2015 Economic Forecasts

New Year Trends to Help Your Business

On Dec 15, 2014

A rising stock market, lower gas prices, a rising GDP, a slowly falling unemployment rate, an end of the Federal Reserve’s quantitative easing practice, the Republican Party gaining a majority in the US Senate and holding its strong majority in the House of Representatives, the continued saga of the Affordable Care Act, Atlantic City casino closings, the Ebola virus, the ISIS terror threat … what a year it’s been for US and New Jersey companies, small and large, to conduct business. No one can accurately predict what path the economy will take in the new year, but in our annual 2015 Economic Forecasts, respected economists and industry leaders look into the crystal ball and give it their best shots. The following prognostications on the New Jersey economy, energy prices, healthcare costs, small business growth, banking, the stock market and commercial real estate are presented so that our readers can cross the threshold into 2015 with a better understanding of economic trends. As always, our goal in delivering these forecasts is to help businesses succeed in the Garden State.

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The Economy

By James W. Hughes and Joseph J. Seneca of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University

The Great Recession officially ended in the US in June 2009. Thus, the nation’s current economic expansion will be 5.5 years old in December 2014 – fully 66 months in length. To put this into perspective, the average length of all post World War II economic expansions in the US (58 months) would suggest that the current one is quite mature, and perhaps living on borrowed time. However, a more appropriate metric may be the average length (95 months) of the three expansions that immediately preceded the Great Recession. This suggests that our current expansion is still quite youthful.

Nonetheless, it is far from robust in New Jersey. The state had appeared to be gaining momentum after the nadir of 2009, when private-sector employment was still hemorrhaging (-114,400 jobs). The years 2010 (+8,200 jobs), 2011 (+28,800 jobs) and 2012 (+45,400 jobs) all showed steady year-by-year employment improvement. And, based on the first six months of 2013, the state was on track to gain 62,800 jobs for the year. However, as we noted last year, during the summer, somebody hit the economic pause button. While we expected a slowdown, we did not expect absolute employment losses. But, an actual decline (-11,600 jobs) did occur during the last six months of 2013, reducing the total growth for the year to a disappointing 19,800 jobs. Thus, 3.5 years of positive employment momentum ended. The state found itself with negative employment momentum entering 2014.

But, that was not the end of the setbacks. The first quarter of 2014 was negatively affected by the severe winter weather. Although positive growth did return, the quarter registered an increase of only 600 jobs. Seemingly, the soft patch then ended in the second quarter; employment increased by a very strong 18,500 jobs (which translates into an annual pace of 74,000 jobs). This momentum continued into the first month of the third quarter – the July increase alone totaled 8,300 jobs. It appeared that somebody finally hit the economic refresh button. Unfortunately, this was not the case – the bounce back was quickly cut short as the negative employment ramifications of casino closings began to be felt. The final third quarter tally showed a net employment loss (-5,100 jobs).

So, 2014 to date has been quite erratic – a strong growth spurt (March through July) sandwiched between two economic soft spots. Nonetheless, at the nine-month mark (September 2014), the private-sector employment gain did reach 24,200 jobs, surpassing the full year increase of 2013 (+19,800 jobs). If this nine-month pace is maintained through the fourth quarter, 2014 could see an employment increase of approximately 32,300 jobs. Thus, New Jersey should enter 2015 with modest employment-growth momentum.

At this stage of the economic expansion, New Jersey is still lagging behind the US. The nation lost almost 8.8 million private-sector jobs during the Great Recession and its aftermath, the worst setback since payroll employment statistics were first compiled in 1939. But, by March 2014, all of these losses were recovered. And, by September 2014, the nation’s private-sector employment base was 13.3 percent higher than its pre-recession high (December 2007). In contrast, by September 2014, New Jersey had recovered only 61.2 percent (+148,400 jobs) of its recessionary private-sector employment losses (-241,000 jobs). Thus, the state still needs to gain 92,600 jobs to get back to its pre-recession employment peak. Most likely, this will take until 2017.

