Insights

On March 4, 2025, President Donald Trump imposed a 25% tariff on all imports from Canada and Mexico, and a 10% tariff on goods from China, escalating trade tensions and prompting concerns across various sectors, including health care.  These tariffs, aimed at combating illegal immigration and drug trafficking, have major implications for the U.S. healthcare system, especially in the supply of medical products and services. 

Canada and Mexico’s Role in U.S. Health Care Supply Chains 

Canada, China, and Mexico are integral to the U.S. health care supply chain, providing a substantial portion of pharmaceuticals, medical devices, and essential raw materials. For example, Canada is a primary supplier of prescription medications, offering drugs that are often more affordable than their U.S. counterparts. Mexico contributes significantly by manufacturing medical devices, including syringes, diagnostic equipment, and surgical instruments, as well as components vital for medical device production. China provides a range of medical products, including syringes, medical masks, respirators, and gloves. 

Direct Effects on Medical Supplies and Equipment 

The newly imposed tariffs are expected to disrupt the availability and affordability of medical supplies and equipment: 

1. Increased Production Costs: Many medical devices and supplies are manufactured using steel and aluminum, materials subject to the new tariffs. This will likely lead to higher production costs for manufacturers, who may pass these costs onto U.S. health care providers and patients. Hospitals and clinics will also face increased expenses for essential equipment, potentially impacting budgets and patient care quality.  The American Hospital Association estimated medical supply expenses account for around 10.5% of the average hospital’s budget, totaling $146.9 billion in 2023 – a $6.6 billion increase over 2022. 
2. Supply Chain Disruptions: The tariffs may prompt manufacturers to seek suppliers outside Canada and Mexico, potentially leading to supply shortages or delays during the transition. Such disruptions could affect the timely availability of critical medical supplies, impacting patient care and treatment schedules.
3. Increasing Domestic Supply: It has been noted that domestic production of pharmaceuticals and supplies could ramp up due to these tariffs.  However, this will take time – so in the short run, there will be supply chain disruptions until domestic alternatives can be found. 

Impact on Pharmaceutical Availability and Costs 

The pharmaceutical sector is particularly vulnerable to these tariffs: 

1. Increased Drug Prices: Many prescription drugs are manufactured in Canada and Mexico. In fact, the U.S. imported $8.4 billion in medications (mixed in dosage) from Canada in 2024.   In addition, China is a major supplier of both raw pharmaceutical ingredients and finished medications to the U.S., especially for generic drugs, which constitute 90% of U.S. prescriptions.  The tariffs may lead to higher prices for these medications in the U.S., increasing costs for both health care providers and patients. This is especially concerning for patients reliant on affordable medications for chronic conditions. 
2. Potential Drug Shortages: If manufacturers reduce exports to the U.S. due to tariffs, there could be shortages of essential medications. This scenario would strain the U.S. health care system, particularly affecting hospitals and clinics, many of whom rely on “just in time” supply logistics and don’t necessarily have a medicinal stockpile.  In the long run, we could see a ramp up in domestic supply – although this will not necessarily be cheaper for providers.  

Broader Economic Implications for Health Care 

Beyond direct costs and supply issues, the tariffs may have broader economic effects that indirectly impact health care: 

1. Stagflation Risks: Economists predict that the tariffs could lead to mild stagflation characterized by increased inflation and slowed economic growth. This economic environment could result in reduced funding for public health programs and increased financial strain on individuals seeking health care services.  
2. Retaliatory Measures: Canada and Mexico have placed a retaliatory 25% tariff on goods from America. This will further disrupt trade and supply chains, exacerbating challenges within the health care sector, including potential delays in medical supply deliveries and increased costs.  

Potential Mitigating Actions 

The Trump administration has acknowledged the potential negative impacts of the tariffs on certain sectors and is considering exemptions, particularly for products like automobiles. However, it remains uncertain whether medical supplies and pharmaceuticals will receive similar considerations. Health care stakeholders, like AdvaMed and the American Hospital Association, are already lobbying for exemptions.  

Conclusion 

The recent imposition of tariffs on imports from Canada, Mexico, and China presents significant challenges for the U.S. health care system. Increased costs, potential supply shortages, and broader economic repercussions threaten to disrupt the immediate delivery of health care services. It is crucial for health care providers, policymakers, and industry stakeholders to collaborate in addressing these challenges, ensuring that patient care remains unaffected amidst shifting trade policies. 

