A lean diet for health plans: Establishing a continuous improvement capability

To stay relevant and competitive in a changing health-care environment, payors must fundamentally rethink their operating model, their cost structure, and their culture. The best means of accomplishing this is to pursue lean-led business transformations that can help them achieve continuous improvement.

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A lean diet for health plans Establishing a continuous improvement capability


Chicago Mike Connolly Senior Partner +1-312-578-4580 mike.connolly @strategyand.pwc.com Anil Kaul Partner +1-312-578-4738 anil.kaul @strategyand.pwc.com Pier Noventa Partner +1-312-578-4877 pier.noventa @strategyand.pwc.com Akshay Jindal Partner +1-312-578-4601 akshay.jindal @strategyand.pwc.com

Florham Park, NJ Frank Ribeiro Partner +1-973-410-7667 frank.ribeiro @strategyand.pwc.com

New York Gil Irwin Senior Partner +1-212-551-6548 gil.irwin @strategyand.pwc.com

San Francisco Thom Bales Partner +1-415-627-3371 thom.bales @strategyand.pwc.com

This report was originally published by Booz & Company in 2013.

Animesh Ghosh and John Yao also contributed to this report.




Healthcare payors face an unprecedented array of challenges. Gone are the days when they could simply pass on the cost burden of their inefficient processes in year-over-year rate increases. As premiums become unaffordable, employers are pushing back. Many are passing some of these cost increases on to their employees and allowing them to choose among health plans on exchanges. The competitive landscape is also evolving, with new competitors bent on disintermediating payors. To stay relevant and competitive, health plans must fundamentally rethink their operating model, their cost structure, and their culture. To do this, they must pursue lean-led business transformations to achieve continuous improvement. This approach has already proven to generate results in the automotive and banking industries. In healthcare, it has the potential to create long-lasting holistic changes that can transform a payor’s operational performance and strategy by attacking waste, inefficiency, poor processes, and systemic breakdowns in an organized, prioritized, sustainable fashion— and in a manner that supports the broader strategic priorities of the enterprise.

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Healthcare payors operate in an environment of enormous and mounting complexity. The Affordable Care Act is introducing sweeping reforms that demand new products, new business processes, and new approaches to delivering care affordably, along with significant investment in IT and the retraining of staff. The law is also giving rise to new competitive threats from providers that are increasingly forming integrated delivery networks. Changing demographics and consumer preferences are altering how companies segment customers and what products they deliver. Add to these new challenges the deep-rooted inefficiencies and complexities at many health plans, caused by inconsistent processes and technology fragmentation.

Most payor executives are aware of these challenges and are rethinking their current operations and cost structures with an eye toward becoming nimbler within the next 12 to 24 months. Unfortunately, many health plans are ill suited to address these challenges and are more likely to pursue cost reduction efforts that don’t align with the strategy of the health plan. Such restructuring efforts often prove no better than stopgap measures; costs may get cut in the wrong places, and whatever gains they generate often fade over time. Booz & Company has identified two complementary approaches that can help payors perform sustainable cost transformation that aligns with growth and competitive priorities: Fit for Growth* initiatives, and continuous improvement. The Fit for Growth Approach No matter how payors choose to differentiate themselves in the coming years, growth depends on three key factors: strategic clarity, including a clear sense

of the distinctive organizational capabilities necessary to win with that strategy; aligning resources to transform the cost structure and generate (or free up) investment capital; and an organizational structure that supports sustainable change by aligning management and mobilizing staff. With this in mind, earlier this year Booz & Company published a related report, “The Fit for Growth Journey for Health Plans,” in which we discussed how to adopt a regimen that fuels strategic growth, nurtures essential capabilities, and ensures cost competitiveness.1 Booz & Company analysis shows that payors that adopt a Fit for Growth approach increase their competitiveness. In addition to the Fit for Growth methodology, which is a triedand-tested approach for balancing the cost agenda with strategic priorities to achieve transformative cost reduction, payors can rely on lean methodologies to maintain their gains and drive operational improvements over time throughout the organization. This is where

Booz & Company analysis shows that payors that adopt a Fit for Growth approach increase their competitiveness.
* Fit for Growth is a registered service mark of Booz & Company Inc. in the United States.


