It might be hard to accept but the cost of medical supplies and devices can be extremely expensive. Hospitals need them on a daily basis, which means they have to shell out thousands and sometimes millions of dollars every month. And that’s just for keeping the lights on. As we all know, you cannot get by without the equipment, meds, and other supplies your hospital routinely uses.
And our guest today, Richard Palarea is the CEO of Kermit, a Baltimore-based healthcare cost reduction and spend management company bringing automation and insight to the high-spend category of implantable medical devices within hospitals and health systems.
Dave Denniston: Hello my friends, and welcome back to another episode of the Freedom Formula for Physicians podcast a podcast dedicated to helping doctors like you slash your debt slash your taxes and live a liberated lifestyle. I am having the pleasure of doing something completely different. We're not talking today about investments. We're not talking today about taxes. We're not talking today even about debt. Every so often I get emails actually pretty often. I get emails from different people that say, Hey, bring on this guest.
They might look interesting. And honestly, the vast majority I turned down. But I thought this particular guest today is something different. Might be good for those of us that are surgeons to check out the company that he is the CEO of, has automation software and stuff to bring into this category of implantable medical devices to help hospitals and practices save money.
So I am glad to help have him here with us. Please help me welcome Richard Palarea from Kermit. Welcome Richard.
Rich Palarea: Thanks, Dave. It's great to be with you today.
Dave: Yes, sir. Glad to have you. Glad to have you. Richard, let's just get right to the meat of the show here. I gave a little bit of an introduction, this company trying to help hospitals and surgeons save money.
So, give us the rundown. What is this that you do?
Rich: Sure. Kermit is a 10 year old organization based in Baltimore, Maryland, although we have customers across the nation. Our customers typically are hospitals and health systems that have a critical spend in implantable medical devices. I think some of your audience might even know the vernacular of physician preference items or PPI.
We help supply chain understand the true cost of these items. Most hospitals across the nation are overpaying for these mainly because they do their best to negotiate prices, but they really don't know what is the best price. Did I leave something on the table? How do I know that?
My two co-founders walked into my office. Like I said, about 10 years ago. I was already doing something different. I had a spend management company in logistics, and I would go out and help companies negotiate better pricing in FedEx, UPS, DHL services. And my model was I would take a portion of that savings as my fee, and they wanted to start exactly the same business for hospitals, looking at things like knee replacement, hip replacement, spine surgery, cardiovascular surgery, they had cooked up about 20 different categories in their head that they had either had exposure to or directly sold to the hospitals. And they knew that every time they went through a negotiation as a vendor in this category, that the hospital was leaving 30, 40, sometimes 50% of what the vendor would be willing to give them as a price if they were really pushed, if the screws were really turned on these guys.
And so when they came in and told me about this idea they had, I wasn't really in the market to do anything else, but I was fascinated that for 50 years this category has been managed by having a sales rep for the implant company, standing the operating room with the surgeon, tender devices to the surgeon. There's no price tag on the box. Tally those items on a piece of paper, write down the price they want to charge for those items and get a nurse to sign it in the operating room and then turn around and walk out of that OR, go down a floor or two at a purchasing and turn that piece of paper in, expecting to get a purchase order or basically get paid for that case.
One thing I thought of Dave, is I was on my own journey of kind of wealth management and wealth creation was I could keep doing what I'm doing and forget I ever had this conversation with these guys. Because my business was a nice lifestyle business, but it wasn't a company. Or I could really do something meaningful to walk in and change something that's been done, like I said, for 50 years in a certain way.
And it's rare that you find something that is at the intersection of healthcare and technology that hasn't already been automated. I think we've gone through lots of different processes already, but here we have something still being collected on a piece of paper. And then when I thought about the nature of having a salesperson standing in the operating room, it immediately got personal for me.
My mom had just had one hip done. A few months later before I met these guys, had her other hip done, and all I could think of was one of you guys was standing in the operating room while she was under anesthesia, had no say in the implant or the price, and the surgeon likely didn't know the cost.
