The OxyMorons - Collaboration, Compliance, and Analytics - S3E2

Today’s guest on The OxyMorons is Rich Palarea, CEO and co-founder of Kermit. Kermit is an analytics platform that delivers insight to the fragmented spend category of physician preference items (PPI). Kermit equips supply chain managers, surgeons, and executives with real-time data on implantable medical device transactions, offering unprecedented visibility that’s saving hospitals millions of dollars.

Rich is also the Host of the new Healing the Hospital podcast. From inflation and shrinking margins to unprecedented labor shortages and unforeseen supply chain challenges, American hospitals are struggling to keep their doors open. After a pandemic that saw our hospitals and healthcare system serve admirably to keep us all safe and healthy, it is time that we return the favor. Across the nation, there are numerous Hospital Healers, people who are working diligently to solve the problems that these hospitals now face. The Healing the Hospital Podcast was created to tell their stories and highlight and celebrate their amazing work while connecting them with the hospitals and health systems that could benefit from their help.

In both of our deep pasts, Rich and I both worked at AIIM. Any errors in transcription or curation that follow are mine. I do consider myself a personal expert on medical devices since I had a hip replacement in 2013. However, I have no idea what my hip cost, which I guess is the focus of The OxyMoron idea at the heart of Rich’s company.

Where did the idea for Kermit come from?

About 10 years ago, I had the pleasure of meeting two former medical device reps. They told me this fantastic tale about how hospitals procure medical devices – everything was literally done manually and on pieces of paper. No one – not the surgeon, not the supply chain manager in the hospital, and not the hospital finance executives – had complete transparency about the transaction.

Most surgeons don’t know what implantable medical devices cost or what the hospital is being charged, and thus hey have no way to help manage spend. With so many cases, contracts, and devices, ensuring fair and accurate billing is nearly impossible for supply chain managers. And confounded by poor data, hospital finance executives have limited ability to address device inefficiencies, and struggle to ensure profitability in the ever-changing reimbursement environment.

The Kermit value proposition is focused on addressing the lack of visibility for PPI – Physician Preference Items. Tell me what that’s about.

Why does a physician prefer a particular device? Let’s focus on knee and hip replacements. The focus of the physician is getting in and out of the operating room as quickly as possible and having a great outcome for the patient. So, it makes sense that a physician would prefer a device they were trained on when they came out of school or a proclivity toward a certain set of instruments because they work well in their hands.

But the reality is that most of these devices are very similar to each other. Yes, there are some nuances. But when you get a hip done, you go in with pain and you come out walking; that's the objective. Kermit doesn’t try to dictate the physician preference, but just makes sure the price of that item is the same as the equivalent device from competitors.

Why is PPI transparency particularly important post-COVID?

Price and feature transparency is critical to ensuring that the hospital remain solvent. One out of every two hospitals in the U.S. are going to post an operating loss this year. The pandemic hit hospitals particularly hard. The hospital business is basically a fee-for-service model. Pre-pandemic if a hospital was facing a deficit, it would do more surgeries, especially elective surgeries. That has always been the top line revenue item for hospitals, they lose a lot of money in other places. When the pandemic broke, the first thing that shut down was operating rooms.

Tell me about the tagline on the Kermit website - Collaboration, Compliance, and Analytics. That’s a Triple Crown familiar to many in content management and governance.

One part of our business value is that we understand where the prices ought to be in the market - we've negotiated hundreds of these contracts over the past decade. So, we help hospitals negotiate better prices. We also take the paper-based billing process, and we digitize it. We've created a piece of software that lives in the cloud. Salespeople for the implant companies use a mobile device to document everything they've sold. And when they hit submit, it goes to the cloud. The Kermit software then adjudicates that bill in real time, corrects the price overages, and looks for wasted items. It takes all that unstructured data that was previously locked up on paper and categorizes it against a taxonomy specific to medical devices. The result is that the surgeon, supply chain executive, financial executives can collaborate on creating a transparent, cost-effective, and compliant process.

It's collaboration, because all the players in the hospital can come together at the table with one pristine set of data. It’s compliance because we're correcting the bill and making sure that the data we're using and looking at is correct. And it's analytics because we’re extracting intelligence from all that information that was previously locked up on paper. 

Is what you’re doing applicable to industries other than healthcare?

It’s a question I get asked often, increasingly by investors saying, “You’ve built a cool engine that seems to be working very well in healthcare. What else can you apply it to?”  Applying what we do to pharmaceuticals would be fascinating. For many years, pharmaceuticals have had the same problem that implants face today, which is a lack of transparency about how surgeons and physicians are being influenced in their decisions. It all comes down to asymmetrical information about the purchasing process - a surgeon gets to choose, but a hospital must pay.

What kinds of experiences stretched your OxyMoron skills in launching Kermit?

I can get lost in a spreadsheet for hours; I love to understand how and why things work. But the vision part is challenging, especially in an area in which people don’t really understand that there could be some other way of doing things. So, we’ve tried to stay just one step ahead of our customers and iterate as we go. Knowing there's a fog bank out there and that we'll try to see a little bit further through it each time and having the discipline to just stick with that was scary. That was a challenge for me.

The second challenge was leading a larger team than I was used to. I'm finding that I can't go at my speed. If I want to go fast, I can go alone. But if I want to go further, I've got to take everybody with me. And I must be able to slow down and explain things to people. Just because it's clear in my head doesn't mean it’s clear to the team.

What is that the most challenging aspect of running Kermit?

Managing growth at each step has been challenging, because there are different things you need to pay attention to at different stages. And deciding whether you're going to do this with investors’ money or do it on your own.

Pricing the product has also been a challenge. We've got this notion where we get paid out of savings. And a lot of people like that. They like the fact that I’m not going to bill them unless I save them money. But there are some customers that have a hard time with this ambiguity – they want to know exactly how much they are going to pay and when.

Right now, customer acquisition is the most challenging thing. COVID shut us out of our client locations; we couldn't go to Ground Zero and meet with them. It's very hard to get anybody in a hospital to make a decision these days. They're worried.  They’re posting operating losses and they're doing far more with way less people and dealing with the mass resignation that’s running through other industries.

How do you deal with failures?

Risk taking is not odd to me or uncomfortable when I'm betting on myself. I know that if I disappoint myself, I can pick myself back up and get back out there. What's has been more difficult is when you have 27 people on staff, and you go down payroll, and you know the name of every single person. You know their family and their situation. And when COVID came along - recall our pricing model - we only get paid based on savings. So, hospitals must do surgery in order to save anything, and that's how we generate our invoices.

We were okay sending people home around March 2020 and we said, “Surely hospitals won't close their operating rooms.” But by April, that's exactly what they were doing. By June, we were watching horrific images from TV and bodies being loaded into refrigerated trucks. It was like Ground Zero, nobody was going back there.

I had pledged to my staff that, if possible, no one was going to be fired. As we got deeper into the pandemic, we had to be resourceful and take a fresh look at everything we had invented. It was like the movie Apollo 13 when everyone at Mission Control dumped everything on the table to try to patch together a solution to get the stranded astronauts home. I'm proud to say we managed to keep everybody on - we got a little PPP money - but we managed to keep everybody, and we weathered that storm. And eventually hospitals started doing surgeries again.