Hospitals grapple with uncertain tariff fallout as pharmaceutical levy looms

May 28 update: A U.S. trade court has issued an injunction on most of the tariffs imposed by the Trump administration, although tariffs on individual products (e.g., steel and aluminum) can remain. The administration has appealed the decision.

May 29 update: The tariffs are back on for now after an appeals court stayed the lower court’s ruling.

Hospitals continue to scramble in response to a shifting tariff policy that has the potential to jolt cost structures.

The latest development came May 5, when President Donald Trump signed an executive order to bolster domestic pharmaceutical manufacturing. Among the planned steps is a tariff on pharmaceutical imports, at a rate to be announced within the next two weeks, Trump said.

While supporting the broader effort to increase domestic drug manufacturing capacity, healthcare stakeholders are wary of what could happen in the short term.

“Imposing tariffs or nontariff barriers on pharmaceutical imports risks harming U.S. patients by increasing the cost of essential medications and disrupting access to treatment,” the Healthcare Leadership Council, a coalition of executives from across the healthcare industry, said in written comments to the administration.

“These added costs would further financially strain providers and hospital systems, many of which are already navigating workforce shortages, budget constraints and post-pandemic recovery pressures. Over time, such compounded burdens could erode the quality and timeliness of care, creating ripple effects across the healthcare system.”

The pharmaceutical surcharge will be added to tariffs of 10% on all imports from most countries, 25% on steel and aluminum worldwide, 25% on Canadian and Mexican goods that are not subject to the protections of a 2020 trilateral trade agreement, and 145% on imports from China.

The China tariff is actually 245% when accounting for a 100% levy that was applied to some Chinese goods during Trump’s first administration and expanded by the Biden administration.

Update: On May 12, the U.S. announced it was reducing the new tariffs on China from 145% to 30% for 90 days in the hope of stimulating trade talks.

Dealing with moving targets

Hospital finance leaders are having a hard time developing strategies in response to the tariffs, given the extent to which policies are evolving. For example, the 10% baseline tariff initially was supposed to be larger, with rates varying based on the U.S.’s trade deficit with the particular country. But Trump paused that sweeping policy for 90 days starting April 9, and whether it eventually gets implemented remains to be seen.

As is, “The new tariff measures, paired with the rollback of de minimis exemptions, may introduce significant complexity and cost pressures,” Premier, Inc., a leading group purchasing organization (GPO), wrote in a recent report (the de minimis exemption authorizes duty-free importing for items valued at $800 or less, but the exemption has been revoked for China).

As prominent examples of items that could be impacted in the healthcare supply chain, Premier mentioned:

• Enteral feeding syringes, which are manufactured exclusively in China
• Medical devices, with 69% of U.S.-marketed devices manufactured entirely outside the country
• Pharmaceutical imports

Before the specific tariff policies were announced, Black Book Market Research surveyed 200 industry professionals and found that 82% predicted costs for hospitals and health systems would surge by at least 15% over the next six months because of higher import expenses.

In another survey, Bain Healthcare checked in with 47 hospital executives and found 70% are either concerned or very concerned about the tariff impact. Only 11% have a mitigation strategy in place, although 47% had evaluated the situation and 36% were starting to do so.

More than half are planning steps such as expanding their supplier base, stockpiling inventory and materials, and delaying equipment purchases.

Assessing the consequences

Divergent impacts can be expected from one organization to the next as the tariff policy stabilizes.

In their recent Q1 earnings calls, leaders of for-profit hospital chains generally downplayed the prospective impact. While the comments in part may reflect an effort to reassure investors, they also suggest the superior supply-chain leverage at larger systems.

At Universal Health Services (UHS), 60% of supply chain purchases are insulated from the tariff policy because the products are either manufactured domestically or are subject to the protections of the trade deal with Canada and Mexico, said Steve Filton, executive vice president and CFO.

Still, hospitals need to be wary of supplier actions in the current environment, he indicated.

“We do find [that] some vendors who have fixed contractual prices with us have started to include things like fees — I’m not even sure how to describe them — on their invoices,” Filton said. “We’ve been sort of ignoring those because we believe they’re not part of the contract.

“We continue to monitor any vendors who would tell us that they’re considering cancellation of contracts or they’re finding availability of products [to be] problematic. We’re not really getting any of that feedback yet but certainly preparing, if we do, for other sourcing alternatives, other pricing alternatives, etc.”

Kevin Hammons, president and CFO of Community Health Systems (CHS), said roughly 70% of CHS’s purchases are through a GPO, offering the protection of fixed pricing over a three-year contract span.

Even for supplies coming up for renegotiation, half the health system’s GPO purchasing is domestic, meaning tariffs do not apply. Only about 5% of purchases are from China.

Plenty of ambiguity

Premier recommends that healthcare organizations call for supplier transparency to ensure complete data on the manufacturing country of origin, exposure risk and product attributes. Next steps are to identify vulnerabilities by leveraging business intelligence and financial-planning tools and to create a customized exposure map.

Other steps being undertaken may not be as strategic but nonetheless could end up being necessary.

For example, “Tariffs also may force hospitals to seek new vendors — often at higher costs or with lower reliability,” the American Hospital Association wrote in a wide-ranging report on hospital costs.

Capital projects are an area of concern, given the 25% tariff on key building materials. In a local report (login required) out of Houston, one of the city’s leading construction firms said hospitals with a budget cushion are looking to speed up projects before prices rise under the new policy.

“There’s no safeguards for how it can be implemented,” said George Godfrey, chief supply chain officer for Baptist Health South Florida. “How do I know if I’m using Canadian lumber or not? I might have this subcontractor passing along this tariff expense, and it’s not even valid.”

Tariffs may have an indirect impact on patient volumes by stirring widespread concern about personal expenses, leading people to deprioritize elective care.

For example, one factor in a year-over-year Q1 hit to CHS’s payer mix, Hammons said, is “some of the disruption in the economy, some of the discussion of recession and fear of potential impacts of tariffs and what that may have.”

The situation may have been best summed up by HCA Healthcare CEO Sam Hazen during the company’s Q1 earnings call.

“We are not comfortable providing estimates [related to tariffs] at this time,” Hazen said. “We just do not have enough insight into what might happen.”