And I went home and thought about it, and a couple days later I called him back and said, all right let's give it a shot. I think we got a real chance to change things and now we manage 40% of the implant spend that transacts in the state of Maryland, both through managing the price and then having this piece of software that automates that paper-based process, adjudicates it, gets rid of the waste, fraud, and abuse for the hospital, tells them what's okay to pay, and then also surfaces a lot of analytics so they can sit with their surgeons. In more of a partner in collaborative way not a confrontational way.
Like I have seen in the past where a CFO might say, we're spending a lot of money, and the surgeon says, you run the hospital, don't tell me how to practice medicine. But now everybody's coming to the table using one common set of data that's irrefutable, and now they're all coming up with an idea about how can we work together.
Because these hospitals, post covid are working on very slim margins, some are losing money and they don't have the personnel any longer, we've had a large scale migration of people leaving healthcare. So I think there are some common things that we can talk about that are common to all your listeners that the one thing that's really interesting to us is how we solve this problem without impacting the patient quality.
Let's get the price as low as we possibly can. Let's find that intersection of a low price and a good patient outcome that everybody can get behind. And that's basically our mission
Dave: I think it's an interesting business model. I guess what I would encourage everyone to think about that's listening to this podcast, as you think about your compensation, maybe you're working at a hospital.
I think if I'm talking completely, I like to say blind here because, I don't know much about, this kind of space as a financial advisor, but I think if you can always find ideas that save your company or the hospital money and they work, I think these are the kind of things that you can use to justify raises.
Or if you're interested in moving up into management of a practice or management of a hospital or what have you. These are the kind of things in the way that you want to think in terms of exploring new ideas, looking at new technologies. So, I guess, Rich Is there with this software in what you do?
Certainly I could think even something like pharma, would be great to apply this kind of technology too. As a patient, as my daughter who has juvenile idiopathic rheumatoid arthritis, These medications and there's this whole thing about cost and how much does this cost versus that one, and then there is trouble of going through it.
I have to imagine medical devices are much the same. And then supply chain issues that have been happening in the world today. I'm curious, just to speak to that real quick, has supply chain and the issues in China and those kinds of things affected medical devices at all in this world that we've been in.
Increasing prices, give us a layout of the land in terms of that.
Rich: In less than 30 seconds. Dave, you just created a very complex picture and probably a very accurate one, not knowing, self-admittedly, you said, not knowing a lot about this category, you got it like that is the complexity that is wreaking havoc on almost every single industry.
Whether we're in the middle of a pandemic or coming out of it I think we can all agree. It doesn't feel like things are ever going to go back to the way they were before. I don't mean what is the new normal. We hear about that a lot. What I'm talking about is I think we've learned a lot in the past two years.
We're working differently, we're meeting differently. We don't have to be physically together to get things done and yet, our culture, at least in our business and other business owners that I know and talk to, has never suffered more because we're missing the water cooler style conversations where true innovation takes place.
So when you think about all those things you just talked about, Impacts to supply chain, foreign supply chains, all of that. Yeah. It's been a real problem for our healthcare professionals and the folks that we deal with primarily are supply chain executives that we deal with now because we have a large it's more of a financial offering.
The output of what we do is savings, so it's bottom line improvement and it's, dramatic savings, like we can drive 30% of the cost out of any category, of any of one of 21 different implant categories that we deal in our subject matter.
Dave: Give me like a specific example, like how does that work?
Rich: An example would be just a regional medical center in your town. Maybe not anything that's part of a large health system or a large brand, but the hospital that's been there over many years serving the community has grown. They've put on a wing to the hospital. That's a substantial hospital, but it's not part of a large system.
It's not out of the question if they're doing knee and hip surgery and doing a fair amount of orthopedic volume and reconstruction in that hospital, that they're spending 40 to 50, maybe 60 million just in that category. So when you talk about bringing 30% back to that CFO, who's paying maybe, Easily over seven figures for an electronic medical record system or an ERP system, or the surgeons are all banging on the door saying we need another operating room.
