Go lean or go home: How health plans can better manage their workforce

By applying tools that have already proven their merit in manufacturing industries — like lean and Six Sigma — health plans can reduce administrative operations costs as much as 15 to 25 percent, while improving quality and service levels.

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Go lean or go home How health plans can better manage their workforce


About the authors

Chicago Anil Kaul Partner +1-312-578-4738 anil.kaul @strategyand.pwc.com Pier Noventa Partner +1-312-578-4877 pier.noventa @strategyand.pwc.com George Svoboda Principal +1-312-578-4554 george.svoboda @strategyand.pwc.com

New York Gil Irwin Senior Partner +1-212-551-6548 gil.irwin @strategyand.pwc.com Frank M. Ribeiro Partner +1-973-410-7667 frank.ribeiro @strategyand.pwc.com Sundar Subramanian Partner +1-212-551-6651 sundar.subramanian @strategyand.pwc.com San Francisco Thom Bales Partner +1-415-653-3476 thom.bales @strategyand.pwc.com

Sundar Subramanian is a partner with Strategy& based in New York. He works with the global health and operations practices and co-leads the firm’s Medicare and Medicaid Center of Excellence, and the core operations offerings in health. He supports health plans, pharmacy benefits managers, and services companies in developing strategies, business models, and transformation efforts. Gil Irwin is a senior partner with Strategy& based in New York. He works with the global health and digital business and technology practices based in New York. He specializes in strategy development and IT/operational transformations for health plans, pharmacy benefits managers, and other specialty health-related suppliers. George Svoboda is a principal with Strategy& based in Chicago. He works with the firm’s global health and digital business and technology practices, where he supports health plans in developing strategies and in transformation efforts. He also leads the firm’s contact center offering and is a member of the multichannel customer solutions team in digital business and technology. Christoph Dankert is a senior associate with Strategy& based in New York. He works with the global health and digital business and technology practices, where he supports health plans in developing technology-based growth strategies and operations transformation efforts.

Also contributing to this report were Strategy& senior associates Jose Espino and Augusto Giacoman.



Executive summary

At a time when the U.S. healthcare industry is undergoing major disruptions, managing one’s workforce effectively represents a fairly straightforward means for health plans to improve performance and reduce costs. Tools such as lean and Six Sigma are fairly common in process industries, and they are increasingly migrating to service industries as well. For health plans, these initiatives can have a significant effect. Based on our client experiences, we believe such tools can reduce administrative operations costs as much as 15 to 25 percent, while improving quality and service levels. There are two simple levers that health plans should focus on as they measure and manage their workforce. First, health plans should increase the percentage of time that employees devote to value-creating work. Second, the plans should improve productivity during this time, by getting employees to do more work at the same or better quality level within a given period. On this front, industrial engineering and lean practices apply: dividing work into measurable units, directly observing both high and low performers to determine the differences, and standardizing best practices across work teams. Although a lot of lean, productivity, and workforce efforts are currently being launched in the healthcare industry, we believe that many do not capture their full potential. Several components are critical to ensure success. Plans must adopt a systematic and rigorous mind-set to identify, measure, and manage workforce cost drivers. Plans also need a hypothesis-driven approach for highlighting and sharing best practices among employees. (In our experience, two or three good ideas from high performers applied across the entire staff can lead to improvements of 20 to 30 percent, even in mature environments.) Most importantly, plans must create a culture of continuous improvement across all operations, to ensure that change is truly rooted in the organization.



