Forecasting with Micro Panels: The Case of Health Care Costs

Publisher:
Wiley
Publication Type:
Journal Article
Citation:
Journal of Forecasting, 2017, 36 (1), pp. 1 - 15
Issue Date:
2017-01
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Micro panels characterized by large numbers of individuals observed over a short time period provide a rich source of information, but as yet there is only limited experience in using such data for forecasting. Existing simulation evidence supports the use of a fixed-effects approach when forecasting but it is not based on a truly micro panel set-up. In this study, we exploit the linkage of a representative survey of more than 250,000 Australians aged 45 and over to 4 years of hospital, medical and pharmaceutical records. The availability of panel health cost data allows the use of predictors based on fixed-effects estimates designed to guard against possible omitted variable biases associated with unobservable individual specific effects. We demonstrate the preference towards fixed-effects-based predictors is unlikely to hold in many practical situations, including our models of health care costs. Simulation evidence with a micro panel set-up adds support and additional insights to the results obtained in the application. These results are supportive of the use of the ordinary least squares predictor in a wide range of circumstances
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