However, absent a severe global slowdown, there are a number of factors that could bolster New Jersey’s economy in 2015. A major tailwind is the strong employment growth momentum of the US. The nation will enter 2015 with four straight years (2011 through 2014) of private-sector employment growth averaging more than 2.4 million private-sector jobs per year. This more than matches the average annual gains achieved during the record 120-month-long expansion of the 1990s (March 1991-March 2001). The state’s casino industry should finally be stabilized by 2015; the difficult post-monopoly resizing in response to the new competitive gaming market may finally have run its necessary course. This may also be the case for New Jersey’s pharmaceutical industry, assuming that the negative employment impacts of mergers and acquisitions are now fully in the past. Manufacturing, which includes pharma, may also have finally stabilized in total.

Manufacturing now represents just 6.4 percent of the state’s total employment base, the result of very long-term job shrinkage. However, manufacturing accounted in 2013 for approximately 8.2 percent (or $42 billion) of New Jersey’s total economic output ($509 billion). Thus, it is a high value-added component of the state’s economy whose output has actually increased during the last year for which we have data, from $41.5 billion in 2012 to $41.7 million in 2013.

Other positives that should impact 2015 are several strong real estate sectors. Housing is on an upward trajectory, led by strong multi-family construction. Industrial-warehouse-distribution-logistics markets are quite strong, as is the data center sector. Taken together, all of these factors suggest that 2015 could surpass the performance of 2013 and 2014.

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Energy 

By Rasika Athawale & Frank A. Felder, Center for Energy, Economic and Environmental Policy, Rutgers University

Deflation and the weakening of global economies, the impact of severe weather on infrastructure reliability and the resiliency – and renewed focus on – a cleaner economy are expected to be the key themes dominating the US energy sector in 2015.

Globally, strong supply and weak demand has made oil the biggest bear market since 2009. According to the International Energy Agency (IEA), the US’ total liquid output has continued to exceed Russian and Saudi Arabian oil supplies and is expected to produce 12.0 million bpd (barrels per day), through December 2015. Pressure on prices, however, could make US shale oil producers reduce domestic production, which according to experts, will occur once oil prices fall below $80 per barrel. Until then, consumers stand to benefit from lower prices (pump prices in the US are the lowest since 2011). According to a rule of thumb, every one-cent drop in the price of gasoline adds up to $1 billion to US household incomes. The US Energy Information Administration (EIA), in its Short-Term Energy Outlook (released October 7, 2014), projects the annual average gasoline retail price to go down from $3.45 per gallon in 2014 to $3.38 per gallon in 2015.

Natural gas prices (Henry Hub spot price) are also expected to be lower as compared to last winter ($4.00 per MMBTU in December 2014 versus $4.53 per MMBTU in December 2013) as per the EIA. This is in spite of lower natural gas inventories, which were about 11 percent lower in September 2014 when compared to the previous year. The EIA expects that a lower heating demand – and steady-to-higher natural gas production – will keep natural gas prices in check in the early months of 2015.

Reduction in prices and a milder winter (as compared to 2013, which was 11 percent colder than the previous 10 year national average) should help consumers limit their expenditure on propane and heating oil, as well as natural gas and electricity. The EIA predicts that the average household should experience a reduction of 27 percent in propane costs, 15 percent in heating oil costs, 5 percent on natural gas and 2 percent less spending on electricity. According to the National Oceanic and Atmospheric Administration (NOAA), heating degree days this winter will be 12 percent lower than the last winter, which witnessed prolonged and severe winter due to a polar vortex.

However, a lack of natural gas pipeline capacity can limit the downward impact on prices, especially electricity prices in the PJM market. As per the region’s wholesale electricity market operator’s (PJM) State of the Market report for 2014, gas plants constituted about 41 percent of the marginal run resources, whereas coal units accounted for 48 percent of the marginal resources during the first six months of 2014. Natural gas pipeline supply challenges can quickly lead to supply shortages, thereby causing a temporary spike in electricity prices in the New York/New Jersey region. Per a study by ICF, natural gas in the NY/NJ region touched a high of $90/MMBTU and later peaked at $120/MMBTU during the January 2014 polar vortex, a steep rise from the average prices (normal winter average of $13/MMBTU), and an aberration when compared to prices in regions as close as Pennsylvania (Leidy) and the Gulf Coast (Henry Hub). In conjunction, the wholesale electricity prices in NY/NJ crossed $600/MWh during the same period.