The opportunity in systematically managing your workforce
Current shifts in the U.S. healthcare industry are putting significant pressure on health plans. The reforms of the Affordable Care Act are introducing new low-cost health exchanges to the market, even as Medicare Advantage reimbursement levels fall (10 percent or more in 2014–15). Meanwhile, new technologies and methods of care delivery are putting greater emphasis on value-based outcomes. Collectively, these shifts are forcing health plans to streamline their operations and reduce total costs, in an effort to improve margins. In this environment, many health plan executives are attempting to implement business model transformations, with varying degrees of success. (In a recent publication, we demonstrated how aggressive plans can reduce their administrative costs to just US$5 per member per month through business model transformation.1) Though such business model changes are appropriate in many contexts, we believe that health plans can also reduce significant costs within their current business model, by more effectively managing their workforce. By “managing the workforce,” we mean the use of tools, processes, and insights such as lean and Six Sigma that enable organizations to better match the supply of staff to the demand of work, and increase productivity among employees during working hours. These techniques have migrated from the factory floor to service-based industries such as banking, particularly call centers and third-party administrative processing. Health plans are the next logical target, given that labor accounts for some 80 percent of a plan’s administrative cost. In fact, the typical plan still has significant “fat” in the system, with opportunities to reduce costs by 15 to 25 percent without sacrificing — and possibly while even increasing — quality and effectiveness.

These techniques have migrated from the factory floor to servicebased industries.



Yet to capture these gains, plans will need to adopt the right approach. That starts with identifying the true cost drivers — i.e., the areas of inefficiency in how employees actually conduct their work. Next, plans must develop and test hypotheses about where the most value can be realized in improving productivity. Plans must analyze both highperforming and low-performing employees as they execute tasks, and focus on the two or three factors that result in the biggest differences. Finally, plans must start with an initial lift that will generate momentum and buy-in across the organization, and then embed a mind-set of continuous improvement into the culture. Identify the cost drivers Health plans that seek to improve their workforce management must start by understanding how employees actually spend their day. Surprisingly, few plans devote systematic effort to do this, despite significant investments in productivity and time management initiatives. Instead, they are more likely to assess the total volume of work (e.g., claims processed in a given day or month, or at a given work site). To better manage the workforce, they need to start by gaining a true understanding of where employees spend their time, by analyzing three key metrics (see Exhibit 1, next page): • Productive time (the time spent on value-creating work, such as processing a claim) • Idle time (any additional, nonwork time spent while processing a claim, such as distractions from talking to co-workers or phone calls not related to work) • Shrink (all other payroll hours registered by an employee, including time spent at meetings, training, and booting up a computer, along with breaks, lunch hours, and paid time off, or PTO) To better manage their workforce, health plans must focus on two direct levers: First, they must reduce shrink (time spent out of the office) and idle time (slices of unproductive time mixed in with actual work). Second, they must improve the throughput of their workers (i.e., the number of tasks completed per hour) during productive time.



Exhibit 1 To better manage the workforce, health plans must measure several categories of employee time
Typical breakdown of workforce cost drivers





Productive time (60%)

Idle time (5%)

Shrink (35%)

Variability across employees A. Task time: Standard time it takes to finish an activity B. Handle time: Total time it takes to finish an activity, including idle time C. Total hours worked: Scheduled hours minus PTO, planned breaks, and lunch hours D. Total payroll hours: Total hours for which an employee is paid, including PTO and paid breaks



Highly variable Standardized

Typical utilization measure = B / D True utilization = A / D Source: Strategy& analysis



Reducing shrink and idle time Shrink is the time that employees are being paid but not working on value-creating tasks. It includes in-office activities such as meetings, projects, and training; technical issues; and any outside-the-office payroll time such as breaks and PTO. Some shrink is, of course, essential to run the business; it is effectively laid out by the company’s HR policies. Yet many operational groups do not manage this time away from the desk or work effectively. They have unnecessary or inefficient meetings, ineffective or prolonged and outdated training sessions, unmonitored or frequent breaks, and project work that may not generate real value. These all pull employees away from value-added work, and they are all root causes of high shrink in organizations. Effectively managing employees to stay on task — and sharing best practices on how to keep distractions to the minimum required to run the business — usually provides an enormous lift in efficiency and effectiveness. To reduce shrink to such low levels, IT systems must be fluid enough to scale up during periods of high demand, with responsive help-desk staff that can quickly address problems. Streamlining recurring processes for employees — such as computer booting, log-in/log-off, and time tracking — can reduce shrink time as well. The goal is to ensure that workers are not unproductive because of technical glitches or backups in the work queue. Moreover, efficient training and coaching systems can ensure that workers are not routinely pulled away from value-added work. By implementing such solutions, call centers and outsourced administrative services firms have been able to reduce shrink to as little as 20 to 27 percent of an employee’s total payroll hours (see Exhibit 2, next page). There are also real efficiency gains from reducing idle time — the lost seconds and minutes when an employee turns away from productive work to read an email, check news online, chat with a co-worker, or do anything else outside of the task at hand. Separating productive time from idle time requires tracking tools and other technological solutions so that supervisors know how employees are spending their day and where they can make improvements.