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our concept of lean-led continuous improvement comes into play. It is often implemented in conjunction with Fit for Growth approaches, but it can be a separate initiative as well. Continuous Improvement Continuous improvement (CI) is a leadership philosophy based on lean methodologies, Six Sigma, and business process management principles that creates a long-term vision for excellence and fosters a culture of continuous learning to maximize customer value, from senior management down to frontline staff. To compete in today’s fast-moving environment, health plans need to embed CI across the enterprise to drive sustainable improvements in three key areas: • Differentiated client service: The goal of differentiated client service is to eliminate customer pain points and streamline processes. Lean transformation improves performance in this

category by ensuring that process designs focus on positive customer outcomes, and improving responsiveness to clients. • Operational/cost efficiency: The goal here is to provide costeffective services and increase process capacity. Lean-led transformations improve performance by reducing process waste, resource requirements, and costs; shortening process cycle times; and creating opportunities to redeploy capacity for new business. • Quality and risk mitigation: The goal of this performance category is to reduce customer-facing errors as well as improve regulatory compliance and controls. Lean transformation improves performance in this category by establishing process standards and error-proofing techniques, institutionalizing a culture of zero defects, and fostering discipline and accountability among employees.

Booz & Company has helped several leading health plans implement lean-led CI over the last few years, yielding administrative cost savings of 20 percent in certain functions and improving overall price competitiveness by more than 10 percent in select market segments. The lean approach is powerful in the context of operations because it articulates how a company must change its operational DNA to execute on its strategic priorities. This is true whether the strategy is to recover efficiency, support a low-cost position, enable product differentiation, or increase go-tomarket agility. More specifically, a lean-led CI program relies on five primary components: methodologies and tools, organizational enablers, high-performance culture, metrics, and accountability and incentives (see Exhibit 1). This approach has many advantages over the standard lean approach, which often lacks a


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Exhibit 1 A Lean-Led Continuous Improvement Framework Comprises Five Elements


A4 form - width - width A systemic, fact-based approach to process improvement using proven methodologies and tools

Linkage of business unit improvement targets with accountability and incentives
Accountability and Incentives Methodologies and Tools

Letter f - width - width

Lines: Lines f

Continuous Improvement Programs

Organizational Enablers

Formal and informal components to implement and sustain CI efforts

Note: Please otherw file. These

Appro Measures for success and identification of opportunities to focus on
High-Performance Culture

Strong, enterprise-wide performance culture
Source: Booz & Company analysis

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holistic change agenda across the full range of operational levers and thus tends to produce a narrow platform for supporting change. 1. Methodologies and tools: There are numerous methodologies and tools for advancing CI efforts. For instance, cost-driver models, which are based on the payor’s own specific activities and cost structure, are critical to discovering cost drivers when benchmarks are lacking and it’s difficult to isolate the impact of a book of business. These and other models have already proven exceptionally valuable. For example, a national payor recently developed a CI effort across core back-office functions based on a member-centric process model. This model—which specifically links payor processes to satisfying member needs—allowed the company to assess time spent on critical backoffice activities that are otherwise difficult to analyze. Lean tools such as time studies and surveys revealed that the monthly productivity varied by more than 20 percent among managers (after accounting for the complexity of assigned cases). With this information in hand, the organization began a training program that standardized activities based on internal best practices and reduced time spent for certain backoffice processes by 25 percent. Another lean tool used by the payor—value stream mapping— identified “time traps” and nonvalue-add activities in member

services call centers. By building a more effective knowledge management database and crosstraining the staff to smooth utilization during peak times, the payor reduced the costs of certain call center subprocesses by nearly 20 percent. 2. Organizational enablers: The organization must regularly reinforce CI for the benefits to take hold and persist. This support comes from both formal and informal organizational levers working in unison to drive operational improvements across the organization. Formal levers include organizational design, roles and responsibilities, governance forums, decision rights, and discrete career models. Informal levers include relationships across organizational boundaries, shared vision and objectives, individual goals and common sources of pride and identity, and shared language and beliefs. There are various ways to enable CI, but we believe the best approach is to establish a central CI center of excellence (COE) with some elements colocated within business units and functions. In this approach, the organization balances the CI focus between the enterprise’s strategic problems and the more tactical operations-level problems. Together, COE and functional experts accelerate the impact of CI through training and shared best practices. This model provides increased

control and standardized processes for determining, implementing, and governing improvements. CI functional experts are not process owners, but they work closely with process owners to align CI activities to day-to-day operations. CI COEs include lean experts and tools available to managers to tackle leanled transformation problems as they arise. These experts serve as mentors to the individuals responsible for various performance improvements in order to help adopt the CI methodology. 3. High-performance culture: At its best, a company’s culture amplifies and sustains the impact of a leanled transformation. At its worst, it can drag down productivity and sap emotional commitment, undermining long-term success. Either way, an organization can purposely shape its culture to better support transformation. There are four key elements to developing a high-performance culture. • Leverage existing strengths: Most change programs are aimed at altering a culture that has proven unsuccessful or slow. But when designing such a program, it’s important to identify those elements of the culture that are currently successful. Building on strengths and familiarity, where possible, can be a powerful source of energy and accelerate behavioral change.


