The Looming Threat to American Drug Supply: Tariffs, Shortages, and a Race to the Bottom
The American healthcare system, already grappling with rising costs and persistent drug shortages, faces a new challenge: potential tariffs imposed on goods imported from China. While the Trump administration initially framed these tariffs as a necessary measure to combat the flow of fentanyl precursors, the repercussions for the healthcare industry, particularly the generic drug market, could be far-reaching and detrimental.
Generic drugs, which constitute approximately 90% of all prescriptions filled in the United States, are heavily reliant on ingredients sourced from China. The proposed 20% levy on imported goods threatens to disrupt this established supply chain, potentially leading to decreased inventories, increased drug prices, and ultimately, exacerbating existing drug shortages. Hospitals, doctors, and individual consumers filling their prescriptions at local pharmacies could all feel the impact, though the effects might not be immediately apparent due to existing stockpiles.
The rationale behind the tariffs, as articulated by White House officials, centers on China’s alleged failure to curb the flow of fentanyl precursor chemicals to drug cartels, which then smuggle the illicit drugs into the U.S. This justification, while addressing a serious public health crisis, raises concerns about the potential collateral damage to the broader healthcare system. China, unsurprisingly, has vowed to "resolutely counter" the pressure from the U.S., signaling a potential escalation of the trade war and further uncertainty for the pharmaceutical industry.
Organizations representing generic drug manufacturers and hospital pharmacists have issued stark warnings about the potential consequences of these tariffs. They argue that the added financial burden could severely strain the nation’s generic drug supplies, worsening already problematic shortages. John Murphy, president and CEO of the Association for Accessible Medicines, emphasized that generic manufacturers operate on extremely thin margins, often selling drugs at a loss. The imposition of tariffs could push these manufacturers into unsustainable territory, forcing them to exit markets where they are already struggling.
The American Society of Health-System Pharmacists further cautioned that the added costs stemming from tariffs, coupled with existing Biden-era penalties levied on drug companies for raising prices faster than inflation, could amplify the problem of drug shortages. Even before the tariff proposals, pharmacists were already contending with shortages of essential medications, including IV solutions, chemotherapy drugs, ADHD medications, and injectable drugs. The compounding effect of these factors paints a concerning picture for the future of drug availability.
These organizations have implored the federal government to exempt drug ingredients and prescription medications from the tariffs, but to date, the Trump administration has not granted any such reprieve. This inflexibility raises questions about the prioritization of national security concerns over the stability of the healthcare system and access to affordable medications.
Erin Fox, a senior pharmacy director at University of Utah Health and an expert on drug supply chains, pointed out that the impact of the tariffs might not be immediately felt due to potential stockpiling of drug ingredients by domestic manufacturers and distributors. However, she cautioned that it could take several months for companies within the global pharmaceutical supply chain to assess and respond to the added costs.
One potential outcome is that drug manufacturers may simply decide to discontinue producing cheap generics, as the razor-thin profit margins become unsustainable under the added financial pressure. Fox emphasized that there is no legal requirement for any drug company to manufacture any specific drug, regardless of its importance. This lack of mandated production underscores the vulnerability of the generic drug market to economic pressures.
Drug shortages have been a persistent challenge for hospital pharmacists long before the most recent round of tariff proposals. The global drug supply strains worsened during the COVID-19 pandemic, with the number of drugs in shortage peaking at 323 during the first three months of 2024. The reasons for these shortages range from disruptions caused by natural disasters like hurricanes to factory contamination that shut down production lines. In some cases, drug manufacturers have simply ceased production of certain drugs due to economic or logistical challenges.
The heavy reliance of U.S. generic drug companies on drug ingredients sourced from large factories in China and India makes them particularly vulnerable to shortages stemming from manufacturing disruptions or factory shutdowns. Geopolitical tensions between the U.S. and China have prompted some drug companies to adopt a "China plus one" strategy, seeking to diversify their sourcing of drug ingredients to mitigate the risk of relying solely on Chinese suppliers. This strategy aims to ensure a backup source of drug ingredients to avoid or limit shortages.
In 2023, more than a dozen cancer drugs were in shortage, including cisplatin and carboplatin, both crucial for treating lung, breast, prostate, and gynecologic cancers. The National Cancer Institute estimates that cisplatin and similar drugs are prescribed for 10% to 20% of all cancer patients, highlighting the severity of the potential impact of shortages on cancer treatment.
Furthermore, beginning in 2018, over 12 million bottles of blood pressure-lowering drugs, such as valsartan and losartan, were recalled from the market due to contamination with cancer-risk chemicals. This incident underscores the potential for quality control issues to disrupt the drug supply and raise concerns about patient safety.
The pressure on generic drug companies to find lower-cost suppliers can sometimes lead to compromises in medication quality, according to David Light, president of Valisure, an independent lab that has identified potentially harmful contaminants in consumer products such as Zantac, hand sanitizers, and sunscreens. Valisure is currently conducting a pilot study with the Department of Defense to assess the quality of 40 medications.
Light believes that the tariffs could further squeeze generic manufacturers financially, potentially leading to more cost-cutting measures and a "race to the bottom" that could compromise drug quality. This pursuit of lower costs could lead to substandard manufacturing practices and an increased risk of contamination or other quality problems.
While prices for brand-name drugs are less likely to be directly affected by the trade war, the overall impact on the pharmaceutical market could still be significant. Brand-name drug companies command higher prices due to patent protection, but the generic drug market plays a crucial role in providing affordable alternatives once those patents expire.
Ohio-based drug research firm 46brooklyn Research tracks drug price changes, noting that in January, which is a common time for pharmaceutical companies to adjust prices, more generic drug prices decreased than increased. This highlights the competitive nature of the generic drug market and the pressure on manufacturers to keep prices low. Antonio Ciaccia, president of 46brooklyn, pointed out that while the U.S. suffers from the highest list prices on brand-name drugs, it also benefits from "dirt cheap drugs" on the generic side.
While some generic drug manufacturers will likely attempt to pass along the costs of the tariffs, they will face significant roadblocks. Medicare and Medicaid have implemented policies designed to limit how much drug companies can increase prices. The Inflation Reduction Act, passed in 2022, includes provisions that penalize pharmaceutical companies for raising Medicare drug prices faster than inflation. Additionally, the American Rescue Plan Act requires pharma companies to pay rebates when they significantly raise Medicaid drug prices over time.
These inflation rebate penalties, combined with intense competition among generic drug manufacturers, have limited the ability of companies to raise prices. These economic constraints also pose a challenge to efforts to reopen domestic factories to manufacture generic drugs in the United States.
While there have been ongoing efforts to bolster domestic manufacturing in recent years, these projects require significant time and investment. Fox estimated that it could take two to three years for drug companies to return manufacturing to the United States from overseas. The economics of reshoring generic drug manufacturing will also be challenging, given the cost advantages of overseas production.
Fox concluded by expressing her concern about the increasing fragility of the overall supply chain, suggesting that some generic manufacturers may decide that absorbing the added cost of the tariffs is simply not worth it. This could lead to further consolidation within the industry and a reduction in the number of manufacturers willing to produce certain essential medications, ultimately exacerbating the problem of drug shortages. The potential consequences of the tariffs extend beyond mere price increases; they threaten the very stability and reliability of the American drug supply.
