The Inside Scoop on the US Healthcare System with Chas Sanders of MARGIN

Listen on
April 7, 2022

On this week’s episode I chat with the Founder and CEO of MARGIN, Chas Sanders. MARGIN is a tech-enabled procurement solution that helps Ambulatory Medical Centers purchase the equipment they need to operate. Apparently, before MARGIN supplies were purchased via phone calls and fax machines. MARGIN has not only put that process on the Internet, but they have also helped doctors to reduce their spend by 15-20%. That’s big bucks - in many cases that’s hundreds of thousands of dollars per office.

Chas is a veteran of the healthcare industry. He’s been an executive at Zimmer Biomet, DaVita and others. After that he stepped out of the industry to launch MARGIN.

In addition to hearing about his company and lessons learned as a founder, what’s great about this conversation is hearing a sophisticated business person provide insights into why the healthcare industry is dysfunctional. And low and behold, one of the reasons is that it’s managed in a similar way to the government of communist Russia. Enjoy.

Show Links:

**** MARGIN is an Interplay Incubator portfolio company.

‍Transcript (this is an automated transcript):

MPD: Chas, thanks for being here, man. I appreciate it.

Chas Sanders: I really appreciate the opportunity. I'm a big fan. Very cool.

MPD: So let's start at the top. How I like to do this. Can you give us an overview of MARGIN?

Chas Sanders: Yeah. MARGIN is a kind of new concept in healthcare. We focus only on outpatient facilities like surgery centers, and essentially what we do are two things.

We renegotiate the price of every line item of everything they need to deliver care to the patients. And then the second piece of what we do is we are a technology. So up to this point, hospitals, doctor's offices, et cetera, could only order by calling their sales reps. And so we've created as a platform for [00:03:00] them to manage every part of their inventory management with one platform, they can order from every vendor at one time with one purchase order.

And so that's what we do. We are completely in the supply chain space for healthcare. Okay. Wait. So

MPD: for surgery centers, those are non hospitals. So those are like the offices you go to where there's a doctor there and they do

Chas Sanders: something. Yeah. So those are the really happy places you go for care. They're usually very well-built they aesthetically look nice as opposed to a hospital that just has that old green tile.

And this is where they do procedures that you can be in and out in the same day. So there's no overnight stay no real complex procedure.

MPD: Okay. And so when you talk about not having to order from your sales rep, does that mean that people at surgery centers before. We're doing all of their supply, ordering over the phone.

Chas Sanders: Yeah, mostly over the phone, about 80%. So they would call their rep would be in a surgery covering somebody else. So they'd miss the rep. [00:04:00] The rep would call them back. Now they're in a surgery. They call the rep back and finally the reps running cross town and they write the purchase order number on their scrub pants.

The other mechanisms is they can call into an 800 number, but we all know how horrible that experience is. And in some circumstances, some individual companies might have a portal to order, but you're juggling 15, 20 different logins and trying to navigate everyone's kind of software system.

MPD: So this is a hell of a job.

Is this usually one person or more?

Chas Sanders: Usually it's one that sounds like a lot of work. It is. I'd say our average customer before MARGIN probably spends five to seven hours a week managing supplies and that's on top of a full day of surgery. So you're standing there on your feet all day. So usually it's one to two staff members, but for us, what we found is they're really highly paid staff members.

These are a hundred thousand dollars nurses or x-ray techs. They're truly just ordering supplies.

MPD: Wow. Now you said inventory management. So what [00:05:00] is, what are people doing? I'm, as we're talking about this, I'm realizing this is an environment that's probably fax machines and outdated Excel files.

Chas Sanders: A lot of healthcare is it's amazing how many documents are sent via fax and healthcare, for as innovative as technology can become to deliver care to a patient processes and infrastructure and healthcare have not changed in 20 or 30 years. So they're just really antiquated, but it isn't that, I think what happens in healthcare is whenever there's a platform, people want to build off the same platform.

