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.
Since its founding in 2011, Kermit has saved hospitals more than $200 million and manages 40% of the implantable device spend transacting in Maryland.
Sharon Fekete: Alright I always like to start with a smile and that's what I do. I hit record mid laughter if I can.
So, I am Sharon Fekete, your host of the Doctor Whisperer. I am very happy today to have Richard Palarea, who is the CEO of Kermit.
He is currently based in Baltimore but heading down this way to my neck of the woods, which is fabulous because it will be gorgeous out here in the Tampa Bay/Sarasota area while you're here with your child and your wife which is fantastic. And very excited to hear about your company.
So, Richard, take it away. Tell us a little bit about you and your company.
Rich Palarea: Thanks, Sharon. Well, I am actually going to be in Sarasota with all my kids. I've got a 24-year-old who works here at Kermit. And that's kind of interesting and fun at the same time to work with somebody who's a family member. Has challenges and has really good things too that come with it.
I have a middle child who is 21 and still in college and she was drafted earlier this week when my wife's coworker had covid on the day they were supposed to leave. And so, my wife is down in Florida building a big house for somebody, so she pulled my middle child down there to help her with a project yesterday. So, she's down there and they're going at it.
And then I'll drag my 19-year-old. We will have his birthday party down there and it'll be great. I love Florida, I really love the area. It's great.
Sharon: It's so great we can't wait to have you. You might just fall in love and want to build your own house, forget about somebody else's.
So, Richard, tell us about Kermit. I am intrigued, as I mentioned to you before, I listened a little bit to some of your videos. I always recommend people follow the companies that I interview. It will all be in the show notes, you'll have all the links to learn more about this company.
And I like to know the why. First just tell me why you decided to open this wonderful company, Kermit.
Rich: Yeah, I wasn't looking to start another company. I am an entrepreneur; Kermit was founded with two Co-Founders. And I'll tell you about their journey in a little bit it's fascinating, and how I got to meet them.
But I already had a going entity at the time, and I didn’t need to start something new. These guys walked into my office, into the other company that I had, introduced to me through an attorney, who was helping them set up a business.
They worked for a large global manufacturer of orthopedic implants called Zimmer Biomet. And they had a non-compete and they wanted to do it carefully, so they were taking baby steps. And they even had burner phones and they had things in their wives' names. They were very careful because they didn’t want to create any spotlight.
So, they were working with this attorney. She was my attorney for over 20 years. She heard the story, and what they wanted to do was they wanted to go back into hospitals and help them renegotiate the contracts they have for implants. Very expensive items as you could imagine. Take a portion of the savings in a successful project as the fee.
And a lightbulb went off for her and she said “I have a client who does this in another industry. You guys just ought to go have coffee.” And so, you know I think I heard you say something about serendipity in a previous episode. We are that story for sure.
So, they walked in, they told me this fantastic story about how a sales rep for the implant company stands in the operating room with a surgeon. They're not part of the hospital staff. And all I am thinking about is my mom just had her hip done last week in Long Beach CA, where I am from. And one of you jokers was standing in the operating room? She had no say in the implant or the price or any of that.
And not only does that happen, the surgeon asks for these implants, they come out of a box. The surgeon doesn't know what these things cost, typically. Surgeons are doing what they're supposed to do. They're there to make sure the patient has the best possible outcome. And now we have this situation where we have a salesperson in there.
So, I am intrigued, I am sitting there listening to this story and I am thinking I am not going to sell my business to start this but wait a minute. There might be something here. And then they told me the really fascinating part.
When the surgery is happening, there's a piece of paper that this sales rep holds, and barcode stickers are peeled off the implant boxes and affixed to the paper. Then they write down what it is they want to charge and then they take that paper down the hallway to purchasing and hand it in and expect to get a purchase order (i.e., to get paid). And I thought, wow so, we have healthcare, and we have a paper-based process. That never happens, everything has been digitized by now.
So, I thought a little bit more about it and I thought ok, let's do this guys. I am very interested; you seem like nice gentlemen. Let's see if maybe we can put something together. You know I have a few ideas. I have some assets. I've built some software. I’ve got an entity that is well respected. I've got a name in the community. Let's just kind of incubate this idea as a joint venture.
