Dangerous dependence: America relies on China and India for critical medicines — a single plant shutdown overseas has already caused nationwide shortages, making this a national security threat.
Patients are protected: Tariffs won’t raise prices at the pharmacy counter. CMS reimbursement adjusts automatically, copays stay flat, and oversized middleman margins absorb cost shifts.
Middleman problem: Only 36% of a generic’s retail price reflects production. The other 64% is captured by PBMs, wholesalers, insurers, and pharmacies — and that’s where tariff costs land.
Math is clear: A 42% foreign cost gap dilutes to ~15% at retail, and once TRQs rebalance the market, the impact shrinks to just 3–5% — easily absorbed upstream, never by patients.
Fixing the system: A phased Tariff-Rate Quota, paired with domestic incentives (like the PILLS Act) and smarter CMS purchasing, secures supply chains and rebuilds U.S. production without raising costs.
Introduction
America is dangerously reliant on high-risk foreign suppliers for essential generics, especially APIs concentrated in China and India. That over-reliance has already triggered preventable crises, such as nationwide chemotherapy shortages when a single overseas plant shut down.
This vulnerability is more than an economic weakness. It is a national security threat. The root of the problem is not a lack of demand, but a lack of domestic production caused by a distorted market structure that rewards dependence on unsafe pharmaceutical imports.
Section 232 of the Trade Expansion Act provides the authority to act when imports undermine security, and pharmaceuticals clearly qualify.
While tariffs generally do not impact prices and inflation significantly, pharmaceuticals are uniquely immune from cost pressure due to the medical industry’s costing structure. Final patient prices are structurally insulated from fluctuating pharmaceutical costs.
Centers for Medicare & Medicaid Services (CMS) reimbursement adjusts automatically. Insurance designs keep copays flat. And oversized middleman margins absorb shocks. These protections make pharmaceuticals unusually immune to tariff cost pressure—strengthening the case for a carefully phased Tariff-Rate Quota (TRQ) system. Such a system can restore domestic and regulatory aligned production while preserving affordability and access for U.S. patients.
Why Tariffs Don’t Touch Patient Prices
Making a generic drug is much cheaper than what the final cost ends up being. That gap is the middleman problem—and it’s why tariffs won’t touch patient costs.
The raw ingredients and formulation are only a fraction of what drives the final price. Once you add packaging, safety checks (often cut corners in overseas production), wholesaler markups, PBM spreads, pharmacy overhead, and administrative costs, the gap between the actual cost of production and the billed price multiplies several times over.
A University of Southern California study, Flow of Money Through the Pharmaceutical Distribution System, found that for every $100 spent at retail pharmacies on generics, only about $36 goes to direct production costs like APIs, excipients, and formulation and to the final drug manufacturer. The supply chain itself accounts for the majority of the cost: $64 flows to middlemen—including wholesalers, Pharmacy Benefit Managers (PBMs), insurers, and pharmacies.
Breakdown of $100 Spent on Generic Drugs
$17 – Insurers Insurers administer the majority of prescription drug spending, pooling payments from employers and individuals. Their share reflects retained premium margins, utilization management, and administrative load.
$7 – Pharmacy Benefit Managers (PBMs) PBMs take their cut through spread pricing, rebate arrangements, and setting reimbursement benchmarks (like MAC lists).
$32 – Pharmacies Retail pharmacies capture the single largest share of generic drug spending. This covers operating overhead (rent, staff, inventory, claims processing) and gross margin.
$8 – Wholesalers Major distributors like McKesson, AmerisourceBergen, and Cardinal Health retain their portion for moving products through the supply chain.
$18 – Manufacturer After covering direct production costs, manufacturers retain ~$18 as gross profit. This must cover production, regulatory compliance, litigation, and overhead.
$18 – Direct production costs This is the actual cost of the medicine ingredients: APIs, excipients, formulation, packaging, and logistics. It is the only portion tied directly to physical drug inputs.
