In this episode, we are joined by Richard Palarea, CEO of Kermit, to talk with us about the advantages and challenges associated with delivering visibility into implantable medical device transactions.Learn how to listen to The Hospital Finance Podcast® on your mobile device.
Highlights of this episode include:
- Who is Kermit
- The process
- Physician preference items (PPI)
Mike Passanante: Hi, this is Mike Passanante and welcome back to the award-winning Hospital Finance podcast. Implantable medical devices comprise a substantial cost for hospitals and health systems. A lack of real-time data about implantable medical device transactions can cost hospitals millions of dollars. Today I’m joined by Richard Palarea, 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. Rich is going to talk with us about the advantages and challenges associated with delivering visibility into implantable medical device transactions. Rich, welcome to the show.
Richard Palarea: Thanks, Mike. It’s great to be here.
Mike: So, Rich, for those in our audience who may not be familiar with Kermit, can you tell us a little bit about what you do there?
Richard: Of course. Why don’t I just start with taking everybody on a journey? And this is the real reason why we do what we do, and then I’ll get into the specifics. But if you think about a world, for a minute, where– I think you probably have a lot of listeners who are like me: married with kids– have more than one. But if we created a world where we let our kids run out and, basically, just buy whatever they want; they don’t really have any concept about what things cost, but we as parents continue to just pay the bill– pay the bill. And as they get older, they have different needs: maybe a car; maybe a house. And it just continues, and they’re just navigating their own way through life. This was what I was introduced to about 10 years ago when two former medical device reps – they worked for Zimmer Biomet – came into my office and told me the world that they came from. It’s one where they, as salespeople, stand in the operating room with a surgeon. They’re not part of the hospital staff. They’re not there to provide patient care. They’re there to do one thing, one thing only, and that’s to tender medical devices that don’t have a price tag on the box to the surgeon. And at the end of that process, when the surgery is completed, they walk down the hallway with a piece of paper that tallies everything that they sold to the surgeon, and expect to receive a purchase order, i.e. payment for everything that they sold. So we have this situation, then, Mike, where the salesperson is just tracking all of this on a piece of paper. And, really, the only one who’s controlling both sides of the equation– what the surgeon buys or uses, and what the hospital is being asked to pay is this rep– is this salesperson.
When you think about the purchasing side of this, those are buyers; they’re hospital staff. They don’t have any clinical understanding of why the surgeon used what he or she did in surgery. So I heard this fantastic tale when my two co-founders at the time were just trying to start a business– walked in and told me about this world that they existed in for 10 years apiece. And so, what we decided to do at that point– nobody was really attending to this. Hospitals, certainly, negotiate the best prices they can with their suppliers, but when they think they have accomplished that– you can think about this this way. They get up from the conference room table, and the project team high fives, and they’ve achieved their savings. And they walk away, and they leave a void there, where the implant reps rush right back in to claw that margin back that was just taken from them. And so when I heard the story, I thought, “Okay. This is crazy,” first of all. Number two, my mom just had her hip done last week, and this was the process that I had no visibility to. And then, also, how can we just stand idly by? We have to do something about this. So what Kermit does is we have software that adjudicates that paper bill. We actually turn that into a digital process rather than paper-based. And rather than have the hospital try to figure out, were three screws used on that surgery or four screws? Why was it a two-hole plate used to fix somebody’s wrist from a trampoline accident, but three screws were used? Where did the third screw go? And nobody has to sit down and figure that out. We adjudicate all of that in real time through the software. We tell the hospital what’s okay to pay and what isn’t.
And the second piece of our service– because we see all of the prices that they’re paying, we understand what – I’ll say it crudely – the street price ought to be. What’s the best price– the going rate for many, many different implants? We’re talking hundreds of thousands of implants. We know what those prices ought to be. So if a hospital will allow us to partner with them, we will help them with the request for proposal process. We’ll do all the negotiating, we’ll do the price benchmarking, and we’ll get them to final contracts. And we only get paid at Kermit if we achieve a positive savings number. So we take a portion of the savings as our fee. And it’s those two services, really, that we’re providing in 23 different categories of implantable medical devices.
