-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LS2xDB9J05jqZmJywglu8/oLc2uiu5L2zGqhc2u1fqhd5f0G41PXIo7G+8yWOW/v Kr6+szIze9v9gxdOOTWBDA== 0001047469-09-007057.txt : 20090731 0001047469-09-007057.hdr.sgml : 20090731 20090731124111 ACCESSION NUMBER: 0001047469-09-007057 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20090630 FILED AS OF DATE: 20090731 DATE AS OF CHANGE: 20090731 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAGELLAN HEALTH SERVICES INC CENTRAL INDEX KEY: 0000019411 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 581076937 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06639 FILM NUMBER: 09976309 BUSINESS ADDRESS: STREET 1: 6950 COLUMBIA GATEWAY STREET 2: STE 400 CITY: COLUMBIA STATE: MD ZIP: 21046 BUSINESS PHONE: 4109531000 FORMER COMPANY: FORMER CONFORMED NAME: CHARTER MEDICAL CORP DATE OF NAME CHANGE: 19920703 10-Q 1 a2193817z10-q.htm FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


(Mark One)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2009
Or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-6639

MAGELLAN HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)


Delaware		58-1076937
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
55 Nod Road, Avon, Connecticut		06001
(Address of principal executive offices)		(Zip code)

(860) 507-1900
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ý		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ý No o

The number of shares of the registrant's Ordinary Common Stock outstanding as of June 30, 2009 was 35,268,535.

Table of Contents

FORM 10-Q

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

INDEX

		Page No.

PART I—Financial Information:
Item 1:	Financial Statements	3
	Condensed Consolidated Balance Sheets—December 31, 2008 and June 30, 2009	3
	Condensed Consolidated Statements of Income—For the Three Months and Six Months Ended June 30, 2008 and 2009	4
	Condensed Consolidated Statements of Cash Flows—For the Six Months Ended June 30, 2008 and 2009	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4:	Controls and Procedures	43
PART II—Other Information:
Item 1:	Legal Proceedings	44
Item 1A:	Risk Factors	44
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3:	Defaults Upon Senior Securities	45
Item 4:	Submission of Matters to a Vote of Security Holders	45
Item 5:	Other Information	45
Item 6:	Exhibits	48
Signatures		49

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

	December 31, 2008			June 30, 2009

				(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	211,825		$	196,200
Restricted cash		192,395			151,439
Accounts receivable, less allowance for doubtful accounts of $1,915 and $2,688 at December 31, 2008 and June 30, 2009, respectively		82,076			101,956
Short-term investments (restricted investments of $116,112 and $94,375 at December 31, 2008 and June 30, 2009, respectively)		225,372			184,233
Deferred income taxes		58,092			58,092
Other current assets (restricted deposits of $17,769 and $18,063 at December 31, 2008 and June 30, 2009, respectively)		52,660			70,655

Total Current Assets		822,420			762,575
Property and equipment, net		88,436			83,089
Long-term investments—restricted		8,527			30,935
Deferred income taxes		76,769			61,511
Other long-term assets		3,472			8,912
Goodwill		367,325			367,325
Other intangible assets, net		50,615			46,332

Total Assets	$	1,417,564		$	1,360,679

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	21,527		$	19,944
Accrued liabilities		96,533			73,830
Medical claims payable		155,860			146,122
Other medical liabilities		99,953			95,432
Current maturities of long-term debt and capital lease obligations		8			5

Total Current Liabilities		373,881			335,333
Long-term debt and capital lease obligations		20			9
Deferred credits and other long-term liabilities		135,590			133,311

Total Liabilities		509,491			468,653

Preferred stock, par value $.01 per share Authorized—10,000 shares—Issued and outstanding—none		—			—
Ordinary common stock, par value $.01 per share Authorized—100,000 shares at December 31, 2008 and June 30, 2009—Issued and outstanding—40,873 shares and 37,006 shares at December 31, 2008, respectively, and 40,995 shares and 35,269 shares at June 30, 2009 respectively		409			410
Multi-Vote common stock, par value $.01 per share Authorized—40,000 shares—Issued and outstanding—none		—			—
Other Stockholders' Equity:
Additional paid-in capital		589,011			605,243
Retained earnings		449,252			481,211
Warrants outstanding		5,382			5,382
Accumulated other comprehensive income (loss)		172			(48	)
Ordinary common stock in treasury, at cost, 3,867 shares and 5,726 shares at December 31, 2008 and June 30, 2009, respectively.		(136,153	)		(200,172	)

Total Stockholders' Equity		908,073			892,026

Total Liabilities and Stockholders' Equity	$	1,417,564		$	1,360,679

See accompanying notes to condensed consolidated financial statements.

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

		Three Months Ended June 30,						Six Months Ended June 30,

		2008			2009			2008			2009
Net revenue		$	656,858		$	635,801		$	1,307,148		$	1,255,316

Cost and expenses:
	Cost of care		458,090			443,048			912,164			874,766
	Cost of goods sold		43,413			49,286			90,237			101,358
	Direct service costs and other operating expenses(1)		106,483			102,934			216,231			205,998
	Depreciation and amortization		14,523			10,516			28,897			21,559
	Interest expense		1,017			657			2,232			1,084
	Interest income		(3,716	)		(1,734	)		(9,209	)		(4,045	)

			619,810			604,707			1,240,552			1,200,720

Income from continuing operations before income taxes			37,048			31,094			66,596			54,596
Provision for income taxes			15,160			12,695			27,464			22,637

Net income			21,888			18,399			39,132			31,959
Other comprehensive (loss) income			(262	)		66			(276	)		(220	)

Comprehensive income		$	21,626		$	18,465		$	38,856		$	31,739

Weighted average number of common shares outstanding—basic (See Note B)			39,961			34,955			39,848			35,578

Weighted average number of common shares outstanding—diluted (See Note B)			40,307			34,992			40,323			35,686

Net income per common share—basic:		$	0.55		$	0.53		$	0.98		$	0.90

Net income per common share—diluted:		$	0.54		$	0.53		$	0.97		$	0.90

(1): Includes stock compensation expense of $6,499 and $6,168 for the three months ended June 30, 2008 and 2009, respectively, and $18,517 and $12,600 for the six months ended June 30, 2008 and 2009, respectively.
See accompanying notes to condensed consolidated financial statements.

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,

(Unaudited)

(In thousands)

	2008			2009

Cash flows from operating activities:
Net income	$	39,132		$	31,959
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		28,897			21,559
Non-cash interest expense		1,355			456
Non-cash stock compensation expense		18,517			12,600
Non-cash income tax expense		19,367			13,343
Cash flows from changes in assets and liabilities, net of effects from acquisitions of businesses:
Restricted cash		37,500			40,956
Accounts receivable, net		(16,218	)		(19,880	)
Other assets		390			(23,604	)
Accounts payable and accrued liabilities		11			(23,960	)
Medical claims payable and other medical liabilities		(4,212	)		(14,259	)
Other		103			973

Net cash provided by operating activities		124,842			40,143

Cash flows from investing activities:
Capital expenditures		(16,687	)		(12,457	)
Acquisitions and investments in businesses, net of cash acquired		(425	)		—
Purchase of investments		(203,745	)		(144,370	)
Maturity of investments		54,172			161,449

Net cash (used in) provided by investing activities		(166,685	)		4,622

Cash flows from financing activities:
Payments on long-term debt and capital lease obligations		(12,668	)		(3	)
Payments to acquire treasury stock		—			(64,019	)
Proceeds from exercise of stock options and warrants		5,603			1,101
Other		2,789			2,531

Net cash used in financing activities		(4,276	)		(60,390	)

Net decrease in cash and cash equivalents		(46,119	)		(15,625	)
Cash and cash equivalents at beginning of period		312,372			211,825

Cash and cash equivalents at end of period	$	266,253		$	196,200

See accompanying notes to condensed consolidated financial statements.

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

(Unaudited)

NOTE A—General

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Magellan Health Services, Inc., a Delaware corporation ("Magellan"), include the accounts of Magellan, its majority owned subsidiaries, and all variable interest entities ("VIEs") for which Magellan is the primary beneficiary (together with Magellan, the "Company"). The financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the Securities and Exchange Commission's (the "SEC") instructions to Form 10-Q. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. The results of operations for the six months ended June 30, 2009 are not necessarily indicative of the results to be expected for the full year. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Company evaluated all events or transactions that occurred after June 30, 2009 and through July 31, 2009, the date we issued these financial statements. Other than as described in Note E—"Subsequent Events," the Company did not have any material recognizable subsequent events during this period.

These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2008 and the notes thereto, which are included in the Company's Annual Report on Form 10-K filed with the SEC on February 27, 2009.

Business Overview

The Company is engaged in the specialty managed healthcare business. Through 2005, the Company predominantly operated in the managed behavioral healthcare business. During 2006, the Company expanded into radiology benefits management and specialty pharmaceutical management as a result of certain acquisitions. The Company provides services to health plans, insurance companies, corporations, labor unions and various governmental agencies. The Company's business is divided into the following five segments, based on the services it provides and/or the customers that it serves, as described below.

Managed Behavioral Healthcare

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

(Unaudited)

NOTE A—General (Continued)

services. The Company generally does not directly provide, or own any provider of, treatment services except as relates to the Company's contract to provide managed behavioral healthcare services to Medicaid recipients and other beneficiaries of the Maricopa County Regional Behavioral Health Authority (the "Maricopa Contract"). Under the Maricopa Contract, effective August 31, 2007 the Company was required to assume the operations of twenty-four behavioral health direct care facilities for a transitional period and to divest itself of these facilities over a two year period. During March 2009, the Company began the operation of two additional behavioral health direct care facilities. At various dates in 2008 and 2009, the Company entered into agreements to transition all behavioral health direct care facilities over various dates. Twenty-three of the 26 direct care facilities have been transitioned through July 2009 and the Company expects to divest itself of the remaining facilities before August 31, 2009.

The Company provides its management services primarily through: (i) risk-based products, where the Company assumes all or a substantial portion of the responsibility for the cost of providing treatment services in exchange for a fixed per member per month fee, (ii) administrative services only ("ASO") products, where the Company provides services such as utilization review, claims administration and/or provider network management, but does not assume responsibility for the cost of the treatment services, and (iii) employee assistance programs ("EAPs") where the Company provides short-term outpatient behavioral counseling services.

The managed behavioral healthcare business is managed based on the services provided and/or the customers served, through the following two segments:

Radiology Benefits Management

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

(Unaudited)

NOTE A—General (Continued)

imaging services, and through risk-based contracts, where the Company assumes all or a substantial portion of the responsibility for the cost of providing diagnostic imaging services.

Specialty Pharmaceutical Management

The Specialty Pharmaceutical Management segment generally reflects the management of specialty drugs used in the treatment of cancer, multiple sclerosis, hemophilia, infertility, rheumatoid arthritis, chronic forms of hepatitis and other diseases. Specialty pharmaceutical drugs represent high-cost injectible, infused, oral, or inhaled drugs which traditional retail pharmacies often do not supply due to their high cost, sensitive handling, and storage needs. The Company's specialty pharmaceutical management services are provided under contracts with managed care companies, health insurers and other health plans for some or all of their commercial, Medicare and Medicaid members. The Company's specialty pharmaceutical services include (i) contracting and formulary optimization on behalf of health plans and pharmaceutical manufacturers; (ii) distributing specialty pharmaceutical drugs on behalf of health plans; (iii) providing strategic consulting services to health plans and pharmaceutical manufacturers; and (iv) providing oncology benefits management services to health plans.

Corporate and Other

This segment of the Company is comprised primarily of operational support functions such as sales and marketing and information technology, as well as corporate support functions such as executive, finance, human resources and legal.

Summary of Significant Accounting Policies

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157 ("SFAS 157"), which provides guidance for using fair value to measure assets and liabilities. It also responds to investors' requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position ("FSP") No. 157-2, Effective Date of FASB Statement No. 157 ("FSP 157-2"), which delays the effective date of SFAS 157 by one year for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). On January 1, 2008, the Company adopted SFAS 157 for financial assets and liabilities. The adoption did not have a material impact on the consolidated financial statements. On January 1, 2009, the Company adopted SFAS 157 for non-financial assets and non-financial liabilities. The adoption did not have a material impact on the consolidated financial statements.

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

(Unaudited)

NOTE A—General (Continued)

In December 2007, the FASB issued SFAS No. 141(R) "Business Combinations" ("SFAS 141(R)") and SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements" ("SFAS 160"). SFAS 141(R) requires the acquiring entity in a business combination to record all assets acquired and liabilities assumed at their respective acquisition-date fair values and changes other practices under SFAS 141, some of which could have a material impact on how the Company accounts for future business combinations. SFAS 141(R) also requires additional disclosure of information surrounding a business combination, such that users of the entity's financial statements can fully understand the nature and financial impact of the business combination. SFAS 160 requires entities to report non-controlling (minority) interests in subsidiaries as equity in the consolidated financial statements. The Company adopted SFAS 141(R) and SFAS 160 simultaneously in the Company's year beginning January 1, 2009. Prior to 2009 and in accordance with American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), reversals of both valuation allowances and unrecognized tax benefits with respect to years prior to the Company's reorganization were recorded to goodwill. All other reversals of these balances were recorded as reductions to income tax expense. As a result of the implementation of SFAS 141(R), beginning in 2009 all reversals of valuation allowances and unrecognized tax benefits are reflected as reductions to income tax expense, even if related to years prior to the Company's reorganization. The adoption of SFAS 160 did not have a material impact on the consolidated financial statements.

In April 2009, the FASB issued FSP SFAS 115-2 and SFAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments," which modify the recognition requirements for other-than-temporary impairments of debt securities and enhances existing disclosures with respect to other-than-temporary impairments of debt and equity securities. FSP SFAS 115-2 and SFAS 124-2 are effective for interim and annual reporting periods ending after June 15, 2009 (the quarter ending June 30, 2009 for the Company). The adoption of FSP SFAS 115-2 and SFAS 124-2 did not have a material impact on the consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 107-1 and Accounting Principles Board ("APB") Opinion No. 28-1, "Interim Disclosures about Fair Value of Financial Instruments" ("FSP FAS 107-1" and "APB 28-1"). FSP FAS 107-1 and APB 28-1 amend SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," to require disclosures, in its interim reporting periods and in its financial statements for annual reporting periods, regarding the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not on the company's balance sheet. FSP FAS 107-1 and APB 28-1 also amend FASB APB Opinion No. 28, "Interim Financial Reporting," to require entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments and describe changes in methods and significant assumptions, in both interim and annual financial statements. FSP FAS 107-1 and APB 28-1 are effective for interim reporting periods ending after June 15, 2009 (the quarter ending June 30, 2009 for the Company). While the adoption of FSP FAS 107-1 and APB 28-1 impacts the Company's disclosures, it does not have an impact on the Company's results of operations or financial condition.

In May 2009, the FASB issued SFAS No. 165, "Subsequent Events," ("SFAS 165"), which establishes general standards of accounting for and disclosure of events that occur after the balance

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

(Unaudited)

NOTE A—General (Continued)

sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for financial statements issued for interim and annual reporting periods ending after June 15, 2009 (the quarter ending June 30, 2009 for the Company). The adoption of SFAS 165 did not have an impact on the Company's results of operations or financial condition.

In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46R" ("SFAS 167"). SFAS 167 amends FASB Interpretation ("FIN") No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46R") to require an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. This statement requires an ongoing reassessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. This statement is effective for fiscal years beginning after November 15, 2009. Accordingly, the Company will adopt SFAS 167 on January 1, 2010. The Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162" ("SFAS 168"), which establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with generally accepted accounting principles ("GAAP"). SFAS 168 explicitly recognizes rules and interpretive releases of the SEC under federal securities laws as authoritative GAAP for SEC registrants. SFAS 168 is effective for financial statements issued for interim and annual reporting periods ending after September 15, 2009 (the quarter ending September 30, 2009 for the Company) and will not have an impact on the Company's results of operations or financial condition.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates of the Company include, among other things, accounts receivable realization, valuation allowances for deferred tax assets, valuation of goodwill and intangible assets, medical claims payable, other medical liabilities, stock compensation assumptions, tax contingencies and legal liabilities. Actual results could differ from those estimates.

Managed Care Revenue

Managed care revenue, inclusive of revenue from the Company's risk, EAP and ASO contracts, is recognized over the applicable coverage period on a per member basis for covered members. The Company is paid a per member fee for all enrolled members, and this fee is recorded as revenue in the month in which members are entitled to service. The Company adjusts its revenue for retroactive membership terminations, additions and other changes, when such adjustments are identified, with the

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

(Unaudited)

NOTE A—General (Continued)

exception of retroactivity that can be reasonably estimated. Any fees paid prior to the month of service are recorded as deferred revenue. Managed care revenues approximated $602.4 million and $1,195.8 million for the three and six months ended June 30, 2008, respectively, and $573.9 million and $1,128.1 million for the three and six months ended June 30, 2009, respectively.

Cost-Plus Contracts

The Company has certain cost-plus contracts with customers under which the Company recognizes revenue as costs are incurred and as services are performed. Revenues from cost-plus contracts approximated $8.3 million and $15.5 million for the three and six months ended June 30, 2008, respectively, and $7.8 million and 15.4 million for the three and six months ended June 30, 2009, respectively.

Block Grant Revenues

The Maricopa Contract is partially funded by federal, state and county block grant money, which represents annual appropriations. The Company recognizes revenue from block grant activity ratably over the period to which the block grant funding applies. Block grant revenues were approximately $30.6 million and $61.2 million for the three and six months ended June 30, 2008, respectively, and $29.3 million and $54.7 million for the three and six months ended June 30, 2009, respectively.

Distribution Revenue

The Company recognizes distribution revenue, which includes the co-payments received from members of the health plans the Company serves, when the specialty pharmaceutical drugs are shipped. At the time of shipment, the earnings process is complete; the obligation of the Company's customer to pay for the specialty pharmaceutical drugs is fixed, and, due to the nature of the product, the member may neither return the specialty pharmaceutical drugs nor receive a refund. Revenues from the distribution of specialty pharmaceutical drugs on behalf of health plans were $46.9 million and $96.9 million for the three and six months ended June 30, 2008, respectively, and $53.6 million and $110.2 million for the three and six months ended June 30, 2009, respectively.

Performance-based Revenue

The Company has the ability to earn performance-based revenue under certain risk and non-risk contracts. Performance-based revenue generally is based on either the ability of the Company to manage care for its clients below specified targets, or on other operating metrics. For each such contract, the Company estimates and records performance-based revenue after considering the relevant contractual terms and the data available for the performance-based revenue calculation. Pro-rata performance-based revenue is recognized on an interim basis pursuant to the rights and obligations of each party upon termination of the contracts. Performance-based revenues were $2.4 million and $6.3 million for the three and six months ended June 30, 2008, respectively, and $2.0 million and $3.3 million for the three and six months ended June 30, 2009, respectively.

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

(Unaudited)

NOTE A—General (Continued)

Significant Customers

Consolidated Company

The Maricopa Contract generated net revenues that exceeded, in the aggregate, ten percent of net revenues for the consolidated Company for the six months ended June 30, 2008 and 2009. In addition to the Maricopa Contract, the Company's contract with the State of Tennessee's TennCare program ("TennCare") generated net revenues that exceeded, in the aggregate, ten percent of net revenues for the consolidated Company for the six months ended June 30, 2008. The Company also has a significant concentration of business from contracts with subsidiaries of WellPoint, Inc. ("WellPoint") and with various counties in the State of Pennsylvania (the "Pennsylvania Counties") which are part of the Pennsylvania Medicaid program.

The Maricopa Contract, which began September 1, 2007 and which extends through June 30, 2010, generated net revenues of $303.1 million and $351.9 million for the six months ended June 30, 2008 and 2009, respectively.

The TennCare program is divided into three regions, and through March 31, 2007 the Company's TennCare contracts encompassed all of the TennCare membership for all three regions. As of April 1, 2007 substantially all of the membership in the Middle Grand Region was re-assigned to managed care companies in accordance with contract awards by TennCare pursuant to its request for proposals for the management of the integrated delivery of behavioral and physical medical care to the region. Substantially all of the membership in the West Grand and East Grand Regions was similarly re-assigned to managed care companies in accordance with contract awards by TennCare effective November 1, 2008 and January 1, 2009, respectively. The Company continues to manage behavioral healthcare services for children enrolled in TennCare Select High, statewide, as well as for certain out-of-state TennCare members pursuant to contracts that extend through August 31, 2009, at which time the contracts will terminate. The Company recorded net revenues of $142.1 million and $24.7 million for the six months ended June 30, 2008 and 2009, respectively, from its TennCare contracts.

Total net revenues from the Company's contracts with WellPoint were $100.6 million and $88.5 million during the six months ended June 30, 2008 and 2009, respectively, including radiology benefits management revenue of $84.1 million and $81.6 million, respectively.

In July 2007, WellPoint acquired a radiology benefits management company, and has expressed its intent to in-source all of its radiology benefits management contracts when such contracts expire. The Company had several radiology benefits management contracts with WellPoint including one that converted from an ASO arrangement to a risk arrangement effective July 1, 2007. Such risk contract has a term through December 31, 2010, and cannot be terminated early, except for cause, as defined in the agreement. The Company's other radiology benefits management ASO contracts with WellPoint generated $7.9 million of net revenues for the six months ended June 30, 2008, and these ASO contracts terminated at various dates in 2008.

Net revenues from the Pennsylvania Counties in the aggregate totaled $145.4 million and $153.7 million for the six months ended June 30, 2008 and 2009, respectively.

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NOTE A—General (Continued)

By Segment

Two customers generated greater than ten percent of Commercial net revenues for the six months ended June 30, 2008 and 2009. The first customer has a contract that extends through December 31, 2012 and generated net revenues of $104.5 million and $116.8 million for the six months ended June 30, 2008 and 2009, respectively. The second customer has a contract that extends through June 30, 2014 and generated net revenues of $44.4 million and $42.2 million for the six months ended June 30, 2008 and 2009, respectively.

Net revenues from the Maricopa Contract and TennCare were each greater than ten percent of the net revenues for the Public Sector segment for the six months ended June 30, 2008. In addition to the Maricopa Contract, one customer generated net revenues greater than ten percent of net revenues for the Public Sector segment for the six months ended June 30, 2009. This customer generated net revenues of $71.2 million and $72.4 million for the six months ended June 30, 2008 and 2009, respectively. This customer contract extends through June 30, 2012 with options for the customer to extend the term of the contract for three one year terms.

In addition to WellPoint, one other customer generated greater than ten percent of the net revenues for the Radiology Benefits Management segment for the six months ended June 30, 2008 and 2009. This customer has a contract that extends through May 31, 2011 and generated net revenues of $50.2 million and $42.5 million for the six months ended June 30, 2008 and 2009, respectively.

For the six months ended June 30, 2008, five customers each exceeded ten percent of the net revenues for the Specialty Pharmaceutical Management segment. Four of such customers generated $33.8 million, $25.1 million, $14.3 million, and $13.4 million of net revenues during the six months ended June 30, 2008. The other contract generated net revenues of $15.4 million for the six months ended June 30, 2008, and this contract terminated as of December 31, 2008. For the six months ended June 30, 2009, four customers each exceeded ten percent of the net revenues for this segment. Such customers generated $42.4 million, $26.8 million, $19.3 million, and $15.2 million of net revenues during the six months ended June 30, 2009. The previously mentioned contract that terminated as of December 31, 2008 generated net revenues for run-off activity of $6.9 million for the six months ended June 30, 2009.

Fair Value Measurements

The Company currently does not have non-financial assets and non-financial liabilities that are required to be measured at fair value on a recurring basis. Financial assets and liabilities are to be measured using inputs from the three levels of the fair value hierarchy, which are as follows:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and

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NOTE A—General (Continued)

inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3—Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including the Company's data.

In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company's financial assets and liabilities that are required to be measured at fair value as of June 30, 2009 (in thousands):

	Fair Value Measurements at June 30, 2009

	Level 1		Level 2		Level 3		Total
Cash and Cash Equivalents(1)	$	—	$	136,435	$	—	$	136,435
Restricted Cash(2)		—		133,327		—		133,327
Investments:
U.S. Government and agency securities		683		—		—		683
Obligations of government-sponsored enterprises(3)		—		23,470		—		23,470
Corporate debt securities		—		169,746		—		169,746
Certificates of deposit		—		21,269		—		21,269

	$	683	$	484,247	$	—	$	484,930

(1): Excludes $59.8 million of cash held in bank accounts by the Company.
(2): Excludes $18.1 million of restricted cash held in bank accounts by the Company.
(3): Includes investments in notes issued by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan Bank.

All of the Company's investments are classified as "available-for-sale" and are carried at fair value, based on quoted market prices. The Company's policy is to classify all investments with contractual maturities within one year as current. Investment income is recognized when earned and reported net of investment expenses. Net unrealized holding gains or losses are excluded from earnings and are reported, net of tax, as "accumulated other comprehensive income (loss)" in the accompanying condensed consolidated balance sheets and condensed consolidated statements of income until realized, unless the losses are deemed to be other-than-temporary. Realized gains or losses, including any provision for other-than-temporary declines in value, are included in the condensed consolidated statements of income.

The recently adopted SFAS 115-2 and SFAS 124-2 apply to debt securities only and provide new guidance on the recognition and presentation of other-than-temporary impairments. In addition, additional disclosures are required related to other-than-temporary impairments. Under this revised guidance, if a debt security is in an unrealized loss position and the Company has the intent to sell the debt security, or it is more likely than not that the Company will have to sell the debt security before

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NOTE A—General (Continued)

recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to other-than-temporary impairment losses recognized in income in the consolidated statements of income. For impaired debt securities that the Company does not intend to sell or it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in other-than-temporary impairment losses recognized in income in the consolidated statements of income and the non-credit component of the other-than-temporary impairment is recognized in other comprehensive income.

The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the debt security. The net present value is calculated by discounting the best estimate of projected future cash flows at the effective interest rate implicit in the debt security at the date of acquisition. Cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings, and estimates regarding timing and amount of recoveries associated with a default. Furthermore, unrealized losses entirely caused by non-credit related factors related to debt securities for which the Company expects to fully recover the amortized cost basis continue to be recognized in accumulated other comprehensive income.

As of December 31, 2008 and June 30, 2009, there were no unrealized losses that the Company believed to be other-than-temporary. No realized gains or losses were recorded for either the six months ended June 30, 2008 or June 30, 2009. The following is a summary of short-term and long-term investments at December 31, 2008 and June 30, 2009 (in thousands):

	December 31, 2008

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Government and agency securities	$	683	$	6	$	—		$	689
Obligations of government-sponsored enterprises(1)		52,479		584		—			53,063
Corporate debt securities		173,184		—		(307	)		172,877
Certificates of deposit		7,270		—		—			7,270

Total investments at December 31, 2008	$	233,616	$	590	$	(307	)	$	233,899

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NOTE A—General (Continued)

	June 30, 2009

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Government and agency securities	$	682	$	1	$	—		$	683
Obligations of government-sponsored enterprises(2)		23,288		182		—			23,470
Corporate debt securities		170,007		—		(261	)		169,746
Certificates of deposit		21,269		—		—			21,269

Total investments at June 30, 2009	$	215,246	$	183	$	(261	)	$	215,168

(1): Includes investments in notes issued by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Federal Home Loan Bank and the Federal Farm Credit Bank.
(2): Includes investments in notes issued by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan Bank.

The maturity dates of the Company's investments as of June 30, 2009 are summarized below (in thousands):

	Amortized Cost		Estimated Fair Value

2009	$	137,611	$	137,842
2010		76,446		76,146
2011		1,189		1,180

Total investments at June 30, 2009	$	215,246	$	215,168

The carrying value for the Company's financial instruments classified as current assets (other than short-term investments) and current liabilities approximate their fair value due to their short maturities.

Income Taxes

The Company's effective income tax rate was 41.2 percent and 41.5 percent for the six months ended June 30, 2008 and 2009, respectively. These rates differ from the federal statutory income tax rate primarily due to state income taxes and permanent differences between book and tax income. The Company also accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes.

Stock Compensation

At December 31, 2008 and June 30, 2009, the Company had equity-based employee incentive plans, which are described more fully in Note 7 in the Company's Annual Report on Form 10-K for the year ended December 31, 2008. The Company recorded stock compensation expense of $6.5 million and $18.5 million for the three and six months ended June 30, 2008, respectively, and $6.2 million and

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NOTE A—General (Continued)

$12.6 million for the three and six months ended June 30, 2009, respectively. Stock compensation expense recognized in the condensed consolidated statements of income for the three and six months ended June 30, 2008 and 2009 has been reduced for estimated forfeitures, estimated at four percent and five percent, respectively.

The weighted average grant date fair value of all stock options granted during the six months ended June 30, 2009 was $8.70 as estimated using the Black-Scholes-Merton option pricing model, which also assumed an expected volatility of 30.2 percent based on the historical volatility of the Company's stock price.

The benefits of tax deductions in excess of recognized stock compensation expense are reported as a financing cash flow, rather than as an operating cash flow. In the six months ended June 30, 2008 and 2009, approximately $4.4 million and $3.0 million of benefits of such tax deductions related to stock compensation expense were realized and as such were reported as financing cash flows, respectively.

Summarized information related to the Company's stock options for the six months ended June 30, 2009 is as follows:

			Weighted Average Exercise Price

Outstanding, beginning of period	4,668,490		$	39.82
Granted	1,129,392			33.09
Cancelled	(395,052	)		40.30
Exercised	(35,435	)		31.08

Outstanding, end of period	5,367,395			38.42

Vested and expected to vest at end of period	5,199,527			38.47

Exercisable, end of period	2,872,859		$	39.17

All of the Company's options granted during the six months ended June 30, 2009 vest ratably on each anniversary date over the three years subsequent to grant, and all have a ten year life.

Summarized information related to the Company's nonvested restricted stock awards for the six months ended June 30, 2009 is as follows:

			Weighted Average Grant Date Fair Value

Outstanding, beginning of period	321,935		$	42.92
Awarded	29,779			30.36
Vested	(46,878	)		36.27
Forfeited	(3,863	)		36.66

Outstanding, ending of period	300,973		$	42.79

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NOTE A—General (Continued)

Summarized information related to the Company's nonvested restricted stock units for the six months ended June 30, 2009 is as follows:

			Weighted Average Grant Date Fair Value

Outstanding, beginning of period	176,112		$	38.72
Awarded	121,065			32.91
Vested	(77,101	)		32.59
Forfeited	(18,878	)		39.42

Outstanding, ending of period	201,198		$	37.51

Restricted stock awards and restricted stock units granted during the six months ended June 30, 2009 generally vest ratably on each anniversary date over the three years subsequent to grant.

Long Term Debt and Capital Lease Obligations

On April 30, 2008, the Company entered into a credit facility with Deutsche Bank AG and Citigroup Global Markets Inc. that provided for a $100.0 million Revolving Loan Commitment for the issuance of letters of credit for the account of the Company with a sublimit of up to $30.0 million for revolving loans (the "2008 Credit Facility"). On April 30, 2008, the Company's credit agreement with Deutsche Bank AG dated January 5, 2004, as amended (the "Credit Agreement") was terminated. The 2008 Credit Facility was guaranteed by substantially all of the subsidiaries of the Company and was secured by substantially all of the assets of the Company and the subsidiary guarantors.

Under the 2008 Credit Facility, the annual interest rate on Revolving Loan borrowings bore interest at a rate equal to the sum of (i) a borrowing margin of 1.00 percent plus (ii) (A) in the case of U.S. dollar denominated loans, the higher of the prime rate or one-half of one percent in excess of the overnight "federal funds" rate, or (B) in the case of Eurodollar denominated loans, an interest rate which is a function of the Eurodollar rate for the selected interest period. The Company had the option to borrow in U.S. dollar denominated loans or Eurodollar denominated loans at its discretion. Letters of Credit issued under the Revolving Loan Commitment bore interest at the rate of 1.125 percent. The commitment commission on the 2008 Credit Facility was 0.375 percent of the unused Revolving Loan Commitment.

On April 29, 2009, the Company entered into an amendment to the 2008 Credit Facility with Deutsche Bank AG, Citibank, N.A., and Bank of America, N.A. that provides for an $80.0 million Revolving Loan Commitment for the issuance of letters of credit for the account of the Company with a sublimit of up to $30.0 million for revolving loans (the "2009 Credit Facility"). Borrowings under the 2009 Credit Facility will mature on April 28, 2010. The 2009 Credit Facility is guaranteed by substantially all of the subsidiaries of the Company and is secured by substantially all of the assets of the Company and the subsidiary guarantors.

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NOTE A—General (Continued)

Under the 2009 Credit Facility, the annual interest rate on Revolving Loan borrowings bear interest at a rate equal to (i) in the case of U.S. dollar denominated loans, the sum of a borrowing margin of 2.25 percent plus the higher of the prime rate or one-half of one percent in excess of the overnight "federal funds" rate, or (ii) in the case of Eurodollar denominated loans, the sum of a borrowing margin of 3.25 percent plus the Eurodollar rate for the selected interest period. The Company has the option to borrow in U.S. dollar denominated loans or Eurodollar denominated loans at its discretion. Letters of Credit issued under the Revolving Loan Commitment bear interest at the rate of 3.375 percent. The commitment commission on the 2009 Credit Facility is 0.625 percent of the unused Revolving Loan Commitment.

At June 30, 2009, the annual interest rate on the Company's capital lease obligation due through 2011 was 6.87 percent. There were no Revolving Loan borrowings at June 30, 2009.

NOTE B—Net Income per Common Share

The following tables reconcile income (numerator) and shares (denominator) used in the computations of net income per common share (in thousands, except per share data):

		Three Months Ended June 30,				Six Months Ended June 30,

		2008		2009		2008		2009
Numerator:
Net income		$	21,888	$	18,399	$	39,132	$	31,959

Denominator:
Weighted average number of common shares outstanding—basic			39,961		34,955		39,848		35,578
	Common stock equivalents—stock options		220		11		307		49
	Common stock equivalents—warrants		122		26		144		57
	Common stock equivalents—restricted stock		4		—		6		2
	Common stock equivalents—restricted stock units		—		—		18		—
	Common stock equivalents—employee stock purchase plan		—		—		—		—

Weighted average number of common shares outstanding—diluted			40,307		34,992		40,323		35,686

Net income per common share—basic		$	0.55	$	0.53	$	0.98	$	0.90

Net income per common share—diluted		$	0.54	$	0.53	$	0.97	$	0.90

The weighted average number of common shares outstanding for the three and six months ended June 30, 2008 and 2009 was calculated using outstanding shares of the Company's Ordinary Common Stock. Common stock equivalents included in the calculation of diluted weighted average common shares outstanding for the three and six months ended June 30, 2008 and 2009 represent stock options to purchase shares of the Company's Ordinary Common Stock, restricted stock awards and restricted

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NOTE B—Net Income per Common Share (Continued)

stock units, stock to be purchased under the Employee Stock Purchase Plan and shares of Ordinary Common Stock related to certain warrants issued on January 5, 2004.

For the six months ended June 30, 2009, the Company had additional potential dilutive securities outstanding representing 5.4 million options, 0.3 million restricted stock awards and 0.2 million restricted stock units that were not included in the computation of dilutive securities because they were anti-dilutive for the period. Had these shares not been anti-dilutive, all of these shares would not have been included in the net income per common share calculation as the Company uses the treasury stock method of calculating diluted shares.

NOTE C—Business Segment Information

The accounting policies of the Company's segments are the same as those described in Note A—"General." The Company evaluates performance of its segments based on profit or loss from continuing operations before stock compensation expense, depreciation and amortization, interest expense, interest income, gain on sale of assets, special charges or benefits, and income taxes ("Segment Profit"). Management uses Segment Profit information for internal reporting and control purposes and considers it important in making decisions regarding the allocation of capital and other resources, risk assessment and employee compensation, among other matters. Intersegment sales and transfers are not significant.

The following tables summarize, for the periods indicated, operating results by business segment (in thousands):

Three Months Ended June 30, 2008	Commercial			Public Sector			Radiology Benefits Management			Specialty Pharmaceutical Management			Corporate and Other			Consolidated

Net revenue	$	163,949		$	362,772		$	75,699		$	54,438		$	—		$	656,858
Cost of care		(85,129	)		(319,721	)		(53,240	)		—			—			(458,090	)
Cost of goods sold		—			—			—			(43,413	)		—			(43,413	)
Direct service costs		(38,144	)		(16,845	)		(14,205	)		(6,130	)		—			(75,324	)
Other operating expenses		—			—			—			—			(31,159	)		(31,159	)
Stock compensation expense(1)		249			194			140			2,015			3,901			6,499

Segment profit (loss)	$	40,925		$	26,400		$	8,394		$	6,910		$	(27,258	)	$	55,371

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NOTE C—Business Segment Information (Continued)

Three Months Ended June 30, 2009	Commercial			Public Sector			Radiology Benefits Management			Specialty Pharmaceutical Management			Corporate and Other			Consolidated

Net revenue	$	160,190		$	343,181		$	70,565		$	61,865		$	—		$	635,801
Cost of care		(88,851	)		(309,770	)		(44,427	)		—			—			(443,048	)
Cost of goods sold		—			—			—			(49,286	)		—			(49,286	)
Direct service costs		(38,008	)		(16,910	)		(12,469	)		(6,870	)		—			(74,257	)
Other operating expenses		—			—			—			—			(28,677	)		(28,677	)
Stock compensation expense(1)		188			209			424			2,136			3,211			6,168

Segment profit (loss)	$	33,519		$	16,710		$	14,093		$	7,845		$	(25,466	)	$	46,701

Six Months Ended June 30, 2008	Commercial			Public Sector			Radiology Benefits Management			Specialty Pharmaceutical Management			Corporate and Other			Consolidated

Net revenue	$	323,552		$	721,010		$	151,198		$	111,388		$	—		$	1,307,148
Cost of care		(166,702	)		(642,895	)		(102,567	)		—			—			(912,164	)
Cost of goods sold		—			—			—			(90,237	)		—			(90,237	)
Direct service costs		(75,569	)		(33,468	)		(27,305	)		(12,050	)		—			(148,392	)
Other operating expenses		—			—			—			—			(67,839	)		(67,839	)
Stock compensation expense(1)		672			368			645			4,119			12,713			18,517

Segment profit (loss)	$	81,953		$	45,015		$	21,971		$	13,220		$	(55,126	)	$	107,033

Six Months Ended June 30, 2009	Commercial			Public Sector			Radiology Benefits Management			Specialty Pharmaceutical Management			Corporate and Other			Consolidated

Net revenue	$	318,943		$	665,041		$	144,124		$	127,208		$	—		$	1,255,316
Cost of care		(178,637	)		(601,916	)		(94,213	)		—			—			(874,766	)
Cost of goods sold		—			—			—			(101,358	)		—			(101,358	)
Direct service costs		(76,533	)		(34,206	)		(25,507	)		(13,264	)		—			(149,510	)
Other operating expenses		—			—			—			—			(56,488	)		(56,488	)
Stock compensation expense(1)		520			444			794			4,218			6,624			12,600

Segment profit (loss)	$	64,293		$	29,363		$	25,198		$	16,804		$	(49,864	)	$	85,794

(1): Stock compensation expense is included in direct service costs and other operating expenses, however this amount is excluded from the computation of Segment Profit since it is managed on a consolidated basis.

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NOTE C—Business Segment Information (Continued)

The following table reconciles Segment Profit to consolidated income from continuing operations before income taxes (in thousands):

		Three Months Ended June 30,						Six Months Ended June 30,

		2008			2009			2008			2009
Segment profit		$	55,371		$	46,701		$	107,033		$	85,794
Stock compensation expense			(6,499	)		(6,168	)		(18,517	)		(12,600	)
Depreciation and amortization			(14,523	)		(10,516	)		(28,897	)		(21,559	)
Interest expense			(1,017	)		(657	)		(2,232	)		(1,084	)
Interest income			3,716			1,734			9,209			4,045

	Income from continuing operations before income taxes	$	37,048		$	31,094		$	66,596		$	54,596

NOTE D—Commitments and Contingencies

Legal

The management and administration of the delivery of specialty managed healthcare entails significant risks of liability. From time to time, the Company is subject to various actions and claims arising from the acts or omissions of its employees, network providers or other parties. In the normal course of business, the Company receives reports relating to deaths and other serious incidents involving patients whose care is being managed by the Company. Such incidents occasionally give rise to malpractice, professional negligence and other related actions and claims against the Company or its network providers. Many of these actions and claims received by the Company seek substantial damages and therefore require the Company to incur significant fees and costs related to their defense. The Company is also subject to or party to certain class actions, litigation and claims relating to its operations and business practices. In the opinion of management, the Company has recorded reserves that are adequate to cover litigation, claims or assessments that have been or may be asserted against the Company, and for which the outcome is probable and reasonably estimable. Management believes that the resolution of such litigation and claims will not have a material adverse effect on the Company's financial condition or results of operations; however, there can be no assurance in this regard.