FIGURE 1:
This breakdown shows how little production costs drive retail prices. 64% of what America spends on prescriptions reflects middleman markups, spreads, and overhead—not the actual making of the drug. Tariffs applied to imported generics or APIs touch at most one-third of the drug’s price and are quickly diluted through the supply chain, trimming margins upstream rather than raising costs for patients.
A well-designed Tariff Rate Quota (TRQ) would also replace high-risk imports from China and India with supply from domestic manufacturers and trusted allies in the EU, UK, and Switzerland. This realignment fosters competition, secures supply chains, and keeps medicines affordable. Patients are further protected by Medicare and Medicaid reimbursement systems, which are designed to recalibrate automatically to market price changes.
CMS Reimbursement Systems Automatically Adjust
One of the most common misconceptions is that government reimbursement systems may lag behind cost changes due to impacts like tariffs, leaving providers exposed and indirectly forcing patients to pay more. In reality, Medicare and Medicaid payments recalibrate efficiently and routinely.
Medicare and Medicaid are structured to reset automatically when drug costs change, ensuring that tariffs never spill over to patients.
Medicare Part B (ASP + 6%) – For hospital-administered generics, Medicare reimburses providers at Average Sales Price (ASP) + 6%. ASP reflects the actual market price providers pay and is recalculated every quarter. If tariffs raise costs, the updated ASP rises as well, and providers are reimbursed at the higher level. Hospitals are not left “underwater,” and patients continue paying only their standard 20% coinsurance—usually offset by Medicare Advantage or Medigap coverage.
Medicaid & Part D (MAC/NADAC) – For retail generics, reimbursement is tied to Maximum Allowable Cost (MAC) or the National Average Drug Acquisition Cost (NADAC) benchmarks. These are updated weekly, meaning pharmacies are almost immediately compensated if acquisition costs increase. Patients remain fully protected by flat-tier copays (often $0–$5) or capped coinsurance. And starting in 2025, Part D will add a $2,000 annual out-of-pocket limit, further shielding beneficiaries.
In short, CMS systems are not static—they are designed to absorb shocks and adjust in real time. Policymakers have already used this model. In 2020, CMS paid more for U.S.-made N95 masks to encourage secure domestic sourcing. The same approach can be applied to medicines, proving this framework is practical and precedent-based. Tariff impacts are captured in reimbursement updates, not passed on to patients.
Insurance Design Protects Patients
Even beyond government programs, private insurance remains a formidable buffer against cost shocks. Most commercial plans assign generics to the lowest copay tier (e.g., $5–$15), regardless of actual acquisition cost or tariff changes. Coinsurance has annual out-of-pocket maximums that cap exposure. Costs attributed to reimbursement changes are spread across large insurance pools, resulting in incremental standard premium adjustments—not abrupt copay hikes.
Moreover, Medicaid includes protections and waivers that shield low-income patients entirely from cost increases; Medicare Part D’s Subsidy programs offer a similar safety net. Thus, consistent insurance design ensures patients are insulated from tariff impacts at the point of sale.
Hospitals: Limited Risks, Strong Safeguards
Hospitals often purchase generics through long-term contracts with Group Purchasing Organizations (GPOs). On paper, these contracts could be vulnerable to tariffs since they lack built-in price adjustments. If costs rise, manufacturers hypothetically face losses and decline to supply under those terms.
In practice, however, several safeguards prevent this from disrupting patient access:
Limited Scope – Hospitals rely on long-term contracts negotiated through GPOs—used by over 96-98% of hospitals. But generic drugs administered in hospital settings are often paid under Part B—not through fixed-price GPO contracts. In 2022, Medicare spent $19.3 billion on Part B drugs administered by hospital outpatient departments (HOPDs), which reflects a substantial treatment volume.
Contractual Flexibility – Nearly all GPO participation agreements include ‘change-in-law’ clauses that trigger renegotiation if new tariffs or regulations disrupt contract terms. Commonly used language includes, ‘if any federal, state or local law… materially changes the terms of this Agreement, the Parties shall negotiate in good faith to amend it.”