Exhibit 2 Other administrative operations have reduced shrink levels to 27 percent or less
Shrink across different operations in- and out-of-office shrink 27.0% 26.8%








22.4% 19.8%




21.3% 17.9% 14.7% 14.7% 14.4%


Dental call center


Financial services


Claims operation

Outsourced domestic call center

Aggregate1 In office (e.g., meetings, projects, training) Out of office (e.g., breaks, PTO)

1 Shrink categorization not available for domestic call center. Source: Selected Strategy& client performance; Knowlagent survey, 2011; Strategy& analysis



Health plans can expect best-in-class shrink levels of 20 to 27 percent, consistent with other service industry leaders. The work is usually queuebased and highly predictable, such as claims to be processed or healthcare providers to be contacted. Admittedly, some health policies can be complex, and health plans are keen to satisfy client wishes (and avoid government penalties for mishandled claims or other errors). Yet workforce management solutions are increasingly available that can track productive time, idle time, and shrink in non-call, back-office environments. These technologies were fairly primitive in the past, but they are now mature enough to handle large-scale environments with complex and variable workloads and projects. At the highest level, workforce management systems can track employee desktop activities, allowing plans to measure the time required for employees to process specific transactions. Such systems can also integrate with workflow routing functions to more effectively forecast and distribute workloads — ensuring that employees have a steady queue of tasks without getting overloaded or waiting during unexpected gaps. Improving throughput by addressing productive time The second key lever for health plans to improve the way they manage the workforce is increasing the throughput of workers during value-added productive or task time — i.e., generating a greater volume of work over a given period, with consistent quality. Admittedly, this idea is easier to implement in highly standardized transactional work. Health plans, by contrast, see a wide variety in the complexity of cases and claims — from an emergency room visit for stitches to a complex cancer diagnosis involving surgery and chemotherapy. Yet the fundamental concepts of lean remain the same. Based on our experience, plans that apply these concepts can improve productivity by 10 to 20 percent.



To achieve this goal, plans should follow a six-step methodology that is hypothesis-driven, in order to identify and act on opportunities: 1. Assess the current state by analyzing data and processes, and generate hypotheses. First, plans must look at their current data and work processes and determine which represent the highest potential increases in productivity. This entails directly observing employees through job shadowing. Simply asking employees how they execute processes is not enough. Generally, people do much of their work through ingrained habits that become routine over time, and thus require an outside perspective to truly analyze them in a way that yields real insight. In addition, these direct observations should include employees at a range of productivity levels — i.e., both high and low performers. Often, this direct observation process alone is an eye-opener for health plan executives, as they see the wide range of methods that employees use to do their work, and the way that different methods lead to large variations in throughput. For example, high performers may orient their applications on the desktop a certain way, or they may check for the most common problems immediately on opening a claim, minimizing the potential for delays later on. Also, it’s worth noting that low performers are often not merely lazy or inefficient — in many cases, they are simply more conscientious and follow the prescribed steps of a certain task to the letter, which takes longer and may not be necessary in all situations.

Simply asking employees how they execute processes is not enough.

2. Conduct time studies. After the direct observation phase, the next step is to conduct a time study, measuring specific processes and activities to determine how long they should take under normal circumstances. Part of the time study involves decomposing the process into the key steps that matter most — those that differentiate high and low performers — and gauging how much time can be saved by standardizing the steps used by high performers. 3. Analyze the data. With the time study complete, plans can then quantify the potential gains that can be made — for example, by raising low performers to the median level or higher.