Infrastructure disruption as a result of severe weather has been a growing concern for energy policy makers and utilities. Retail prices of energy (both electricity and natural gas) are not just affected by commodity prices, but by infrastructure investments as well. This year, the New Jersey Board of Public Utilities approved PSE&G’s $1.2-billion Energy Strong proposal for infrastructure upgrades, which involves various projects such as raising and relocating substations, replacing gas pipe lines, upgrading meters and creating more redundancy in the system. JCP&L, another electric utility serving consumers in New Jersey, announced plans to invest $250 million and has completed various upgrades to enhance reliability on major circuits in nine counties. New Jersey electricity and gas retail prices may rise, depending upon the final costs of upgrades and their phasing in over the years to come. There is a possibility that the negative change in retail prices, due to lower commodity costs, might be offset in part due to a much higher increase in transmission and delivery costs.

New Jersey has maintained its ambition for creating a cleaner economy through legislative support such as the Energy Master Plan. Recently, there has been a call for greater action by clean energy advocates, particularly solar energy developers and financiers. The state’s Senate Environment and Energy Committee is considering a bill (S-2444) that requires 80 percent of New Jersey’s electricity to come from renewable energy sources by 2050. An increase in the share of renewable energy resources can result in a higher subsidy burden on the rate payers and an increase in retail electricity prices. According to Stefanie A. Brand, Esq., director, Office of Rate Counsel, New Jersey, the bill (if approved) would burden the ratepayers with $2.8 billion.

Overall, the energy sector in New Jersey and its impacts on consumers and businesses depend upon a variety of global and domestic macroeconomic factors. If the predictions for a warmer winter are accurate, the retail prices should not rise much in 2015.

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Commercial Real Estate 

By Michael G. McGuinness, Chief Executive Officer, NAIOP New Jersey

With a lot of new product out there, it feels like 2006 again, according to one of NAIOP’s leading brokers. As New Jersey re-emerges from the recent recession, rising consumer confidence, major improvements to the state’s transportation infrastructure (such as the New Jersey Turnpike widening) and the new custom-tailored incentive programs that are attracting businesses from around the globe, have combined to create a marked increase in the number of transactions.

The real beneficiary of this rising tide, however, is the industrial market which is ablaze with activity. This sector includes warehouse and distribution centers that are integral to the logistics industry that accounts for more than 11 percent of the state’s GDP. It is the only industry in New Jersey in which we can have complete confidence in its future growth.

With US e-commerce sales rising exponentially (projected to be 9.5 percent annually through 2018) and given the consumer preferences of the new demographics for same day and next day delivery, a first-class port, an international airport, the state’s intricate network of rail, highways and mass transit, and New Jersey’s prime location with close proximity and easy access to the nation’s largest consumer market, no one should be surprised with industrial real estate prowess.

Demand for industrial space from third-party providers, big-box retailers and the food and beverage industry is increasing throughout New Jersey, from the Meadowlands in the north down along the New Jersey Turnpike corridor, and westward and southward along I-195 and I-295. Vacancy rates are dropping and asking rents are rising, especially among the larger and more modern facilities in the central and southern counties.

Industrial space vacancy rates range from 7.6 percent in the north, to 8 percent in Central Jersey, to 11 percent in South Jersey. However, they are as low as 2 percent for Class A space in the south. Comparatively speaking, Pennsylvania’s Lehigh Valley is posting a 3.6 percent vacancy rate. Net absorption of industrial space statewide in 2014 is expected to exceed seven million square feet. Speculative construction is gaining substantial momentum again, especially in the southern half of the state.

Port region investments are also fueling industrial demand. The Port Authority of New York and New Jersey (PANY&NJ) has begun $117 million in upgrades to the port roadway network, and is investing in improvements of the port’s efficiency, security and environmental footprint. The PANY&NJ plans to spend another $248 million over the next 10 years at its bi-state facilities. Also, raising the Bayonne Bridge to ensure that Post-Panamax cargo ships can navigate the port when the Panama Canal project is complete in 2016, along with expanding the Goethals Bridge to alleviate congestion on roadways in the northern port region, are huge plusses.

