In a world riddled by risk, managed care is giving Wall Street reason for optimism. Last year, the sector had a banner year — with an average weighted return of 49 percent, compared with 9 percent for the S&P 500. And this year holds promise too, according to Eric Veiel, an industry analyst at Wachovia Securities.

Consider that industry fundamentals appear solid, Medicare continues to drive membership growth, and merger and acquisition activity is expected to continue apace. As a result, investors should have high expectations for managed care companies. "The glass is half full," Veiel wrote in a recent report to investors. "We are optimists."

A big reason for his bullishness is Medicare. Last year, managed care enrollment in the program rose 3.5 percent nationally, and enrollment is reportedly picking up. And beyond any increase in the traditional HMO, Veiel points out that regional PPOs and the federal Prescription Drug Plan should further boost membership. What's more, this should accelerate as 2006 gets closer.

Another factor is the emergence of the consumer-directed health plans, which many expect to grow quite quickly. For instance, Veiel estimated that enrollment increased significantly at major companies — 108 percent at UnitedHealth group, 226 percent at BCBS plans, and a whopping 1,567 percent at Cigna.

Tempering the upside is a modest 2 percent forecast for enrollment increase, although Aetna is expected to post the largest gain, at 6 percent.

Sources: Inside Consumer-Directed Care, Wachovia Securities; Kaiser/HRET Survey of employer-sponsored health benefits, 2004.

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