And when you put that OR in when you're done with the building costs and everything, we like a robot in there too. Those robotic surgery is really taken off. Those are things that a CFO looks at the budget and say, I just don't see how it's going to work. We've got 1% on the margin, on a good day.
And so how are we going to do that? So an approach, like what we do, we typically will go in and look at these cost do a benchmark style analysis to say, if you hired us, we think we could get you this much, but you don't have to risk that because we're going to get paid only on the savings. So, any penny we bring to you is going to be largely in your pocket.
We get to keep a little portion of that for ourselves, for our work. So it's a pretty easy thing to engage around. But the, back to your question, the supply chain part of this hasn't been as much of an impact as you would think. There's some overseas manufacturing, some of it's done onshore and nearshore.
A lot of it is inventory items that don't arrive to a hospital until it's time for surgery. We call it trunk stock. It's basically driven to the hospital. They're sterile processed and then moved up to the floor. Only a portion of it's used in surgery. The vast majority gets sent back to the manufacturer. So the cost around that are the movement, the transportation of those things as fuel costs have gone up, but hospitals have declining margins.
Surgeon pay has been relatively flat for a period of time, and the margins for the manufacturers are still very healthy. So, there's a lot more to go despite where we are. The one party in all of this is still making a lot of money and has for a long period of time, are the implant manufacturers just because there's not a lot of visibility or transparency in the pricing?
Dave: And it takes certainly barrier to entry is, has been, pretty high. I would wonder, I think of technology like 3D printing. That maybe you get some of those things working, you can manufacture on site versus being dependent on the supply chain, and having a device come from a specific company like a Medtronic or Boston Scientific or whoever.
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Rich: And the and even those big brand companies that you're talking about have all innovated and they've adopted things like 3D printing there. There are quite a few spine manufacturers now that manufacture a lot of their stuff via 3D printing.
Some of it is around innovation, around customization. So if you had a specific anatomic need, they could take imaging before the surgery and send that, send those films, send those files off to the manufacturer. Custom print your spinal cage for your surgery has your name when it comes in for surgery, but a lot of that innovation is being used on the manufacturing side to push their costs down so they have more profitability, but then they turn around and tell the hospital, this is innovative. We now want to command a higher price for our brand new 3D printed Super whiz bang thing. And you know what it's an interesting juxtaposition that a lot of supply chain users will say that seems good.
It's a new product and new product has innovation and therefore a lot of R and D costs. So of course we can understand paying more for it, and surgeons want to use the latest and greatest thing. So you have this narrative that's being controlled by one side of the process to keep this opaqueness to the transaction, how it works.
But the reality is that those innovations are actually driving down cost for the manufacturers. They're just not passing that on.
Dave: Interesting. So let's say, so from what I'm understanding, let's say I'm an orthopedic surgeon and I'm going to get, my patient needs a hip replacement. I don't know the hip replacement vendors, but I'm just going to make it up.
I'll say Boston Scientific and Medtronic, or two producers and I don't know, Stryker or something. So, these three companies are, producing the stuff that we need for the hip replacement. So how does your software work? Does it is taking prices from nation averages or like how is that comparing versus I guess, the bill that they're leaving that you mentioned, like you have to negotiate then, I guess help walk me through this process of you have a few different vendors and companies that might be competing on a product, or maybe you don't even don't have someone competing on a product but you're still getting a higher bill than what you're supposed to.
Rich: And you're thinking about it the way that I initially thought about it when these two med device reps walk into my office and told me about this category, I thought about it the same way.
You walk into a Best Buy. All the TVs are lined up on the wall. They're all the same size. They all do HD they all have whatever it might be. And you're expecting the price to be relatively the same. That's the one thing that is dramatically different when it comes to implants.
There's a hip implant by Stryker, there's in very many of them too, because a lot of variation in the line for different purposes, but they all do hip Stryker, DePuy, which is a Johnson and Johnson. Smith and Nephew, Zimmer Biomet and the list goes on. There's been a lot of consolidation over the last couple years. It's hard to have a small startup, innovative knee or hip company that comes to the fore without it being acquired and gobbled up by one of the big ones, but they all have a technology.