Worth noting is Amazon’s decision to invest in New Jersey with a new 1.2 million-square-foot mega-warehouse in Robbinsville, from where it shipped its first orders this past summer. The project was enhanced by a public-private partnership that had Mercer County, the township and the Greater Mercer Transportation Management Association pooling nearly $200,000 — including $80,000 from Amazon and $90,000 from a federal grant — to establish the ZLine, a free shuttle service that will bring commuters from the Hamilton Marketplace to the Matrix Business Park. And Amazon, which is also in Woodbridge and Logan townships, is seeking more sites in New Jersey.

In contrast, the state’s office market overall seems stuck in neutral due to marginal job growth, worsened by corporate consolidations and relocations. There are, however, significant regional differences in a number of submarkets. While the northern counties are not expected to bottom out until later in 2015, Central New Jersey (i.e., Princeton, the Route 1 corridor, etc.) is already seeing a rising market with landlords gaining leverage to raise rents as vacancies decrease.

While office vacancies for Class A space range from as high as 33 percent in Morris County, they are only 14 percent along the Hudson County waterfront, 17 percent in the Princeton/Route 1 area, and 18 percent in Metropark. On average, the northern counties are averaging 27 percent vacancies (slightly higher than last year) with office space in the central counties faring better at 23 percent vacancy (lowest in eight years).

There is considerable movement in distressed assets, which will continue throughout 2015 as much of the obsolete 40-year-old suburban office stock is being targeted for gut rehabs and adaptive reuse to more marketable and creative mixed-use projects that are more attractive to the Millennials that comprise a larger share of today’s workforce. A desire for denser and more efficient work space is driving interest in smaller (5,000- to 10,000-square-foot) spaces. Suburban office continues to struggle, but the overall office market saw over 1.4 million square feet of absorption through the third quarter of 2014.

The newer and refurbished buildings will feature heavier power, multiple uses and extensive common areas for social collaboration. The Millennial generation’s desire and need for a more affordable, more simple, connected and car-free lifestyle will compel municipalities to re-examine and update their outdated planning and zoning ordinances to provide for mixed-use developments that feature the live/work/play environment. This trend will slowly breathe new life into some of these vacant office buildings, while others will be replaced entirely as local officials are cured of their “home rule mentality.”

Innovative projects such as Advance Realty’s New Jersey Center of Excellence on the site of the former Sanofi campus in Bridgewater, Somerset Development’s ambitious mixed-use Bell Works in Holmdel and Rutgers University’s initiative to create an Innovation and Research Center are generating buzz and support from local government. Expect to see more of these initiatives in 2015.

The year 2015 is poised to come in roaring like a freight train with an increase in speculative industrial development, movement of distressed products, gut rehabs and retail outlets that are showrooms for fulfillment at the warehouse and distribution centers. How long this uptick lasts is uncertain given the accelerating rate of change in technology, continued economic globalization and huge demographic shifts.

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Small Business 

By Alfred J. Titone, NJ District Director, US Small Business Administration

If the economy were a car engine, you could say that it is starting to fire on all cylinders. There’s no denying that all signs and indicators are pointing to a robust economy in 2015.

According to a recent Kiplinger’s “Economic Outlook,” GDP is predicted to climb to 3.3 percent in in the latter part of 2015. That is much better than the modest 2.5 to 2.7 percent growth that we saw last year.

Improving Employment Numbers

Heading into 2015, the national unemployment rate sits at 6.1 percent, while New Jersey is at 6.5 percent; again, much better than the national rate of 7.5 percent and state rate of 8.5 percent that we were seeing a year ago. There is even a chance that the national unemployment rate may dip below 5.6 percent. Another positive sign is that the number of new hires during this past year is the highest it has been since 2000.

SBA Loan Approvals Up 16 Percent

When assessing New Jersey’s economy and the pulse of the small business community, all we have to do at the SBA is look at the number of loan approvals small business owners are receiving.

