Operating in an International Environment of Uncertainty

For the past year, tariffs have had a significant impact on the medical device industry.   Reimbursements from insurance companies for medical procedures have not changed due to the tariffs, therefore, the tariff costs are absorbed at various parts of the healthcare value chain

The medical market imports about $6B worth of goods from China. Like many other industries, the medical device industry has lobbied hard for exemptions. In early July, the U.S. Trade Representative granted exemptions for certain electro-surgical medical devices imported into the U.S under the USA HTS (code 9018.90.6000). Needless to say, it is confusing as to what methodology is used to grant these exemptions. 

The Federal Register has identified 110 exemptions as part of notice. Of those exemptions there are seven that have carried the 9018.90.6000 code which is tied to the electrosurgical segment of medical device manufacturing.

Below are the exemptions identified:

 (100) Microwave ablation antennas, whether or not with attached controls, as parts of ablation systems used to ablate live tumors (described in statistical reporting number 9018.90.6000)

(101) Parts and accessories of electrosurgical instruments and appliances, other than extracorporeal shock wave lithotripters (described in statistical reporting number 9018.90.6000)

(102) Smoke evacuation pencils with accompanying tubing and hoses designed to integrate smoke evacuation into electrosurgery by combining both features into a single handpiece, which is designed to apply mono-polar electrosurgical energy to target tissue in a surgical setting while simultaneously evacuating smoke from the surgical site (described in statistical reporting number 9018.90.6000)

(103) Suction coagulators, consisting of a hand-piece with mechanical and/ or electrical controls and a disposable shaft, used for the coagulation of tissue and aspiration of fluids during surgical procedures (described in statistical reporting number 9018.90.6000)

(104) Vessel sealing and dividing devices that use electrical energy to separate and seal tissue during open or laparoscopic surgical procedures, consisting of a handpiece with mechanical and/or electrical controls, and a bipolar electrode intended to deliver electrosurgical current from a system generator directly to tissues for cutting/ coagulation/ablation (described in statistical reporting number 9018.90.6000)

(105) Dental X-ray alignment and positioning apparatus, each valued over $5,000 (described in statistical reporting number 9022.90.6000)

(106) Multi-leaf collimators of radiotherapy systems based on the use of X-ray (described in statistical reporting number 9022.90.6000)

(107) Overhead tube suspension used to hold and position X-ray generating equipment (described in statistical reporting number 9022.90.6000)

So, what’s being done?

One large driver of the confusion is the US Customs’ import database not being kept up-to-date with modern technology. Many of our customers are confused because of the abundance of “gray areas.” 

Per the database seven years ago, a monitoring device used during spinal surgery was classified as electrosurgical. Today, a new video scope with a working channel for surgery has been classified as a monitoring/diagnostic device and is currently still subject to tariffs. When the aforementioned device was imported into the US, reasonable judgement was made to declare an import (HTSUS) code when, in reality, it didn’t matter much. Now, that decision may have a 25% cost impact that cannot be recovered.

From ATL’s point of view, China has the best supply chain support for electronics manufacturing in the world.  While cell phones and other consumer electronics get the headlines, many electrosurgical devices, components, and sub-assemblies are also made in China. ATL started manufacturing in China in the mid-1990’s, and, over the last 20+ years, the southeast China infrastructure to produce electronic components has become the best in the world.

So, how to deal with this uncertainty?  At ATL, many of the electrosurgical devices made in our China facility are now tariff free – providing certainty for the future of that band of products. However, for many medical devices not covered under this tariff code, we believe the analysis should include how to take advantage of China’s electronics infrastructure. Once the Chinese expertise is leveraged, it is ATL’s strategy to complete the assembly and manufacturing of the medical devices in the geography where they will be distributed. Because the cost of doing business has risen so drasticallyv in China the past 10 years, the gap between China and other manufacturing markets has closed significantly.

Because of the ever-changing trade and tariff landscape, ATL has been preparing and evolving for this new reality with manufacturing locations in China, Costa Rica and the USA. Many of our new products for our OEM customers have the interconnect assembly made in China and the rest of the device manufactured and assembled in Costa Rica or USA.  We expect this trend to continue so long as China is the dominant manufacturing environment in the world.