The impact of tariffs on healthcare costs 

President Trump issued an executive order on April 2 invoking a series of reciprocal tariffs on a number of trading partners. These tariffs are in addition to previously announced tariffs on Canada, Mexico and China. The reciprocal tariffs, effective April 5, start at 10% for all imports to the US. About 60 nations that have large trade imbalances with the US were subject to higher tariffs set to take effect on April 9 when President Trump announced a 90-day pause. Although the urgency to respond has lessened, below are our thoughts on the potential impacts of tariffs on healthcare costs and the possible need to review budget estimates.

What are the economic effects from tariffs?

Tariffs create headwinds to growth, while also triggering a one-off rise in inflation. Companies importing products into the US pay tariffs to the US government. Tariffs are likely to have both direct and indirect impacts on the economy. Typically, companies pass these costs to consumers by raising product prices, weighing on business and consumer confidence.

What’s the likely impact on the healthcare industry?

The effective date and amount of the paused tariffs remains uncertain. Additional uncertainties include the extent to which exporters will absorb tariffs, how quickly US-based companies will be able to adjust their supply chain, and the degree to which tariffs will be passed on to the end-consumer.

A January survey of 200 healthcare industry experts captured key concerns of the industry: Most (82%) expect tariff-related import expenses to drive up hospital and health system costs by 15% within the next six months. Nearly 70% of respondents predicted at least a 10% spike in pharmaceutical costs, driven largely by US dependence on Chinese imports for active pharmaceutical ingredients. Most of the hospital supply chain professionals surveyed (90%) anticipated major procurement disruptions and 94% of healthcare administrators said they plan to delay equipment upgrades to help manage financial strain.

Healthcare claims cost impacts will potentially occur across three major expense categories: Facility, currently about 40% of total claims costs; professional, about 25%; and pharmaceutical, about 35%, including costs coming through the medical plan. (Services like ambulance and durable medical equipment represent relatively small expenditures). The potential impact of tariffs on each category could be considered as follows:

Facilities: Typically, the primary expenses are for wages and benefits, which are not affected directly by tariffs. However, supplies and other expenses may account for about a quarter or more of operating costs and will be impacted by tariffs.

Professional services: These are entirely domestic and thus not directly impacted by tariffs, resulting in little to no impact.

Pharmaceutical: Cost of sales (the direct cost of producing a drug, including ingredient costs) are an important source of expenses and would be impacted by tariffs, but research and development and other expenses are equally important and are not expected to be affected to a large degree. The impact of tariffs could be muted by contractual and regulatory guardrails that limit the manufacturers' ability to immediately increase list prices beyond CPI and/or reduce rebates. At the time of writing (April 10), prescription drugs are exempt from tariffs, but President Trump has said that he will be “announcing very shortly a major tariff on pharmaceuticals.” It has been reported that pharmaceutical industry leaders, anticipating such a move, have been lobbying for potential tariffs to be implemented gradually instead of immediately being imposed at a 25% rate. The Trump Administration has stated that a goal of the new tariffs policy is to shift pharmaceutical manufacturing back to the US. Some think that tariffs may result in shortages and higher generic drug prices.

What should employers consider?

The operating environment involves a number of uncertainties that are affecting the ability to plan strategically very far into the future. It is not clear how long the existing tariffs will stay in effect and whether the paused tariffs will go into effect. Executive orders suggested there is a potential for tariffs to be reduced if trading partners make certain concessions, although no specific criteria have been set out.

Given the common three-year contracting cycle for providers and health plans, the full impact of the tariffs may not be felt immediately. Rather, price increases are likely to phase in over a few years. It’s also possible that secondary impacts from tariffs could be more significant than primary impacts. Labor costs are a major consideration in all three of the healthcare expense categories described above. To the extent tariffs create inflation in the economy and put pressure on wages, healthcare costs will reflect the impact.

Additionally, while not directly tied to tariffs, changes in funding for Medicare and Medicaid, and research hospitals and other related developments may end up exerting more upward pressure on commercial rates.

Given the unprecedented level of uncertainty, employers may want to consider adding margin to baseline budget estimates, reviewing a wider range of future state scenarios and monitoring developments as they unfold. Historically, as seen in the graph, increases in the average per-employee cost of health plan coverage over multi-year time horizons have exceeded CPI by 4% - 6% before any plan changes are made and by approximately 2% after plan changes. This may be the best guidance for the time being in terms of forecasting future healthcare costs, even in the face of tariffs.