Stock Repurchase

On July 30, 2008 the Company's board of directors approved a stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through January 31, 2010. Stock repurchases under the program could be executed through open market repurchases, privately negotiated transactions, accelerated share repurchases or other means. The board of directors authorized management to execute stock repurchase transactions from time to time and in such amounts and via such methods as management deemed appropriate. The stock repurchase program could be limited or terminated at any time without prior notice. Pursuant to this program, the Company made open market purchases of 1,859,959 shares of the Company's common stock at an

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NOTE D—Commitments and Contingencies (Continued)

average share price of $34.39 per share for an aggregate cost of $64.0 million (excluding broker commissions) during the six months ended June 30, 2009. The repurchase program was completed as of April 7, 2009, the $200 million authorization having been exhausted.

NOTE E—Subsequent Events

Acquisition of First Health Services Corporation

Pursuant to the June 4, 2009 Purchase Agreement (the "Purchase Agreement") with Coventry Health Care, Inc. ("Coventry"), on July 31, 2009 the Company acquired (the "Acquisition") all of the outstanding equity interests of Coventry's direct and indirect subsidiaries First Health Services Corporation ("FHS"), FHC, Inc. ("FHC") and Provider Synergies, LLC (together with FHS and FHC, "First Health") and certain assets of Coventry which are related to the operation of the business conducted by First Health. First Health provides pharmacy benefits management and other services to Medicaid programs. As consideration for the Acquisition, the Company paid $110 million in cash, subject to working capital adjustments as provided in the Purchase Agreement. The Company funded the Acquisition with cash on hand.

The Company and its wholly-owned subsidiary National Imaging Associates, Inc. ("NIA") also entered into a Master Services Agreement for Radiology Benefit Management Services, dated as of June 4, 2009, with Coventry (the "Master Radiology Services Agreement") pursuant to which they will manage on a risk basis, advanced diagnostic imaging services, including cardiac diagnostic testing, in five markets served by Coventry. Pursuant to the Master Radiology Services Agreement, the parties were obligated to enter into services agreements for radiology services for each of the five markets to be served by NIA (the "Individual Radiology Services Agreements"). On July 31, 2009, the Company and Coventry entered into such Individual Radiology Services Agreements. In addition, the Company and its wholly owned subsidiary ICORE Healthcare, LLC ("ICORE"), entered into a Management Services Agreement for Medical Pharmaceuticals, dated as of June 4, 2009, with Coventry (the "Oncology Services Agreement") pursuant to which they will provide oncology management programs and clinical care management services in five markets served by Coventry. The Master Radiology Services Agreement, the Individual Radiology Services Agreements and the Oncology Services Agreement (collectively the "Services Agreements") became effective as of the closing of the Acquisition and each has a minimum term of three years from the implementation of services in each market, subject to earlier termination in certain circumstances. In connection with the Purchase Agreement, the Company and Coventry also entered into a Transition Services Agreement, dated as of June 4, 2009 (the "Transition Services Agreement"), pursuant to which Coventry (or its affiliates) will continue for up to one year after the closing of the Acquisition to provide, or cause certain third party service providers to provide, certain information technology and other support services to First Health on a transitional basis. The Company also has the use of the names FHC, Inc. and First Health Services Corporation for one year, after which the Company is obligated to change such names.

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

(Unaudited)

NOTE E—Subsequent Events (Continued)

Stock Repurchase

On July 28, 2009 the Company's board of directors approved a stock repurchase plan which authorizes the Company to purchase up to $100 million of its outstanding common stock through July 28, 2011. Stock repurchases under the program may be executed through open market repurchases, privately negotiated transactions, accelerated share repurchases or other means. The board of directors authorized management to execute stock repurchase transactions from time to time and in such amounts and via such methods as management deems appropriate. The stock repurchase program may be limited or terminated at any time without prior notice.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of the financial condition and results of operations of Magellan Health Services, Inc. ("Magellan"), and its majority-owned subsidiaries and all variable interest entities ("VIEs") for which Magellan is the primary beneficiary (together with Magellan, the "Company") should be read together with the Condensed Consolidated Financial Statements and the notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the year ended December 31, 2008, which was filed with the Securities and Exchange Commission ("SEC") on February 27, 2009.

Forward-Looking Statements

This Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Although the Company believes that its plans, intentions and expectations as reflected in such forward-looking statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include:

•: the Company's inability to renegotiate or extend expiring customer contracts, or the termination of customer contracts;
•: the Company's inability to integrate acquisitions in a timely and effective manner;
•: changes in business practices of the industry, including the possibility that certain of the Company's managed care customers could seek to provide managed healthcare services directly to their subscribers, instead of contracting with the Company for such services, particularly as a result of further consolidation in the managed care industry and especially regarding managed healthcare customers that have already done so with a portion of their membership;
•: the impact of changes in the contracting model for Medicaid contracts, including certain changes in the contracting model used by states for managed healthcare services contracts relating to Medicaid lives;
•: the Company's ability to accurately predict and control healthcare costs, and to properly price the Company's services;
•: the Company's dependence on government spending for managed healthcare, including changes in federal, state and local healthcare policies;
•: restrictive covenants in the Company's debt instruments;
•: present or future state regulations and contractual requirements that the Company provide financial assurance of its ability to meet its obligations;
•: the impact of the competitive environment in the managed healthcare services industry which may limit the Company's ability to maintain or obtain contracts, as well as to its ability to maintain or increase its rates;
•: the possible impact of healthcare reform;
•: government regulation;
•: the possible impact of additional regulatory scrutiny and liability associated with the Company's Specialty Pharmaceutical Management segment;

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•: the inability to realize the value of goodwill and intangible assets;
•: future changes in the composition of the Company's stockholder population which could, in certain circumstances, limit the ability of the Company to utilize its net operating loss carryforwards ("NOLs");
•: pending or future actions or claims for professional liability;
•: claims brought against the Company that either exceed the scope of the Company's liability coverage or result in denial of coverage;
•: class action suits and other legal proceedings;
•: the impact of governmental investigations;
•: the impact of varying economic and market conditions on the Company's investment portfolio; and
•: the state of the national economy and adverse changes in economic conditions.

Further discussion of factors currently known to management that could cause actual results to differ materially from those in forward-looking statements is set forth under the heading "Risk Factors" in Item 1A of Magellan's Annual Report on Form 10-K for the year ended December 31, 2008. When used in this Quarterly Report on Form 10-Q, the words "estimate," "anticipate," "expect," "believe," "should," and similar expressions are intended to be forward-looking statements. Magellan undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

Business Overview

Managed Behavioral Healthcare

Two of the Company's segments are in the managed behavioral healthcare business. This line of business generally reflects the Company's coordination and management of the delivery of behavioral healthcare treatment services that are provided through its contracted network of third-party treatment providers, which includes psychiatrists, psychologists, other behavioral health professionals, psychiatric hospitals, general medical facilities with psychiatric beds, residential treatment centers and other treatment facilities. The treatment services provided through the Company's provider network include outpatient programs (such as counseling or therapy), intermediate care programs (such as intensive outpatient programs and partial hospitalization services), inpatient treatment and crisis intervention services. The Company generally does not directly provide, or own any provider of, treatment services except as relates to the Company's contract to provide managed behavioral healthcare services to Medicaid recipients and other beneficiaries of the Maricopa County Regional Behavioral Health Authority (the "Maricopa Contract"). Under the Maricopa Contract, effective August 31, 2007 the Company was required to assume the operations of twenty-four behavioral health direct care facilities for a transitional period and to divest itself of these facilities over a two year period. During March 2009, the Company began the operation of two additional behavioral health direct care facilities. At various dates in 2008 and 2009, the Company entered into agreements to transition all behavioral

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health direct care facilities over various dates. Twenty-three of the 26 direct care facilities have been transitioned through July 2009 and the Company expects to divest itself of the remaining facilities before August 31, 2009.

The managed behavioral healthcare business is managed based on the services provided and/or the customers served, through the following two segments:

Commercial. The Managed Behavioral Healthcare Commercial segment ("Commercial") generally reflects managed behavioral healthcare services and EAP services provided under contracts with managed care companies, health insurers and other health plans for some or all of their commercial, Medicaid and Medicare members, as well as with employers, including corporations and governmental agencies, and labor unions. Commercial's contracts encompass risk-based, ASO and EAP arrangements. As of June 30, 2009, Commercial's covered lives were 4.1 million, 13.6 million and 20.6 million for risk-based, EAP and ASO products, respectively. For the six months ended June 30, 2009, Commercial's revenue was $203.1 million, $52.3 million and $63.5 million for risk-based, EAP and ASO products, respectively.

Public Sector. The Managed Behavioral Healthcare Public Sector segment ("Public Sector") generally reflects services provided to Medicaid recipients under contracts with state and local governmental agencies. Public Sector contracts encompass either risk-based or ASO arrangements. As of June 30, 2009, Public Sector's covered lives were 1.5 million and 0.3 million for risk-based and ASO products, respectively. For the six months ended June 30, 2009, Public Sector's revenue was $661.9 million and $3.1 million for risk-based and ASO products, respectively.

Radiology Benefits Management

The Radiology Benefits Management segment generally reflects the management of the delivery of diagnostic imaging services to ensure that such services are clinically appropriate and cost effective. The Company's radiology benefits management services currently are provided under contracts with managed care companies, health insurers and other health plans for some or all of their commercial, Medicaid and Medicare members. The Company has bid on contracts with state and local governmental agencies for the provision of such services to Medicaid recipients. The Company has won one state Medicaid contract, which was implemented in July 2008. The Company offers its radiology benefits management services through ASO contracts, where the Company provides services such as utilization review and claims administration, but does not assume responsibility for the cost of the imaging services, and through risk-based contracts, where the Company assumes all or a substantial portion of the responsibility for the cost of providing diagnostic imaging services. As of June 30, 2009, covered lives for Radiology Benefits Management were 2.3 million and 14.7 million for risk-based and ASO products, respectively. For the six months ended June 30, 2009, revenue for Radiology Benefits Management was $118.0 million and $26.1 million for risk-based and ASO products, respectively.

Specialty Pharmaceutical Management

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injectible, infused, oral, or inhaled drugs which traditional retail pharmacies often do not supply due to their high cost, sensitive handling, and storage needs. The Company's specialty pharmaceutical management services are provided under contracts with managed care companies, health insurers and other health plans for some or all of their commercial, Medicare and Medicaid members. The Company's specialty pharmaceutical services include (i) contracting and formulary optimization on behalf of health plans and pharmaceutical manufacturers; (ii) distributing specialty pharmaceutical drugs on behalf of health plans; (iii) providing strategic consulting services to health plans and pharmaceutical manufacturers; and (iv) providing oncology benefits management services to health plans. The Company's Specialty Pharmaceutical Management segment had contracts with 41 health plans as of June 30, 2009.

Corporate and Other

Significant Customers

Consolidated Company

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Net revenues from the Pennsylvania Counties in the aggregate totaled $145.4 million and $153.7 million for the six months ended June 30, 2008 and 2009, respectively.

By Segment

Off-Balance Sheet Arrangements

The Company does not maintain any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Company's finances that is material to investors.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported

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amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates of the Company include, among other things, accounts receivable realization, valuation allowances for deferred tax assets, valuation of goodwill and intangible assets, medical claims payable, other medical liabilities, stock compensation assumptions, tax contingencies and legal liabilities. Actual results could differ from those estimates. Except as noted below, the Company's critical accounting policies are summarized in the Company's Annual Report on Form 10-K, filed with the SEC on February 27, 2009.

Income Taxes. The Company's effective income tax rate was 41.2 percent and 41.5 percent for the six months ended June 30, 2008 and 2009, respectively. These rates differ from the federal statutory income tax rate primarily due to state income taxes and permanent differences between book and tax income. The Company also accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes.

The Company files a consolidated federal income tax return for the Company and its eighty-percent or more owned subsidiaries, and the Company and its subsidiaries file income tax returns in various states and local jurisdictions. With few exceptions, the Company is no longer subject to state or local income tax examinations by tax authorities for years ended prior to December 31, 2005. The statute of limitations regarding the assessment of federal and most state and local income taxes for the year ended December 31, 2005 will expire during 2009.

Prior to 2009 and in accordance with American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), reversals of both valuation allowances and unrecognized tax benefits with respect to years prior to the Company's reorganization were recorded to goodwill. All other reversals of these balances were recorded as reductions to income tax expense. As a result of implementation of SFAS 141(R), beginning in 2009 all reversals of valuation allowances and unrecognized tax benefits will be reflected as reductions to income tax expense, even if related to years prior to the Company's reorganization.

Results of Operations

The Company evaluates performance of its segments based on profit or loss from continuing operations before stock compensation expense, depreciation and amortization, interest expense, interest income, gain on sale of assets, special charges or benefits, and income taxes ("Segment Profit"). Management uses Segment Profit information for internal reporting and control purposes and considers it important in making decisions regarding the allocation of capital and other resources, risk assessment and employee compensation, among other matters. Intersegment sales and transfers are not significant. The Company's segments are defined above.

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The following tables summarize, for the periods indicated, operating results by business segment (in thousands):

Three Months Ended June 30, 2008	Commercial			Public Sector			Radiology Benefits Management			Specialty Pharmaceutical Management			Corporate and Other			Consolidated

Net revenue	$	163,949		$	362,772		$	75,699		$	54,438		$	—		$	656,858
Cost of care		(85,129	)		(319,721	)		(53,240	)		—			—			(458,090	)
Cost of goods sold		—			—			—			(43,413	)		—			(43,413	)
Direct service costs		(38,144	)		(16,845	)		(14,205	)		(6,130	)		—			(75,324	)
Other operating expenses		—			—			—			—			(31,159	)		(31,159	)
Stock compensation expense(1)		249			194			140			2,015			3,901			6,499

Segment profit (loss)	$	40,925		$	26,400		$	8,394		$	6,910		$	(27,258	)	$	55,371

Three Months Ended June 30, 2009	Commercial			Public Sector			Radiology Benefits Management			Specialty Pharmaceutical Management			Corporate and Other			Consolidated

Net revenue	$	160,190		$	343,181		$	70,565		$	61,865		$	—		$	635,801
Cost of care		(88,851	)		(309,770	)		(44,427	)		—			—			(443,048	)
Cost of goods sold		—			—			—			(49,286	)		—			(49,286	)
Direct service costs		(38,008	)		(16,910	)		(12,469	)		(6,870	)		—			(74,257	)
Other operating expenses		—			—			—			—			(28,677	)		(28,677	)
Stock compensation expense(1)		188			209			424			2,136			3,211			6,168

Segment profit (loss)	$	33,519		$	16,710		$	14,093		$	7,845		$	(25,466	)	$	46,701

Six Months Ended June 30, 2008	Commercial			Public Sector			Radiology Benefits Management			Specialty Pharmaceutical Management			Corporate and Other			Consolidated

Net revenue	$	323,552		$	721,010		$	151,198		$	111,388		$	—		$	1,307,148
Cost of care		(166,702	)		(642,895	)		(102,567	)		—			—			(912,164	)
Cost of goods sold		—			—			—			(90,237	)		—			(90,237	)
Direct service costs		(75,569	)		(33,468	)		(27,305	)		(12,050	)		—			(148,392	)
Other operating expenses		—			—			—			—			(67,839	)		(67,839	)
Stock compensation expense(1)		672			368			645			4,119			12,713			18,517

Segment profit (loss)	$	81,953		$	45,015		$	21,971		$	13,220		$	(55,126	)	$	107,033

Six Months Ended June 30, 2009	Commercial			Public Sector			Radiology Benefits Management			Specialty Pharmaceutical Management			Corporate and Other			Consolidated

Net revenue	$	318,943		$	665,041		$	144,124		$	127,208		$	—		$	1,255,316
Cost of care		(178,637	)		(601,916	)		(94,213	)		—			—			(874,766	)
Cost of goods sold		—			—			—			(101,358	)		—			(101,358	)
Direct service costs		(76,533	)		(34,206	)		(25,507	)		(13,264	)		—			(149,510	)
Other operating expenses		—			—			—			—			(56,488	)		(56,488	)
Stock compensation expense(1)		520			444			794			4,218			6,624			12,600

Segment profit (loss)	$	64,293		$	29,363		$	25,198		$	16,804		$	(49,864	)	$	85,794

(1): Stock compensation expense is included in direct service costs and other operating expenses, however this amount is excluded from the computation of Segment Profit since it is managed on a consolidated basis.

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The following table reconciles Segment Profit to consolidated income from continuing operations before income taxes (in thousands):

		Three Months Ended June 30,						Six Months Ended June 30,

		2008			2009			2008			2009
Segment profit		$	55,371		$	46,701		$	107,033		$	85,794
Stock compensation expense			(6,499	)		(6,168	)		(18,517	)		(12,600	)
Depreciation and amortization			(14,523	)		(10,516	)		(28,897	)		(21,559	)
Interest expense			(1,017	)		(657	)		(2,232	)		(1,084	)
Interest income			3,716			1,734			9,209			4,045

	Income from continuing operations before income taxes	$	37,048		$	31,094		$	66,596		$	54,596

Quarter ended June 30, 2009 ("Current Year Quarter"), compared to the quarter ended June 30, 2008 ("Prior Year Quarter")

Commercial

Net Revenue

Net revenue related to Commercial decreased by 2.3 percent or $3.8 million from the Prior Year Quarter to the Current Year Quarter. The decrease in revenue is mainly due to terminated contracts of $7.9 million and other net unfavorable variances of $0.9 million, which decreases were partially offset by favorable rate changes of $2.2 million, net favorable retroactive membership and rate adjustments of $1.0 million recorded in the Current Year Quarter, revenue from new contracts implemented after (or during) the Prior Year Quarter of $1.0 million, and increased membership from existing customers of $0.8 million.

Cost of Care

Cost of care increased by 4.4 percent or $3.7 million from the Prior Year Quarter to the Current Year Quarter. The increase in cost of care is primarily due to unfavorable medical claims development for the Prior Year Quarter which was recorded after the Prior Year Quarter of $5.2 million, increased membership from existing customers of $0.3 million, and care trends and other net variances of $6.7 million, which increases were partially offset by terminated contracts of $4.8 million, the favorable impact of contractual settlements in the Current Year Quarter of $2.7 million, favorable prior period medical claims development recorded in the Current Year Quarter of $0.5 million, and unfavorable prior period medical claims development recorded in the Prior Year Quarter of $0.5 million. Cost of care increased as a percentage of risk revenue (excluding EAP business) from 73.9 percent in the Prior Year Quarter to 79.4 percent in the Current Year Quarter, mainly due to unfavorable care trends and changes in business mix.

Direct Service Costs

Direct service costs are relatively unchanged from the Prior Year Quarter. Direct service costs increased as a percentage of revenue from 23.3 percent in the Prior Year Quarter to 23.7 percent in the Current Year Quarter, mainly due to changes in business mix.

Public Sector

Net Revenue

Net revenue related to Public Sector decreased by 5.4 percent or $19.6 million from the Prior Year Quarter to the Current Year Quarter. This decrease is primarily due to the net impact of terminated

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contracts offset by increased membership from existing customers of $29.7 million and other net decreases of $0.6 million, which decreases were partially offset by net favorable rate and contract funding changes of $4.7 million, and the recognition in the Current Year Quarter of $6.0 million of previously deferred revenue on the Maricopa Contract.

Cost of Care

Cost of care decreased by 3.1 percent or $10.0 million from the Prior Year Quarter to the Current Year Quarter. This decrease is primarily due to care associated with terminated contracts offset by increased membership from existing customers of $21.3 million, favorable medical claims development for the Prior Year Quarter which was recorded after the Prior Year Quarter of $1.4 million, and favorable care trends and other net variances of $0.4 million, which decreases were partially offset by favorable prior period medical claims development recorded in the Prior Year Quarter of $6.7 million, unfavorable prior period medical claims development recorded in the Current Year Quarter of $3.5 million, and care associated with rate changes for contracts with minimum cost of care requirements of $2.9 million. Cost of care increased as a percentage of risk revenue from 88.4 percent in the Prior Year Quarter to 90.7 percent in the Current Year Quarter mainly due to care development and changes in business mix.

Direct Service Costs

Direct service costs are relatively unchanged from the Prior Year Quarter. Direct service costs increased as a percentage of revenue from 4.6 percent for the Prior Year Quarter to 4.9 percent in the Current Year Quarter mainly due to changes in business mix.

Radiology Benefits Management

Net Revenue

Net revenue related to Radiology Benefits Management decreased by 6.8 percent or $5.1 million from the Prior Year Quarter to the Current Year Quarter. This decrease is primarily due to decreased membership from existing customers of $10.3 million, and terminated contracts of $3.1 million, which decreases were partially offset by favorable retroactive membership, rate and contractual adjustments recorded in the Current Year Quarter of $1.8 million, favorable rate changes of $4.3 million, revenue from new contracts implemented after (or during) the Prior Year Quarter of $0.7 million, and other net favorable variances of $1.5 million.

Cost of Care

Cost of care decreased by 16.6 percent or $8.8 million from the Prior Year Quarter to the Current Year Quarter. This decrease is primarily due to decreased membership from existing customers of $8.8 million, favorable contractual settlements in the Current Year Quarter of $5.2 million, and favorable medical claims development for the Prior Year Quarter which was recorded after the Prior Year Quarter of $2.0 million, which decreases were partially offset by favorable prior period medical claims development of $1.5 million recorded in the Prior Year Quarter and care trends and other net variances of $5.7 million. Cost of care decreased as a percentage of risk revenue from 86.5 percent in the Prior Year Quarter to 76.6 percent in the Current Year Quarter mainly due to favorable care development and favorable contractual settlements.

Direct Service Costs

Direct service costs decreased by 12.2 percent or $1.7 million from the Prior Year Quarter to the Current Year Quarter. The decrease in direct service costs is mainly attributable to terminated contracts. As a percentage of revenue, direct service costs decreased from 18.8 percent in the Prior

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Year Quarter to 17.7 percent in the Current Year Quarter, mainly due to favorable rate changes and contractual settlements.

Specialty Pharmaceutical Management

Net Revenue

Net revenue related to Specialty Pharmaceutical Management increased by 13.6 percent or $7.4 million from the Prior Year Quarter to the Current Year Quarter. This increase is primarily due to increased distribution activity from new and existing customers of $12.1 million and increased consulting and rebate revenue of $0.2 million, which increases were partially offset by terminated distribution contracts of $4.9 million.

Cost of Goods Sold

Cost of goods sold increased by 13.5 percent or $5.9 million from the Prior Year Quarter to the Current Year Quarter. This increase is primarily due to increased distribution activity from new and existing customers of $10.8 million, which increase was partially offset by terminated contracts of $4.5 million and other net favorable variances of $0.4 million. As a percentage of the portion of net revenue that relates to distribution activity, cost of goods sold decreased from 92.5 percent in the Prior Year Quarter to 92.0 percent in the Current Year Quarter, mainly due to changes in business mix.

Direct Service Costs

Direct service costs increased by 12.1 percent or $0.7 million from the Prior Year Quarter to the Current Year Quarter. This increase is primarily due to expenses required to support the aforementioned increases to revenue. As a percentage of revenue, direct service costs were 11.1 percent for the Current Year Quarter, which is consistent with the Prior Year Quarter.

Corporate and Other

Other Operating Expenses

Other operating expenses related to the Corporate and Other Segment decreased by 8.0 percent or $2.5 million from the Prior Year Quarter to the Current Year Quarter. The decrease results primarily from net one-time expenses incurred in the Prior Year Quarter of $1.2 million and other net favorable changes of $1.3 million. As a percentage of total net revenue, other operating expenses decreased from 4.7 percent for the Prior Year Quarter to 4.5 percent for the Current Year Quarter, primarily due to changes in business mix.

Depreciation and Amortization

Depreciation and amortization expense decreased by 27.6 percent or $4.0 million from the Prior Year Quarter to the Current Year Quarter, primarily due to assets that became fully depreciated as of December 31, 2008.

Interest Expense

Interest expense decreased by $0.4 million from the Prior Year Quarter to the Current Year Quarter, mainly due to reductions in outstanding debt balances as a result of scheduled debt payments.

Interest Income

Interest income decreased by $2.0 million from the Prior Year Quarter to the Current Year Quarter mainly due to lower yields.

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Income Taxes

The Company's effective income tax rate was 40.9 percent in the Prior Year Quarter and 40.8 percent in the Current Year Quarter. The Prior Year Quarter and Current Year Quarter effective income tax rates differ from the federal statutory income tax rate primarily due to state income taxes and permanent differences between book and tax income. The Company also accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes.

Six months ended June 30, 2009 ("Current Year Period"), compared to the six months ended June 30, 2008 ("Prior Year Period")

Commercial

Net Revenue

Net revenue related to Commercial decreased by 1.4 percent or $4.6 million from the Prior Year Period to the Current Year Period. The decrease in revenue is mainly due to terminated contracts of $17.4 million and net favorable retroactive membership adjustments of $4.1 million recorded in the Prior Year Period, which decreases were partially offset by increased membership from existing customers of $8.1 million, favorable rate changes of $2.8 million, revenue from new contracts implemented after (or during) the Prior Year Period of $1.8 million, and other net favorable variances of $4.2 million.

Cost of Care

Cost of care increased by 7.2 percent or $11.9 million from the Prior Year Period to the Current Year Period. The increase in cost of care is primarily due to increased membership from existing customers of $5.2 million, unfavorable medical claims development for the Prior Year Period which was recorded after the Prior Year Period of $5.9 million, and care trends and other net variances of $20.2 million, which increases were partially offset by terminated contracts of $11.0 million, unfavorable prior period medical claims development recorded in the Prior Year Period of $5.2 million, the favorable impact of contractual settlements in the Current Year Period of $2.7 million, and favorable prior period medical claims development recorded in the Current Year Period of $0.5 million. Cost of care increased as a percentage of risk revenue (excluding EAP business) from 73.9 percent in the Prior Year Period to 80.4 percent in the Current Year Period, mainly due to unfavorable care trends and changes in business mix.

Direct Service Costs

Direct service costs increased by 1.3 percent or $1.0 million from the Prior Year Period to the Current Year Period. The increase in direct service costs is mainly attributable to increased staffing to improve support for the Commercial book of business. Direct service costs increased as a percentage of revenue from 23.4 percent in the Prior Year Period to 24.0 percent in the Current Year Period, mainly due to changes in business mix.

Public Sector

Net Revenue

Net revenue related to Public Sector decreased by 7.8 percent or $56.0 million from the Prior Year Period to the Current Year Period. This decrease is primarily due to the net impact of terminated contracts offset by increased membership from existing customers of $68.9 million, favorable retroactive rate changes recorded in the Prior Year Period of $3.6 million, and other net decreases of $5.7 million, which decreases were partially offset by net favorable rate and contract funding changes of

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$16.2 million, and the recognition in the Current Year Period of $6.0 million of previously deferred revenue on the Maricopa Contract.

Cost of Care

Cost of care decreased by 6.4 percent or $41.0 million from the Prior Year Period to the Current Year Period. This decrease is primarily due to care associated with terminated contracts offset by increased membership from existing customers of $53.7 million, favorable medical claims development for the Prior Year Period which was recorded after the Prior Year Period of $3.7 million, and care associated with retroactive rate changes for contracts with minimum care requirements recorded in the Prior Year Period of $3.1 million, which decreases were partially offset by care associated with rate changes for contracts with minimum cost of care requirements of $6.8 million, favorable prior period medical claims development recorded in the Prior Year Period of $5.0 million, unfavorable prior period medical claims development recorded in the Current Year Period of $1.3 million, and care trends and other net variances of $6.4 million. Cost of care increased as a percentage of risk revenue from 89.4 percent in the Prior Year Period to 90.9 percent in the Current Year Period mainly due to changes in business mix.

Direct Service Costs

Direct service costs increased by 2.2 percent or $0.7 million from the Prior Year Period to the Current Year Period. The increase in direct service costs is primarily due to higher staffing required to support certain contracts. Direct service costs decreased as a percentage of revenue from 4.6 percent for the Prior Year Period to 5.1 percent in the Current Year Period mainly due to changes in business mix.

Radiology Benefits Management

Net Revenue

Net revenue related to Radiology Benefits Management decreased by 4.7 percent or $7.1 million from the Prior Year Period to the Current Year Period. This decrease is primarily due to decreased membership from existing customers of $16.1 million, and terminated contracts of $6.3 million, which decreases were partially offset by favorable rate changes of $10.5 million, favorable retroactive membership, rate and contractual adjustments recorded in the Current Year Period of $3.2 million, revenue from new contracts implemented after (or during) the Prior Year Period of $1.2 million, and other net favorable variances of $0.4 million.

Cost of Care

Cost of care decreased by 8.1 percent or $8.4 million from the Prior Year Period to the Current Year Period. This decrease is primarily due to decreased membership from existing customers of $13.7 million, favorable contractual settlements in the Current Year Period of $4.7 million, and favorable medical claims development for the Prior Year Period which was recorded after the Prior Year Period of $2.5 million, which decreases were partially offset by favorable prior period medical claims development of $1.4 million recorded in the Prior Year Period and care trends and other net variances of $11.1 million. Cost of care decreased as a percentage of risk revenue from 84.6 percent in the Prior Year Period to 79.9 percent in the Current Year Period mainly due to favorable care development and favorable contractual settlements.

Direct Service Costs

Direct service costs decreased by 6.6 percent or $1.8 million from the Prior Year Period to the Current Year Period. The decrease in direct service costs is mainly attributable to terminated contracts.

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As a percentage of revenue, direct service costs decreased from 18.1 percent in the Prior Year Period to 17.7 percent in the Current Year Period, mainly due to favorable rate changes and contractual settlements.

Specialty Pharmaceutical Management

Net Revenue

Net revenue related to Specialty Pharmaceutical Management increased by 14.2 percent or $15.8 million from the Prior Year Period to the Current Year Period. This increase is primarily due to increased distribution activity from new and existing customers of $21.5 million, and net increased consulting and rebate revenue of $1.9 million, which increases were partially offset by terminated contracts of $7.5 million and other net unfavorable variances of $0.1 million.

Cost of Goods Sold

Cost of goods sold increased by 12.3 percent or $11.1 million from the Prior Year Period to the Current Year Period. The increase is primarily due to increased distribution activity from new and existing customers of $19.4 million, which increase was partially offset by terminated contracts of $6.9 million and other net favorable variances of $1.4 million. As a percentage of the portion of net revenue that relates to distribution activity, cost of goods sold decreased from 93.1 percent in the Prior Year Period to 92.0 percent in the Current Year Period, mainly due to changes in business mix.

Direct Service Costs

Direct service costs increased by 10.1 percent or $1.2 million from the Prior Year Period to the Current Year Period. This increase is primarily due to expenses required to support the aforementioned increases to revenue. As a percentage of revenue, direct service costs decreased from 10.8 percent in the Prior Year Period to 10.4 percent in the Current Year Period, mainly due to increased distribution revenue.

Corporate and Other

Other Operating Expenses

Other operating expenses related to the Corporate and Other Segment decreased by 16.7 percent or $11.4 million from the Prior Year Period to the Current Year Period. The decrease results primarily from prior year expenses incurred pursuant to the former Chief Executive Officer's employment agreement in relation to his service to the Company ending of $10.1 million (including $5.4 million of stock compensation expense related to the acceleration of vesting for certain equity awards) and net one-time expenses incurred in the Prior Year Period of $1.5 million, which decreases were partially offset by other net unfavorable variances of $0.2 million. As a percentage of total net revenue, other operating expenses decreased from 5.2 percent for the Prior Year Period to 4.5 percent for the Current Year Period, primarily due to prior year expenses incurred pursuant to the former Chief Executive Officer's employment agreement.

Depreciation and Amortization

Depreciation and amortization expense decreased by 25.4 percent or $7.3 million from the Prior Year Period to the Current Year Period, primarily due to assets that became fully depreciated as of December 31, 2008.

Interest Expense

Interest expense decreased by $1.1 million from the Prior Year Period to the Current Year Period, mainly due to reductions in outstanding debt balances as a result of scheduled debt payments.

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Interest Income

Interest income decreased by $5.2 million from the Prior Year Period to the Current Year Period mainly due to lower yields.

Income Taxes

The Company's effective income tax rate was 41.2 percent in the Prior Year Period and 41.5 percent in the Current Year Period. The Prior Year Period and Current Year Period effective income tax rates differ from the federal statutory income tax rate primarily due to state income taxes and permanent differences between book and tax income. The Company also accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes.

Outlook—Results of Operations

The Company's Segment Profit and net income are subject to significant fluctuations from period to period. These fluctuations may result from a variety of factors such as those set forth under Item 2—"Forward-Looking Statements" as well as a variety of other factors including: (i) changes in utilization levels by enrolled members of the Company's risk-based contracts, including seasonal utilization patterns; (ii) contractual adjustments and settlements; (iii) retrospective membership adjustments; (iv) timing of implementation of new contracts, enrollment changes and contract terminations; (v) pricing adjustments upon contract renewals (and price competition in general); and (vi) changes in estimates regarding medical costs and incurred but not yet reported medical claims.

Care Trends. The Company expects that the care trend factors for 2009 for Commercial will be 7 to 9 percent, Public Sector will be 3 to 5 percent, and Radiology Benefits Management will be 10 to 13 percent.

Interest Rate Risk. Changes in interest rates affect interest income earned on the Company's cash equivalents and investments, as well as interest expense on variable interest rate borrowings under the Company's credit facility with Deutsche Bank AG, Citibank, N.A., and Bank of America, N.A. dated April 29, 2009 (the "2009 Credit Facility"). Based on the amount of cash equivalents and investments and the borrowing levels under the 2009 Credit Facility as of June 30, 2009, a hypothetical 10 percent increase or decrease in the interest rate associated with these instruments, with all other variables held constant, would not materially affect the Company's future earnings and cash outflows.

Historical—Liquidity and Capital Resources

Operating Activities. The Company reported net cash provided by operating activities of $124.8 million and $40.1 million for the Prior Year Period and Current Year Period, respectively. The $84.7 million decrease in operating cash flows is primarily attributable to the shift of restricted cash to restricted investments, which results in an operating cash flow source that is directly offset by an investing cash flow use. During the Prior Year Period, $77.4 million of restricted cash was shifted to restricted investments as compared to the Current Year Period in which $0.7 million of restricted cash was shifted to restricted investments, resulting in a net decrease in operating cash flows between periods of $76.7 million. Also contributing to the decrease in operating cash flows is the decrease in segment profit and interest income of $21.2 million and $5.2 million, respectively, from the Prior Year Period, and other net unfavorable items of $3.7 million. Partially offsetting these items is the release of restricted cash in the Current Year Period of $7.1 million associated with a contract that terminated in fiscal year 2007 and the funding of restricted cash in the Prior Year Period of $15.0 million for a risk radiology contract.

During the Current Year Period, the Company's restricted cash decreased $41.0 million. The change in restricted cash is attributable to a reduction in restricted cash of $32.9 million associated with

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the Company's regulated entities, the release of restricted cash of $7.1 million associated with a contract that terminated in fiscal year 2007, and other net decreases of $1.0 million. In regards to the decrease in restricted cash associated with the Company's regulated entities, $43.0 million is offset by changes in other assets and liabilities, primarily accounts receivable, medical claims payable and other medical liabilities, thus having no impact on operating cash flows. Partially offsetting these reductions is the net funding of $10.1 million in additional restricted cash associated with the Company's regulated entities.

Investing Activities. The Company utilized $16.7 million and $12.5 million during the Prior Year Period and Current Year Period, respectively, for capital expenditures. The majority of the decrease in capital expenditures of $4.2 million is attributable to capital expenditures incurred during the Prior Year Period of $3.2 million associated with the Maricopa Contract. Most of the remainder of the capital expenditures for the Prior Year Period and the majority of capital expenditures for the Current Year Period related to management information systems and related equipment.

During the Prior Year Period, the Company used net cash of $149.6 million for the net purchase of "available for sale" investments. During the Current Year Period, the Company received net cash of $17.1 million from the net maturity of "available-for-sale" investments.

During the Prior Year Period, the Company made the final working capital payment of $0.4 million related to the acquisition of ICORE Healthcare LLC.

Financing Activities. During the Prior Year Period, the Company repaid $12.5 million of indebtedness outstanding under the Company's 2008 Credit Facility (as defined below), made payments on capital lease obligations of $0.2 million and had a financing cash flow use of $1.8 million related to restricted stock units that were surrendered by certain employees in exchange for the payment of taxes associated with restricted stock unit awards that vested. In addition, the Company received $5.6 million from the exercise of stock options and warrants, obtained tax benefits of $4.4 million from the exercise of stock options and had other net favorable items of $0.2 million.

During the Current Year Period, the Company paid $64.0 million for repurchase of treasury stock under the Company's share repurchase program and had a financing cash flow use of $0.7 million related to restricted stock units that were surrendered by certain employees in exchange for the payment of taxes associated with restricted stock unit awards that vested. In addition, the Company received $1.1 million from the exercise of stock options and warrants, obtained tax benefits of $3.0 million from the exercise of stock options and had other net favorable items of $0.2 million.

Outlook—Liquidity and Capital Resources

Liquidity. During the remainder of 2009, the Company expects to fund its additional estimated capital expenditures of $12 to $22 million, inclusive of capital needs for First Health Services Corporation (as discussed below), with cash from operations. The Company does not anticipate that it will need to draw on amounts available under the 2009 Credit Facility for its operations, capital needs or debt service in 2009. The Company also currently expects to have adequate liquidity to satisfy its existing financial commitments over the periods in which they will become due. The Company maintains its current investment strategy of investing in a diversified, high quality, liquid portfolio of investments and continues to closely monitor the situation in the financial and credit markets. The Company estimates that it has no risk of any material permanent loss on its investment portfolio; however, there can be no assurance that the Company will not experience any such losses in the future. As discussed in Item 1, Note E—"Subsequent Events", the Company acquired First Health Services Corporation on July 31, 2009. As consideration for the acquisition, the Company paid $110 million in cash, subject to working capital adjustments as provided in the Purchase Agreement. The Company funded the acquisition with cash on hand.

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Stock Repurchase. On July 28, 2009 the Company's board of directors approved a stock repurchase plan which authorizes the Company to purchase up to $100 million of its outstanding common stock through July 28, 2011. Stock repurchases under the program may be executed through open market repurchases, privately negotiated transactions, accelerated share repurchases or other means. The board of directors authorized management to execute stock repurchase transactions from time to time and in such amounts and via such methods as management deems appropriate. The stock repurchase program may be limited or terminated at any time without prior notice. The Company expects to fund stock repurchase activity using cash on hand.

Off-Balance Sheet Arrangements. As of June 30, 2009, the Company has no material off-balance sheet arrangements.

2009 Credit Facility. On April 30, 2008, the Company's Credit Agreement was terminated, and the Company entered into a credit facility with Deutsche Bank AG and Citigroup Global Markets Inc. that provided for a $100.0 million Revolving Loan Commitment for the issuance of letters of credit for the account of the Company with a sublimit of up to $30.0 million for revolving loans (the "2008 Credit Facility").

Restrictive Covenants in Debt Agreements. The 2009 Credit Facility contains covenants that limit management's discretion in operating the Company's business by restricting or limiting the Company's ability, among other things, to:

•: incur or guarantee additional indebtedness or issue preferred or redeemable stock;
•: pay dividends and make other distributions;
•: repurchase equity interests;
•: make certain advances, investments and loans;
•: enter into sale and leaseback transactions;
•: create liens;
•: sell and otherwise dispose of assets;
•: acquire or merge or consolidate with another company; and
•: enter into some types of transactions with affiliates.

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These restrictions could adversely affect the Company's ability to finance future operations or capital needs or engage in other business activities that may be in the Company's interest.

The 2009 Credit Facility also requires the Company to comply with specified financial ratios and tests. Failure to do so, unless waived by the lenders under the 2009 Credit Facility pursuant to their terms, would result in an event of default under such credit facilities.

Net Operating Loss Carryforwards. The Company estimates that it had reportable federal NOLs as of December 31, 2008 of approximately $124.5 million available to reduce future federal taxable income. These estimated NOLs expire in 2011 through 2020 and are subject to examination and adjustment by the IRS. In addition, the Company's utilization of such NOLs is subject to limitation under Internal Revenue Code Section 382, which affects the timing of the use of these NOLs. At this time, the Company does not believe these limitations will limit the Company's ability to use any federal NOLs before they expire. Although the Company has NOLs that may be available to offset future taxable income, the Company may be subject to Federal Alternative Minimum Tax.

As of December 31, 2008, the Company's valuation allowances against deferred tax assets were $9.4 million, mostly relating to uncertainties regarding the eventual realization of certain state NOLs and other state deferred tax assets. Determination of the amount of deferred tax assets considered realizable required significant judgment and estimation. Changes in these estimates in the future could materially affect the Company's financial condition and results of operations.

