Latest / Off the Chart: A Business of Medicine Podcast / S1 Ep57: Tariffs and the medical device industry with Rohit Harve of PA Consulting
Transcript
- Rohit Harve 00:00:00 The prices are going to get directly passed on to the consumers. And the consumers in this case are doctors, patients, health care providers. They will feel the pinch. Austin Littrell 00:00:14 Welcome to Off the Chart: A Business of Medicine Podcast, featuring lively and informative conversations with health care experts, opinion leaders, and practicing physicians about the challenges facing doctors and medical practices. I'm your host, Austin Littrell. This episode features a conversation between Medical Economics Managing Editor Todd Shryock and Rohit Harve, a technical operations partner and health care expert with PA consulting. Rohit joins the show to talk tariffs and what impact they might have on the medical device industry. Todd Shryock 00:00:49 I'm here with Rohit Harvey, a health care expert with PA consulting, and today we're going to talk about tariffs. Rohit thanks for joining me. Rohit Harve 00:00:59 Glad to be here. Thank you. Todd Shryock 00:01:01 So let's talk about the current landscape as of right now, which is changing rapidly. Give me an overview of how do tariffs currently impact the medical device industry, and which devices or components are most affected by them. Rohit Harve 00:01:20 Yeah, that's a great question. as you can imagine, the, it's a volatile situation, you know, with trade wars and things like that. So, definitely, medical device industry is going to be at the center of it. so if the tariffs are imposed on the medical device industry, I would say segments focused on discretionary care. So these are like elective procedures, aesthetic devices, AI and diagnostic tools. Right. These are some of the things that are going to be impacted, mainly on profitability growth, and even market dynamics. Right. so I would say, maybe if we just drill down, on this profitability. Right. This is more around tariffs are going to impact your cost of goods, squeezed margins. And so when that happens, you know, components like semiconductors, surgical grade materials, polymers will all shoot up in cost. And when you look at the discretionary care segment, these are, aesthetics, you know, elective surgery centers, they don't have the pricing power. The pricing power is very limited. Rohit Harve 00:02:29 So they cannot pass on the cost of the components to the buyers, without dampening the demand. So there'll be a compression in kind of the profitability. the EBITDA is going to definitely come down. and what the companies will need to do now is really focus on operational efficiencies. What are some of the ways they can shave out cost with, the components? Do they really need all these different colors on their components? there's things like designed to cause design to value that is going to happen, but costs are going to come up. One of the things that I was also going to look at us was digging deeper into this. Our research was that there's a lot of medical device innovation that's happening, and they all consume these, parts and products. and these are cutting edge technologies, semiconductors, that has that has limited manufacturing potential in at least the United States. So these are going to get impacted. and so the innovation is going to get, slowed down a little bit as projects will get postponed. And, and, my sense would be that this would also squeeze kind of like your cash flow, and once the cash flow is, cut down, then you can't do your M&A. Rohit Harve 00:03:42 So the growth is going to also be impacted. And then without without saying, I mean, stock market, you know, with lower valuation, profitability declines, could see an impact, to the earnings and PE multiples. so that's kind of like the way I would say the medical industry is going to be affected. Todd Shryock 00:04:03 You talked about costs, who ultimately with medical devices is going to see an increase there? Is it the physicians who might be buying these for their practice? Will that then be passed on to the patient. You know who's ultimately going to be paying more? Rohit Harve 00:04:17 Yeah. No, that's a great question. Right. So one of the things we have to look at, it is kind of like the price elasticity here. Right? So in the way to look at this is medical devices that are lifesaving or essential having inelastic demand. So what basically that means is that even if the prices go up the consumers will continue to need it will continue to need demanded. Right. And so for those components, the prices are going to get directly passed on to the consumers. Rohit Harve 00:04:48 And the consumers in this case are doctors, patients, health care providers. They will feel the pinch, when it comes to kind of like the elective care, discretionary care In those cases, I would say. It'll be tough to kind of like pass on the cost reduction. But I basically worry that that it's going to slow down on people consuming it. And so so there's going to be a drop in the demand. And when the demand drops, then there's going to be a little bit of a slowdown in kind of like the the efficiency piece. But broadly speaking this is going to impact health care costs. Right. When you think about, patients, consumers getting impacted by it, the health care is going to, cost are going to shoot up. And with we talked about innovation. If the innovation is going to slow down a little bit, then it's going to impact the quality of care. And and typically what ends up happening in quality of care is, folks, and kind of the lower income segment are going to get impacted much, much more than, than, than the others. Speaker 4 00:05:55 Say, Keith, this is all well and good, but what if someone is looking for more clinical information? Todd Shryock 00:06:00 Oh. Keith Reynolds 00:06:01 Then they want to check out our sister site, Patient Care Online. Com the leading clinical resource for primary care physicians. Again that's patient care online.com. Todd Shryock 00:06:14 What about supply chain issues. New tariffs have any effect on supply chain. And if so explain how. Rohit Harve 00:06:23 Yeah. So the biggest