Investing in healthcare manufacturing is an investment in job creation

Since our national recession began, the United States has lost more than seven million jobs, more than half of which are permanent. As was noted in the President’s recent State of the Union Address, the U.S. is increasingly falling behind nations like China and India, who are investing in education and industry, and taking good jobs in the process.

The reality is that it does not have to be this way. But we need policy changes to encourage domestic manufacturing and a different philosophy on how we approach the market.

In the manufacturing sector, good jobs are increasingly moving overseas. Today, we import $4.50 worth of goods from countries like China and India for every $1 we export. In healthcare, more than 90 percent of all nutritional supplements, facemasks, exam gloves, enzymes and amino acids are manufactured overseas. Even basic items aren’t produced in the United States – China manufactures two-thirds of the world’s aspirin and 70 percent of its penicillin, and could become the sole supplier within a few years.

We’ve outsourced so much of our manufacturing capability that the Chinese now have the second largest global economy behind the United States, and are poised to take the top spot by 2030.

Offshoring is about reducing the costs associated with raw materials, labor, regulatory compliance and taxes. Companies moving to China spend just 10 cents on the dollar for labor compared to domestic costs. China is also able to deflate the cost of raw materials using their currency, giving them a 40 percent price advantage over the United States for commodities such as steel.

At the same time, there precious few regulations in China – almost no pollution controls, labor laws or safety authorities, which drive the cost of doing business down to near rock-bottom levels. At the same time, corporate taxes are radically out of step with foreign countries, with U.S. firms paying the second highest rate among industrialized countries.

Given these realities, it may seem futile to advocate for a return of U.S. manufacturing. But while outsourcing cuts expenses in the near term, there is a hidden price tag. China, India and Russia are classic examples of nations with weak intellectual property protections and regulatory enforcement, making them safe havens for counterfeiters, whose knockoff wares cost manufacturers upwards of $75 billion a year.

There’s also a price for safety. From toxic toothpaste and pet food to counterfeit pharmaceuticals, nations like China have abysmal safety records. The most notable example of the risk is heparin, which was produced in China using counterfeit raw materials that led to the deaths of nearly 100 U.S. citizens. Aside from the human toll, this incident cost the manufacturer $11 million to recall the drug, as well as 10 percent of its stock value during the crisis. Outstanding lawsuits and potential settlements could cost billions more.

Adding together the product liability and intellectual property risks of offshoring, and you can neutralize the arguments that supplies are cheaper overseas. But that doesn’t address the corporate tax rate, which simply must be more competitive with those in foreign nations. Most U.S. companies today pay close to 40 percent in federal and state taxes, compared to rates of 20 percent in China. Nor does it address the high regulatory cost of doing business domestically.

But, as the President noted, we may be poised to make policy changes that make domestic manufacturing more attractive. In the State of the Union, the President called for a reduction of the corporate tax rate for the first time in 25 years. Moreover, there is a bipartisan bill in the Senate that would greatly improve U.S. competitiveness by allowing small businesses to permanently expense all equipment and inventory costs in a single year.

To help level the playing field and increase U.S. competitiveness with foreign nations, the bill also replaces a convoluted tax system with a single, flat tax of 24 percent, which would lower the top tax rate to less than that paid in Germany, France and many other nations.

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The President also used his national platform to call for a simplification of U.S. regulatory policies to make it easier and cheaper to do business here. Most U.S. manufacturers have to deal with a spate of laws and regulators. Drug makers, for instance, must deal with the Environmental Protection Agency on pollution levels, the Department of Transportation for shipping, the Food and Drug Administration for quality and safety controls, the Drug Enforcement Agency if the drug is scheduled, Department of Labor and Occupational Safety and Health Administration regulations for their workers, to name a very few.

In fact, a study by the consulting firm Bain & Company reported that the cost for discovering, developing and launching a new drug (along with the prospective drugs that fail) now totals $1.7 billion. We simply can’t have that sort of compliance price tag and expect manufacturers to remain here.

These reforms aren’t about corporate welfare - they are essential to ensuring the U.S. companies can compete in a global economy. In healthcare, the need to remain competitive is even more acute, given the very real public health dangers associated with offshoring our capabilities to nations with dangerous quality control and safety records.

Equalizing the cost equation is about more than just articulating the total cost of offshoring and introducing new tax rates and regulation. Particularly in healthcare, we need to inject rationality into the marketplace by making better, more informed purchasing decisions that put the product’s end user in the driver’s seat, factor in the cost of safety and carefully consider the need for a diverse network of raw supply.

In healthcare, we continually see supply dictating demand, rather than the other way around. Essentially, this creates pressure on manufacturers to make their money by eliminating supply and production costs through offshoring, rather than developing products that satisfy real needs and capitalizing on savings based on demand-based volume.

For commodity items, the problem is more serious, with a broad array of manufactures all producing the same products for the same purpose, relying on advertising, sales forces and superficial details like colors and styles that don’t affect clinical outcomes to capture market share. The problem is all these extras that providers don’t need add expense, not value.

My company, the Premier healthcare alliance, develops hospital purchasing contracts worth more than $36 billion a year for everything from cotton swabs to the most sophisticated new imaging systems. We’ve tried to stop this irrational behavior by introducing a new methodology that we call “sourcing to specification.” This involves working with hospital clinicians, documenting the product attributes that are medically necessary, and then working with a manufacturer to create a product that only includes those features. After all, why pay extra for a purple glove when there’s no medical reason why we need gloves to be purple?

In putting the medical professionals in charge of the design specifications, we can create products they truly want, based on clinical need. And we can work with U.S. manufacturers to produce products to those specifications, get “no frills” alternatives on a purchasing contract for a price that competes with foreign products and create a viable market for domestic goods that will increase corporate revenues and generate new jobs.

To stop the cycle of offshoring, we must rebuild domestic manufacturing by clearing away the barriers that stand in the way of lower production costs, while creating a long-term consumer base for manufactured goods. In part, this requires a public policy remedy, including new export agreements that create American jobs, simplified regulation and a reduction in corporate taxes. The question before us was simply stated to me by a large healthcare manufacturer, who said “I would love to produce more products in the United States, but the federal government doesn’t seem to understand that our tax and regulatory environment makes that cost-prohibitive.”

But consumer demand for affordable, quality U.S. goods is equally important to creating markets for domestic goods that could only be answered with expansion and job creation.

In fact, if we were able to reclaim just half the jobs that have been shipped overseas, we would have more than enough work for every American seeking a job today. And we would create a viable economic future that’s once again based on the things we make, rather than just the things we buy.

Mike Alkire is president of Premier Purchasing Partners, a division of the Premier healthcare alliance.