Now, serendipity number two. Very quickly we landed two hospitals who said we love the idea, come help us negotiate a better contract. And all of a sudden, I wasn't being an effective CEO of either business.
So, I had to make the really hard decision at that point to sell my other company and come over and do this full time and that was ten years ago. And it's been a wonderful journey, I've learned a lot.
I come from a medical background only in that my dad was a cardiologist. But I didn't know anything else. He would sit me down in the doctor’s lounge at the hospital to go make his rounds on a Sunday with a box of donuts and cartoons. And then he would come back an hour later and I wasn’t kidnapped, and he would take me home and that was what I knew about healthcare.
But I didn't know about all this other stuff that happens in surgery and now Kermit, the company, not only does the negotiation on behalf of the hospitals. Gets paid a portion of what we save the hospitals, but we also have purpose-built software that we have deployed to digitize this paper process and check the bills automatically, in a price audit and contract compliance way, to ensure the hospital pays only what they're supposed to pay.
So, we created a digital process. No longer is all this unstructured data locked in paper. It’s in a purpose-built system that has analytics. CFOs and Supply Chain managers can sit down with their surgeons and show them real metrics. We can see where items were wasted in surgery and all kinds of other fascinating data that has really defied quantification until we started this company ten years ago.
Sharon: That's amazing. So, what was the other company?
Rich: The other company was a logistics spend management company where I was negotiating FedEx, UPS, DHL contracts for some of the nation's largest shippers. Again, there are some really interesting similarities between these two worlds. Pricing is obscured, you really don't know what you're going to pay when you book a shipment. Does it get residential surcharges, is it a Saturday delivery?
You think you've got a great rate but when you get your bill, it's inflated with all these surcharges and you're not exactly sure how to negotiate that. Because you think you've got a great rate, but you don't know what the guy down the street is paying.
So, it's identical to the way we do our negotiations. We're informing a lot of what we bring to the hospitals from previous successful negotiations because we understand how to benchmark. We understand what the price points are. We understand what the vendor community is looking for in any certain quarter based on what they're trying to do.
The true sense of negotiation, find something that works for both parties and be the intermediary to buffer that communication and that relationship. So that way you don't have to beat up a vendor on price and then ask them to come provide great service. It’s not a place anybody wants to be.
Sharon: No, never. My husband has worked for UPS for the last 30 years and I decided in December of this past year to take on the challenge of being a seasonal driver with him. Just as an experiment because I am a curious human being.
As an entrepreneur I always want to know the ins and outs of every business because I think that there are so many transferable skills, and we really don't understand a business until we are actually in it. And I mean I came from telecom in my 20’s and who would've thought that 20 plus years later I would still be in the medical industry but having this outside perspective. But business is business, right?
And we can very easily take our skills from other companies and other services and other experiences and bring them to the medical industry. And I think the medical industry needs it the most. Right?
I mean, people ask me all the time how come I am not involved in MGMA or going to all of these medical conferences, and I say, “Because I want to learn from the people who aren’t actually in the industry.” Now my other question for you is why Kermit? Why the name Kermit?
Rich: We built the software, we had landed the two hospitals, we built the software. And we said, “Ok we got the software, but it needs a name. How are we going to do this?” So, we were just four employees at the time. Me, my two Co-Founders, and one person who this was his first job out of college, sitting around in a very small office throwing out Ideas.
So, I said before we just go too far out of the left field with this because we could go at this for a long time, let’s just set some parameters. What is the essence of the brand? Who do we want to be? What do we want to convey in a name, that if somebody doesn’t know who we are, they feel good and they get the sense.
So, what I said to my two co-founders was, think about the beginning of the movie when the kid is sitting on the edge of the moon with the fishing pole, and he casts it out and the line hits the water, and the ripples go out and the music plays and it’s just nice and easy and calm. I said we are dealing with people who are embattled. Who are being asked to save money every day that don’t know where to turn.