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• Focus on a few critical behaviors: Don’t expect everyone in the organization to change everything they do. Focus on a few critical behaviors at different levels. Behaviors are tangible and specific, and through repetition they can help to change mind-sets. • Build a “viral” movement: Use viral methods to motivate employees and spread the cultural message. Along with traditional top-down communications about high-performance goals, peerto-peer and cross-organizational interactions, exemplars, and storytelling can build excitement about participation in the organizational change. • Integrate formal and informal mechanisms: Align the formal and informal elements of the orga-

nization to enable, sustain, and reinforce the new behavior for the high-performance culture and avoid unintentional dissonance among these levers. For instance, the company can tap key “influencers” or “exemplars” within the organization—those whose personal behavior advances the cultural ideal—to serve as ambassadors to promote their behaviors more widely. We helped one national payor design this approach for its call center and the results were dramatic, thanks to the influencers’ abilities to tap their internal networks to drive engagement and motivation, and their insights into which elements of the organization were already working (thus allowing the payor to leverage the current culture as much as possible).

Another payor looking to improve customer service wanted to instill a strong sense of pride in the day-to-day work of the call center. To do so, the company used both formal and informal levers. On the formal side, it defined new roles with the responsibility and power to create a new team environment and promote certain behaviors; the payor also identified new performance metrics for “customer focus” and “customer satisfaction with rep’s commitment.” On the informal side, the company started a “pride building” community. Ultimately, a high-performance culture is built on behaviors and mind-sets that encourage strong execution in several key performance areas (see Exhibit 2). For each of these, there are good behaviors that the organization


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aölkdfölk 32.8%

Exhibit 2 A High-Performance Culture Applies Behaviors and Mind-sets That Encourage Strong Execution in Key Performance Areas


TABLE Underperforming Culture Behaviors & Mind-sets - Culture tolerant of frequent defects - No clear idea where defects originate or strategy for mitigation - Attitude of “it’s always been done this way” - Rationalization and avoidance rather than confronting problems - Unnecessary escalation of minor problems - Lack of clarity around who can make decisions - Senior leadership’s behavior inconsistent and may undermine performance goals - Workers afraid to raise issues; culture of “shoot the messenger” - Knowledge silos Key Performance Areas High-Performance Culture Behaviors & Mindsets - Culture of zero defects and perfection - Clear mitigation strategies for fixing problems at the source - Belief that the organization is never done, always striving to improve - Looking to identify and solve problems - Framework in place defining degrees of freedom of the operator to find and implement solutions - Senior leadership visibly engaged


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Lines: 0, Lines for

Empowerment Engagement of senior leadership Trust Dissemination of knowledge Organizational participation Flexible job designations

- Workers can bring errors to the attention of senior management - CI capabilities built through training by teachers who have done it - Full participation of entire organization

Note: Please a otherwis file. These co


- Partial participation resulting in bottlenecks to efficiency and quality - Rigid job designations discourage departures from the standard routine

- People can do multiple jobs as a way to maintain flexible capacity and meet variations in demand

Source: Booz & Company analysis

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should emulate, and bad behaviors that it should avoid. 4. Metrics: Establishing and measuring metrics is critical to CI and allows the company to compare its performance with that of others in the industry. Three particularly valuable metrics include (1) a straight-through processing metric that measures the percentage of claims or other transactions that are never touched by human hands (from submission to processing to post-processing); (2) productivity metrics that measure how much time employees spend on their main functions, such as the percentage of time a customer service rep is on the phone; and (3) a self-service metric that measures usage and quality of low-cost self-service channels, such as the percentage of inquiries submitted to interactive voice response or Web self-service systems and resolved without human intervention. Many payors struggle with managing these and other metrics, and with this in mind we have identified several best practices. • Frequency: Too often metrics are measured infrequently or on ad hoc basis, if at all. Instead,

