The consequences of pharmaceutical tariffs in the United States

Abstract

The Trump Administration has threatened to impose tariffs on imported branded, generic, and biosimilar pharmaceutical products. Although specific details regarding the exact rates and implementation timeline remain unclear, the administration has indicated that these tariffs will be substantial. Tariffs can create supply chain disruptions, increase costs, limit patient access to essential medications, and negatively impact research and innovation. Rather than punitive tariffs, industrial policy options and collaborative international treaties may better serve US economic and public health interests and lead to a more secure and consistent domestic supply of critical medicines.

Plain language summary

The Trump Administration has threatened tariffs on imported pharmaceutical products. Tariffs create supply chain disruptions, increase costs, and adversely impact patient access. Uncertainty in the capital markets would negatively affect future investments in new treatments. Patients may experience increased costs through higher prices, insurance premiums, and taxes. Collaborative international policies, rather than punitive tariffs, may better serve US interests and lead to a more secure and consistent domestic supply of medicines.

Implications for managed care pharmacy

The Trump Administration’s threatened pharmaceutical tariffs would impact finished products and intermediate goods (eg, ingredients and packaging materials) for domestic manufacturing. Supply chain disruptions would cause or exacerbate drug shortages, disrupting patient care, delaying or canceling procedures, and increasing costs.

The US pharmaceutical trade deficit in 2024 was $139 billion out of a total of $1.2 trillion for all goods. ¹ In an attempt to address the deficit and reshore pharmaceutical manufacturing capacity, President Trump has threatened to impose tariffs on imported pharmaceutical products, including branded, generic, and biosimilar drugs and pharmaceutical ingredients. On Tuesday, April 15, 2025, the Commerce Department opened a broad investigation under Section 232 of the Trade Expansion Act on pharmaceuticals. The findings from a Section 232 investigation would allow the president to justify tariffs to protect national security interests.

Tariffs will impact both intermediate goods (eg, ingredients and packaging materials) for domestic manufacturing and finished products. Although specific details regarding the exact rates and implementation timeline remain unclear, the administration has indicated that these tariffs will be substantial and sector specific. In response, Eli Lilly, Johnson & Johnson, Merck, Roche, and Novartis have made public statements announcing significant new investments in US manufacturing facilities. The construction and certification of new manufacturing capacity in the United States will take years.

A central question is the net impact of tariffs: the balance of harms and benefits to the economy. In The Wealth of Nations, the economist Adam Smith argued that tariffs distort markets, reduce efficiency and productivity, harm consumers, and favor special interests at the expense of public welfare. ² Tariffs imposed on branded, generic, and biosimilar finished products will have wide-ranging implications for health care, product availability, and consumers in the United States. The Budget Lab at Yale University projected that a 25% ad valorem tariff would increase medication costs by an “average of around $600 per year per household in the United States.” ³ Tariffs can also create supply chain disruptions, increase costs and limit patient access to essential medications, and negatively impact research and innovation. We explore these consequences for the health care system and patients.

Supply Chain Disruptions

Supply chains are globally interconnected. China, India, Ireland, and a few other European countries supply a large fraction of generic and branded medications to the United States as either finished drug products or their intermediary ingredients. ⁴ Imposing tariffs will likely disrupt the movement of essential raw materials, active pharmaceutical ingredients, and finished medications. In the near term, disruptions will likely increase costs, delay access to treatments, and trigger shortages, especially for critical generic medicines with already tenuous supply, such as antibiotics, intravenous fluids, sterile injectables (e.g., epinephrine, heparin), and infused cancer therapies. A recent article in the Washington Post highlighted for heparin the complicated chain of events that lead from raw material to patient care. ⁵

Hospitals and pharmacies will face difficulties maintaining consistent inventories. News of possible tariffs have led to increased inbound shipments and domestic stockpiling by drug companies. Impending shortages can trigger panic buying by hospitals and pharmacies, further straining the supply chain, creating severe localized shortages and unequal access. Offshore generic manufacturers faced with tariffs may abandon the production of drugs with already small financial margins. The United States has already experienced this problem. ⁶ Shortages from supply chain disruptions directly and immediately impact medication access for patients who rely on these lifesaving treatments.

Increased Medication Costs

Tariffs will increase the price of procurement. But who will absorb the added costs? Eli Lilly CEO David Ricks told the BBC, “Drug companies like his would be forced to take on the full burden of tariffs rather than pass the costs to consumers because there are so many controls on the price of medicines.” ⁷

The more likely scenario in the long run is that higher prices will force payers, hospitals, pharmacies, and patients to pay more for drugs. In publicly financed programs, like Medicaid and Medicare, the industry will have limited ability to raise prices. These programs have rebate penalties for companies that raise prices above the consumer price index. Hospitals, faced with higher drug prices, would have to absorb the costs in the short term until and if diagnosis-related group reimbursement rates adjust to reflect higher costs.

