Tariffs will impact supply chain and balance sheet stability

Photo:Suriyapong Thongsawang/Getty Images 

The volatility of President Donald Trump's tariff policies is making it difficult for hospital executives to pin down the effect they will have on the supply chain and budget.

CFOs are also weighing the effect tariffs will have on the economy and inflation, according to Paul Keckley, managing director of The Keckley Report.

The current executive view on tariffs – rather than being an all-hands on deck urgency – is a wait and see approach until the dust settles and the effect on the stock market, economy and therefore hospital bottom lines is known, said Keckley, who advises CFOs.

Keckley said he attended a health system board retreat this month in which tariffs were referenced, but the subject was not a center of conversation. 

"The sense is, we've got to let the dust settle," Keckley said. "It's still being digested at a macro level and at a micro level."

However, there's no doubt that any increases in the supply chain would impact operating costs, Keckley said.

China is a big concern. Keckley estimates that half of the supply chain for medical supplies, devices and pharmaceuticals comes from China. There are no manufacturers in the United States to replace China, he said. 

Trump announced last week he is pausing higher tariffs on most countries for 90 days, according to The Washington Post. But Trump has raised tariffs on goods imported from China to 125%. The White House then said that U.S. tariffs on Chinese imports were now at least 145%, not the 125% that Trump had said previously.

The tariffs currently do not apply to pharmaceuticals, but Trump has indicated that tariffs for pharmaceuticals are on their way.

Trump said the 90-day pause will allow countries to reach bilateral deals with the U.S., according to Reuters.

The Trump administration has been presented with offers from at least 15 nations for trade deals, White House press secretary Karoline Leavitt told reporters Tuesday, according to the New York Post.

Leaders, who are already considering how potential Medicaid cuts would affect the bottom lines, are looking at their agreements with suppliers for any contract details on clawbacks or adjustments, Keckley said.

Within the drug procurement process, healthcare and pharma executives are going back to review contracts.

"I don't think anyone is comfortable," Keckley said of hospital leaders and advisors. "No one has reached a sense of, we've got it figured out."

Everyone is looking at the 2026 midterms, Keckley said, especially if the economy becomes purely toxic in two to three months. If the Democrats capture the House and/or the Senate in two years, then it's a whole new ballgame.

"Everything is on a  trajectory," Keckley said. "I work backward from that."

WHY THIS MATTERS

Keckley said he sees two consistent themes from CFOs: What's the long-term effect and what's the expectation short-term.

The larger, long-term factor is whether the administration's policies will increase inflation and prices and whether the Feds will get involved. 

The other theme revolves around hospital expenses involving capital expenditures, such as construction and labor. 

Fitch Ratings has said market volatility presents a challenge to not-for-profit hospitals' balance sheet stability. Maintaining balance sheet strength is crucial for addressing ongoing macroeconomic uncertainties, including tariffs and potential Medicaid changes, the report said.

Hospitals with strong liquidity from investment income are best able to survive labor and inflationary pressures. Hospitals benefited from strong stock market performance from 2020 to 2024, with the S&P 500's annual return averaging over 14%. 

The Federal Reserve's aggressive interest rate hikes over the past two years have also supported investment earnings for lower-rated hospitals and hospitals with more conservative asset allocations, as shorter-term, lower-risk fixed income assets have yielded more favorable returns, Fitch said.

For hospital CFOs, everything comes down to revenue, said David Kirshner, managing partner at LogicSource, who is a former CFO of Boston Children's Hospital. 

Hospitals must plan for a world when there's no revenue growth by cutting expenses, Kirshner said. For this, nonprofit hospitals need the sense of discipline and rigor that's been a part of business and private equity for years, he said.

The supply chain around healthcare tends to remain fixed due to a level of resistance to go outside the current group purchasing organization. But healthcare pays, on average, 7% to 10% more for supply chain products than other businesses, according to Kirshner.

"Forty-percent of hospital systems are in the red," Kirshner said. "The CFO's role is clearly in the spotlight now."

THE LARGER TREND

Trump last week announced a 90-day pause on most tariffs and a lowering of the "reciprocal tariff" rate to 10%. 

The administration initially unveiled an additional 25% tariff on imports from Canada and Mexico and a 10% increase on goods from China. 

Smartphones, computers and certain other electronics, along with semiconductors, were granted exclusions from steep tariffs. These products are largely imported from China.

In its Q1 financial earnings report on Tuesday, Johnson & Johnson estimated a cost of $400 million in tariffs in 2025 guidance.

Joseph Wolk, executive vice president and CFO, said this was primarily MedTech tariffs. It includes the cost of Chinese tariffs as well as the China retaliatory tariff and Mexico and Canadian import tariffs that are not excluded and to a small degree some of the steel and aluminum tariffs that impact some of products. 

"And so just to maybe clarify for everybody, that is products of U.S. origin being shipped into China, and that's probably the most penalizing factor. That $400 million, I don't want to be cavalier about that. It's obviously – the program has been phased in as a partial year. And then you have mostly this being captured as cost of goods. So it's going to sit on the balance sheet in inventory and be relieved through the P&L in future periods. So, that's how we're thinking of it."

Johnson & Johnson CEO and Chairman Joaquin Duato said tariffs could create disruptions in the supply chain, leading to shortages. 

"If what you want is to build manufacturing capacity in the U.S., both in MedTech and in pharmaceuticals, the most effective answer is no tariffs, but tax policy," Duato said. "As a matter of fact, since President Trump's 2017 tax reform, the investment in manufacturing both in MedTech and in pharmaceuticals has significantly increased. And when you think about our recent announcement of investing $55 billion over the next four years at the completion of this investment plan, essentially all our advanced medicines that are used in the U.S. will be manufactured in the US. So, tax policy is a very effective tool to be able to build manufacturing capacity here in the U.S., both for MedTech and pharmaceuticals."

Email the writer: SMorse@himss.org