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Managed care is one of those businesses that always seem to make money. After all, everyone needs to go to the doctor. Even in a hotly contested political season, when talk of rising health-care costs has become a core component of campaign rhetoric, companies are expected to grow profits in the range of 20 percent this year. That hasn't stopped naysayers from warning of a selloff in HMO stocks.

But Legg Mason's Thomas Carroll can be trusted to offer a careful diagnosis. Carroll, 34, is a former health-care consultant with KPMG. As a stock picker, he's unsurpassed in the health-care sector. In 2003 he gained 48 percent, vs. 12 percent for the median sector analyst. That followed a 41 percent return in 2002.

Carroll says the big issue for companies will be how effectively they control costs. Managed-care companies grow profits by capturing the spread between rising coverage prices paid by employers and employees and the underlying cost of medical treatment. If coverage costs rise 12 percent this year -- as they are expected to -- but treatment costs are up only 9 percent, the company pockets the difference. But that kind of growth goes only so far. And so Carroll is looking for companies that can do well even if the growth of health-care premiums slows.

That points him to Anthem (ATH, $88), part of the Blue Cross/Blue Shield network. The California-based company is merging with Wellpoint to form the largest managed-care company in the country, with 26 million participants and annual revenues of $36 billion. Like Anthem, Wellpoint came out of the Blue Cross system, which could make for a smoother merger transition since both share a common heritage of cost cutting. Where Carroll sees an investment opportunity is in investors' skepticism about the merger -- Anthem's stock has fallen 10 percent over the past two months -- and Anthem's track record of growing profits by introducing new products and growing enrollment, not just relying on increases in health-care payments. The forecast is for earnings to grow 26 percent this year on top of 28 percent growth in 2003. Once the merger is complete, Carroll estimates total savings of more than $250 million per year, cash flow in excess of $2 billion, and higher profit margins. He also expects the emboldened Anthem to make an even bigger stamp on the national level and become the top health-coverage provider for large employers.