During the agency’s fiscal year 2014, the US Small Business Administration’s New Jersey district office approved 1,347 loans for a total of $650 million to small business owners around the state. This represented a 16 percent increase in the number of loans and a 2 percent increase in the dollar volume. This is the spark we have been waiting for. All along, we knew that growth would be slow, but now it seems that the pace is starting to pick up. This is great news for the small business community. A better economy leads to more spending, and more spending leads to investment in equipment that spurs production and leads to healthy economic growth.

This past year, the SBA has focused on smaller loans of $150,000 or less. In fact, the average SBA loan in New Jersey was $482,553, much lower than the previous year’s average of $548,192. By providing fee relief on SBA 7(a) loans of $150,000 or less, we are getting capital out to communities where it can make a game-changing difference, especially to our underserved communities that use these small dollar loans more frequently. This program, which was was initiated last year and originally slated to expire on September 30, will now be extended through fiscal year 2015.

Case in Point: “A Taste of Success”

When Paul Ritter was winding down a 29-year career with the New Jersey Division of Fish & Wildlife, he began to make wine from his home. Eight years later, he is the owner of the Brook Hollow Winery, a 10.5-acre vineyard tucked away in the heart of the Delaware Water Gap in the town of Columbia.

The idea of opening a winery somewhere down the road didn’t come until 2006. It was then that Ritter decided it was time to see if he could take his hobby and turn it into a full-time business. He leased some retail space and land on a local farm. “When we moved from the home to commercial space, we were only doing wine tastings on the weekends,” Ritter says. “We took it slow and wanted to see what the reaction would be to our wines.”

Three years later, he realized it would work on a larger scale. In 2011, he went to work looking for property that he could buy. Initially, he approached the owner of the land he was leasing. However, the owner wasn’t quite ready to sell the property. So Ritter decided to reach out to other landowners in the area.

He eventually found the perfect property. Paul quickly turned to the SBA for help with the financing. He worked with Mike Tironi, a representative of Square 1 Bank, and was approved for $1.25-million SBA guaranteed loan, which enabled him to purchase the land and construct a tasting room combined with enough space and equipment necessary to produce wine.

This is a textbook success story. Ritter did everything the right way. He started from his home making wine as a hobby. When he was confident enough to start his own winery, he started out slowly and built a loyal following. Then, he took a major step two years ago when he wanted to purchase his own land and build a winery that has now become a destination in Warren County.

The Future Looks Bright

In addition to improved unemployment numbers and the increase in the availability of capital, small business owners should benefit from lower energy costs and an increase in consumer confidence. It could very well be the beginning of the economic boon we all have been waiting for. And for small businesses, that would be welcome news in 2015.

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Banking

By John E. McWeeney, Jr., President & CEO, New Jersey Bankers Association

New Jersey’s banks will be heading into the New Year with a lot of positive momentum while, at the same time, facing some lingering and growing challenges. All in all, though, if the national and state economies continue to grow at a moderate pace the expectation is that banks will perform well in 2015. This would continue a trend of modest – but consistent – improvement since the Great Recession.

From a balance sheet perspective, the industry has probably never been stronger. Capital and liquidity levels are at all-time highs and the level of charge-offs and non-current loans continues to decline. Based on the most recent FDIC data available as of June 30, 2014, New Jersey headquartered banks had total equity capital of $17.6 billion, which is up $1.9 billion, or 12 percent from the prior year. Similarly, total deposits were $107.4 billion, which is $2.6 billion, or over 2 percent higher than 2013. These high levels of capital and liquidity put New Jersey banks in a strong position to fuel economic growth by making loans to consumers and businesses. In fact, we are seeing the results of that. Total loans and leases for New Jersey-headquartered banks grew by $5 billion, or over 5 percent from June of 2013 to June of 2014.

Bank earnings, while improved in recent years, continue to face some strong headwinds. New Jersey headquartered banks earned net income of approximately $894 million in 2013 and are running slightly behind that pace in 2014. Clearly, banks have benefitted from significantly improved asset quality and the ability to reduce their loan loss provisions. They’ve also benefitted from the increase in lending activity, but loan demand is still far from robust and our banks have the appetite and the capacity to lend much more. New Jersey banks make the most of their earnings through lending and therein lies the challenge. Modest loan demand and narrowing net interest margins created by the low interest rate environment have made it difficult to grow earnings. An increase in either – and they’ll probably move in tandem – will significantly boost bank earnings and allow banks to put more of their capital and liquidity to work.