Recent Accounting Pronouncements

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unrecognized tax benefits with respect to years prior to the Company's reorganization were recorded to goodwill. All other reversals of these balances were recorded as reductions to income tax expense. As a result of the implementation of SFAS 141(R), beginning in 2009 all reversals of valuation allowances and unrecognized tax benefits are reflected as reductions to income tax expense, even if related to years prior to the Company's reorganization. The adoption of SFAS 160 did not have a material impact on the consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments" ("FSP FAS 107-1" and "APB 28-1"). FSP FAS 107-1 and APB 28-1 amend SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," to require disclosures, in its interim reporting periods and in its financial statements for annual reporting periods, regarding the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not on the company's balance sheet. FSP FAS 107-1 and APB 28-1 also amend FASB Accounting Principles Board "APB" Opinion No. 28, "Interim Financial Reporting," to require entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments and describe changes in methods and significant assumptions, in both interim and annual financial statements. FSP FAS 107-1 and APB 28-1 are effective for interim reporting periods ending after June 15, 2009 (the quarter ending June 30, 2009 for the Company). While the adoption of FSP FAS 107-1 and APB 28-1 impacts the Company's disclosures, it does not have an impact on the Company's results of operations or financial condition.

In May 2009, the FASB issued SFAS No. 165, "Subsequent Events," ("SFAS 165"), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for financial statements issued for interim and annual reporting periods ending after June 15, 2009 (the quarter ending June 30, 2009 for the Company). The adoption of SFAS 165 did not have an impact on the Company's results of operations or financial condition.

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interim and annual reporting periods ending after September 15, 2009 (the quarter ending September 30, 2009 for the Company) and will not have an impact on the Company's results of operations or financial condition.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Changes in interest rates affect interest income earned on the Company's cash equivalents and restricted cash and investments, as well as interest expense on variable interest rate borrowings under the 2009 Credit Facility. Based on the Company's investment balances, and the borrowing levels under the 2009 Credit Facility as of June 30, 2009, a hypothetical 10 percent increase or decrease in the interest rate associated with these instruments, with all other variables held constant, would not materially affect the Company's future earnings and cash outflows.

Item 4. Controls and Procedures.

a) The Company's management evaluated, with the participation of the Company's principal executive and principal financial officers, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act), as of June 30, 2009. Based on their evaluation, the Company's principal executive and principal financial officers concluded that the Company's disclosure controls and procedures were effective as of June 30, 2009.

b) Under the supervision and with the participation of management, including the Company's principal executive and principal financial officers, the Company has determined that there has been no change in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company's quarter ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

The management and administration of the delivery of specialty managed healthcare entails significant risks of liability. From time to time, the Company is subject to various actions and claims arising from the acts or omissions of its employees, network providers or other parties. In the normal course of business, the Company receives reports relating to deaths and other serious incidents involving patients whose care is being managed by the Company. Such incidents occasionally give rise to malpractice, professional negligence and other related actions and claims against the Company or its network providers. Many of these actions and claims received by the Company seek substantial damages and therefore require the Company to incur significant fees and costs related to their defense. The Company is also subject to or party to certain class actions, litigation and claims relating to its operations or business practices. In the opinion of management, the Company has recorded reserves that are adequate to cover litigation, claims or assessments that have been or may be asserted against the Company, and for which the outcome is probable and reasonably estimable. Management believes that the resolution of such litigation and claims will not have a material adverse effect on the Company's financial condition or results of operations; however, there can be no assurance in this regard.

Item 1A. Risk Factors

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On July 30, 2008 the Company's board of directors approved a stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through January 31, 2010. Stock repurchases under the program could be executed through open market repurchases, privately negotiated transactions, accelerated share repurchases or other means. The board of directors authorized management to execute stock repurchase transactions from time to time and in such amounts and via such methods as management deemed appropriate. The stock repurchase program could be limited or terminated at any time without prior notice. Pursuant to this program, the Company made open market purchases of 60,026 shares of the Company's common stock for an aggregate cost of $2.2 million (excluding broker commissions) during the three months ended June 30, 2009. The repurchase program was completed as of April 7, 2009, the $200 million authorization having been exhausted.

Following is a summary of stock repurchases made during the three months ended June 30, 2009 (dollars in thousands):

Period		Average Price Paid per Share(2)

April 1 - 30, 2009	60,026	$	36.42	60,026	—
May 1 - 31, 2009	—		—	—	—
June 1 - 30, 2009	—		—	—	—

	60,026			60,026	—

(1): Excludes amounts that could be used to repurchase shares acquired under the Company's equity incentive plans to satisfy withholding tax obligations of employees and non-employee directors upon the vesting of restricted stock units.

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(2): Excludes broker commissions and transaction fees.

See Item 5. "Other Information" below regarding the July 28, 2009 stock repurchase authorization.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

The annual meeting of shareholders of the Company (the "Meeting") was held on May 19, 2009 in connection with which proxies were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934. At the close of business March 31, 2009, the record date for the meeting, 35,296,577 shares of the Company's common stock were issued and outstanding. At the Meeting holders of 33,578,069 shares of the Company's common stock were represented in person or by proxy. Two proposals were scheduled and noticed to be acted upon at the Meeting: (a) the election of three directors ("Proposal Number 1"); and (b) ratification of the appointment of Ernst & Young LLP as the Company's independent registered public accounting firm for the fiscal year 2009 ("Proposal Number 2").

(1) At the meeting, the three nominees of the Board of Directors (René Lerer, M.D., Nancy L. Johnson and Eran Broshy) were re-elected as directors, to serve for three year terms or until the election and qualification of their successors. The vote with respect to each nominee was as follows:

Nominee

René Lerer, M.D.	30,265,632	3,312,437
Nancy L. Johnson	30,452,110	3,125,959
Eran Broshy	32,001,235	1,576,834

Other directors whose terms of office continued after the annual meeting are: William J. McBride, Robert M. Le Blanc, Michael P. Ressner, Michael Diament and William D. Forrest.

Proposal Number 2 was adopted with 33,559,196 votes cast for, and 16,467 votes cast against; in addition there were 2,406 abstentions on Proposal Number 2.

Item 5. Other Information.

Appointment of President

The Company announced on July 31, 2009 that Karen S. Rohan will become the President of the Company on August 1, 2009.

Ms. Rohan has 18 years of corporate and business experience in managed health care. Most recently, since November 2005 she served as President, Group Insurance (disability, life and accident insurance), Dental and Vision for CIGNA Healthcare. From November 2004 through November 2005 she served as President CIGNA Specialty Businesses (dental/visions care, behavioral & pharmacy). Prior to 2004, she also served in various capacities with CIGNA beginning in 1991. Ms. Rohan is 46 years old.

On July 28, 2009, the Company and Ms. Rohan entered into an employment agreement and related Amendment No. 1 (collectively, the "Agreement"), pursuant to which Ms. Rohan will be employed as President of the Company. The Agreement provides for an initial one year term beginning on August 1, 2009 which is automatically renewed for successive one year terms unless either party provides notice of non-renewal 90 days prior to the end of any then existing term. Pursuant to the Agreement, Ms. Rohan will receive a base salary of $530,000 per year, and be eligible for an annual target bonus opportunity of 75% of her base salary under the Company's Short Term Incentive Plan

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("STIP"). For the year 2009, Ms. Rohan's target bonus opportunity will be 37.5% of base salary. Ms. Rohan will also receive a sign on grant of options pursuant to the Company's 2008 Management Incentive Plan to purchase that number of shares of the Company's Common Stock equal to $1,375,000 divided by the Black Scholes value of an option to purchase a share of Common Stock of the Company at an exercise price equal to the closing price of the Common Stock of the Company on the grant date, which will be September 1, 2009 pursuant to the Company's Equity Award Policy. Such options shall vest ratably over three years on an annual basis on each anniversary date of such option grant. Ms. Rohan will also be entitled to benefits and participation in other compensation plans on a basis at least as favorable as other similarly situated senior level executives of the Company.

Ms. Rohan may resign her employment at any time upon 90 days' prior written notice, and the Company may terminate the Agreement at any time for cause as defined in the Agreement, provided that Ms. Rohan is provided with notice and an opportunity to cure any matter giving rise to the Company's right to terminate her for cause. In the event Ms. Rohan's resigns without good reason as defined below, or she is terminated by the Company with cause, she would receive all base salary accrued through the date of termination, accrued paid time off and the vested portion of any retirement, deferred compensation or other benefit plan, including vested stock options or restricted stock awards.

The Company may terminate Ms. Rohan's employment at any time without cause. Upon termination of her employment by Company without cause, Ms. Rohan would receive all base salary and paid time off accrued through the date of termination, and any other payments payable under applicable benefit plans, the vested portion of any retirement, deferred compensation or other benefit plan, including vested stock options or restricted stock awards and the continued payment of her base pay for a period of twelve months after the date of termination. Also, the Company may in its discretion pay her a pro-rata portion of any bonus that she would have earned had she been employed for the full calendar year, conditioned on the satisfaction of financial targets established by the board in the STIP. The agreement is considered terminated without cause by the Company if, among other things, Ms. Rohan's position is relocated to a location more than 50 miles from Avon, CT or a material reduction in her base salary, or if the Company provides notice of non-renewal of a then existing term of the Agreement.

If Ms. Rohan's employment terminates as a result of her death, or if the Company terminates Ms. Rohan's employment upon her disability, she (or her estate) would receive all base salary and accrued paid time off through the date of termination and the vested portion of any retirement, deferred compensation or other benefit plan, including vested stock options or restricted stock awards. In addition, the Company may in its discretion pay Ms. Rohan (or her estate) a pro rata portion of any bonus for any bonus plan in which she participates in the year of termination, subject to achievement of applicable performance objectives.

If Ms. Rohan's employment is terminated without cause by the Company or with good reason by Ms. Rohan in connection with or within two years after a change in control, upon any such termination, Ms. Rohan would receive all base salary accrued through the date of termination, pro rata target bonus for the year in which termination occurs, severance equal to two times the sum of base salary and target bonus payable in a single cash installment immediately after termination, accelerated vesting of all stock options with restricted stock grants, COBRA benefits for eighteen months after termination, the vested portion of any retirement, deferred compensation or other benefit plan, and any other amounts accrued and unpaid as of the date of termination. Under the employment agreement, good reason for termination by Ms. Rohan for these purposes includes a material reduction in her base salary or her bonus opportunity, a material diminution in her duties or responsibilities, or a relocation of her place of work to a new location more than 50 miles from Avon, CT.

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In addition, if during a three year period beginning on August 1, 2009, any of the payments or benefits received by Ms. Rohan in connection with a change of control or termination of employment is subject to excise tax under Section 4999 of the Internal Revenue Code, then the Company is required to pay Ms. Rohan an additional gross-up amount such that the net amount retained by her after the payment of the excise tax and any income and excise tax due on such additional amount, will equal the amount to which she was entitled before the imposition of such income and excise tax on her.

Following her termination under any circumstances, Ms. Rohan will be subject to a non-competition covenant and covenants prohibiting her from soliciting any Company customers or soliciting or hiring employees for a period of one year following her termination or any longer period for which she continues to receive base salary, or in respect of which base salary is paid in a lump sum.

Acquisition of First Health Services Corporation

Stock Repurchase

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authorized management to execute stock repurchase transactions from time to time and in such amounts and via such methods as management deems appropriate. The stock repurchase program may be limited or terminated at any time without prior notice.

Item 6. Exhibits

	Exhibit No.			Description

		2.1		Purchase Agreement, dated June 4, 2009 by and among Coventry Health Care, Inc., Coventry Management Services, Inc., First Health Group Corp. and Magellan Health Services, Inc.
		10.1		Employment Agreement, dated July 28, 2009 between Karen S. Rohan and Magellan Health Services, Inc.
		10.2		Amendment to Employment Agreement, dated July 28, 2009 between Magellan Health Services, Inc. and Karen S. Rohan.
		31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
		31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
		32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished).
		32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: July 31, 2009	MAGELLAN HEALTH SERVICES, INC. (Registrant)
	By:	/s/ JONATHAN N. RUBIN Jonathan N. Rubin Executive Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)

EX-2.1 2 a2193817zex-2_1.htm EXHIBIT 2.1

Exhibit 2.1

EXECUTION VERSION

PURCHASE AGREEMENT

by and among

COVENTRY HEALTH CARE, INC.

COVENTRY MANAGEMENT SERVICES, INC.

FIRST HEALTH GROUP CORP.

and

MAGELLAN HEALTH SERVICES, INC.

June 4, 2009

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		Page

ARTICLE 1 DEFINED TERMS		1

1.1	Definitions	1

1.2	Terms Defined Elsewhere	12

1.3	Interpretation	14

ARTICLE 2 PURCHASE AND SALE OF ASSETS AND STOCK		15

2.1	Sale of Assets	15

2.2	Excluded Assets	15

2.3	Sale of Stock and Interests	15

2.4	Purchase Price	16

ARTICLE 3 WORKING CAPITAL ADJUSTMENT		16

3.1	Estimated Working Capital Adjustment	16

3.2	Post-Closing Working Capital Adjustments	16

3.3	Methodology for Working Capital Calculations	19

ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE SELLERS		20

4.1	Organization, Etc.	20

4.2	Corporate Authority; No Violation, Etc.	20

4.3	Ownership of Interests and Stock; Subsidiaries	21

4.4	Title to, Condition and Sufficiency of Assets	22

4.5	Financial Statements	22

4.6	Absence of Certain Changes or Events	23

4.7	Litigation; No Undisclosed Liabilities	24

4.8	Compliance with Laws	24

4.9	Environmental Matters	24

4.10	Tax Matters	25

4.11	ERISA and Employee Plans	27

4.12	Labor and Employment Matters	28

4.13	Intellectual Property	29

4.14	Material Contracts	32

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		Page

4.15	Insurance	34

4.16	Payments to Employees	34

4.17	Permits	35

4.18	Brokers or Finders	35

4.19	Related Party Transactions	35

4.20	Banks; Power of Attorney	36

4.21	Certain Payments	36

4.22	Health Care Regulatory Compliance	36

4.23	Customers and Suppliers	38

ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF BUYER		38

5.1	Organization	38

5.2	Corporate Authority; No Violation, Etc.	38

5.3	Actions; Litigation	39

5.4	Solvency	39

5.5	Financing	39

5.6	Purchase for Own Account; Accredited Investor	40

5.7	[Reserved]	40

5.8	Brokers or Finders	40

ARTICLE 6 COVENANTS		40

6.1	Conduct of the Business in the Ordinary Course Pending the Closing	40

6.2	Access to Information Pre-Closing	44

6.3	Access to Information Post-Closing	45

6.4	Notification of Certain Matters	45

6.5	Governmental Consents	46

6.6	Consents and Third Party Notices	47

6.7	Reasonable Efforts; Further Assurances	47

6.8	Investigation and Agreement; No Other Representations or Warranties	48

6.9	Indebtedness	48

iii

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		Page

6.10	Release of Guarantees and Letters of Credit	48

6.11	Termination of Intercompany Agreements	49

6.12	Post-closing Indemnification of Directors and Officers	49

6.13	Audited Financial Statements	49

6.14	Transaction Agreements	50

ARTICLE 7 ADDITIONAL AGREEMENTS		50

7.1	WARN	50

7.2	Employee Matters and Employee Benefits	50

7.3	Covenants Not to Compete	52

7.4	[Reserved]	53

7.5	[Reserved]	53

7.6	Confidential Nature of Information	53

7.7	Acquisition Proposals	54

7.8	Release for Pre-closing Intercompany Liabilities	54

7.9	Securities	54

ARTICLE 8 TAX MATTERS		54

8.1	Tax Indemnification	54

8.2	Transfer Taxes and Property Taxes on Acquired Assets	57

8.3	Tax Claims; Cooperation on Tax Matters	58

8.4	Termination of Tax Sharing Agreements	59

8.5	Election	59

8.6	Tax Treatment of Payments	59

8.7	Exclusivity; Survival	59

ARTICLE 9 CLOSING		60

9.1	Time and Place of Closing	60

9.2	Deliveries by Sellers at Closing	60

9.3	Deliveries by Buyer at Closing	61

ARTICLE 10 CONDITIONS PRECEDENT		61

10.1	Conditions to Each Party’s Obligation	61

TABLE OF CONTENTS

		Page

10.2	Conditions to Obligation of Buyer	62

10.3	Conditions to Obligations of Sellers	64

10.4	Frustration of Closing Conditions	64

ARTICLE 11 TERMINATION, AMENDMENT AND WAIVER		64

11.1	Termination	64

11.2	Effect of Termination	66

ARTICLE 12 INDEMNIFICATION		66

12.1	Survival	66

12.2	Indemnification by the Parties	67

12.3	Limits on Indemnification	68

12.4	Matters Involving Third Parties	70

12.5	Indemnification Notices	71

12.6	Releases	72

ARTICLE 13 MISCELLANEOUS		72

13.1	Public Announcement	72

13.2	Payment of Costs and Expenses	73

13.3	Non-Assignment; Successors and Assigns	73

13.4	Entire Agreement	73

13.5	Severability; Enforceability	73

13.6	Counterparts	73

13.7	Notices	73

13.8	Waiver	75

13.9	Third Parties	75

13.10	Rules of Construction	75

13.11	Governing Law	76

13.12	Non-Recourse	76

13.13	Specific Performance	76

PURCHASE AGREEMENT

THIS PURCHASE AGREEMENT, is made as of the 4th day of June, 2009, by and among Magellan Health Services, Inc., a Delaware corporation (“Buyer”), Coventry Health Care, Inc., a Delaware corporation (“Coventry”), First Health Group Corp., a Delaware corporation and a wholly-owned subsidiary of Coventry (“First Health Group”) and Coventry Management Services, Inc., a Pennsylvania corporation and a wholly-owned subsidiary of Coventry (“CMS”). Buyer, Coventry, First Health Group and CMS are referred to collectively herein as the “Parties” and each individually as a “Party.” Each capitalized term used but not otherwise defined herein shall have the meaning set forth in Article I.

RECITALS

WHEREAS, CMS owns the Acquired Assets;

WHEREAS, (i) First Health Group owns all of the issued and outstanding stock (the “FHS Stock”) of First Health Services Corporation, a Virginia corporation (“FHS”); (ii) First Health Group owns all of the issued and outstanding stock (the “FHC Stock”) of FHC, Inc., a Canadian corporation (“FHC”); and (iii) Coventry owns all of the issued and outstanding ownership interests (the “Provider Synergies Interests”) in Provider Synergies, LLC, an Ohio limited liability company (“Provider Synergies”). For purposes of this Agreement, the FHS Stock, the FHC Stock and the Provider Synergies Interests are collectively referred to herein as the “Shares”;

WHEREAS, FHS of Florida and FHS of Montana are each direct, wholly-owned subsidiaries of FHS; and

WHEREAS, subject to the terms and conditions set forth herein, (i) CMS desires to sell, and Buyer desires to acquire, all of CMS’s right, title and interest in and to the Acquired Assets; (ii) First Health Group desires to sell, and Buyer desires to acquire, all of the FHS Stock and the FHC Stock; and (iii) Coventry desires to sell, and Buyer desires to acquire, all of the Provider Synergies Interests.

NOW, THEREFORE, in consideration of the respective representations, warranties, agreements, and conditions hereinafter set forth, and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the Parties hereto agree as follows:

ARTICLE 1

DEFINED TERMS

1.1 Definitions. The following terms used in this Agreement shall have the meanings indicated below unless the context otherwise indicates:

“Acquire” shall mean as the result of, or in connection with, any cash tender or exchange offer, merger or other business combination or sales of assets or any combination of the foregoing transactions, more than a majority of the combined voting power of the then outstanding securities of Coventry or any successor corporation or entity entitled to vote generally in the election of the directors of Coventry or such other corporation or entity after such transactions is held in the aggregate by the holders of Coventry’s securities entitled to vote generally in the election of directors of Coventry immediately prior to such transaction.

“Acquired Assets” shall mean those assets of CMS relating to the Business set forth on Section 1.1(a) of the Seller Disclosure Letter and, without limiting anything set forth on Section 1.1(a) of the Seller Disclosure Letter, shall include: (A) to the extent such assets are not owned by any Acquired Entity, all tangible personal property, including any Furniture and Equipment, that is located, or in the ordinary course of conduct of the Business would be located, on the premises relating to the Leased Real Property and (B) all data relating to business with customers or suppliers of the Business in the possession or control of CMS. The Parties acknowledge and agree that Section 1.1(a) of the Seller Disclosure Letter has been prepared as of June 4, 2009, and that Coventry shall update such schedule periodically (but in no event later than five (5) days prior to the Closing Date) to reflect any changes in the scheduled Acquired Assets made in the operation of the Business after June 4, 2009, provided that any such changes are made in compliance with Section 6.1 and do not violate Section 4.4(e).

“Acquired Entities” shall mean, collectively, FHS, Provider Synergies, FHC, FHS of Florida and FHS of Montana.

“Action” shall mean any action, claim, proceeding, audit, hearing (including counterclaim), arbitration, mediation, litigation or suit (whether civil, criminal, administrative, investigative or informal) commenced, brought or heard by or before any Governmental Authority, arbitrator or mediator (public or private).

“Affiliate” shall mean, with respect to any specified Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with, such specified Person. For purposes of this definition, “control” (including, with correlative meanings, the terms “controlled by” and “under common control with”), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by contract or otherwise.

“Agreement” shall mean this Purchase Agreement, together with all exhibits attached hereto and the Disclosure Letters.

“Antitrust Division” shall mean the Antitrust Division of the United States Department of Justice.

“Antitrust Laws” shall mean, collectively, (a) the HSR Act, (b) the Sherman Antitrust Act of 1890, as amended, (c) the Clayton Act of 1914, as amended, (d) the Federal Trade Commission Act of 1914, as amended and (e) any other Law designed to prohibit, restrict or regulate actions for the purpose or effect of monopolization or restraint of trade.

“Business” shall mean the business and operations of the Acquired Entities as currently conducted.

“Business Day” shall mean any day other than a Saturday, a Sunday or a day on which banks in New York, New York are authorized or obligated by law or executive order to not open or remain closed.

“Business IP” means all Intellectual Property owned by any of the Acquired Entities.

“Business Technology” means all Technology owned by any of the Acquired Entities.

“Buyer Disclosure Letter” shall mean the Disclosure Letter prepared and delivered by Buyer to Sellers prior to the execution of this Agreement.

“Buyer Indemnifiable Losses” shall mean Losses Buyer Indemnitees may suffer, sustain or become subject to and be entitled to indemnity against, pursuant to Article VIII or Article XII.

“Buyer Material Adverse Effect” means any event, occurrence, fact, condition, change, development or effect that materially and adversely affects Buyer’s ability to consummate the transactions contemplated by this Agreement and the other Transaction Agreements.

“Buyer’s Knowledge” shall mean the actual knowledge after due inquiry of the individuals listed in Section 1.1 of the Buyer Disclosure Letter.

“Buyer” shall have the meaning assigned to such term in the Preamble hereto.

“Capital Lease Indebtedness” shall mean all obligations of any of the Acquired Entities to pay rent or other payment amounts under a lease of real or personal property which, if outstanding on December 31, 2008, would be classified in accordance with GAAP as a capital lease or a liability on the face of a balance sheet for such Acquired Entity or CMS.

“Cash” shall mean, with respect to any Person, all cash and cash equivalents (including stocks, bonds, debt securities, certificates of deposit and similar investments that are marketable securities and short term investments) of such Person.

“Change in Control” shall mean as the result of, or in connection with, any cash tender or exchange offer, merger or other business combination or sales of assets or any combination of the foregoing transactions, less than a majority of the combined voting power of the then outstanding securities of Coventry or any successor corporation or entity entitled to vote generally in the election of the directors of Coventry or such other corporation or entity after such transactions is held in the aggregate by the holders of Coventry’s securities entitled to vote generally in the election of directors of Coventry immediately prior to such transaction.

“CMS Group” shall mean CMS (solely with respect to the Acquired Assets) and the Acquired Entities.

“Code” shall mean the Internal Revenue Code of 1986, as amended, and as the context requires, the Treasury Regulations promulgated thereunder.

“Commitments” shall mean any subscriptions, options, rights, warrants, convertible securities or other agreements or commitments.

“Confidentiality Agreement” shall mean the Confidentiality Agreement, dated October 12, 2007, as amended on March 23, 2009, and further amended on April 2, 2009, by and between Coventry and Buyer.

“Consent” shall mean any approval, consent, license, permit, ratification, waiver or other authorization issued, granted, given, or otherwise made available by or under the authority of any Governmental Authority or pursuant to any applicable Law.

“Consolidated Group” means an affiliated, consolidated, combined or unitary group with respect to any Taxes.

“Contract” shall mean any loan or credit agreement, note, bond, debenture, indenture, mortgage, guarantee, deed of trust, lease, franchise, permit, authorization, license, contract, instrument, employee benefit plan or practice or other binding agreement, obligation, arrangement, understanding or commitment.

“Coventry Group” shall mean Coventry and its Affiliates, excluding however, CMS (solely with respect to the Acquired Assets) and the Acquired Entities.

“Coventry Name” shall mean the name “Coventry,” “First Health,” and “First Health Services,” including all derivations thereof, and any and all Intellectual Property rights relating to the foregoing and shall include, without limitation, any uniform resource locators (or “URLs”) containing the name “Coventry,” or any derivation thereof.

“Designated Area” shall mean anywhere in the United States.

“Disclosure Letters” shall mean, collectively, the Seller Disclosure Letter and the Buyer Disclosure Letter.

“Eligible Employee” shall mean any individual who is an active employee, consultant, contingent worker, leased employee or independent contractor of the CMS Group as of the date hereof, together with such individual who is hired by the CMS Group after the date hereof, and identified on Section 1.1(b) of the Seller Disclosure Letter. The Parties acknowledge and agree Section 1.1(b) of the Seller Disclosure Letter has been prepared as of June 4, 2009 and that Coventry shall update such schedule periodically, but in no event later than five (5) days prior to the Closing Date, to reflect any changes made in the operation of the Business after June 4, 2009, provided, that any such change was made in compliance with Section 6.1

“Employee Plan” shall mean any “employee benefit plan” within the meaning of section 3(3) of ERISA and all other employee benefit arrangements or payroll practices, including, without limitation, any employment agreement, consulting agreement, bonus, incentive compensation, deferred compensation, stock ownership, stock option, stock appreciation right, restricted stock, phantom stock, equity, premium conversion, medical, hospitalization, vision, dental, health, life, disability, severance, change of control, vacation, death benefit, educational, adoption, dependent care assistance or other employee benefit plan, policy, arrangement, or agreement, whether or not subject to ERISA, that any of the Sellers, any of the Acquired Entities, or any their respective ERISA Affiliates, sponsors, maintains or contributes to for the benefit of current or former employees, consultants, or directors of any of the Sellers or ERISA Affiliates.

“Environmental Laws” shall mean any Law now or hereinafter in effect, relating to pollution or the protection, cleanup or restoration of the environment and natural resources, and health and safety (as it relates to exposure to Hazardous Materials) including the Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource Conservation and Recovery Act, the Federal Comprehensive Environmental Response, Compensation, and Liability Act, the Federal Toxic Substances Control Act, the Federal Occupational Safety and Health Act (as it relates to exposure to Hazardous Materials) and the Hazardous Materials Transportation Act.

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

“ERISA Affiliate” shall mean any trade or business, affiliate or subsidiary of any of the Sellers, that is or has been under common control or that is or has ever been treated as a single employer with any of them under sections 414(b), (c), (m) or (o) of the Code.

“FHS of Florida” shall mean First Health Services of Florida, Inc.

“FHS of Montana” shall mean First Health Services of Montana, Inc.

“FHS Outstanding Indebtedness” shall mean, as of any particular time, the unpaid principal amount, accrued interest, prepayment and redemption premiums or penalties (if any), unpaid fees and expenses or other monetary obligations in respect of all

indebtedness of the Acquired Entities for borrowed money, but specifically excluding all Capital Lease Indebtedness of the Acquired Entities.

“FHS Target Working Capital” shall mean $15,000,000.

“FHS Working Capital” shall be in the amount by which the current assets of the Acquired Entities (provided, that, current assets shall not include FHS Intercompany Receivables) exceeds the current liabilities of the Acquired Entities (provided, that, current liabilities shall not include (i) Intercompany Payables and (ii) any FHS Outstanding Indebtedness). For purposes of Article III, FHS Working Capital shall be determined as of immediately prior to the Closing and shall not be calculated to include any changes in assets or liabilities as a result of purchase accounting adjustments or other changes arising from or resulting as a consequence of the Transactions.

“FTC” shall mean the United States Federal Trade Commission.

“Furniture and Equipment” means all furniture, fixtures, furnishings, equipment, vehicles, leasehold improvements, and other tangible personal property owned or used by the Acquired Entities in the conduct of the Business, including all desks, chairs, tables, hardware, copiers, telephone equipment and lines, telecopy machines and other telecommunication equipment, networks, hubs and switches, cubicles and miscellaneous office furnishings and supplies.

“GAAP” shall mean United States generally accepted accounting principles as set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board.

“Governmental Authority” shall mean any foreign, federal, provincial, state or local government court, administrative or regulatory agency, board, bureau or commission or other governmental department or authority or instrumentality thereof.

“Governmental Program” shall mean ‘federal health care programs’ as defined in 42 U.S.C. § 1320a-7b(f).

“Guarantees” shall mean shall mean all guarantees, endorsements, performance bonds, surety bonds, bid bonds or other similar agreements relating to the Business.

“Handling” shall mean the production, use, generation, storage, treatment, transportation, recycling, or other management of any Hazardous Material.

“Hazardous Material” shall mean any substance, material or waste that is regulated, classified, or otherwise characterized under or pursuant to any Environmental Law as “hazardous,” “toxic,” “pollutant,” “contaminant,” or “radioactive,” including petroleum and its by-products, asbestos, polychlorinated biphenyls and radon.

“Healthcare Laws” means any Law relating to the provision, administration, and/or payment for healthcare or healthcare-related products or services, including, without limitation, to the extent applicable: (i) rules and regulations governing the operation and administration of Medicare, Medicaid, or other federal and state health care programs; (ii) 42 U.S.C. § 1320a-7b(b), commonly referred to as the “Federal Anti-Kickback Statute,” (iii) 31 U.S.C. §§ 3729 et seq., commonly referred to as the “False Claims Act,” (iv) 31 U.S.C. § 3801 et seq., commonly referred to as the Program Fraud Civil Penalties Act, (v) the rules and regulations of the U.S. Food and Drug Administration, and (vi) rules and regulations of the state boards of pharmacy.

“HSR Act” shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

“Intellectual Property” shall mean all U.S., foreign and state issuances, registrations and applications for, and all rights (common law, statutory or otherwise) throughout the world in, intellectual property, including all (a) trademarks, service marks, trade names, logos, common law trademarks and service marks, domain names and any applications, renewals and extensions therefor, (b) patents, provisional patents and utility models and applications therefor, all reissues, divisions, re-examinations, renewals, extensions, substitutions, continuations and continuations in part thereof, and equivalent or similar rights anywhere in the world in inventions and discoveries, including invention disclosures, invention certificates, and the like (“Patents”), (c) trade secrets and other rights in privacy, data, know-how and confidential or proprietary information, (d) copyrights, database rights, mask work rights, works of authorship and other rights corresponding thereto, and all registrations, applications, renewals, extensions and reversions thereof, (e) unregistered design rights and registered industrial designs and any registrations, applications, renewals and extensions therefor, (f) Moral Rights, (g) computer programs, algorithms, routines, source code and executable code, whether embodied in firmware, software or otherwise, documentation, designs, files, records and data (“Software”), (h) the content of websites and Software related thereto; (i) inventions (whether or not patentable and whether or not reduced to practice), research and development, discoveries, improvements and technology, (j) proprietary and confidential information, including technical data, customer and supplier lists and data, trade secrets, know-how and techniques, (k) databases, data compilations and collections and technical data, tools, methods, processes, devices, prototypes, schematics, bread boards, net lists, mask works, test methodologies and hardware and Software development tools and (l) any similar, corresponding or equivalent rights to any of the foregoing.

“Intercompany Agreements” shall mean the Contracts between one or more members of the Coventry Group, on the one hand, and one or more members of the CMS Group, on the other hand, that are set forth on Section 1.1(c) of the Seller Disclosure Letter.

“Intercompany Payables” shall mean all payables and notes payable of any one or more members of the CMS Group owing to any one or more members of the Coventry

Group, whether or not billed or accrued or recorded or unrecorded, together with any unpaid interest or fees accrued thereon or other amounts due with respect thereto.

“Intercompany Receivables” shall mean all accounts, accounts receivable and notes receivable held by any one or more members of the CMS Group that are owed by any one or more members of the Coventry Group, whether or not billed or accrued or recorded or unrecorded, together with any unpaid interest or fees accrued thereon or other amounts due with respect thereto.

“IRS” shall mean the United States Internal Revenue Service.

“Law” means any foreign, federal, state or local law, statute, code, ordinance, rule, regulation or Ruling.

“Leased Real Property” shall mean all real property leased, subleased or licensed to the Acquired Entities.

“Letters of Credit” shall mean the letters of credit, bankers’ acceptances and similar facilities issued by or on behalf of any one or more members of the Coventry Group in connection with the Business.

“Lien” shall mean any lien, pledge (including any negative pledge), purchase option, easement, restrictive covenant, security interest, deed of trust, mortgage, conditional sales agreement, right of first refusal, servitude, proxy, voting trust or agreement, transfer restriction under any shareholder or similar agreement, registration rights with respect to securities, encumbrance or other right of third parties voluntarily incurred or arising by operation of Law, or any other restriction or limitation whatsoever, including any agreement to give any of the foregoing in the future, and any contingent sale or other title retention agreement or lease in the nature thereof, including any lien resulting from the FHS Outstanding Indebtedness.

“Losses” means any and all claims, demands, suits, proceedings, judgments, losses, liabilities, damages, Taxes, interest, fines, penalties, assessments, awards and costs and expenses of every kind and nature (including reasonable attorneys’ and other professionals’ fees and court costs) incurred in responding to claims, demands, assessments, awards or investigations or defending suits or proceedings, whether or not involving a third party claim; provided, however, that in computing the amount of any Losses of an Indemnified Party, for purposes of determining the liability of the Indemnifying Party under Article VIII or Article XII, (a) the amount of any insurance proceeds or other recoveries actually received by the Indemnified Party shall be deducted from such Losses, (b) the amount of any Tax benefit actually used to reduce Taxes by any Indemnified Party arising from the incurrence or payment of any such Losses shall be deducted from such Losses, and (c) other than Losses resulting from Third Party Claims, the amount of any Losses in the form of exemplary or punitive Losses shall not be included in Losses for which an Indemnified Party may seek indemnification under Article VIII or Article XII. In computing the amount of any such Tax benefit, the

Indemnified Party shall be deemed to utilize all Tax items arising from the incurrence or payments of any Losses after all other Tax items of such Person have been accounted for and utilized.

“Material Adverse Effect on the Business” means any event, occurrence, fact, condition, change, development or effect that, individually or in the aggregate with all other events, occurrences, facts, conditions, changes, developments or effects, is, or would reasonably be expected to be, materially adverse to the business, assets, liabilities, results of operations or condition (financial or otherwise) of the Business, taken as a whole, except to the extent that such event, occurrence, fact, condition, change, development or effect results from: (a) any generally applicable change in GAAP or interpretation thereof, (b) any adoption, implementation, promulgation, repeal, modification, reinterpretation or proposal of any Law after the date hereof, (c) (i) the announcement of this Agreement, or (ii) the pendency of the consummation of the transactions contemplated hereby, (d) actions or inactions taken by CMS, or the Acquired Entities as expressly required by this Agreement, (e) economic, political or financial market conditions generally affecting the industries in which CMS or the Acquired Entities conduct the Business, or the U.S. economy as a whole or the capital markets in general, and (f) any outbreak or escalation of hostilities (including, without limitation, any declaration of war by the U.S. Congress) or acts of terrorism, provided, in the case of clauses (a), (e) and (f), that such events, occurrences, facts, conditions, changes, developments or effects do not disproportionately affect the Business relative to others in the industries in which the Acquired Entities operate.

“Moral Rights” shall mean any right to claim authorship to or to object to any distortion, mutilation or other modification or other derogatory action in relation to a work of authorship, whether or not such claim or objection would be prejudicial to the author’s reputation, and any similar right existing under common or statutory law of any country in the world or under any treaty, regardless of whether or not such right is denominated or generally referred to as a “moral right.”

“Off-the-Shelf Software” shall mean Software that is not customized for any of the Acquired Entities or CMS or that is generally available on reasonable terms through commercial distributors or in retail stores.

“ordinary course of business” shall mean the ordinary and usual course of normal day-to-day operations of the Business as conducted by Sellers, through the date hereof, consistent with past practice.

“Patents” shall have the meaning specified in the definition of “Intellectual Property.”

“Permits” shall mean any licenses, franchises, certificates, approvals, permits, consents, waivers and other authorizations issued, granted, given or otherwise made available by or under the authority of any Governmental Authority.

“Permitted Liens” shall mean all (i) Liens consisting of zoning or planning regulations, easements, permits and other restrictions or limitations on the use of real property or irregularities in title thereto that do not materially detract from the value of, or impair the use of, property as it is presently used in connection with the Business, provided that such regulations have not been violated, (ii) Liens for current Taxes, assessments or governmental charges or levies on property not yet due or that are being contested in good faith and for which appropriate reserves have been created, (iii) mechanic’s, materialmen’s and similar Liens arising in the ordinary course of business or by operation of Law for sums not yet due or that are being contested in good faith that are not material to the Business and that are not resulting from a breach, default or violation by Sellers or any of the Subsidiaries of any Contract or Law; (iv) Liens securing all or any portion of the FHS Outstanding Indebtedness that are released at Closing, (v) Liens on Leased Real Property arising from the provisions of such leases, (vi) mortgages, deeds of trust and other security instruments, and ground leases or underlying leases covering the title, interest or estate of landlords with respect to the Leased Real Property and to which the leases with respect to the Leased Real Property are subordinate, (vii) Liens for Capital Lease Indebtedness, (viii) Liens set forth on Section 1.1(d) of the Seller Disclosure Letter that are to be released at or prior to the Closing in accordance with Section 9.2(d), and (ix) Liens for Guarantees or Letters of Credit (in each case, to the extent they have not been extinguished or released prior to or at Closing).

“Person” shall mean a natural person, corporation, limited liability company, partnership, limited partnership or other entity, including a Governmental Authority.

“Pre-Closing Tax Period” shall mean any Taxable period that ends on or prior to the Closing Date.

“Release” or “Released” shall mean any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, migrating or disposing (including abandoning or discarding).

“Ruling” means any award, decision, injunction, decree, stipulation, determination, writ, judgment, order, ruling, assessment or arbitration award, subpoena or verdict entered, issued, made or rendered (whether temporary, preliminary or permanent) by any court, administrative agency or other Governmental Authority or arbitrator.

“SEC” shall mean the U.S. Securities and Exchange Commission.

“Securities Act” shall mean the Securities Act of 1933, as amended, together with the rules and regulations of the SEC promulgated thereunder.

“Seller Disclosure Letter” shall mean the Disclosure Letter prepared and delivered by Coventry to Buyer prior to the execution of this Agreement.

“Sellers’ Knowledge” shall mean the actual knowledge after due inquiry of the individuals listed in Section 1.1(e) of the Seller Disclosure Letter.

“Sellers” shall mean, collectively, Coventry, CMS and First Health Group.

“Software” shall have the meaning specified in the definition of “Intellectual Property.”

“Straddle Period” shall mean any Taxable period that begins on or before and ends after the Closing Date.

“Subsidiaries” shall mean, with respect to any Person, another Person (a) of which 50% or more of the capital stock, voting securities, other voting ownership or voting partnership interests having voting power under ordinary circumstances to elect directors or similar members of the governing body of such corporation or other entity (or, if there are no such voting interests, 50% or more of the equity interests) are owned or controlled, directly or indirectly, by such first Person or (b) of which such first Person is a general partner.

“Tax” or “Taxes” shall mean (i) all taxes, charges, fees, levies or other assessments, including all net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, premiums, license, withholding, payroll, employment, social security, unemployment, excise, estimated, severance, stamp, occupation, property or other taxes, customs duties, fees, assessments or charges of any kind whatsoever, including all interest and penalties thereon, and additions to tax or additional amounts imposed by any Governmental Authority, and (ii) all liabilities in respect of any items described in clause (i) payable by reason of contract or arrangement, assumption, transferee or successor liability, operation of Law or Treasury Regulations Section 1.1502-6(a) (or any predecessor or successor thereof or any analogous or similar provision of Law).

“Taxing Authority” shall mean the United States, any subdivision or instrumentality thereof or any other Governmental Authority, which imposes Taxes.