What we're doing is we're saying, what Kermit is saying is through our benchmarking efforts, we understand that this particular knee from Zimmer Biomet has the same outcome, serves the same purpose, achieves the same function as this one from Stryker and this one from Smith and Nephew. So when we slot them all into a matrix, we can apply one price to that category.
And when we go out to bid, we'll say this particular knee or a construct of the four parts that make up any knee replacement, ought to be $1,600. So anybody who wants to stay here and compete in the hospital, it's an all play environment. We don't care, any vendor can come bid. You have to match this price of $1,600.
That's, we're bringing more of a market competition view like you would find in the best buy. You can't have an outlier on price because what's going to happen? That TV is going to hang on the wall and all the inventory stock is going to sit in that warehouse. It's never going to move because the average person won't understand why the same set of features, it costs more.
You just don't buy that way. But we don't have that in orthopedic surgery. We don't have it in cardiovascular surgery. It's largely the preference of the physician. And if the physician was trained to use a specific set of instruments from Stryker when they went through med school and they went through their residency and they went through their fellowship, that's what they're comfortable with.
So they really don't have an idea about what the cost is. Nor do they really care. It's only until we are where we are today. And you talked about some of this a bit ago, of bringing the surgeon in, showing them what the stuff costs, letting them have an understanding of why is it important that I get the prices down?
If I do, first of all, I'll have an employer who's solvent. That's a good thing. So the checks that they write to me, I can actually cash. But if I save money for them, maybe it doesn't come back to me in my pocket. And there are some sanctioned gain share programs that the government has come up with inside of Medicare that allow for that, but it could come back to them in another operating room that they've been asking for, or more administrative clinical assistance or that robot that they want from Stryker to do this type of knee surgery.
Whatever the innovation is that they want to ask for, that's going to cost more money. They can then come to the CFO and say, I can help you save money. I found a way to do it and if I can drive savings back, do we get to put a portion of that in a bucket so when that bucket fills, we can do this or that?
And the answer should be yes, because that's collaboration that gets everybody on the same page. There's no more adversarial, tug and pull in that relationship.
Dave: Rich, I think it's interesting technology and, I encourage everyone I'm no expert in this area at all, but certainly, hey, it's worth a look at and see if it might make sense for you and your practice, your hospital or whatever.
And who knows, you might get a raise or bonus out of it. Or if you are, of course the practice owner, hey, might be something for you to really highly consider. So Rich, if people are interested, they want to check you out, they want more information, what's the best way they could understand more about the technology and what y'all do?
Rich: Okay, Dave. Yeah. The best way to find us, and there's even a quick little two minute explainer video. We'll even make you dangerous, Dave, if you go watch this video you'll be an expert in your circles. It's Kermit ppi, just like the frog, Kermitppi.com. And when you arrive on the website, that video is there.
We also do a lot of writing. We do a lot of thought leadership, demystifying these spend categories for, not just for the average person, but certainly for the hospital to understand. We have a blog up there where we put a lot of that too. We also are very active on LinkedIn, so if you just search for Kermit or Kermit ppi, I think anything that pops up that doesn't look like a frog is probably going to be us like and follow and subscribe to what we're doing.
We post videos up there and we have a lot of other content too.
Dave: Awesome. Thank you so much, Rich. I appreciate you being with us.
Rich: My pleasure, Dave. Thanks for having me.
Dave: All right, my friends. This is another episode wrapped up for the Freedom Formula for physicians and as always, remember to slash your debt slash your taxes and live a liberated Red Lifestyle.
Thank you, my friends, so much for listening to the last podcast. I am pleased to announce that I am now a completely independent financial advisor where to the point. Now I can really integrate my financial planning practice with this podcast if you might be looking for help. If you have found any of our information here, interesting or relevant, and you're looking for a second opinion, I am making myself available for 30 minute strategy.