Trump's tariffs raises concerns over potential impact on healthcare costs

New York

PACEMAKERS and artificial joints. Defibrillators. Dental fillings. Birth control pills and vaccines. All are made in China, and all could be subject to new US tariffs.

Dozens of drugs and medical devices are among the Chinese products and ingredients the Trump administration targeted for a potential 25 per cent tariff in a proposal recently.

The list includes some products that are in dangerously short supply, such as epinephrine, used to treat allergic reactions, and others, such as insulin, whose rising prices have driven public outrage in the US. The proposed tariffs have unsettled the medical device and supply industries, given that a growing number of products, as well as their components, are now manufactured in China.

In recent years, as trade groups have noted, Chinese manufacturing of medical equipment has undergone a major shift from throwaway items such as surgical gloves to more complicated products such as MRI scanners. China's medical device industry has been expanding rapidly. An International Trade Commission report in January said that the fastest growth was in sales of implantable orthopedic devices, plates and screws, mostly made of titanium and used for surgery and sports medicine.

One analyst estimates that about 12 per cent of medical devices imported into the US come from China, amounting to US$3 billion a year. Several companies, including Medtronic and Zimmer Biomet, have orthopedic device factories in China that export goods to the US.

In 2012, Medtronic, considered the world's leading medical-device maker, bought China Kanghui Holdings, a major provider of orthopedic devices in China. Any products shipped from those operations to the US would be subject to the tariffs. Medtronic declined to comment, saying it was still reviewing the proposal. And a report by RBC Capital Markets estimated that if the proposed 25 per cent tariffs took effect, the move could cost the medical device industry up to US$1.5 billion each year. Some of the higher costs would undoubtedly result in increased prices for those devices, affecting baby boomers, who are now among the biggest recipients of hip and knee replacements.

Brandon Henry, a medical device analyst for RBC Capital Markets, said some of the bigger medical technology companies were surprised to find their products on the list. Greg Crist, a spokesman for AdvaMed, the trade group for device members, said its members were "disappointed because this action threatens to affect the health and well-being of American patients and those around the world". How much would be passed on to consumers remains unknown.

"The impact of this orthopedic device tariff isn't a straight line," said David Halsey, president of the American Academy of Orthopaedic Surgeons, in an e-mail, adding that the group was working to assess the possible effects. It is still unclear whether the tariffs will be enacted: Companies have until May to lobby the administration for changes. But on Friday, President Donald Trump ratcheted up the pressure by threatening to levy tariffs on an additional US$100 billion in imports, provoking China to respond that it would strike back yet again.

Indeed, stocks of drug manufacturers remained largely unruffled after the unveiling of the list on Tuesday, but by Friday, the major medical device company stocks had dipped along with the overall market. Medtronic shares were 2.7 per cent lower for the week, and Zimmer Biomet was down 2.4 per cent.

It was unclear whether the tariffs would have a substantial effect on the drug industry, analysts said, even though China is a leading exporter of raw pharmaceutical ingredients. "We don't see much impact," Umer Raffat, a pharmaceutical industry analyst for Evercore ISI, said in a note to investors on Tuesday.

That is because many generic drugs that contain Chinese ingredients are manufactured in countries such as India, meaning they would not be subject to the tariffs. And brand-name drugs made in the US are frequently so expensive that the list price often has little connection to the product's manufacturing cost. Nevertheless, at least one trade group sounded the alarm on the tariffs, warning that they could exacerbate the already contentious issue of healthcare costs, just when the Trump administration has pledged to take action to lower drug prices. "We are concerned that the proposed tariffs may lead to increased costs of manufacturing for generics and biosimilars and thus higher prescription drug prices for patients in the US," said Jeffrey Francer, senior vice-president and general counsel at the Association for Accessible Medicines, which represents generic-drug companies. The generic business has been struggling with falling prices even as brand-name drug prices have risen.

"The cynic in me thinks this is another way for companies to say they need to raise their prices," said Erin Fox, a drug-shortage expert at the University of Utah.

Ms Fox said she suspected that the tariffs could exacerbate shortfalls of generic injectable drugs - decades-old products that are mainstays in hospitals and have been in short supply for years because of manufacturing problems and supply disruptions. While many pill forms of generic drugs are manufactured overseas, most generic injectable drugs are made in the US, using raw ingredients acquired from overseas. But because many companies do not disclose where those raw ingredients come from - saying the information is proprietary - it is hard to know the impact of the proposed tariffs, Ms Fox said. NYTIMES

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