“Tax Return” shall mean any return, report, declaration, form, claim for refund or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.

“Technology” means all Software, information, designs, libraries, formulae, procedures, methods, techniques, ideas, know-how, research and development, technical data, programs, subroutines, tools, materials, specifications, processes, inventions (whether or not patentable and whether or not reduced to practice), apparatus, creations, improvements and other similar materials, and all recordings, graphs, drawings, reports, analyses, and other writings, and other tangible embodiments of the foregoing, in any form whether or not specifically listed herein.

“Transaction Agreements” shall mean this Agreement, the Confidentiality Agreement, the Transition Services Agreement, the Master Services Agreement for Radiology Benefit Management Services entered into simultaneously herewith by and

among Buyer and certain Subsidiaries of Sellers named therein and dated the date hereof (the “Master Radiology Services Agreement”), the Management Services Agreement for Medical Pharmaceuticals entered into simultaneously herewith by and between Buyer and certain Subsidiaries of Sellers named therein and dated the date hereof (the “Medical Pharmaceuticals Agreement”), the radiology benefits management agreements to be entered into between National Imaging Associates Inc. and Coventry and/or its Subsidiaries as provided by the Master Radiology Services Agreement and any other agreements that any Seller or any of its Subsidiaries and Buyer or any of its Subsidiaries agree to enter into in connection with this Agreement or the Closing.

“Transactions” shall mean the transactions contemplated by this Agreement and the other Transaction Agreements.

“Transition Services Agreement” shall mean the Transition Services Agreement entered into simultaneously herewith between CMS and Buyer dated as of the date hereof.

“Treasury Regulations” shall mean the regulations promulgated by the Treasury pursuant to and in respect of provisions of the Code. All references in this Agreement to sections of the Treasury Regulations shall include any corresponding provisions of succeeding, similar, substitute proposed or final Treasury Regulations.

“Treasury” shall mean the United States Department of Treasury.

“WARN Act” shall mean the Worker Adjustment and Retraining Notification Act, as amended and other similar Laws.

1.2 Terms Defined Elsewhere. The following is a list of additional terms used in this Agreement and a reference to the Section hereof in which such term is defined:

	Term		Section

	Acquisition Proposal		Section 7.7(a)
	ARRA		Section 4.11(g)
	Audited Financial Statements		Section 6.13
	Auditor’s Consent		Section 6.13
	Bankruptcy and Equity Exception		Section 4.2(a)
	Buyer		Preamble
	Business Software		Section 4.13(i)
	Buyer Indemnitees		Section 12.2(a)
	Cap		Section 12.3(c)(i)
	Calculation Notice		Section 3.2(b)
	Change In Control Customer Contracts		Section 4.14(d)
	Closing		Section 9.1
	Closing Date		Section 9.1
	Closing Date Interest Rate		Section 3.2(d)

	Term		Section

	CMS		Preamble
	CMS Group Charter Documents		Section 4.1(b)
	CMS Group Release		Section 7.8
	COBRA		Section 4.11(g)
	Coventry		Preamble
	Cure Period		Section 11.1(b)
	Deductible		Section 12.3(a)
	Disputed Items		Section 3.2(b)
	D&O Obligations		Section 6.12
	D&O Released Parties		Section 12.6
	Excluded Assets		Section 2.2(a)
	FHC		Recitals
	FHC Stock		Recitals
	FHS		Recitals
	FHS Closing Date Balance Sheet		Section 3.2(a)
	FHS Closing Date Payment		Section 2.4(a)
	FHS Estimated Working Capital		Section 3.1(a)
	FHS Financial Statements		Section 4.5(a)
	FHS Initial Calculation		Section 3.2(a)
	FHS Interim Financial Statements		Section 4.5(a)
	FHS Material Permits		Section 4.17
	FHS Negative Estimated Working Capital Adjustment		Section 3.1(a)
	FHS Positive Estimated Working Capital Adjustment		Section 3.1(a)
	FHS Restricted Business		Section 7.3(a)
	FHS Stock		Recitals
	FHS Working Capital Adjustment Amount		Section 3.2(d)
	FHS Year End Financial Statements		Section 4.5(a)
	Final FHS Working Capital		Section 3.2(d)
	FIRPTA Affidavit		Section 9.2(l)
	First Health Group		Preamble
	Foreign Plans		Section 4.11(h)
	Fundamental Representations		Section 12.1(a)
	Governmental Damages		Section 10.2(e)
	Governmental Investigation		Section 10.2(e)
	HIPAA		Section 4.11(g)
	Hired Employees		Section 7.2(b)(i)
	HSR Filing		Section 6.5(b)
	Indemnifiable Losses		Section 12.2(b)
	Indemnification Notice		Section 12.5(a)
	Indemnified Party		Section 12.2(c)
	Infringes		Section 4.13(b)

	Term		Section

	Injunctions		Section 10.1(b)
	Labor Union		Section 4.12(a)
	Legal Actions		Section 10.1(c)
	Loss of Profits		Section 12.3(f)
	Material Contract		Section 4.14(b)
	Party or Parties		Preamble
	Policies		Section 4.15
	Property Taxes		Section 8.2(b)(i)
	Provider Synergies		Recitals
	Provider Synergies Interests		Recitals
	Purchase Price		Section 2.4(a)
	Re-Calculated FHS Working Capital		Section 3.2(e)
	Re-Calculated FHS Working Capital Adjustment Amount		Section 3.2(e)
	Registered IP		Section 4.13(a)
	Related Persons		Section 4.19
	Releasing Parties		Section 12.6
	Restraints		Section 10.1(c)
	Seller Indemnifiable Losses		Section 12.2(b)
	Seller Indemnitees		Section 12.2(b)
	Settlement Firm		Section 3.2(c)
	Shares		Recitals
	Tax Claim		Section 8.3(a)
	Tax Return Notice		Section 8.1(b)(i)
	Tax Settlement Firm		Section 8.1(b)(i)
	Termination Date		Section 11.1(e)(i)
	Third Party Claim		Section 12.4(a)
	Transfer Taxes		Section 8.2(a)
	Unsold Securities		Section 7.9

1.3 Interpretation. In this Agreement, unless otherwise specified or where the context otherwise requires:

(a) the headings of particular provisions of this Agreement are inserted for convenience only and will not be construed as a part of this Agreement or serve as a limitation or expansion on the scope of any term or provision of this Agreement;

(b) words importing any gender shall include other genders;

(d) the words “include,” “includes” or “including” shall be deemed to be followed by the words “without limitation”;

(e) the words “hereof,” “hereto,” “herein” and “herewith” and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement;

(f) references to “Articles,” “Exhibits”, “Sections” and other subdivisions shall be to Articles, Exhibits, Sections and other subdivisions of or to this Agreement; and

(g) references to any Person include the successors and permitted assigns of such Person.

ARTICLE 2

PURCHASE AND SALE OF ASSETS AND STOCK

2.1 Sale of Assets. Upon the terms and conditions set forth herein,

(a) Buyer agrees to purchase from CMS, and CMS agrees to sell, transfer, assign, convey and deliver to Buyer, all of CMS’ right, title and interest in, to and under the Acquired Assets, free and clear of all Liens, other than Permitted Liens.

2.2 Excluded Assets.

(a) Excluded Assets. Notwithstanding Section 2.1 of this Agreement, CMS is not selling, and Buyer is not purchasing, pursuant to this Agreement, any assets, properties, rights, licenses, Contracts, real property, causes of action or businesses of any kind or description, wherever located, real, personal or mixed, tangible or intangible, owned by, leased by, granted to or in the possession of CMS, that is not an Acquired Asset, all of which shall be retained by CMS; provided further that Sellers are not selling and Buyer is not purchasing any right, title or interest to the Coventry Name (collectively, the “Excluded Assets”).

2.3 Sale of Stock and Interests. Upon the terms and conditions set forth herein, at the Closing:

(a) Buyer agrees to purchase from First Health Group, and First Health Group agrees to sell, transfer, assign, convey and deliver to Buyer, all of the FHS Stock and FHC Stock, free and clear of all Liens; and

(b) Buyer agrees to purchase from Coventry, and Coventry agrees to sell, transfer, assign, convey and deliver to Buyer, all of the Provider Synergies Interests, free and clear of all Liens.

2.4 Purchase Price.

(a) Subject to Article XII, the aggregate cash purchase price payable by Buyer in consideration of the sale and transfer of the Acquired Assets, FHS Stock, FHC Stock and Provider Synergies Interests (the “Purchase Price”) shall be an amount in cash equal to the sum of the FHS Closing Date Payment plus, if applicable, any adjustments made pursuant to Section 3.2. The “FHS Closing Date Payment” shall be an amount equal to the sum of (a) $110,000,000, plus, if applicable, (b) the FHS Positive Estimated Working Capital Adjustment and minus, if applicable, (c) the FHS Negative Estimated Working Capital Adjustment.

(b) In calculating the various respective adjustments to the Purchase Price under this Agreement, no single item shall be given duplicative effect.

ARTICLE 3

WORKING CAPITAL ADJUSTMENT

3.1 Estimated Working Capital Adjustment.

(a) No later than two Business Days prior to the Closing Date, Coventry shall deliver to Buyer a statement showing the calculation of an estimate of the FHS Working Capital as of immediately prior to the Closing (the “FHS Estimated Working Capital”). The amount, if any, by which the FHS Estimated Working Capital exceeds the FHS Target Working Capital is referred to herein as the “FHS Positive Estimated Working Capital Adjustment”, and the amount, if any, by which the FHS Target Working Capital exceeds the FHS Estimated Working Capital is referred to herein as the “FHS Negative Estimated Working Capital Adjustment.”

(b) Coventry’s calculation of the FHS Estimated Working Capital as delivered to Buyer shall be accompanied by such schedules and data as may be necessary to support such calculation.

3.2 Post-Closing Working Capital Adjustments.

(a) Buyer shall cause to be prepared and, as soon as practical, but in no event later than 180 days after the Closing Date, shall cause to be delivered to Coventry, the unaudited combined balance sheet of the Acquired Entities prepared as of immediately prior to the Closing (the “FHS Closing Date Balance Sheet”) and a statement showing the calculation of the FHS Working Capital as of immediately prior to the Closing (the “FHS Initial Calculation”). The FHS Closing Date Balance Sheet and the FHS Initial Calculation shall be accompanied by such schedules and data with respect to the determination of the FHS Working Capital contained therein as may be appropriate to support such FHS Initial Calculation.

(b) Within 45 days after delivery to Coventry of the FHS Closing Date Balance Sheet and the FHS Initial Calculation by Buyer pursuant to Section 3.2(a), Coventry may deliver to Buyer a written notice (the “Calculation Notice”) either (A) advising Buyer that Coventry agrees with and accepts the FHS Initial Calculation (as the case may be) or (B) setting forth those particular line items (the “Disputed Items”) in the FHS Initial Calculation that Coventry disputes and a statement, with reasonable detail as to the Disputed Items, of what Coventry believes is the correct calculation of each Disputed Item and of the FHS Working Capital as of immediately prior to the Closing. Coventry and the advisors engaged by Coventry shall be entitled to review Buyer’s working papers, trial balances and similar materials relating to its preparation of the FHS Closing Date Balance Sheet for purposes of reviewing the FHS Initial Calculation. In addition, Buyer shall also provide Coventry and its accountants with (i) the reasonable assistance of personnel and (ii) timely and reasonable access, during normal business hours, to its personnel, properties, books and records, in each case at Buyer’s expense, but only to the extent related to review by Coventry of such FHS Initial Calculation. If Coventry does not submit a Calculation Notice within the 45-day period provided herein, then the Initial Calculation shall become final, binding and conclusive on the Parties and shall not be subject to further review, challenge or adjustment. To the extent that Coventry timely provides a Calculation Notice within the 45-day period, all items reflected therein that are not Disputed Items shall become final, binding and conclusive on the Parties and shall not be subject to further review, challenge or adjustment.

(c) Buyer and Coventry shall use commercially reasonable efforts for a period of 30 days (or such longer period as they may mutually agree) after the date of Coventry’s objection to the Calculation Notice to resolve any Disputed Items. During such 30-day period (or such longer period as they may mutually agree), Buyer and Coventry shall have access to the working papers, trial balances, schedules and calculations of the other used in the preparation of the FHS Initial Calculation, the Calculation Notice and the determination of the FHS Working Capital contained therein and the Disputed Items. In the event that Buyer and Coventry are unable to resolve all Disputed Items within such 30-day period (or such longer period as they may mutually agree), then the remaining unresolved Disputed Items shall be referred to Deloitte and Touche LLP or such other nationally recognized accounting firm selected by mutual agreement of Buyer and Coventry (such selected firm, the “Settlement Firm”). Buyer and Coventry will promptly, and in no event later than the time that Disputed Items are submitted to the Settlement Firm, enter into reasonable and customary arrangements for the services to be rendered by the Settlement Firm under this Section 3.2(c). The Parties agree that the selection process for the Settlement Firm shall occur only once and that such Settlement Firm, once selected, shall resolve remaining unresolved Disputed Items. The determination of the remaining unresolved Disputed Items by the Settlement Firm shall be final, binding and conclusive and shall constitute an arbitral award that is unappealable and not subject to further review, challenge or adjustment and upon which a judgment may be entered by a court having jurisdiction thereof. Buyer and Coventry shall use commercially reasonable efforts to cause the Settlement Firm to reach a determination as promptly as practicable (and in any event within 30 days from the date

that the Disputed Items are submitted to it). Within 10 days after the Settlement Firm has been retained, Buyer and Coventry shall furnish, at their own expense, to the Settlement Firm and each other a written statement of their position with respect to each Disputed Item. Within five Business Days after the expiration of such 10-day period, Buyer and Coventry may deliver to the Settlement Firm and to each other its response to the other’s position on each Disputed Item. With each submission, Buyer and Coventry may also furnish to the Settlement Firm such information, workpapers and other documents as they deem relevant to the resolution of the Disputed Items, with appropriate copies or notification being given to the other. In addition, Buyer and Coventry shall each furnish the Settlement Firm such workpapers and other documents and information relating to the Disputed Items, and shall provide interviews and answer questions, as such Settlement Firm may reasonably request. The Settlement Firm may, at its discretion, conduct a conference concerning the disagreement with Buyer and Coventry, at which conference Buyer and Coventry shall each have the right to present additional documents, materials and other information and to have present its advisors, counsel and accountants. The fees, costs and expenses of the Settlement Firm shall be allocated to and borne by Coventry and Buyer based on the inverse of the percentage that the Settlement Firm’s determination (before such allocation) bears to the total amount of the Disputed Items as originally submitted to the Settlement Firm. For example, should the items in dispute total in amount to $1,000 and the Settlement Firm awards $600 in favor of Coventry’s position, 60% of the costs of its review would be borne by Buyer and 40% of the costs would be borne by Coventry.

(d) The “FHS Working Capital Adjustment Amount”, which may be a positive or negative amount, shall mean the amount equal to the FHS Working Capital, as finally determined in accordance with Sections 3.2(a), 3.2(b) and 3.2(c) (the “Final FHS Working Capital”), minus the FHS Estimated Working Capital. If the FHS Working Capital Adjustment Amount is a positive amount, then Buyer shall promptly deliver, by wire transfer of immediately available funds to an account or accounts designated in writing by Coventry, an amount equal to the FHS Working Capital Adjustment Amount, together with interest thereon from the Closing Date to the date of payment at the rate equal to the weighted average of the LIBOR for a one month period (the “Closing Date Interest Rate”). If the FHS Working Capital Adjustment Amount is a negative amount, then Coventry shall promptly deliver or cause an Affiliate to promptly deliver, by wire transfer of immediately available funds to an account designated in writing by Buyer, an amount equal to the FHS Working Capital Adjustment Amount, together with interest thereon from the Closing Date to the date of payment at the Closing Date Interest Rate.

(e) As soon as practicable after the beginning of the thirteenth month after the Closing Date, the FHS Working Capital shall be re-calculated as of the Closing Date, taking into account only post-Closing events through and including the twelve months following the Closing Date as they relate to customer accounts receivable that existed on the Closing Date and the aggregate allowance for doubtful accounts with respect thereto (the “Re-Calculated FHS Working Capital”). Coventry shall cooperate

with Buyer in determining a mutually agreeable figure for the Re-Calculated FHS Working Capital. In the event of a disagreement between Coventry and Buyer as to the FHS Working Capital as so re-calculated, the provisions of Section 3.2(c) relating to the use of the Settlement Firm shall apply. The “Re-Calculated FHS Working Capital Adjustment Amount,” which may be a positive or negative amount, shall mean the amount equal to the Re-Calculated FHS Working Capital, as finally determined in accordance with Sections 3.2(c) and 3.2(e), minus the Final FHS Working Capital. If the Re-Calculated FHS Working Capital Adjustment Amount is a positive amount, then Buyer shall promptly deliver, by wire transfer of immediately available funds to an account or accounts designated in writing by Coventry, an amount equal to the Re-Calculated FHS Working Capital Adjustment Amount, together with interest thereon from the Closing Date to the date of payment at the rate equal to Closing Date Interest Rate. If the Re-Calculated FHS Working Capital Adjustment Amount is a negative amount, then Coventry shall promptly deliver or cause an Affiliate to promptly deliver, by wire transfer of immediately available funds to an account designated in writing by Buyer, an amount equal to the Re-Calculated FHS Working Capital Adjustment Amount, together with interest thereon from the Closing Date to the date of payment at the Closing Date Interest Rate.

(f) All amounts paid pursuant to this Section 3.2 shall be deemed an adjustment to the Purchase Price. For purposes of this Section 3.2, all computations of interest shall be made on the basis of a year of 365 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable. Any payments made by any Person pursuant to this Section 3.2 shall be made by wire transfer of immediately available funds within 10 Business Days after the date on which the FHS Working Capital determinations become final and binding on the Parties under this Section 3.2.

(g) The FHS Working Capital, as finally determined pursuant to this Section 3.2, shall be the final FHS Working Capital for purposes of this Agreement.

3.3 Methodology for Working Capital Calculations. Section 3.3 of the Seller Disclosure Letter sets forth certain agreed-upon exceptions to GAAP applicable to the determination of the FHS Working Capital under this Article III. All FHS Working Capital determinations made pursuant to this Article III (estimated and actual), including each and every amount and calculation determined in accordance therewith, shall be determined and calculated in accordance with GAAP, as it exists on the date hereof, and as applied consistently with the preparation of the FHS Financial Statements, except as set forth on Section 3.3 of the Seller Disclosure Letter. Section 3.3 of the Seller Disclosure Letter shall set forth a sample calculation of the FHS Working Capital calculated as of April 30, 2009.

ARTICLE 4

REPRESENTATIONS AND WARRANTIES OF THE SELLERS

Except as set forth in the Seller Disclosure Letter delivered by Sellers to Buyer simultaneously with the execution of this Agreement, it being understood and agreed that each item in a particular section of the Seller Disclosure Letter applies only to such section and to any other section to which its relevance is reasonably apparent on the face of such disclosure, each of the Sellers, jointly and severally, represents and warrants to Buyer as follows:

4.1 Organization, Etc.

(a) Each of the Sellers and the Acquired Entities is a corporation or limited liability company duly incorporated or formed, validly existing and in good standing under the laws of its jurisdiction of incorporation or formation. CMS has all requisite corporate power and authority to own or lease and operate the Acquired Assets. Each of the Acquired Entities has all of the requisite corporate or limited liability company power and authority to own, or lease and operate its assets. The Acquired Entities have all requisite corporate or limited liability company power and authority to carry on the Business as it is now being conducted. Each of the Acquired Entities is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the property owned, leased or operated by such Person or the nature of the business conducted by it makes such qualification necessary, except in such jurisdictions where the failure to be so qualified or licensed and in good standing has not had a Material Adverse Effect on the Business.

(b) Coventry has delivered to Buyer correct and complete copies of the certificate of formation and limited liability company agreement and correct and complete copies of the certificates of incorporation and by-laws (or comparable organizational documents) of each of the Acquired Entities (the “CMS Group Charter Documents”), in each case as amended to the date of this Agreement.

4.2 Corporate Authority; No Violation, Etc.

(a) Each of the Sellers has the requisite corporate power and authority to enter into this Agreement and each other Transaction Agreement to which such Person is to be a party and to perform its obligations hereunder and thereunder and to consummate the Transactions. The execution, delivery and performance by the Sellers of this Agreement and each such other Transaction Agreement and the consummation of the Transactions have been duly authorized by all requisite corporate action on the part of the Sellers. This Agreement has been duly executed and delivered by the Sellers and constitutes a legal, valid and binding agreement of each of the Sellers, enforceable against each such Person in accordance with its terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and other Laws affecting creditors’ rights generally and except insofar as the availability of equitable remedies may

be limited by applicable Law (the “Bankruptcy and Equity Exception”). As of the Closing, each other Transaction Agreement to which any of the Sellers is to be a party will have been duly executed and delivered by each such Person and will constitute a legal, valid and binding agreement of each such Person, enforceable against it in accordance with its terms, subject to the Bankruptcy and Equity Exception.

(b) Except as set forth in Section 4.2(b) of the Seller Disclosure Letter, none of the execution and delivery by any of the Sellers or any of their Subsidiaries of this Agreement or any other Transaction Agreement to which it is or will be a party, the consummation by the Sellers or any of their Subsidiaries of the Transactions or compliance by the Sellers or any of their Subsidiaries with any of the provisions hereof or thereof (a) violates or conflicts with any provisions of the CMS Group Charter Documents, (b) requires any consent, approval, authorization or permit of, registration, declaration or filing with, or notification to, any Governmental Authority or any other Person (except for (i) filings required under any applicable Antitrust Laws, (ii) Permits as may be required under, and other applicable requirements of, state securities laws and (iii) consents, approvals or notifications required under Contracts that are not Material Contracts), (c) results in the creation of a Lien on any of the Shares or the Acquired Assets, or (d) violates or conflicts with any Rulings or Law applicable to the Business.

4.3 Ownership of Interests and Stock; Subsidiaries.

(a) First Health Group owns (i) all of the FHS Stock free and clear of all Liens and there are no other outstanding shares of capital stock of FHS or Commitments to issue any additional shares of FHS capital stock, and (ii) all of the FHC Stock free and clear of all Liens and there are no other outstanding shares of capital stock of FHC or Commitments to issue any additional shares of FHC capital stock. Both the FHS Stock and the FHC Stock are validly issued, fully paid and non-assessable.

(b) Coventry owns all of the Provider Synergies Interests free and clear of all Liens and there are no other outstanding interests in Provider Synergies or Commitments to issue any additional equity interests in Provider Synergies. The Provider Synergies Interests are validly issued, fully paid and non-assessable.

(c) Section 4.3(c) of the Seller Disclosure Letter sets forth the name of each Subsidiary of FHS, FHC and Provider Synergies, and with respect to each Subsidiary, the jurisdiction in which it is incorporated or organized and the jurisdictions, if any, in which it is qualified to do business, the number of shares of its authorized capital stock, the number and class of shares thereof duly issued and outstanding, the names of all stockholders or other equity owners and the number of shares of stock owned by each stockholder or the amount of equity owned by each equity owner. The outstanding shares of capital stock or equity interests of each Subsidiary are validly issued, fully paid and non-assessable. All such shares or other equity interests represented as being owned by FHS, FHC or Provider Synergies, as applicable, are owned by them free and clear of any and all Liens. There are no Commitments requiring the issuance of any shares of capital stock or other equity interests of any Subsidiary or

other securities convertible into shares of capital stock or other equity interests of any Subsidiary.

4.4 Title to, Condition and Sufficiency of Assets.

(a) None of the Acquired Entities owns any real property in fee.

(b) Section 4.4(b) of the Seller Disclosure Letter sets forth a list of all real property leases relating to the Leased Real Property. Each lease set forth on Section 4.4(b) of the Seller Disclosure Letter is a valid and binding obligation of an Acquired Entity. Each Acquired Entity that is a party to a lease covering the Leased Real Property has good and valid title to the leasehold interest created by such lease, free and clear of all Liens, except Permitted Liens. No event has occurred that, with the passage of time or the giving of notice or both, would constitute a default or breach in any respect by any of the Acquired Entities, or to the Knowledge of the Sellers, any other party thereto.

(c) CMS has good title to, or holds pursuant to valid and enforceable leases, if any, all the properties and assets (excluding real property) included in the Acquired Assets, with only such exceptions as constitute Permitted Liens.

(d) The Acquired Entities have good title to, or hold pursuant to valid and enforceable leases, all the properties and assets (excluding real property) of the Acquired Entities, with only such exceptions as constitute Permitted Liens.

(e) Except for the matters set forth on Section 4.4(e) of the Seller Disclosure Letter, and after giving effect to the services to be provided pursuant to the Transition Services Agreement, the Acquired Entities and Acquired Assets are, and as of the Closing will be, sufficient for the conduct of the Business as currently conducted, it being understood that only services and certain Intellectual Property rights, but no physical assets, are to be provided to an Acquired Entity pursuant to the Transition Services Agreement.

4.5 Financial Statements.

(a) Section 4.5(a) of the Seller Disclosure Letter sets forth true, complete and correct copies of the unaudited combined balance sheet of the Acquired Entities as of December 31, 2008, 2007 and 2006 and the related unaudited combined statements of income of the Acquired Entities for the years then ended (collectively, the “FHS Year End Financial Statements”), and (ii) the unaudited combined balance sheet of the Acquired Entities as of April 30, 2009 and the unaudited combined statements of income of the Acquired Entities for the four months ended April 30, 2009 (collectively, the “FHS Interim Financial Statements,” and together with the FHS Year End Financial Statements, the “FHS Financial Statements”).

(b) Except as set forth on Section 4.5(b) of the Seller Disclosure Letter, the FHS Financial Statements are true and complete in all material respects, and,

have been prepared in accordance with GAAP, consistent with past practices, without modification of the accounting principles used in the preparation thereof throughout the periods presented (except as noted therein), and fairly present the financial position, results of operations of the Acquired Entities as of the respective dates thereof (subject to appropriate note and year-end adjustments).

(c) Coventry maintains systems of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary to permit the preparation of financial statements in conformity with GAAP and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the actual levels at reasonable intervals and appropriate action is taken with respect to any differences.

(d) Coventry’s management has completed its assessment of the effectiveness of Coventry’s internal control over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act for the year ended December 31, 2008, and such assessment concluded that such controls were effective. Coventry’s principal executive officer and its principal financial officer have identified, based on their evaluation made for purposes of SEC Rule 13a-14 as of and for the period ended March 31, 2009, (i) no significant deficiencies in the design or operation of Coventry’s internal control over financial reporting which could adversely affect the ability of an Acquired Entity to record, process, summarize and report financial data in the periodic reports Coventry is required to file under the Exchange Act and no material weaknesses in such internal control over financial reporting pertaining to an Acquired Entity and (ii) no fraud, whether or not material, that involves management or other employees of the Acquired Entities who have a significant role in Coventry’s internal control over financial reporting.

(e) All books, records and accounts of each of the Acquired Entities are accurate and complete and are maintained in all material respects in accordance with good business practice and all applicable Laws. Complete and accurate copies of all minute books of each of the Acquired Entities have been made available to Buyer.

4.6 Absence of Certain Changes or Events. Except (i) as specifically contemplated or permitted by this Agreement or the other Transaction Agreements, or (ii) as set forth in Section 4.6 of the Seller Disclosure Letter, since December 31, 2008, the Business has been conducted in all material respects in the ordinary course, and there has not been any Material Adverse Effect on the Business. Since December 31, 2008, none of the Acquired Entities has taken any action described in Section 6.1 hereof that if taken after the date hereof and prior to the Closing Date without the prior written consent of Buyer would violate such provision. Without limiting the foregoing, since December 31, 2008 there has not occurred any damage, destruction or loss (whether or not covered by insurance) of any asset of the Acquired Entities which materially affects the use thereof.

4.7 Litigation; No Undisclosed Liabilities. Except as described on Section 4.7 of the Seller Disclosure Letter:

(a) No Action against CMS (with respect to the Acquired Assets), the Acquired Entities or the Business is pending or, to Sellers’ Knowledge, threatened. To Sellers’ Knowledge, there are no investigations pending or threatened against CMS (with respect to the Acquired Assets), the Acquired Entities or the Business.

(b) None of the Acquired Entities has any liability or obligation of any nature (whether accrued, absolute, contingent or otherwise) other than those (i) incurred in the ordinary course of business since December 31, 2008, or (ii) fully reflected on or reserved against in the FHS Financial Statements.

4.8 Compliance with Laws. Except as set forth in Section 4.8 of the Seller Disclosure Letter, the Business is being conducted in all material respects in compliance with all applicable Laws. None of the Acquired Entities has received any written notice of or been charged with the violation of any Laws. To the Knowledge of Sellers, none of the Acquired Entities is under investigation with respect to the violation of any Laws.

4.9 Environmental Matters. Except as set forth on Section 4.9 of the Seller Disclosure Letter:

(a) each of the Acquired Entities has obtained all Permits required under Environmental Laws for the conduct and operation of the Business and is in material compliance with the terms and conditions contained therein;

(b) each of the Acquired Entities is in compliance with all applicable Environmental Laws, except for such noncompliance as would not form the basis of a claim under or create a liability under applicable Environmental Laws that would be material to such Acquired Entity, and Sellers have made available to Buyers all environmental reports, assessments, surveys, audits, claims, and other documents that are in the possession and control of Sellers regarding environmental matters pertaining to the Acquired Entities and that are material to the operation of the Business;

(c) to Sellers’ Knowledge, none of the Acquired Entities is subject to any contractual environmental indemnification obligation regarding the business or properties currently owned, leased or operated by any of the Acquired Entities;

(d) there are no environmental Actions pending or threatened with respect to the Business;

(e) there is no condition on, at or under any property (including the air, soil and ground water) currently or formerly owned, leased or used by any of the Acquired Entities (including off-site waste disposal facilities) or created by any of the Acquired Entities’ operations that would create liability with respect to the Business under applicable Environmental Laws; and

(f) there are no past or present actions, activities, circumstances, events or incidents (including the Release or Handling of any Hazardous Material) with respect to any of the Acquired Entities that would form the basis of a claim or create a liability under applicable Environmental Laws that is material to an Acquired Entity.

4.10 Tax Matters. Except as set forth in Section 4.10 of the Seller Disclosure Letter:

(a) (i) All income and other material Tax Returns required to be filed by the Acquired Entities or with respect to the Acquired Assets have been timely filed, (ii) all such Tax Returns are true, correct and complete in all material respects, (iii) all income and other material Taxes due have been timely paid, (iv) the Acquired Entities have duly and timely withheld all income and other material Taxes relating to the Business required to be withheld and such withheld Taxes have been either duly and timely paid to the proper Governmental Authority or properly set aside in accounts for such purpose and will be duly and timely paid to the proper Governmental Authority.

(b) (i) No audits or other administrative proceedings or court proceedings are presently pending or threatened in writing with regard to any income or other material Taxes or income or other material Tax Returns of any of the Acquired Entities or with respect to any of the Acquired Assets, (ii) no Taxing Authority is now asserting or has asserted any deficiency or claim for income and other material Taxes or any adjustment to income and other material Taxes with respect to which any of the Acquired Entities may be liable which have not been fully paid or finally settled, (iii) none of the Acquired Entities has granted (or is subject to) any waiver or extension that is currently in effect for the period of limitations for the assessment, collection or payment of any Tax or the filing of any Tax Return, and (iv) no claim has been made by a Taxing Authority in a jurisdiction where the Acquired Entities do not file Tax Returns such that the Acquired Entities are or may be subject to taxation by that jurisdiction.

(c) Section 4.10(c) of the Seller Disclosure Letter lists any audit report issued within the last three years relating to any income and other material Taxes due from or with respect to each of the Acquired Entities or Acquired Assets. All income and other material Tax Returns filed by or on behalf of each of the Acquired Entities and with respect to the Acquired Assets have been examined by the relevant Taxing Authority or the statute of limitations with respect to such Tax Returns has expired.

(d) Neither the Acquired Entities nor any other Person on their behalf has (i) agreed to or is required to make any adjustments pursuant to Section 481(a) of the Code or any similar provision of Law or has any Knowledge that any Taxing Authority has proposed any such adjustment, or has any application pending with any Taxing Authority requesting permission for any changes in accounting methods that relate to any of the Acquired Entities, (ii) executed or entered into a closing agreement pursuant to Section 7121 of the Code or any similar provision of Law with respect to any of the Acquired Entities affecting the Acquired Entities after the date hereof, (iii) granted to any Person any power of attorney that is currently in force with respect to any Tax matter, or

(iv) executed or entered into any agreement with, or obtained any consents or clearances from, any Taxing Authority, or been subject to any ruling guidance specific to the Acquired Entities, any of which would be binding on Buyer for any taxable period (or portion thereof) ending after the Closing Date.

(e) None of the Acquired Entities has constituted either a “distributing corporation” or a “controlled corporation” (within the meaning of Section 355(a)(1)(A) of the Code) in a distribution of stock qualifying for tax-free treatment under Section 355 of the Code (A) in the two years prior to the date of this Agreement or (B) in a distribution which could otherwise constitute part of a “plan” or “series of related transactions” (within the meaning of Section 355(e) of the Code) in conjunction with the transactions contemplated by this Agreement.

(f) There is no taxable income of any of the Acquired Entities or with respect to any of the Acquired Assets that will be required under applicable Tax Law to be reported by Buyer or any of its Affiliates, including the Acquired Entities, for a taxable period beginning after the Closing Date which taxable income was realized (and reflects economic income) arising prior to the Closing Date.

(g) None of the Acquired Entities has, or has ever had, a permanent establishment in any country other than the United States, or has engaged in a trade or business in any country other than the United States that subjected it to Tax in such country.

(h) Each of the Sellers is a United States Person within the meaning of Code Sections 897 and 1445.

(i) Provider Synergies, at all times since its formation, (A) is and has been treated for U.S. federal income tax purposes (and in all states in which it files income Tax Returns) as a single member limited liability company disregarded for federal income Tax purposes, and (B) has not filed any election under Treasury Regulations Section 301.7701-3(c) (or similar provision of state, local or foreign Law) to be treated as an association taxable as corporation, and has not been classified as a corporation by any Taxing Authority.

(j) None of the Acquired Entities (i) is a party to, bound by or has any obligation under any Tax allocation, sharing, indemnity or similar agreement or arrangement, other than with respect to the Consolidated Group for which Coventry is the common parent, (ii) has any obligation for Taxes of any Person under Treasury Regulations Section 1.1502-6 (or any predecessor or successor thereof or any analogous or similar provision of Law), other than with respect to the Consolidated Group for which Coventry is the common parent, or (iii) is or has ever been a member of a Consolidated Group, other than the Consolidated Group of which Coventry is the common parent.

(k) None of the Acquired Assets and none of the properties or assets of any of the Acquired Entities are subject to any Tax lien (other than Permitted Liens).

(l) None of the Acquired Entities has consummated, has participated in or is currently participating in any transaction that was or is a “reportable transaction” as defined in Treasury Regulations Section 1.6011-4(b).

(m) No Acquired Entity has an interest in an entity classified as a partnership for U.S. federal income tax purposes.

4.11 ERISA and Employee Plans.

(a) Section 4.11(a) of the Seller Disclosure Letter lists each material Employee Plan. Each of the Sellers has heretofore made available to Buyer true and complete copies of each Employee Plan and any amendments thereto, any related trust or other funding vehicle, the most recent annual reports or summaries, the most recent determination or opinion letter, the most recent actuarial valuations, the most recent summary plan descriptions and written descriptions of all non-written agreements relating to Employee Plans.

(b) No Employee Plan sponsored, maintained or contributed to by any of the Sellers or any of their respective ERISA Affiliates, within the six (6) year period preceding the Closing Date, is or has been subject to Title IV of ERISA, or is or was a multiemployer plan as defined in Section 3(37) of ERISA.

(c) Each Employee Plan has been operated and administered in all material respects in accordance with its terms and applicable Law, including, but not limited to, ERISA, the Code and the Laws of any applicable foreign jurisdiction. There are no pending or, to Sellers’ Knowledge, threatened claims by, on behalf of or against any Employee Plan or any assets thereof, other than routine claims for benefits and no matter is pending (other than routine qualification determination filings, copies of which have been furnished to Buyer or will be promptly furnished to Buyer when made) with respect to any Employee Plan before the IRS or the United States Department of Labor.

(d) Each Employee Plan intended to be “qualified” within the meaning of Section 401(a) of the Code has received a determination or opinion letter from the IRS stating that it and the trust maintained thereunder is exempt from taxation under Section 401(a) or Section 501(a) of the Code, respectively, and, to Sellers’ Knowledge, nothing has occurred with respect to the operation of any such plan which could cause the loss of such qualification or exemption or the imposition of any liability, penalty or Tax under ERISA or the Code.

(e) All material contributions required to have been made under any of the Employee Plans by Law have been timely made and no accumulated funding deficiencies exist in any of the Employee Plans subject to Section 412 of the Code.

(f) Except as set forth on Section 4.11(f) of the Seller Disclosure Letter and except as otherwise provided in or contemplated by this Agreement, any other Transaction Agreement, or otherwise required under applicable Law, the consummation

of the Transactions shall not result, by itself or with the passage of time, in the payment or acceleration of any amount, the accrual or acceleration of any benefit or any increase in any vested interest or entitlement to any benefit or payment by any Eligible Employee.

(g) Neither Sellers nor any of their ERISA Affiliates has any obligation to provide medical, surgical, hospitalization, death or similar benefits (whether or not insured) for any participant (or any of the participant’s dependents, spouse, or beneficiaries) for the period extending beyond their retirement or other termination of service, other than continuation coverage mandated by the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”) or the American Recovery Act of 2009 (“ARRA”) and at the expense of the participant or the participant’s beneficiary. Each of the Sellers and any of the ERISA Affiliates which maintains a group health plan within the meaning of Section 5000(b)(1) of the Code has complied in good faith with any notice and continuation requirements of Section 4980B of the Code, as amended by ARRA, COBRA, Part 6 of Subtitle B of Title I of ERISA, as amended by ARRA and with the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by ARRA and the regulations thereunder.

(h) With respect to each Employee Plan that is a maintained outside of the United States substantially for employees who are situated outside the United States (the “Foreign Plans”): (i) each Foreign Plan is in compliance in all material respects with the applicable provisions of Law and regulations regarding employee benefits, mandatory contributions and retirement plans of each jurisdiction in which each such Foreign Plan is maintained, to the extent those Laws are applicable to such Foreign Plan; (ii) each Foreign Plan has been administered at all times and in all material respects in accordance with its terms; (iii) there are no pending investigations by any Governmental Authority involving any Foreign Plan, and no pending claims (except for claims for benefits payable in the normal operation of the Foreign Plans), suits or proceedings against any Foreign Plan or asserting any rights or claims to benefits under any Foreign Plan; (iv) the transactions contemplated by this Agreement, by themselves or in conjunction with any other transactions, will not create or otherwise result in any material liability, accelerated payment or any materially enhanced benefits with respect to any Foreign Plan; and (v) all liabilities with respect to each Foreign Plan have been funded to the extent required by the terms of such Foreign Plan and applicable Law or have been properly reflected in the financial statements of the Sellers.

(i) Any individual who performs services for one or more members of the CMS Group (other than through a Contract with an organization other than such individual) and who is not treated as an employee for federal income or employment Tax purposes by one or more members of the CMS Group is not an employee for such purposes.

4.12 Labor and Employment Matters.

(a) Neither the Sellers nor any of their respective Affiliates is a party to any collective bargaining or similar agreement with respect to any Eligible Employees

with any labor union, group or association (“Labor Union”) and no such agreement is being negotiated. No Labor Union represents or, to the Knowledge of Sellers, purports to represent any Eligible Employees. To the Knowledge of Sellers, there are no, and have not been since January 1, 2004 any, activities or proceedings of any Labor Union to organize any such activity. There are no, and have not been since January 1, 2004 any, strikes, slowdowns, work stoppages, lockouts, labor grievances, unfair labor practice complaints or other labor dispute, or, to the Knowledge of Sellers, threats of such activities, by any Labor Union or any Eligible Employees.

(b) Except as set forth on Section 4.12(b) of the Seller Disclosure Letter, there are no complaints, charges or claims against any of the Sellers pending or, to the Knowledge of Sellers, threatened that could be brought or filed, with any Governmental Authority or based on, arising out of, in connection with or otherwise relating to the employment or termination of employment or failure to employ by the Sellers, of any Eligible Employee. Each of the Sellers is in compliance with all Laws relating to labor and employment, including all such Laws relating to wages, hours, overtime, “mass layoffs” or “plant closings”, collective bargaining, discrimination, civil rights, safety and health, workers’ compensation and the collection and payment of withholding and/or social security taxes and any similar tax except for immaterial non-compliance. Since January 1, 2004, there have not been any plant closings, mass layoffs or other similar terminations of Eligible Employees that would create any obligations upon or liability of any of Sellers or any of their respective Affiliates under the WARN Act requiring notice in connection with plant closings, mass layoffs or other similar terminations of employment.

