Let’s Talk Tariffs

If you have checked the news lately, you’ve seen the United States’ ongoing negotiations with China over tit-for-tat tariffs dominating the headlines. What is missing from the discussion is the impact of tariffs on home medical equipment (HME) manufacturers and customers—and how the industry will weather the storm of changes.   

When the Trump administration proposed increasing tariffs on Chinese imports from 10% to 25% in May 2018, 48 product categories crucial to the HME industry were included on the list. The American Association for Homecare (AAHomecare) engaged international law firm King & Spalding to draft industry comments on the proposed tariffs—and found that some of the items targeted would become unavailable to U.S. consumers.

“Many of the HME products and supplies covered by the Section 301 List are simply not available from U.S. manufacturers and providers,” read the letter to the United States Trade Representative (USTR). “When AAHomecare surveyed its members to obtain their views on the proposed tariff, several members stated that they would not be able to obtain similar products from U.S. sources at all. Others stated that, while comparable products might be available domestically, they were not available with the same specifications or quality level as the Chinese products.”

AAHomecare cited the pressures of the competitive bidding program and falling reimbursement rates on the HME industry. The proposed 25% levy would “exacerbate the financial pressures on HME manufacturers and providers that led to the access and supply problems arising out of the competitive bidding program” and “have a serious and disproportionate impact on the seniors, chronically ill individuals and persons with disabilities who need these products,” said the comments.

The USTR did remove some categories from the tariff list in response. See the chart below for a list of harmonized tariff schedule (HTS) codes.

The Industry Today

Yet despite exemptions, HME manufacturers in several categories are still facing the impact of the tariffs on their products. (Editor’s Note: At press time, additional tariffs set to go into effect Dec. 15 on about $160 billion in Chinese goods had been cancelled.) In the long run, manufacturers must choose whether to maintain operations overseas or move back to the U.S. 

“Our hope is that the tariff situation, which can add up to a 25% surcharge on imports, will resolve,” said Alex Lucio, CEO of 3B Medical, a provider of respiratory devices. “In the meantime, we are in process of moving manufacturing of some products over to the U.S.” The company has been absorbing the costs of the tariffs rather than passing them on to consumers; most of the impact has been limited to 3B’s retail product lines, Lucio said.

“The tariffs have certainly affected the margin for our products produced in Asia.” said Brandon Rodriguez, vice president of product management for Brownmed, which provides compression products, bandage protection and more. Brownmed has broadened capacity at its production facility in northeast Iowa to minimize the impact of tariffs. 

“Our costs for parts imported from China have gone up or will be going up about 15% to 25%,” said Dan Janczuk, vice president of operation for Assured Comfort Beds. Janczuk said the company has not seen a direct effect of the tariffs yet because it had ordered raw materials before they kicked in and has now switched to sourcing some materials in the United States.

“While we may not be able to control macroeconomic factors like tariffs, we continually strive to reduce our product costs without lowering product quality,” said Cure Medical CEO John Anderson. The catheter manufacturer has worked to negotiate shipping costs, reduce cardboard and produce new products with lower shipping weight in order to insulate consumers from tariffs.

Philip Mattison, president of Core Products, a manufacturer of orthopedic softgoods and a contract manufacturer, echoed Janczuk’s concerns about prices rising in 2020. 

“A lot of the price changes from the raw materials vendors we won’t see until (this month),” he said. “If you’re in manufacturing, you have to guess at what the price increases will be.”

Looking Ahead

2020 is an election year, and, at press time, the House had announced articles of impeachment against President Trump—both of which could lead to policy changes. However, no Democratic presidential candidates had indicated they would rescind the tariffs to pre-2018 levels.

And some HME companies said the tariffs may accomplish the desired effect of bringing manufacturing back home. 

“If the goal of the tariffs is to drive corporations to invest back in the U.S., I think we are seeing some of that happen,” said 3B’s Lucio, who believes there will be a comprehensive trade agreement between China and the U.S. in 2020. “The most difficult part of this to manage is the uncertainty. Businesses require some degree of certainty for planning and the administration seems to make decisions on the fly with seemingly little concern to the impact on small business.” 

Mattison said the country may be headed toward a small recession—but not one many will feel. 

“Everyone is having trouble hiring,” he said. “The economy is up. In our little Wisconsin town, the health of Main Street is related to the industrial park. When the industrial park is healthy, so is Main Street.” 

“You have to work a little bit harder to maintain a good relationship with your customer and stand behind your products. Stand behind your products and it doesn’t matter who’s in office,” said Mattison.

DME-related Product Categories Removed from the Original Proposed Tariff List:

• 40169915: Caps, lids, seals, stoppers and other closures of non-cellular vulcanized rubber other than hard rubber
• 73202050: Iron or steel helical springs (other than suitable for motor-vehicle suspension)
• 76042910: Aluminum alloy, profiles (other than hollow profiles)
• 85079040: Parts of lead-acid storage batteries, including separators thereof
• 90183100: Syringes, with or without their needles; parts and accessories thereof
• 90183900: Catheters, cannulae and the like used in medical, surgical, dental or veterinary sciences, and parts and accessories thereof
• 90192000: Ozone, oxygen and aerosol therapy, artificial respiration or other therapeutic respiration apparatus, and parts and accessories thereof
• 90211000: Orthopedic or fracture appliances and parts and accessories thereof
• 90213100: Artificial joints and parts and accessories
• 90262080: Instruments and apparatus, other than electrical, for measuring or checking the pressure of liquids or gases

What is a tariff?

A tariff is a tax paid by the importing company. The cost can either be absorbed by the importer or passed on to consumers in the form of higher prices. The goal of a tariff is to encourage increased domestic manufacturing and fewer imports.

Why China?

In August 2017, President Donald Trump initiated an investigation through the USTR into “unfair trade practices” or the diversion of intellectual property, technology and jobs to China under Section 301 of the Trade Act of 1974. The investigation found that Chinese companies used vague language in trade agreements to force technology transfer or broker wider market access. Chinese trade associations denied these claims during the course of the investigation.