Which independent variable has the largest effect on the gross drug costs?

Timp Health

Please follow the instructions for this case and respond in a question/answer format where no specific instructions are given. When other instructions are given (e.g. Part II asks for a memo), please follow those instructions.

Note: You can use any analytic tool that you think would work best but you must use Tableau for your visuals.

NOTE: BOTH THE DELIVERABLES REFERENCED IN THIS SHOULD IN VIA CANVAS

Scoring:

· Deliverable 1: 10 points

· Deliverable 2: 10 points

Background

You work for Timp Health, a large, for-profit managed health care company. The division within the company that you work for specializes in pharmacy benefit management (PBM). According to the American Pharmacists Association, “PBMs are primarily responsible for developing and maintaining the formulary, contracting with pharmacies, negotiating discounts and rebates with drug manufacturers, and processing and paying prescription drug claims. For the most part, they work with self-insured companies and government programs striving to maintain or reduce the pharmacy expenditures of the plan while concurrently trying to improve health care outcomes.”

For this case, you will focus specifically on drug costs related to Medicare Part D. Medicare Part D (also called the Medicare prescription drug benefit) subsidizes the cost of prescription drugs and drug insurance premiums for Medicare beneficiaries in the United States. The following diagram illustrates the role of PBM in the prescription fulfillment process. The PBM helps by working with members who have Medicare coverage and need pharmaceutical drugs, the pharmacy that fills drug prescriptions and the government that helps pay for the drugs.

image1

Information flows:

  1. Members pay a premium, usually monthly, to the PBM as part of Medicare.
  2. When members need drugs, they go to their doctor, receive a prescription and take their prescription to the pharmacy to have it filled.
  3. The pharmacy receives the prescription information from the member and, using the member’s medical ID card, contacts the PBM to find out if the drug prescribed is covered by the member’s insurance.
  4. The PBM tells the pharmacy if the drug is covered by the insurance plan and how much the member must pay as a co-pay.
  5. The member pays the co-pay amount to the pharmacy and receives their prescription.
  6. The PBM submits claims to the government for reimbursement through a formatted claims file. The government pays the PBM.
  7. Sometime later during the period, the PBM reviews all of the pharmacy’s drug disbursements and sends the pharmacy a check for the amount that the PBM and the pharmacy previously agreed to contractually as payment for each drug.

It is important to note several things about this information flow. The PBM adds value in a few ways. First, since the PBM works with many different members, the PBM is able to negotiate with the pharmacy to receive discounted drug prices. That is, the PBM negotiates with all pharmacies and because of the projected volume of purchasing, the pharmacies are willing to give the PBM, and thus the member, a discount. Second, the PBM manages the information around (and helps determine) what is covered by insurance.

As already mentioned, the PBM is a for-profit entity. To make money, the PBM must have revenues that exceed the gross costs of the drugs prescribed to members, plus other business costs (e.g., salaries, administration costs). In this arrangement, on a short-term basis, the PBM has a limited ability to control the revenues and gross costs of the drugs, but it can control other business costs. Thus, it becomes very important for the PBM to understand revenues and gross drug costs so it can make informed business decisions about the other business costs.

Part I

Your role at Timp Health is to forecast the monthly gross drug costs. To do this, you have been given six months’ worth of data about previous drug costs, including several factors that are expected to influence the gross drug costs. See the appendix for a detailed description of the data.

Your job is to investigate which factors are important for determining the gross drug costs and create a model that predicts drug costs so you have better information to manage your other business costs. You recognize that the best tool for this analysis is regression, which is designed to determine the relationship between an independent variable (or multiple independent variables) and a dependent variable (in this case, the monthly gross drug costs).

Before asking you to forecast the gross drug costs, Timp Health had several other employees attempt the same task. Below, you will find three models they tried, as well as corresponding questions you need to answer about the different models. Upon receiving this assignment from your boss, you recognize that you will need to exercise an analytics mindset to respond to his request. As a reminder, an analytics mindset is the ability to:

· Ask the right questions

· Extract, transform and load relevant data

· Apply appropriate data analytics techniques

· Interpret and share the results with stakeholders

Required

· DELIVERABLE 1: Using the complete data provided (Analytics_mindset_case_studies_Timp_Health_PartI.txt), estimate the gross drug costs using each model and answer the questions. Note that you should not change anything in the data (e.g., remove outliers).

Model 1: GrossDrugCost = B0 + B1 * RiskScore + ε

  1. Provide a statistical interpretation of the coefficient, standard error, T-stat and P-value for the RiskScore variable. Provide a practical explanation of the information to senior management.
  2. Provide a statistical interpretation of the coefficient, standard error, T-stat and P-value for the intercept. Provide a practical explanation of the information to senior management.
  3. Provide a statistical interpretation of the adjusted R-squared value. Explain what it means in a statistical way and provide a practical explanation of the information to senior management.
  4. A coworker wants to know what the predicted gross drug costs would be for a new member. The new member is a 73-year-old man who the government classifies as frail and he has a risk score of 510. Using the model above, what would you predict the gross drug costs will be?
  5. Based on the data in the last problem, what range of values would make you 95% confident that the range represents the actual gross drug costs of the new member?