They’re trying to balance the business side of healthcare with caring for patients. It’s not a pleasant place to be. And in addition to all of this, we have a lot of, it was like government alphabet for where we worked. It was a lot of acronyms and stodgy old companies and no personality.
So that’s what I said to them, almost verbatim what I am telling you, Sharon. So, I put that out there and we started to throw out names, and I have been in a couple of bands in my earlier years in college and it felt like naming a band. You know names are being thrown out and were like “That’s terrible, that will never work.” And my partner John, who is a great guy and a very big thinker, kind of impetuous, says “Kermit!” And we laughed and ran out of the room like that will never work.
It’s just not dressed up enough to put in front of a hospital CFO, they’ll laugh us out of the room. And even if we could pull it off, how are we going to get around the trademark issue? And so, we spent another five minutes throwing names out and we came back to that, and we said, “Nothing has been better than that.” I’ll tell you what, if we can pull that off, we have a big win.
And it’s exactly what we were able to do. So, if I turned my camera around and showed you the bookshelf on the other side of my computer, its full of little frogs.
Sharon: Oh, let me see! Turn it around. For those of you that are listening, too bad. You’re going to have to watch on YouTube.
Rich: I am not sure I can disconnect the whole setup here. But there is one over there that I would love to show you. It’s a frog on a rock that I got from a very large, I will leave it nameless, but academic medical center, that narrows it down for you, in the state of Maryland.
Sharon: Well, I love that. Send pictures. So interesting.
So, I want to know, you came from a different business. What has it been like for you to transition? And real talk here on the Doctor Whisperer, what has it been like to start working in the medical and healthcare industry?
Rich: It was fun, it was terrifying, it was and still is a journey that I am enjoying every day. You know you’re talking about walking in as the consultant who has to know more, about this very technical area, than your client because you are providing them with guidance and bringing them along so that they feel comfortable that they actually can trust you to do this job.
First of all, let me say this, Sharon. I think it’s a disservice that we have done I think it’s a disservice that we have done, when I say we – not you and I, not even the general public, hospital leadership has done, to hold the Vice President of Supply Chain or the Materials Manager or anybody who manages Supply Chain at a hospital, accountable to negotiate these types of implants. Or any really highly technical area, and there are many as you know, inside of healthcare.
These folks have to be versed on capital equipment like CT machines and MRI machines. They have to source protective equipment in the midst of a pandemic, they have to do a lot of things and so we are asking them to do all these things, and landscaping contracts and food service, that’s a lot of stuff right?
So, hospitals have gotten smart, and they start to build specialties around that. It's very hard to find somebody who is specialized in understanding implants, and not only just knee and hip implants, I haven’t talked about it yet, 23 different categories that Kermit manages. Biologics, very complex. Spine and even electronic equipment that is used for pain management that gets implanted, all the cardiovascular lines.
And so, I think when you think about that, you have to be a leader when you go in. You have to instill confidence in your client, that you understand this stuff really well, you’re not here to lord it over them. You’re trying to educate them so you can make them the star next time they walk into a meeting with a surgeon, and they feel confident they can stand toe to toe with a surgeon and have a dialogue about this stuff.
Because they understand the difference between a femoral component and a tibial component and that one is made out of titanium, and one is porous to allow bone ingrowth and all these different things. So obviously it didn’t come overnight but I do love to absorb that kind of knowledge.
The most freeing thing that I did was selling the other business because then I had nothing else to do. And it kind of set me up to learn, and I learned a lot of it just on the job. Going to meetings with my Co-Founders and listening to the way they talk and understanding what it was that the client needed. How did they feel insecure? Or what was it that we could do to really help them? And that was natural for me, and I love to work with people. So, I think that part was easy.
Rich: I am still learning about these technologies as is all of us. You know the one thing that this industry does very well, the implant manufacturers, is they release new versions of products and new products trying to innovate all the time.
But there really hasn’t been a truly meaningful innovation in some of these mature categories in a long time. There have been tons of products released and they all have a bigger price tag than they did last year and that gets really confusing for hospitals.
