Tariffs could fuel further medical inflation
April 12, 2025
Employers have faced the highest premium increases in decades over the past two years, and imposition of substantial tariffs on most U.S. trading partners could increase medical inflation in the coming years. The Trump Administration announced a 90-day delay in many planned global tariffs last week, so what tariffs will be enacted, and for how long, is unclear.
Here are ways that tariffs can directly lead to increased medical expenses, if they are imposed:
Most medical devices are imported, largely from the European Union, Mexico, and Costa Rica. Increases in the cost of medical devices increase the cost of providing medical care. The impact on increased costs for medical devices will likely be delayed due to existing hospital contracts but will be reflected in new contractual rates.
Medical supplies represent about 13% of total hospital costs, and most medical supplies are imported. Again, the impact of these tariffs on medical premiums could be delayed as existing contracts between carriers and providers run out.
Medical equipment production costs and prices, even for the many U.S. manufacturers in this industry, may be increased by tariffs on imported materials such as aluminum and steel.
Pharmaceutical products are often produced overseas, and even drugs formulated in the U.S. are often made of active pharmaceutical ingredients that are manufactured in India and China. The Administration exempted pharmaceutical goods from the initial round of tariffs, although later said it would introduce pharmacy tariffs.
Brand name drugs have very high gross margins, so tariffs might not lead to dramatically higher prices. The current prices were designed to maximize profit, and higher prices generally suppress utilization which could lower pharmaceutical company margins.
Generic drugs represent close to 90% of total pharmacy utilization, but less than 20% of total costs. Most generic drugs with multiple manufacturers are imported and have razor-thin margins. Tariffs could make some companies discontinue export into the U.S. and could lead to shortages of these inexpensive drugs. Such shortages have historically led to higher overall costs as providers substitute more expensive brand name or generic drugs for inexpensive generic drugs that are hard to obtain.
There are many potential indirect consequences of tariffs that could also impact employer sponsored health insurance:
Stock market declines could lead some employees close to retirement to “hold on” for a few more years, leaving employers with higher costs that would otherwise be covered after retirement by Medicare.
Falling margin and decreased share prices could increase pressures to reduce capital spending, cut costs, including layoffs and more cost-shifting. This could theoretically increase the attractiveness of more restrictive plans that limit choice or reduce coverage, or make companies consider exiting the health insurance market through Individual Coverage Health Reimbursement Arrangement (ICHRA).
Implications for employers:
Tariffs could increase operating costs for health care delivery systems, further inflating prices.
Tariffs could also lead to changes in the workforce, depending on how they impact the overall economy.
Medical and pharmaceutical goods could be exempted from tariffs if the Administration wished to avoid increasing medical costs.
Employers should be aware that tariffs are one additional reason why medical costs could increase further in the future.
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