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
· Deliverable 1: 10 points
· Deliverable 2: 10 points
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.
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.
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
· 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
Model 2: GrossDrugCost = B0 + B1 * RiskScore + B2 * Age + B3 * Gender + ε
Model 3: GrossDrugCost = B0 + B1 * RiskScore + B2 * SpecialtyDummy + B3 * RiskScore * SpecialtyDummy + ε
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
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.
· 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.
PBM (also acting as an insurance provider)
� “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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