4.13 Intellectual Property.

(a) Section 4.13(a) of the Seller Disclosure Letter sets forth an accurate and complete list of all Intellectual Property that is the subject of an issuance or registration or an application for issuance or registration that is owned by any of the Acquired Entities (“Registered IP”). For each such item of Registered IP, Section 4.13(a) of the Seller Disclosure Letter lists (i) the record owner of such item, (ii) the jurisdiction in which such item has been issued or registered or in which such application has been filed and (iii) the date and number of such issuance, registration or application. Except as set forth on Section 4.13(a) of the Seller Disclosure Letter, to the Sellers’ Knowledge, (A) there are no overdue filings or unpaid filing, maintenance or renewal fees currently overdue with respect to any Registered IP and no filings or fees due to be submitted or paid with respect to any Registered IP within ninety (90) days after the date of this Agreement and (B) no material Registered IP has lapsed or been cancelled or expired other than in the reasonable business judgment of the Acquired Entities in the ordinary course of business.

(b) Except as set forth on Section 4.13(b) of the Seller Disclosure Letter or as has not had and would not have a Material Adverse Effect, (i) the Acquired Entities exclusively own all right, title and interest in all Business IP and Business Technology, and otherwise control or have the right to use, practice and otherwise

exploit, all other Intellectual Property and Technology as the same is used, practiced and otherwise exploited in the Business as currently conducted (including in connection with services provided by the Acquired Entities to third parties), free of all Liens, (ii) no Action or Ruling is pending or is threatened against any of the Acquired Entities or CMS by any Person in writing with respect to any Business IP or Business Technology (including the validity or enforceability thereof or the ownership or use thereof by any of the Acquired Entities) or that alleges that the conduct of the Business or any Business IP or Business Technology or any other Intellectual Property or Technology used by any of the Acquired Entities (or the use, practice or other exploitation thereof) infringes or misappropriates or violates (“Infringes”) the Intellectual Property rights of any Person, and none of the Acquired Entities is subject to any outstanding Ruling involving any Intellectual Property or Technology that relates to the Business, (iii) to Sellers’ Knowledge, all of the Registered IP (excluding any applications included in the Registered IP) is enforceable, and Sellers are not aware of any facts that would limit or impair the validity of any of the Registered IP, (iv) to the Sellers’ Knowledge, neither the conduct of the Business nor the use, practice or other exploitation of any Business IP or Business Technology Infringes the Intellectual Property rights of any Person, (v) to Sellers’ Knowledge, none of the Business IP is being Infringed by any Person and (vi) no Action is pending or threatened in writing by any of the Acquired Entities against any Person alleging that any Person is Infringing any Business IP or Business Technology.

(c) The Business IP and Business Technology owned by the Acquired Entities and any Intellectual Property or Technology licensed to any of the Acquired Entities pursuant to the Material Contracts, together with the Intellectual Property and Technology to be made available to Buyer or its Subsidiaries by CMS pursuant to the Transition Services Agreement, include all of the Intellectual Property and Technology that is used in, and is sufficient to enable, the conduct by the Acquired Entities of the Business as currently conducted. To Sellers’ Knowledge, the only Intellectual Property and Technology to be made available to Buyer or its Subsidiaries by CMS pursuant to the Transition Services Agreement will be provided pursuant to licenses from third parties that are identified in a schedule to the Transition Services Agreement.

(d) Each of the Acquired Entities has taken commercially reasonable measures to protect the confidentiality of all trade secrets, personal identifiable information and other confidential and proprietary information of the Acquired Entities or any Person to whom any of the Acquired Entities has a confidentiality obligation. To the Sellers’ Knowledge, (i) to the extent that any Business IP or Business Technology has been developed or created by an employee, consultant, independent contractor or third party on behalf of or for the Acquired Entities, the Acquired Entities have obtained ownership of such Business IP or Business Technology created by such employee, consultant, independent contractor or third party; and (ii) no employee, consultant or independent contractor of any of the Acquired Entities is, as a result of or in the course of such employee’s, consultant’s or independent contractor’s engagement by such Acquired Entity, in default or breach of any term of any employment agreement, non-disclosure agreement, assignment of invention agreement or similar agreement.

(e) Except with respect to (i) licenses of Off-the-Shelf Software or (ii) any payments required of any of the Acquired Entities under any Material Contract, none of the Acquired Entities is required, obligated or under any liability whatsoever to make any payments by way of royalties, fees or otherwise to any Person with respect to the use of any Intellectual Property or Technology in the conduct of the Business as currently conducted.

(f) To the Sellers’ Knowledge, the consummation of the Transactions will not result in the loss or impairment of the right of Buyer or any of the Acquired Entities to own or use any Business IP or Business Technology, except as would not have a Material Adverse Effect. Except as would not have a Material Adverse Effect or as disclosed on Section 4.13(f) of the Seller Disclosure Letter, neither this Agreement nor any of the Transactions will result in the grant by any of the Acquired Entities of any ownership interest, right, license or protection from any Action with respect to any Business IP or Business Technology.

(g) Except as set forth in Section 4.13(g) of the Seller Disclosure Letter, the Acquired Entities have established privacy compliance policies. To the Knowledge of Sellers, each of the Acquired Entities has complied and is complying in all material respects, as applicable at the relevant time, with (i) such policies and (ii) any Laws regarding social security numbers.

(h) Except as would not have a Material Adverse Effect, during the previous two (2) years, there has been no unscheduled downtime or disruption with respect to the information technology systems owned, leased or licensed by the Acquired Entities that resulted in the Acquired Entities being unable to perform services on behalf of its clients. To Sellers’ Knowledge, during the previous eighteen (18) months, there has been no material unauthorized access to any such information technology systems or any confidential or proprietary information stored thereon.

(i) Section 4.13(i) of the Seller Disclosure Letter sets forth a complete and accurate list of all Software developed by or for any of the Acquired Entities, which is owned by an Acquired Entity (“Business Software”).

(j) None of the Acquired Entities has licensed or provided to any Person (other than any employee, consultant or independent contractor of the Acquired Entities) any source code for any Business Software. No Business Software has been combined, incorporated or embedded with any open source or public library code that is licensed under any terms that impose a requirement or condition that would require that any source code for such proprietary Business Software (i) be disclosed or distributed in source code form to a third party or (ii) be redistributed at no charge.

4.14 Material Contracts.

(a) Set forth in Section 4.14(a) of the Seller Disclosure Letter is a list of each Contract of the following types or having the following terms to which any of the Acquired Entities is a party as of the date hereof:

(i) a Contract that purports to limit, curtail or restrict the ability of the Acquired Entities or any of its future Subsidiaries or Affiliates to compete in any geographic area or line of business or restricts the Persons to whom the Acquired Entities or any of its existing or future Subsidiaries or Affiliates may sell products or deliver services;

(ii) a partnership or joint venture agreement;

(iii) a Contract for the acquisition, sale or lease of properties or assets outside the ordinary course of business (by merger, purchase or sale of stock or assets or otherwise) entered into since December 31, 2006, and which provides for aggregate consideration in excess of $175,000 annually;

(iv) a Contract with any Governmental Authority which provides for aggregate consideration in excess of $175,000 annually;

(v) an agreement relating to the transfer or voting of, or providing for registration rights with respect to the Shares;

(vi) a mortgage, pledge, security agreement, deed of trust, hypothecation, or other Contract granting a Lien on any property or assets of the Acquired Entities, other than Permitted Liens;

(vii) a customer or client Contract involving revenue or potential revenue in excess of $175,000 annually;

(viii) a Contract (other than customer or client) that involves consideration of greater than $175,000 annually;

(ix) a collective bargaining agreement;

(x) a “standstill” or similar agreement;

(xi) a Contract providing for severance, retention, change in control or similar payments;

(xii) a Contract for the employment of any individual on a full-time, part-time or consulting or other basis;

(xiii) any lease for real property;

(xiv) any license or royalty Contract with respect to Business IP or Business Technology, other than licenses for Off-the-Shelf Software; and

(xv) commitments or agreements to enter into any of the foregoing.

(b) Each of the Contracts and other documents required to be listed on Section 4.14(a) of the Seller Disclosure Letter, together with any and all other Contracts of such type entered into in accordance with Section 6.1 is a “Material Contract.” The Sellers have heretofore made available to Buyer correct and complete copies of each Material Contract (subject to the applicable provisions of the Confidentiality Agreement) in existence as of the date hereof, together with any and all amendments and supplements thereto and material “side letters” and similar documentation relating thereto.

(c) Except for Material Contracts that terminate in accordance with their terms between the date hereof and Closing, each of the Material Contracts is valid, binding and in full force and effect and, to the Knowledge of Sellers, is enforceable in accordance with its terms, subject to the Bankruptcy and Equity Exception. Except as separately identified in Section 4.14(c) of the Seller Disclosure Letter, no approval, consent or waiver of or notice to any Person is needed in order that any Material Contract continue in full force and effect without any changes in terms following the consummation of the Transactions. The Acquired Entities are not in default under any Material Contract nor, to the Knowledge of the Sellers, does any condition exist that, with notice or lapse of time or both, would constitute a default thereunder by any of the Acquired Entities. To the Knowledge of Sellers, no other party to any Material Contract is in default thereunder, nor does any condition exist that with notice or lapse of time or both would constitute a default by any such other party thereunder. Except for Material Contracts, the termination of which would result in potential Losses aggregating less than $650,000, the Sellers have not received any written notice of termination or cancellation under any Material Contract or, to Sellers’ Knowledge, received any written notice of breach or default under any Material Contract which breach has not been cured, or granted to any third party any rights, adverse or otherwise, that would constitute a breach of any Material Contract.

(d) Section 4.14(d) of the Seller Disclosure Letter sets forth an accurate and complete list of all Material Contracts between any Acquired Entity and their respective customers or clients which either give rise to a right of termination by, or require notice to, any such customer or client as a result of the Transactions (e.g., as a result of change in control provisions) (the “Change In Control Customer Contracts”). Since December 31, 2008 to the date hereof, no customer or client identified on Section 4.14(d) of the Seller Disclosure Letter has terminated its relationship with an Acquired Entity or materially reduced or changed the pricing or other material terms of its business with such Acquired Entity and no such customer or client has notified Sellers in writing or, to the Knowledge of Sellers, otherwise informed Sellers that it intends to terminate or materially reduce or change the pricing or other material terms.

(e) Except as set forth in Section 4.14(e) of the Seller Disclosure Letter, each of the Acquired Entities, as applicable, has satisfied all performance standards under any Material Contract where it is required to do so in order to receive any fees, bonuses, rebates, incentives, or other payments at the levels at which it has received fees or payments under such Material Contract in the last or the current fiscal year. Except as set forth in Section 4.14(e) of the Seller Disclosure Letter, none of the Acquired Entities, as applicable, is required to return any fees or payments received by it or to provide credits against any future fees or payment that would otherwise be due to it under any Material Contract, nor is it subject to any penalties under any such Material Contract, by reason of its failure to satisfy any performance standard contained in such Material Contract.

4.15 Insurance. Section 4.15 of the Seller Disclosure Letter sets forth an accurate and complete list (including the carrier of such policies and the amount of the coverage thereunder) of all material worker’s compensation, automobile, terrorism, earthquake, flood, fire, general liability, fiduciary liability, directors’ and officers’ liability, malpractice liability, theft and other forms of property and casualty and other material insurance maintained by Coventry or any of its Subsidiaries with respect to the Business, the Acquired Assets, the properties and assets of the Acquired Entities or the Eligible Employees and any written notice from any insurance company relating to a reservation of rights under any policy under which a claim has been made (collectively, the “Policies”). The Policies provide coverage for the operations conducted with respect to the Business, the Acquired Assets, the properties and assets of the Acquired Entities of a scope and coverage consistent with customary practice in the industries in which the Acquired Entities operate. Except for Policies that have been, or are scheduled to be, terminated in the ordinary course of business and in accordance with the terms thereof, each of the insurance policies set forth in Section 4.15 of the Seller Disclosure Letter is in full force and effect. To the Knowledge of Sellers, none of the Acquired Entities is in breach or default, and none of the Acquired Entities has taken any action or failed to take any action which, with notice or the lapse of time, would constitute such a breach or default, or permit termination or modification, of any of the Policies. No written notice of cancellation or termination has been received by the Sellers with respect to any of the Policies. The consummation of the Transactions will not, in and of itself, cause the revocation, cancellation or termination of any Policy.

4.16 Payments to Employees. Except as otherwise provided for in or contemplated by this Agreement or the other Transaction Agreements, or as set forth on Section 4.16 of the Seller Disclosure Letter, no Employee Plan of Coventry or its Subsidiaries, and no other contractual arrangements between Coventry or any of its Subsidiaries and any third party, exist that will, as a result of the Transactions, (i) result in the payment (or increase of any payment) by Coventry or any of its Subsidiaries to any current, former or future director, officer, employee or consultant of CMS or any of the Acquired Entities of any money or other property or rights or (ii) accelerate or provide any other rights to benefits to any such individual, whether or not (A) such payment, increase, acceleration or provision would constitute a “parachute payment” (within the

meaning of Section 280G of the Code) or (B) the passage of time or some other subsequent action or event would be required to cause such payment, acceleration or provision to be triggered.

4.17 Permits. Section 4.17 of the Seller Disclosure Letter contains a true and complete list of each material Permit (other than Permits referred to in Section 4.9) that is owned, held or possessed by any of the Acquired Entities or that otherwise relates to the Acquired Assets (“FHS Material Permits”). Each of the Acquired Entities is, and has been in compliance in all material respects with the terms of the applicable FHS Material Permit. The FHS Material Permits collectively constitute all of the material licenses necessary to permit the Acquired Entities to lawfully conduct the Business and to permit the Acquired Entities to own, use, operate and maintain the properties and assets of the Acquired Entities in substantially the same manner in which they currently own and use such properties and assets. Each of the FHS Material Permits is current and valid and, except as set forth on Section 4.17 of the Seller Disclosure Letter, Sellers have no Knowledge of any actual or proposed revocation, withdrawal, suspension, cancellation or termination of, or modification to, any FHS Material Permits. The consummation of the Transactions, in and of themselves, will not cause the revocation or cancellation of any FHS Material Permit.

4.18 Brokers or Finders. Except as previously disclosed to Buyer, no agent, broker, investment banker, financial advisor or other similar Person is or will be entitled, by reason of any agreement, act or statement by Coventry or any of its Subsidiaries, directors, officers or employees, to any financial advisory, broker’s, finder’s or similar fee or commission from, to reimbursement of expenses by or to indemnification or contribution by, in each case, the Sellers or any of their respective Subsidiaries in connection with any of the Transactions.

4.19 Related Party Transactions. Except as set forth on Section 4.19 of the Seller Disclosure Letter, no key employee, officer, manager, director, stockholder, partner or member of the Acquired Entities, or, to the Knowledge of Sellers, any member of his or her immediate family or any of their respective Affiliates (“Related Persons”) (i) owes any amount to Coventry or any of its Subsidiaries nor, except for salary, wages and other amounts payable to or for the benefit of the employees pursuant to any Employee Plan, does Coventry or any of its Subsidiaries owe any amount to, or has Coventry or any of its Subsidiaries made or committed to make any loan or guarantee of any credit or performance to or for the benefit of, any Related Person, (ii) except for the relationship set forth above, is involved in any business arrangement or other relationship with Coventry or any of its Subsidiaries (whether written or oral), (iii) owns any property or right, tangible or intangible, that is used by Coventry or any of its Subsidiaries, (iv) to Sellers’ Knowledge, has any claim or cause of action against Coventry or any of its Subsidiaries or (v), to Sellers’ Knowledge, owns any direct or indirect interest of any kind in, or controls or is a director, officer, employee or partner of, or consultant to, or lender to or borrower from or has the right to participate in the profits of, any Person which is a competitor, supplier, customer, landlord, tenant, creditor or debtor of Coventry or any Subsidiary.

4.20 Banks; Power of Attorney. Section 4.20 of the Seller Disclosure Letter contains a complete and correct list of the names and locations of all banks in which the Acquired Entities have accounts or safe deposit boxes and the names of all persons authorized to draw thereon or to have access thereto. Except as set forth on Section 4.20 or Section 4.10(c) of the Seller Disclosure Letter, no person holds a power of attorney to act on behalf of any of the Acquired Entities.

4.21 Certain Payments. None of the Acquired Entities, nor, to the Knowledge of the Sellers, any director, officer, employee, or other Person associated with or acting on behalf of any of them, has directly or indirectly (a) made any contribution, gift, bribe, rebate, payoff, influence payment, kickback, or other payment to any Person, private or public, regardless of form, whether in money, property, or services (i) to obtain favorable treatment in securing business for the Acquired Entities, (ii) to pay for favorable treatment for business secured by the Acquired Entities, (iii) to obtain special concessions or for special concessions already obtained, for or in respect of the Acquired Entities, or (iv) in violation of any Law.

4.22 Health Care Regulatory Compliance.

(a) No Litigation Relating to Licensing Matters. None of the Acquired Entities is involved in any Action and to Sellers’ Knowledge, none of the Acquired Entities are involved in any investigation, by or with any Governmental Authority relating to any Healthcare Permit required, or alleged by such Governmental Authority to be required, for the operation of its business which, if determined or resolved adversely, would prevent it from doing business with any Governmental Authority or any Person regulated by a Governmental Authority or have an adverse impact on the ability of the Acquired Entities to conduct Business, other than any local licensing matter that is incidental in nature.

(b) Fraud and Abuse. The Acquired Entities and, to the Knowledge of the Sellers, their respective officers, managers, directors, employees and shareholders, have not knowingly engaged in any activities that are prohibited under 42 U.S. Code Section 1320a-7a and 7b, or the regulations promulgated pursuant to such statutes or similar or related state or local statutes or regulations.

(c) Compliance with Healthcare Laws. Except as set forth in Section 4.22(c), of the Seller Disclosure Letter, and without limiting the generality of any other representation or warranty made by the Sellers’ herein, the Acquired Entities are conducting and have conducted their business and operations in compliance with, and none of the Acquired Entities nor any of their respective officers, managers, directors, employees or shareholders have engaged in any activities that would constitute a violation of, any applicable Healthcare Law (including, the Prescription Drug Marketing Act, the Federal Controlled Substances Act of 1970, Food, Drug and Cosmetic Act and any state Pharmacy Practice Acts). Except as set forth in Section 4.22(c) of the Seller Disclosure Letter:

(i) none of the Acquired Entities has received any written notice or communication from any Governmental Authority alleging noncompliance with any Healthcare Laws;

(ii) to the Knowledge of Sellers, there is no civil, criminal or administrative action, suit, demand, claim, complaint, hearing, investigation, notice, demand letter, warning letter, proceeding or request for information related to noncompliance with, or otherwise involving, any Healthcare Laws pending against any of the Acquired Entities;

(iii) to the extent required by any Healthcare Laws, any remuneration exchanged between the Acquired Entities and their customers, suppliers, contractors, consultants or other entities with which they have a business relationship has at all times been commercially reasonable, negotiated at arms-length and represents the fair market value for rendered services; and

(iv) the Acquired Entities are not relying on any exemption from or deferral of any Healthcare Law that would not be available after the Closing.

(d) Third-Party Payors. Except as disclosed in Section 4.22(d) of the Seller Disclosure Letter, the Acquired Entities have no outstanding overpayments or refunds due to Government Programs in excess of $10,000. The Acquired Entities have paid or caused to be paid all known and undisputed refunds, overpayments, discounts or adjustments that have become due to Government Programs other than any refund, overpayment, discount or adjustment that occurs in the ordinary course of business. None of the Acquired Entities have received any notice indicating that it is excluded or suspended from participation in a Government Program.

(e) HIPAA Compliance. The Acquired Entities are in all material respects in compliance, to the extent currently applicable, with the provisions of the HIPAA, as amended by ARRA, and all regulations promulgated pursuant to HIPAA, including the Transaction Code Set Standards, the Privacy Rules and the Security Rules set forth at 45 C.F.R. Parts 160 and 164.

(f) Prescription Drug Purchases. The purchase of prescription drugs and related items by the Acquired Entities has at all times been conducted pursuant to the proper classification of the identity and status of the purchaser of such prescription drugs and/or related items and in accordance with all applicable Healthcare Laws and Contracts.

(g) Status of Persons. Neither the Acquired Entities nor, to the Knowledge of Sellers, their respective officers, managers or directors: (1) has been convicted of or charged with any violation of any Law related to any Governmental Program; (2) has been convicted of, charged with, or received a notice of being investigated for any violation of Law related to fraud, theft, embezzlement, breach of fiduciary responsibility, financial misconduct, obstruction of an investigation, or

controlled substances; or (3) is excluded, suspended or debarred from participation, or is otherwise ineligible to participate, in any Government Program or has been convicted of violating any Law that is reasonably expected to serve as the basis for any such exclusion, suspension, debarment or other ineligibility.

(h) Manufacturer Discounts and Rebates. The Acquired Entities have properly documented, accounted for and disclosed to its customers all manufacturer discounts, rebates, incentive payments, administrative fees and remuneration from pharmaceutical manufacturers and is in material compliance with Healthcare Laws (including without limitation the provisions of ERISA), and policies and contractual requirements of manufacturers and health plans regarding such manufacturer discounts, rebates, incentive payments, administrative fees and remuneration.

4.23 Customers and Suppliers. Section 4.23 of the Seller Disclosure Letter sets forth a list of the client or customers of the Acquired Entities that were among the top 10 clients or customers and of the suppliers to the Acquired Entities that were among the top 10 suppliers and the approximate total purchases by the Acquired Entities from each such supplier, in each case during the fiscal year ended December 31, 2008 and, separately, during the current fiscal year through March 31, 2009. Since December 31, 2008 to the date hereof, no customer or supplier listed on Section 4.23 of the Seller Disclosure Letter has terminated its relationship with the Acquired Entities, as applicable, or reduced or changed the pricing or other material terms of its business and, to the Knowledge of Sellers, no customer or supplier listed on Section 4.23 of the Seller Disclosure Letter has notified any of the Acquired Entities in writing that it intends to terminate or materially reduce or change the pricing or other material terms.

ARTICLE 5

REPRESENTATIONS AND WARRANTIES OF BUYER

Except as set forth in the Buyer Disclosure Letter delivered by Buyer simultaneously with the execution of this Agreement, it being understood and agreed that each item in a particular section of the Buyer Disclosure Letter applies only to such section and to any other section to which its relevance is reasonably apparent on the face of such disclosure, Buyer represents and warrants to Sellers as follows:

5.1 Organization. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation.

5.2 Corporate Authority; No Violation, Etc. Buyer has the requisite corporate power and authority to enter into this Agreement and each other Transaction Agreement to which it is to be a party and to perform its obligations hereunder and thereunder and to consummate the Transactions. The execution, delivery and performance by Buyer of this Agreement and each such other Transaction Agreement to which it is to be a party and the consummation of the Transactions have been duly authorized by all requisite corporate action on the part of Buyer. This Agreement has been duly executed and delivered by

Buyer and constitutes a legal, valid and binding agreement of Buyer, enforceable against each such Person in accordance with its terms, subject to the Bankruptcy and Equity Exception. As of the Closing, each other Transaction Agreement to which Buyer is to be a party will have been duly executed and delivered by such Person and will constitute a legal, valid and binding agreement of such Person, enforceable against it in accordance with its terms, subject to the Bankruptcy and Equity Exception. None of the execution and delivery by Buyer of this Agreement or any other Transaction Agreement to which it is or will be a party, the consummation by Buyer of the Transactions or the compliance by Buyer with any of the provisions hereof or thereof (a) violates or conflicts with any provisions of Buyer’s certificate of incorporation or bylaws, (b) requires any consent, approval, authorization or permit of, registration, declaration or filing with, or notification to, any Governmental Authority or any other Person (except for (i) filings required under any applicable Antitrust Laws, (ii) Permits as may be required under, and other applicable requirements of, state securities laws, and (iii) such filings and consents as may be required under any environmental, health or safety law or regulation pertaining to any notification, disclosure or required approval necessitated by the Transactions), (c) results in a default (or an event that, with notice or lapse of time or both, would become a default) or gives rise to any right of termination or buy-out by any third party, cancellation, amendment or acceleration of any obligation or the loss of any benefit under, any material Contract of Buyer or any of its Subsidiaries (including Buyer), (d) results in the creation of a Lien on any of assets or properties of Buyer or any of its Subsidiaries or (e) violates or conflicts with any Ruling or Law applicable to Buyer or any of its Subsidiaries or any of the properties, businesses or assets of any of the foregoing, other than such exceptions in the case of each of clauses (b), (c), (d) and (e) above as has not had and would not have, individually or in the aggregate, a Buyer Material Adverse Effect.

5.3 Actions; Litigation. No Action against Buyer, any of its Subsidiaries or their respective businesses or properties is pending or, to Buyer’s Knowledge, threatened, that has had, or could reasonably be expected to have, a Buyer Material Adverse Effect and there is no Ruling against Buyer, any of its Subsidiaries or their respective businesses or properties that has had, or could reasonably be expected to have, a Buyer Material Adverse Effect.

5.4 Solvency. Assuming the representations and warranties of the Sellers contained in this Agreement are true in all material respects, at and immediately after the Closing, and after giving effect to the Transactions, Buyer will be solvent (in that both the fair value of its assets will not be less than the sum of its debts and that the present fair saleable value of its assets will not be less than the amount required to pay the liability on its debts as they become absolute and matured), will have adequate capital with which to engage in its business and will not have incurred and do not immediately plan to incur debts beyond their ability to pay as they become absolute and matured.

5.5 Financing. Buyer has available sufficient cash in immediately available funds to make the payments contemplated by Section 2.4, Section 3.2(d) and Section 3.2(e) and has provided Sellers evidence of such.

5.6 Purchase for Own Account; Accredited Investor.

(a) Buyer is acquiring the Shares for its own account, not as a nominee or agent, and not with a view to the public resale or distribution of such securities within the meaning of the Securities Act, and has no present intention of selling, granting any participation in, or otherwise distributing the same, and has not been formed for the specific purpose of acquiring the Shares. Buyer is an “accredited investor” within the meaning of SEC Rule 501 promulgated under Regulation D, as presently in effect.

(b) Buyer acknowledges the Shares are not registered under the Securities Act or any applicable state securities law or other applicable Laws, and that such Shares may not be transferred or sold except pursuant to the registration provisions of such Securities Act or pursuant to an applicable exemption therefrom and pursuant to states securities laws and regulations as applicable.

5.7 [Reserved]

5.8 Brokers or Finders. Except as previously disclosed to Seller, no agent, broker, investment banker, financial advisor or other similar Person is or will be entitled, by reason of any agreement, act or statement by Buyer, its Subsidiaries or any of their respective directors, officers or employees, to any financial advisory, broker’s, finder’s or similar fee or commission from, to reimbursement of expenses by or to indemnification or contribution by, in each case, Buyer or any of its Subsidiaries in connection with any of the Transactions.

ARTICLE 6

COVENANTS

6.1 Conduct of the Business in the Ordinary Course Pending the Closing. Following the date of this Agreement and prior to the earlier of the Closing Date or the Termination Date, except (i) as specifically contemplated or permitted by this Agreement or the other Transaction Agreements, (ii) as described in Section 6.1 of the Seller Disclosure Letter, and (iii) to the extent that Buyer shall otherwise consent in writing, which consent shall not be unreasonably withheld:

(a) Ordinary Course. Coventry shall cause the Acquired Entities to conduct the Business, and to not take any action except in the ordinary course of business and to use all commercially reasonable efforts to (i) preserve intact their present business organizations, (ii) maintain FHS Material Permits, (iii) comply in all material respects with all applicable Laws and the requirements of all Material Contracts, (iv) keep available the services of their key employees, (v) preserve their relationships with customers, suppliers and others having business dealings with them in such a manner that their goodwill and the Business are not impaired as of the Closing, (vi) keep in full force and effect all Policies, (vii) maintain the Acquired Assets and all of the assets and properties of, or used by, the Acquired Entities in their current condition, ordinary wear

and tear excepted, (viii) maintain the books, accounts and records of the Acquired Entities, (ix) continue to collect accounts receivable and pay accounts payable utilizing normal procedures and without discounting or accelerating payment of such accounts, and (x) comply with all contractual and other obligations of the Acquired Entities.

(b) Acquisitions. Coventry will not permit the Acquired Entities to, in a single transaction or a series of related transactions, acquire or agree to acquire by merging or consolidating with, or by purchasing any equity interest in or assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof;

(c) Dispositions. Except as otherwise provided for in this Agreement, Coventry shall not permit the Acquired Entities to, in a single transaction or a series of related transactions, sell (including sale-leaseback), lease, pledge, encumber or otherwise dispose of, or agree to sell (or engage in a sale-leaseback), lease (whether such lease is an operating or capital lease), pledge, encumber or otherwise dispose of, any of their assets, other than dispositions in the ordinary course of business; provided, however, that no such dispositions in the ordinary course of business that, individually, has a sale price in excess of $50,000, or in the aggregate, has a sale price in excess of $50,000 shall be made without reasonable prior notice to Buyer and shall not be made without Buyer’s consent (which shall not be unreasonably withheld or delayed); provided, further, that in any event, Coventry shall not permit the Sellers to consummate or agree to consummate any such transaction with respect to the Shares.

(d) Capital Stock. Coventry shall not permit the Acquired Entities to issue, sell, pledge, dispose or encumber or grant rights with respect to (whether through the issuance or granting of any options, warrants, commitments, subscriptions, rights to purchase or otherwise) any units, voting securities or equity interests or any securities convertible into or exercisable or exchangeable for units, voting securities or equity interests.

(e) Employee Arrangements. Except (1) as required pursuant to any collective bargaining agreements or Contract in effect as of the date hereof and listed on Section 6.1(e) of the Seller Disclosure Letter, (2) as contemplated by this Agreement or the other Transaction Agreements or (3) as required by applicable Laws, Coventry shall not permit CMS or any of the Acquired Entities to:

(i) grant any increases in the compensation of any of the Eligible Employees, except in the ordinary course of business consistent with past practice;

(ii) pay or agree to pay to any of the Eligible Employees any pension, retirement allowance or other material employee benefit not required or contemplated by any of the existing Benefit Plans as in effect on the date hereof;

(iii) enter into any new, or amend any existing, employment, severance or termination agreement or like arrangement with any of the Eligible Employees; or

(iv) become obligated under any collective bargaining agreement, new pension plan, welfare plan, multiemployer plan, employee benefit plan, severance plan, benefit arrangement or similar plan or arrangement that was not in existence on the date hereof, including any plan that provides for the payment of bonuses or incentive compensation, trust, fund, policy or arrangement for the benefit of any Eligible Employees or any of their beneficiaries, or amend any such plan or arrangement in existence on the date hereof, except in each case as would not result in a material increase in the annual aggregate cost (based on CMS’ and the Acquired Entities’ historical annual aggregate cost) of maintaining such collective bargaining agreement, pension plan, welfare plan, multiemployer plan, employee benefit plan, severance plan, trust, fund, policy or arrangement for the benefit of the Eligible Employees or as otherwise required by applicable Law.

(f) Accounting Methods. Coventry shall not permit any of the Acquired Entities to make any change in their respective financial accounting methods or procedures in effect at December 31, 2008 (including procedures with respect to revenue recognition, payments of accounts payable and collection of accounts receivable), except (i) as required by changes in GAAP as concurred with by Coventry’s independent auditors, or (ii) as required by changes in the standards promulgated by the Public Company Accounting Oversight Board, as concurred with by Coventry’s independent auditors.

(g) Tax Matters. Coventry shall not permit the Acquired Entities to, other than in the ordinary course of business and consistent with past practice, make any material Tax election or enter into any settlement or compromise of any material Tax liability. Coventry shall cause the Acquired Entities to, consistent with past practice, continue to file Tax Returns relating to the Business which are required to be filed (taking into account any relevant extension periods) prior to the Closing and shall pay, to the extent required, the Taxes with respect to such Tax Returns.

(h) Intellectual Property. Coventry shall not permit any of the Acquired Entities to sell, transfer, license, abandon, let lapse, encumber or otherwise dispose of any interest in Business IP, except for non-exclusive licenses granted by any of the Acquired Entities in the ordinary course of business.

(i) No Liquidation or Dissolution. Coventry shall not permit the Acquired Entities to adopt a plan or agreement of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other material reorganization or any other transaction that would preclude or be inconsistent in any material respect with, or hinder or delay in any material respect, the Transactions.

(j) Governing Documents. Coventry shall not permit any of the Acquired Entities to amend or propose to amend or otherwise change its certificate of incorporation or formation or bylaws or other similar governing document.

(k) Indebtedness. Coventry shall not permit any of the Acquired Entities to incur or assume any indebtedness for borrowed money or guarantee any indebtedness (or enter into a “keep well” or similar agreement) or issue or sell any debt securities or options, warrants, calls or other rights to acquire any debt securities of the Acquired Entities.

(l) Capital Expenditure. Coventry shall not permit any of the Acquired Entities to make any capital expenditures, except in the ordinary course of business and in an amount not in excess of $100,000 in the aggregate for the Acquired Entities taken as a whole.

(m) Material Contracts. Coventry shall not permit any of the Acquired Entities to (i) terminate or amend any Material Contract, or make any proposal to enter into, terminate, or amend any customer or client Contract, or, other than in the ordinary course of business, any other Contract that is material to the Business or the assets and properties of the Acquired Entities, (ii) enter into or extend the term or scope of any Contract that purports to restrict the Acquired Entities, or any existing or future Subsidiary or Affiliate of the Acquired Entities from engaging in any line of business or in any geographic area or that purports to restrict the Persons to whom the Acquired Entities or any of its existing or future Subsidiaries or Affiliates may sell products or deliver services, (iii) enter into any Contract, that would be breached by, or require the consent of any third party in order to continue in full force following consummation of the Transactions, or (iv) release any Person from, or modify or waive any provision of, any confidentiality, standstill or similar agreement or fail to take all action necessary to enforce each such confidentiality, standstill and similar agreement (in each case, other than any such agreement with Buyer).

(n) Litigation. Coventry shall not permit any of the Acquired Entities to settle or compromise any litigation, proceeding or investigation or any claim or claims for, or that would result in a loss of revenue of, an amount that could, individually or in the aggregate, reasonably be expected to be greater than $100,000.

(o) Liens. Coventry shall not subject to any Lien or otherwise encumber or, except for Permitted Liens, permit, allow or suffer to be encumbered, the Acquired Assets or any of the properties or assets (whether tangible or intangible) of the Acquired Entities.

(p) Material Changes. Coventry shall not introduce any material change with respect to the operation of the Business, including any material change in the types, nature, composition or quality of products or services, or, other than in the ordinary course of business, make any change in product specifications or prices or terms of distributions of products and services.

(q) Guarantees and Letters of Credit. No Guarantees or Letters of Credit shall be issued without Buyer’s consent (which shall not be unreasonably withheld or delayed).

(r) Distributions. Coventry shall not, and shall cause the Acquired Entities not to (i) declare, set aside, make or pay any dividend or other distribution in respect of the capital stock of, or other ownership interests in, any of the Acquired Entities; (ii) repurchase, redeem or otherwise acquire any outstanding shares of the capital stock or other securities of, or other ownership interests in, any of the Acquired Entities; or (iii) otherwise transfer Cash to any member of the Coventry Group.

(s) No Agreements. Coventry shall not permit any of the Acquired Entities to agree, in writing or otherwise, to take any of the foregoing actions, or take any action which would (i) cause any of the representations or warranties of the Sellers set forth in this Agreement to be untrue in any material respect or (ii) in any material respect impede or delay the ability of the parties to satisfy any of the conditions to the Closing set forth in this Agreement.

For purposes of Coventry seeking to obtain the consent of Buyer where required by any of the foregoing provisions of this Section, Buyer shall designate one person, who shall initially be Prakash Patel, as the individual authorized to provide the Sellers with any such consent.

6.2 Access to Information Pre-Closing. From and after the date hereof until the earlier to occur of the Closing Date and the Termination Date, Sellers shall afford to Buyer and its Affiliates and each of their respective representatives (including accountants, consultants, and counsel) full access, in each case, during normal business hours throughout the period prior to the Closing, upon reasonable prior notice and in such manner as will not unreasonably interfere with the conduct of the Business, to all properties and facilities, books, financial information, contracts, commitments and records of the Business (including Tax Returns of the Acquired Entities, but excluding Tax Returns of a Consolidated Group) and, during such period, shall furnish promptly such other information concerning the Business, properties and personnel of Sellers as Buyer shall reasonably request, together with the opportunity to discuss the Business with such members of senior management, officers, directors, and accountants for Coventry as Buyer and its representatives may reasonably request. All discussions with members of management, officers, directors, and accountants for Coventry shall be coordinated in advance with Mike Burgoyne and Coventry shall not be required to, or to cause any of its Subsidiaries to, grant access or furnish information to Buyer or its Affiliates or any of their respective representatives to the extent that such information is subject to an attorney/client or attorney work product privilege. All information provided pursuant to this Agreement shall remain subject in all respects to the Confidentiality Agreement. Notwithstanding the foregoing, no Party shall be required to supply any information to any other Party pursuant to this Section 6.2 if, in the opinion of antitrust counsel to such Party, the sharing of such information might violate applicable Antitrust Laws.

6.3 Access to Information Post-Closing. Subject to any retention requirements relating to the preservation of Tax records, Coventry and Buyer agree that each of them shall (and shall cause the Acquired Entities to) preserve and keep the records held by them relating to the Business for a period of five (5) years from the Closing Date and shall make such records and personnel available to the other as may be reasonably required by such party in connection with, among other things, any insurance claims by, legal proceedings against or governmental investigations of Sellers, Coventry, the Subsidiaries or Buyer or any of their Affiliates or in order to enable the Sellers or Buyer to comply with their respective obligations under this Agreement and each other agreement, document or instrument contemplated hereby or thereby. In the event Coventry or Buyer wishes to destroy (or permit to be destroyed) such records after that time, such party shall first give 90 days prior written notice to the other and such other party shall have the right at its option and expense, upon prior written notice given to such party within that 90 day period, to take possession of the records within 180 days after the date of such notice.

6.4 Notification of Certain Matters.

(a) Coventry shall give written notice to Buyer as promptly as reasonably practical upon becoming aware of: (i) the occurrence, or failure to occur, of any event, change, condition, or circumstance that would cause any representation or warranty of Sellers contained in this Agreement or in any other Transaction Agreement to be untrue or inaccurate in any material respect at any time from the date of this Agreement to the Closing determined as if such representation or warranty were made at such time, (ii) the failure of Sellers to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with by it hereunder, (iii) any written notice or other written communication from any Person alleging that the Consent of such Person is or may be required in connection with the Transactions, (iv) any written notice or other written communication from any Governmental Authority in connection with the Transactions and (v) the institution of or the threat of institution of any Action related to this Agreement or the Transactions, provided, however, that the delivery of any notice pursuant to this Section 6.4(a) shall not (x) cure any breach of any representation of warranty by Sellers or any non-compliance by Sellers with any other provision contained in this Agreement or (y) limit the remedies available to Buyer.

(b) Buyer shall give to Coventry prompt written notice of: (i) the occurrence, or failure to occur, of any event, change, condition or circumstance of which Buyer has Knowledge that would cause any representation or warranty of Buyer contained in this Agreement or in any other Transaction Agreement to be untrue or inaccurate in any material respect at any time from the date of this Agreement to the Closing determined as if such representation or warranty were made at such time, (ii) the failure of Buyer to comply with or satisfy in any material respect any covenant to be complied with by it hereunder, (iii) any written notice or other written communication from any Person alleging that the Consent of such Person is or may be required in connection with the Transactions, (iv) any written notice or other written communication from any Governmental Authority in connection with the Transactions, and (v) the

institution of or the threat of institution of any Action or investigation related to this Agreement or the Transactions, provided, however, that the delivery of any notice pursuant to this Section 6.4(b) shall not (x) cure any breach of any representation of warranty by Buyer or any non-compliance by Buyer with any other provision contained in this Agreement or (y) limit the remedies available to Seller under this Agreement.

6.5 Governmental Consents.

(a) Subject to Coventry’s and Buyer’s additional obligations under paragraphs (b) and (c) below, Coventry and Buyer will cooperate and use its commercially reasonable efforts to make, on a timely basis, all registrations, filings and applications, to give all notices and to obtain any governmental transfers, approvals, orders, qualifications and waivers necessary for the consummation of the Transactions. Buyer shall be responsible for and shall pay all fees associated with such registrations, filings, applications, notices, transfers, approvals, orders, qualifications and waivers, including all fees payable in connection with the HSR Filing (as defined below).

