surgeons that all came to light and laws were passed about documenting all of that. Anything that a surgeon gets, or a doctor in the case of the pharmacy issue that I raised a minute ago had to be documented. We do have that now in implants.
So, you can go to the CMS Open payments website. It's a site run by Medicare. It's available to anybody. And you go look that up and you can plug in a surgeon's name, and you can see how much money they've made from the device companies. So, there's that influence that goes on. Some of them are getting paid for speaking.
They use the implants. They speak on behalf of the implant companies at big conferences. Some of them have designed implants. And so, they have a royalty that they get every time that implant is sold. They typically don't get that when they use it on their own surgeries, there's a law preventing them from doing that, but they get it on every other sale.
And so, you've got to kind of follow the dollar, I think a little bit, just like in any industry about who's a stakeholder, who may be conflicted, who has those conflicts, how do we disclose them in a professional way? How do patients continue to get care? How do we get the price down? Because you got razor thin margins at the hospital.
You have surgeon pay potentially falling, somebody's still making money. Who is it? You know, it's got to be the implant company, so let's right size that. So, everybody's taking their fair share. Let's let everybody make a profit, but let's not have this unbalanced system where the hospital is losing and somebody else is winning.
Cal: You know what I'm listening to all the complexities here and my mind is thinking, well that makes sense. If a surgeon is devoting his life to this and he invents a product an implant, that's better. Well of course he should be able to go out and tell people about it and profit from it.
I can see how there would be a lot of gray areas that might come up. What I’m getting out of this conversation is you're basically taking the gray out. And letting everybody have as much as they can get. Is there some way that you figure out, okay, this profit margin is good for the hospital, this is good for the company that makes the implants and any transportation?
How do you figure all that out? It's amazing. I just, I have a book here. Economics like these principles of economics. I never looked into it before, but this conversation is really gearing me up to go even deeper into that book because you're really putting yourself in a position of setting a market in a way.
Rich: Yeah, so you probably didn't even realize that you asked a very involved question that has lots of implications. The economic piece of this, the market setting and the kind of potential, monopsony, which is kind of the other side of a monopoly when, you know monopoly is everybody understands that when you only have one provider of service, we're all beholden to go to that place.
Monopsony is when the market drives one price for many providers. And that's also an antitrust issue that's also illegal. So, when we sit down to do the type of work that we do, we have to be extremely careful. There are lots of non-disclosure and confidentiality documents and language that govern all of that.
We have to be protective of the pricing that we have access to. We can't let that out. That's market secret stuff. And that's privy and should be confidential only to the provider of the product and the buyer of the product. But we stand in the middle, so we keep that all a secret.
We're really not doing much more, we’re not really measuring the profitability as much as we are, Cal, looking at what's the price set for this particular stock keeping unit, this skew in the market, It's out there. Either we've negotiated it, or we've seen it in pricing, or we're aware of it someplace. What we're saying to the marketplace, the vendor, the bidding supplier, is we're not asking you to set a new low water mark.
We're not asking for unreasonable price. We're only asking for the price that you've already put in the marketplace. And we're just asking you to bring it to this customer. Charge anybody else, whatever you want. As long as they're not a customer of Kermit, we don't care. But here we already know that this is the price that they're entitled to, and we expect you to bring it.
And if you don't want to do it, that's okay. You don't have to actually include it in the bid, but if you don't include it in the bid. This is a competitive market. It's no different than walking into Best Buy and seeing a whole bunch of TVs with similar features. They're all going to be within plus or minus 10% pricewise of each other.
If you have all the same feature and you have this other outlier product, guess what happens with that tv? It's going to sit in stock. Nobody's going to buy it. And that's just market competitive forces that work. You talk about economics, so everybody's got to bring their cost and their pricing in line, and then they have to compete, and they have to survive.
And if they don't want to, then we're not asking them to do something crazy or different. Just there's the door. They don't have to compete.