measurements need to happen at a rate that truly supports business needs. Sometimes quarterly measurements are sufficient, but real-time measurements are increasingly necessary. • Oversight: Instead of expecting the different business areas to track their own metrics and selfreport the results, the payor needs a centralized, unbiased oversight authority to collect data and publish results. • Technology: Payors must replace manual, inefficient, costly processes used to collect and report on key metrics. They should invest in automated systems and processes to collect data on a real-time basis. • Granularity: A common problem with data is that it is aggregated at such a high level that individual managers can’t act on the results. Instead, data and reporting need to be sliced on demand as finely as possible so managers can take specific actions on root causes and be accountable for doing so. 5. Accountability and incentives: Employees generally don’t deliberately act in a counterproductive

fashion; they don’t actively set out to derail a company’s strategy. Rather, they respond rationally to what they see, what they understand, and how they’re rewarded. The problem is that companies often send the wrong signals. For instance, when an appraisal system inflates performance ratings, it implies satisfaction with the status quo and makes it difficult to get employees to push hard at new goals. To drive accountability and results, payors need to assign clear responsibility for specific metrics and create incentive schemes designed to improve those metrics. Sometimes this will require overcoming significant employee resistance. But linking the company’s performance to individual performance and feeding real-time performance updates into management dashboards will enhance accountability and responsibility at all levels of the organization—and will encourage communication to keep goals on track. If employees know with greater certainty what’s expected of them, how they are being measured, and how they are being rewarded, performance will improve and the total cost of operations will decline.

If employees know what’s expected of them, how they are being measured, and how they are being rewarded, performance will improve and the total cost of operations will decline.


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PMO responsibilities include strategy, governance, methodology, resourcing, reporting, change management, and education. To keep the transformation on track, the office needs a mechanism to prioritize efforts, have line of sight across business units to enforce accountability, and establish metrics to track actions and drive improvement. Several operating model options exist for standing up lean-led or CI-type programs: • Workout projects: These projects have a small individual impact on return on invested capital (ROIC), but collectively make a big impact. Workout projects are short in duration (about three months) and get the right people together to solve problems, increase the individual ROIC per project, and help build awareness and acceptance of improvement methodologies.

• SWAT teams: These teams of experts focus on a single business problem. They are not used to build capabilities or reinforce culture, but their impact on the specific business problem can be sizable and quick. • Lean Six Sigma program: This program builds an internal capability (or process) for continual selfimprovement. Over several years, this capability becomes integral to the company’s culture and identity. Underlying all these options must be clear communication from executives about the transformation’s goals in order to align all the formal and informal levers in the organization. Once employees understand the goals and begin to witness success, momentum for change can build at all levels of the organization, spurring a culture of continuous improvement.

Once a payor decides to pursue a lean-led business transformation, leaders must mobilize the enterprise correctly and lay the appropriate groundwork. The first step is to estab lish a lean center of excellence and identify the experts who will serve as mentors to the individuals responsible for various performance improvements. The COE runs a program management office (PMO) to coordinate ongoing process improvement initiatives—for example, deciding where to cut costs or which initiatives should receive funding.

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Lean-led transformations are a new way for payors to achieve highperformance operations. Their power resides in moving payors away from a one-off approach— which often loses momentum and doesn’t establish permanent gains—to a more holistic, long-term, sustainable mind-set that focuses investment and other resources on the enterprise’s strategic priorities. By creating a culture of continuous improvement through the training

and empowerment of rank-andfile employees, the engagement of senior leaders, and the establishment of the right tools and metrics to understand performance, the payor makes the challenging of established processes and procedures a behavioral norm. At a moment when productivity is falling precipitously across the industry, the constant pursuit of excellence in the form of more efficient, less costly operations is vital.


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Thom Bales, Anil Kaul, Pier Noventa, and Frank Ribeiro, “The Fit for Growth Journey for Health Plans: A Strategic Framework for Winning a Two-Front War,” Booz & Company, June 2013, www.booz.com/global/home/what-we-think/reports-white-papers/ article-display/fit-for-growth-health-plan.

About the Authors Thom Bales is a partner with Booz & Company based in San Francisco. He specializes in operations, technology, and transformation strategy in the healthcare industry. Anil Kaul is a partner with Booz & Company based in Chicago. His areas of expertise are organizational design, performance measurement, process design, cost analysis, implementation of business process outsourcing/offshoring, and shared services. Pier Noventa is a partner with Booz & Company based in Chicago. He specializes in operating model transformation, lean operations, and technology strategy in the healthcare industry. Akshay Jindal is a principal with Booz & Company based in Chicago. His areas of expertise include healthcare payor effectiveness and efficiency improvement with a focus on sustainable Medicare business and technology operations.

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This report was originally published by Booz & Company in 2013.

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