So in healthcare, the first tech solutions they were getting were truly electronic medical record. But if you ever have a physician friend ask them about their experience with electronic medical records, it's just a series of dropdown screens, which are entirely annoying. And the problem is people can't be innovative.

They try to recreate or copy what's out there. But if the stuff out there isn't good, we should recreate the entire wheel. And in every other sector in the [00:06:00] world, that's done at a rapid pace and in healthcare just isn't. Yeah,

MPD: but why is it not in healthcare? Because in the same time period, every other industry I could think of has been adapting, advancing, they've been atomizing, the technology, taking these giant platforms and breaking them down to pieces where companies specialize in doing it very elegantly.

If you're talking about really outdated tech across the board, why has this industry had the brakes on it?

Chas Sanders: Yeah, so I, I would say that there's a couple of factors. One is that healthcare is very new. And so the sector of healthcare you're talking about could be very dissimilar from another and being niche.

It's also very clique-ish. So you're actually in the know, or in the group or in the, a crowd is a big feat. The other part is that the really bright people that innovate others industries just don't as a general, they don't have the reference or the framework to understand the workflows for your average health care provider.

And [00:07:00] so you could have a nice solution, but if you don't understand what it's like in the daily life for that healthcare provider, and you're not addressing the needs for the workflow, then you're at a disadvantage. And we see that a lot. There's a few competitors of mine that are trying to emerge and their technology is interesting, but it doesn't handle what the flow is for those staff members every day.

MPD: But in every other industry, as a VC, I see someone jump out of the industry. They were not in a technological industry. They realized something was weird, right? They're using Uber on their cell phone for their personal life. And then they're going into these extremely outdated technologies and they show up and they pitch us.

Why is that not happen more rapidly in healthcare, something. So mission critical. There's so many smart people around it. Yeah. It's bizarre

Chas Sanders: to me. It's a great question. I couldn't give you a clear cut answer. The reality is, I think as a general rule, [00:08:00] if you just take the life cycle of a physician, they're in school all the way through college, right?

If they're lucky they have a year off after college where they blow off some steam, then they jump right back into medical school. Then they jump into the residency. Then they jump into their fellowship program. Then they're trying to join a practice. And from the moment they hit med school for the next 10 to 12 years before they even start treating their own patients with full autonomy, everyone from every sector of their life is asking them to buy some.

They're always being sold. And so when new innovative technology comes out, it's been thrown in a bucket with all these vendors that have been after something from doctors from day one. And a lot of the times they just can't embrace the concept of change. We had some of those headwinds early on when we started MARGIN and I made a decision not to be a marketing company.

I wanted to pull customers to me by just offering great service and letting their friends talk to them about us. And so we've grown really [00:09:00] organically just from word of mouth, but I think it's that mindset of physicians that they're always being sold. And if you're always being sold, you're going to be resistant to hear anything new.

MPD: Okay. So you've got a technology solution to help with inventory management, procurement. You mentioned also the price negotiation, how much variance is there in medical supply pricing? When I think of this syringes and. The gowns and everything else. I assume all of that's extraordinarily commoditized and there's not a lot of MARGIN in any way.

What's the, how much does this

Chas Sanders: vary? It's crazy. There are some devices where I've seen a 50% swing from the east coast to the west coast in the same product, in the same type of facility with the same type of physician doing the same type of volume. So it just depends what we find.

We have a nice mix between new constructions, new centers that are opening now [00:10:00] and centers that have a historical spend for 5, 10, 15 years. And what we find is on our centers have been open for a long time. We're still saving them between 15 and 20% on their global spent. Are they surprised

MPD: by.

Yeah. You think that you've been in the business for a long time? You've got all the good pricing, but I guess behind the scenes, someone with an Excel sheets laughing,

Chas Sanders: What it is I think everyone will focus on the most expensive items that they buy and S they buy in use, but the really expensive items you buy and use, you may only do 15 or 20 surgeries a year, whereas you could do a thousand surgeries overall.