Especially when the objective of these companies is to have great relationships with their surgeons. Take them to dinner, play golf, send them to sporting events and do all that.
And every good sales organization does that type of thing. But you get to a point where, how much of that stuff are we going to allow? When does a surgeon really need to be a good corporate citizen of the budget, they are also on the payroll for, of that hospital? They have to be embraced as a decision maker in all of this and that’s really what we do in our process.
Sharon: So, are hospitals seeking you out? Or are you kind of knocking on the door to get in?
Rich: We’re more door-knocking honestly. We are ten years into this, but I liken it to when you watch the Grammys, and the best new artist category is announced and you’re like “Where did this person come from? The music is amazing! They just appeared on the scene.”
You know they didn’t just appear on the scene. It was 20 years of playing little Nashville bars and everything else they did. So, I think we have kind of paid the ten-year dues. We are really now; we manage 40% of the implant spend that transacts in the state of Maryland today.
So, we have done a really good job in our home state and spreading out into the Mid-Atlantic. And now we are looking out, sitting on our back porch, ready to attack the nation. We’ve got a brand new, well here for one year, Marketing Manager. We have a Chief Growth Officer who has hired a full Sales Team. We’ve got all the infrastructure we need to go out and tell the story. And that’s kind of where we are.
So, a lot of people, even though we have been around ten years, don’t know of us. They’ve never heard of us. They’re going to. I’d love for every hospital that wants to do this to be able to have a shot at doing this, and it’s not for everybody honestly.
There are times where I will sit across the table from a supply chain manager who’s got a scowl and crossed arms saying, “You’re not going to find ten million dollars' worth of savings on my watch.” And I am not trying to do that. I just want them, if they want to save money. If they want to manage this without headaches. If they want it to feel like everything is taken care of like everything in their childhood was, because Kermit is here, and we can do it.
That’s what we really want to bring to them.
Sharon: So, I want to liken it to kind of what I used to do when I would go into a practice and restructure it. Before I started The Doctor Whisperer 8 years ago, I ran a pediatric office for 8 years, and before that, I was Director of Operations for New York medical.
So, I got a really great education on how difficult it can be to start up something new. How to collaborate with other specialties, how to build a business, how to have staff, all of it right? And what I have found as a consultant, and when I would go in and rebrand, I would only ever get referred because if I come in and you aren’t ready for me then there’s no point.
But the most interesting thing that I always found was when I would meet with these administrators, was I always wanted to help save money. Because I know you have to spend money on me, and I used to feel like I always had to justify everything you paid for with me. So, let’s find some savings. Let’s start there.
And a lot of these administrators you know, and I would liken it to hospitals as well, there’s so many things that they have to deal with. You know, there’s staff, there’s supply chain, there’s the doctors, there’s malpractice, there’s just so much. So, I never really thought they spent enough time doing their due diligence on where they could save.
Because that savings right there affects the bottom line and it affects the surgeon, it affects everybody. It affects that administrator’s salary, their bonus. Everything! So, to be able to have a company where you know that it’s technology-driven, which you know, is shocking but not really shocking in the medical industry that they still use fax machines ok, let’s be real here Richard. When people ask me “Can you fax me the proposal” I am like, where am I, like what year is this? But, you know, it is the truth.
It’s a slower-moving world, I mean it was a slow shift to electronic health records. It’s very complex when you’re dealing with doctors and administrators. So, of course, I am like well duh everybody needs Kermit. Like it’s a no-brainer!
Rich: You used the word! You used the word!
Sharon: No brainer. No brainer, right? Well, that’s it. Well, you know I feel the same way even when I go into practices, and you don’t need me if you have somebody great. That’s my no-brainer.
Duh Doc, you don’t need me, you need to hire somebody that can get the job done. So, I wonder how, well I know it’s difficult to get past the gatekeeper.
Rich: So, you have to ask yourself if it’s a no-brainer, why aren’t we in every single hospital across the nation? I would say this, there are currently two reasons.
The first is, we took ten years to build this very carefully and make sure it really worked. We’ve had wonderful client relationships who have let us build this brand-new product in their midst. Yes, we will be the Alpha site. Not even Beta, bring it in we will try it and use it.