Phased Tariff Design – A Tariff-Rate Quota (TRQ) would phase in tariffs over 2–3 years, giving contracts time to reset before higher rates apply.
Alternative Supply Channels – Imports from FDA-MRA countries (EU, UK, Switzerland) remain tariff-free within quota, while domestic production expands—ensuring hospitals have safe alternative sources.
CMS Reimbursement Adjustments – Hospitals are ultimately reimbursed based on ASP or MAC/NADAC updates, which rise if acquisition costs increase, reducing any short-term financial strain.
Taken together, these safeguards mean that tariff pressure is confined to contract margins, not patient access or affordability.
Structural Distortions Driving Shortages
Indian and Chinese suppliers undercut U.S. and European producers by about 42% on APIs and finished generics. That advantage does not reflect greater efficiency. It comes from subsidies, lax labor and environmental standards, and scale dominance that artificially depress costs.
These distortions have squeezed U.S. manufacturers with already thin margins, forcing some to exit and leaving others on the brink. USAntibiotics, one of the last domestic producers of amoxicillin, faces unsustainable foreign competition and may shutter without support. Generic prices in the U.S. are now so low that domestic production has become economically unsustainable.
Furthermore, a Brookings report found that hospitals are incentivized to buy the cheapest pharmaceuticals—often at the expense of quality and reliability—because they cannot directly assess manufacturing standards and bear little accountability for downstream patient risks. This dynamic encourages corner-cutting, fueling shortages and undermining supply resilience.
That downward pressure is magnified by concentrated buyer power: in hospitals, three large GPOs (Vizient, Premier, and HealthTrust) control about 90% of generic contracting, while in retail, three purchasing alliances built around AmerisourceBergen, Cardinal Health, and McKesson with major chains also control around 90%. More than 200 U.S. manufacturers must therefore compete for the business of a handful of dominant buyers, who impose ultra-low, unsustainable prices that drive exits and heighten shortage risk.
The result has been a wave of closures and persistent widespread shortages. A Tariff-Rate Quota (TRQ) would correct these distortions by excluding or pricing out high-risk imports from China and India, resetting the “price anchor” to trusted U.S. and European producers competing on a fair basis. In the short term, domestic and allied suppliers may face somewhat higher costs, but that gap narrows quickly once artificially cheap imports no longer dictate the benchmark.
Domestic incentives such as PILLS Act–style production credits, federal purchasing guarantees, and advanced manufacturing grants can reduce the upfront cost of building or expanding U.S. facilities.
Economies of scale as U.S. and allied plants ramp up output, spreading fixed costs and improving efficiency.
FDA modernization efforts encourage a shift from traditional batch production to continuous manufacturing, where drugs are produced in a nonstop, automated flow with real-time quality checks. This reduces waste, improves reliability, and lowers long-run per-unit costs, making U.S. plants more competitive.
Taken together, these measures ensure that within 3–5 years, the effective cost gap narrows to just 10–15%—a modest difference easily absorbed in the supply chain, not by patients.
Estimated Price Impact and Who Pays
Only $36 of every $100 spent on generics goes to production and manufacturing. The other $64 is captured by intermediaries—pharmacies, PBMs, wholesalers, and insurers. That’s where tariffs land.
Using the best available cost estimates, API production in India and China are about 42% cheaper than U.S. facilities. Applied to the 36% production slice of the total cost, that equates to about 15% at the pharmacy counter—before accounting for TRQs and domestic economies of scale effects.
Once tariffs reset the benchmark to U.S. and European producers (allowing U.S. and European supply to increase and replace Indian and Chinese imports), the gap narrows further. When the long-term price differential falls to 10–15%, the retail impact is only 3–5%—a modest adjustment easily absorbed long before it could ever reach patients.