Pharmacy Benefit Managers (PBMs) have long played a crucial role in the U.S. health care system, acting as intermediaries between insurers, pharmacies, and pharmaceutical manufacturers. These organizations manage prescription drug benefits, negotiate prices, and determine which medications are covered by insurance plans. PBMs have become the subject of intense scrutiny in recent years. Critics argue that PBMs contribute to rising drug prices by prioritizing profits over patient welfare and engaging in practices that lack transparency. Given the growing concern over these issues, the question is now being asked: Is there still time and political will for Congress to act on PBM reform legislation? 

The Growing Concerns Over PBMs 

 PBMs have become a focal point in the debate over prescription drug costs in the United States. While PBMs negotiate discounts and rebates with pharmaceutical manufacturers, critics argue that these savings are not always passed on to consumers. In practice, PBMs may keep a portion of these rebates or use them to incentivize insurers to choose more expensive drugs over less costly alternatives. This practice raises serious concerns about whether PBMs are working in the best interests of patients or prioritizing their bottom lines. 

The consolidation of power within the PBM industry has only exacerbated these issues. Today, three PBMs—CVS Caremark, Express Scripts, and OptumRx—control the majority of the market, reducing competition and giving these companies significant leverage over drug prices. Many believe that this concentration of power has allowed PBMs to wield undue influence, increasing prices higher for consumers and limiting access to more affordable medications. 

As these concerns have gained traction, the question of whether Congress will step in to reform PBM practices has become increasingly urgent. Lawmakers from both sides of the aisle have recognized the need for change, but with so many obstacles in the way, it is still unclear if legislative action is possible. 

Legislative Efforts and the Current State of Reform 

Over the past few years, Congress has seen the introduction of several bills aimed at reforming the PBM industry. Proposed reforms have focused on increasing transparency, limiting harmful pricing practices like spread pricing (where PBMs charge insurers more than they reimburse pharmacies), and ensuring that rebates are passed on directly to consumers. Some bills have also looked at tackling the market dominance of the largest PBMs, with the aim of introducing more competition into the space. 

One prominent legislative effort is the Pharmacy Benefit Manager Transparency Act, which would require PBMs to disclose the financial arrangements they make with drug manufacturers and pass on the benefits of negotiated rebates directly to consumers. However, while such proposals have gained attention, the road to meaningful reform remains uncertain.  

The Energy and Commerce Hearing: A Sign of Continued Interest? 

A key moment in the ongoing debate about PBM reform came on February 26, 2025, when the House Energy and Commerce Committee held a hearing focused on the role of PBMs in prescription drug pricing. The hearing featured testimony from industry experts and PBM executives, highlighting the concerns over the lack of transparency of how PBM practices contribute to high drug prices. This hearing demonstrated that there is still significant interest in tackling PBM reform, particularly among Republican lawmakers. 

Republicans, historically aligned with free-market policies, have expressed growing frustration with PBMs, recognizing their influence in shaping the prescription drug market. The Energy and Commerce hearing underscored bipartisan recognition that PBM practices are contributing to rising health care costs. This moment suggests that the issue of PBM reform is still very much on Congress’s radar, with both parties continuing to explore solutions. 

Is There Time for Action? 

While interest in PBM reform is alive and well in Congress, passing meaningful legislation will not be easy. One major obstacle is the complexity of the issue itself. PBMs are deeply embedded within the health care ecosystem, and any reforms could have far-reaching consequences. For example, requiring PBMs to pass on negotiated rebates directly to consumers could disrupt the entire drug supply chain and potentially increase premiums or affect the availability of certain medications. Navigating these complexities and finding a solution that benefits consumers without disrupting the entire system will be a delicate balancing act. 

However, there is still reason for hope. Public frustration with high drug prices continues to grow, and PBMs have become an easy scapegoat in the search for solutions. The Energy and Commerce hearing on February 26th indicated that Congress is still paying attention to the issue, and some states have already implemented successful PBM regulations. These state-level efforts could serve as a blueprint for federal action, demonstrating that reform is not only possible but necessary. 

Political Will: Is Congress Ready to Act? 

Perhaps the most significant question is whether Congress has the political will to act. Despite bipartisan support for PBM reform, lawmakers face considerable pressure from powerful industry players. This pressure could be enough to slow down or weaken reform efforts, especially as elections approach and political divisions deepen. While public support for lowering drug prices is high, it is unclear whether this support will translate into swift action from Congress. 