One hospital in particular in Annapolis Maryland, the capital of our state, has been a client of ours for the nine out of ten years we have been in business. So, that’s great and they were the first to use Kermit and that’s been wonderful.
But the second reason is, and you will know what I mean by this, there are lots of relationships in healthcare and not all of them are transparent. And you’ve got to wonder why, if it’s such a no-brainer, who is protecting what and whom? And what do we not want to be exposed?
We had a client many years back that was a very short-lived engagement for us, not too many of those are the case. Usually, they’re with us for nine years, like I said the other one was. But this one, in particular, was a group of hospitals that were owned by a private equity firm, and they were very interested in the reports and the analytics, they wanted the dashboard, they loved the Kermit approach.
Come to find out, the surgery centers were part surgeon owned and some of them had their own implant distributorships that they also owned. They were buying their own implants to put them in the patients. And while that can be done above board, in the case of this organization, the parent company wanted to know what exactly was going on.
So, they deployed Kermit as a way to understand that without telling the other hospitals what they were doing. And we just walk in, happy-go-lucky Kermit trying to do our job and save them a ton of money and we’re getting all kinds of resistance and we’re wondering what’s going on.
So, we uncovered some of this stuff and it was on the order of kind of, there was some impropriety that would’ve been illegal had we brought it to their attention. So, yes, you’ve got to wonder why this isn’t a no-brainer for everybody.
And, when I get a no, it isn’t really a true no for me it's just a “You’re just not ready for this today” and that’s ok. Because that means there are five people behind you in line that I need to get to who will probably want to do this right now.
Sharon: Well, I love that, you know every time I have these kinds of conversations it reminds me of a practice I went into where the administrator when I was asking about the vendors that they use right? Because I am always looking for savings.
So, you know I said “Well the vendor that you’re using is literally the most expensive. Why would we be using them?” Very innocently she told me not thinking that I have a very strategic business mindset, she said: “Oh well I love him, and he takes us to Boston Red Sox games, and he has great kids, and he comes in here and he feeds my staff.” And I am like I get it.
And a lot of that is true, especially in the medical industry, it’s very sometimes almost incestual, dare I say. You know with the relationships and who we use and what we do. And then there’s a big fear that what you’re talking about, well this isn’t going to work.
That’s why I asked you before how it felt coming into the healthcare industry after being in such a different industry before. Because it definitely is its own, if you’re in it you go “Wow, who would’ve thought that the medical industry was like this.”
Rich: Yeah, I did feel that when I first started to do this journey. I was taking the approach as a CEO and a strategist of, “There are lots of logical things we can do, I think we could bring tremendous value, let’s do these things.” And then you bring them in, and they just fall flat.
And you’re wondering like, what is it about this environment? They must be making decisions differently or seeing things differently. So, yes. Highly political, lots of fiefdoms, lots of folks not willing to take a risk on something for fear that it will be negative on them and maybe they would lose their job or something.
So, there was a lot of that that I had to just learn. But it didn’t take too many closed doors for me to back up and say, wait a minute maybe the approach is a little too heavy-handed. Maybe there is a different way of doing this. And my Co-Founders, being formal medical device reps, really helped me understand that.
There is a reason why these guys are trusted and there is also a value to them being in the operating room. It’s not to produce bills on paper and do all of that. Think about the best salespeople you know, they’re probably the worst at paperwork, we don’t want our salespeople doing paperwork. They should be tending to the relationships and that’s what they do really well, that’s why the doctor trusts them.
Let’s not stand in between that. Let’s let that continue to be. So, everything that we have done with the technology, we have a mobile app that we give for free to the sales rep, that actually allows them to enter all this data and the value for them is that they get paid faster. They will get paid on the day of surgery whereas in some large health systems I have heard it can take them upwards of three or four weeks to get paid.
So, they like it, so let’s not stand in the way of that relationship. But let’s do what were there to do. Let’s provide transparency, let’s make sure that nobody is overpaying, let’s make sure if there is waste, fraud, and abuse we’re going to call it out and show everybody. And let’s do what’s right for the patient to really improve the bottom line of the hospital and also bring down the costs. I think that’s a good mission that everybody can get behind.