Illustrative Calculation
$100 spent at pharmacy
Production/manufacturing slice = $36
If production costs are 42% lower abroad → $36 × 0.42 = $15.12 difference → ≈15.1% of total cost
After TRQs, gap falls to 10–15% at the production stage → $36 × 0.10–0.15 = $3.6–$5.4 → 3.6–5.4% of total cost
All of this is absorbed by middlemen—not patients. Consumer copays never change.
Estimated Cost Absorption Across the Final Generic Drug Price
The modest 3–5% adjustment (post-TRQ) is absorbed entirely upstream—not by patients or domestic manufacturers. Each segment of the supply chain has margins or regulatory protections that ensure it carries its share.
Domestic and Allied Manufacturers (0%) – Generic manufacturers already operate on razor-thin margins, which is why they were undercut by low-cost imports. TRQs remove that distortion, allowing compliant producers to scale and reduce unit costs over time. Their contribution to narrowing the cost gap comes from economies of scale, not margin compression.
Pharmacies (~40% of the total cost absorption) – Pharmacies capture about $32 of every $100 spent on generics, with gross margins on generics averaging 40–45%—far higher than branded drugs. Because of this, they are expected to absorb roughly 40% of the tariff impact. Even a small reduction in these margins offsets the 3–5% differential without affecting patient copays or plan reimbursement formulas.
PBMs & Wholesalers (~30% of the total cost absorption) – PBMs (about $7 per $100) and wholesalers (about $8 per $100) together claim around $15 of the drug dollar. Their revenues rely heavily on spread pricing, rebates, and distribution fees—areas with substantial room for compression. CMS reimbursement design and Federal Trade Commission (FTC) oversight both accelerate this margin squeeze, ensuring costs are absorbed upstream rather than passed downstream. Recent FTC enforcement on insulin and specialty generics proves this margin compression is real and actively monitored.
Insurers and Payers (~20% of the total cost absorption) – Insurers retain 17% of retail drug spending. By spreading incremental increases across millions of covered lives and existing profit margins, the effect is effectively invisible at the premium level. Patient contributions do not change: copays remain fixed, and Medicare Part D’s $2,000 annual out-of-pocket cap (beginning in 2025) further protects beneficiaries.
Hospitals (~5% of the total cost absorption) – Hospitals using multi-year GPO contracts face limited short-term exposure since these agreements typically lack dynamic price adjustments. But such contracts represent only a minority of the generic market, and nearly all include force majeure or “change in law” clauses—meaning a Section 232 tariff triggers renegotiation rather than disruption. In addition, CMS reimbursement resets (ASP updates, MAC/NADAC benchmarks) quickly catch up to higher acquisition costs, reducing financial strain.
Patients (0%) – Patients are fully insulated. Generic copays under Medicare Part D and commercial insurance are flat dollar amounts, not tied to acquisition costs. CMS reimbursement systems reset quarterly or weekly, ensuring providers and pharmacies are made whole. Beginning in 2025, Medicare’s $2,000 annual out-of-pocket cap further guarantees no beneficiary faces unexpected exposure.
Policy Takeaway
An initial 15% retail-level gap is comfortably absorbed by pharmacies (~40%), PBMs and wholesalers (~30%), insurers (~20%), and hospitals (~5%). As TRQ supply substitution and scale efficiencies narrow the gap to 3–5%, the system absorbs it even more easily. Domestic manufacturers are protected, and patients never pay more.
Policy Design Safeguards: TRQ System and Flexibility
To safeguard access and strengthen supply resilience, tariff policy must be carefully structured with adaptive design features:
0% In-Quota Tariff for Trusted Sources – Generics and APIs from FDA Mutual Recognition Agreements (MRA) countries (EU, UK, Switzerland, etc.) enter tariff-free up to demand-based quotas. This ensures supply diversity while rewarding trusted allies that meet U.S. regulatory standards.
