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Regression 3: Medical Supplies Costs A + (B: Summary Output

Julie and Rhett discuss using both the number of procedures and number of patient-hours as factors to estimate medical supplies costs in a multiple regression analysis. A regression is run using both as independent variables, finding number of patient-hours significant but number of procedures not significant. While the multiple regression fits the data well, it does not improve the estimation over a simple regression using just patient-hours, and introduces issues of multicollinearity between the independent variables. The simple regression is recommended.

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Elliot Richard
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210 views2 pages

Regression 3: Medical Supplies Costs A + (B: Summary Output

Julie and Rhett discuss using both the number of procedures and number of patient-hours as factors to estimate medical supplies costs in a multiple regression analysis. A regression is run using both as independent variables, finding number of patient-hours significant but number of procedures not significant. While the multiple regression fits the data well, it does not improve the estimation over a simple regression using just patient-hours, and introduces issues of multicollinearity between the independent variables. The simple regression is recommended.

Uploaded by

Elliot Richard
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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After further discussion, Julie and Rhett wonder if they should view both the number of

procedures and number of patient-hours as cost drivers in a multiple regression estimation in


order to best understand Apollo’s medical supplies costs.

Required:
1. Conduct a multiple regression to estimate the regression equation for medical supplies costs
using both number of procedures and number of patient-hours as independent variables. You
should obtain the following result:

Regression 3: Medical supplies costs = a + (b × No. of procedures) + (b × No. of patient-hours)


1 2

Variable Coefficient Standard Error t-Value


Constant –$3,103.76 $30,406.54 –0.10
Independent variable 1: No. of procedures     $     38.24 $     100.76   0.38
Independent variable 2: No. of patient-hours     $     54.37 $       10.33   5.26
r = 0.84; Durbin-Watson statistic = 1.96
2

2. Evaluate the multiple regression output using the criteria of economic plausibility goodness of
fit, significance of independent variables, and specification of estimation assumptions.
3. What potential issues could arise in multiple regression analysis that are not present in simple
regression models? Is there evidence of such difficulties in the multiple regression presented in
this problem? Explain.
4. Which of the regression models from Problems 10-42 and 10-43 would you recommend Julie
Chen use? Explain.

SOLUTION

(30 min.)  Multiple regression (continuation of 10-42).

1.  Solution Exhibit 10-43 presents the regression output for medical supplies costs using both
number of procedures and number of patient-hours as independent variables (cost drivers).  

SOLUTION EXHIBIT 10-43


Regression Output for Multiple Regression for Medical Supplies Costs Using Both Number of
Procedures and Number of Patient-Hours as Independent Variables (Cost Drivers)

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.91806327
R Square 0.84284017
Adjusted R
Square 0.80791577
Standard Error 27661.7936
Observations 12

ANOVA
Significance
  df SS MS F F
1.85E+1
Regression 2 36932343254 0 24.13 0.00
7.65E+0
Residual 9 6886573413 8
Total 11 43818916667      

Coefficient Standard P- Upper


  s Error t Stat value Lower 95% 95%
Intercept -3103.76 30406.54 -0.10 0.92 -71888.13 65680.61
X Variable 1 38.24 100.76 0.38 0.71 -189.68 266.17
X Variable 2 54.37 10.33 5.26 0.00 31.00 77.73

2.  
Economic  A positive relationship between medical supplies costs and each of the
plausibility independent variables (number of procedures and number of patient-
hours) is economically plausible.
Goodness of fit r = 84%, Adjusted r = 81%
2 2

Standard error of regression =$27,662


Excellent goodness of fit.
Significance of The t-value of 0.38 for number of procedures is not significant at the 0.05
Independent level.  The t-value of 5.26 for number of patient-hours is significant at
Variables the 0.05 and 0.01 levels.  
Specification  Assuming linearity, constant variance, and normality of residuals, the
analysis of Durbin-Watson statistic of 1.96 suggests the residuals are independent.  
estimation However, we must be cautious when drawing inferences from only 12
assumptions observations.

3.   Multicollinearity is an issue that can arise with multiple regression but not simple regression
analysis.  Multicollinearity means that the independent variables are highly correlated.  

The correlation feature in Excel’s Data Analysis reveals a coefficient of correlation of


0.61 between number of procedures and number of patient-hours.  This is close to the threshold
of 0.70 that is usually taken as a sign of multicollinearity problems.  As evidence, note the
substantial drop in the t-value for patient-hours from 7.25 to 5.26, despite a fairly small change
in the estimated coefficient (from $56.76 to $54.37).

4.  The simple regression model using the number of patient-hours as the independent variable
achieves a comparable r to the multiple regression model.  However, the multiple regression
2

model includes an insignificant independent variable, number of procedures.  Adding this


variable does not improve Apollo Hospital’s ability to better estimate medical supplies costs and
it also introduces multicollinearity issues.  Julie should use the simple regression model with
number of patient-hours as the independent variable to estimate medical supplies costs.

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