question out there thought is you know, you've got 30 years of free market that was in place to kind of like go with the supply chain that's currently in place. Right? So a lot of these, leaders are thinking, you know, should we rip out this supply chain deal with the free market, for policies, from a four year administration? Right. So that's kind of like the big question on the table, but I sense that, you know, the the the manufacturers will definitely try to look for local suppliers. Right. And it's going to be a very difficult and a costly solution because we talked about some of the semiconductors. Rohit Harve 00:07:02 these are medical devices that require specialized components, advanced materials, and that's not available domestically. So, so that's going to really impact your, raw material cost, you know, aspects as such. Right? One of the piece with supply chain where you bring your products in, they need to be approved by FDA. Right. So you have this regulatory barriers, and FDA is looking to make sure that you know the products are safe, effective and compliant. And and typically when you're looking at your class three medical devices, these are kind of like the high risk devices. You know, you might require clinical studies. You might need to go back to the to the hospitals. So there's going to be a lot of regulatory complications that may also come up as you're bringing the supply chain back inside. but but the most important thing that I'm going to say here is that there is economies of scale right now. So the global supply chain, the vendor set up now, my sense would be that the tariffs, you know, even if you look at them one on one basis, I think the cost to manufacture products internally, in-house, reshoring, the labor arbitrage has got to make it so more expensive that I think the, the manufacturers will just suck it up and kind of like go with kind of like status quo for now in the short term. Rohit Harve 00:08:22 and they'll pass on the cost to the, to the patients, consumers and doctors. but in the longer run, they'll start thinking about bringing some of these, supply chain, raw materials and input materials back in. and that's where I would say, you know, people need to start thinking about efficiency and, and bringing automation and other things into place. Todd Shryock 00:08:44 But is it realistic to move some of these more complex factories from, you know, maybe Southeast Asia or wherever they're located to the United States? I mean, some of these factories are very complicated, may take years to build. It's not like there's one ready to go. And you know, suburban Philadelphia isn't even realistic to move some of these onshore. Rohit Harve 00:09:07 Oh my God. You hit the nail on the head. Right. The technology transfer cost. The the the cost. Kind of like these devices these takes years, right? I mean, if you are bringing a complex component and you're talking 2 to 3 years to actually bring it in, right? Unless there's the, the the administration provides a kind of regulatory relief and, and figures out a way of, you know, you know, bringing labor costs down. Rohit Harve 00:09:35 The only way you can bring the labor costs down is by bringing robotics and automation. And sure, you can bring robotics and automation in place, but then you need the talent. We still don't have the talent to kind of like support, you know, that level of automation. So skill building needs to happen in parallel. So not only are you talking about complex processes that need to be, moved into state side, but also upskilling. And so you've got a bunch of multiple things that are happening where, this is going to be, you know, 4 to 5 year program, really, when you think about it. So in the short term, I would say people are just going to dual source potentially. But most likely, you know, this might be an opportunity of adding a little bit more muscle within the, within us to kind of like build that expertise. Todd Shryock 00:10:27 And if you're looking at a program of 4 to 5 years, you're probably looking at a different administration who may have a whole different set of rules. Todd Shryock 00:10:35 And so that seems like a pretty big risk to, to uproot somewhere and, and try and move everything here, only to have the rules change again. Possibly. Rohit Harve 00:10:46 Exactly. And you know, the free markets, you know, when they do come back, if they do come back, will automatically, you know, folks will go back to, you know, what's the best way of manufacturing products, which is kind of like the global economy. So without any doubt, if things change, companies will go back to where they were before, right? Todd Shryock 00:11:07 Or US based medical companies? Medical device companies. How are the tariffs going to affect their competitiveness in the global market. Rohit Harve 00:11:17 So so the biggest hit is going to be around innovation right. So when you have kind of like this flexibility of saying you can price you know then automatically you're not competing with with the with the you know global companies. So you know there's going to be impact on your innovation. You're going to invest less on projects. You've got to, delay some of these, some of these, you know, cutting edge technologies that are out there. Rohit Harve 00:11:45 So to a certain extent, I would say, without the lack of this global economy and global infrastructure in place, it's definitely going to make the, the, the US based companies, I would say a little bit more big fat and unfortunately not so happy. Keith Reynolds 00:12:05 Oh, you say you're a practice leader or administrator? We've got just the thing. Our sister site, Physicians Practice. Com your one stop shop for all the expert tips and tricks that will get your practice really humming. Again, that's physicians practice.com. Todd Shryock 00:12:22 Guess what? If anything, has been the industry's response to these tariffs. Do you see active lobbying efforts for policy changes or is it is it too early in the game for that? Rohit Harve 00:12:35 So definitely there's a lot of back door discussions going on. There's obviously lobbying going on. You saw that in the auto industry was quite successful