Cal: You know, the amazing thing about this conversation, I started out in healthcare not knowing anything about it, and I just started asking questions. And the more questions you start to ask, the more it takes you into other areas like markets and economics and you [00:44:00] realized how detailed reshaping this system would be.
But it really sounds like you provide a tremendous service and I love the model just being paid for the savings that you can bring. And I really hope that you can continue this and make it grow and that other people will see the virtue in what you're doing and apply it to the way they might do business.
Is there, I mean, you've just given me quite an education. Is there anything else I should know before you head off to your workday?
Rich: Well, I think Cal, you just went on a journey and you've just kind of been enlightened, so to speak. I think another way of saying what you just said is I pull this one thread on the sweater, and it just keeps going.
And it's getting me thinking about more things and how connected everything is. And I think that's good. I do believe that people who are in the business of healthcare ought to be asking the questions that you're asking, and they ought to be having a thoughtful dialogue about this. It’s no longer we in a place, especially post pandemic. I hope we're post pandemic. Are we post pandemic yet, or are we still in a pandemic? Who knows. Right?
Cal: Well, it may be pandemic light.
Rich: Let's go with that. That sounds good to me. But here we are in this like it's a different era, right? It's a different way no matter what we're talking about healthcare or just buying food at the store or filling our tanks with gas, whatever.
I think everybody is just kind of awoken to the fact that we just can't go on like autonomous robots anymore. We have to think. We have to advocate for ourselves. We have to do what's right. We have to be smart. Be efficient and do more with less. Whether it's less people in our businesses because they're walking out the doors and it's hard to hang on to them or less revenue, whatever it is.
And have this kind of conversation and maybe there's an opportunity for me to come back and we can continue talking about these things as we see more and do more. But I do think it's bringing in awareness. It's taking you on that journey and getting you to think about this. And now probably you'll look across the continuum of all different businesses and see opportunities like this.
Where its value based, but not everybody wants to do it because it brings a tremendous amount of transparency in a very short period of time. And then you have to ask yourself why? Who's blocking that? What forces are at work that we need to actually do maybe more of an expose or maybe uncovering that so that people in influences can come in and clean that up.
Cal: Yeah, it sounds like wherever you see a lack of transparency, there's something going on behind that curtain, and that veil seems to be all across healthcare and maybe that's got to be part of my mission to maybe I'm like, Toto in the Wizard of Oz. I got to pull the curtain back.
Rich: You got to pull the curtain back. I totally agree with you. Yeah.
Cal: So, thank you for giving me these insights. I so appreciate it. I wish you great luck going forward.
Rich: Thanks, Cal, it's been a lot of fun.
Cal: That about wraps it up. Want to thank Tim Ferris for nudging me to start this podcast. As usual, it's always taken me on an adventure and teaching me something new. One new place I'm headed is back on the road to speak after taking off to care from my 90-year-old dad during Covid. I've spoken for years about the power of questions and the building blocks of storytelling.
I've added an additional twist that will be very helpful to organizations and companies, which have been hit by the great resignation. The great shuffle and that you're grappling with maintaining a sense of togetherness among remote workers. Those companies may also be looking to find ways to make those who have to return to the office comfortable.
The talk in the workshop is about the power of hugs through [00:48:00] storytelling it enables anybody who listens to present better, but it also brings together teams and companies because the storytelling is seen to the power of hugs. I know that on the surface, hugs may sound soft and squishy. It's not.
In an hour and a half, the storytelling will connect groups of people in a very deep way. They don't even need to be in the same room and physically hug. They can have a virtual experience because the power of hugs comes through the stories told. It's one of the most impactful messages I've ever passed on, and if you want to bring a team together, please reach out to me directly via email at calfussman.com and we can see about giving it a try.
I have never felt better about anything I've done in my life, and I look forward to sharing it with you. Thanks for coming along on the journey. It's only just beginning, and the best is yet to come.