(b) Coventry and Buyer shall duly file with the FTC and the Antitrust Division the notification and report form (the “HSR Filing”) required under the HSR Act with respect to the transactions contemplated hereby no later than the tenth Business Day following the date hereof. The HSR Filing shall be in substantial compliance with the requirements of the HSR Act. Each party shall cooperate with the other party to the extent necessary to assist the other party in the preparation of its HSR Filing, to request early termination of the waiting period required by the HSR Act and, if requested, use its reasonable best efforts to certify as soon as practicable their substantial compliance with any requests for additional information or documentary material that may be made under the HSR Act. Each of Buyer and Coventry shall as promptly as practicable comply with the Laws of any other Governmental Authority that are applicable to any of the Transactions and pursuant to which any consent, approval, order or authorization of, or registration, declaration or filing with such Governmental Authority is necessary, but in no event shall either Coventry or Buyer make any necessary initial filings, notifications, reports, registrations or declarations with any such Governmental Authority or take any initial action required by such Governmental Authority later than the tenth Business Day following the date hereof. Buyer and Coventry shall furnish to each other all such information as is necessary to prepare any such registration, declaration or filing. Buyer and Coventry shall keep each other apprised of the status of any communications with, and any inquiries or requests for additional information from, any Governmental Authority with respect to the Transactions. Buyer and Coventry shall furnish to each other copies of all filings made by Buyer and Coventry, as applicable, with any Governmental Authority or any other information supplied by Buyer or Coventry, as applicable, to a Governmental Authority in connection with this Agreement and the Transactions; provided, however, that materials may be redacted (i) to remove references concerning the valuation of the Acquired Assets or the Shares and (ii) as necessary to comply with applicable Law or contractual arrangements.

(c) Consistent with Section 6.5(a), each of Buyer and Coventry agrees that it will, if necessary to enable Coventry and Buyer to consummate the Transactions, use its commercially reasonable efforts to defend against any Action challenging this Agreement or the consummation of the Transactions under the Antitrust Laws, including by seeking to vacate or reverse any temporary restraining order, preliminary injunction or other legal restraint or prohibition entered or imposed by any court or other Governmental Authority that is not yet final and nonappealable and by pursuing all available avenues of administrative and judicial appeal, unless, by mutual agreement, Buyer and Coventry decide that litigation is not in their respective best interests.

6.6 Consents and Third Party Notices.

(a) After the date hereof and prior to the Closing, Coventry shall use its commercially reasonable efforts, to obtain at the earliest practicable date the Consents (except for such matters covered by Section 6.5), in form and substance reasonably satisfactory to Buyer, that is required to be obtained by the Acquired Entities in connection with the execution, delivery and performance of this Agreement and the other Transaction Agreements, and the Transactions.

(b) The Sellers shall, prior to the Closing Date, (i) notify each third party to the Change In Control Customer Contracts listed on Section 4.14(d) of the Seller Disclosure Letter of the Transactions and (ii) request a waiver, if required, of any termination rights arising as a result of the Transactions from each such party.

6.7 Reasonable Efforts; Further Assurances.

(a) Subject to Section 6.5 and Section 6.6, which shall govern the subject matter thereof, prior to the Closing, upon the terms and subject to the conditions set forth in this Agreement, the Parties shall cooperate with each other and shall use commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable (subject to any applicable Law) to consummate the Transactions as promptly as practicable. In addition, no Party shall take any action after the date of this Agreement with the intent of materially delaying the obtaining of, or not obtaining, any Consent from any Governmental Authority necessary to be obtained prior to Closing.

(b) At and after the Closing, each of the Parties hereto agrees to use its reasonable efforts to execute and deliver, or cause to be executed and delivered, all documents and to take, or cause to be taken, all actions that may be reasonably requested of it by another Party and are necessary or appropriate, in the reasonable opinion of counsel for Coventry and Buyer, to effectuate the provisions of this Agreement. Without limiting the generality of the foregoing, (i) Sellers shall, upon reasonable request of Buyer, execute and deliver such instruments of assignment or transfer, and such related notices, as may be or become necessary to effectuate or perfect the transfer of any Acquired Asset to Buyer or a Subsidiary of Buyer and (ii) take reasonable actions necessary to cause any telephone numbers that have been made available to customers or

clients for use in the conduct of the Business to become available to Buyer or a Subsidiary of Buyer for such use. In addition, in the event it is determined that any Intellectual Property or Technology that has been used primarily in the conduct of the Business in the ordinary course is not owned by an Acquired Entity but such Intellectual Property or Technology is owned by the Coventry Group, the Sellers will take all reasonable actions necessary to grant to Buyer a perpetual, royalty-free, fully paid-up, non-exclusive, worldwide, license to use internally such Intellectual Property or Technology for use in the conduct of the Business.

6.8 Investigation and Agreement; No Other Representations or Warranties.

(a) Buyer acknowledges and agrees that it has made its own inquiry and investigation into, and, based thereon, has formed an independent judgment concerning, the Acquired Assets and the Business, and Buyer has been furnished with or given full access to such information about the Acquired Assets and the Business as they requested. In connection with Buyer’s investigation of the Acquired Assets and the Business, Buyer and its representatives have received from the Sellers, or their respective representatives, certain projections and other forecasts for the Business and certain estimates, plans and budget information. Buyer acknowledges and agrees that (i) there are uncertainties inherent in attempting to make such projections, forecasts, estimates, plans and budgets, (ii) Buyer is familiar with such uncertainties, and (iii) Buyer will not (and will cause all of its respective Subsidiaries and other Affiliates and all other Persons acting on their behalf to not) assert any claim or cause of action against Coventry or any of its Subsidiaries or any of their direct or indirect directors, officers, employees, agents, stockholders, Affiliates, consultants, counsel, accountants, investment bankers or representatives with respect to actual results differing from the information reflecting such projections, forecasts, estimates, plans and budgets, or hold any such other Person liable with respect thereto.

(b) Buyer agrees that, except for the representations and warranties made by Sellers that are expressly set forth in Article IV of this Agreement, neither Sellers nor any of their respective Affiliates has made and shall not be deemed to have made to Buyer, or to any of its respective representatives, any representation or warranty of any kind.

6.9 Indebtedness. Coventry shall, and shall cause the Acquired Entities to, immediately before the Closing, repay any FHS Outstanding Indebtedness (or, earlier before the Closing do so in whole or in part, consistent with the operation of the business in the ordinary course) except for Permitted Liens. In addition, Coventry shall make arrangements such that, at the Closing, all expenses of the Acquired Entities relating to the Transactions, including any investment banking or broker fees and expenses and any legal expenses and filing fees, that have not already been paid shall be paid in full so that the Acquired Entities shall have no liability therefor.

6.10 Release of Guarantees and Letters of Credit. Set forth in Section 6.10 of the Seller Disclosure Letter is a list of the Guarantees and Letters of Credit. The Parties

shall cooperate and use their reasonable best efforts to (i) obtain the release, effective as of the Closing Date, of each and every member of the Coventry Group that is a party to or bound by the Guarantees and Letters of Credit, and (ii) cause to be issued, as promptly as practicable after the Closing Date, letters of credit, bankers’ acceptances and similar facilities on Buyer’s account, to replace the Letters of Credit. In the event any of the Guarantees or Letters of Credit are not released at the Closing, Buyer agrees to indemnify and hold each member of the Coventry Group that is a party to each such Guarantee or Letter of Credit harmless for any and all payments required to be made under such Guarantee or Letter of Credit by such members of the Coventry Group following the Closing until it is released for events that occur following the Closing.

6.11 Termination of Intercompany Agreements. Except as provided in Section 6.11 of the Seller Disclosure Letter, effective as of the Closing and without any further action on the part of the Parties hereto, (a) all Intercompany Agreements shall terminate and be of no further force or effect and all parties shall be released from all obligations thereunder, (b) all Intercompany Payables shall terminate, all related notes shall be cancelled and all FHS Outstanding Indebtedness thereunder shall be released and forgiven, and (c) all Intercompany Receivables shall terminate and be of no further force or effect and all outstanding obligations thereunder shall be released and forgiven. Each Party shall, at the reasonable request of the other Party, take, or cause to be taken, such other actions as may be necessary to effect the foregoing. Notwithstanding anything to the contrary herein, the provisions of this Section 6.11 shall not apply to this Agreement and the other Transaction Agreements.

6.12 Post-closing Indemnification of Directors and Officers. During the period of time beginning on the Closing Date and continuing until the date that is two (2) years after the Closing Date, Buyer shall not, and shall cause the Acquired Entitles not to, amend the provisions of the CMS Group Charter Documents relating to the indemnification of directors and officers and advancement of expenses (the “D&O Obligations”) in any manner that would adversely affect the rights thereunder of any Person that is as of the date hereof an officer or director of any of the Acquired Entities. The D&O Obligations of the Acquired Entities shall continue during such period, provided, however, that any Loss incurred on account thereof shall be a Buyer Indemnifiable Loss pursuant to Article XII.

6.13 Audited Financial Statements. If Buyer reasonably determines that Audited Financial Statements (as defined below) are required in order to comply with its reporting obligations relating to the Transaction arising under SEC Form 8-K, then at Buyer’s request, Coventry shall promptly (in no event later than fifty (50) days following the later of the Closing or such request) cause (i) an audit in accordance with U.S. generally accepted auditing standards to be conducted by its regular independent auditor of a combined balance sheet of the Acquired Entities and, to the extent required, the Acquired Assets as at December 31, 2008 and related combined statements of income of the Acquired Entities and, to the extent required, the Acquired Assets for the year then ended (collectively, the “Audited Financial Statements”), and (ii) deliver to Buyer the Audited Financial Statements including an unqualified audit report of Coventry’s

independent auditor thereon. The Audited Financial Statements shall be prepared in such form as shall be suitable for inclusion as an exhibit in a Form 8-K Current Report (or a Form 10-Q Quarterly Report that may be filed in lieu of Form 8-K Current Report) required to be filed by Buyer with the SEC in connection with the acquisition of the Acquired Entities and the Acquired Assets and Coventry shall cooperate with Buyer in preparing the pro forma financial statements and any unaudited interim period financial statements also required to be included as an exhibit thereto. Coventry shall use its reasonable best efforts to obtain any necessary written consent of the auditor of the Audited Financial Statements for the inclusion of its audit report on the Audited Financial Statements in such SEC filings by Buyer for which such consent is required in order for such audit report to be included in such filing (the “Auditor’s Consent”). The Buyer shall reimburse Coventry for all fees, costs and expenses payable by Coventry or its Affiliates to Coventry’s independent registered public accounting firm in connection with the preparation and audit of the Audited Financial Statements.

6.14 Transaction Agreements. At or prior to the Closing, Coventry shall execute and deliver to Buyer, and cause each of its Subsidiaries that are to be a party thereto to execute and deliver to Buyer, the Transaction Agreements to which such Person is to be a party and that have not previously been executed and delivered by it.

ARTICLE 7

ADDITIONAL AGREEMENTS

7.1 WARN. Each of the Sellers shall not, and shall not permit any of its Affiliates to, at any time within the 90-day period prior to the Closing, effectuate a “plant closing” or “mass layoff” as those terms are defined in WARN or any state or local Law, affecting in whole or in part any site of employment, facility, operating unit or employee of the Business, including Eligible Employees, without notifying Buyer in advance and without complying with the notice requirements and all other provisions of WARN and any state or local Law.

7.2 Employee Matters and Employee Benefits.

(a) Offers of Employment or Engagement. On or before the Closing Date, Buyer or an Affiliate of Buyer shall, or shall cause the Acquired Entities to, immediately following the Closing Date offer employment to any Eligible Employees who were employed by CMS immediately prior to the Closing Date. Such employment shall be at base annual salaries or hourly wage rate substantially comparable to the annual base salaries or hourly wage rate of such Eligible Employees immediately prior to the Closing Date. Nothing contained herein shall be construed as requiring Buyer or any of its Affiliates to continue the employment of any Eligible Employees.

(b) Employee Benefits.

(i) Buyer shall take any and all such action as may be necessary so that, on and after the Closing Date, Eligible Employees who after the Closing are employed by Buyer or an Affiliate of Buyer (“Hired Employees”) participate, as soon as administratively feasible following the Closing Date, in the employee benefits of the Buyer or its Affiliates, to the extent permitted under the terms of such plans or applicable Law, provided, that Buyer shall have the right to designate that Hired Employees participate in one or more of Buyer’s health plans. Nothing contained herein shall be construed as requiring Buyer or any of its Affiliates to entitle the Hired Employees to participate in all the Buyer’s employee benefit plans in existence as of the Closing Date or to continue any specific employee benefit plan for any Hired Employees. As of the Closing Date, each Acquired Entity shall cease to be a participating company in the Employee Plans, each such Hired Employees shall cease to be eligible to participate in the Employee Plans and no further benefits shall accrue under such Employee Plans with respect to any such Hired Employees or any beneficiary of any such Hired Employees (other than any such beneficiary receiving health coverage under COBRA). Sellers shall be responsible for any administrative costs related to the termination of the Hired Employees’ participation in the Employee Plans. All contributions accrued by the Hired Employees under the Sellers’ 401(k) plan with respect to all employer contributions, including employee deferrals, matching contributions (including any true-up contributions, if applicable), profit-sharing contributions, employer non-elective contributions, and Seller share contributions for the Hired Employees through the Closing Date, determined in accordance with the terms and provisions of the Sellers’ 401(k) plan, ERISA and the Code, and based on all service performed and compensation accrued prior to the Closing Date, shall be deposited by the Sellers to the Sellers’ 401(k) plan as soon as administratively feasible following the Closing Date. On or after the Closing Date, Buyer shall be responsible for any costs of participation and provision of administrative services related to the Hired Employees in Buyer’s employee benefit plans.

(ii) For purposes of eligibility to participate and vesting in all benefits provided by Buyer to such Hired Employees, each Hired Employee will be credited with his or her years of service with the applicable Seller or Affiliate to the same extent as such Hired Employee was entitled, before the Closing Date, to credit for such service under any corresponding Employee Plans, except for any plan subject to Title IV of ERISA or any plan, program or policy providing retiree health or life benefits, or except to the extent that it would result in a duplication of benefits. The eligibility of any such Hired Employee to participate in any welfare benefit plan or program of Buyer shall not be subject to any exclusion for any pre-existing conditions if such individual has met the participation requirements of similar benefit plans and programs of the applicable Seller or Affiliate. All individuals eligible to participate in any plan or arrangement

contemplated above shall be immediately eligible to participate in the similar plan or arrangement maintained by Buyer and its Affiliates. Amounts paid before the Closing Date by a Hired Employee under any health plans of Sellers or their Affiliates shall, after the Closing Date, be taken into account in applying deductible and out-of-pocket limits applicable under the health plans of Buyer provided as of the Closing Date to the same extent as if such amounts had been paid by such Hired Employee under such health plans of Buyer.

(iii) To the extent practicable, Buyer will cause Buyer’s 401(k) Plan to accept a direct rollover of, or an eligible rollover of, all or a portion of the taxable portion of a distribution of an Eligible Employee’s account balance from Sellers’ 401(k) Plan.

(iv) Notwithstanding anything in this Agreement to the contrary, Buyer shall not assume, and shall be deemed not to have assumed, any liabilities arising out of, relating to or with respect to (i) the employment or performance of services, or termination of employment or services by CMS of any current or former employees or directors of CMS on or before the Closing Date (including without limitation, wages or other compensation, and plans, agreements or arrangements providing for bonus, incentive compensation, vacation, sick days, personal days, severance benefits, or other employee benefits), (ii) workers’ compensation claims against any of the Sellers except against the Acquired Entities, irrespective of whether such claims are made prior to or after the Closing, or (iii) any Employee Plan.

(v) The Parties acknowledge and agree that all payroll, payroll taxes, employer taxes and withholdings (including without limitation federal and state employee withholding taxes, employer taxes and employer and employee FICA) that are required to be paid or withheld through the Closing Date shall be paid by Sellers. Sellers shall pay all accrued but unused vacation through the Closing Date, provided, that up to a maximum of five (5) days per Hired Employee shall not be paid by Sellers and shall be included in accrued liabilities, and thus in the FHS Working Capital, to the extent that each such Hired Employee has five (5) days of accrued but unused vacation immediately prior to the Closing Date.

7.3 Covenants Not to Compete.

(a) Except as described in Section 7.3(b), during the period of time beginning on the Closing Date and continuing until four (4) years after the Closing Date, each Seller covenants and agrees that it will not, and will cause its Affiliates and representatives (on behalf of a Seller) not to, without the prior written consent of Buyer, directly or indirectly, own, manage, engage in, operate, control, maintain any interest in (proprietary, financial or otherwise) or participate in the ownership, management, operation or control of, any business within the Designated Area in the business of

pharmacy administration services to state “fee-for-service” Medicaid programs (the “FHS Restricted Business”).

(b) Nothing contained herein shall limit the right of any Seller, its representatives (on behalf of a Seller) or its Affiliates to:

(i) Provide pharmacy services to state Medicaid or other entitlement programs as part of a managed care contract;

(ii) Purchase or Acquire any entity or substantially all of the assets of any entity that generates less than 15% of its revenue from the FHS Restricted Business; or

(iii) Maintain any ownership interest of five percent (5%) or less of the outstanding common stock of any publicly traded corporation.

(c) Notwithstanding anything herein to the contrary, this Section 7.3 shall not apply to Coventry in the event of a Change in Control.

7.4 [Reserved]

7.5 [Reserved]

7.6 Confidential Nature of Information. Each of Buyer and each Seller and their respective Affiliates shall treat in confidence all documents, materials and other information, whether written or oral, which it shall have obtained regarding the other parties during the course of the negotiations leading to the consummation of the transactions contemplated hereby (whether obtained before or after the Effective Date), the investigation provided for herein and the preparation of this Agreement and other related documents, and, in the event the transactions contemplated hereby shall not be consummated, each party will return to the other party all copies of nonpublic documents and materials which have been furnished in connection therewith. Such documents, materials and information shall not be communicated to any third Person (other than, in the case of Buyer, to its counsel, accountants, financial advisors or lenders, and in the case of Sellers, to their counsel, accountants or financial advisors). No Person shall use any confidential information in any manner whatsoever except solely for the purpose of evaluating the transactions contemplated by this Agreement or the negotiation or enforcement of this Agreement or any agreement contemplated hereby. The obligation of each party to treat such documents, materials and other information in confidence shall not apply to any information which (i) is or becomes lawfully available to such party from a source other than the furnishing party; (ii) is or becomes available to the public other than as a result of disclosure by such party or its agents; or (iii) is required to be disclosed under applicable laws, but only to the extent it must be disclosed.

7.7 Acquisition Proposals.

(a) On and after the date hereof and prior to the Effective Time, Coventry agrees that it shall not invite, initiate, solicit or encourage, directly or indirectly, any inquiries, proposals, discussions or negotiations or the making or implementation of any proposal or offer with respect to any direct sale, lease, exchange, mortgage, pledge, transfer, merger, consolidation, business combination, or other disposition of any material amount of the assets of the Acquired Entities or any capital stock or other ownership interests of the Acquired Entities in one transaction or a series of related transactions (any such proposal or offer being hereinafter referred to as an “Acquisition Proposal”), or engage in any discussions or negotiations with or provide any confidential or non-public information or data to, or afford access to properties, books or records to, any Person relating to, or that may reasonably be expected to lead to, an Acquisition Proposal, or enter into any letter of intent, agreement in principle or agreement relating to an Acquisition Proposal, or propose publicly to agree to do any of the foregoing, or otherwise facilitate any effort or attempt to make or implement an Acquisition Proposal.

(b) Notwithstanding anything herein to the contrary, nothing in this Agreement shall prohibit any officer, director, employee or agent of Coventry or its Affiliates from inviting, initiating, soliciting or encouraging, directly or indirectly, any inquiries, proposals, discussions or negotiations or the making or implementation of any proposal for the acquisition (whether through merger, share exchange, purchase or otherwise) of Coventry or substantially all of the assets of Coventry.

7.8 Release for Pre-closing Intercompany Liabilities. The Coventry Group shall execute and deliver to Buyer effective as of the Closing Date, a release substantially in the form attached hereto as Exhibit A (the “CMS Group Release”) releasing the Acquired Entities from any and all liabilities to the Coventry Group arising prior to the Closing Date.

7.9 Securities. Notwithstanding anything in this Agreement to the contrary, Sellers shall use their commercially reasonable efforts to sell or liquidate before the Closing any and all long term securities by the Acquired Entities. In the event that any such securities have not been sold or liquidated previously (the “Unsold Securities”), Coventry shall purchase, or shall cause its Affiliates to purchase, the Unsold Securities at their fair market value within two (2) Business Days before the Closing Date.

ARTICLE 8

TAX MATTERS

8.1 Tax Indemnification.

(a) Tax Indemnification. Subject to the limitations set forth in Section 12.3(c)(ii) with respect to Buyer Indemnifiable Losses, Sellers shall jointly and severally indemnify, defend and hold harmless the Buyer Indemnitees from and against any Losses

that Buyer Indemnitees may suffer, sustain or become subject to arising out of, in connection with or resulting from (i) any Taxes of the Acquired Entities or with respect to the Acquired Assets for any Pre-Closing Tax Period and the portion of any Taxes of the Acquired Entities or with respect to the Acquired Assets for any Straddle Period that is allocable (determined in accordance with Section 8.1(c)) to the portion of the Straddle Period ending on the Closing Date, (ii) any Taxes arising by reason of any of the Acquired Entities being a member of any Consolidated Group on or prior to the Closing Date, including pursuant to Treasury Regulations Section 1.1502-6(a) (or any predecessor or successor thereof or any analogous or similar provision of Law), (iii) without duplication, the failure of any of the representations and warranties contained in Section 4.10 to be true and correct in all respects (determined without regard to any qualifications related to materiality contained therein) or the failure to perform any covenant contained in this Agreement with respect to Taxes, and (iv) any failure by Coventry to timely pay its portion of Transfer Taxes pursuant to Section 8.2(a) hereof. Notwithstanding the foregoing, Coventry shall not be required to indemnify the Buyer Indemnitees, and Buyer shall indemnify and hold harmless the Seller Indemnitees, from any Taxes to the extent resulting from any action taken by Buyer or the Acquired Entities after the Closing and on the Closing Date outside of the ordinary course of business.

(b) Tax Returns and Taxes of Acquired Entities.

(i) Coventry shall prepare and file (or cause to be prepared and filed) all Tax Returns with respect to the Acquired Entities for all Pre-Closing Tax Periods and shall pay all Taxes due with respect thereto. With respect to such Tax Returns required to be filed after the Closing Date (other than with respect to the Tax Returns of the Consolidated Group for which Coventry is the common parent), Coventry shall provide, at least 35 days prior to filing such Tax Return, a copy of such Tax Return, together with all workpapers and schedules utilized in its preparation, to Buyer for its review, comment and approval (which approval shall not be unreasonably withheld), and such Tax Returns shall be prepared in a manner consistent with past practices, except as otherwise required by applicable Law. Within 10 days after delivery by Coventry of a copy of such Tax Returns, Buyer shall deliver to Coventry a written notice (the “Tax Return Notice”) either (A) advising Coventry that Buyer agrees with and accepts such Tax Returns (in which event Buyer shall sign and timely file such Tax Returns and Coventry shall timely pay all Taxes shown as due on such Tax Returns to the appropriate Tax Authorities), or (B) advising Coventry that Buyer disputes such Tax Returns (in which event Buyer and Coventry shall use commercially reasonable efforts for a period of 10 days after the receipt of the Tax Return Notice by Coventry to resolve any dispute relating to such Tax Returns). If the Parties cannot in good faith resolve such dispute within such 10 day period, Buyer shall refer the dispute relating to such Tax Returns to Deloitte and Touche LLP or such other nationally recognized accounting firm that is reasonably acceptable to Coventry (the “Tax Settlement Firm”). Buyer shall be required to sign such Tax Returns only if Buyer is advised in writing by the Tax Settlement Firm that the filing of such Tax

Returns would not subject the applicable Acquired Entity to Tax penalties excluding late filing penalties. The fees, costs and expenses of the Tax Settlement Firm shall be borne by Buyer.

(ii) Buyer shall prepare or cause to be prepared all Tax Returns with respect to the Acquired Entities for all Straddle Periods. With respect to each such Tax Return for a Straddle Period, (A) Buyer shall provide, at least 30 days prior to filing such Tax Return, a copy of such Tax Return, together with all workpapers and schedules utilized in its preparation, to Coventry for its review, comment and approval (which approval shall not be unreasonably withheld), along with a statement of the amount due from Sellers with respect to such Tax Returns determined in a manner consistent with Section 8.1(c), and (B) such Tax Return shall be prepared as required by applicable Law and in a manner consistent with Section 8.1(c) and with past practices, except as otherwise required by applicable Law. Buyer shall pay all Taxes due with respect to such Tax Returns, provided, however, that Coventry shall pay to Buyer the amount of Taxes which relate to the portion of the Straddle Period ending on the Closing Date as determined pursuant to Section 8.1(c) hereof and set forth on the statement. After the Closing, neither Buyer nor any of the Acquired Entities shall, without the prior written consent of Coventry, file any amended Tax Return with respect to any Acquired Entity for any Taxable period beginning on or prior to the Closing Date.

(c) Allocation of Straddle Period Taxes of Acquired Entities. For purposes of allocating Taxes and preparing Tax Returns of the Acquired Entities for a Straddle Period, the portion of any Taxes of the Acquired Entities for a Straddle Period that is allocable to the portion of the Straddle Period ending on the Closing Date shall be:

(i) in the case of Taxes that are either (A) based upon or related to income or receipts, or (B) imposed in connection with any sale or other transfer or assignment of property (real or personal, tangible or intangible), deemed equal to the amount which would be payable if the taxable year or period ended on the Closing Date;

(ii) in the case of Taxes not described in subparagraph (i) above that are imposed on a periodic basis and measured by the level of any item, deemed to be the amount of such Taxes for the entire relevant period (or, in the case of such Taxes determined on an arrears basis, the amount of such Taxes for the immediate preceding period) multiplied by a fraction the numerator of which is the number of calendar days in the period ending on the Closing Date and the denominator of which is the number of calendar days in the entire relevant period; and

(iii) for purposes of determining such Taxes, exemptions, relief, allowances or deductions that are calculated on an annual basis, such as the deduction for depreciation, shall be apportioned in the manner specified in subparagraph (ii) above. All determinations necessary to give effect to the

foregoing allocations shall be made in a manner consistent with prior practice of the applicable Acquired Entity.

(d) Tax Refunds of the Acquired Companies. The amount or economic benefit of any refunds, credits or offsets of Taxes of the Acquired Entities for any Pre-Closing Tax Period shall be for the account of Coventry. The amount or economic benefit of any refunds, credits or offsets of Taxes of the Acquired Entities for any Taxable period beginning on or after the Closing Date shall be for the account of Buyer. The amount or economic benefit of any refund, credit or offset of Taxes of the Acquired Entities for any Straddle Period shall be equitably apportioned between Coventry and Buyer in accordance with the principles set forth in Section 8.1(c). Each Party shall forward, and shall cause its Affiliates to forward, to the party entitled to receive the amount or economic benefit (net of any Taxes payable with respect thereto) of a refund, credit or offset to Tax pursuant to this Section 8.1(d) the amount of such refund or economic benefit within 30 days after such refund is received or such credit or offset is allowed or applied against another Tax liability, as the case may be.

(e) Carrybacks. Except as otherwise provided in this paragraph, Buyer and its Affiliates shall not carryback any net operating loss, capital loss, tax credit or other tax attribute of any of the Acquired Entities arising in any taxable period beginning after the Closing Date to a Pre-Closing Tax Period. Buyer or its Affiliates may carryback any net operating loss, capital loss, tax credit or other tax attribute of any of the Acquired Entities arising in any taxable period beginning after the Closing Date to a Pre-Closing Period only if (a) there is no election under applicable Law to waive such carryback and (b) a failure to carryback would result in Buyer or its Affiliates permanently losing the economic benefit associated with any such net operating loss, capital loss, tax credit or other tax attribute. If, at Buyer’s request, any such net operating loss, capital loss, tax credit or other tax attribute is carried back as set forth herein (x) Coventry will cooperate with the Acquired Entities in obtaining such refund (or reduction or benefit), including through the filing of amended Tax Returns or refund claims, and (y) Coventry shall pay to Buyer any Tax refund (or reduction in Tax liability or other Tax benefit) resulting from a carryback of any net operating loss, capital loss, tax credit or other tax attribute of any of the Acquired Entities arising in any taxable period beginning after the Closing Date to a Pre-Closing Tax Period, when such refund (or reduction or benefit) is realized by Coventry, net of the reasonable costs incurred by Coventry to secure such refund (or reduction or benefit), including, without limitation, costs related to the utilization of employees of Coventry or its Affiliates.

8.2 Transfer Taxes and Property Taxes on Acquired Assets.

(a) Transfer Taxes. All sales, use, transfer, real property transfer, value added, recording, registration, notary, stamp, stamp duty or similar Taxes and fees, and all recording costs, arising out of the transfer of the Acquired Assets and the Shares pursuant to this Agreement and all costs and expenses incurred in connection with the transferring and recording of title to the Acquired Assets (collectively, the “Transfer Taxes”), shall be borne 50% by Buyer and 50% by Coventry. The Tax Returns relating

to such Transfer Taxes shall be timely prepared by the Party legally obligated to make such filing, and such Party will use its commercially reasonable efforts to provide such Tax Returns to the other Parties at least 10 days prior to the due date for such Tax Returns.

(b) Property Taxes.

(i) All ad valorem Taxes, personal property Taxes and similar obligations attributable to the Acquired Assets with respect to the Tax period in which the Closing Date occurs (“Property Taxes”) shall be apportioned as of the Closing Date among Coventry and Buyer determined by prorating such Property Taxes on a daily basis over the entire Taxable period.

(ii) Buyer shall pay or cause to be paid, when due, to the appropriate Taxing Authorities all Property Taxes relating to the Taxable period during which the Closing Date occurs. Buyer shall send to Coventry a statement that apportions the Property Taxes as of the Closing Date between Coventry and Buyer based upon Property Taxes actually invoiced and paid to the Taxing Authorities by Buyer for the Tax year which includes the Closing Date. Within five (5) Business Days of receipt of such statement, Coventry shall reimburse Buyer for Coventry’s pro-rated portion of such Property Taxes to the extent the aggregate amount of such Property Taxes pro-rated to Coventry exceeds the amount of Property Taxes included as a current liability in the FHS Working Capital, as finally determined in accordance with Article III.

8.3 Tax Claims; Cooperation on Tax Matters.

(a) Control of Tax Claims. Buyer shall promptly notify Coventry upon receipt of any notice of any Tax audit, assessment, claim or investigation relating to the Acquired Entities or the Acquired Assets for any Pre-Closing Tax Period or Straddle Period (a “Tax Claim”) for which Sellers and their Affiliates may be liable, provided, however, no failure or delay by Buyer or any of its Affiliates to provide notice of a Tax Claim shall reduce, release, waive, or otherwise affect the obligation of Sellers or their Affiliates hereunder except to the extent that such failure or delay has materially and adversely affected the right of Seller or its Affiliates to participate in and contest the Tax Claim. Notwithstanding any other provision in this Agreement, with respect to any Tax Claim relating to Taxes for which Sellers or their Affiliates may be liable, Coventry shall control all proceedings; provided, however, that Coventry will allow Buyer to participate at its own expense in the defense of any such Tax Claim (other than a Tax Claim relating to a Tax or Tax Return of the Consolidated Group of which Coventry is the common parent or the Consolidated Group in which First Health Services Corporation was included prior to its acquisition by Coventry); provided further that Coventry shall not enter into any compromise or agree to settle any claim pursuant to such proceeding without written consent of Buyer, which consent shall not be unreasonably withheld, to the extent that such compromise or settlement may adversely affect Buyer or its Affiliates (including the Acquired Entities) after the Closing Date. With respect to any Tax Claim relating to a Straddle Period and involving both Taxes for which either Sellers or any of

their Affiliates are liable and Taxes for which neither Sellers nor their Affiliates are liable, Coventry and Buyer shall jointly control the defense of such Tax Claim and neither Coventry nor Buyer shall enter into any compromise or agree to settle any claim pursuant to such proceeding without prior written consent of the other Party, which consent shall not be unreasonably withheld.

(b) Cooperation. The Parties shall cooperate fully, as and to the extent reasonably requested by the other Parties in connection with the filing of Tax Returns filed after the Closing Date and any audit, litigation, or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon another Party’s request) the provision of records and information which are relevant to the filing of any Tax Return or any filing with the SEC (including, without limitation, information regarding tax basis and other attributes) or any such audit, litigation, or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided under this Agreement. The Parties agree to retain all books and records with respect to Tax matters pertinent to the Acquired Entities and Acquired Assets relating to any Taxable period beginning before the Closing Date until the expiration of the statute of limitations of the respective Taxable periods, and to abide by all record retention agreements entered into with any Taxing Authority.

(c) Mitigation. The Parties further agree, upon request, to use their commercially reasonable efforts to obtain any certificate or other document from any Governmental Authority or any other Person as may be necessary to mitigate, reduce, or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby).

8.4 Termination of Tax Sharing Agreements. Any and all Tax allocation or Tax sharing agreements or other similar agreements or arrangements with any of the Acquired Entities, whether or not written, shall be terminated with respect to the Acquired Entities as of the Closing Date and, after the Closing Date, the Acquired Entities shall not be obligated to make any payment to any Person pursuant to any such agreement or arrangement for any past or future period.

8.5 Election. Unless Buyer provided written consent to the contrary, in connection with the transactions contemplated by this Agreement, Sellers and their Affiliates shall not make an election pursuant to Treasury Regulations 1.1502-36(d)(6)(i)(B) or (C) to reattribute any portion of any tax attributes of the Acquired Entities to Sellers or its Affiliates.

8.6 Tax Treatment of Payments. The Parties shall treat any payments made pursuant to Section 8.1(a) as an adjustment to the Purchase Price for federal Tax purposes, unless a final determination causes such payment not to be treated as an adjustment to the Purchase Price for federal Tax purposes.

8.7 Exclusivity; Survival. The provisions of Article XII other than Sections 12.3(c)(ii), 12.3(g) and 12.5 shall not apply with respect to the obligations of Sellers

concerning Taxes and the provisions of this Article VIII (subject to Section 12.3(c)(ii)) shall be the exclusive source of the rights of the parties with respect to matters concerning Taxes. Without limiting the generality of the foregoing, none of the limitations on indemnification in Section 12.3 (other than in Section 12.3(c)(ii)) shall apply with respect to indemnification under this Article VIII. The provisions of Section 8.1(a) shall survive until thirty (30) days following the expiration of the applicable statute of limitations (including any extensions or waivers thereof), except as to Section 8.1(a)(iii) for breaches of the representations and warranties in Section 4.10, which shall survive until the expiration of the statute of limitations. The remaining provisions of this Article VIII shall survive the Closing Date in accordance with their terms.

ARTICLE 9

CLOSING

9.1 Time and Place of Closing. Unless otherwise agreed to by Coventry and Buyer, the closing of the transactions contemplated hereby (the “Closing”) will occur at 9:00 a.m. local time on the second Business Day following the day on which all conditions to Closing (other than conditions the fulfillment of which is to occur at the Closing) are satisfied or waived. The Closing shall take place at the offices of Bass, Berry & Sims PLC in Nashville, Tennessee. The date upon which the Closing actually occurs is referred to as the “Closing Date.”

9.2 Deliveries by Sellers at Closing. At the Closing, Coventry shall deliver or cause to be delivered to Buyer the following:

(a) the original books and records (financial and otherwise) of the Acquired Entities;

(b) such bills of sale and any other appropriate instruments of sale, transfer, conveyance, assignment and delivery covering the Acquired Assets, in form and substance reasonably acceptable to Buyer, as may be requested by Buyer to fully and effectively transfer the Acquired Assets to Buyer or its designee;

(d) evidence reasonably acceptable to Buyer of the release and termination of each Lien, except for Permitted Liens on the Acquired Assets, the Shares or the properties and assets of the Acquired Entities;

(e) counterpart signature pages to each of the Transaction Agreements not yet executed, duly executed by Coventry and/or each Subsidiary of Coventry a party thereto;

(f) to the extent requested by Buyer, written resignations of the directors, managers and officers, as applicable, of each of the Acquired Entities;

(g) certificates representing the Shares, together with stock transfer forms and other appropriate forms duly endorsed in blank and with all requisite stock transfer tax stamps attached and otherwise sufficient to transfer the Shares to Buyer free and clean of all Liens;

(h) certificates of good standing dated not more than 10 Business Days prior to the Closing Date with respect to each of the Acquired Entities, issued by the Secretary of State of the state of incorporation;

(i) copies of resolutions of the board of directors (or equivalent governing body) of each Seller authorizing and approving the execution and delivery of this Agreement and the other Transaction Agreements and the performance by such Seller of its obligations hereunder and thereunder, certified by the Secretary or such other authorized officer of such Seller;

(j) copies of the certificate of incorporation and bylaws (or equivalent governance documents) of each Acquired Entity, in each case certified by the Secretary of such Acquired Entity;

(k) a certificate of a duly authorized officer of each of the Sellers certifying that all conditions set forth in Section 10.2(a) and 10.2(b) have been satisfied (or to the extent any such condition has been waived in accordance with the terms hereof, attaching thereto the applicable written waiver);

(l) affidavits of non-foreign status from each of the Sellers that comply with Section 1445 of the Code (a “FIRPTA Affidavit”); and

(m) a duly executed copy of the CMS Group Release.

9.3 Deliveries by Buyer at Closing. At the Closing, Buyer shall deliver or cause to be delivered to Sellers (i) the Closing Date Payment by wire transfer of immediately available funds into an account designated by Coventry in writing at least two (2) Business Days prior to the Closing Date and (ii) counterpart signature pages to each of the Transaction Agreements not yet executed, duly executed by Buyer.

ARTICLE 10

CONDITIONS PRECEDENT

10.1 Conditions to Each Party’s Obligation. The respective obligations of each Party to effect the transactions contemplated hereby are subject to the satisfaction, on or prior to the Closing Date, of the following conditions:

(a) Governmental Consents. All authorizations, consents, orders or approvals of, or declarations or filings with, or expirations of waiting periods imposed by, any Governmental Authority necessary for the consummation of the Transactions shall

have been obtained, occurred or been filed including, those arising under all applicable Antitrust Laws and the applicable waiting period under the HSR Act shall have expired or terminated; provided, however, that this condition shall not apply to Contracts with Governmental Authorities, which shall be subject, if applicable, to Section 10.2(f).

(b) No Injunctions. No temporary restraining order, preliminary or permanent injunction or other order issued by any Governmental Authority preventing the consummation of the Transactions shall be in effect (the “Injunctions”).

(c) No Action. No action shall have been taken nor any Law shall have been enacted or promulgated by any Governmental Authority that prohibits consummation of the Transactions (the “Legal Actions” and together with the Injunctions, the “Restraints”).

(d) Transaction Agreements. The Transaction Agreements shall be in full force and effect.

10.2 Conditions to Obligation of Buyer. The obligation of Buyer to effect the transactions contemplated hereby is subject to the satisfaction, on or prior to the Closing Date, of the following conditions unless waived, in whole or in part, by Buyer:

(a) Representations and Warranties. Each of the representations and warranties of the Sellers set forth in this Agreement that are qualified as to materiality or Material Adverse Effect shall be true and correct in all respects as of the date of this Agreement and as of the Closing Date as though made on and as of such time (other than such representations and warranties that address matters only as of a particular date, which shall be so true and correct as of such date) and the representations and warranties of the Sellers contained in this Agreement that are not qualified as to materiality shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date, as though made on and as of such date (other than such representations and warranties that address matters only as of a particular date, which shall be so true and correct as of such date). Buyer shall have received certificates signed on behalf of each of the Sellers by an executive officer to such effect.

(b) Performance of Obligations of the Sellers. Each of the Sellers shall have performed or complied in all material respects with all obligations and covenants required to have been performed or complied with by it under this Agreement and the other Transaction Agreements at or prior to the Closing Date. Buyer shall have received certificates signed on behalf of each of the Sellers by an executive officer to such effect.

(c) Intercompany Agreements. Except as provided in Section 6.11 of the Seller Disclosure Letter, each of the Intercompany Agreements shall have been terminated at or prior to the Closing.

(d) FHS Material Adverse Effect. No event, change in circumstances or state of facts shall have occurred or been discovered since the date of this Agreement that has resulted in a Material Adverse Effect on the Business.