High Out-of-Quota Tariffs – Imports beyond quota, or from non-MRAs (e.g., China/India), face steep tariffs of 200–300%, calibrated to incentivize sourcing shifts rather than generate revenue. This deters over-reliance on high-risk suppliers and resets the price anchor away from artificially cheap imports.
Phased Tariff Ramp-Up – Tariffs escalate gradually—e.g., from 10% to full rate over 2–3 years—allowing supply chains to adjust smoothly. This minimizes contract shocks while still sending a clear signal for investment in domestic and allied production.
Inclusion Rounds – The policy includes a quarterly mechanism to expand tariff scope to additional shortage-prone generics and adjust to specific volume- and weight-based tariffs based on domestic producer input. This builds accountability and ensures the TRQ evolves in response to real-time market needs.
Emergency Exemptions & Stockpiles – Temporary waivers can be granted for essential drugs under sudden shortage, and a strategic stockpile buffer ensures continuity during transitions. This prevents patient harm while maintaining pressure for long-term supply chain reform.
This layered design balances prompt national-security action with adaptability, minimizing disruption while reinforcing incentives for domestic or allied production.
Production Incentives to Accelerate Supply
While tariffs and TRQs create the protected market space for domestic producers, complementary measures are needed to accelerate capacity expansion. Legislation modeled on the PILLS Act would provide targeted production incentives—such as tax credits, advanced manufacturing grants, or guaranteed federal purchasing agreements—that lower the upfront risk of building or retrofitting facilities.
These additional supports help U.S. manufacturers bring new supply online more quickly, ensuring that reliable domestic output fills the market space created by tariffs. Together, tariffs and PILLS-style incentives form a two-pronged strategy: one corrects distorted import competition, the other jump-starts domestic investment.
Demand-Side Reforms to Strengthen the Drug Supply Chain
Tariffs and production incentives address the supply side by cutting off unsafe imports and creating space for domestic production. But demand-side reforms are also needed to counter the distortions created by concentrated purchasing groups.
Today, three hospital GPOs and three retail purchasing alliances control about 90% of generic drug contracting. Their focus on locking in the lowest possible prices often drives unsustainable margins, discourages domestic production, and contributes to shortages. CMS and FTC can help rebalance the system:
Reward secure sourcing – Just as CMS offered add-on payments for U.S.-made N95 masks in 2023, it could provide small bonuses to hospitals and pharmacies that source generics from domestic or allied producers, making “buying right” financially sustainable.
Realign reimbursement flows – CMS could redistribute a small share of reimbursement back to providers that prioritize secure sourcing, ensuring GPO contracts don’t penalize hospitals that choose reliability over price.
Contract oversight of GPOs and wholesalers – Federal review should address how large purchasing groups lock in long-term contracts that enforce rock-bottom prices and destabilize supply.
FTC action on market concentration – FTC scrutiny of exclusivity clauses, anti-competitive contracting, and buyer power could prevent abuse, rebalance leverage, and keep margins sustainable for domestic manufacturers.
Tariffs create the market space for domestic producers, while CMS and FTC reforms ensure hospitals and pharmacies aren’t trapped in a purchasing system that rewards only the lowest upfront price. Together, these steps strengthen the drug supply chain without raising costs for patients.
Conclusion
America’s dependence on high-risk pharmaceutical imports is both a national security and public health threat. Section 232 tariffs are the right tool to correct this distortion, and generics are uniquely insulated from tariff-driven costs. Production is only a fraction of the final price, and middlemen capture the majority of margins. Tariff costs are absorbed upstream—by pharmacies, PBMs, wholesalers, and insurers—not by patients or domestic manufacturers. A well-designed Tariff-Rate Quota excludes unsafe imports, gives domestic and allied producers the space to expand, and steadily narrows the cost gap without raising prices at the pharmacy counter.
The winners are clear. Patients remain protected from unsafe imports and price hikes, while domestic producers finally gain room to grow. And PBMs, wholesalers, and pharmacies only give up a slice of their oversized margins. The outcome is a more resilient, secure, and affordable system—one where American patients are safe, America regains control over its most essential medicines, and Section 232 is applied exactly as Congress intended: to defend national security in the face of import dependence.
