Six Sigma

Reducing Pricing Variance from 18% to 5%

Deming provides philosophical foundation, but Six Sigma's DMAIC framework delivers tactical execution. Developed at Motorola and popularized through GE, DMAIC offers structured problem-solving for data-intensive challenges (Pyzdek & Keller, 2024). OptumRx's pricing variance problem is ideal for Six Sigma: measurable quality, identified requirements, quantifiable defects, controllable inputs (George et al., 2023). 

Figure 1: Pricing Variance Reduction Workflow

The swim lane diagram shows five phases with distinct colors: Define (blue), Measure (green), Analyze (yellow), Improve (orange), Control (red). Activities flow through rectangles, decisions through diamonds, data through parallelograms. Arrows connect steps sequentially, stars mark milestones, and a feedback loop from Control to Define establishes continuous improvement.

Define Phase: Weeks 1 to 2

OptumRx pricing variance averages 18% between quoted and actual costs, exceeding industry benchmarks of 3% to 5% and driving client dissatisfaction. The goal is reducing variance to 5% or less within 12 months through standardization and automation (Pyzdek & Keller, 2024). The scope focuses on the top 500 medications representing 80% of volume, covering quote generation, reconciliation, and rebate calculation.

Voice of Customer interviews with 50 clients revealed 82% cite unpredictability as their primary concern. Clients value accuracy over absolute price levels and will accept higher costs if predictable (Brue & Howes, 2023).

Measure Phase: Weeks 3 to 6

Current state analysis reveals pricing involves 7 systems, 23 handoffs, and 15 manual verifications, with a 6.2 day cycle time (Montgomery, 2023). Baseline data from 50,000 quotes between January and June 2024 shows mean variance of 18.3%, standard deviation of 12.7%, and range from negative 34% to positive 47%.

Process capability measures 1.8 sigma with 93,319 defects per million opportunities. The 4.5 sigma target would reduce defects to 1,350 per million, requiring 98.6% improvement (Breyfogle, 2023).

Analyze Phase: Weeks 7 to 12

Pareto analysis shows seven categories drive 87% of variance: rebate errors (28%), generic substitution (19%), network misalignment (14%), specialty routing (11%), formulary changes (8%), plan interpretation (7%), and integration failures (5%).

Root causes include manual processes prone to error, a 15-year-old pricing engine, batch processing, no real-time monitoring, insufficient training, and 32% annual turnover (George et al., 2023). Statistical validation confirms rebate automation reduces variance 68% (p less than 0.001), real-time integration 47% (p less than 0.001), training 31% (p less than 0.01), and standardization 44% (p less than 0.001).

Improve Phase: Weeks 13 to 36

The solution deploys a next-generation pricing engine with real-time integration, automated calculation, intelligent substitution, and continuous monitoring. Process redesign eliminates 11 of 15 manual steps and reduces handoffs from 23 to 9. A client portal provides transparency, and an 80 hour certification program ensures analyst competency (Pyzdek & Keller, 2024).

Phased pilots validated the approach. Phase 1 with 10 large accounts achieved 4.8% variance and 74% improvement. Phase 2 with 30 mid-market accounts reached 5.4% variance and 70% improvement. Phase 3 with 150 small accounts delivered 6.2% variance and 66% improvement. All phases met success criteria (Breyfogle, 2023).

Control Phase: Weeks 37 to 52

Statistical control establishes an upper limit of 8%, target of 5%, and lower limit of 2%. Variance outside these limits triggers immediate investigation (Montgomery, 2023).

Infrastructure includes a real-time dashboard tracking variance, trends, control status, root causes, and corrective actions. Quarterly external audits validate measurement systems. Monthly internal audits sample 500 transactions. Annual reviews assess control effectiveness and identify refinement opportunities (Brue & Howes, 2023).

Business Case: 1,759% ROI

Total investment of $13.5 million includes technology ($8.2 million), redesign ($1.4 million), training ($2.1 million), and management ($1.8 million). Annual benefits of $251 million comprise retention ($180 million), efficiency ($24 million), disputes ($12 million), and compliance ($35 million).

First year ROI reaches 1,759% with 0.6 month payback. Net present value over five years at 8% discount totals $982 million, validating the investment while delivering satisfaction improvements and risk mitigation (Pyzdek & Keller, 2024).

Integration with Deming

Six Sigma operationalizes Deming's principles. Define operationalizes constancy of purpose, Measure implements cease inspection, Analyze embodies improve constantly, Improve demonstrates adopt philosophy, and Control establishes institute leadership. Together, Deming's cultural transformation and Six Sigma's process discipline create comprehensive architecture (George et al., 2023).