Healthcare company stocks rise despite Medicare price cuts for their drugs

Today, the U.S. government announced major price cuts for the first 10 Medicare Part D drugs as part of the Inflation Reduction Act. Announced by the Centers for Medicare and Medicaid Services (CMS), these price cuts include a 79% discount for Merck's (MRK) diabetes drug Januvia, which is the largest price cut on the list. Other notable price cuts include 76% for Novo Nordisk's (NVO) insulin Fiasp and 68% for AstraZeneca's (AZN) diabetes drug Farxiga. Interestingly, investors don't seem too concerned, with shares of healthcare companies mostly up in today's trading.

The new drug prices, which are set to take effect in 2026, are expected to save US taxpayers $6 billion and reduce Medicare beneficiaries' co-payments by $1.5 billion. Not surprisingly, pharmaceutical companies such as Bristol-Myers Squibb (BMY) and Novartis (NVS) are not happy with the new pricing rules. They criticize the Inflation Reduction Act and say that the price negotiations are not transparent and do not truly reflect the value of their drugs.

Novartis, for example, fears that these price controls may not actually lead to better patient access to medicines or lower costs at pharmacies. Bristol-Myers Squibb, which tried but failed to challenge the law in court, argues that the law does not really address the question of how insurance plans determine patients' out-of-pocket costs.

A fundamental change in the negotiation of drug prices

The Inflation Reduction Act, introduced in 2022, represents a major change in the way drug prices are negotiated for Medicare Part D beneficiaries, primarily affecting Americans ages 65 and older. While CMS's new authority to negotiate prices is seen as a step to ease financial burdens on taxpayers and patients, it has also sparked debate.

Pharmaceutical companies are concerned about the fairness and effectiveness of this new pricing system, and there are ongoing concerns about how these changes will affect drug availability, innovation and patient access to medicines in the long term.

Which healthcare stock is best to buy now?

As for Wall Street, analysts believe that MRK stock has the most room to move higher among the stocks mentioned above. In fact, MRK's price target of $143.45 per share implies nearly 27% upside potential.