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Looking ahead to 2018: Interest rates, health care costs and M&A all on the rise

By , - Last modified: December 15, 2017 at 12:09 PM
2018 Outlook at Blue in Bethlehem Township.
2018 Outlook at Blue in Bethlehem Township. - (Photo / )

Next year, health care costs will rise; the predicted federal interest rate hikes will bring market uncertainty, and a proposed tax bill offers a mixed bag of benefits and drawbacks, while the merger and acquisition market will heat up, particularly for technology companies.

These were a few of the main insights shared at a panel discussion at Lehigh Valley Business’ 2018 Outlook this morning at the Event Center at Blue in Bethlehem Township.

[For photos of the event click HERE]

The event attracted about 100 executives looking for insights on what their businesses can expect in the coming year, with topics that focused on health care costs for employers, proposed tax cuts, M&A activity and the impact of federal interest rate increases.

HEALTH CARE INSURANCE

With health care, employers should prepare for rising costs.

“From our standpoint, we don’t see anything that’s going to bring those costs down,” said Shawn Hughes, vice president of BSI Corporate Benefits of Bethlehem, and a panelist. “Costs are going to go up; health care is very expensive.”

The issue is really the health of this country, Hughes said. With average life expectancy going down and obesity rates rising, along with the high cost of pharmaceutical drugs, costs for employers will continue to increase.

However, employers can use strategies to reduce costs such as charging more for health coverage for employees who smoke and encouraging annual checkups and the use of telemedicine to diagnose medical conditions to reduce the number of claims for high-cost emergency room visits, according to Hughes.

Also, Hughes said, employers should be aware that the Internal Revenue Service is going after employers who have not offered health benefits compliant with the Affordable Care Act. Those companies who haven’t could face fines or penalties.

The Cadillac Tax calls for imposing a 40 percent excise tax on higher-cost individual and family health insurance policies, originally beginning in 2018 and now delayed to 2020, Hughes said. The tax would be imposed on government and private-sector employers.

“It’s a law that begins in 2020,” Hughes said.

Employers should start doing their Cadillac Tax projections to make sure they are under that threshold, Hughes said, noting that 2020 is right around the corner.

MERGERS AND ACQUISITIONS

The amount of companies buying related companies, known as convergence, is a trend that’s expected to be a big theme in 2018, said Colin Keefe, shareholder for Fitzpatrick Lentz & Bubba of Upper Saucon Township.

“We’ve all seen a number of practices being bought up by St. Luke’s and Lehigh Valley Health Network,” Keefe said. “That is starting to run its course and that’s called consolidation.”

In the financial industry, banks will continue to consolidate, but the region will also see an increase in banks acquiring related companies such as financial advisers and wealth management firms, Keefe said.

In the national M&A market, several trends will drive growth on the buyer side, including the potential interest rate increases and proposed tax bill, which are going to increase cash on hand for companies, Keefe said. Overall, economic confidence is still high, he added.

“The time is now for buyers,” Keefe said. “We expect that to be a positive driver for M&A in 2018. It’s a good time to strike if you are a buyer or a seller.”

The health care and financial services industries are both areas that will have a lot of activity, Keefe said.

Technology acquisitions will be big in 2018, as well, particularly companies that want another company’s technology incorporated into their product, he said. The way they will do it is by buying the company.

Divestitures and spinoffs of companies should continue and be a driver of M&A activity, Keefe said. The assisted living industry is going through a major period of consolidation, and general health care mergers and acquisitions will be very active, he said.

INTEREST RATES

The Federal Reserve predicts three interest rate hikes next year and into 2019 and beyond, said John Miller, chief operating officer of First Commonwealth Federal Credit Union, based in Hanover Township, Northampton County. The Federal Reserve wants to get the interest rate up to 2.75 percent, and the market predicts a 60 percent chance of an economic recession in 2019, Miller said.

“Inflation has remained lower than what the Fed wants,” Miller said. “The employment market has been great in the Lehigh Valley. The wild card is inflation. We are still running well under 2 percent.”

Normally in a tight labor market, employers would be paying more wages, but that hasn’t been seen, he said.

The other wild card is the makeup of the Federal Reserve board, with Jerome Powell replacing Janet Yellen as chairperson.

With interest rates rising, businesses should be aware of a potential slowing of the economy, not next year but possibly 2019, Miller said.

Employers should also determine if their employees have the knowledge partners to help them navigate through an interest rate cycle such as this, Miller said.

TAX BILL

As the proposed tax bill moves through Congress, with a Senate and House vote planned for next week, Republicans are making several changes throughout the process on a daily basis.

Tony Deutsch, shareholder of tax services for Concannon Miller & Co. of Hanover Township, Northampton County, shared details of the proposed changes in the tax bill.

The general recommendation for individuals is to accelerate deductions into 2017 and defer income into 2018, Deutsch said.

For businesses, the proposed corporate tax rate is a 21 percent flat tax rate. Also, anti-abuse rules will be put in place to prevent businesses from converting from a pass-through entity to a corporation.

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Brian Pedersen

Brian Pedersen

Reporter Brian Pedersen covers construction, development, warehousing and real estate and keeps you up to date on the changing landscape of our community. He can be reached at brianp@lvb.com or 610-807-9619, ext. 4108. Follow him on Twitter @BrianLehigh and read his blog, “Can You Dig It,” at http://www.lvb.com/section/can-you-dig-it.

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