And because you've only focused on your most expensive line items, all the smalls are bleeding you out. And so it's, for us, it's the aggregate from the moment that you buy a staple remover to the moment that you buy an x-ray machine, we handle everything in.

MPD: What kind of spend is that when we're talking about a surgery centers, I assume that's

Chas Sanders: millions of dollars.

It can be. [00:11:00] So our core customer base right now, our physicians who do procedures related to blood vessels to like plumbers for the human body and our average center with one operator. So one physician will spend about a million dollars a year. Now, if you had a surgery center that was doing orthopedics or spine, and they have three or four doctors that could be a $10 million spend per year it just depends on their volume, but I would say your average family doctor will spend $30,000 a year on supplies.

Your average doctor who does procedures will spend between 703 million.

MPD: Okay. Wait, and you're talking about wiping out 15, 20% of the cost structure. So you're talking hundreds of thousands

Chas Sanders: of dollars. Yeah. One of the recent centers that we brought on, we, they were doing 2.4 million before us. They had been open for about five years and we got them down to sub two.

MPD: Okay. So their expenses dropped more than

Chas Sanders: 400 grand and that's directly to their bottom line.

MPD: How [00:12:00] painful was that for them to go through that process? Is that easy, like flipping a switch or is it a

Chas Sanders: whole thing? A little bit of work because there's nuances. You have reps that you have relationships with for years, and the reps are paid generally on a percent commission on dollar sales.

So if they did a million dollars with you last year, and now you want them to give you the same service and you buy the same product for 700,000, you're going to, there's going to be a rub there. But many of the physicians are really excited and surprised, because maybe they think they're spending too much, 10,005,000, our average customer we're saving 2, 3, 4, $500,000 a year.

Wow.

MPD: Do the product suppliers they do. They consider you an ally or a threat, right? Cause it sounds like your mission is healthy doctors. The people are purchasing the products. Here are the sellers threatened by you coming in and taking prices down? Or is there a benefit to them?

Chas Sanders: It's a [00:13:00] mixed bag because we do so many new constructions.

All the vendors are really excited to work with us because they want to get their foot in the door for these new builds, because it's all upside where some we've had some rubs as some vendors want their cake and eat it too. So they want to preserve their price point for their existing customers and get all the new business.

And that's just not a formula that works for us. And path the industry now I would say, has set pricing for my customers, meaning whether they buy one widget a year, a thousand widgets, my customers all get the same price. And with some vendors I'm still negotiating at every center and every doctor level.

It just depends. We've been very fortunate that in our industry, there's a lot of companies that are called GPS group purchasing organizations. To legally be considered a GPO. You have to get paid by the vendor. And that never made sense to me, especially when I was back in med device, Hey, I just give you really strong pricing for your network.

And now you want me to pay you 3% [00:14:00] for the luxury of selling to you. It just didn't make sense. So when we launched MARGIN, I had a different formula. My thought is I was going to provide the tech solution included in my soft and my service. And so they're going to get a nice software tech solution that they didn't have before.

And then in addition to that, they were going to pay me. So our average fee is four or 5% of whatever their spend is. So in the circumstance of the customer, I referenced a minute ago we saved them. We took them from 2.4 to 2 million. They saved a gross 400,000. They're now paying us 4% on the 2 million going forward.

So their net savings is 320,000 plus or saving about seven or eight staff hours a week. And so that's our formula. And because of that, I felt there was no kind of ethical conflict. I am not incentivized to steer anyone to any particular company I'm agnostic accompany. So the doctors tell me what they want to use and I'll negotiate for them.

MPD: So the GPS are like the financial advisors out there, right? They're [00:15:00] getting hidden kickbacks and fees. And so they're, while they're servicing you as a doctor, they're not really on your side because you're not paying them. They're not the right way to

Chas Sanders: think about. They're not part of the family, cause you're going to be aligned with whoever writes the checks to you.

