Sermo, Pareto, and Palestrant Road Show

I have entered on an enterprise which is without precedent.

Jean Jacques Rousseau 01712-`78), Confessions


December 13, 2012 - Daniel Palestrant, MD, surgeon-turned entrepreneur and founder in 2006 of Sermo.com, a physician networking site with 130,000 members, is leaving Sermo with Sermo’s medical director to launch a new startup. par80.

He is taking his idea, using sophisticated software to facilitate direct referrals between physicians, on the road by promoting it heavily on Twitter, Facebook, Linkedin, and other webstie.
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The par80 idea rests on principles set forth by Valfredo Pareto (1848-1923), an Italian economist. The Pareto principle (also known as the 80–20 rule, the law of the vital few, and the principle of factor sparsity) states 80% of the effects come from 20% of the causes. Pareto observed in 1906 that 20% of people 80% owned 30% of the land in Italy and 20% of the pea pods in his garden contained 80% of the peas.

Palestrant’s departure surprised many. Palestrant had said his body, heart, and soul was devoted to Sermo. Perhaps Sermo’s growth has stalled. In any case, here’s how Palestrant explains his new venture.

“Above all, Pareto teaches us that efficiency comes from effectively matching supply and demand. A “pareto optimized” system maximizes the benefits that any group of people can receive from a limited amount of resources. For this efficiency to occur, there needs to be as few intermediaries as possible between the reciprocal parties and a clear, transparent understanding of the goods or services being provided.

Therefore, ALL markets (and efficient economies) have these two features in common:

1. Transparency - The ability for the goods or services to be understood by all parties, also known as “price discovery.”

1. Liquidity - Direct interaction between both parties, which is critical because it allows both parties to adjust relative to one another and minimizes the friction caused by intermediaries.

When a system does not have these features, almost as a rule, opacity replaces transparency and the multiple intermediaries replace liquidity. These outcomes benefit incumbents, rather than the broader good.

Hence, par8o.

As physicians we can see that we have strayed far from Pareto’s insights, which has resulted in the exact opposite of an efficient system (and our patients are suffering for it). There are so many intermediaries in the healthcare system today, that only a small fraction of our nation’s healthcare spending actually goes to the people providing the care. Furthermore, the AMA’s CPT coding system has turned physicians into a commodity. It makes absolutely no sense that my sister (who is just finishing her radiology residency) and my father (who has had an immensely successful 30+ year career as a radiologist), should both get paid the same amount for reading an X-Ray. No law firm pays the first-year associate the same amount as the senior partner, because higher value is placed on greater experience. As physicians we have allowed ourselves to be commoditized.

par8o is the catalyst to help that happen for both physicians and our patients.”

My Interest

Why does Palestrant’s new venture intrigue me? Partly because of my familiarity with Palestrant. I have interviewed Palestrant for this blog in the past, and I have devoted two chapters to him:

• One, “View of a Surgeon Turned Physician Social Worker, “ in my 2009 book Obama, Doctors, and Health Reform.

• Two, in “Sermo.com – Physician Social Networking” in The Health Reform Maze (2011)

From these writings, I have learned Palestrant staunchly advocates tort reform, streamlined/simplified billing, and minimizing, even eliminating, 3rd party intervention in physician-patient affairs. He foresees physicians opting out of Medicare at an accelerating rate and moving quickly to cash-only practices. He is no fan of Obamacare or the American Medical Association. He supports physician independence, trust, and self-reliance.

Palestrant believes in free enterprise and physician entrepreneurship. He knows how to obtain venture capital , having created two successful venture-capital backed companies. His strategy appears to be to obtain more venture capital by hyping his track record and his new venture in social service networks like Facebook, Twitter, and Linkedin. He is not giving many details on either his software or his business model. I do not understand where the revenues will come from to support Par80, but I suppose that will come in time.

Tweet: Dr. Daniel Palestrant, Sermo.com founder, is starting par80, founded on the Pareto Principle: 20% of people produce 80% of results.