Mike: Got it. So let’s break this down a little bit, Rich. Could you describe for our listeners the process for the selection, use, and payment of implantable medical devices in surgery?
Richard: Sure. So as I mentioned in that little story I took you through, Mike, you’ve got this situation where– just to crudely say it this way, a surgeon picks and a hospital pays. And neither side of that equation– the use side, the choice side, or the payment side typically work together in real time to collaborate on how they’re going to keep the costs low and manage the spend. So you’ve got this bifurcated process, and that’s a problem. It’s not unique to this category. There are other things– other industries– other buying triads, if you will, that work that way. But in this case, you’re dealing with very, very expensive implants. So the selection and the use is driven by the surgeon. The surgeon is concerned with providing the best possible patient care. They want the best outcome. Sometimes that may mean using a more expensive implant to, let’s say, for example, get a better outcome– maybe less blood loss or less pain involved in the recovery or whatever that might be. But nobody is really comparing, if we’re going to spend more on an implant, is it really going to produce a better patient outcome or isn’t it? Most of these decisions are made because surgeons are fellowship-trained by implant companies when they first come into their profession and start to do surgery on a certain set of instrumentation, and that becomes very comfortable for them. And they become, in some cases, lifelong users of those implants.
On the other side, we have the payment side of things, and typically, we’re dealing with your audience: healthcare finance, definitely supply chain folks– anybody who is tasked with keeping a lid on costs and negotiating contracts with vendors. And the issue that really arises in that whole setup is that these folks don’t really have a keen understanding of the technology. We’ve really done them a disservice, if I’m being honest with your listeners, Mike, in that we expect these people in hospitals to be able to negotiate food services, landscape and lawn care, and laundry, and CT machines, and MRI machines, oh, and then, also, 23 different categories of very technical, very expensive implants. And you really just can not be an expert; it’s just impossible to be an expert on all those things. So this is really an area that, as far as my business is concerned – and there are others that do this – is really a great area to outsource to a third party who is an expert in this category and can understand where the price is, but also can understand how to manage the billing side of it, too.
Mike: Okay. Rich, do prices differ for similar devices from competing manufacturers? In other words, is price the way that implant companies compete?
Richard: Yes. Unfortunately, the prices actually do differ. What we have is, largely, a situation where the implant companies tend to lean on a lot of the marketing that differentiates their product one from another. Let’s just put some labels on this, just so we can talk about real things that your audience may have come in contact with. For example, we talk about a very mature category like total joint orthopedics– knee and hip surgery, for example. Some of the big players in that space might be Zimmer Biomet, DePuy, Stryker; those are the household names that people know. But each of those three manufacturers all have a standard knee that they sell. They all have an advanced knee or more of a high-end, feature-rich knee. And if you looked at the components that make up that knee, there are just four common components. They’re pretty simple pieces of metal and plastic, and they all do the same thing. They’re priced wildly different. And even the same hospital within a health system might be paying a different price for exactly the same SKU– the same exact part number. And so, what we have is the manufacturers and the distributors of these devices– there isn’t a lot of transparency to how these things are priced or why one is more expensive than another. Medicare doesn’t care about which device is used. They’re more interested in the cost being managed and the patient not coming back into the operating room for a revision surgery. Those are the two primary drivers for Medicare. So if Medicare doesn’t care, why should we?
And so, what we’re doing at Kermit is we’re actually stripping away all of the marketing language and saying, “This particular femoral component is the same as these four from these four other manufacturers. And so all five go into a product matrix, and they all meet a standard price.” And that’s the way we’re actually– we’re not taking the implants away from the surgeon. We’re actually just reducing the cost to where it ought to be for all the like products across all competitors.
Mike: So, Rich, I read on your blog that PPI stands for physician preference items, and the preference part of that is pretty intriguing. Can you describe where the preference comes into play?