Sharon: Absolutely, and really if you have the right team in place that is really wanting to make the hospital the best that it can be, you really need to have more innovation and really look at all of the cost savings. You know I was laughing as you were talking about it, a lot of people just don’t want to do the extra work.
And a lot of people, especially in the medical industry because it’s been so, I mean when I bring up electronic healthcare to doctors it’s like, “Oh, God please don’t!” You know? So, technology hasn’t always been a friend to them. And really, they go into this business thinking that they want to save lives.
They don’t want to be burdened with all of the other technological advances. Sometimes they just feel like it’s easier to just keep what we have. And that usually ends up costing them a ton of money in the long run.
So, Richard, I am really excited about your company. I am excited about it expanding throughout, maybe here in Tampa Bay, maybe we need to introduce this to BayCare, we need to introduce this to Tampa General Hospital because I think that as we grow, we really do need to have companies come in that have that connection that you have.
Your dad was a cardiologist, you also have a great business sense, and your Co-Founders the fact that they worked in the medical device companies is, the reason I get hired is because I have been working with doctors for over 20 years. That’s it, it’s the trust factor that’s so important and you definitely have that trust to walk in with which is so comforting.
So, is there anything else you want to leave the audience with before we go today? Because you know you’re in the technological world that the attention span of most people is that of a flea.
Rich: Well, I would say this, whether you’re a surgeon or you’re on staff at a hospital charged to save money, or you’re a patient, really. If you’re a patient and you want to learn more about this, go to Kermitppi. PPI, P as in Peter, PPI is the acronym that is used in the vernacular in our industry for “Physician Preference Items” that’s this large category of implantable medical devices.
So, Kermitppi.com and there’s this really cool little explainer video, I think you have probably watched it already Sharon, on the front of the website, where you can really digest, why is this a no-brainer? Why shouldn’t I tell my surgeon about this? Or I wonder if my hospital is using this? Or if I am a sales rep and I want to get paid faster, maybe I will introduce this to the hospital I work in.
There are lots of places where we actually have to make that connection. There isn’t one true “decision maker” You know, according to what everybody likes to talk about in sales, “Who’s your decision maker?” There isn’t one in this category, it’s a collaboration.
Everybody needs to be honored for the role they play, and we really are trying to create that visibility between the surgeon, the financial office (the CFO), and the supply chain managers so they can all collaborate by removing the walls that exist today. Putting true data in the center of that, data that’s collected in the operating room, categorized properly, and doesn’t have any error in it.
And we can really look at data, we can manage recalls in a wonderful way, there’s lots of things we can do with this data that we’re doing at Kermit. So, check out the website, follow us on LinkedIn, we post a lot of stuff on LinkedIn. It’s really easy to find us just search “Kermit” and anything that’s not a frog is probably going to be us.
Sharon: Ah! I love it! And you also, it’s not just hospitals that you work with. You work with surgery centers and such. Lots of orthopedics. What specialty do you find you work with the most?
Rich: Primarily our area is going to be in community and regional medical centers and large academic health systems. But yes, if there is a specialty hospital that is only doing spine and joint and cardiovascular surgery, and that’s all they do, they’re not seeing patients for anything else, that’s probably a pretty good area where we can come in and help.
We’ll negotiate the price, get them better prices on 23 different categories of implants. We’ll deploy the software to make sure that all that hard-fought cost reduction is hung onto long term with spend management, it doesn’t erode, doesn’t go away, which is a big problem in this category.
So, yes, we to a lesser extent do ambulatory surgical centers that do a lot of hip and knee and shoulder work and spine work. That’s a great place to deploy our product.
Sharon: Awesome. Well, thank you so much! And I hope that you enjoy this beautiful area as you come and visit!
Rich: Can’t wait! I can’t wait to get down there.
Sharon: Alright Richard thanks so much for joining us.
Rich: Thank you, Sharon, I appreciate it.