On Sunday, the U.S. House of Representatives passed the Obama administration’s massive overhaul of the U.S. health-care system, nicknamed Obamacare. On Tuesday, the president signed the bill into law.

The non-partisan Congressional Budget Office puts the cost of Obamacare at about $940 billion over ten years. The administration plans to cover this cost with a new tax on high-income earners, Medicare savings and new taxes on health-care companies, including major U.S. drug stocks.

However, a number of health-care firms, including drug stocks and medical-equipment suppliers, stand to benefit from Obamacare. That’s mainly because it will extend coverage to over 32 million Americans who are currently uninsured.

High costs are a major drawback of drug stocks

Even though drug stocks stand to be among the “winners” under Obamacare, there are several drawbacks to drug companies that you should keep in mind if you are thinking of investing in them.

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In particular, drug stocks need to spend heavily to create new drugs, and spend even more to gain regulatory approval. Even then, they only get to profit for a limited time before patents run out and generic products appear. Then too, their research spending may lead to dead ends, rather than new drugs that fill a need and can overcome the regulatory hurdles.

In addition, demand for effective drugs can evaporate overnight, long before the patent expires, if more effective drugs come along. Unlike many other manufacturers, drug stocks don’t benefit from brand loyalty.

However, if you want to invest in drug stocks, we think you should focus on those that have high cash holdings and a number of drugs in the pipeline. All the better if they have access to fast-growing markets, like China, India and Latin America.

Look to medical-equipment suppliers for lower-risk Obamacare profits

Instead of drug companies, consider medical-equipment suppliers. Demand for medical equipment tends to grow, or at least hold steady, regardless of swings in the overall economy. Many of these firms also get recurring revenue, mainly from long-time customers. They also face little competition from generic products.

Baxter International Inc. (symbol BAX on New York) is one example of such a stock. We cover Baxter in our Wall Street Stock Forecaster newsletter.

Like drug companies, Baxter makes vaccines and other pharmaceuticals. But these only account for 45% of its revenue. It gets the rest from intravenous equipment and systems, as well as dialysis equipment. That lowers its risk. Moreover, demand for both drugs and medical equipment is expected to rise under the new U.S. health-care system. That could put Baxter in an ideal position to profit as the major parts of Obamacare are put in place.

We’ll keep you up to date on the very latest developments in the U.S. health-care sector as the Obama health-care reforms come into effect in Wall Street Stock Forecaster. Click here to learn how you can get one month free when you subscribe today.