That's just human nature. And so GPS we partner with the GPO and the reason why is I don't have the time to negotiate every bandaid that there is in the marketplace. So I use a GPO to help me out with all the small stuff, syringes band-aids pieces of tape, and then all the big stuff we handle all those negotiations.

So I think there's a place for GPS, but with business in general, you always got to look at everyone's Batman, what everyone's incentives are. And I think. For healthcare, everyone's had been incentivized to take something from doctors and that's why it, innovation is slow because you're not including doctors as part of the table.

You're bringing things from them.

MPD: [00:16:00] Anecdotally, I've heard in the market that Dr. PEI has stagnated. It's not what it used to be as the markets, the value of the dollar is deflated, et cetera, is that is this part of the story, doctors are making less money long-term because you get chipped away by all the different vendors and everyone else in the supply chain.

Chas Sanders: Yeah. You and I are young enough to know health care as it stands today. But if you were to ask your parents, Hey, what was it like to see your family doctor. You would go in, you'd have an hour with the doctor. They would go through every ailment, head to toe that you're facing and come up with a treatment plan.

Now healthcare is really compartmentalized. So it's a machine. Your family doctor has seen 60 patients a day to make the money that a doctor 20 years ago would do in 20. And so their machine, they have to get you in and get you out. And they really focus on the small minute kind of myopic part of healthcare that they focus on.

And, in [00:17:00] addition to that, Medicare has been reducing rates. So in healthcare, Medicare CMS sets the price point and almost every private payroll follow suit. So as Medicare keeps carving down, for example, the doctors that we are selling to currently, they just faced a 15 to 17% rate reimbursement cut in January of 2022.

So overnight they lost 15% of the revenues for the same procedures they did last year. Now for my organization. That was good for us because people are seeking us out, trying to figure out how they can recoup that 15% back. But yeah, the healthcare is being squeezed and a lot of people don't realize is say, you get a surgery done at the hospital.

There are two parts of that fee that 80, 90% of it goes to the hospital as a technical portion. So it pays for the facility only about 10 or 15% actually goes to your physician. And so what physicians realize is in the hospital, they're just a number they're being told how to [00:18:00] deliver care as opposed to choosing the care that they want for their own patients.

And if they move all their procedures out of the hospital to their own facility, now they get the recoup, the technical portion and the professional portion, and they get controlled the spent, but they're using the products they want and delivering the care they want. So we're seeing a huge migration of, procedures and doctors leaving hospitals to open up their own surgery centers.

And I think.

MPD: But when they get to their own surgery center, they're on the same reimbursement program from the government, right? So isn't that always going to limit the type of quantity, the quality of the care, the time they can spend per patient, because there's a cast.

Chas Sanders: There is, it's, interestingly enough is say you were going to get a stent put in your leg.

If you were going to have it done at the ambulatory surgery center versus the hospital gets paid twice as much more, same physician, same technology, same outweigh. It's just as the overhead, it's just the game that they [00:19:00] have in place. And so when you say

MPD: it's a game, it, do they need that money?

Is that an inherent cost? Or they're just saying, Hey, let's charge as much as we can because we're bumping heads with the insurance companies and they're trying to undercut us. So we're gonna ask for too

Chas Sanders: much, I think on an ethical level, you could argue that the hospitals treating indigent patients and that they have procedures that are lost leaders for them.

So the procedures that are profiting. I need to feed the rest of the hospital. The reality though is cost of care should be delivered at a really affordable price point where we're incentivizing our brightest to go into healthcare and Dupee doctors and our brightest scientists to keep developing new technologies and new paths forward.

And unfortunately, because healthcare is somewhat broken in the U S we're not seeing that our best and brightest, it used to be scientists and doctors, mathematicians are now going into finance and investments and sales positions because the income is not what it used to be.

MPD: And [00:20:00] so the income though, the reason why people are making less is because the government on a real dollar basis is reimbursing at lower rates through cuts or not changing it to match inflation, or is it because the cost structure has gotten.