Richard: So that’s kind of what I was just getting at. You have the surgeon who prefers to use something. And remember, this is in a vacuum, so to speak. I mean, when they look at the patient situation, and they realize, for example, that they’re looking at X-rays as they start to template what type and what style of implant they’re going to put into this patient, they’ve made that judgment call already. They have their favorite, and they know how to get into the surgery and how to get out of the surgery relatively quickly; that’s very important for a hospital to manage that time. They know how to do it safely, and they know how to be efficient with that. You can imagine that they have a preference, then, toward a particular device. They’re probably not going to be inclined for the next shiny new object from a competitor– to try that on their next patient. Now some do. Some surgeons are agnostic – they really are – and they’re very in-tune with the prices. But by and large, most surgeons are not. They want to get into and out of the operating room with the best outcome for the patient. So you have this interesting– as you mentioned, this PPI acronym, and you have preference there. We’re not going to be in these very expensive, very technical devices ever at a place where this truly is a commodity. But imagine, if you will for a moment, that if all the prices are standardized down to– all like products are categorized the same and all prices are the same for that product, you really get into a very exciting realm for a chief financial officer or anybody who’s in charge of the budget.
On average, when Kermit deploys our process, we can save hospitals 30% of their annual spend. And these categories, like I said, are very expensive. To just find a standalone regional medical center that is spending $50 million a year on knee and hip devices is not out of the ordinary. And if you talk about saving 30% of that, that’s real money, and that’s a real impact to the bottom line. So we don’t want to change the preference. The way that we do this is we allow surgeons to keep everything they’re currently using. Whereas some of our competitors will come in and say, “Okay. You have 13 vendors here. You only really need two. Let’s standardize on two.” And that’s a difficult process for a CFO and a supply chain officer to sit down with a surgeon and make them decide who’s going to give up their toys and who’s going to standardize on what. So that is not our approach. We allow them to maintain the preference; we’re just standardizing the price.
Mike: So you’ve got this software that reduces spend on devices for the hospital. I would imagine in that instance you’d be getting pushback from the implant suppliers that are trying to sell those devices to the hospital. Is that correct?
Richard: I think that’s logical to say that. And I think in some cases you’re probably right. There was a situation at a large academic health system that we went into in New England where, once we deployed the software into their hands, and they realized they were no longer able to add an extra drill bit or an extra screw here and there, that they’ve been used to for many years, that they started to question, who is Kermit and where is this data going and how is it being used? But I have to say, Mike, by and large, this is a situation where it’s paper-based, and it’s very difficult for these salespeople to get paid in a timely manner. A lot of questions arise on that handwritten bill sheet. Sometimes it’s not even legible. Other times you might have two femoral components on a right total knee. Well that’s an anatomic impossibility. Right? Something must have been opened and not used, or maybe something was wasted. Maybe it was dropped on the floor, and maybe the rep dropped it, in other words, the hospital shouldn’t have to pay for that. That may not be noted anywhere on the piece of paper. So what ends up happening for that sales rep when they use our process, which is actually quite elegant and very simple– it’s not hard to actually deploy. It’s just a mobile app that we give to them. They install it on their phone or their tablet. And then they log into Kermit, the software, and then they put in the devices that were used into, basically, a screen, and hit submit. It takes about 60 seconds to do. It’s not difficult at all. What I find is the sales reps actually get paid a lot faster. Many times they’re getting paid on the day of surgery.
And in some large health systems we’ve gone into before the Kermit process was deployed, we found that these reps weren’t getting paid sometimes four to six weeks from the date of surgery. So this is a market improvement. And I don’t want this to sound like we’re coming down on the sales rep side of the equation. That’s our background; that’s where we came from. So we just understand that world very, very well. What I am saying is that most of those people are very, very conscientious– very honest people. Nobody is really stealing from the hospital. But this is a process that is paper-based, and it is a process that lacks the transparency that other processors have. And so if you can use a process like Kermit to bring visibility and transparency to that, and your suppliers get paid faster, I think everybody wins in that equation.