in delaying, you know, some of these tariffs, you know, they got about a month reprieve. So I'm sure that's happening also with the, you know, healthcare, infrastructure as well. Rohit Harve 00:12:57 But but I think to a certain extent, you know, the administration is going to be looking for opportunities to, you know, obviously, you know, win some, win some relief on the drug trafficking side or regards to labor relations and things like that. So I think it's one of those, politicking that's happening. but but in the end, I think it's going to be one of the things, where, we'll have to wait and see. I was talking to one of the guys, whom I work with. So I work for about 3 to 4 months in, in a market in, Reynosa, Mexico. And I was talking to the general manager, yesterday, and he was telling me that he thinks it's very unlikely that these tariffs are going to even come in play because he thinks there's a so big these are in such big numbers. He's just thinking that this might just be a dilatory tactic. but again that's one person's point of view right. Todd Shryock 00:13:53 Interesting I guess. Do you think. that a deal. Todd Shryock 00:14:01 I guess. What's your opinion? Do you think there will be some sort of deal that gets done? Do you think these tariffs will be, you know, rescinded? What's your kind of gut feeling on this. Rohit Harve 00:14:12 Yeah. So so hard to say. But my sense is that this was essentially a promise made to the people the administration's promise. So it's going to happen. the question is with what magnitude. Right. My sense would be that it would, it would be a little bit more muted. Not not the numbers that we are talking about, 25%, you know, etc., with Mexico and Canada. You know, there's a little bit of a trade war that's going on. So we'll have to wait and see. But my sense would be that this will come down a little bit, as you know, countries, you know, are able to kind of like support, you know, some of the, you know, challenges across the border and things like that. So that would be my hope. Rohit Harve 00:14:54 Yeah. Todd Shryock 00:14:56 I know in hearing from other reading about other industries. A lot of people say, you know, what's worse is the on again off again. It's 25. It's 50. It's ten. It's 25 again. It's the uncertainty is actually worse than the tariff itself. Is that true for the medical device industry as well? Rohit Harve 00:15:18 Absolutely. But the one thing that I was telling you about is that because the cost to transfer technology and etc. is going to be so much more stuff that takes years, right? The medical industry to a certain extent might be able to kind of like deal with some of those, the ups and downs and the uncertainty with, with things changing on a day to day basis. because the stuff that they're going to do is probably going to be more long term. Right? and so things are that there are no regret moves for the US companies as, you know, deal sourcing. Right? They could start that process immediately and say, hey, listen, we have a site in China. Rohit Harve 00:15:54 Let's build a, you know, facility, you know, near Mexico or whatever, to be or in us, right? or they could look at, they could start looking at some of the parts and things like that and start, you know, looking at robotics and things like that, that they could start, getting into. Right. So some of those things could happen in parallel. But I would say just because lifting and shifting these operations, and bringing it to us is going to be so much more. You know, there's big inertia of rest here, right? that we talk about. So, so I would say, much, much less compared to the auto and some of the other retail industries where, you know, things change really quickly. Todd Shryock 00:16:34 But are there any other insights on tariffs that you'd like to share? Rohit Harve 00:16:41 Yeah. No, I would say, you know, one aspect about about the startups is the companies need to start looking at the efficiency of making products, right? I mean, we lost a lot of talent when we offshored a lot of these products. Rohit Harve 00:16:57 Right? So as you kind of like start thinking about bringing some of these, capabilities in-house, right? It's also being done with automation and robotics, but also at the same time, you need to look at, you know, how do you be competitive in the global marketplace, right. How do you establish efficiencies? You know, there are various ways in Lean Six Sigma Digital that that can be brought in. That helps in making you more competitive. And so those are some of the things I think the companies should start focusing on, you know, immediately so that, you know, depending on how things change, they're going to be ready for the uncertainty, right? Todd Shryock 00:17:35 Very good. Rohit, this has been a great conversation. It's an interesting topic, in very interesting economic times. So thanks for joining me. Rohit Harve 00:17:44 Amazing. Thank you so much, Todd. Speaker 6 00:17:50 And. Austin Littrell 00:17:57 Again, that was Medical Economics Managing Editor Todd Shryock and Rohit Harve, a technical operations partner and health care expert with PA consulting. My name is Austin Littrell, and on behalf of the whole Medical Economics and Physicians Practice teams, I'd like to thank you for listening to the show and ask you to Austin Littrell 00:18:11 please subscribe on Apple Podcasts or Spotify so you don't miss the next episode. Also, if you'd like the best stories that Medical Economics and Physicians Practice publish delivered straight to your email six days of the week, subscribe to our newsletter at Medicaleconomics.com and Physicianspractice.com. Oh, and be sure to check out Medical Economics Pulse, a quick-hitting news podcast that offers concise updates on the most important developments affecting your practice, your bottom line, and the broader health care landscape delivered by the editorial team at Medical Economics. Off the Chart: A Business of Medicine Podcast, is executive produced by Chris Mazzolini and produced by Keith Reynolds and Austin Littrell. Medical Economics, Physicians Practice, and Patient Care Online are all members of the MJH Life Sciences family. Thank you.