MADE IN AMERICA.
CPA is the leading national, bipartisan organization exclusively representing domestic producers and workers across many industries and sectors of the U.S. economy.
The Price Impact of Generic Drug Tariffs: Why Patients Do Not Bear the Cost
KEY POINTS
Introduction
America is dangerously reliant on high-risk foreign suppliers for essential generics, especially APIs concentrated in China and India. That over-reliance has already triggered preventable crises, such as nationwide chemotherapy shortages when a single overseas plant shut down.
This vulnerability is more than an economic weakness. It is a national security threat. The root of the problem is not a lack of demand, but a lack of domestic production caused by a distorted market structure that rewards dependence on unsafe pharmaceutical imports.
Section 232 of the Trade Expansion Act provides the authority to act when imports undermine security, and pharmaceuticals clearly qualify.
While tariffs generally do not impact prices and inflation significantly, pharmaceuticals are uniquely immune from cost pressure due to the medical industry’s costing structure. Final patient prices are structurally insulated from fluctuating pharmaceutical costs.
Centers for Medicare & Medicaid Services (CMS) reimbursement adjusts automatically. Insurance designs keep copays flat. And oversized middleman margins absorb shocks. These protections make pharmaceuticals unusually immune to tariff cost pressure—strengthening the case for a carefully phased Tariff-Rate Quota (TRQ) system. Such a system can restore domestic and regulatory aligned production while preserving affordability and access for U.S. patients.
Why Tariffs Don’t Touch Patient Prices
Making a generic drug is much cheaper than what the final cost ends up being. That gap is the middleman problem—and it’s why tariffs won’t touch patient costs.
The raw ingredients and formulation are only a fraction of what drives the final price. Once you add packaging, safety checks (often cut corners in overseas production), wholesaler markups, PBM spreads, pharmacy overhead, and administrative costs, the gap between the actual cost of production and the billed price multiplies several times over.
A University of Southern California study, Flow of Money Through the Pharmaceutical Distribution System, found that for every $100 spent at retail pharmacies on generics, only about $36 goes to direct production costs like APIs, excipients, and formulation and to the final drug manufacturer. The supply chain itself accounts for the majority of the cost: $64 flows to middlemen—including wholesalers, Pharmacy Benefit Managers (PBMs), insurers, and pharmacies.
Breakdown of $100 Spent on Generic Drugs
Insurers administer the majority of prescription drug spending, pooling payments from employers and individuals. Their share reflects retained premium margins, utilization management, and administrative load.
PBMs take their cut through spread pricing, rebate arrangements, and setting reimbursement benchmarks (like MAC lists).
Retail pharmacies capture the single largest share of generic drug spending. This covers operating overhead (rent, staff, inventory, claims processing) and gross margin.
Major distributors like McKesson, AmerisourceBergen, and Cardinal Health retain their portion for moving products through the supply chain.
After covering direct production costs, manufacturers retain ~$18 as gross profit. This must cover production, regulatory compliance, litigation, and overhead.
This is the actual cost of the medicine ingredients: APIs, excipients, formulation, packaging, and logistics. It is the only portion tied directly to physical drug inputs.
FIGURE 1:
This breakdown shows how little production costs drive retail prices. 64% of what America spends on prescriptions reflects middleman markups, spreads, and overhead—not the actual making of the drug. Tariffs applied to imported generics or APIs touch at most one-third of the drug’s price and are quickly diluted through the supply chain, trimming margins upstream rather than raising costs for patients.
A well-designed Tariff Rate Quota (TRQ) would also replace high-risk imports from China and India with supply from domestic manufacturers and trusted allies in the EU, UK, and Switzerland. This realignment fosters competition, secures supply chains, and keeps medicines affordable. Patients are further protected by Medicare and Medicaid reimbursement systems, which are designed to recalibrate automatically to market price changes.
