Last October, Barrons recommended a couple of California health care companies as possible take-over targets, Health-Net and Molina.  HNT is more of a HMO/managed care operator. MOH is more into Medicaid.  Barrons saw a mature industry in a static economy where growth comes by acquiring smaller companies.

Both stocks have risen sharply, although perhaps not because of the Barrons article. There is an additional catalyst.

Both are worth keeping an eye on because of a possible and little-publicized pending California law change. There is a costly overlap in Medicare and Medicaid coverage that results in excessive  payments and poor health care delivery.(* more below)  California proposes to remedy it by moving Medicaid recipients into a single program and hiring a health care company or companies to handle it.

Of interest is that California decided only companies already doing business in the state were eligible bidders. This puts smaller companies like Health-net and Molina on a short-list and in a good position to pick up a lot of new business, estimated at $14 billion and up. In February, a Barclay's analyst named HNT, MOH, and WLP as possible beneficiaries.

One industry overhang - There is considerable uncertainty over what the Supreme Court will do in the pending health care case. Legal arguments in the case begin on Monday. Issues to be heard are: whether the case should be heard at all now (there is an obscure 1867 law which basically says no); whether the new law is legal; and whether the new Medicaid rules go too far.

The Court, like America, is fractured along party lines, 5-4. So predictions range from striking down the law to upholding it to all points in between. One article even suggests that a runaway Supreme Court could also strike down Medicaid and Medicare, which are integral to the new health care law. In which case, all bets are off.  (For example, MOH just did an acquisition that could be hurt by adverse action on Medicaid. More generally, I would expect the stocks of all health care companies to collapse if the Medicare and Medicaid programs are overturned: pharma, managed care, medical devices, diagnostics.)

Health care is politically charged, but the California proposal is something I see the senior lobby, patient advocacy groups and both the political factions liking, except, obviously, the extremist wings. Delivery of better care at lower cost is hard to argue against, especially in a cash-strapped state like California.

My spin: The legal uncertainty means there will be investing opportunities for speculators with insight or a good crystal ball.

I see a partial strike-down of the new law, along political lines. I don't see a strike down of Medicare and Medicaid now because it's too politically charged for an election year.  (I can't see Congressman Scott coming home to brag about tax savings to the local Seniors Club who will be paying $2,000 a month for private health care with no coverage of pre-existing conditions.)

So I think the smaller California health care companies should be on your watch list. 

I have preferred HNT over MOH because HNT is (or was) a value / turnaround play. Con's --  It's stumbled in the past and analysts are 2:1 bearish on it now. Pro's -- It is in private managed care, and employer-provided plans aren't going away no matter what the Court decides. It's got decent cash on the balance sheet ($21/ share versus $37 price), an increased stock buy-back program, good cash flow in relation to debt and is a possible winner if the California economy starts turning around.   It has a government business, which is a two-edged sword.

Seems to me HNT and MOH are fairly valued now. A sell-off during the Court hearings might bring them into buying range.

Just my opinion.

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*  One example of inefficiency: Nursing homes keep sending older patients back to the hospital. Why? Not because they're sick. Because the nursing homes get $400 a day per patient from Medicare for a hospital referral but only $200 a day for Medicaid patient. Obviously, this sort of nonsense does not help the patients, the overburdened doctors and hospitals or the taxpayers.

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This article covers the legal issues without getting too hysterical:

3 epic days: Health care law reaches high court

http://www.usatoday.com/news/story/2012-03-26/supreme-court-health-care/53768996/1