Predictive Modeling with Longitudinal Data

The recent development and availability of sophisticated computer software has facilitated the use of predictive modeling by actuaries and other financial analysts. Predictive modeling has been used for several applications in both the health and property and casualty sectors. Often these applications employ extensions of industry-specific techniques and do not make full use of information contained in the data. In contrast, we employ fundamental statistical methods for predictive modeling that can be used in a variety of disciplines. As demonstrated in this article, this methodology permits a disciplined approach to model building, including model development and validation phases. This article is intended as a tutorial for the analyst interested in using predictive modeling by making the process more transparent.This article illustrates the predictive modeling process using State of Wisconsin nursing home cost reports. We examine utilization of approximately 400 nursing homes from 1989 to 2001. Because the data vary both in the cross section and over time, we employ longitudinal models. This article demonstrates many of the common difficulties that analysts face in analyzing longitudinal health care data, as well as techniques for addressing these difficulties. We find that longitudinal methods, which use historical trend information, significantly outperform regression models that do not take advantage of historical trends.