The recent Energy and Commerce hearing does suggest that there is still political interest in the issue, but whether this interest will turn into concrete action remains uncertain. The challenges of enacting reform are significant, and there may not be enough time for comprehensive legislation before the next election cycle. 

Conclusion 

While there is growing support for PBM reform in Congress, it remains to be seen if lawmakers can overcome the substantial obstacles in their path. The February 26th Energy and Commerce hearing demonstrates that there is continued interest in addressing PBM practices, particularly among Republicans. However, with industry pushback, political complexities, and the time constraints of the legislative calendar, passing meaningful reform will require both political will and bipartisan cooperation. Whether Congress can muster both remains one of the most pressing questions in the battle for lower drug prices. 

Medicaid, the joint federal and state program that provides health care for low-income individuals, has long been a critical part of the U.S. health care system. Over the years, states have explored various mechanisms to increase the flexibility and efficiency of Medicaid spending. In 2016, the Centers for Medicare and Medicaid Services (CMS) created a new option to pay providers according to specific rates known as directed payments.  Since 2016, states have greatly increased their use of directed payments. Now, lawmakers are asking: Should Medicaid directed payments continue as they are, or do they need stricter oversight? 

History of Medicaid Directed Payments 

In 2016, CMS created directed payments to allow states to pay providers according to specified rates and methods.  The payments were originally designed to require Managed Care Organizations (MCOs) to pay providers a certain amount.  In practice, directed payments allow Medicaid funds to be used in ways that are not directly tied to traditional reimbursement methods, such as fee-for-service (FFS). This flexibility has enabled states to target resources where they believe they will have the most impact, such as for certain population groups or in areas with pressing health care needs. 

These payments have drawn attention and controversy, particularly regarding their transparency and potential for misuse.  According to the Medicaid and CHIP Payment and Access Commission, directed payment use increased from 23 states in 2016 to 37 in 2020 – growing from 65 distinct payment agreements to 230.  In 2024, total state spending on directed payments was $110 billion, an amount much greater than on each of the two largest types of FFS supplemental payments – disproportionate share hospital (DSH) and upper payment limit (UPL) payments.   The largest beneficiaries of state-directed payments are hospitals, particularly rural and safety-net hospitals.   

Critics argue that directed payments can lead to distortions in the allocation of resources, favoring certain providers or services over others, potentially undermining the program’s goals of equity and efficiency. 

The Pros of Medicaid Directed Payments 

1. Increased Flexibility: Directed payments give states more leeway in how they allocate Medicaid funds, enabling them to target specific health care challenges. This can be particularly beneficial in addressing local health disparities or funding innovative models of care delivery. 
2. Potential for Cost Savings: When states can direct payments toward cost-effective health care solutions, they may see savings. For example, incentivizing preventive care or effective chronic disease management can reduce the need for more expensive emergency care or hospitalizations. 
3. Focus on Quality of Care: Directed payments can also be tied to quality metrics, encouraging health care providers to focus on improving patient outcomes. This can incentivize better care practices, which may lead to healthier patient populations in the long run.

The Cons of Medicaid Directed Payments 

1. Potential for Misallocation: Critics argue that Medicaid directed payments can lead to the misallocation of resources. Without proper oversight, funds could be directed toward specific providers or services based on political influence or lobbying efforts rather than public health needs. 
2. Lack of Transparency: Directed payments can sometimes operate behind closed doors, making it difficult for the public to track how funds are being spent. This lack of transparency raises concerns about accountability and fairness in how Medicaid dollars are distributed. 
3. Inequity in Access: Directed payments could disproportionately benefit certain providers, particularly those with more political influence or better access to state decision-makers. This could lead to inequities in care access, particularly in underserved or rural areas where providers may have less sway in shaping payment decisions. 

Cost Cutting Measures in the New White House and Congress  

The House-passed budget places limits on state directed payments (SDPs), with an estimated savings of $25 billion.  It would also limit Medicaid provider taxes, lowering the safe harbor from 6% down to 2%, creating savings of $175 billion.  Lowering provider taxes also lowers the amounts used for state directed payments, as many states use the provider tax to fund SDPs.   

Ultimately, Medicaid directed payments are likely to remain a contentious issue, as the balance between state flexibility and federal oversight remains a key point of contention in U.S. health care policy. The pressure is high to create some type of savings on the federal level, even if the result is to handicap states’ ability to shore up safety-net and rural hospitals.