4. Conduct pilot tests. Next, health plans can conduct pilot tests on any proposed new steps or revamped processes, to determine how well they function within a subset of the workforce. 5. Implement solutions. Successful pilot tests can be rolled out across the entire organization. This step should include engaging stakeholders in the planning and rollout phases, as well as follow-up testing and revisions to ensure that the solution is still effective on a larger workforce population. 6. Realize savings. Finally, the organization can quantify projected overall savings, reduced headcount, monitor performance against that goal, and update its implementation plan if necessary. Our experience shows that this methodology can lead to real and rapid gains. For example, a national health plan sought to improve its workforce management as part of a significant cost reduction program. It looked at several highly transactional back-office functions — including enrollment, account setup, billing, provider interactions, and claims — and standardized them according to the best practices of top performers. As a result, the plan reduced the average low performer’s time per claim by 40 percent for some types of work.



A mind-set of continuous improvement
Workforce management is not a strictly linear process or a one-time initiative. Instead, the most successful plans will foster a broader cultural shift toward continuous improvement, in which anyone can make suggestions to improve productivity and quality, at any time. In that context, the steps above are a mental map or checklist that can be used by multiple teams in parallel work efforts across the organization. The right solution not only is cross-functional but relies on every person in the organization — all the way down to individual supervisors and frontline employees who need to start looking at productivity, quality, and service in an integrated manner. Supervisors at all levels also need to understand the key drivers that impact performance, and then — using that knowledge — become better at coaching slow performers and instituting process changes (revising computer interfaces, changing the screen layout, and so on). In addition, the right incentive structure is critical; health plans should design rewards, bonuses, and acknowledgments that motivate teams to stick to new processes and continue to refine them, instead of slipping back to more familiar ways of working. The well-known and widely studied manufacturing analogy is Toyota, which famously empowered all assembly line workers to halt production if they saw potential defects or mistakes. Workers who took this step were praised instead of punished, and the long-term result was more consistent outcomes and a culture of quality in which everyone believes that a core part of his or her job is to improve the overall system of manufacturing cars. This is a significant departure from the traditional thinking at many health plans, in which companies believe they can improve only one or two standard performance metrics — costs, quality, or speed — at a time. Yet making sure employees are present and productive (i.e., higher employee utilization) does not mean a trade-off with speed or service level. The right mind-set is one of quality assurance, in which it’s easier to do something right than to do it wrong. This mind-set requires a cross-functional approach and an end-to-end view of processes. The end result is performance improvements across all three — lower costs, better quality, and faster service — through gains that build on one another over time.
12 Strategy&

The right incentive structure is critical.

Success requires new capabilities
To improve workforce management across both levers — reducing idle time and shrink, and improving productivity — plans must develop several capabilities, including the following: • Forecasting, which allows the firm to accurately predict work volume and handle time and to flex staff levels to meet demand • Capacity planning, or better alignment between supply (through HR) and demand (through volume forecasts), to identify and lock in the right workforce needed to meet service-level targets • Scheduling, entailing both a method and the IT support required to manage staff time efficiently, including typical shifts and PTO planning • Workflow management, allowing plans to automatically distribute work based on service-level needs and skill, giving leaders visibility into inventory levels at any time • Activity management, measuring minute-to-minute time requirements for each activity and task • Performance management, evaluating back-office employees consistently, through data on quality, complexity, and speed of work




Regardless of the business and operating model, health plans have a significant opportunity to reduce operating costs and increase quality by applying a set of relatively basic workforce management and productivity tools and methodologies. To succeed, plans will need a comprehensive, hypothesis-driven approach that identifies true cost drivers and looks at three critical components: reducing shrink and idle time, improving throughput during the productive time, and adopting a mind-set of continuous improvement to empower and enable supervisors and frontline staff. Plans that implement these measures can generate savings of 15 to 25 percent within a couple of years — even within their current workforce and operating model — and continue to improve their performance in costs, quality, and service. At a time when market shifts in the healthcare landscape are causing a lot of business uncertainty among health plans, such gains are well within their own control, and reaching those gains will become essential to remaining competitive. In other words, plans will need to “go lean or go home.”




Thom Bales, Gil Irwin, Anil Kaul, and Sundar Subramanian, “The $5 PMPM Health Plan: Coming Soon to Your Neighborhood,” Strategy& white paper, 2012.



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