Manufacturers may be able to raise prices to private health insurers. This would involve renegotiating contracts with the insurers and their pharmacy benefit managers (PBMs). Should those increased prices be passed through the finance supply chain, insurers would likely increase premiums and alter pharmacy benefit designs, resulting in increased costs to employers and patients.

What about the generics market? Almost 90% of all dispensed medications in the United States are generics. Although the focus is typically on branded prescription drugs, where the United States pays higher prices than many other countries, generics are generally less expensive. ⁸ Hospital and retail pharmacies buy generics on contract, typically through wholesalers or large buying groups. Generic manufacturers, faced with tariffs, will likely increase invoice prices for wholesalers and buying groups. This will translate to higher wholesale acquisition costs or average wholesale prices that pharmacies face. For generics, retail pharmacies are reimbursed by PBMs based on a maximum allowable cost (MAC). Increases to wholesale acquisition costs or average wholesale prices without a corresponding adjustment to MAC will leave the pharmacy financially strained, particularly independent pharmacies already disadvantaged in PBM contracts. The winner? The PBM that purchases and holds no physical products would pocket the difference until the MAC adjusts. For cash-based generics plans like Mark Cuban Cost Plus Drugs, razor-thin margins mean that a larger share of increased prices would be passed on to patients.

Domestic Manufacturing

Tariffs indirectly encourage retaliatory trade measures from other nations, potentially limiting export markets for US-manufactured pharmaceutical products and medical equipment. Such retaliations can harm the domestic pharmaceutical industry, which relies on global markets for revenue. On the domestic front, supporters of pharmaceutical tariffs often argue that tariffs protect US manufacturing, incentivize domestic production, and reduce reliance on foreign suppliers. Although appealing, this viewpoint overlooks critical complexities. Pharma-ceutical manufacturing is highly specialized, requiring significant capital investments, technological expertise, and regulatory compliance. Scaling domestic production, including importing ingredients from countries like China and India, to offset disrupted foreign supply chains is often impractical and costly. Instead of prompting domestic production, tariffs might incentivize pharmaceutical companies to shift production to tariff-exempt countries rather than back to the United States, undermining the intended economic benefits. Importantly, the geographic location of a product’s intellectual property could determine taxation.

Innovation

The pharmaceutical industry relies heavily on profits and capital markets to fund research and development (R/D). Tariffs create uncertainty in currency, stock, and bond markets, negatively impacting access to capital supporting industry investments in innovations. Tariffs also raise production costs that can divert funds away from R/D activities. Research and development jobs in industry pay high wages, which the current administration does not want to see impacted if R/D budgets are reduced.

Smaller pharmaceutical companies and startups, which play a critical role in innovation and drug discovery, are particularly vulnerable to capital market fluctuations and increased operational costs from tariffs. These organizations may lack the resources to effectively absorb increased expenses or restructure supply chains. Consequently, by disproportionately harming smaller firms, tariffs could ultimately lead to market consolidation and decreased consumer choice. The United States has long been a global leader in pharmaceutical innovation. Adding significant trade barriers that increase costs may inadvertently weaken this leadership position.

Impact on Patients and Consumers

In the short run, patients will likely face higher out-of-pocket costs for pharmaceuticals, access to critical treatments will diminish, and health outcomes may suffer. In the long run, consumers may face higher premiums and taxes to finance higher health insurance program costs. Reshoring generic man-ufacturing will never lead to lower consumer costs, whether for generic prescription drugs or over-the-counter generic products commonly found in pharmacies and grocery stores. The costs of importing ingredients and materials and paying higher US labor costs to manufacture generic products in the United States will exceed those in China and India.

Alternatives to Tariffs

There are better global and domestic policy options to achieve the Trump Administration’s goals. To reduce dependence on US revenue for innovation and offset the impact of tariffs, the CEOs of Novartis and Sanofi published a letter in the Financial Times imploring European governments to raise prices on pharmaceuticals. They proposed a Europe-wide list price for new medicines, pegged “within the range of US net prices” and adjusted via rebates. ⁹

Encouraging greater transparency in drug pricing and the supply chain and incentivizing domestic pharmaceutical manufacturing through industrial policy such as subsidies or tax incentives rather than tariffs would more quickly and sustainably achieve the desired objectives while minimizing the negative consequences of tariffs. Collaborative international treaties and policies, rather than punitive tariffs, may better serve US economic and public health interests and lead to a more secure and consistent domestic supply of these critical medicines.