Mike: So I’m curious, Rich– it all seems pretty logical. This makes life easier for the rep; it saves money for the hospital. But as we know, there’s always challenges in the market. I’m curious, what are some of the obstacles that you’re facing as you grow Kermit and deal with some of these challenges?
Richard: Well, I’d say, probably, the first obstacle is– we’ve been doing this 10 years, and we’ve had a very productive 10 years, but it’s been a slow 10 years, to be honest with you, here in the State of Maryland, where we’re located. We manage 40% of the implant spend that transacts in the State of Maryland today. So I think we’ve done a very good job of demonstrating that this brand new piece of software– with no competitors at the time we started this company. We had to navigate all of this on our own and build it from scratch– that it works– that our hospitals are saving– in some cases, have a large academic health system in the state here who saved $55 million in a period of four years on just a few categories. So that’s meaningful savings being returned to the bottom line for their CFO. But the real obstacle I’m facing right now in growing the business is getting the word out far and wide that the experience that the Maryland and the Mid-Atlantic hospitals had with our process and with our service is available to everybody. And if you think about what we’re doing– if I’m to walk into a large health system and sit down across the table from the vice president of supply chain and try to convince them that their process works, but they’re spending too much time, and they don’t have enough personnel, and they don’t have all of the information they need to negotiate these prices where they could be. And even if they’re able to do that, that they’re leaving a big hole where this paper-based process is exploitable, and those reps, those vendors, and those manufacturers can actually claw back that margin that they just took from them.
Even with that great story, “Why wouldn’t everybody do this?” mentality, that that supply chain manager, really, if we’re being honest, probably doesn’t want me to find $55 million sitting there on their watch. Right? So I think it’s more of a leadership opportunity. The best hospitals in the United States– the top leaders, the CFO’s, the CEOs, will empower every operator of a– every manager of a budget and every department head to examine, what is the best way to go after this cost reduction that is in such dire need today, on the backside of COVID, with the CARES Act money drying up, that we’ve really got to get supply chain and spend under control? How are we going to do that? And so if they give their supply chain managers the permission, maybe, we’ll say, to explore that with a third party– to use a third-party consultant, especially one that has a fair model like ours, where we’re only getting paid on performance. We’re only going to take a portion of the savings as our fee; let the hospital keep the rest. And it’s getting that message out so that we could be seen as a partner and not an adversary. And not somebody who’s going to make somebody look bad, but really come in– we’re going to do all the hard work– all the heavy lifting, so that they’re not beating up their vendors, and then in the same breath, asking to provide them, after they sign the contract with great service. But that’s our role. We will do that hard work, that heavy lifting, all the analytics, and then provide the software in the back end to manage the process. And you know what? I’ll say it this way, Mike. It’s probably not for everybody. There definitely has to be a fit and a willingness to allow a third party– a consultant, if you will, to bring technology in. We’re not changing their process at all, but we do want them to understand that through an outside party’s efforts, the results typically are going to be better.
Mike: Great discussion, Richard. If someone wanted to find out more about Kermit, where can they go?
Richard: Sure, Mike. Well, the first place they can go to is our website. It’s Kermit, spelled just like the frog: kermitppi.com. And I would encourage anybody who goes there– just start on the front page. There’s a little two-minute explainer video there that will really solidify everything we talked about today in a lot less time than I took to say it. The other place they can find a lot of our information– and by the way, on the website we have a very extensive blog where, as you mentioned, we publish a lot of tips and tricks and how-tos. We give a lot of information away; we’re just that type of organization. The other place we keep people up to date on our comings and goings is on LinkedIn. So if you go to LinkedIn and you search for Kermit, and, I guess, anything that’s not a frog, then just follow that and it’ll lead you to our company. And do subscribe and do follow us there, because a lot of the things that are wins and interesting features we’re putting in the software, how we’re managing things like patient recalls and things like that– we publish all that information up on LinkedIn for people that follow us.
Mike: Excellent. Richard Palarea, thanks so much for joining us today on the Hospital Finance podcast.
Richard: It’s been my pleasure. Thank you, Mike.
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