And there's been no adjustment to, to raise the rates and reimbursement rates as well. What's the driver. Is it price compression

Chas Sanders: or cost scaling for both? I think it's both, the reality is every year Medicare takes six months in June. They put out their proposed rates for the next year. And then in December they put out their final rates and over that five to six month period, they are supposed to be looking at every dollar.

That's spent everything that's reported every cost of every implant and they're coming up with reimbursement. And the reality is they're just driving down the reimbursement for physicians. So physicians at certain points that, Hey, I don't want to be in the hospital anymore. My surgery time is not guaranteed.

I was supposed to do this procedure at two it's now 9:00 PM. And I'm finally getting the patient into the room [00:21:00] or, Hey, I've used this, company's widget for the last five years. And then today they're telling me I can no longer use it because a hospital just negotiated a contract with a different company.

And so physicians have just gotten really tired of being told how to deliver care, not having the accessibility to the labs, and they can't give the patient experience that they want. And so when you had that kind of boiling over and now the ability to have these outpatient facilities and they've been vetted, and it's the fastest rate of growth in healthcare right now, I can control everything, make more money and have a better quality of life.

And then the studies are really evident that the outcomes are better for patients in the outpatient facility and the doctors and the patients are happier. So for me, it's a huge win that cost to help to the Medicare comes down, doctors are happier, their staff is happier, the patients are happier and the outcomes are better.

And so it's a win all the way around. And that's why I've finding this space for me and [00:22:00] MARGIN was so important because everything we do is trying to help a problem. That's systemic to healthcare system in the us today. So this is a

MPD: macro shift we're seeing is that right? Like doctors are essentially moving away from hospitals or is it happening in piecemeal?

And it's not a macro shift, right? If someone was to study this, are we watching the decline of centralized hospitals?

Chas Sanders: Yeah. There's you know I, so my first hospital I ever sold into was a Honamin university hospital in Philly, big teaching center, residency programs, attached to a Drexel medical school.

Last year they went out of business, they went bankrupt. It was a pillar of healthcare in Philadelphia. I probably repped 3000 surgeries at that hospital. I spent my twenties and thirties. And so what we're seeing is there's a huge migration of physicians out of the hospital, into their own facilities.

It's much akin to the huge migration that we saw in the nineties from Sears Macy's to, the gap [00:23:00] and banana Republic in specialized stores that focus on a few things. Whereas 30, 40 years ago, you bought everything you needed from Sears Roebuck. And now Sears is just in a few locations across the country.

And so I think what we're seeing is people like having really fine tuned choice on the items that they want to buy or service and having specialized opportunities is what in the U S of what is, what the average consumer wants

MPD: and what kind of medical practices do you support?

Cause you don't support every dimension of medicine.

Chas Sanders: Yeah, I don't, we've played around with a few, but our core business right now is interventional cardiology, interventional radiology, vascular surgery, and nephrology. I would say that before the calendar year ends, just because of previous relationships in my professional life we probably will jump into pain management spine and orthopedic center.

MPD: When you get to the end of the year and you've got [00:24:00] those other practices in line, have you covered kind of 80 20 of the market or is there a lot of space

Chas Sanders: outside of that? Yeah, so there's, that's part of, for me in my, my journey as an entrepreneur and a founder, I'm finally at the point where we're positive cashflow, we're growing at a really consistent, strong clip, and I know that we're safe, right.

And that's a huge hurdle, but now that we're there now that we're there, I'm surveying my industry. Plastic surgery office called me a couple of weeks ago and topically, it sounds great. Awesome fun procedures. Everyone leaves happy. And the reality is I looked at the math of what they buy and it was not worth the effort for us.

So their annual spend was a little too low. Whereas some specialties, orthopedics and spine where I'm not in now, they can have five or $10 million a year in spend. And so every center I sign there is four or five of my current customers. For me, what I decided to do is to get [00:25:00] really specialized in one area of medicine, so we've got 40, 50,000 skews that we buy routinely.