CMS Reimbursement Systems Automatically Adjust
One of the most common misconceptions is that government reimbursement systems may lag behind cost changes due to impacts like tariffs, leaving providers exposed and indirectly forcing patients to pay more. In reality, Medicare and Medicaid payments recalibrate efficiently and routinely.
Medicare and Medicaid are structured to reset automatically when drug costs change, ensuring that tariffs never spill over to patients.
In short, CMS systems are not static—they are designed to absorb shocks and adjust in real time. Policymakers have already used this model. In 2020, CMS paid more for U.S.-made N95 masks to encourage secure domestic sourcing. The same approach can be applied to medicines, proving this framework is practical and precedent-based. Tariff impacts are captured in reimbursement updates, not passed on to patients.
Insurance Design Protects Patients
Even beyond government programs, private insurance remains a formidable buffer against cost shocks. Most commercial plans assign generics to the lowest copay tier (e.g., $5–$15), regardless of actual acquisition cost or tariff changes. Coinsurance has annual out-of-pocket maximums that cap exposure. Costs attributed to reimbursement changes are spread across large insurance pools, resulting in incremental standard premium adjustments—not abrupt copay hikes.
Moreover, Medicaid includes protections and waivers that shield low-income patients entirely from cost increases; Medicare Part D’s Subsidy programs offer a similar safety net. Thus, consistent insurance design ensures patients are insulated from tariff impacts at the point of sale.
Hospitals: Limited Risks, Strong Safeguards
Hospitals often purchase generics through long-term contracts with Group Purchasing Organizations (GPOs). On paper, these contracts could be vulnerable to tariffs since they lack built-in price adjustments. If costs rise, manufacturers hypothetically face losses and decline to supply under those terms.
In practice, however, several safeguards prevent this from disrupting patient access:
Taken together, these safeguards mean that tariff pressure is confined to contract margins, not patient access or affordability.
Structural Distortions Driving Shortages
Indian and Chinese suppliers undercut U.S. and European producers by about 42% on APIs and finished generics. That advantage does not reflect greater efficiency. It comes from subsidies, lax labor and environmental standards, and scale dominance that artificially depress costs.
These distortions have squeezed U.S. manufacturers with already thin margins, forcing some to exit and leaving others on the brink. USAntibiotics, one of the last domestic producers of amoxicillin, faces unsustainable foreign competition and may shutter without support. Generic prices in the U.S. are now so low that domestic production has become economically unsustainable.
Furthermore, a Brookings report found that hospitals are incentivized to buy the cheapest pharmaceuticals—often at the expense of quality and reliability—because they cannot directly assess manufacturing standards and bear little accountability for downstream patient risks. This dynamic encourages corner-cutting, fueling shortages and undermining supply resilience.
That downward pressure is magnified by concentrated buyer power: in hospitals, three large GPOs (Vizient, Premier, and HealthTrust) control about 90% of generic contracting, while in retail, three purchasing alliances built around AmerisourceBergen, Cardinal Health, and McKesson with major chains also control around 90%. More than 200 U.S. manufacturers must therefore compete for the business of a handful of dominant buyers, who impose ultra-low, unsustainable prices that drive exits and heighten shortage risk.
The result has been a wave of closures and persistent widespread shortages. A Tariff-Rate Quota (TRQ) would correct these distortions by excluding or pricing out high-risk imports from China and India, resetting the “price anchor” to trusted U.S. and European producers competing on a fair basis. In the short term, domestic and allied suppliers may face somewhat higher costs, but that gap narrows quickly once artificially cheap imports no longer dictate the benchmark.
Taken together, these measures ensure that within 3–5 years, the effective cost gap narrows to just 10–15%—a modest difference easily absorbed in the supply chain, not by patients.
Estimated Price Impact and Who Pays
Only $36 of every $100 spent on generics goes to production and manufacturing. The other $64 is captured by intermediaries—pharmacies, PBMs, wholesalers, and insurers. That’s where tariffs land.