(e) No Litigation, Etc. There shall not be any action, investigation, proceeding or litigation instituted, commenced, pending or threatened by or before any Governmental Authority or arbitrator that would, or that seeks to or is reasonably likely to, (i) restrain, enjoin, prevent, prohibit or make illegal the acquisition of some or all of the Shares and Acquired Assets by Buyer or the consummation of the Transactions, (ii) impose limitations on the ability of Buyer or its Affiliates effectively to exercise full rights of ownership of all Shares, including the right to vote all such shares, (iii) restrain, enjoin, prevent, prohibit or make illegal Buyer’s or any of its Affiliates’ ownership or operation of all or any material portion of the Business, (iv) as a result of the Transactions, restrain, enjoin, prevent, prohibit or make illegal any portion of the businesses or assets of Buyer or any of its Subsidiaries or result in a Governmental Investigation being commenced or continued after the Closing or in Governmental Damages being imposed on the Acquired Entities or Buyer or any of its Affiliates, (v) as a result of the Transactions, compel Buyer or any of its Affiliates to dispose of any Shares or to dispose of or hold separate any material portion of the Business or any portion of the business or assets of Buyer and its Subsidiaries, or (vi) impose material damages (other than Governmental Damages referred to in the foregoing clause (iv) of this sentence) on Buyer or any of its Subsidiaries or the Acquired Entities as a result of the Transactions. As used herein, (i) “Governmental Damages” shall mean (A) any penalties or fines paid or payable to a Governmental Authority or (B) any restitution paid or payable to a third party, in either case as a result of the (x) conviction (including as a result of the entry of a guilty plea, a consent judgment or a plea of nolo contendere) of any of the Acquired Entities of a crime or (y) a settlement with a Governmental Authority for the purpose of closing a Governmental Investigation; provided, however, that any de minimis penalties, fines or payments shall not be deemed to be Governmental Damages; and (ii) “Governmental Investigation” shall mean an investigation by a Governmental Authority for the purpose of imposing criminal sanctions.

(f) Required Third Parties Consents. Sellers shall have obtained all consents, waivers and approvals referred to in Section 10.2(f) of the Seller Disclosure Letter, each such consent, waiver and approval being in form and substance reasonably satisfactory to Buyer and not requiring as a term thereof or condition thereto any adverse condition or requirement on the conduct of business by the Acquired Entities or Buyer or any of its Subsidiaries.

(g) CMS Group Release. The CMS Group Release shall be in full force and effect.

(h) Other. All documents, instruments, certificates or other items required to be delivered at the Closing by Sellers pursuant to this Agreement shall have been delivered.

10.3 Conditions to Obligations of Sellers. The obligation of Sellers to effect the transactions contemplated hereby is subject to the satisfaction, on or prior to the Closing Date, of the following conditions unless waived, in whole or in part, by Coventry:

(a) Representations and Warranties. Each of the representations and warranties of Buyer set forth in this Agreement shall be true and correct in all respects as of the date of this Agreement and as of the Closing Date as though made on and as of such time (other than such representations and warranties that address matters only as of a particular date, which shall be so true and correct as of such date), except where the failure of such representations and warranties to be true and correct has not had, individually or in the aggregate, or could not reasonably be expected to have a Buyer Material Adverse Effect. Coventry shall have received a certificate signed on behalf of Buyer by an executive officer of Buyer to such effect.

(b) Performance of Obligations of Buyers. Buyer shall have performed or complied in all material respects with all obligations and covenants required to have been performed or complied with by it under this Agreement and the other Transaction Agreements at or prior to the Closing Date, and Coventry shall have received a certificate signed on behalf of Buyer by an executive officer of Buyer to such effect.

(c) Other. All documents, instruments, certificates or other items (including, without limitation, the payments to be made at the Closing pursuant to Section 9.3(a)) required to be delivered at the Closing by Buyer pursuant to this Agreement shall have been delivered.

10.4 Frustration of Closing Conditions. None of the Sellers or Buyer may rely on the failure of any condition set forth in Section 10.1, 10.2 or 10.3, as the case may be, to be satisfied as grounds for its not consummating the Transactions when otherwise required hereunder, if such failure was caused by such Party’s failure to use its commercially reasonable efforts to consummate the Transactions, as required by and subject to the provisions of Section 6.7.

ARTICLE 11

TERMINATION, AMENDMENT AND WAIVER

11.1 Termination. This Agreement and the transactions contemplated hereby may be terminated prior to the Closing:

(a) by mutual written consent of Buyer and Coventry, duly authorized by each of their respective Boards of Directors (or a duly authorized committee thereof);

(b) by Buyer if there shall have been any breach by Sellers of any representation or warranty (or if any of the representations or warranties of Sellers set forth in this Agreement shall fail to be true and correct), or if the Sellers have breached or failed to perform or adhere to any of its covenants or agreements set forth in this

Agreement, which breach (i) would give rise to the failure of a condition to the Closing set forth in Section 10.2(a) or (b) hereunder in favor of Buyer and (ii) cannot be cured, or has not been cured within 30 days (the “Cure Period”; for purposes of clarification, if the failure of a condition to Closing cannot be cured, the applicable Cure Period is zero days), following receipt by Coventry of written notice, of such breach or failure;

(c) by Sellers if there shall have been any breach by Buyer of any representation or warranty (or if any of the representations or warranties of Sellers set forth in this Agreement shall fail to be true and correct), or if Buyer has breached or failed to perform or adhere to any of its covenants or agreements set forth in this Agreement, in each case which breach (i) would give rise to the failure of a condition to the Closing set forth in Section 10.3(a) or (b) hereunder in favor of Sellers and (ii) has not been cured within the Cure Period, following receipt by Buyer of written notice of such breach;

(d) by Buyer, if after the date of this Agreement, there shall have occurred any events or changes in circumstances or states of fact that have resulted in a Material Adverse Effect on the Business;

(e) by either Buyer or Sellers:

(i) if the Closing shall not have occurred on or before November 30, 2009 (the “Termination Date”); provided, however, that (A) if a Cure Period has not expired prior to such date, then Sellers shall have the right to extend the Termination Date to the first Business Day after the last day of such Cure Period, and (B) the right to terminate this Agreement pursuant to this Section 11.1(e)(i) shall not be available to any Party whose breach of this Agreement at or prior to the Termination Date has been a cause of or resulted in the failure of the Closing to occur on or before the Termination Date; or

(ii) if any Restraint having the effect set forth in Section 10.1(c) shall be in effect and shall have become final and nonappealable or if any Restraint resulting from any judicial or administrative injunction, judgment, order or any arbitration award is in effect and, although such injunction, judgment, order or award is subject to appeal or review and, as a result, to being reversed, over-ruled, dissolved or revoked, in the good faith judgment of Coventry or Buyer, as the case may be, such reversal, over-ruling, dissolution or revocation cannot reasonably be expected to occur before the Termination Date; provided, however, that the right to terminate this Agreement under this Section 11.1(e)(ii) shall not be available to a party if such Restraint was primarily due to the failure of such party to perform any of its obligations under this Agreement.

Any termination pursuant to this Section 11.1 (other than a termination pursuant to clause (a) hereof) shall be effected by written notice from the Party so terminating to the other Parties, which notice shall specify the Section hereof pursuant to which this Agreement is being terminated.

11.2 Effect of Termination. In the event of the termination of this Agreement as provided in Section 11.1, this Agreement shall forthwith become void and of no further force or effect with no liability or obligation hereunder on the part of any Party or their respective Affiliates, officers, directors, employees or stockholders, except Section 13.1 (Public Announcements), Section 7.6 (Confidential Nature of Information), Section 6.13 (Audited Financial Statements, as it relates to Buyer’s obligation to reimburse Coventry for all audit fees, costs and expenses), Article XI and Article XIII shall survive such termination and the liability of any Party for any willful breach by such Party of the representations, warranties, covenants or agreements of such Party set forth in this Agreement occurring prior to the termination of this Agreement shall survive the termination of this Agreement and the non-breaching Party shall be entitled to pursue any and all legally available remedies and to seek the recovery of all losses, liabilities, damages costs and expenses of every kind and nature (including reasonable attorneys’ fees).

ARTICLE 12

INDEMNIFICATION

12.1 Survival.

(a) The representations and warranties in this Agreement or made pursuant to this Agreement shall terminate and shall expire at 11:59 p.m. on the date that is 21 months after the Closing Date; provided, however, (i) that the representations and warranties of the Sellers set forth in Sections 4.3 (Ownership of Interests and Stock; Subsidiaries), 4.10 (Tax Matters) and 4.4(c) and (d) (Title to and Condition of Assets) (collectively, the “Fundamental Representations”) shall survive the Closing until the expiration of the applicable statute of limitations with respect to a claim by a third party that, if true, would constitute a breach of such representation and warranty; and (ii) the representations and warranties with respect to the Sellers set forth in Section 4.22 (Health Care Regulatory Compliance) shall survive the Closing and shall expire at 11:59 p.m. on the date that is the fourth anniversary of the Closing; provided, further that such expiration shall not affect the Parties’ rights and obligations as to any claims asserted prior to such time. The right of an Indemnified Party (as defined below) to assert any new claim for indemnification under this Article XII after the expiration of the above survival period shall terminate.

(b) All covenants and agreements made by the parties to this Agreement that contemplate performance following the Closing Date shall survive the Closing Date in accordance with their terms. All covenants and agreements that contemplate performance prior to the Closing Date shall not survive the Closing Date; provided, however, that if any such covenant or agreement is breached on or prior to the Closing Date, the non-breaching party shall retain all rights and remedies hereunder with respect to such breach following the Closing Date.

12.2 Indemnification by the Parties.

(a) Indemnification by Sellers. Subject to the limitations set forth in this Article XII, Sellers shall jointly and severally indemnify, defend and hold harmless Buyer and its Affiliates, including the Acquired Entities (all such persons, collectively, the “Buyer Indemnitees”) from and against any Buyer Indemnifiable Losses arising out of, in connection with or resulting from:

(i) any breach or inaccuracy of any representation and warranty made by Sellers under Article IV of this Agreement (other than Section 4.10 (Tax Matters) which shall be governed exclusively by Article VIII) or any certificate delivered pursuant to Section 10.2(a) of this Agreement;

(ii) any nonfulfillment or breach of any covenant, agreement or obligation to be performed by Sellers prior to, at or after the Closing pursuant to this Agreement (other than any covenant, agreement or obligation with respect to Taxes, which shall be governed exclusively by Article VIII);

(iii) any financial advisory, broker’s, finder’s or similar fee, commission, reimbursement of expenses, indemnification or contribution payable as a result of any agreement, act or statement by Coventry or any of its Subsidiaries with respect to the Transaction;

(iv) any payment made by an Acquired Entity, as contemplated by Section 6.12; or

(v) the defense or settlement of, or any damages or other liabilities sustained by an Acquired Entity as a result of a judgment or order entered in, (A) the litigation captioned Jerry Beeman, et al. v. First Health Services Corporation referred to in Section 4.7 of the Seller Disclosure Letter and (B) the litigation captioned Melanie Purple v. First Health Services Corporation referred to in item Section 4.7 of the Seller Disclosure Letter.

(b) Indemnification by Buyer. Subject to the limitations set forth in this Article XII, Buyer shall indemnify, defend and hold harmless Coventry and its Affiliates (all such Persons, collectively, the “Seller Indemnitees”) from and against any Losses the Seller Indemnitees may suffer, sustain or become subject to (“Seller Indemnifiable Losses”; Buyer Indemnifiable Losses and Seller Indemnifiable Losses, as the context requires, are sometimes referred to herein as “Indemnifiable Losses”), arising out of, in connection with or resulting from:

(i) any breach or inaccuracy of any representation and warranty made by Buyer under Article V or any certificate delivered pursuant to Section 10.3(a);

(ii) any nonfulfillment or breach of any covenant, agreement or obligation to be performed by Buyer, prior to, at or after the Closing pursuant to this Agreement; or

(iii) any financial advisory, broker’s, finder’s or similar fee, commission, reimbursement of expenses, indemnification or contribution payable as a result of any agreement, act or statement by Buyer or any of its Subsidiaries with respect to the Transaction.

(c) Indemnified Parties and Indemnifying Parties. As the context requires, a Buyer Indemnitee when entitled to indemnity hereunder and a Seller Indemnitee when entitled to indemnity hereunder is sometimes referred to herein as an “Indemnified Party” and a Seller when required to provide indemnity hereunder and the Buyer when required to provide indemnity hereunder is sometimes referred to herein as the “Indemnifying Party.”

12.3 Limits on Indemnification.

(a) Sellers shall not have any obligation to indemnify Buyer Indemnitees with respect to any Buyer Indemnifiable Losses arising under Section 12.2(a) until Buyer Indemnitees shall first have suffered aggregate Buyer Indemnifiable Losses in excess of $500,000 (the “Deductible”) (at which point, subject to the limitations set forth in this Article XII, Sellers shall only be obligated to indemnify Buyer Indemnitees for all such Buyer Indemnifiable Losses to the extent that such Losses are in excess of the Deductible); provided, the Deductible limitation shall not apply to Buyer Indemnifiable Losses arising (i) out of a breach of any Fundamental Representation, (ii) under Article VIII (Tax Matters), (iii) under Section 6.12 (Post-closing Indemnification of Directors and Officers) or (iv) under Section 12.2(a)(v).

(b) Buyer shall not have any obligation to indemnify Seller Indemnitees with respect to any Seller Indemnifiable Losses arising under Section 12.2(b) until Seller Indemnitees shall first have suffered aggregate Seller Indemnifiable Losses in excess of the Deductible (at which point, subject to the limitations set forth in this Article XII, Buyer shall only be obligated to indemnify Seller Indemnitees for all such Seller Indemnifiable Losses to the extent that such Losses are in excess of the Deductible); provided, the Deductible limitation shall not apply to Seller Indemnifiable Losses arising (i) out of a breach of Section 6.10 or (ii) under Article VIII (Tax Matters).

(c) (i) Other than Losses arising out of a breach of a Fundamental Representation or Losses arising under Article VIII (Tax Matters), the aggregate liability of Sellers for Buyer Indemnifiable Losses arising under Section 12.2 shall not exceed $15,000,000 (the “Cap”).

(ii) Sellers’ aggregate liability for all Buyer Indemnifiable Losses shall not in any case exceed the Purchase Price, except that any Buyer

Indemnifiable Losses to which Buyer is entitled to indemnity pursuant to Section 8.1(a)(ii) shall be excluded for purposes of applying such limitation.

(iii) Other than Losses arising out of a breach of Section 6.10 or under Article VIII (Tax Matters), Buyer’s aggregate liability for all Seller Indemnifiable Losses arising under Section 12.2(b) shall not exceed the Cap. In no event shall Buyer’s aggregate liability for all Seller Indemnifiable Losses exceed the Purchase Price.

(d) For purposes of calculating Losses hereunder, after a breach or failure by the Sellers referred to in Section 12.2(a)(i) or by Buyer referred to in Section 12.2(b)(i) has been established, any materiality or Material Adverse Effect qualifications in the representations and warranties shall be ignored for purposes of determining the amount of the Loss.

(e) The Indemnified Party shall take and shall cause their respective Affiliates to take all reasonable steps to mitigate and otherwise minimize the Indemnifiable Losses pursuant to this Article XII or Article VIII to the extent required by applicable Law.

(f) The provisions of this Article XII are not intended to provide a Party (or its Affiliates), in connection with a claim hereunder for indemnification by such Party (or its Affiliates) in respect to a breach of a representation, warranty or covenant hereunder by another Party, indemnity against damages resulting from the breach to the extent the damages were not reasonably foreseeable to result from such breach; it being understood and agreed that indemnity shall be accorded in accordance with this Article XII against Losses sustained by an Indemnified Party as a result of a Third Party Claim even if, and to the extent, such Losses include an award of damages to a third party that were not reasonably foreseeable. It is understood and agreed that it is reasonably foreseeable that a breach of a representation or warranty set forth in Section 4.14 (Material Contracts) or Section 4.23 (Customers and Suppliers) or the giving or a failure to give notification relating thereto, required by Coventry under Section 6.4(a)(i) may result in a Loss of Profits by an Acquired Entity and, to the extent an Acquired Entity sustains a Loss of Profits as a result of such a breach, indemnity against such Loss shall be accorded in accordance with (and subject to the limitations provided by) this Article XII (in addition to indemnity against other forms of Losses sustained). For purposes hereof, “Loss of Profits” means lost revenue to the Business from a customer contract (net of expenses, including Taxes, that would have been incurred to realize such lost revenue) resulting from the breach of a representation or warranty set forth on Section 4.14 (Material Contracts) or Section 4.23 (Customers and Suppliers) or the giving or the failure to give a notification relating thereto required by Section 6.4(a)(i).

(g) THE RIGHTS OF INDEMNITY PROVIDED IN THIS ARTICLE XII AND IN ARTICLE VIII SHALL BE AN INDEMNIFIED PARTY’S SOLE AND EXCLUSIVE REMEDY AFTER THE CLOSING RELATING IN ANY WAY TO A BREACH OF THIS AGREEMENT, EXCEPT FOR LOSSES ARISING FROM OR ATTRIBUTABLE TO ANY WILLFUL BREACH OR FRAUD. Each Indemnified

Party waives all other rights and claims that such Person may otherwise have, whether in Law or in equity, relating in any way to a breach of this Agreement, including claims for contribution, breach of contract, breach of representation or warranty, negligent or intentional misrepresentation or breach of duty.

(h) The Parties shall treat any payments made pursuant to this Article XII or Article VIII as an adjustment to the Purchase Price for federal Tax purposes, unless a final determination causes such payment not to be treated as an adjustment to the Purchase Price for federal Tax purposes.

(i) The Buyer Indemnitees shall not be entitled to recover any amounts under this Article XII to the extent included as a current liability or current reserve on the FHS Closing Date Balance Sheet as finally determined pursuant to Section 3.2.

12.4 Matters Involving Third Parties.

(a) If any third party shall notify any Indemnified Party with respect to any matter (a “Third Party Claim”) which may give rise to a claim for indemnification against an Indemnifying Party under this Article XII, then the Indemnified Party shall promptly notify the Indemnifying Party thereof in writing; provided, however, that the failure to so notify an Indemnifying Party shall not affect the rights of the Indemnified Party to indemnity hereunder except to the extent the Indemnifying Party is prejudiced by such failure.

(b) Except as otherwise provided by Article VIII with respect to a proceeding with respect to a Tax Claim relating to Taxes for which Sellers or their Affiliates may be liable and subject to Section 12.4(d), the Indemnifying Party shall have the right to defend the Indemnified Party against the Third Party Claim with counsel of the Indemnifying Party’s choice, reasonably satisfactory to the Indemnified Party, so long as (i) the Indemnifying Party notifies the Indemnified Party, within 15 days after the Indemnified Party has given notice of the Third Party Claim, that the Indemnifying Party is assuming the defense of such Third Party Claim and (ii) the Indemnifying Party conducts the defense of the Third Party Claim in an active and diligent manner. In the event that the Indemnifying Party fails to assume the defense of any Third Party Claim within 15 days after receipt of notice of the Third Party Claim, the Indemnified Party shall have the right to undertake the defense of such Third Party Claim at the expense and for the account of the Indemnifying Party in accordance with this Article XII.

(c) So long as the conditions set forth in Section 12.4(b) are and remain satisfied, then (i) the Indemnifying Party may conduct the defense of the Third-Party Claim in accordance with Section 12.4(b), (ii) the Indemnified Party may retain separate co-counsel at its sole cost and expense to represent it in connection with the Third Party Claim and the Indemnifying Party shall cooperate, and cause the counsel selected by the Indemnifying Party, to cooperate with such co-counsel in connection with the response, defense and settlement of such Third Party Claim and any related suit or proceeding and (iii) the Indemnifying Party shall not, without the prior written consent of

the Indemnified Party (which consent shall not be unreasonably withheld or delayed), consent to any admission or the entry of any judgment with respect to the matter, or enter into any settlement which (A) imposes an injunction or other equitable relief upon the Indemnified Party or (B) does not include an unconditional provision whereby the plaintiff or claimant in the matter releases the Indemnified Party from all liability with respect to such matter.

(d) Notwithstanding anything in this Section 12.4 to the contrary, Sellers shall not have the right to assume the defense of any Third Party Claim against the Buyer or any of its Affiliates, including the Acquired Entities, in respect of which the Buyer Indemnified Parties may be entitled to indemnity in accordance with this Article XII if such Third Party Claim (i) involves as a claimant a client or customer or supplier listed in Section 4.14 of the Seller Disclosure Letter, (ii) is a criminal investigation or proceeding or (iii) involves any other investigation or inquiry by any Governmental Authority. In each such case, the Buyer (on its own behalf or on behalf of any other Buyer Indemnitees if such claim, assertion, action or proceeding involves another Buyer Indemnitee) shall direct, through counsel of its own choosing reasonably acceptable to the Sellers, the response to, defense of or settlement of any such claim, assertion, investigation, inquiry, action or proceeding, but the cost thereof and any other Loss resulting therefrom shall be a Buyer Indemnifiable Loss in accordance with the Article XII. The Buyer Indemnitee shall not, however, without the prior written consent of the Sellers (which consent shall not be unreasonably withheld or delayed), consent to the entry of any judgment with respect to any such matter or enter into any settlement thereof if Sellers are required to provide indemnity hereunder with respect to any Loss resulting from such judgment or settlement. Buyer shall consult with Sellers for the purpose of allowing Sellers to participate in the response, defense or settlement of any such claim, assertion, investigation, inquiry, action or proceeding, but in such case, the expenses of Sellers, including the fees and disbursements of its counsel, shall be paid by Sellers. If Sellers shall determine to be represented by counsel in connection with any such claim, assertion, investigation, inquiry action or proceeding, the Buyer Indemnitee shall cooperate, and cause the counsel representing it in such proceeding to cooperate, with counsel representing Sellers in such proceeding and Buyer shall provide and shall cause its Subsidiaries to provide (during normal business hours) Sellers and their counsel with reasonable access to the records and personnel of the Acquired Entities and Buyer relating to any such claim, assertion, investigation, inquiry, action or proceeding as to which Sellers may be required to provide indemnity hereunder to the extent reasonable for Sellers to participate in the response, defense or settlement thereof.

12.5 Indemnification Notices.

(a) In order to obtain indemnity in respect of a Loss as provided by Section 12.2 or under Article VIII, an Indemnified Party shall give an “Indemnification Notice” to the Indemnifying Party. For the purposes hereof, an “Indemnification Notice” shall mean a notice signed by any officer of Indemnified Party and delivered to Indemnifying Party and (i) stating that the Indemnified Party has paid, incurred, sustained or accrued, or reasonably anticipates that it will be obligated to pay, incur, sustain or

accrue, a Loss against which it is entitled to indemnity, (ii) specifying in reasonable detail the nature of such Loss (including the calculation thereof or the basis for estimation thereof), the date insofar as practicable such Loss was paid or is expected to be incurred, sustained or accrued or the basis on which it anticipates incurring, sustaining or accruing such Loss, and the nature of the misrepresentation, breach of warranty or covenant resulting in such Loss or out of which such Loss arose or to which such Loss relates, and (iii) the amount of cash to be delivered to the Indemnified Party (for the benefit of the pertinent Indemnitee) as indemnity against each such Loss. If a Loss is anticipated but not yet incurred, sustained or accrued at the time an Indemnification Notice is given, an additional Indemnification Notice shall be given providing such information regarding the Loss incurred, sustained or accrued as was not included in an earlier Indemnification Notice. In a case where a Buyer Indemnitee or Seller Indemnitee, as the case may be, other than Buyer or Coventry shall seek to obtain the indemnity provided by Section 12.2 or Article VIII, Buyer or Coventry, as applicable, shall give an appropriate Indemnification Notice on behalf of such Buyer Indemnitee or Seller Indemnitee.

12.6 Releases. Effective upon the Closing, Buyer and each Acquired Entity, and each of their respective representatives, successors and assigns (collectively, the “Releasing Parties”), shall be deemed to have remised, released and forever discharged the individuals set forth on Exhibit B hereto (collectively, the “D&O Released Parties”) of and from any and all Actions which the Releasing Parties, or any of them, now has or ever had, or hereafter can, shall or may have, for, upon or by reason of any matter, cause or thing whatsoever, against the D&O Released Parties, and each of them, from the beginning of time through the Closing Date; provided, however, that this Section 12.5(b) shall not apply to any Action that may arise from any breach by any of the D&O Released Parties of, or the failure to properly perform, any obligation or duty arising on the part of any of the D&O Released Parties after the date hereof under this Agreement or any other agreement to be entered into after the date hereof and contemplated hereby to which any of the D&O Released Parties is a party.

ARTICLE 13

MISCELLANEOUS

13.1 Public Announcement. The initial press release with respect to the execution and Closing of this Agreement shall be either a joint press release or coordinated press releases to be reasonably agreed upon by Buyer and Coventry. Thereafter, neither Buyer nor Coventry shall issue any press release or make any public statement with respect to this Agreement or the other Transaction Agreements or the Transactions without the prior written consent of the other Parties (which consent shall not be unreasonably withheld or delayed), except that any Party may make any disclosure required by applicable Law (including federal securities laws) or by the applicable rules of any stock exchange on which Buyer or Coventry lists securities. A Party, with respect to each such disclosure, shall provide the other Parties with prior notice and a reasonable opportunity to review the disclosure.

13.2 Payment of Costs and Expenses. Except as otherwise expressly provided in this Agreement, the Parties shall each bear their own respective costs and expenses in connection with the preparation, execution and performance of this Agreement, including all fees and expenses of agents, representatives, counsel, accountants and investment bankers.

13.3 Non-Assignment; Successors and Assigns. No Party shall assign this Agreement or any part hereof without the prior written consent of the other Parties; provided, however, that Buyer may assign or delegate any or all of its rights or obligations under this Agreement to one or more Affiliates of Buyer, provided, further, that any Party may assign its right to receive a payment entitled to be received by it pursuant to this Agreement. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the Parties and their respective permitted successors and assigns. In the event Buyer assigns this Agreement, Buyer will remain primarily liable for its obligations hereunder unless expressly released in writing by Sellers.

13.4 Entire Agreement. This Agreement (which term shall be deemed to include the exhibits and schedules hereto and the other certificates, documents and instruments delivered hereunder), together with the other Transaction Agreements, set forth the entire understanding of the Parties, and supersede all prior agreements, arrangements and communications, whether oral or written, with respect to the subject matter hereof. This Agreement shall not be modified or amended except by written agreement of the Parties.

13.5 Severability; Enforceability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon a determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect their original intent as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the maximum extent possible.

13.6 Counterparts. This Agreement may be executed and delivered (including by facsimile transmission) in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument, and in pleading or proving any provision of this Agreement it shall not be necessary to produce more than one such counterpart.

13.7 Notices. Any notice, request, consent or other instrument or thing required or permitted to be given, made, served or delivered to any of the Parties hereto shall be in writing and shall be deemed to have been duly given, made, served or delivered (a) on the date delivered if delivered personally; (b) on the next Business Day following the date of deposit (i) in United States first-class express mail, postage prepaid or (ii) with an overnight courier service guaranteeing next-Business Day delivery; or (c) on the date of

facsimile transmission if transmitted prior to 5:00 p.m. local time of the recipient on a Business Day (provided that confirmation of receipt of such telecopy transmission is confirmed by the recipient on such date), otherwise on the next Business Day; in any case addressed or transmitted as follows (or in accordance with a party’s instructions specified in a notice given pursuant to this Section 13.7):

If to Sellers, to:

Coventry Health Care, Inc.
6705 Rockledge Dr., Suite 100
Bethesda, MD 20817
Attention: Drew Asher
Facsimile: (301) 493-0780

With a copy (which shall not constitute effective notice) to

Bass, Berry & Sims PLC
Regions Center
315 Deaderick Street, Suite 2700
Nashville, TN 37238
Attention: Bob F. Thompson
Facsimile: (615) 742-2762
and
Attention: Angela Humphreys
Facsimile: (615) 742-2718

If to Buyer, to:

Magellan Health Services, Inc.
55 Nod Road
Avon, Connecticut 06001
Attention: Daniel N. Gregoire, Executive Vice President,
General Counsel and Secretary
Telephone: (860) 507-1906
Facsimile: (860) 507-1990

With copies to:

Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, NY 10153
Attention: Robert L. Messineo
Raymond O. Gietz
Telephone: (212) 310-8000
Facsimile: (212) 310-8007

13.8 Waiver.

(a) The rights and remedies of the Parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by any Party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege.

(b) To the maximum extent permitted by applicable law:

(i) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one Party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other Parties;

(ii) no waiver that may be given by a Party will be applicable except in the specific instance for which it is given; and

(iii) no notice to or demand on one Party will be deemed to be a waiver of any obligation of such Party or of the right of the Party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement.

13.9 Third Parties. This Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns, the Hired Employees as provided in Article VII and the Indemnified Party as provided in Article XII.

13.10 Rules of Construction.

(a) Each of the Parties hereto acknowledges that it has been represented by independent counsel of its choice throughout all negotiations that have preceded the execution of this Agreement and that it has executed the same with consent and upon the advice of said independent counsel. Each Party and its counsel cooperated in the drafting and preparation of this Agreement and the documents referred to herein, and any and all drafts relating thereto exchanged between the Parties shall be deemed the work product of the Parties and may not be construed against any Party by reason of its preparation. Accordingly, any rule of law or any legal decision that would require interpretation of any ambiguities in this Agreement against any Party that drafted it is of no application and is hereby expressly waived.

(b) Notwithstanding anything contained in this Agreement to the contrary, except as otherwise expressly provided in this Agreement, the Parties hereto covenant and agree that no amount shall be (or is intended to be) included, in whole or in

part (either as an increase or a reduction), more than once in the calculation of any calculated amount pursuant to this Agreement if the effect of such additional inclusion (either as an increase or a reduction) would be to cause such amount to be over- or under-counted for purposes of the transactions contemplated by this Agreement.

13.11 Governing Law.

(a) This Agreement shall be construed in accordance with, and governed in all respects by, the internal laws of the State of Delaware (without giving effect to principles of conflicts of laws).

(b) Any legal action or other proceeding relating to this Agreement or the enforcement of any provision of this Agreement shall be brought or otherwise commenced exclusively in the Court of Chancery or federal court located in the State of Delaware. Each Party:

(i) expressly and irrevocably consents and submits to the jurisdiction of the Court of Chancery and federal court located in the State of Delaware (and each appellate court located in the State of Delaware), in connection with any proceeding;

(ii) agrees that service of any process, summons, notice or document by U.S. mail addressed to him at the address set forth in Section 13.7 shall constitute effective service of such process, summons, notice or document for purposes of any such proceeding;

(iii) agrees that the Court of Chancery and federal court located in the State of Delaware, shall be deemed to be a convenient forum; and

(iv) agrees not to assert (by way of motion, as a defense or otherwise), in any such proceeding, any claim by any Party that it is not subject personally to the jurisdiction of such court, that such proceeding has been brought in an inconvenient forum, that the venue of such proceeding is improper or that this Agreement or the subject matter of this Agreement may not be enforced in or by such court.

13.12 Non-Recourse. No past, present or future director, officer, employee, incorporator, member, partner, stockholder, Affiliate, agent, attorney or representative of Buyer or its Affiliates shall have any liability for any obligations or liabilities of Buyer under the Transaction Agreements of or for any claim based on, in respect of, or by reason of, the transactions contemplated hereby and thereby.

13.13 Specific Performance. The Parties acknowledge and agree that the breach of this Agreement would cause irreparable damage to the non-breaching Party and that the non-breaching Party will not have an adequate remedy at law. Therefore, the obligations of the Parties under this Agreement, including Seller’s obligation to sell the

Acquired Assets and Shares to Buyer and Buyer’s obligation to purchase the Acquired Assets and the Shares, shall be enforceable by a decree of specific performance issued by any court of competent jurisdiction, and appropriate injunctive relief may be applied for and granted in connection therewith. Such remedies shall, however, be cumulative and not exclusive and shall be in addition to any other remedies which any party may have under this Agreement or otherwise.

[Signature Page Follows.]

IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first above written.

	MAGELLAN HEALTH SERVICES, INC.


	By:	/s/ Rene Lerer
	Name:	Rene Lerer
	Title:	Chairman and CEO


	COVENTRY HEALTH CARE, INC.


	By:	/s/ Drew Asher
	Name:	Drew Asher
	Title:	SVP


	COVENTRY MANAGEMENT SERVICES, INC.


	By:	/s/ Shirley R. Smith
	Name:	Shirley R. Smith
	Title:	Secretary


	FIRST HEALTH GROUP CORP.


	By:	/s/ Shirley R. Smith
	Name:	Shirley R. Smith
	Title:	Secretary

EX-10.1 3 a2193817zex-10_1.htm EXHIBIT 10.1

Exhibit 10.1

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into by and between Karen S. Rohan an individual (“Employee”), and, Magellan Health Services, Inc. on behalf of itself and its subsidiaries and affiliates (collectively referred to herein as “Employer”) on this 28th day of July, 2009 effective as of August 1, 2009.

WHEREAS, Employer desires to obtain the services of Employee and Employee desires to continue to render services to Employer; and

WHEREAS, Employer and Employee desire to set forth the terms and conditions of Employee’s employment with Employer under this Agreement;

NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual covenants and agreements contained in this Agreement and Amendment No. 1 to this Agreement executed simultaneously herewith (hereinafter “Amendment No. 1”), the parties agree as follows:

STATEMENT OF AGREEMENT

1. Employment. Employer agrees to employ Employee, and Employee accepts such employment in accordance with the terms of this Agreement, for a term of one year commencing on August 1, 2009 and, unless terminated earlier in accordance with the terms of this Agreement, ending on July 31, 2010. Thereafter, this Agreement shall automatically renew for twelve (12) month periods, unless sooner terminated as provided herein. If either party desires not to renew the Agreement, they must provide the other party with written notice of their intent not to renew the Agreement at least one hundred eighty (180) days prior to the next renewal date. Non-renewal of the Agreement by either party will in all cases result in termination of employment at the non-renewal date. Employer’s notice of intent not to renew the Agreement shall be deemed to be a termination without cause and the provisions of Section 6(c) shall apply.

2. Position and Duties of Employee. Employee will serve as President of Employer. Employee agrees to serve in such position, or in such other positions as Employer determines, and with agreement from Employee, from time to time, and to perform the duties that Employer may assign from time to time to Employee, at the same or greater base salary level and a similar location, until the expiration of the term or such time as Employee’s employment with Employer is terminated pursuant to this Agreement.

3. Time Devoted. Employee will devote his or her full business time and energy to the business affairs and interests of Employer, and will use his or her best efforts and abilities to promote Employer’s interests. Employee agrees that he or she will diligently endeavor to perform services contemplated by this Agreement in a manner consistent with his or her position and in accordance with the policies established by the Employer. Excluding charitable and civic organizations, Employee shall not serve on any outside boards of directors of any organizations without the prior approval of the board of directors of Employer.

4. Compensation.

(a) Base Salary. Employer will pay Employee an annual base salary in the amount of $530,000 which amount will be paid in semi-monthly intervals less appropriate withholdings for federal and state taxes and other deductions authorized by Employee. Such salary will be subject to review and adjustment by Employer not less than annually.

(b) Annual Bonus. Employee’s annual target bonus opportunity will be 75% of Base Salary (“Target Bonus”) under the Company’s Short-Term Incentive Plan (or successor annual incentive plan applicable to similarly situated executive officers). The actual payout to Employee will be based on Company and individual performance during the measurement period. Any such bonus payable to Employee shall be paid to Employee during the period January 1 to March 15 of each year in respect of service in the preceding year provided that Employee is still employed by Employer at the time the bonus is paid. Subject to the conditions for payment of bonus stated above in this paragraph, for the year 2009 Employee’s Target Bonus shall be 37.5% of Base Salary (“2009 Target”).

(c) Sign on Equity Grant. Employee will receive a grant of options with a total value of $1,375,000, to purchase that number of shares equal to $1,375,000 divided by the Black Sholes value of an option to purchase a share of stock of Employer as determined by Employer on the first business day of the month following the month of commencement of her employment under this Agreement (the “Grant Date”) at an exercise price equal to the closing price of a share of the Common Stock of Employer on NASDAQ on the Grant Date. Such options shall be granted on terms provided to other employees of Employer under the Employer’s 2008 Management Incentive Plan on the Grant Date and shall vest ratably in annual installments over a period of three years from the Grant Date.

(d) Benefits. Employee will be eligible to participate in Employer’s Benefit Plans commensurate with his or her position on a basis at least as favorable as other similarly situated senior level executives of Employer. Employee will receive separate information detailing the terms of such Benefit Plans and the terms of those plans will control. Employee also will be eligible to participate in any annual incentive plan and stock option plan applicable to Employee by their terms respectively on terms at least as favorable as other similarly situated senior level executives of Employer. Annual incentive payments, if any, will be determined and paid (unless validly deferred if then permitted by the Company) between January 1 and March 15 of the year following the performance year. During the term of this Agreement, Employee will be entitled to such other benefits of employment with Employer as are now or may later be in effect for salaried employees of Employer, and also will be eligible to participate in other benefits adopted for employees at his or her level.

5. Expenses. During the term of this Agreement, Employer will reimburse Employee promptly for all reasonable travel, entertainment, parking, business meetings and similar expenditures in pursuance and furtherance of Employer’s business upon receipt of reasonably supporting documentation as required by Employer’s policies applicable to its employees generally, subject to Section 10(a) (iii).

6. Termination.

(a) Termination Due to Resignation. Employee may resign his or her employment at any time by giving 90 days written notice of resignation to Employer. Except as otherwise set forth in this Agreement, Employee’s employment, and Employee’s right to receive compensation and benefits from Employer, will terminate upon the effective date of Employee’s termination.

If Employee resigns pursuant to this Section 6(a), Employer’s only remaining financial obligation to Employee under this Agreement will be to pay, subject to Section 10: (i) any earned but unpaid Base Salary and accrued Paid Time Off through the effective date of Employee’s termination; (ii) reimbursement of expenses incurred by Employee through the effective date of termination which are reimbursable pursuant to this Agreement; and (iii) the Employee’s vested portion of any Magellan deferred compensation or other benefit plan.

(b) Termination with Cause. Except as otherwise set forth in this Agreement, Employee’s employment, and Employee’s right to receive compensation and benefits from Employer, will be terminated for cause at the discretion of Employer under the following circumstances:

(i) Employee’s commission of an act of fraud or dishonesty involving his or her duties on behalf of Employer;

(ii) Employee’s failure or refusal to faithfully and diligently perform duties assigned to Employee or other breach of any material term under this Agreement;

(iii) Employee’s failure or refusal to abide by Employer’s policies, rules, procedures or directives; or

(iv) Employee’s conviction of a felony or a misdemeanor involving moral turpitude.

If Employee is terminated pursuant to this Section 6(b), Employer’s only remaining financial obligation to Employee under this Agreement will be to pay, subject to Section 10: (i) any earned but unpaid Base Salary and accrued Paid Time Off through the date of Employee’s termination; (ii) reimbursement of expenses incurred by Employee through the date of termination which are reimbursable pursuant to this Agreement; and (iii) the Employee’s vested portion of any Magellan deferred compensation or other benefit plan.

For the events described in Sections 6(b) (ii) and (iii), Employer will give Employee written notice of such deficiency and a reasonable opportunity to cure such situation, but in no event more than thirty days.

(c) Termination Without Cause. Employer may terminate this Agreement for any reason without cause at any time. “Without cause” termination shall also include, but not be limited to (i) Employer’s notice to Employee of its intent not to renew this Agreement in accordance with the provisions of Section 1 hereof; (ii) Employer’s notice to Employee that his or her position will be relocated to an office which is greater than 50 miles from Employee’s prior office location; or (iii) Employer’s material reduction of Employee’s base salary to an amount less than the base salary identified in Section 4(a) of this Agreement (a reduction with an annualized value of 1.5% of Employee’s base pay or more, taking into account any related effect of the reduction on annual incentive, shall be deemed material); provided, however, that in the case of the reasons stated in (i), (ii) and (iii) above, Employee must have given notice to Employer that an event under clause (i), (ii) or (iii) has occurred, that the Employee objects to such action by the Employer and the circumstance must remain uncorrected by Employer after the expiration of 30 days after receipt of such notice. If Employer terminates this Agreement without cause, Employer shall continue to pay, subject to Section 10, Employee the compensation provided for in Section 4(a) of this Agreement for a period of time equal to one year. Such pay continuation is contingent upon Employee executing Employer’s standard severance agreement, which incorporates a general release, at the time of termination. In addition, Employee will receive (i) any earned but unpaid Base Salary and accrued Paid Time Off through the date of Employee’s termination; (ii) reimbursement of expenses incurred by Employee through the date of termination which are reimbursable pursuant to this Agreement; and (iii) the Employee’s vested portion of any Magellan Health Services, Inc. deferred compensation or other benefit plan, including but not limited to, any stock option or restricted stock grant plans, in accordance with the terms of those plans. If Employee participates in any bonus plan(s), including but not limited to, any long term bonus plan(s), Employer may in its sole discretion pay Employee, on a pro-rata basis, the amount of such plan(s) as Employee would have earned if Employee had been employed for the full calendar year. The pro-ration will be determined by the fraction of the number of months in the calendar year in which the Employee worked (rounded to the nearest whole month) divided by 12 months. In determining whether a pro-rata bonus shall be paid to Employee, the Employer may consider factors that include but are not limited to (i) the Employee’s target bonus (percentage of base salary), (ii) the Company’s financial performance and (iii) the Employee’s achievement of his or her specific performance objectives. At the time of termination, Employer shall determine the Employee’s bonus amount, if any. Notwithstanding the foregoing, any payout of such bonus amount shall be at the Employer’s sole discretion and shall be contingent upon the Company satisfying the financial targets established by the Company’s Board of Directors. Payment of bonus, if any, shall be made at the time of the annual bonus payout for all employees, subject to Section 4(b). Also, notwithstanding the foregoing, Employer shall have sole discretion to make any additional payments to Employee. COBRA coverage may be elected to continue health, dental, and vision insurance during the Severance Period and beyond. If COBRA coverage is elected, Employee will pay only the employee contribution rate for the health insurance portion of the COBRA coverage during the Severance Period. Dental and vision coverage under COBRA will be billed at the full COBRA rate.

