A Look at How Tariffs Affect the Healthcare Industry

Tariffs, or taxes imposed on imported goods, play a significant role in global trade. While they are often implemented to protect domestic industries, they can also lead to unintended consequences, particularly in sectors like healthcare and healthtech.

Given the United States healthcare system’s reliance on imported medical devices, pharmaceuticals, and other essential supplies, tariffs can impact costs, accessibility, and innovation.

For a long time, tariffs have been used as an economic tool to control trade, encourage domestic production, and generate government revenue. Historically, tariffs typically have been used to protect local industries from foreign competition; however, they can also lead to trade disputes, retaliatory measures, and increased consumer costs.

In healthcare, tariffs often create challenges by increasing the price of imported medical goods. Since the U.S. imports a large portion of its medical supplies, including medical devices, pharmaceuticals, diagnostic equipment, and surgical instruments, higher tariffs on these goods could translate into increased costs for hospitals, healthcare providers, and ultimately, patients.

Additionally, trade restrictions can cause supply shortages, making essential medical goods harder to obtain during times of crisis, such as pandemics or natural disasters.

Key U.S. Healthcare & Healthtech Imports

The U.S.’s biggest medical supply trading partners are Canada, Mexico, and China. Some of the most significant healthcare-related imports include:

Medical Devices: The U.S. imports over 69% of its medical devices, of which 13.9% are from China. As of May 2024, $14.9B worth of medical equipment was imported.Pharmaceuticals: The U.S. sources the bulk of its active pharmaceutical ingredients (APIs) from countries such as India and China.Personal Protective Equipment (PPE): Face masks, gloves, and gowns are primarily sourced from China and Southeast Asia.Biotech and Lab Equipment: Many biotech components and research tools come from Europe and Asia.Imaging and Diagnostic Equipment: MRI machines, CT scanners, and ultrasound machines are imported from China, Germany, and The Netherlands.

The Cost of These Imports

According to trade data, the U.S. spent approximately $146.9 billion on medical supply imports in 2023 alone. For hospitals, imports comprise approximately 10.5% of the budget. The cost of these imports directly affects the pricing of healthcare services, as hospitals and healthcare providers depend on them to deliver patient care efficiently. The complexity of global supply chains means that even minor trade disruptions can lead to significant price fluctuations.

How Higher Tariffs Affect Healthcare Imports

When tariffs are imposed on healthcare and healthtech products, the direct impact is a domino effect throughout the industry:

Higher Costs for Hospitals and Clinics: Medical institutions must pay more for essential supplies, which can lead to budget constraints and reduced service offerings.Increased Costs for Patients: Rising supply costs are often passed down to patients through higher insurance premiums, out-of-pocket expenses, and service fees.Supply Chain Disruptions: Tariffs can force suppliers to shift production, leading to delays in obtaining critical medical equipment.Impact on Innovation: Increased costs for imported research equipment and biotech components can slow down innovation in healthtech, affecting the development of new treatments and medical technologies.Impact on Small Healthcare Providers: Independent clinics and smaller hospitals may struggle more than large hospital networks, leading to potential consolidations or closures.Increased Government Spending: Public healthcare programs such as Medicare and Medicaid may experience budget strain as they must cover higher costs for essential medical supplies.

Now, let’s consider a potential real-world example of how tariffs may trickle down into the market.

Let’s examine how a 20% tariff on PPE imports from China would impact the final cost. Let’s assume an 80% pass-through rate (i.e., the importer pays 16%, and the manufacturer pays the remaining 4%); the manufacturer will likely find ways to maintain its profit through some combination of cost-cutting and productivity-increasing approaches.

The importer, however, is likely to extend its 16% increase in cost directly to its customers. Retailers that resell the PPE will pay 16% more. That means they’ll extend the 16% increase to consumers such that the price of masks, gloves, etc., online or in brick-and-mortar, will now be 16% higher. If there are domestically produced alternatives, those will likely sell faster until those manufacturers decide they can raise their prices to align with the new prices of imports; in other words, we’ll see pricing umbrella effects.

The impacts will be more insidious in healthcare facilities that rely on but don’t resell PPE. These facilities already operate on low margins. To compensate for their 16% increased expenses on PPE, they will have to decrease expenses elsewhere—fewer employees, reduced quality in the cafeteria, etc.— or increase prices where they can— parking hourly rate, etc. Ultimately, patients and providers will pay the 16% indirectly, and both patient and provider satisfaction will decline.

To visualize this example further, let’s do the math. If a box of single-use gloves used to cost $1.00, with the new tariffs, the cost goes up to $1.16. If a hospital uses 200 boxes per day, its spending may increase:

(200×7 x$1.16)-(200x7x$1.00)=$224 per week— let’s call it $1000/month.

And that’s just gloves. Depending on the size of the hospital and the acuity of patients it serves, these numbers could be higher. Imagine now, the difference in cost when it comes to medical devices and medications. As the expenses grow, hospitals won’t be able to absorb the tariffs. Rather, the impact will be measured in jobs… jobs will be cut to maintain operating margins.

Going Forward: Things to Consider

While tariffs are often implemented with the goal of protecting domestic industries, policymakers may consider alternative solutions to prevent negative impacts on healthcare:

Encouraging Domestic Production: Investing in domestic manufacturing for critical medical supplies could reduce dependence on imports and lessen tariff-related cost increases. (While this is ultimately the best long-term solution, it can take time to beef up production to levels where output is able to meet demand.)

Negotiating Trade Agreements: Forming agreements with key trading partners can help ensure the smooth flow of essential medical goods without excessive tariffs.

Tariff Exemptions for Critical Medical Goods: Governments can implement exemptions for healthcare-related imports to ensure accessibility and affordability. (Likely the best short-term solution during negotiations.)

Diversifying Supply Chains: Encouraging healthcare providers and suppliers to diversify their sourcing strategies can mitigate the risks of supply disruptions due to tariffs. (A key example is the mask and PPE shortage experienced during the Covid-19 pandemic. The bulk of these supplies are imported from China. Finding other sources became critical during that time.)

Tariffs on healthcare and healthtech imports can have significant repercussions, affecting everything from the price of medical supplies to patient access to care. While tariffs may aim to boost domestic production, they often result in increased costs and supply chain disruptions.

It’s important that policymakers weigh these factors carefully to ensure that tariff policies do not negatively impact the healthcare sector and, ultimately, patient well-being.

FOX28 Spokane©