Using the best available cost estimates, API production in India and China are about 42% cheaper than U.S. facilities. Applied to the 36% production slice of the total cost, that equates to about 15% at the pharmacy counter—before accounting for TRQs and domestic economies of scale effects.
Once tariffs reset the benchmark to U.S. and European producers (allowing U.S. and European supply to increase and replace Indian and Chinese imports), the gap narrows further. When the long-term price differential falls to 10–15%, the retail impact is only 3–5%—a modest adjustment easily absorbed long before it could ever reach patients.
Illustrative Calculation
Estimated Cost Absorption Across the Final Generic Drug Price
The modest 3–5% adjustment (post-TRQ) is absorbed entirely upstream—not by patients or domestic manufacturers. Each segment of the supply chain has margins or regulatory protections that ensure it carries its share.
Policy Takeaway
An initial 15% retail-level gap is comfortably absorbed by pharmacies (~40%), PBMs and wholesalers (~30%), insurers (~20%), and hospitals (~5%). As TRQ supply substitution and scale efficiencies narrow the gap to 3–5%, the system absorbs it even more easily. Domestic manufacturers are protected, and patients never pay more.
Policy Design Safeguards: TRQ System and Flexibility
To safeguard access and strengthen supply resilience, tariff policy must be carefully structured with adaptive design features:
This layered design balances prompt national-security action with adaptability, minimizing disruption while reinforcing incentives for domestic or allied production.
Production Incentives to Accelerate Supply
While tariffs and TRQs create the protected market space for domestic producers, complementary measures are needed to accelerate capacity expansion. Legislation modeled on the PILLS Act would provide targeted production incentives—such as tax credits, advanced manufacturing grants, or guaranteed federal purchasing agreements—that lower the upfront risk of building or retrofitting facilities.
These additional supports help U.S. manufacturers bring new supply online more quickly, ensuring that reliable domestic output fills the market space created by tariffs. Together, tariffs and PILLS-style incentives form a two-pronged strategy: one corrects distorted import competition, the other jump-starts domestic investment.
Demand-Side Reforms to Strengthen the Drug Supply Chain
Tariffs and production incentives address the supply side by cutting off unsafe imports and creating space for domestic production. But demand-side reforms are also needed to counter the distortions created by concentrated purchasing groups.
Today, three hospital GPOs and three retail purchasing alliances control about 90% of generic drug contracting. Their focus on locking in the lowest possible prices often drives unsustainable margins, discourages domestic production, and contributes to shortages. CMS and FTC can help rebalance the system:
Tariffs create the market space for domestic producers, while CMS and FTC reforms ensure hospitals and pharmacies aren’t trapped in a purchasing system that rewards only the lowest upfront price. Together, these steps strengthen the drug supply chain without raising costs for patients.
Conclusion
America’s dependence on high-risk pharmaceutical imports is both a national security and public health threat. Section 232 tariffs are the right tool to correct this distortion, and generics are uniquely insulated from tariff-driven costs. Production is only a fraction of the final price, and middlemen capture the majority of margins. Tariff costs are absorbed upstream—by pharmacies, PBMs, wholesalers, and insurers—not by patients or domestic manufacturers. A well-designed Tariff-Rate Quota excludes unsafe imports, gives domestic and allied producers the space to expand, and steadily narrows the cost gap without raising prices at the pharmacy counter.
The winners are clear. Patients remain protected from unsafe imports and price hikes, while domestic producers finally gain room to grow. And PBMs, wholesalers, and pharmacies only give up a slice of their oversized margins. The outcome is a more resilient, secure, and affordable system—one where American patients are safe, America regains control over its most essential medicines, and Section 232 is applied exactly as Congress intended: to defend national security in the face of import dependence.
MADE IN AMERICA.
CPA is the leading national, bipartisan organization exclusively representing domestic producers and workers across many industries and sectors of the U.S. economy.
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