Beyond the analysis of balance sheet and earnings performance, there are some major issues that banks are dealing with that will change the face of the industry. Among these issues are the changing demographics and preferences of bank customers, the threat of cyber security and the significant consolidation occurring within the industry. Banks are now serving a much more diverse and tech-savvy customer base that demands different services and different channels to do their banking. The migration to online and mobile banking has also increased the level of risk for cyber security. While to date the targets have been larger institutions and retail companies, banks of all sizes are working closely with their service providers, regulators and law enforcement to protect their data and customers. The number of banks is shrinking due to a number of factors; most notably the earnings challenge, which is exacerbated by an increasing and overwhelming regulatory burden created by Dodd Frank. In New Jersey alone, the number of New Jersey headquartered institutions has declined from 152 in the year 2000, to 100 today.

As we look to 2015, we can anticipate more change driven by the emerging trends in banking, but we can also expect a strong group of New Jersey banks ready to support New Jersey’s consumers, businesses and communities.

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The Stock Market

By Bradley H. Bofford, CLU, ChFC, CFP^®, Managing Partner, Financial Principles, LLC

As we turn the calendar from 2014 to 2015, there are plenty of potential hazards that can negatively impact the stock market; from the Federal Reserve concluding Quantitative Easing, which can signal possible rate hikes, to economic weakness in China and a European recession. Then, there are such wildcards as ISIS and Ebola, which can theoretically propel the market into negative territory next year.

Nevertheless, we encourage investors to take a deep breath and review the fundamentals, along with academic research, before jumping to negative conclusions. Additionally, it is vital not to get caught in the constant negativity avalanche provided by much of the financial media. More importantly, one needs to consider his or her respective investment horizon and risk tolerance before making impulsive investment decisions.

Though there could be some trouble spots, there are positive fundamentals in the economy and markets. Some of the factors that support the fundamentals of a positive market are: Price/Earnings (P/E) Ratios that are favorable for 2015; corporate balance sheets that continue to remain flush with cash and stronger than they have ever been; the 10-year Treasury yields, which remain at near or close to historic lows; and unemployment levels that are at their lowest levels since 2008. Interestingly enough, despite these positive economic factors, a recent study on what part of the economic cycle the country is in revealed that 45 percent of participants said we are, in fact, in a recession (source: JPMorgan Asset Management). That is a good barometer of the high level of pessimism despite it not being economic reality.

Our approach is for our clients to rely more on verifiable facts – the reality – not perception or a wide array of opinions. One of the primary factors economists look towards as a driver of the economy and markets is Gross Domestic Product (GDP). Many can argue that the US GDP is anemic and needs to be greater than 3 percent per annum to have meaningful growth. This is difficult to dispute. However, in dissecting GDP, 69 percent of it consists of consumption. The current improvement in vehicle sales, favorable manufacturing and trade inventories, and increased consumer spending, can assist in improving GDP. In fact, the current consumer balance sheet is also at its strongest level at $82 trillion, which surpassed the previous high of $67 trillion in 2007 (source: JPMorgan Asset Management). As a result, a stronger labor market and the wealth effect on consumers is boosting confidence, which, in turn, is driving earnings to support the probability of a positive market.

Another interesting indicator that market analysts and economists evaluate is the four-year presidential election cycle. Historically, the election cycle has a profound effect on the economy and stock market returns. Typically, there have been more wars, recessions and bear markets during the first half of a presidential term, while bull markets typically occurred in the second half. As we enter the third year of President Obama’s second term, and give credence to historical returns, things can point towards a higher stock market for 2015.

Circling back to the concern of rising interest rates, there too is another indicator that results in the stock market faring well. When the 10-year Treasury yield is less than 5 percent, investors tend to be more receptive towards risk and invest more in equities for the opportunity of a higher overall return. Even with interest rates possibly rising in 2015, the Federal Reserve is well aware of not increasing rates too quickly or to unreasonably high levels. Therefore, the fact that the markets typically perform well in rising rate environments, coupled with the fact that rates will still remain at low historical levels, all bodes well for the markets.

