For the past few years, stocks of health maintenance organizations and other health care providers have been about as popular as bubonic plague.

But recently, several downtrodden issues in the sector have registered impressive gains, thanks in part to a spate of good news, including Monday's

Supreme Court

ruling that shielded HMOs from certain lawsuits. Most health care mutual funds have shunned them -- and continue to do so -- in favor of go-go biotechs or pharmaceuticals, but a few value funds have ridden HMOs and hospital stocks and reaped healthy returns.

Now, it's time for a checkup: Have HMO and hospital stocks fully recovered, or is the recent rally just a remission?

The experts are far from unanimous in their diagnosis.


HMO and hospital stocks bounced back more on valuations than on improvements in fundamentals,'' says Tim Bepler, portfolio manager of the $230 million


Orbitex Health & Biotech fund. He's shunned both hospitals and HMOs in favor of biotechs, in which he has a 70% allocation.

But Dean DuMonthier, portfolio manager of

Strong's Mid-Cap Discipline

fund, a value manager who favors beaten-down stocks, finds these stocks a compelling buy. "There's been a real secular shift for these stocks, which had just a horrendous couple of years," he says.

Horrendous, indeed. In the past three years, health care providers have been hit by the cuts in Medicare reimbursement levels from the

Balanced Budget Act of 1997

. HMOs, meanwhile, have been buried under a wave of patient litigation, ambitious expansion plans that went awry and the specter of legislation that would give patients greater leverage in dealing with their providers. The sector has been battered on Wall Street.

Recently, however, Medicare reimbursement rates have been revised upward, the

Patients Bill of Rights

failed to pass the


and the Supreme Court ruled that HMOs can't be sued in federal court for giving physicians financial incentives to curb costs. They also have benefited from the boost to Old Economy stocks during the

Nasdaq Composite's

springtime swoon. While these events don't mean HMOs -- which started to see better returns in 1999 as they were able to raise prices on policies -- are out of the legal woods, the picture is getting sunnier.

DuMonthier finds several healthy picks. Among hospitals, he's fond of

Tenet Healthcare

(THC) - Get Tenet Healthcare Corporation Report

, the second-largest hospital system. The San Diego company bought up the remnants of

Allegheny Health's

debt-ridden hospitals in Pennsylvania and New Jersey, causing its stock price to fall in 1998 as it absorbed that debt.

He's also held


(UNH) - Get UnitedHealth Group Incorporated Report

, an HMO provider, but sold out when its valuation crept upward. That stock is up 50.6% year to date. In 2000, his fund is up 13.3%.

There also are success stories among the HMOs. The once-beleaguered

Oxford Health Plans


is up 72.4% year to date.


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, a Virginia-based HMO, is up 60.2%. And



is up just 10.8% on the year, hampered by its proposed acquisition of



, though that stock is up 32.8%. And


(CI) - Get Cigna Corporation Report

is up 13.6%.

One fund that's used the revival in HMOs is

(FSHCX) - Get Fidelity Select Health Care Svcs Report

Fidelity Select Medical Delivery. It's almost entirely made up of the subsector. It has underperformed its peers since 1995. So far this year, it has outperformed the broader market, rising 7.4%. But those gains haven't helped the fund keep up with the 26.2% gain for the health fund group, according to



Critics of hospitals and HMOs don't give much credence to the recent gains. And they don't expect the rally to last. "The time to own them would have been last year,'' says Bihag Patel, a health care analyst with

Banc One

in Columbus, Ohio.

This spring, "there was a rotation out of higher P/E ratio stocks,'' says Feraz Naqvi, portfolio manager of the


Desdener RCM Global Technology fund. "And hospitals moved in concert with the Old Economy stocks.''

For that reason, Naqvi, who prefers biotech and pharmaceutical names, loaded up on a few hospital names, including Tenet and


, to ride out the decline of some of his more speculative names in biotech. He's more suspicious of HMOs because there are too many forces conspiring against them long term. For the year, Tenet is up 7.5%, and Columbia is down 4.8%. But from March through May, those stocks gained 37% and 35%, respectively. He's since sold them, but is holding onto shares of

Health Management Associates


, a rural hospital chain, for diversification.

Some hospitals also have had quite a ride this year.

Universal Health Services


is up 63.9% year to date and


(HRC) - Get Hill-Rom Holdings, Inc. Report

, which operates outpatient facilities, is up 32.5%.

"The hospitals are getting a one-year delay in the pricing boost of HMOs,'' Patel says.

Patel expects hospitals to sustain their solid gains in coming quarters as stronger hospitals buy up weaker not-for-profit operators and consolidate. "It's a slow-growth business and the only growth comes from consolidating,'' he says.

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