In a recently released white paper, members of the Applied Policy medical devices and diagnostics verticals examine how federal tax incentives could be used to strengthen domestic production of pharmaceuticals, medical devices, and other essential healthcare products.
The analysis considers the complexity of the healthcare supply chain and the United States’ reliance on foreign sources for both key inputs and finished products.
Linda Rouse O’Neill, Vice President of Health Policy and one of the paper’s lead authors, said that only about one-quarter of active pharmaceutical ingredient (API) facilities supplying the U.S. market are based in the United States. She noted that API production is concentrated in a limited number of countries, including India and China.
“This reliance on global production has left the U.S. healthcare sector vulnerable to disruption and has complicated efforts to ensure consistent access to critical products,” O’Neill explained.
The administration is also very interested in this issue. As John Knox, Principal Deputy Assistant Secretary for Preparedness and Response at the U.S. Department of Health and Human Services, stated in 2025, “manufacturing medicines from start to finish in the United States ensures a secure supply of essential medications.”
A Sector with Distinct Constraints
Sabrina Luther, Health Policy Associate and one of the paper’s lead authors, observed that healthcare manufacturing differs in important ways from other advanced manufacturing sectors. “Long development timelines, FDA regulatory requirements, high capital intensity, and uncertainty around coverage and reimbursement all shape decisions about where production is located,” she explained, noting that tax incentives alone may be insufficient to offset these factors, particularly for products with narrow margins or uncertain demand.
Luther added that incentives effective in other industries may fall short in healthcare if they do not account for regulatory approval and clinical validation requirements.
The paper highlights considerations related to incentive structures focused on capital investment, noting that workforce availability and other operational variables are often critical to the viability of domestic manufacturing.
Building Upon Lessons Learned
Drawing on experiences from both pharmaceutical and medical device manufacturers, the authors identify several recurring themes. In some instances, tax incentives contributed to the expansion or modernization of domestic facilities, but often, when paired with mechanisms that helped offset higher costs and provide consistent demand, such as long-term purchasing arrangements or guaranteed purchasing programs. In other cases, manufacturers continued to maintain or expand overseas production despite available incentives, citing persistent cost differentials and operational challenges associated with domestic manufacturing.
Luther said, “Our research suggests that tying incentives to clearly identified public health or supply chain needs can improve their effectiveness.”
The paper’s analysis aligns with broader federal efforts to reduce U.S. reliance on foreign production of critical goods, particularly in sectors with implications for national security and public health. The authors examine how tax incentives might be structured to better support domestic production by addressing cost differentials, regulatory timelines, and market uncertainty specific to healthcare products. Rather than advancing tax policy as a stand-alone solution, the paper considers incentives within a broader set of economic and policy considerations that influence manufacturing location decisions.
Recommendations Grounded in Experience
O’Neill, Luther, and their co-authors ultimately recommend a more tailored approach to tax incentives for healthcare products. They suggest designing incentives that align with regulatory and development timelines, coordinating tax policy with procurement strategies, and targeting support to products that play a critical role in patient care or supply chain resilience.
The paper cautions against broad, sector-agnostic incentives and instead argues for approaches that recognize the distinct economic and operational environments in which healthcare manufacturers operate. Given the continued reliance on global production, the authors conclude that tax incentives are most effective when integrated into a coordinated strategy. They also stress the importance of monitoring and evaluation of any initiatives designed to incentivize domestic manufacturing.
O’Neill says the analysis offers policymakers a pragmatic framework for considering how tax policy can support domestic healthcare manufacturing. “We have grounded our recommendations in real-world case studies,” she explains. “This allows us to move the conversation beyond abstract incentives toward implementation strategies that reflect the realities of healthcare product production.”
Download the paper here.