I know every product, I know every competitive product of every other one. And so I know the classes of products and anyone that comes on, we can onboard them quickly. I'll have to recreate that wheel and orthopedics and spine and learn everyone's skews and expanding. So growth should be calculated for us.

MPD: W what are the reasons why people say no to this? What are your naysayers? What's the friction in the sale.

Chas Sanders: What I would say is we pass on a lot more customers than the customers say no to us. Because for us, our, it's easy. Hey, I'll save you more money than I charge you.

And if I don't, you can walk away. That talking points pretty easy. I think pride is a big part of it. There are a lot of physicians. And business people that, view themselves as the top negotiator [00:26:00] or, the Oracle of Omaha. And they're not, there are times where a doctor's Hey, my price is you can't beat them.

And maybe you're right, but I'll give you a free assessment. Just tell me what your products are and tell me how much you spend. And I'll tell you if you overspend. And so usually with a free assessment, they're happy to test the waters, but most people just don't think we can do any better than they have before.

And the reason why is their sales reps are telling them, oh, you got the best price in the country. And, but again, how your sales rep incentivize,

MPD: but the numbers are the numbers. That should be pretty easy to discern. No.

Chas Sanders: Yeah. I think there is a bit of work. You're gonna have to do a couple hours of work to get all your spend together and organized so I can actually assess.

And a lot of these physician practices don't have traditional business acumen. So their entire spend could be kept in a shoe box with every invoice slip that comes in the course of the year. [00:27:00] And then our hope is at the end of the year, they're going to pay an accountant to put every invoice into an Excel.

Now, also, if you're making a million or 2 million profit on your facility, you may never look at that shoe box because a million or $2 million in profit is better than the 600,000 you made at the hospital. And I think there's just varying degrees of business acumen and organizational skills.

MPD: Got it. Okay. So normal human issues, not logic-based issues. Got it. Okay. When you look at the U S healthcare, you were talking about this before a little bit about how things are trending. The thing that always gets stuck in my mind is I always hear that the U S is two to three times more expensive per capita, or maybe not more expensive spend.

Two to three times more per capita than other countries in NATO. So we're not talking countries and different economic situations or different access to healthcare countries in NATO. Why is that? What is [00:28:00] happening with the us healthcare

Chas Sanders: system? So if you think of the average Americans, just preferences and styles or what they're accustomed to in their daily life as Americans, we want choice, you always want to have choice.

And as Americans, you also want to have things done very quickly. So choice and patients are two things that are innate to be an American that you may not see in other countries. So a lot of other countries, especially European or NATO countries, they could have socialized medicine. So your healthcare will be free, but you are going to be assigned a doctor in 63 days and you have to show up on that day and you're not going to who your doctor is that day.

And nor are you going to have the ability to say, Hey, I want this. Whereas, if you take an American and they need to get a total hip done, so they need a hip replacement with today's technology, they can search three or four biggest brands. They can read testimonials, they can look at any lawsuits or anything.

They can find all those things out. They can also research their doctor. [00:29:00] Hey, this doctor went to Harvard medical school, did their internship at rush. And they have done this procedure 700 times a year, and this is the doctor I want to go to. So for that optionality, we pay up for it. And there's also a markup.

I'm sorry, Martin. There's also a markup on products because yes, the unit cost on an item might be $25 and the company could sell it for $250. But a portion of that has to go to future research and development, because if you're not going to innovate new technology, you're going to be left behind. And so the research and development budgets for a lot of these med device companies is astronaut.

Compared to other spaces or sectors.

MPD: Okay. But comparing it to other countries in the same sector, are they doing less R and D and the narrative you're telling is not the narrative we usually hear in the news scenario we hear in the news is

Chas Sanders: our system's broken. Eh, the answer, yes. There is a certain element of our system that's broken.

[00:30:00] To answer your