To quote one of our modern day sages, Yogi Berra, “It’s tough to make predictions, especially about the future.” Overall, we can infer the markets should rise in 2015, but that is said with caution. Undoubtedly, there are headwinds that need to be considered. Whether it is some of the items mentioned above, the rising dollar, or an unknown event that can spook the markets, we advise investors to have well-rounded portfolios. It is crucial to have a proper asset allocation model inclusive of vast diversification and tax structure to assist in weathering any storm that can be on the horizon. We remind clients to try to avoid the impulses of “timing the market.” Rather, academic research has proven that staying true to one’s time horizon and actual risk tolerance allows capital to have “time in the market” and not adversely affect the portfolio.

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Health Insurance 

By Sarah M. Adelman, Vice President, New Jersey Association of Health Plans 

Implementation of the Affordable Care Act (ACA) began in 2010 and various elements of the law are scheduled to roll out through 2018. However, much of the ACA’s reforms occurred this past year, including: individual mandate for coverage; launch of the www.healthcare.gov public exchange; availability of sliding-scale government subsidies to obtain individual health insurance; state expansion of Medicaid; new mandated coverage benefits (e.g. pediatric dental and vision coverage, and the elimination of any dollar limits); new rules for how insurers can price policies; requirements that the actuarial value of all policies conform with the ACA’s metallic tiers (i.e., Bronze – Platinum); and a slew of new taxes and fees. While insurers tried to make the 2014 transition as seamless as possible for businesses and individuals, this unprecedented level of change created significant market disruption.

With this enormous shift in the market now behind us, the pricing disruption employers felt in 2014 isn’t expected to recur in 2015. However, there are still significant pressures driving premium and coverage costs higher year-after-year. New Jersey’s health insurers paid billions of dollars in claims last year. About half of their total payments went to hospitals, while a growing portion went toward specialty drugs. While specialty drugs offer tremendous promise and are ground breaking in the treatment of cancer, rheumatoid arthritis and other chronic conditions, a course of treatment for the most expensive specialty drugs can cost $750,000 per year, leaving payers grappling with how to keep coverage affordable. New Jersey insurers will also pay approximately $5 billion in ACA premium taxes over the next 10 years. At the end of the day, premiums are a reflection of the underlying cost of healthcare and these high-ticket items and taxes continue to drive premiums higher. Addressing these cost trends is critical to ensuring a sustainable healthcare system and achieving affordability for businesses and consumers.

New Jersey insurers are working to bend the cost curve by partnering with physicians and hospitals to form Patient Centered Medical Homes and Accountable Care Organizations, promising higher payments for achieving more coordinated patient care and greater efficiency. Some insurers are also beginning to offer new high-performing, high-quality and high-value preferred-networks which incentivize consumers with less expensive cost-sharing when they choose a preferred-network provider. These innovations lead to improved health outcomes, a lower cost of care and increased value for purchasers.

NJBIA’s recent health benefits survey results emphasize what has long been true in New Jersey: Despite rising healthcare costs, employers want to offer coverage to attract and retain employees and to keep their workforce healthy and productive. At the same time, employers may look to higher-deductible plans and new coverage arrangements. The public Small Business Health Options Program (SHOP) on www.healthcare.gov launched on November 15, 2014, while a number of private exchanges are also available and may attract employers wishing to move to defined contribution plans. The year 2015 will also bring a new insurer to the New Jersey individual market: Oscar Health Insurance, with both Oscar and UnitedHealthcare joining the public exchange. As a result, in 2015 employers and consumers can purchase insurance from any of the insurers on www.healthcare.gov: AmeriHealth, Health Republic, Horizon Blue Cross Blue Shield, Oscar Health Insurance or UnitedHealthcare; or in the private market from Aetna, Cigna and the insurers listed above.

Looking forward to 2016, employers should anticipate another transition year as New Jersey’s small group market – currently groups with up to 50 employees – is required to expand and bring in mid-sized employers with up to 100 employees. More on that in next year’s issue.

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