Model 2: GrossDrugCost = B0 + B1 * RiskScore + B2 * Age + B3 * Gender + ε

  1. Provide a statistical interpretation of the coefficient, standard error, T-stat and P-value for the gender variable. Provide a practical explanation of the information to senior management.
  2. Provide a statistical interpretation of the coefficient, standard error, T-stat and P-value for the age variable. Provide a practical explanation of the information for senior management.
  3. Explain why the coefficient, standard error and T-stat for the RiskScore variable are different in this model than they were in Model 1.
  4. Provide a statistical interpretation of the coefficient, standard error, T-stat and P-value for the intercept. Provide a practical explanation of the information to senior management.
  5. Compare the adjusted R-squared values between Models 1 and 2. Are they the same or different? Why? What could you conclude about the differences (if any) in the adjusted R-squared values?
  6. Senior management wants to know the expected gross drug costs of the average customer. That is, for the median value of the RiskScore, age and gender, what would you expect the average gross drug costs to be? What is the 95% confidence interval for this estimate?
  7. Which independent variable has the largest effect on the gross drug costs?

Model 3: GrossDrugCost = B0 + B1 * RiskScore + B2 * SpecialtyDummy + B3 * RiskScore * SpecialtyDummy + ε

  1. Interpret the output for senior management in memo form using at least two visualizations.

Appendix

Data descriptions

RecordID – Primary key from the database that is a unique number for each row of data

MemberID – A unique ID for each different member

Month – The month to which the data pertains, listed in numeric format as 1 for January, 2 for February, etc.

GrossDrugCost – The total amount of drug costs incurred by a member during the corresponding month

NLISDummy – A dummy variable that takes the value of 1 if the member is listed as non-low income by the government and 0 otherwise

LISCHOSERDummy – A dummy variable that takes the value of 1 if the member chose a specific plan and 0 if the member automatically was assigned a plan, i.e., members automatically are assigned (thus, LISCHOSERDummy = 0), but some members take the initiative to choose a specific drug plan other than one assigned (thus, LISCHOSERDummy = 1)

RiskScore – A score assigned by the government based on previous government data indicating how sick someone is, higher scores indicate members are sicker

SpecialtyDummy – A dummy variable that takes the value of 1 if the member utilizes specialty drugs and 0 otherwise

AdjudicationDays – The number of non-holiday workdays in a month

Age – The age of each member during the month

Gender – A dummy variable that takes the value of 1 if the member is female and 0 if the member is male

FrailtyDummy – A dummy variable that takes the value of 1 if the government indicates the member is frail and 0 if the government indicates the member is not frail

HospiceDummy – A dummy variable that takes the value of 1 if the member is receiving hospice care and 0 if they are not

InstitutionDummy – A dummy variable that takes the value of 1 if the member is receiving institutionalized long-term care (e.g., hospital, nursing facility) and 0 if they are not

ESRDDummy – A dummy variable that takes the value of 1 if the member is receiving care for end-stage renal disease (i.e., end-stage kidney disease) and 0 if they are not

Timp Health

Part II

Now that you have considered models developed by other employees, your task is to create the best model you can for predicting the gross drug costs. For purposes of this assignment, the best models are those that have the smallest prediction errors for future realized drug costs. That is, you will use the model you developed for the six months’ worth of data provided and predict the gross drug costs for the next month using your model coefficients.

Required

· DELIVERABLE 2: Create your best regression model based on the data to predict the future gross drug costs.

· Submit a brief memo that contains the standard regression output (coefficients, T-stats, P-values, adjusted R-squared, etc.). You must include at least two visualizations as part of your memo.

· Explain to senior management what you learned from your model that will be valuable in operating the PBM business.

· Also include any cautions that senior management should understand about using this model.

Members

PBM (also acting as an insurance provider)

Pharmacy

Government

1

2

3

4, 7

5

6

� “Pharmacy Benefit Management,” American Pharmacists Association website, � HYPERLINK “http://www.pharmacist.com/sites/default/files/files/Profile_26%20PBM%20Final%20071213.pdf” �http://www.pharmacist.com/sites/default/files/files/Profile_26%20PBM%20Final%20071213.pdf�, accessed May 30, 2017.

� This diagram is simplified by assuming the PBM and the insurance provider are the same entity. This is common in practice but not uniform because some providers contract with a PBM. For purposes of this case, assume that the PBM and the insurance provider are the same.

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