(d) Automatic Termination. This Agreement will terminate automatically upon the death or permanent disability of Employee. Employee will be deemed to be “Disabled” or to suffer from a “Disability” within the meaning of this Agreement if, because of a physical or mental

impairment, Employee has been unable to perform the essential functions of his or her position, with or without reasonable accommodation, for a period of 180 consecutive days, or if Employee can reasonably be expected to be unable to perform the essential functions of his or her position for such period. If Employee is terminated pursuant to this Section 6(d), Employee or her estate will receive, subject to Section 10, (i) any earned but unpaid Base Salary and accrued Paid Time Off through the date of Employee’s termination; (ii) reimbursement of expenses incurred by Employee through the date of termination which are reimbursable pursuant to this Agreement; and (iii) the Employee’s vested portion of any Magellan Health Services retirement, deferred compensation or other benefit plan, including but not limited to, any stock option or restricted stock grant plans, in accordance with the terms of those plans. If Employee participates in any bonus plan(s), including but not limited to, any long term bonus plan(s), Employer may at its sole discretion pay Employee or her estate, on a pro-rata basis, the amount of such plan(s) as Employee would have earned if Employee had been employed for the full calendar year. The pro-ration will be determined by the fraction of the number of months in the calendar year in which the Employee worked (rounded to the nearest whole month) divided by 12 months. In determining whether a pro-rata bonus shall be paid to Employee or her estate, the Employer may consider factors that include but are not limited to (i) the Employee’s target bonus (percentage of base salary); (ii) the Company’s financial performance; and (iii) the Employee’s achievement of her specific performance objectives. At the time of termination, Employer shall determine the Employee’s bonus amount, if any. Notwithstanding the foregoing, any payout of such bonus amount shall be at Employer’s sole discretion and shall be contingent upon the Company satisfying the financial targets established by the Company’s Board of Directors. Payment of bonus, if any, shall be made at the time of the annual bonus payout for all employees, subject to Section 4(b).

(e) Effect of Termination. Except as otherwise provided for in this Section 6, upon termination of this Agreement, all rights and obligations under this Agreement will cease except for (i) the rights and obligations under Sections 4 and 5 to the extent Employee has not been compensated or reimbursed for services performed prior to termination (the amount of compensation to be prorated for the portion of the pay period prior to termination); (ii) the rights and obligations under Sections 7, 8 and 9; and (iii) all procedural and remedial provisions of this Agreement.

7. Protection of Confidential Information/Non-Competition/Non-Solicitation.

Employee covenants and agrees as follows:

(a)(i) Confidential Information: During Employer’s employment of Employee and for a period of one year following the termination of Employee’s employment for any reason, Employee will not use or disclose, directly or indirectly, for any reason whatsoever or in any way, other than at the direction of Employer during the course of Employee’s employment or after receipt of the prior written consent of Employer, any confidential information of Employer or its controlled subsidiaries or affiliates, that comes into her knowledge during her employment by Employer (the “Confidential Information” as hereinafter defined). The obligation not to use or disclose any Confidential Information will not apply to any Confidential Information that is or becomes public knowledge through no fault of Employee, and that may be utilized by the public without any direct or indirect obligation to Employer, but the termination of the obligation for non-use or nondisclosure by

reason of such information becoming public will extend only from the date such information becomes public knowledge. The above will be without prejudice to any additional rights or remedies of Employer under any state or federal law protecting trade secrets or other information.

(a)(ii) Trade Secrets. Employee shall hold in confidence all Trade Secrets of Employer, its direct and indirect subsidiaries or affiliates, and/or its customers that came into her knowledge during her employment by Employer and shall not disclose, publish or make use of at any time after the date hereof such Trade Secrets, other than at the direction of Employer, for as long as the information remains a Trade Secret.

(a)(iii) For purposes of this Agreement, the following definitions apply:

“Confidential Information” means any data or information, other than Trade Secrets, that is valuable to Employer and not generally known to the public or to competitors of Employer. It is understood that the term “Confidential Information” does not mean and shall not include information which:

(a) is or subsequently becomes publicly available without the breach of any obligation owed to the Employer;

(b) is disclosed with the prior written approval of the Employer; or

(c) is obligated to be produced under order of a court of competent jurisdiction or a valid administrative, congressional, or other subpoena, civil investigative demand or similar process; provided, however, that upon issuance of any such order, subpoena, demand or other process, the Employee shall promptly notify the Employer and shall provide the Employer with an opportunity (if then available) to contest, at the Employer’s expense, the propriety of such order or subpoena (or to arrange for appropriate safeguards against any further disclosure by the court or administrative or congressional body seeking to compel disclosure of such Confidential Information).

“Trade Secret” means information including, but not limited to, any technical or non-technical data, formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, financial plan, product plan, list of actual or potential customers or suppliers or other information similar to any of the foregoing, which (i) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can derive economic value from its disclosure or use; and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

(a)(iv) Interpretation. The restrictions stated in paragraphs 7(a)(i) and 7(a)(ii) are in addition to and not in lieu of protections afforded to trade secrets and confidential information under applicable state law. Nothing in this Agreement is intended to or shall be interpreted as diminishing or otherwise limiting Employer’s right under applicable state law to protect its trade secrets and confidential information.

(b) Non-Competition.

(i) Employee covenants and agrees that during the term of her employment with Employer and for a period of one year immediately following the termination of said employment for any reason, she will not, on her own behalf or as a partner, officer, director, employee, agent, or consultant of any other person or entity, directly or indirectly, engage or attempt to engage in the business of providing or selling services in the United States that are services offered by Employer or any of its subsidiaries and affiliates at the time of the termination of this Agreement, unless waived in writing by Employer in its sole discretion. Employee recognizes that the above restriction is reasonable and necessary to protect the interest of the Employer and its subsidiaries and affiliates.

(ii) During the one year period immediately following Employee’s termination from her employment with Employer, Employee may submit a written request to Employer outlining a proposed employment or other employment opportunity that Employee is considering. Employer will review such request, and make a determination within ten (10) business days following receipt of such request, in its sole discretion, as to whether the opportunity would constitute a breach of the non-competition covenant.

(c) Non-Solicitation. To protect the goodwill of Employer and its controlled subsidiaries and affiliates, or the customers of Employer and its subsidiaries and affiliates, Employee agrees that, for a period of one year immediately following the termination of her employment with Employer, she will not, without the prior written permission of Employer, directly or indirectly, for herself or on behalf of any other person or entity, solicit, divert away, take away or attempt to solicit or take away any Customer of Employer for purposes of providing or selling services that are offered by Employer, if Employer, or the particular subsidiary or affiliate of Employer, is then still engaged in the sale or provision of such services at the time of the solicitation. For purposes of this Section 7(c), “Customer” means any individual or entity to whom Employer or its controlled subsidiaries or affiliates has provided, or contracted to provide, services and with whom Employee had, alone or in conjunction with others, contact with or knowledge of, during the twelve months prior to the termination of his or her employment. For purposes of this Section 7(c), Employee had contact with or knowledge of a customer if (i) Employee had business dealings with the customer on behalf of Employer or its subsidiaries or affiliates; (ii) Employee was responsible for supervising or coordinating the dealings between the customer and Employer or its subsidiaries or affiliates; or (iii) Employee obtained or had access to trade secrets or confidential information about the customer as a result of Employee’s association with Employer or its subsidiaries or affiliates.

(d) Solicitation or Hiring of Employees. During Employer’s employment of Employee and for a period of one year following the termination of Employee’s employment with Employer for any reason, Employee will not, on her own behalf or on behalf of any other person or

entity, solicit for employment or hire, directly or indirectly, any employee of Employer or any of its subsidiaries or affiliates who was employed with Employer or its subsidiaries or affiliates within the one year period immediately prior to Employee’s termination.

8. Work Made for Hire. Employee agrees that any written program materials, protocols, research papers, other writings, as well as improvements, inventions, new techniques, programs or products (the “Work”) made or developed by Employee within or after normal working hours relating to the business or activities of Employer or any of its subsidiaries, shall be deemed to have been made or developed by Employee solely for the benefit of Employer and will be considered “work made for hire” within the meaning of the United States Copyright Act, Title 17, United States Code, which vests all copyright interest in and to the Work in the Employer. In the event, however, that any court of competent jurisdiction finally declares that the Work is not or was not a work made for hire as agreed, Employee agrees to assign, convey, and transfer to the Employer all right, title and interest Employee may presently have or may have or be deemed to have in and to any such Work and in the copyright of such work, including but not limited to, all rights of reproduction, distribution, publication, public performance, public display and preparation of derivative works, and all rights of ownership and possession of the original fixation of the Work and any and all copies. Additionally, Employee agrees to execute any documents necessary for Employer to record and/or perfect its ownership of the Work and the applicable copyright.

9. Property of Employer. Employee agrees that, upon the termination of Employee’s employment with Employer, Employee will immediately surrender to Employer all property, equipment, funds, lists, books, records and other materials of Employer or its controlled subsidiaries or affiliates in the possession of or provided to Employee.

10. Special Rules for Compliance with Code Section 409A. This Section 10 serves to ensure compliance with applicable requirements of Section 409A of the Internal Revenue Code (the “Code”). Certain provisions of this Section 10 modify other provisions of this Agreement. If the terms of this Section 10 conflict with other terms of the Agreement, the terms of this Section 10 control.

(a) Timing of Certain Payments. Payments and benefits specified under this Agreement shall be paid at the times specified as follows:

(i) Accrued Payments at Termination. Sections 6(a) — (d) of this Agreement and Section I.1 (ii) of the Amendment No. 1 to the Employment Agreement relating to Change in Control (the “CIC Amendment”) require payment of amounts earned but unpaid or accrued at the date of Employee’s termination. Unless the amount is payable under an applicable plan, program or arrangement on explicit terms providing for a delay in payment compliant with Code Section 409A, these amounts shall be payable at the date the amounts otherwise would have been payable under the applicable plans, programs and arrangements in the absence of termination but in no event more than 30 days after Employee’s termination of employment (subject to 10(d)).

(ii) Gross-Up. Gross-up payments payable under the CIC Amendment will be paid as promptly as practicable after the excise tax is payable by Employee, and in any event must be paid no later than the end of Employee’s taxable year next following the taxable year in which Employee remits the excise tax or related taxes to the taxing authorities; provided, however, that any gross-up payment will be subject to Section 10(d) if applicable under Section 409A.

(iii) Expense Reimbursements. Any payment under Section 5 or otherwise as an expense reimbursement hereunder must be paid no later than the end of Employee’s taxable year next following the taxable year in which Employee incurred the reimbursable expense.

(iv) Other Payments. Any other payment or benefit required under this Agreement to be paid in a lump sum or otherwise to be paid promptly at or following a date or event shall be paid within five days after the due date, subject to Section 10(b), (c) and (d) below.

(v) No Influence on Year of Payment. In the case of any payment under the Agreement payable during a specified period of time following a termination or other event (including any payment for which the permitted payment period begins in one calendar year and ends in a subsequent calendar year), Employee shall have no right to elect in which year the payment will be made, and the Company’s determination of when to make the payment shall not be influenced in any way by Employee.

(b) Special Rules for Severance Payments. In the case of payments in the nature of continuation of payments under Section 4(a) required under Section 6(c) (“Pre-CIC Severance Payments”) and severance payable under Section I.1(iii) of the CIC Amendment (the “CIC Severance Payments” and, with the “Pre-CIC Severance Payment, the “Severance Payments”), the following rules will apply:

(i) Separate Payments. Each monthly installment of the Pre-CIC Severance Payments shall be deemed to be a separate payment for all purposes, including for purposes of Section 409A. The portion of the CIC Severance Payments that exceeds the Pre-CIC Severance Payments (or the present value thereof, if such present valuing is required to comply with Section 409A), and the portion attributable to inclusion of Target Bonus in the calculation of CIC Severance Payments (or, if so required, the present value thereof) as compared to Pre-CIC Severance Payments, shall be deemed to be a separate payment for all purposes, including for purposes of Section 409A (the “Separate Lump Sum”).

(ii) Severance Payment Timing Rules. Each installment of Pre-CIC Severance Payments shall be treated as follows for purposes of Section 409A:

(A) Installments payable during the year of termination and by March 15 of the year following termination shall, to the maximum extent possible, be deemed to

constitute a short-term deferral under Treasury Regulation § 1.409A-1(b) (4);

(B) Installments payable during the period within six months after termination, to the extent not covered by Section 10(b)(ii)(A), shall, to the maximum extent possible, be deemed to constitute amounts payable under the “two-year/two-times” exclusion from being a deferral of compensation under Treasury Regulation § 1.409A-1(b)(9)(iii);

(C) To the extent that the “two-year/two-times” exclusion from being a deferral of compensation under Treasury Regulation § 1.409A-1(b)(9)(iii) has not been fully applied by virtue of Section 10(b)(ii)(B), installments payable as Pre-CIC Severance Payments shall be excluded, to the maximum extent possible, by such “two-years/two-times” exclusion (applied in the reverse order of payment of the installments — that is, to the latest installments first); and

(D) All installments of the Pre-CIC Severance Payment not covered by Section 10(b)(ii)(A), (B) and (C) shall be paid at the applicable installment payment date in compliance with Section 409A, except that any such payment shall be subject to the six-month delay rule of Section 10(d).

The portions of the CIC Severance Payments that correspond to the Pre-CIC Severance Payments (that is, deemed to be the same payment for purposes of Section 409A) shall be governed by Section 10(b)(ii)(A) — (D) above, provided that amounts of the CIC Severance Payments corresponding to Pre-CIC Severance Payments covered by Section 10(b)(ii)(A), (B), and (C) above shall be payable as a lump sum within five days after termination of employment. The Separate Lump Sum shall be treated as follows for purposes of Section 409A:

(E) The Separate Lump Sum shall, to the maximum extent possible, be deemed to constitute a short-term deferral under Treasury Regulation § 1.409A-1(b) (4);

(F) To the extent that the “two-year/two-times” exclusion from being a deferral of compensation under Treasury Regulation § 1.409A-1(b)(9)(iii) has not been fully applied by virtue of Section 10(b)(ii)(B) and (C), the Separate Lump Sum, to the extent not covered by Section 10(b)(ii)(E), shall, to the maximum extent possible, be deemed to constitute amounts payable under the “two-year/two-times” exclusion; and

(G) Any portion of the Separate Lump Sum not covered by Section 10(b)(ii)(E) and (F) shall be paid within five days after the qualifying termination of employment in compliance with Section 409A, except that any such payment shall be subject to the six-month delay rule and other provisions of Section 10(d) and except to the extent that the Separate Lump Sum is not deemed to be a valid separate payment from amounts governed by Section 10(b)(ii)(D).

Any portions of the CIC Severance Payments corresponding to Pre-CIC Severance Payments governed by Section 10(b)(ii)(D) shall be payable, subject to Section 10(d), in a lump sum within five days after the qualifying termination of employment if such termination has occurred within two years following a change in the ownership of the Company, a change in effective control of the Company, or a change in the ownership

of a substantial portion of the assets of the Company as defined in Treasury Regulation § 1.409A-3(i)(10) (a “409A Change in Control”), and in any other case shall be payable at the applicable time under Section 10(b)(ii)(D).

(c) Special Rules for Other Payments. With respect to amounts payable under Section I.1 (ii) of the CIC Amendment (relating to incentive awards), the following rules will apply:

(i) Separate Payments. The amounts payable thereunder shall each be deemed to be a separate payment for all purposes, including for purposes of Section 409A (subject to any further designation of separate payments explicitly made in any separately identifiable plan or arrangement for purposes of Section 409A).

(ii) Payment Timing Rules. A payment referenced in Section 10(c)(i) shall be payable as a lump-sum payment within five days after termination of employment if and to the extent that (A) the separate payment constitutes short-term deferral under Treasury Regulation § 1.409A-1(b)(4), (B) the amount of the separate payment not covered by Section 10(c)(ii)(A) can be paid under the “two-year/two-times” exclusion from being a deferral of compensation under Treasury Regulation § 1.409A-1(b)(9)(iii), after first applying such exclusion under Section 10(b)(ii), (C) the separate payment is covered by any other applicable exclusion or exemption under Treasury Regulation § 1.409A-1(b)(9) (provided that the exclusion under subsection (b)(9)(v)(D) shall be used only to the extent not relied upon for other payments or benefits) and (D), the six-month delay rule in Section 10(d) does not apply to the separate payment (except as otherwise provided in Section 10(c)(iii)). Any other such separate payment (i.e., amounts subject to the six-month delay rule) shall be subject to the six-month delay rule of Section 10(d), subject to Section 10(c) (iii). Any delay in payment under the six-month delay rule shall not limit Employee’s rights under this Agreement to not forfeit a specified item of compensation as a result of Employee’s termination.

(iii) Payments of 409A Deferrals For a Termination Not Within Two Years After a 409A Change in Control. If a payment referenced in Section 10(c)(ii) is a direct payment or a substitute or replacement for a right to payment (the “Original Payment Right”) that constitutes a deferral of compensation under Section 409A, and if either (A) the Change in Control does not involve a 409A Change in Control, or (B) Employee’s termination triggering payments hereunder did not occur within the two-year period following a 409A Change in Control, then such payments (i.e., payments that constitute deferrals under Section 409A) must be paid at the times and in the form applicable to a separation from service under the terms of the Original Payment Right, subject to Section 10(d). If in no circumstances was such payment payable upon a separation from service under the Original Payment Right, then this Section 10(c)(iii) shall not apply.

(d) Six-Month Delay Rule.

(i) General Rule. The six-month delay rule will apply to payments and benefits under the Agreement if all of the following conditions are met:

(A) Employee is a “key employee” (as defined in Code Section 416(i) without regard to paragraph (10) thereof) for the year in which the termination occurs. The Company will determine status of “key employees” annually, under administrative procedures applicable to all Section 409A plans and arrangements and applied in accordance with Treasury Regulation § 1.409A-1(i).

(B) The Company’s stock is publicly traded on an established securities market or otherwise.

(C) The payment or benefit in question is a deferral of compensation and not excepted, exempted or excluded from being such by the short-term deferral rule, or the “two-years/two-times” rule in Treasury Regulation § 1.409A-1(b)(9)(iii), or any other exception, exemption or exclusion; provided, however, that the exclusion under Treasury Regulation § 1.409A-1(b)(9)(v)(D) shall apply only if and to the extent that it is not necessary to apply to any other payment or benefit payable within six months after Employee’s termination.

(ii) Effect of Rule. If it applies, the six-month delay rule will delay a payment or benefit which otherwise would be payable under this Agreement within six months after Employee’s separation from service.

(A) Any delayed payment or benefit shall be paid on the date six months after Employee’s separation from service.

(B) During the six-month delay period, accelerated payment will occur in the event of the Employee’s death but not for any other reason (including no acceleration upon a Change in Control), except for accelerations expressly permitted under Treasury Regulation § 1.409A-1 — A-6.

(C) Any payment that is not triggered by a termination, or is triggered by a termination but would be made more than six months after the termination (without applying this six-month delay rule), or would be payable at a fixed date not tied to termination that is earlier than the expiration of the six-month delay period, shall be unaffected by the six-month delay rule.

(iii) Limit to Application of Six-Month Delay Rule. If the terms of this Agreement or other plan or arrangement or document relating to this Agreement or payments hereunder impose this six-month delay rule in circumstances in which it is not required for compliance with Section 409A, those terms shall not be given effect.

(e) Other Provisions.

(i) Good Reason. Termination for “Good Reason” as defined under the CIC Amendment and termination without cause under the related rules governing constructive termination not for cause are intended to qualify as “involuntary separations” within the meaning of Treasury Regulation § 1.409A-1(n)(2)(i), and shall be so construed and interpreted.

(ii) Non-transferability. No right to any payment or benefit under this Agreement shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by Employee’s creditors or creditors of any of Employee’s beneficiaries.

(iii) No Acceleration. The timing of payments and benefits under the Agreement which constitute a deferral of compensation under Code Section 409A may not be accelerated to occur before the time specified for payment hereunder, except to the extent permitted under Treasury Regulation § 1.409A-3(j)(4) or as otherwise permitted under Code Section 409A without Employee incurring a tax penalty.

(iv) Timing Relating to Release. Other provisions of this Agreement (including this Section 10) notwithstanding, if Employee is obligated to execute a release, non-competition, or other agreement as a condition to receipt of a payment hereunder, the Company will supply to Employee a form of such release or other document not later than the date of Employee’s termination, which must be returned within the time period required by law and must not be revoked by Employee within the applicable time period in order for Employee to satisfy any such condition, such that it becomes legally effective. If any amount payable during a fixed period following Employee’s termination is subject to a requirement or condition requiring Employee’s execution of a release (including any case in which such fixed period would begin in one year and end in the next), the Company, in determining the time of payment of any such amount, will not be influenced by the timing of any action by Employee including execution of such a release or other document and expiration of any revocation period. In particular, the Company will be entitled in its discretion to deposit any payment hereunder in escrow at any time during such fixed period, so that such deposited amount is constructively received and taxable income to Employee upon deposit (it may be constructively received even in the absence of such deposit) but with distribution from such escrow remaining subject to Employee’s execution and non-revocation of such release or other document.

(v) Definition of Termination of Employment. For purposes of this Agreement, the term “termination of employment” shall mean a separation from service as defined in Treasury Regulation § 1.409A-1(h); provided, however, that if a date for termination of employment is designated by the Company but Employee has a separation from service prior to such designated date, the designated termination date shall be deemed the date of termination for any compensation payable under this Agreement that would fully qualify for the short-term deferral exception under Treasury Regulation §

1.409A-1(b)(4) and/or the “two-year/two-times” exclusion from being a deferral of compensation under Treasury Regulation § 1.409A-1(b)(9)(iii) under both circumstances (i.e., assuming the separation from service date was the termination date hereunder or that the designated termination of employment date was the termination date hereunder).

(vi) Continued Medical Coverage. Any continued medical coverage following termination of employment, to the extent provided under Section 6 or any other provision of this Agreement, if and to the extent such medical coverage (or the Company’s contributions or reimbursement of such coverage) represents taxable income to Employee, is intended to qualify as excluded from being a deferral of compensation under Treasury Regulation § 1.409A-1(b)(9)(v)(B), and the rights to such coverage shall be limited to the extent necessary to qualify thereunder.

(vii) References to Other Plans. References in the Agreement to the obligation of the Company to pay amounts under other plans, including Employee’s vested portion of any Magellan deferred compensation or other benefit plan, shall not be construed to modify the timing of payment, which shall be governed by such other plans..

11. Remedies. An actual or threatened violation by Employee of the covenants and obligations set forth in Sections 7, 8 and 9 will cause irreparable harm to Employer or its controlled subsidiaries or affiliates and that the remedy at law for any such violation will be inadequate. Employee agrees, therefore, that Employer or its controlled subsidiaries or affiliates will be entitled to appropriate equitable relief, including, but not limited to, a temporary restraining order and a preliminary injunction, without the necessity of posting a bond. Employee will also be entitled to seek equitable relief against Employer in connection with enforcement of the covenants and obligations set forth in Sections 7, 8 and 9. The provisions of Sections 4, 5, 6, 7, 8 and 9 will survive the termination of this Agreement in accordance with the terms set forth in each Section.

12. Arbitration. Except for an action for injunctive relief as described in Section 11, any disputes or controversies arising under this Agreement will be settled by arbitration in Avon, Connecticut in accordance with the rules of the American Arbitration Association relating to the arbitration of employment disputes. The determination and findings of such arbitrators will be final and binding on all parties and may be enforced, if necessary, in any court of competent jurisdiction. The costs and expenses of the arbitration shall be paid for by Employer, but each party shall pay its own attorney’s fees and other litigation costs.

Employee’s Initials

13. Notices. Any notice or request required or permitted to be given to any party will be given in writing and, excepting personal delivery, will be given at the address set forth below or at such other address as such party may designate by written notice to the other party to this Agreement:

To Employee:		Name: Karen S. Rohan
Address on file


To Employer:		Magellan Health Services, Inc.
		55 Nod Road
		Avon, CT 06001
		Attention: General Counsel

Each notice given in accordance with this Section will be deemed to have been given, if personally delivered, on the date personally delivered; if delivered by facsimile transmission, when sent and confirmation of receipt is received; or, if mailed, on the third day following the day on which it is deposited in the United States mail, certified or registered mail, return receipt requested, with postage prepaid, to the address last given in accordance with this Section.

14. Headings. The headings of the sections of this Agreement have been inserted for convenience of reference only and should not be construed or interpreted to restrict or modify any of the terms or provisions of this Agreement.

15. Severability. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term of this Agreement, such provision will be fully severable and this Agreement and each separate provision will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement. In addition, in lieu of such illegal, invalid or unenforceable provision, there will be added automatically, as a part of this Agreement, a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable, to the extent such reformation is allowable under applicable law.

16. Governing Law. This Agreement and all issues relating to the validity, interpretation, and performance will be governed by, interpreted, and enforced under the laws of the State of Connecticut.

17. Binding Effect. This Agreement and Amendment No. 1 hereto will be binding upon and shall inure to the benefit of each party and each party’s respective successors, heirs and legal representatives. This Agreement may not be assigned by Employee to any other person or entity but may be assigned by Employer to any subsidiary or affiliate of Employer or to any successor to or transferee of all, or any part, of the stock or assets of Employer.

18. Employer Policies, Regulations, and Guidelines for Employees. Employer may issue policies, rules, regulations, guidelines, procedures or other material, whether in the form of handbooks, memoranda, or otherwise, relating to its Employees. These materials are general

guidelines for Employee’s information and will not be construed to alter, modify, or amend this Agreement for any purpose whatsoever.

19. Background Check, Drug Screening, Employment Eligibility. This Agreement and Employee’s employment hereunder are subject to and conditioned upon: (i) satisfactory completion of a background investigation of Employee by Employer at Employer’s expense; (ii) Employee’s receipt of a drug screening test conducted in accordance with Employer’s customary practice for all new employees, with results acceptable to Employer in accordance with such practice, to be arranged by Employer and Employer at Employer’s expense; (iii) Employee shall complete an Officer’s Questionnaire containing answers satisfactory to Employer, and (iv) Employee shall provide Employer documentation indicating her eligibility to work within the United States pursuant to The Immigration Reform and Control Act of 1986. Notwithstanding anything herein to the contrary, the effective date of this Agreement shall be the date on which the conditions contained in this Section 19 are fulfilled.

20. Indemnification. Employer shall indemnify Employee for her services as an officer of Employer to the fullest extent permitted by Delaware law, subject to all requirements and conditions of such law.

21. Entire Agreement. This Agreement and Amendment No. 1 embodies the entire agreement and understanding between the parties with respect to its subject matter and supersedes all prior agreements and understandings, whether written or oral, relating to its subject matter, unless expressly provided otherwise within this Agreement. No amendment or modification of this Agreement will be valid unless made in writing and signed by each of the parties. No representations, inducements, or agreements have been made to induce either Employee or Employer to enter into this Agreement, which are not expressly set forth within this Agreement. Employee and Employer acknowledge and agree that Employer’s controlled subsidiaries and affiliates are express third party beneficiaries of this Agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day of August, 2009 but shall not become effective until the conditions contained in Section 19 have been fulfilled.

		MAGELLAN HEALTH SERVICES, INC.
“Employee”		“Employer”

/s/ Karen S. Rohan
Karen S. Rohan	By:	/s/ René Lerer
		Name: René Lerer, M.D.

		Title: Chairman and Chief Executive

EX-10.2 4 a2193817zex-10_2.htm EXHIBIT 10.2

Exhibit 10.2

AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT

This Amendment to Employment Agreement between Magellan Health Services, Inc. (“Employer”) and Karen S. Rohan entered into on this 28th day of July, 2009 effective as of the 1st day of August, 2009 (“Employee”).

WHEREAS, Employer and Employee desire to amend the terms of the Employment Agreement currently in effect between Employer and Employee (the “Employment Agreement”).

NOW THEREFORE, Employer or Employee agree that the Employment Agreement is hereby amended as follows:

I. New Change in Control Provisions — Add the following new paragraphs:

1. Termination Without Cause by the Employer or With Good Reason By Executive In connection With, Or Within Two Years After, A Change In Control: If Employer terminates this Agreement and Employee’s employment without cause, or if Employee terminates this Agreement and Employee’s employment with Good Reason, in connection with a Change in Control (as defined below) (whether before or at the time of such Change in control) or within two years after a change in Control, Employee shall receive the following, in lieu of the amounts and benefits described in Section 6:

(i) Base Salary through the date of termination, payable at the next payroll date at or after termination (subject to Section 10);

(ii) pro-rata target bonus for the year in which termination occurs, payable in a single installment immediately after termination (subject to Section 10); provided, however, that, for any termination in 2010 or later, if (i) Employee was, for the Company’s fiscal year before the year of termination, an executive officer (other than the chief financial officer) for whom disclosure of compensation information was required in the Company’s proxy statement or Form 10-K under Item 402 of Regulation S-K (i.e., whose compensation for the previous fiscal year was potentially subject to the limitation on deductibility under Code Section 162(m)), and (ii) the payment required hereunder would otherwise be payable before the occurrence of a “change of ownership or control” within the meaning of Treasury Regulation § 1.162-27(e)(2)(v) (a “162(m) Control Change”), then the amount payable hereunder shall equal the pro rata bonus Employee would have become entitled to receive for the year of termination assuming his employment had not terminated (with no exercise of downward discretion permitted), payable at the time annual bonuses for such year otherwise are payable, provided that if a 162(m) Control Change occurs within one year after such termination, payment shall then be made based on Employee’s pro-rata target bonus amount as provided in the first clause of this Section 1(ii) (subject to Section 10

and net of any amount previously paid under this proviso, but without any forfeiture by Employee if such amount previously paid under this proviso exceeds the pro-rata target bonus), with such further payment payable on the date of such 162(m) Control Change;

(iii) 2 times the sum of (a) Base Salary plus (b) Target bonus, payable in a single cash installment immediately after termination (subject to Section 10);

(iv) if employee elects COBRA coverage for health, dental and vision benefits, Employer shall pay Employer’s contributions for health insurance and Employee shall pay Employee’s contributions rate for health, dental and vision insurance for up to eighteen (18) months after termination;.

(v) any other amounts earned, accrued or owing to Executive but not yet paid (subject to Section 10); and

(vi) other payments, entitlements or benefits, if any, that are payable in accordance with applicable plans, programs, arrangements or other agreements of the Employer or any affiliate (subject to Section 10);

2. Definitions:

A. Change in Control:

A “Change in Control” of the Employer shall mean the first to occur after the date hereof of any of the following events:

(i) any “person,” as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), becomes a “beneficial owner,” as such term is used in Rule 13d-3 promulgated under the Exchange Act, of 51% or more of the Voting Stock (as defined below) of the Employer;

(ii) the majority of the Board of Directors of the Employer consists of individuals other than “Continuing Directors,” which shall mean the members of the Board on the date hereof, provided that any person becoming a director subsequent to the date hereof whose election or nomination for election was supported by a vote of the directors who then comprised the Continuing Directors, shall be considered to be a Continuing Director;

(iii) the Board of Directors of the Employer adopts and, if required by law or the

certificate of incorporation of the Corporation, the shareholders approve the dissolution of the Employer or a plan of liquidation or comparable plan providing for the disposition of all or substantially all of the Employer’s assets;

(iv) all or substantially all of the assets of the Employer are disposed of pursuant to a merger, consolidation, share exchange, reorganization or other transaction unless the shareholders of the Employer immediately prior to such merger, consolidation, share exchange, reorganization or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they previously owned the Voting Stock or other ownership interests of the Employer, 51% of the Voting Stock or other ownership interests of the entity or entities, if any, that succeed to the business of the Employer; or

(v) the Employer merges or combines with another company and, immediately after the merger or combination, the shareholders of the Employer immediately prior to the merger or combination own, directly or indirectly, 50% or less of the Voting Stock of the successor company, provided that in making such determination there shall be excluded from the number of shares of Voting Stock held by such shareholders, but not from the Voting Stock of the successor company, any shares owned by Affiliates of such other company who were not also Affiliates of the Employer prior to such merger or combination.

B. “Cause” in connection with a Change in Control shall mean:

(i) Employee is convicted of (or pleads guilty or nolo contendere to) a felony or a crime involving moral turpitude;

(ii) Employee’s commission of an act of fraud or dishonesty involving his or her duties on behalf of the Employer;

(iii) Employee’s willful failure or refusal to faithfully and diligently perform duties lawfully assigned to Employee as an officer or employee of the Employer or other willful breach of any material term of any employment agreement at the time in effect between the Employer and Employee; or

(iv) Employee’s willful failure or refusal to abide by the Employer’s policies, rules, procedures or directives, including any material violation of the Employer’s Code of Ethics.

C. “Good Reason” shall mean:

(i) a material reduction in Employee’s salary in effect at the time of a Change in

Control, unless such reduction is comparable in degree to the reduction that takes place for all other employees of the Employer of comparable rank, or a material reduction in Employee’s target bonus opportunity for the year in which or any year after the year in which the Change of Control occurs from Employee’s target bonus opportunity for the year in which the Change in Control occurs (if any) as established under any employment agreement Employee has with the Employer or any bonus plan of the Employer applicable to Employee (or, if no such target bonus opportunity has yet been established for Employee under a bonus plan applicable to Employee for the year in which the Change of Control has occurred, the target bonus opportunity so established for Employee for the immediately preceding year, if any); provided, however, that a reduction in salary and/or target bonus with an annualized value of 1.5 % of Employee’s Base Salary in effect immediately preceding the Change of Control or more in the aggregate, taking into account any related effect a salary reduction has on target bonus and other components of compensation, shall be deemed material;

(iii) a material diminution in Employee’s position, duties or responsibilities as in effect at the time of a Change in Control, or the assignment to Employee of duties which are materially inconsistent with such position, duties and authority, unless in either case such change is made with the consent of the Employee; or

(iv) the relocation by more than 50 miles of the offices of the Employer which constitute at the time of the Change in Control Employee’s principal location for the performance of his or her services to the Employer;

provided that, in each such case, Employee shall have given notice to the Employer that such event or condition has arisen within 90 days after such event or condition has arisen, and the event or condition has continued uncured for a period of more than 30 days after Employee has given such notice thereof to the Employer, and Employee has terminated employment for Good Reason within 18 months after such uncured event or condition has arisen.

D. “Employer” shall include any entity that succeeds to all or substantially all of the business of the Employer,

E. “Affiliate” of a person or other entity shall mean a person or other entity that directly or indirectly controls, is controlled by, or is under common control with the person or other entity specified,

F. “Voting Stock” shall mean any capital stock of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect the directors of a corporation and reference to a percentage of Voting Stock shall refer to such percentage of the votes that all such Voting Stock is entitled to cast.

3 Tax Gross-Up. The following provisions shall apply with respect to any excise tax imposed under Section 4999 of the Internal Revenue Code as amended (the “Code”), (the “Excise Tax):

a. For the three (3) year period beginning on the date hereof and ending on July 31, 2012, if any of the payments or benefits received or to be received by Employee in connection with a Change in Control or Employee’s termination of employee (whether pursuant to the terms of this Agreement or any other plan, arrangement of agreement with the Employer, any person whose actions result in a Change on Control of the Employer or any person affiliated with the Employer or such person (the “Total Payments”)) will be subject to the Excise Tax, the Employer shall pay to Employee an additional amount (the “Gross-Up Payment”) such that the net amount retained by Employee after payment of (a) the Excise Tax, if any, on the Total Payments and (b) any Excise Tax and income tax due in respect of the Gross-Up Payment, shall equal the Total Payments. Such payment shall be made in a single lump sum within 10 days following the date of a determination that only such payment is required.

b. For purposes of determining whether any of the Total payments will be subject to Excise Tax and the amount of such Excise Tax, (i) any Total Payments shall be treated as “parachute payments” (within the meaning of Section280G(b) (2) of the Code) unless, in the opinion of tax counsel selected by the Employer and reasonably acceptable to Employee, such payments or benefits (in whole or in part) should not constitute parachute payments, including by reason of Section 280G (b) (4) (A) of the Code, and all “excess parachute payments” (within the meeting of Section 280G(b) (1) of the Code) shall be treated as subject to the Excise Tax unless, in the opinion of such tax counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b) (4) (B) of the Code), or are otherwise not subject to the Excise Tax, and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Employer’s independent auditors in accordance with the principles of Section 280G(d) (3) of the Code. For purposes of determining the amount of the Gross-Up payment, Employee shall be deemed to pay federal income and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income and employment taxes at the highest marginal rate of taxation in the state and locality of Employee’s residence on the date of termination of employment (or such other time as hereinafter described), net of the maximum reduction in federal income or employment taxes which could be obtained from deduction of such state and local taxes.

In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of Employee’s employment (or such other time as is hereinafter described), Employee shall repay to the Employer, at the time that the amount of such reduction in Excise Tax is finally

determined, the portion of the Gross-Up Payment attributable to such reduction plus interest on the amount of such repayment at the applicable federal rate, as defined in Section 1274(b) (2) (B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Employee’s employment (or such other time as is hereinafter described) (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Employer shall make an additional Gross-Up Payment in respect of such excess (plus any interest at the applicable federal rate, penalties or additions payable by Employee with respect to such excess) at the time that the amount of such excess is finally determined. Employee and the Employer shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total payments.

II. Other Changes

1. Amendment to Section 7(b)(i):

Section 7(b)(i) is hereby amended to delete it and insert the following in place thereof:

(i) Employee covenants and agrees that during any period in which Base Salary is continued after termination of this Agreement (or in respect of which Base Salary is paid in a lump sum) or for one year after Employee’s voluntary termination of employment without Good Reason or termination of Employee’s employment for cause, he or she will not, on his or her own behalf or as a partner, officer, director, employee, agent, or consultant of any other person or entity, directly or indirectly, engage or attempt to engage in the business of providing or selling services in the United States that are services offered by Employer at the time of the termination of this Agreement, unless waived in writing by Employer in its sole discretion. Employee recognizes that the above restriction is reasonable and necessary to protect the interest of the Employer and its controller subsidiaries and affiliates.

IN WITNESS WHEREOF, Employer and Employee have executed this Amendment to Employment Agreement as of the date first above written.

Magellan Health Services, Inc.

By	/s/ René Lerer
	Duly Authorized

/s/ Karen S. Rohan
Karen S. Rohan, Employee

EX-31.1 5 a2193817zex-31_1.htm EXHIBIT 31.1

Exhibit 31.1

CERTIFICATIONS

I, Rene Lerer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Magellan Health Services, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ RENE LERER
	Rene Lerer
Date: July 31, 2009	Chief Executive Officer

EX-31.2 6 a2193817zex-31_2.htm EXHIBIT 31.2

Exhibit 31.2

CERTIFICATIONS

I, Jonathan N. Rubin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Magellan Health Services, Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ JONATHAN N. RUBIN
	Jonathan N. Rubin
Date: July 31, 2009	Chief Financial Officer

EX-32.1 7 a2193817zex-32_1.htm EXHIBIT 32.1

Exhibit 32.1

Certification Required by Rule 13a-14(b) and 18 U.S.C. Section 1350

(as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

I, Rene Lerer, as Chief Executive Officer of Magellan Health Services, Inc (the “Company”), certify, pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), that to my knowledge:

(1) the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2009 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ RENE LERER
	Rene Lerer
Date: July 31, 2009	Chief Executive Officer

EX-32.2 8 a2193817zex-32_2.htm EXHIBIT 32.2

Exhibit 32.2

Certification Required by Rule 13a-14(b) and 18 U.S.C. Section 1350

(as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

I, Jonathan N. Rubin, as Chief Financial Officer of Magellan Health Services, Inc (the “Company”), certify, pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), that to my knowledge:

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ JONATHAN N. RUBIN
	Jonathan N. Rubin
Date: July 31, 2009	Chief Financial Officer

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