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The CEOs of Medicaid managed care companies are confident that Medicaid enrollment will enter an "unprecedented stage of development" — and so are investors, reports the Wall Street Journal:

Industry executives argue the benefits of outsourcing the costly government program. Medicaid, on average, accounts for some 20% of state budgets, and health insurers say they can help governments lower costs through their managed-care plans.
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Centene (CNC)--as well as Medicaid-focused rivals Amerigroup Corp. (AGP), Molina Healthcare Inc. (MOH) and Wellcare Health Plans Inc. (WCG) -- saw their share prices surge in 2010 on expectations of a significant rise in Medicaid patients, prompted by last year's health-care overhaul law and the economic downturn.

How Medicaid enrollment progresses, though, will depend on the economic health of states and local governments, the funding support that the federal government provides, and the political process.

Since February 2010 (a month before the Patient Protection and Affordable Care Act became law), Centene, Molina and AMERIGROUP have outperformed the S&P 500 (orange line) between two and five times.

Medicaid Managed Care Stocks v. S&P 500
(Click to enlarge)

Investors in municipal bonds, meanwhile, expect state and local governments to navigate a challenging environment. The chart below compares the iShares S&P National Municipal Bond Fund ETF (MUB) to the S&P 500 (red line) over the same one-year period.

iShares Municipal Bond Fund v. S&P 500

(Click to enlarge)

To be sure, Medicaid enrollment can still expand despite tough economic conditions. But are bond investors and equity investors now discounting two separate expectations?

The answer could well come in the coming weeks as Washington and state capitals work through their budget plans. How much fat, for example, will state officials expect to cut from non-Medicaid expenditures? How much leeway does Medicaid outsourcing to managed care create?

Employment activity will also factor into decision-making, not just as a potential revenue source (higher, or lower, tax receipts) but also as a gauge of health care utilization, which tends to trend down when unemployment rises, and vice versa. Sustained high unemployment, moreover, could in fact elevate Medicaid enrollment beyond the health reform bill's original framework, and create additional funding pressures.

And of course there's also the legal challenge to the individual mandate, and the possibility of the U.S. Supreme Court striking it down, which would disrupt the law's implementation including Medicaid expansion.

For now, at least, these risk factors don't have chief executives and equity investors too concerned.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Despite Major Risk Factors, CEOs/Investors Bullish on Medicaid Managed Care Companies